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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
PARK BANCORP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State of incorporation)
36-4082530
(IRS Employer Identification No.)
5400 SOUTH PULASKI ROAD, CHICAGO, ILLINOIS
(Address of Principal Executive Offices)
60632
(ZIP Code)
(773) 582-8616
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None.
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01, PAR VALUE PER SHARE
(Title of each class)
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 the 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]
The aggregate market value of the voting stock of the Registrant held by
non-affiliates was approximately $42,203,066 as of March 13, 1998.
As of March 13, 1998, the Registrant had outstanding 2,332,649 shares of common
stock.
DOCUMENTS INCORPORATED BY REFERENCE
Selected portions of the definitive Proxy Statement for the Registrant's Annual
Meeting of Stockholders to be held on April 21, 1998. Incorporated into Part
III.
1
PART I
ITEM 1. BUSINESS
Park Bancorp, Inc. (the "Company") is a bank holding company engaged in the
business of banking through its wholly-owned subsidiary, Park Federal Savings
Bank (the "Bank"). The Bank is engaged in the business of retail banking, with
operations conducted through its main office and two branches located in Chicago
and Westmont, Illinois.
All table amounts throughout the Form 10-K are in thousands except share and per
share data.
GENERAL
On August 9, 1996, Park Federal Savings Bank (the "Bank") converted from a
federally chartered mutual savings bank to a federally chartered stock savings
bank (the "Conversion"). In connection with the Conversion, the Bank issued all
of its common stock to the Company and concurrently the Company issued 2,701,441
shares of common stock at $10.00 per share. As part of the Conversion,
approximately 50% of the net proceeds, or $13.5 million, was used to purchase
the common stock of the Bank.
The Bank attracts retail deposits from the general public in the area
surrounding its offices and invests those deposits, together with funds
generated from operations, primarily in fixed-rate one-to-four-family
residential mortgage loans and securities. The Bank invests, on a limited basis,
in multi-family mortgage, commercial real estate, construction, land, and
consumer loans. The Bank's revenues are derived principally from interest on its
mortgage loans and interest and dividends on its securities. The Bank's primary
sources of funds are deposits, advances from the Federal Home Loan Bank,
securities sold under repurchase agreements, and principal and interest payments
from loans and securities. The Bank also engages in real estate development
activities through its subsidiary. The Bank's investment in real estate held for
development totaled $2.3 million, or 1.3% of total assets at December 31, 1997.
During 1997, the Bank continued sales of its primary development project, Rose
Hill Farm, and completed development and began sales efforts of its latest
project, Prairie Ridge. During the years ended December 31, 1997, 1996, and
1995, the Bank recorded income of $276,000, $60,000, and $523,000, respectively,
related to real estate development.
MARKET AREA AND COMPETITION
The Bank is a community-oriented savings bank. The Bank's primary deposit
gathering area is concentrated in the communities surrounding its offices, while
its lending activities primarily include areas throughout Cook, DuPage, and Will
counties.
The Bank's market area is both an urban and suburban area with the manufacturing
industry as the major industrial group, followed by the services sector, and
then the wholesale/retail sector. The Bank's Chicago offices are located in
diverse communities which have a high percentage of customers of various ethnic
backgrounds. Management of the Bank believes that its urban communities are
stable, residential neighborhoods of predominantly one-to-four-
2
family residences, and low to middle income families. The Bank's Westmont office
is located in DuPage County which consists predominantly of middle to upper
income families.
The Bank does not formally track real estate value or construction starts in its
primary market area; however, the officers and directors of the Bank maintain
relationships with area contractors and real estate agents which enable them to
continually monitor the trends in housing construction and real estate sales in
its primary market area. In addition, the Bank obtains information on real
estate sales on a weekly basis through the publication of public records.
Management is not aware of any material adverse trends in real estate values in
its market area.
The Bank's primary market area is a highly competitive market for financial
services and the Bank faces significant competition both in making loans and in
attracting deposits. The Bank faces direct competition from a significant number
of financial institutions operating in its market area, many with a state-wide
or regional presence, and in some cases, a national presence. Many of these
financial institutions are significantly larger and have greater financial
resources than the Bank. The Bank's competition for loans comes principally from
savings institutions, mortgage banking companies, and commercial banks. In
addition, the Bank faces increasing competition for deposits and other financial
products from nonbank institutions such as brokerage firms and insurance
companies in such areas as short-term money market funds, corporate and
government securities funds, mutual funds, and annuities. Competition may also
increase as a result of the lifting of restrictions on the interstate operations
of financial institutions.
LENDING ACTIVITIES
Loan Portfolio Composition. The Bank's loan portfolio consists primarily of
conventional first mortgage loans secured by one-to-four-family residences. At
December 31, 1997, the Bank had total gross loans outstanding of $70.2 million,
of which $55.6 million were one-to-four-family residential mortgage loans, or
79.2% of the Bank's total gross loans. The remainder of the portfolio consists
of $7.9 million of multi-family mortgage loans, or 11.3% of total gross loans;
$1.8 million of commercial real estate loans, or 2.5% of total gross loans; $3.4
million of construction and land loans, or 4.9% of total gross loans; and
consumer loans of $1.5 million, or 2.1% of total gross loans. At December 31,
1997, 90.0% of the Bank's loan portfolio had fixed interest rates. The Bank had
no loans held for sale at December 31, 1997.
The types of loans that the Bank may originate are subject to federal and state
laws and regulations. Interest rates charged by the Bank on loans are affected
by the demand for such loans, the supply of money available for lending
purposes, and the rates offered by competitors. These factors are, in turn,
affected by, among other things, economic conditions, fiscal policies of the
federal government, the monetary policies of the Federal Reserve Board, and
legislative tax policies.
3
The following table sets forth the composition of the Bank's loan portfolio in
dollar amounts and as a percentage of the portfolio at the dates indicated.
-------------------------------------------------------AT DECEMBER 31,-----------------------------------
--------1997-------- --------1996--------- --------1995-------- -------1994--------- ---------1993----
Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ -------- ------ -------- ------ -------
Real estate
Residential
One-to-four-
family $ 55,634 79.24% $ 53,757 78.88% $ 48,577 77.42% $ 44,655 75.88% $ 45,786 77.34%
Multi-family 7,860 11.19 8,168 11.99 6,163 9.82 5,907 10.04 7,483 12.64
Commercial 1,794 2.56 1,716 2.52 1,750 2.79 1,426 2.42 774 1.31
Construction and
land 3,421 4.87 3,284 4.82 5,133 8.18 6,038 10.26 4,213 7.12
Consumer 1,501 2.14 1,223 1.79 1,179 1.79 825 1.40 942 1.59
------- ------- ------- ------ ------- ------- ------- ------- ------- -------
Total loans, gross 70,210 100.00% 68,148 100.00% 62,742 100.00% 58,851 100.00% 59,198 100.00%
====== ======== ======= ======= =======
Undisbursed loan
funds (1,042) (1,043) (1,148) (1,493) (1,633)
Unamortized
discounts, net (4) (8) (23) (51) (86)
Deferred loan
origination fees (337) (418) (460) (474) (533)
Allowance for
loan losses (500) (500) (573) (275) (250)
-------- -------- ------- --------- --------
Total loans, net $ 68,327 $ 66,179 $ 60,538 $ 56,558 $ 56,696
======== ======== ======== ========= ========
4
Loan Maturity. The following table shows the contractual maturity of
the Bank's gross loans at December 31, 1997. The table does not include
principal prepayments.
One-to- Construction Total
Four- Multi- and Loans
Family Family Commercial Land Consumer Receivable
---------- ----------- ----------- ------------- ---------- -----------
Amounts due
One year or less $ 583 $ - $ 320 $ 1,833 $ 300 $ 3,036
After one year
More than one year
to three years 610 85 308 1,483 655 3,141
More than three years
to five years 2,146 36 64 105 179 2,530
More than five years
to ten years 7,878 934 685 - 54 9,551
More than ten years
to twenty years 12,256 3,944 380 - 313 16,893
More than twenty years 32,161 2,861 37 - - 35,059
--------- ---------- ---------- ---------- ---------- ----------
Total due after
December 31, 1998 55,051 7,860 1,474 1,588 1,201 67,174
--------- ---------- ---------- ---------- ---------- ----------
Gross loans
receivable $ 55,634 $ 7,860 $ 1,794 $ 3,421 $ 1,501 $ 70,210
========= ========== ========== ========== ========== ==========
The following table sets forth at December 31, 1997 the dollar amount of total
gross loans receivable contractually due after December 31, 1998 and whether
such loans have fixed interest rates or adjustable interest rates.
------Due After December 31, 1998---
Fixed Adjustable Total
---------- ----------- ---------
Real estate loans
Residential
One-to-four-family $ 48,374 $ 6,677 $ 55,051
Multi-family 7,860 - 7,860
Commercial 1,437 37 1,474
Construction and land 1,588 - 1,588
Consumer 888 313 1,201
---------- ---------- ----------
Total gross loans receivable $ 60,147 $ 7,027 $ 67,174
========== ========== ==========
Origination and Purchase of Loans. The Bank's mortgage lending activities are
conducted through its home office and two branch offices. Although the Bank may
originate adjustable-rate mortgage loans, the substantial majority of the Banks'
loan originations are fixed-rate mortgage loans. The Bank's ability to originate
loans is dependent upon the relative customer demand for fixed-rate or
adjustable-rate mortgage loans, which is affected by the current and expected
future level of interest rates. While the Bank retains for its portfolio all of
the mortgage loans that it originates, the Bank may, in the future, sell
mortgage loans that it originates depending on market conditions and the
financial condition of the Bank. At December 31, 1997, there were no loans
categorized as held for sale. In addition, the Bank also originates construction
loans.
5
From time to time, the Bank has purchased loans or participated in loans
originated by other institutions based upon the Banks' investment needs and
market opportunities.
The following table sets forth the Bank's loan originations, purchases, and
principal repayments for the periods indicated:
---For the Year Ended December 31,---
1997 1996 1995
---- ---- ----
Gross loans
Beginning balance $ 68,148 $ 62,742 $ 58,851
Loans originated
One-to-four-family 8,382 14,305 11,571
Multi-family 2,958 3,076 1,104
Commercial 488 290 1,767
Construction and land 5,932 6,001 5,484
Consumer 217 415 674
---------- ---------- ----------
Total loans originated 17,977 24,087 20,600
Loans purchased 538 118 182
---------- ---------- ----------
18,515 24,205 20,782
Principal prepayments (18,208) (20,677) (19,142)
Transfer to REO (129) (269) -
Change in undisbursed loan funds 1 105 345
Change in allowance for loan losses - 73 (298)
---------- ---------- ----------
Ending balance, net $ 68,327 $ 66,179 $ 60,538
========== ========== ==========
ONE-TO-FOUR-FAMILY MORTGAGE LENDING. The Bank offers mortgage loans secured by
one-to-four-family residences located in the Bank's primary market area. Loan
originations are obtained by the Bank's loan officers and their contacts with
the local real estate industry, existing or past customers, and members of the
local communities.
The Bank's policy is to originate one-to-four-family residential mortgage loans
in amounts up to 80% of the lower of the appraised value or the selling price of
the property securing the loan and up to 95% of the appraised value or selling
price if private mortgage insurance is obtained. The residential mortgage loans
originated by the Bank are for maturity terms of up to 30 years. The maximum
one-to-four-family loan amount is $350,000, unless otherwise approved by the
Board of Directors.
The Bank offers ARM loans as a means of reducing its exposure to changes in
interest rates, however, the volume and types of ARM loans originated by the
Bank have been affected by such market factors as the level of interest rates,
competition, consumer preferences, and the availability of funds. In recent
years, the Bank has not originated a significant amount of ARM loans as compared
to its originations of fixed-rate loans. ARM loans pose credit risks different
from the risks inherent in fixed rate loans, primarily because as interest rates
rise, the underlying payments of the borrower rise, thereby increasing the
potential for default. The ARM loans offered by the Bank do not provide for
initial deep discount "teaser" interest rates. Although the Bank will continue
to offer ARM loans, there can be no assurance that in the future the Bank will
be able to originate a sufficient volume of ARM loans to constitute a
significant portion of the Bank's loan portfolio.
6
MULTI-FAMILY LENDING. The Bank originates multi-family mortgage loans secured by
properties located in the Bank's primary market area. The amount of multi-family
loans originated by the Bank depends upon market conditions.
In reaching its decision on whether to make a multi-family loan, the Bank
considers a number of factors including: the net operating income of the
mortgaged premises before debt service and depreciation; the debt service ratio
(the ratio of net operating income to debt service); and the ratio of loan
amount to appraised value. Pursuant to the Bank's current underwriting policies,
a multi-family mortgage loan may be made in an amount up to 80% of the appraised
value of the underlying property. In addition, the Bank generally requires a
debt service ratio of 120%. Properties securing a multi-family loan are
appraised by an independent appraiser. Title and property insurance are required
on all multi-family loans.
When evaluating a multi-family loan, the Bank also considers the financial
resources and income level of the borrower, the borrower's experience in owning
or managing similar property, and the Bank's lending experience with the
borrower. The Bank's underwriting policies require that the borrower be able to
demonstrate strong management skills and the ability to maintain the property
for current rental income. The borrower is required to present evidence of the
ability to repay the mortgage and a satisfactory credit history. In making its
assessment of the creditworthiness of the borrower, the Bank reviews the
financial statements and the employment and credit history of the borrower as
well as other related documentation.
Loans secured by multi-family residential properties generally involve a greater
degree of risk than one-to-four-family residential mortgage loans. Because
payments on loans secured by multi-family properties are often dependent on
successful operation or management of the properties, repayment of such loans
may be subject to a greater extent to adverse conditions in the real estate
market or the economy. The Bank seeks to minimize these risks through its
underwriting policies, which require such loans to be qualified at origination
on the basis of the property's income and debt coverage ratio.
The Bank's largest multi-family loan at December 31, 1997 had an outstanding
balance of $711,000 and was secured by a 48-unit building which is current as to
the repayment of principal and interest.
COMMERCIAL REAL ESTATE LENDING. On a limited basis, the Bank originates
commercial real estate loans that are generally secured by properties used for
business purposes such as small office buildings or retail facilities located in
its primary market area. The Bank's underwriting procedures provide that
commercial real estate loans may be made in amounts up to the lesser of 80% of
the appraised value of the property or the sales price. The Bank's underwriting
standards and procedures are similar to those applicable to its multi-family
loans, whereby the Bank considers the net operating income of the property and
the borrower's expertise, credit history, and profitability. The Bank has
generally required that the properties securing commercial real estate loans
have debt service coverage ratios of at least 120%. The largest commercial real
estate loan in the Bank's portfolio at December 31, 1997 was $195,000 and was
secured by commercial retail property. The loan was current and performing in
accordance with its contractual terms at December 31, 1997.
7
Loans secured by commercial real estate properties, like multi-family loans, are
generally larger and involve a greater degree of risk than one-to-four-family
residential mortgage loans. Because payments on loans secured by commercial real
estate properties are often dependent on successful operation or management of
the properties, repayment of such loans may be subject to a great extent to
adverse conditions in the real estate market or the economy. The Bank seeks to
minimize these risks through its underwriting standards, which require such
loans to be qualified on the basis of the property's income and debt service
ratio.
CONSTRUCTION AND LAND LENDING. The Bank originates construction and land
development loans to contractors and individuals in its primary market area. The
Bank's construction loans primarily are made to finance real estate development
and the construction of one-to-four-family residential properties. These loans
are primarily fixed-rate loans with maturities of three years or less. The
Bank's policies provide that construction loans may be made in amounts up to 80%
of the appraised value of the property for construction of one-to-four-family
residences. These loans typically have terms of less than one year. The Bank
requires an independent appraisal of the property. Loan proceeds are disbursed
in increments as construction progresses and as inspections warrant. The Bank
requires regular inspections to monitor the progress of construction. Land loans
are determined on an individual basis, but generally they do not exceed 75% of
the actual cost or current appraised value of the property, whichever is less.
The largest construction and land loan in the Bank's portfolio at December 31,
1997 had a balance of $376,000. This loan is currently performing in accordance
with its terms.
Construction and land financing is considered to involve a higher degree of
credit risk than long-term financing on improved, owner-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 or
development compared to the estimated cost (including interest) of construction.
If the estimate of value proves to be inaccurate, the Bank may be confronted
with a project, when completed, having a value which is insufficient to assure
full repayment.
CONSUMER AND OTHER LENDING. The Bank's originated consumer loans generally
consist of automobile loans, second mortgage loans, and loans secured by
deposits.
The Bank from time to time purchases one-to-four-family mortgage loans and loan
participations from other financial institutions in its primary market area. At
December 31, 1997, the Bank had $1.2 million in purchased mortgage loans and
loan participations serviced by others, totaling 1.7% of the total loan
portfolio at that date, primarily secured by one-to-four-family residences. The
Bank may purchase loans to supplement reduced loan demand as needed and must
meet the same underwriting criteria as loans originated by the Bank.
LOAN APPROVAL PROCEDURES AND AUTHORITY. The Board of Directors establishes the
lending policies of the Bank and delegates lending authority and responsibility
to the Executive Committee, a management committee of the Bank. All real estate
loans must be approved by the Executive Committee or the Board of Directors.
Loans of $350,000 or more must have Board ratification prior to commitment.
Pursuant to Office of Thrift Supervision ("OTS") regulations, loans to one
borrower cannot exceed 15% of the Bank's unimpaired capital and surplus without
regulatory notification. The Bank has no loans to one borrower that are in
excess of regulatory limits.
8
DELINQUENCIES AND CLASSIFIED ASSETS. The Board of Directors performs a monthly
review of all delinquent loans sixty days or more past due. In addition,
management reviews on an ongoing basis all loans thirty or more days delinquent.
The procedures taken by the Bank with respect to delinquencies vary depending on
the nature of the loan and period of delinquency. When a borrower fails to make
a required payment on a loan, the Bank takes a number of steps to have the
borrower cure the delinquency and restore the loan to current status. The Bank
sends the borrower a written notice of nonpayment after the loan is first past
due. If the loan is not brought current and it becomes necessary for the Bank to
take legal action, which occurs after a loan is delinquent at least 60 days or
more, the Bank will commence foreclosure proceedings against any real property
that secures the loan. If a foreclosure action is instituted and the loan is not
brought current, paid in full, or refinanced before the foreclosure sale, the
real property securing the loan is foreclosed upon and sold.
Federal regulations and the Bank's Classification of Assets Policy require that
the Bank utilize an internal asset classification system as a means of reporting
problem and potential problem assets. The Bank has incorporated the OTS internal
asset classifications as a part of its credit monitoring system. The Bank
currently classifies problem and potential problem assets as "Substandard",
"Doubtful", or "Loss" assets, depending upon the severity of the delinquency
status or repayment capacity of the borrower. The likelihood of collection on
the loan declines with each classification, and assets classified as "Loss" are
those considered "uncollectible" and of such little value that their continuance
as assets without the establishment of a specific loss allowance is not
warranted. Assets which do not currently expose the insured institution to
sufficient risk to warrant classification in one of the aforementioned
categories but possess weaknesses are required to be designated "Special
Mention".
The Bank's Executive Committee reviews and classifies the Bank's assets monthly
and reports the results of its review to the Board of Directors. The bank
classifies assets in accordance with the management guidelines described above.
Real Estate Owned (REO) is classified as "Substandard". At December 31, 1997,
the Bank had $348,000 of assets classified as "Special Mention" and $60,000 of
assets classifies as "Substandard". No assets were classified as "Doubtful" or
"Loss".
Non-Accrual and Past-Due Loans. The following table sets forth information
regarding nonaccrual loans, troubled-debt restructurings, and REO. It is the
policy of the Bank to cease accruing interest on loans 90 days or more past due.
For the years ended December 31, 1997, 1996, 1995, 1994, and 1993, respectively,
the amount of interest income that would have been recognized on nonaccrual
loans if such loans had continued to perform in accordance with their
contractual terms was $20,000, $13,000, $83,000, $33,000, and $16,000,
respectively, none of which was recognized.
9
-----------------------------At December 31,--------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Nonaccrual loans
Residential real estate
One-to-four-family $ 241 $ 93 $ 416 $ 603 $ 303
Multi-family 99 190 71 67 -
Commercial - - 430 - -
Construction and land - - - - -
Consumer 8 16 - 18 18
-------- -------- -------- -------- -------
Total nonperforming loans 348 299 917 688 321
REO 60 60 50 50 157
-------- -------- -------- -------- -------
Total nonperforming assets $ 408 $ 359 $ 967 $ 738 $ 478
======== ======== ======== ======== =======
Allowance for loan losses
as a percent of gross loans
receivable 0.71% 0.73% 0.91% 0.47% 0.42%
Allowance for loan losses as
a percent of total
nonperforming loans(1) 143.68 167.22 62.49 39.97 77.88
Nonperforming loans as
a percent of gross loans
receivable(1) 0.50 0.44 1.46 1.17 0.54
Nonperforming assets as
a percent of total assets(1) 0.23 0.20 0.61 0.51 0.35
(1) Nonperforming assets consist of nonperforming loans and REO.
Nonperforming loans consist of all loans 90 days or more past due and
all other nonaccrual loans.
Allowance for Loan Losses. The allowance for loan losses is established through
a provision for loan losses based on management's evaluation of the risks
inherent in the loan portfolio, its classifications of individual loans, and the
general economy. The allowance for loan losses is maintained at an amount
management considers adequate to cover estimated losses in loans receivable
which are deemed probable and estimable. The allowance is based upon a number of
factors, including current economic conditions, actual loss experience, and
industry trends. In addition, various regulatory agencies, as an integral part
of their examination process, periodically review the Bank's allowance for loan
losses. Such agencies may require the Bank to make additional provisions for
loan losses based upon information available at the time of the review. The Bank
will continue to monitor and modify the allowance for loan losses as conditions
dictate.
10
The following table sets forth activity in the Bank's allowance for loan losses
for the period set forth in the table.
-------------------------Year Ended December 31,------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Balance at beginning
of period $ 500 $ 573 $ 275 $ 250 $ 175
Provision for loan losses - - 298 48 140
Charge-offs
Real estate
One-to-four-family - - - (23) -
Multi-family - (73) - - -
Construction and land - - - - (65)
Consumer - - - - -
--------- --------- ---------- ----------- ---------
Total - (73) - (23) (65)
Recoveries - - - - -
--------- --------- ---------- ----------- ---------
Balance at end of period $ 500 $ 500 $ 573 $ 275 $ 250
========= ========= ========== =========== =========
Net charge-offs to average
gross loans outstanding - 0.12% - 0.04% 0.11%
11
The following table sets forth delinquencies in the Bank's loan portfolio
as of the dates indicated.
-------------------At December 31, 1997--------- ---------------At December 31, 1996---------------
60-89 DAYS 90 DAYS OR MORE(1) 60-89 DAYS 90 DAYS OR MORE(1)
Principal Principal Principal Principal
Number Balance Number Balance Number Balance Number Balance
of Loans of Loans of Loans of Loans of Loans of Loans of Loans of Loans
-------- -------- -------- -------- -------- -------- -------- --------
One-to-four-family 5 $ 310 4 $ 241 6 $ 344 2 $ 93
Multi-family - - 1 99 - - 2 190
Commercial - - - - 2 209 - -
Construction and land - - - - - - - -
Consumer - - 2 8 - - 2 16
--------- --------- --------- -------- --------- -------- -------- --------
Total 5 $ 310 7 $ 348 8 $ 553 6 $ 299
========= ========= ========= ======== ========= ======== ======== ========
Delinquent loans to
total gross loans 0.44% 0.50% 0.81% 0.44%
========= ======== ======== ========
-------------------At December 31, 1997--------- ---------------At December 31, 1996---------------
60-89 DAYS 90 DAYS OR MORE(1) 60-89 DAYS 90 DAYS OR MORE(1)
Principal Principal Principal Principal
Number Balance Number Balance Number Balance Number Balance
of Loans of Loans of Loans of Loans of Loans of Loans of Loans of Loans
-------- -------- -------- -------- -------- -------- -------- --------
One-to-four-family 3 $ 391 5 $ 416 4 $ 214 6 $ 603
Multi-family - - 1 71 - - 1 67
Commercial - - 2 430 - - - -
Construction and land - - - - - - - -
Consumer 2 9 - - - - 2 18
--------- --------- --------- -------- --------- -------- -------- --------
Total 5 $ 400 8 $ 917 4 $ 214 9 $ 688
========= ========= ========= ======== ========= ======== ======== ========
Delinquent loans to
total gross loans 0.64% 1.46% 0.36% 1.17%
========= ======== ======== ========
(1) Loans 90 days or more past due are included in nonaccrual loans.
12
The following table sets forth the amount of the Bank's allowance for loan
losses, the percent of allowance for loan losses to total allowance, and the
percent of gross loans to total gross loans in each of the categories listed at
the dates indicated.
------------------------------------------At December 31,-------------------------------------------
------------1997-------------- ------------1996-------------- -------------1995---------------
Percent of Percent of Percent of
Gross Gross Gross
Loans in Loans in Loans in
Each Each Each
Percent of Category Percent of Category Percent of Category
Allowance to Total Allowance to Total Allowance to Total
to Total Gross to Total Gross to Total Gross
Amount Allowance Loans Amount Allowance Loans Amount Allowance Loans
------ --------- ----- ------ --------- ----- ------ --------- -----
One-to-four-
family $ 278 55.60% 79.24% $ 269 53.80% 78.88% $ 245 42.76% 77.42%
Multi-family 79 15.80 11.19 82 16.40 11.99 135 23.56 9.82
Commercial 36 7.20 2.56 35 7.00 2.52 35 6.11 2.79
Construction
and land 68 13.60 4.87 65 13.00 4.82 103 17.98 8.18
Consumer 4 0.80 2.14 6 1.20 1.79 17 2.96 1.79
Unallocated 35 7.00 - 43 8.60 - 38 6.63 -
-------- -------- ----- --------- ------- ------- --------- ------- -------
Total
allowance
for loan
losses $ 500 100.00% 100.00% $ 500 100.00% 100.00% $ 573 100.00% 100.00%
======== ======= ======= ========= ======= ======= ========= ======= =======
----------------------At December 31,-----------------------------
---------------1994-------------- ------------1993--------------
Percent of Percent of
Gross Gross
Loans in Loans in
Each Each
Percent of Category Percent of Category
Allowance to Total Allowance to Total
to Total Gross to Total Gross
Amount Allowance Loans Amount Allowance Loans
------ --------- ----- ------ --------- -----
One-to-four-
family $ 112 40.73% 75.88% $ 115 46.00% 77.34%
Multi-family 30 10.91 10.04 38 15.20 12.64
Commercial 15 5.45 2.42 8 3.20 1.31
Construction
and land 61 22.18 10.26 43 17.20 7.12
Consumer 17 6.18 1.40 19 7.60 1.59
Unallocated 40 14.55 - 27 10.80 -
--------- ------- ------- --------- ------- -------
Total
allowance
for loan
losses $ 275 100.00% 100.00% $ 250 100.00% 100.00%
========= ======= ======= ========= ======= =======
13
REAL ESTATE OWNED
At December 31, 1997, the Bank had $60,000 of REO. This consisted of a single
family lot, which was appraised at $60,000. If the Bank acquires any REO, it is
initially recorded at fair value less costs to sell, and thereafter, REO is
recorded at the lower of the recorded investment in the loan or the fair value
of the related assets at the date of foreclosure, less costs to sell. If there
is a further deterioration in value, the Bank provides for a specific valuation
allowance. The Bank relies on appraisals or market valuations in the disposition
of all REO.
INVESTMENT ACTIVITIES
The investment policies of the Company and the Bank as established by the Board
of Directors attempt to provide and maintain liquidity, generate a favorable
return on investments without incurring undue interest rate and credit risk, and
complement the Bank's lending activities. The policies provide the authority to
invest in United States Treasury and federal agency securities, mortgage-backed
securities guaranteed by the United States government and agencies thereof, and
equity securities.
Investments in mortgage-backed securities involve a risk that actual prepayments
will be greater than estimated prepayments over the life of the security which
may require adjustments to the amortization of any premium or accretion of any
discount relating to such instruments thereby reducing or increasing,
respectively, the net yield on such securities. There is also reinvestment risk
associated with the cash flows from such securities. In addition, the market
value of such securities may be adversely affected by changes in interest rates.
The following table sets forth information regarding the carrying amount and
fair values of the Company's securities at the dates indicated.
------------------------------At December 31,-------------------------------
-----------1997-------- ----------1996-------- ----------1995----------
Carrying Fair Carrying Fair Carrying Fair
Amount Value Amount Value Amount Value
------ ----- ------ ----- ------ -----
Available-for-sale
U.S. Treasury bills and notes $ - $ - $ 1,514 $ 1,514 $ 4,547 $ 4,547
U.S. government agency notes 29,167 29,167 39,371 39,371 28,358 28,358
FNMA 4,166 4,166 5,078 5,078 1,335 1,335
FHLMC 3,073 3,073 4,146 4,146 2,894 2,894
Municipal securities 287 287 - - - -
Equity securities 408 408 - - - -
----------- ---------- ---------- ---------- ---------- ----------
Total available-for-sale $ 37,101 $ 37,101 $ 50,109 $ 50,109 $ 37,134 $ 37,134
=========== ========== ========== ========== ========== ==========
Held-to-maturity
U.S. government agency notes $ 44,975 $ 45,088 $ 34,134 $ 34,017 $ 24,635 $ 24,521
FNMA 5,651 5,566 6,290 6,206 7,497 7,431
FHLMC 5,110 5,030 7,416 7,330 10,274 10,249
CMOs - - - - 88 92
----------- ---------- ---------- ---------- ---------- ----------
Total held-to-maturity $ 55,736 $ 55,684 $ 47,840 $ 47,553 $ 42,494 $ 42,293
=========== ========== ========== ========== ========== ==========
14
The table below sets forth certain information regarding the carrying amount,
weighted average yields, and contractual maturities of the Company's securities
and mortgage-backed securities as of December 31, 1997. Equity securities have
no stated maturity and are included in the total column only.
-----------------------------------------------At December 31, 1997-------------------------------
More than One More than Five More than
One Year or Less Year to Five Years Years to Ten Years Ten Years Total
---------------- ------------------ ------------------ --------- -----
Weighted Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Securities
Available-for-sale
U.S. government agency
notes $ 1,991 5.37% $ 17,166 6.30% $ 6,020 7.03% $ 3,990 7.34% $ 29,167 6.53%
Municipal securities - - - - - - 287 5.35 287 5.35
Equity securities - - - - - - - - 408 9.00
------- ---- ------- ----- ------- ----- ------- ----- ------- ----
Total available-for-sale 1,991 5.37 17,166 6.30 6,020 7.03 4,277 7.20 29,862 6.55
Held-to-maturity
U.S. government agency
notes 6,000 5.38 3,999 7.21 19,987 7.34 14,989 7.52 44,975 7.13
------- ---- ------- ----- ------- ----- ------- ----- ------ ----
Total securities $ 7,991 5.38% $ 21,165 6.47% $26,007 7.27% $19,266 7.45% $ 74,837 6.90%
======= ==== ======= ===== ======= ===== ======= ===== ====== ====
Mortgage-backed securities
Available-for-sale
FNMA $ - -% $ 3,271 6.71% $ - -% $ 895 6.89% $ 4,166 6.75%
FHLMC 1,425 6.06 1,648 6.70 - - - - 3,073 6.40
------- ---- ------- ----- ------- ----- ------- ----- ------ ----
Total available-for-sale 1,425 6.06 4,919 6.71 - - 895 6.89 7,239 6.60
Held-to-maturity
FNMA - - - - - - 5,651 7.12 5,651 7.12
FHLMC - - - - - - 5,110 6.77 5,110 6.77
------- ---- ------- ----- ------- ----- ------- ----- ------ ----
Total held-to-maturity - - - - - - 10,761 6.95 10,761 6.95
------- ---- ------- ----- ------- ----- ------- ----- ------ ----
Total mortgage-
backed securities $ 1,425 6.06%$ 4,919 6.71% $ - -% $11,656 6.95% $ 18,000 6.81%
======= ==== ======= ===== ======= ===== ======= ===== ====== ====
15
SOURCES OF FUNDS
General. Deposits, loan repayments and prepayments, cash flows generated from
operations, and, to a significantly lesser extent, FHLB advances are the primary
sources of the Bank's funds for use in lending, investing, and for other general
purposes.
Deposits. The Bank offers a variety of deposit accounts with a range of interest
rates and terms. The Bank's deposits consist of passbook savings, NOW accounts,
money market accounts, and certificates of deposit. The term of the certificates
of deposit offered by the Bank varies from three months to seven years and the
offering rates are established by the Bank on a weekly basis. Specific terms of
an individual account vary according to the type of account, the minimum balance
required, the time period funds must remain on deposit, and the interest rate,
among other factors. The flow of deposits is influenced significantly by general
economic conditions, changes in money market rates, prevailing interest rates,
and competition. At December 31, 1997, the Bank had $62.0 million of certificate
accounts maturing in less than one year. The Bank's deposits are obtained
predominantly from the areas surrounding its banking offices. The Bank relies
primarily on customer service and long-standing relationships with customers to
attract and retain these deposits; however, market interest rates and rates
offered by competitors significantly affect the Bank's ability to attract and
retain deposits.
The following table presents the deposit activity of the Bank for the periods
indicated:
----------YEAR ENDED DECEMBER 31,--------
1997 1996 1995
---- ---- ----
Net deposits (withdrawals) $ 1,933 $ (7,086) $ 7,200
Interest credited on deposit accounts 5,330 5,435 4,782
----------- ----------- -----------
Total increase (decrease) in deposit accounts $ 7,263 $ (1,651) $ 11,982
=========== =========== ===========
At December 31, 1997, the Bank had approximately $11.6 million in certificate
accounts in amounts of $100,000 or more maturing as follows:
Weighted
Average
Maturity Period Amount Rate
--------------- ------ ----
Three months or less $ 2,004 5.76%
Over three through six months 3,020 5.97
Over six through twelve months 2,637 5.91
Over twelve months 3,973 6.24
----------- ----
Total $ 11,634 6.01%
=========== ====
16
The following table sets forth the distribution of the Bank's deposit accounts
for the periods indicated.
---------------------------------------Year Ended December 31,-----------------------------
-----------1997------------ ------------1996-------------- -----------1995-------------
Percent of Percent of Percent of
Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ -----
Passbook accounts $ 32,155 23.62% $ 33,875 26.29% $ 34,798 26.66%
Money market savings accounts 4,002 2.94 4,041 3.14 4,014 3.08
NOW accounts 5,708 4.20 5,672 4.40 5,630 4.31
Non-interest-bearing accounts 1,115 0.82 1,088 0.84 1,352 1.04
--------- -------- --------- ------ -------- -------
Total 42,980 31.58 44,676 34.67 45,794 35.09
Certificate accounts
4.00% to 4.99% - - 1,056 0.82 5,513 4.22
5.00% to 5.99% 76,199 59.10 56,516 43.86 42,123 32.28
6.00% to 6.99% 12,432 9.13 25,785 20.01 34,436 26.39
7.00% to 7.99% 254 0.19 354 0.28 1,270 0.97
8.00% to 8.99% - - 465 0.36 1,108 0.85
9.00% and over - - - - 259 0.20
--------- -------- --------- ------ -------- -------
Total certificate accounts 88,885 68.42 84,176 65.33 84,709 64.91
--------- -------- --------- ------ -------- -------
Total deposits $ 131,865 100.00% $128,852 100.00% $ 130,503 100.00%
========= ======== ========= ====== ======== =======
The following table presents, by various rate categories, the amount of
certificate accounts outstanding at the dates indicated and the periods to
maturity of the certificate accounts outstanding at December 31, 1997.
-----------------------Period to Maturity From December 31,-----------------------------
Less than 1 to 2 to 3 to 4 to More than
1 Year 2 Years 3 Years 4 Years 5 Years 5 Years Total
------ ------- ------- ------- ------- ------- -----
Certificate accounts
5.00% to 5.99% $ 55,842 $ 15,450 $ 2,802 $ 1,022 $ 937 $ 146 $ 76,199
6.00% to 6.99% 1,647 7,068 2,483 233 1,001 - 12,432
7.00% to 7.99% 254 - - - - - 254
---------- ---------- ---------- --------- ---------- ---------- ----------
Total $ 57,743 $ 22,518 $ 5,285 $ 1,255 $ 1,938 $ 146 $ 88,885
========== ========== ========== ========= ========== ========== ==========
17
Borrowings. Periodically, the Bank has obtained advances from the Federal Home
Loan Bank of Chicago ("FHLB") as an alternative to retail deposit funds and may
do so in the future as part of its operating strategy. These advances are
collateralized primarily by the Bank's mortgage loans which are less than 90
days past due. Such advances are made pursuant to several different credit
programs, each of which has its own interest rate and range of maturities. The
maximum amount that the FHLB will advance to member institutions fluctuates in
accordance with the policies of the OTS and the FHLB. There were no advances
outstanding at December 31, 1997.
The Bank's borrowings may, from time to time, also include collateralized
borrowings through securities sold under repurchase agreements whereby a
customer will maintain deposit balances in excess of federal deposit insurance
limits and are secured by securities which are pledged to the depositor by the
Bank. The Bank maintains physical control over the securities. The Bank had $4.2
million of securities sold under repurchase agreements outstanding at December
31, 1997 which carried interest rates ranging from 5.75% to 5.80%, and terms
ranging from 30 to 90 days.
SUBSIDIARY ACTIVITIES
The Bank has two wholly-owned subsidiaries. GPS Development Corp. is an Illinois
corporation which participates in the residential real estate development
projects. GPS Corporation is an Illinois corporation previously engaged in the
sale of retail insurance products. In December 1994, the Bank sold the insurance
policies to an unaffiliated insurance agency. Presently, the activities of GPS
Corporation are limited to recordkeeping and receipt of certain fees relating to
the sold policies.
GPS Development Corp. The Bank engages in the business of purchasing unimproved
land for development into residential subdivisions of primarily single-family
lots through its wholly-owned subsidiary, GPS Development Corp. ("GPS"), which
was incorporated in 1993. The Bank and its subsidiary have been engaged in this
activity since 1985, and since that time, have developed and sold over 440 lots
in four different subdivisions in the western suburbs of Chicago. Currently, GPS
acts as joint venture partner in its developments. For those joint ventures it
is engaged in, GPS has historically provided essentially all of the capital for
a joint venture in exchange for an ownership interest which entitles it to a
percentage of the profit or loss generated by the venture. GPS only invests in
real estate development projects which it believes it can monitor effectively.
GPS has a percentage interest in the net profit of each joint venture, generally
50%, with the exact percentage based upon a number of factors, including
characteristics of the venture, the perceived risks involved, and the time to
completion. The net profits are generally defined in the joint venture agreement
as the gross profits of the joint venture from sales, less all expenses, loan
repayments, capital contributions, and an agreed-upon rate of return to GPS on
such capital contribution.
At December 31, 1997, GPS was involved in the Prairie Ridge development, located
in Naperville, Illinois. This project consists of 88 single-family residential
lots, and as of December 31, 1997, 14 single-family lots have been sold.
18
Real estate development activities involve risks that could have an adverse
effect on the profitability of the Bank. GPS incurs substantial costs to
acquire, improve, and market the land prior to commencement of construction.
There are negative cash flows in the early stages of the project because it does
not recoup such costs until sales of the lots are closed. During the
construction phase, a number of factors could result in cost overruns, which
could decrease or possibly eliminate the potential profit from the project. In
addition, the profit potential on any given project may cease if the project is
not completed, the underlying value of the project or the general market area
declines, the project is not sold or is sold over a longer period of time than
initially contemplated, or a combination of these factors occurs. Additionally,
the ability to generate income from such projects is dependent, in part, on the
economy of the metropolitan Chicago area. Although the economy in such area has
been stable in recent years, there can be no assurance that such economy will
continue to be favorable. For the years ended December 31, 1997, 1996, and 1995,
gain on the sale of real estate held for development totaled $276,000, $60,000,
and $523,000, respectively.
EMPLOYEES
At December 31, 1997, the Company had a total of 40 full-time employees and 16
part-time employees. None of the Company's employees are represented by any
collective bargaining group. Management considers its relationship with
employees to be excellent.
FEDERAL TAXATION
General. The Company and the Bank report their income on a calendar year basis
using the accrual method of accounting and are subject to federal income
taxation in the same manner as other corporations with some exceptions,
including particularly the Bank's reserve for bad debts discussed below. The
following discussion of tax matters is intended only as a summary and does not
purport to be a comprehensive description of the tax rules applicable to the
Bank or the Company.
In August 1996, legislation was enacted that repeals the reserve method of
accounting used by many thrifts to calculate their bad debt reserve for federal
income tax purposes. As a result, the Bank is required to recapture that portion
of the reserve that exceeds the amount which could have been deducted under the
experience method for post-1987 tax years, and now account for bad debts for
federal income tax purposes on the same basis as commercial banks. The recapture
will occur over a six-year period beginning in 1998 since the institution meets
certain residential lending requirements. The legislation did not have a
material impact on the Company or the Bank.
To the extent earnings appropriated to a savings association's bad debt reserves
for "qualifying real property loans" and deducted for federal income tax
purposes exceed the allowable amounts of such reserves computed under the
experience method and to the extent of the association's supplemental reserves
for losses on loans (Excess), such Excess may not, without adverse tax
consequences, be utilized for the payment of cash dividends or other
distributions to a shareholder (including distributions on redemption,
dissolution, or liquidation) or for any other purpose (except to absorb bad debt
losses). As of December 31, 1997, the Company's Excess for tax purposes totaled
approximately $3.3 million.
19
Corporate Alternative Minimum Tax. The Internal Revenue Code of 1986, as amended
(the Code), imposes a tax on alternative minimum taxable income (AMTI) at a rate
of 20%. The excess of the bad debt reserve deduction using the percentage of
taxable income method over the deduction that would have been allowable under
the experience method is treated as a preference item for purposes of computing
the AMTI. Only 90% of AMTI can be offset by net operating loss carryovers of
which the Bank currently has none. AMTI is increased by an amount equal to 75%
of the amount by which the Bank's adjusted current earnings exceeds its AMTI
(determined without regard to this preference and prior to reduction for net
operating losses). The Bank does not expect to be subject to AMTI.
STATE AND LOCAL TAXATION
State of Illinois. The Company and the Bank file a combined Illinois income tax
return. For Illinois income tax purposes, they are taxed at an effective rate
equal to 7.18% of Illinois taxable income. For these purposes, "Illinois taxable
income" generally means federal taxable income, subject to certain adjustments
including the addition of interest income on state and municipal obligations and
the exclusion of interest income on United States Treasury and qualifying agency
obligations. The exclusion of income on United States Treasury and qualifying
agency obligations has the effect of reducing Illinois taxable income. The
Company is also required to file an annual report with and pay an annual
franchise tax to the state of Illinois.
Delaware Taxation. As a Delaware holding company not earning income in Delaware,
the Company is exempted from Delaware corporate income tax but is required to
file an annual report with and pay an annual franchise tax to the state of
Delaware.
REGULATION
The Bank is subject to extensive regulation, examination, and supervision by the
OTS, as its chartering agency, and the Federal Deposit Insurance Corporation
("FDIC"), as the deposit insurer. The Bank's deposit accounts are insured up to
applicable limits by the FDIC. The Bank must file reports with the OTS and the
FDIC concerning its activities and financial condition in addition to obtaining
regulatory approvals prior to entering into certain transactions such as mergers
with, or acquisitions of, other financial institutions. There are periodic
examinations by the OTS and the FDIC to test the Bank's compliance with various
regulatory requirements. The Company, as a savings bank holding company, is also
required to file certain reports with and otherwise comply with the rules and
regulations of the OTS and of the Securities and Exchange Commission ("SEC")
under the federal securities laws. This regulation and supervision establishes a
comprehensive framework of activities in which a depository institution and its
holding company can engage and is intended primarily for the protection of the
insurance fund and depositors. The regulatory authorities have extensive
discretion in connection with their supervisory and enforcement activities and
examination policies, including polices with respect to the classification of
assets and the establishment of adequate loan loss reserves for regulatory
purposes. Any change in the regulatory structure or the applicable statutes or
regulations, or policies, whether by the OTS, the FDIC, the SEC, or the
Congress, could have a material impact on the Company, the Bank, and their
operations.
20
ITEM 2. PROPERTIES
The Bank conducts its business through three banking offices. The Company
believes that the current facilities are adequate to meet the present and
immediately foreseeable needs of the Bank and the Company. In addition, the Bank
currently holds two properties, a vacant parcel near its Chicago branch facility
which is currently being developed as a parking lot with a net book value of
$162,000 and a property in a western suburb for a possible future branch office
with a net book value of $145,000.
The following table sets forth certain information regarding the Bank's three
banking offices, all of which are owned by the Bank.
Net Book Value of Property
Location Date Acquired At December 31, 1997
-------- ------------- --------------------
Home office:
5400 South Pulaski Road
Chicago, Illinois 60632 1985 $ 945,000
Branch offices:
2740 West 55th Street 1954 13,000
Chicago, Illinois 60632
21 East Ogden Avenue
Westmont, Illinois 60559 1975 650,000
ITEM 3. LEGAL PROCEEDINGS
The Bank is not involved in any pending proceedings other than the legal
proceedings occurring in the ordinary course of business. Such legal proceedings
in the aggregate are believed by management to be immaterial to the Company's
financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of stockholders during the fourth quarter of
the year ended December 31, 1997.
EXECUTIVE OFFICERS OF PARK BANCORP, INC.
DAVID A. REMIJAS, age 45, has served as the President and Chief Executive
Officer of the Bank since 1993. Mr. Remijas also serves as a Director and
Chairman of the Board of the Bank. Mr. Remijas has been with the Bank since 1974
and has held various positions during that time. Mr. Remijas is the brother of
Richard J. Remijas, Jr.
21
RICHARD J. REMIJAS, JR., age 48, has served as Executive Vice President, Chief
Operating Officer, and Corporate Secretary since 1993. Mr. Remijas has served as
a Director of the Bank since 1977. Mr. Remijas was a principal in
Merrion-Remijas Realtors, Inc. from 1986 to 1995. Mr. Remijas is the brother of
David A. Remijas.
STEVEN J. POKRAK, age 38, joined the Bank in 1985 and has served as Treasurer
and Chief Financial Officer since 1993. Prior to joining the Bank, Mr. Pokrak
had four years of public accounting experience.
SANDRA L. REMIJAS, age 36, joined the Bank in 1986 and has served as Vice
President-Lending since 1993. Mrs. Remijas is the wife of David A. Remijas.
22
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the NASDAQ National Market under the
symbol "PFED" and has 284 shareholders as of December 31, 1997. The table below
shows the reported high and low sales price of the common stock during the
period indicated in 1997.
High Low
---- ---
First quarter $ 16.25 $ 12.75
Second quarter 16.63 14.25
Third quarter 18.00 15.88
Fourth quarter 18.63 17.13
ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following tables set forth selected historical financial and other data of
the Company for the periods and at the dates indicated. The information should
be read in conjunction with the Consolidated Financial Statements and Notes
thereto of the Company contained elsewhere herein.
Selected Financial Data
-----------------------------At December 31,-------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Total assets $ 176,672 $ 178,194 $ 158,939 $ 144,788 $ 136,422
Cash and cash equivalents 7,812 6,213 12,790 2,573 13,252
Securities available-for-sale 37,101 50,109 37,134 14,958 -
Securities held-to-maturity 55,736 47,840 42,494 65,896 58,528
Loans receivable, net(1) 68,327 66,179 60,538 56,558 56,696
Deposits 131,865 128,852 130,503 118,521 119,679
Securities sold under repurchase
agreements 4,250 - - - -
FHLB advances - 5,000 9,000 8,000 -
Stockholders' equity(2) 38,601 42,457 17,533 16,413 14,770
Interest income 12,464 11,335 9,755 8,861 9,254
Interest expense 6,390 6,320 5,706 4,643 4,890
Provision for loan losses - - 298 48 140
Noninterest income 585 307 694 1,284 1,223
Noninterest expense 4,261 3,718 3,096 2,822 2,598
Provision for income taxes 855 543 413 881 1,113(3)
Net income 1,543 1,061 936 1,751 1,736
23
Selected Financial Ratios and Other Data
------------At or for the Year Ended December 31,-----------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Performance ratios:
Return on average assets 0.87% 0.65% 0.65% 1.25% 1.27%
Return on average equity 3.84 3.92 5.49 11.15 12.52
Average equity to average assets 22.75 16.48 11.82 11.26 10.16
Average interest rate spread(4) 2.58 2.48 2.38 2.80 3.22
Net interest margin(5) 3.61 3.19 2.90 3.15 3.44
Efficiency ratio(6) 63.99 69.86 65.28 51.28 46.50
Noninterest expense to average assets 2.41 2.26 2.15 2.02 1.90
Asset quality ratios:
Nonperforming loans as a
percent of gross loans receivable(7) 0.50% 0.44% 1.46% 1.17% 0.54%
Nonperforming assets as a
percentage of total assets(7) 0.23 0.20 0.61 0.51 0.35
Allowance for loan losses as a
percent of gross loans receivable 0.71 0.73 0.91 0.47 0.42
Allowance for loan losses as a
percent of nonperforming loans(7) 143.68 167.22 62.49 39.97 77.88
Other data:
Number of full service offices 3 3 3 3 3
(1) The allowance for loan losses at December 31, 1997, 1996, 1995, 1994,
and 1993 was $500,000, $500,000, $573,000, $275,000, and $250,000,
respectively.
(2) Retained earnings for years prior to 1996.
(3) Income taxes for the year ended December 31, 1993 includes a $104,000
charge due to the cumulative effect of a change in accounting for
income taxes.
(4) The average interest rate spread represents the difference between
the weighted average yield on interest-earning assets and the weighted
average cost of interest-bearing liabilities.
(5) The net interest margin represents net interest income as a percent
of average interest-earning assets.
(6) The efficiency ratio represents noninterest expense as a percent of net
interest income before the provision for loan losses and
noninterest income.
(7) Nonperforming assets consist of nonperforming loans and REO.
Nonperforming loans consist of all loans 90 days or more past due and
all other nonaccrual loans.
24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report contains certain forward-looking statements within the meaning of
Section 27a of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Corporation intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies and expectations of the Corporation, are
generally identifiable by use of the words "believe", "expect", "intend",
"anticipate", "estimate", "project", or similar expressions. The Corporation's
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors which could have a material adverse affect on the
operations and future prospects of the Corporation and its wholly-owned
subsidiary include, but are not limited to, changes in: interest rates; general
economic conditions; legislative/regulatory provisions; monetary and fiscal
policies of the U.S. Government, including policies of the U.S. Treasury and the
Federal Reserve Board; the quality or composition of the loan or investment
portfolios; demand for loan products; deposit flows; competition; demand for
financial services in the Corporation's market area; and accounting principles,
policies, and guidelines. These risks and uncertainties should be considered in
evaluating forward-looking statements and undue reliance should not be placed on
such statements.
GENERAL
The primary business of the Company is the ownership of the Bank. The Bank's
results of operations are dependent primarily on net interest income, which is
the difference between the interest income earned on the Bank's interest-earning
assets, such as loans and investments, and the interest expense on its
interest-bearing liabilities, such as deposits and borrowings. The Bank also
generates noninterest income such as income from real estate development
activities and other fees. The Bank's noninterest expenses consist of employee
compensation and benefits as well as occupancy expenses. The Bank's results of
operations are also significantly affected by general economic and competitive
conditions, particularly changes in market interest rates, government policies,
and actions of regulatory agencies.
25
AVERAGE STATEMENT OF FINANCIAL CONDITION
The following table sets forth certain information relating to the Company's
Average Statement of Financial Condition and reflects the average yield on
assets and average cost of liabilities for the years ended December 31, 1997,
1996, and 1995. The yields and costs are derived by dividing income or expense
by the average balance of assets or liabilities, respectively, for the years
shown. Average balances are derived from average month-end balances. Management
does not believe that the use of average monthly balances instead of average
daily balances has caused any material differences in the information presented.
Average balances of loans receivable include loans on which the Bank has
discontinued accruing interest. The yields and costs include fees which are
considered adjustments to yields.
-------------------------Year Ended December 31,--------------------------------------
------------1 9 9 7--------- --------1 9 9 6----------- --------1 9 9 5---------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ---- ------- -------- ----
ASSETS
Interest-earnings assets
Interest-earning deposits and
other investments $ 4,848 $ 175 3.63% $ 9,595 $ 438 4.56% $ 6,971 $ 361 5.18%
Securities, net(1) 75,579 5,261 6.96 62,868 4,022 6.40 55,390 3,175 5.73
Loans receivable(2) 67,408 5,649 8.38 62,447 5,398 8.64 58,830 5,090 8.65
Mortgage-backed securities, net(1) 20,623 1,379 6.68 22,541 1,477 6.55 18,560 1,129 6.08
--------- -------- ------- ------ -------- -------
Total interest-earning assets 168,458 12,464 7.40 157,451 11,335 7.20 139,751 9,755 6.98
-------
Non-interest-earning assets 8,010 6,672 4,418
--------- ------ -------
Total assets $ 176,468 $164,123 $144,169
========= ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
Passbook accounts $ 33,336 915 2.74 $ 34,266 949 2.77% $ 36,761 1,059 2.88%
Money market savings accounts 3,988 134 3.36 4,121 138 3.35 3,656 120 3.28
NOW accounts 5,839 111 1.90 5,887 111 1.89 5,336 103 1.93
Certificate accounts 85,106 4,959 5.38 84,740 5,003 5.90 75,640 4,322 5.71
--------- -------- ------- ------ -------- -------
Total 128,269 6,119 4.77 129,014 6,201 4.81 121,393 5,604 4.62
FHLB advances and other borrowings 4,392 271 6.17 4,758 118 2.48 2,692 102 3.79
--------- -------- ------- ------- -------- -------
Total interest-bearing liabilities 132,661 6,390 4.82 133,772 6,319 4.72 124,085 5,706 4.60
-------- ------- -------
Non-interest-bearing liabilities 3,662 3,298 3,038
--------- ------- --------
Total liabilities 136,323 137,070 127,123
Stockholders' equity 40,145 27,053 17,046
--------- ------- --------
Total liabilities and stockholders'
equity $ 176,468 $164,123 $144,169
========= ======== ========
Net interest income before provision
for estimated loan losses $ 6,074 $ 5,016 $ 4,049
========= ======== ========
Net interest rate spread(3) 2.58% 2.48% 2.38%
===== ===== =====
Net interest margin(4) 3.61 3.19 2.90
===== ===== =====
Ratio of average interest-earning
assets to average interest-bearing
liabilities 126.98% 117.70% 112.63%
======== ======== ======
(1) Includes related assets available for sale and unamortized discounts and
premiums and certificates of deposit.
(2) Amount is net of deferred loan origination fees, undisbursed loan funds,
unamortized discounts, and allowance for loan losses and includes non-performing
loans.
(3) Net interest rate spread represents the difference between the yield
on average interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Net interest margin represents net interest income divided by average
interest-earning assets.
26
RATE/VOLUME ANALYSIS
The following table presents the extent to which changes in interest rates and
changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Bank's interest income and interest expense during
the periods indicated. Information is provided in each category with respect to:
(i) changes attributable to changes in volume (changes in volume multiplied by
prior rate); (ii) changes attributable to changes in rate (changes in rate
multiplied by prior volume); and (iii) the net change. The changes attributable
to the combined impact of volume and rate have been allocated proportionately to
the changes due to volume and the changes due to rate.
Year Ended Year Ended
December 31, 1997 December 31, 1996
Compared to Compared to
Year Ended Year Ended
---------December 31, 1996--------- ----------December 31, 1995--------
Increase (Decrease) Due to Increase (Decrease) Due to
-------------------------- --------------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
INTEREST-EARNING ASSETS
Interest-earning deposits
and other investments $ (185) $ (78) $ (263) $ 124 $ (47) $ 77
Securities, net(1) 863 376 1,239 455 392 847
Loans receivable, net 419 (168) 251 313 (5) 308
Mortgage-backed securities,
net(1) (128) 30 (98) 257 91 348
--------- ---------- --------- -------- --------- ---------
Total interest-earning
assets 969 160 1,129 1,149 431 1,580
--------- ---------- --------- -------- --------- ---------
INTEREST-BEARING LIABILITIES
Passbook savings accounts (26) (8) (34) (70) (40) (110)
Money market savings accounts (4) - (4) 16 2 18
NOW accounts (1) 1 - 10 (2) 8
Certificate accounts 22 (66) (44) 534 147 681
FHLB advances and other
borrowings (10) 163 153 60 (44) 16
--------- ---------- --------- -------- --------- ---------
Total interest-bearing
liabilities (19) 90 71 550 63 613
--------- ---------- --------- -------- --------- ---------
Change in net interest income $ 988 $ 70 $ 1,058 $ 599 $ 368 $ 967
========= ========== ========= ======== ========= =========
(1) Includes assets available-for-sale.
27
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1997 AND DECEMBER 31, 1996
Total assets at December 31, 1997 were $176.7 million compared to $178.2 million
at December 31, 1996, a decrease of $1.5 million. During 1997, loans increased
by $2.1 million to $68.3 million due to increased demand for fixed-rate mortgage
loans in the Chicago market. The increase in deposits and the decrease in
securities were used to fund the loan growth, repay $5 million of Federal Home
Loan Bank advances, and complete to the repurchase of 391,709 shares of the
Company common stock.
Total liabilities at December 31, 1997 were $138.0 million compared to $135.7 at
December 31, 1996, an increase of $2.3 million. The increase is attributable to
deposit growth of $3.0 million and an increase in securities sold under
repurchase agreements of $4.2 million, offset by the repayment of Federal Home
Loan Bank advances.
Stockholders' equity at December 31, 1997 was $38.6 million compared to $42.4
million at December 31, 1996, a decrease of $3.8 million, due primarily to net
income for the year offset by the repurchase of Company common stock.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1996 AND DECEMBER 31, 1995
Total assets at December 31, 1996 were $178.2 million compared to $158.9 million
at December 31, 1995, an increase of $19.3 million. The increase in total assets
is primarily attributable to the proceeds raised in the Company's initial public
offering of common stock. The net proceeds of the stock offering were invested
in securities which is reflected in the $13.0 million increase in securities
available-for-sale and the $5.3 million increase in securities held-to-maturity.
During 1996, loans increased by $5.6 million due to increased demand for
fixed-rate mortgage loans in the Chicago market. The increases to securities and
loans were partially offset by a $6.6 million decrease in cash and cash
equivalents which was primarily attributable to repayment of Federal Home Loan
Bank advances and additional development costs associated with real estate
development at Prairie Ridge.
Total liabilities at December 31, 1996 were $135.7 million compared to $141.4 at
December 31, 1995, a decrease of $5.7 million. The decrease is attributable to a
$4.0 million decrease in Federal Home Loan Bank advances and a $1.7 decrease in
deposits.
Stockholders' equity at December 31, 1996 was $42.4 million compared to $17.5
million at December 31, 1995, an increase of $24.9 million, due primarily to net
proceeds of the initial public offering that was completed on August 9, 1996 and
the net income for the year.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND
DECEMBER 31, 1996
GENERAL
Net income increased 45.4% from $1,061,000 for the year ended December 31, 1996
to $1,543,000 for the year ended December 31, 1997. Fiscal 1996 results were
negatively affected by the $736,000 one-time special assessment paid by the Bank
to recapitalize the Savings Association Insurance Fund ("SAIF") as further
discussed below.
28
INTEREST INCOME
Interest income for the year ended December 31, 1997 was $12.5 million compared
to $11.3 million for the year ended December 31, 1996, an increase of $1.1
million or 9.9%. The increase in interest income was caused primarily by an
increase in the average yield on securities, including mortgage-backed
securities. The increase in average yield resulted from the investment in higher
yielding investment and mortgage-backed securities. Additionally, the average
balance of loans outstanding increased by more than 7.9% from 1996.
INTEREST EXPENSE
Interest expense for the year ended December 31, 1997 was $6.4 million compared
to $6.3 million for the year ended December 31, 1996, an increase of $71,000 or
1.1%. The increase in interest expense was primarily due to growth in the
average balance of certificates of deposit and higher costs of Federal Home Loan
Bank advances for the year ended December 31, 1997.
PROVISION FOR LOAN LOSSES
There was no provision for losses on loans for the years ended December 31, 1997
and 1996. The lack of provision is indicative of management's assessment that
the allowance for loan losses is adequate, given the trends in historical loss
experience of the portfolio and current economic conditions.
NONINTEREST INCOME
Noninterest income for the year ended December 31, 1997 was $585,000 compared to
$307,000 for the year ended December 31, 1996, an increase of $278,000 or 90.5%.
The increase was primarily attributable to increased sales volume of real estate
held for development which generated a gain of $276,000 as compared to a gain of
$60,000 for the year ended December 31, 1996. Additionally, the Company
recognized a one-time completion fee of $106,000 during 1997 on a land
development loan. Service fee income decreased from $177,000 for the year ended
December 31, 1996 to $145,000 for the year ended December 31, 1997 primarily due
to a lesser amount of construction loans.
NONINTEREST EXPENSE
Noninterest expense for the year ended December 31, 1997 was $4.3 million
compared to $3.7 million for the year ended December 31, 1996, an increase of
$543,000. The primary components attributable to the increase were increased
compensation expense associated with the employee stock ownership plan ("ESOP")
and management retention plan ("MRP") as well as other costs incurred as a
result of operating as a public company. The Company also realized a decrease in
federal deposit insurance costs due to a $736,000 special one-time assessment to
recapitalize the SAIF recorded in 1996. Additionally, the insurance premium rate
was reduced after this special assessment.
INCOME TAXES
Income tax expense was $855,000 for the year ended December 31, 1997 compared to
$543,000 for the year ended December 31, 1996, an increase of $312,000. The
increase in income tax expense was primarily the result of the increase in
income before income taxes to $2.4 million for the year ended December 31, 1997
from $1.6 million for the year ended December 31, 1997.
29
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND
DECEMBER 31, 1995
GENERAL
Net income increased 13.3% from $936,000 for the year ended December 31, 1995 to
$1,061,000 for the year ended December 31, 1996. Fiscal 1996 results were
negatively affected by the one-time special assessment paid by the Bank to
recapitalize the Savings Association Insurance Fund ("SAIF") as further
discussed below. Prior to this charge, the earnings of the Company were
$1,547,000 due primarily to the growth in earning assets from 1995 to 1996 as a
result of the Company's conversion to a stock form of ownership during 1996.
INTEREST INCOME
Interest income for the year ended December 31, 1996 was $11.3 million compared
to $9.8 million for the year ended December 31, 1995, an increase of $1.5
million or 15%, caused primarily by an increase in the average yield on
securities and the investment of stock offering proceeds.
INTEREST EXPENSE
Interest expense for the year ended December 31, 1996 was $6.3 million compared
to $5.7 million for the year ended December 31, 1995, an increase of $613,000 or
10.7%. The increase in interest expense was primarily due to a higher rate paid
on certificates of deposit.
PROVISION FOR LOAN LOSSES
The Bank's provision for losses on loans for the year ended December 31, 1996
was $0 compared to $298,000 for the year ended December 31, 1995. The lack of
provision is indicative of management's assessment of the adequacy of the
allowance for loan losses, given the trends in historical loss experience of the
portfolio and current economic conditions.
NONINTEREST INCOME
Noninterest income for the year ended December 31, 1996 was $307,000 compared to
$695,000 for the year ended December 31, 1995, a decrease of $388,000 or 55.8%.
The decrease was primarily attributable to the slowdown in sales volume of real
estate held for development. During the year ended December 31, 1996, six of the
remaining nine lots were sold in the Rose Hill subdivision at a gain of $60,000
as compared to a gain of $523,000 for the year ended December 31, 1995. This
decline was mitigated by an increase in service fee income from fees on deposit
accounts which increased from $102,000 for the year ended December 31, 1995 to
$177,000 for the year ended December 31, 1996.
NONINTEREST EXPENSE
Noninterest expense for the year ended December 31, 1996 was $3.7 million
compared to $3.1 million for the year ended December 31, 1995, an increase of
$0.6 million. The primary factor attributable to the increase was a $736,000
special one-time assessment to recapitalize the SAIF. This assessment was
charged to the Bank during 1996 and was based upon a 65.7 basis point charge on
insured deposits outstanding as of March 31, 1995.
30
INCOME TAXES
Income tax expense was $543,000 for the year ended December 31, 1996 compared to
$413,000 for the year ended December 31, 1995, an increase of $130,000. The
increase in income tax expense was primarily the result of the increase in
income before income taxes from $1.3 million for the year ended December 31,
1995 to $1.6 million for the year ended December 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Bank's primary sources of funds are deposits, principal and interest
payments on loans and securities, proceeds from the maturation of securities,
FHLB advances, and securities sold under repurchase agreements. While maturities
and scheduled amortization of loans and securities are predictable sources of
funds, deposit flows and mortgage prepayments are greatly influenced by general
interest rates, economic conditions, and competition. The Bank maintains a
liquidity ratio substantially above the regulatory requirement. This
requirement, which may be varied at the direction of the OTS depending upon
economic conditions and deposit flows, is based upon a percentage of deposits
and short-term borrowings. The required ratio is currently 5%. The Bank's
average regulatory liquidity ratios were 53.48%, 52.98%, and 52.72% for the
years ended December 31, 1997, 1996, and 1995, respectively.
The Bank's cash flows are comprised of three primary classifications -- cash
flows from operating activities, investing activities, and financing activities.
Cash flows provided by operating activities were $1,919,000, $895,000, and
$863,000 for the years ended December 31, 1997, 1996, and 1995, respectively.
Net cash from investing activities consisted primarily of disbursements for loan
originations and the purchase of securities, offset by principal collections on
loans, proceeds from maturation of investments and paydowns on mortgage-backed
securities, and the investment in and proceeds from the sale of real estate held
for development. Net cash from financing activities consisted primarily of the
activity in deposit accounts, FHLB borrowings, and securities sold under
repurchase agreements in addition to the repurchase of Company common stock in
1997. The net cash from financing activities was $(4.0) million, $18.4 million,
and $12.9 million for the years ended December 31, 1997, 1996, and 1995,
respectively.
At December 31, 1997, the Bank exceeded all of its regulatory capital
requirements with a tangible capital level of $23.7 million or 14.5% of adjusted
total assets, which is above the required level of $2.4 million or 1.5%; core
capital of $23.7 million or 14.5% of adjusted total assets, which is above the
required level of $4.9 million or 3.0%; and risk-based capital of $24.2 million
or 38.6% of risk-weighted assets, which is above the required level of $5.0
million or 8.0%.
The Bank's most liquid assets are cash and short-term investments. The levels of
these assets are dependent on the Bank's operating, financing, lending, and
investing activities during any given period. At December 31, 1997, cash and
short-term investments totaled $7.8 million. The Bank has other sources of
liquidity if a need for additional funds arises, including securities maturing
within one year and the repayment of loans. The Bank may also utilize FHLB
advances or the sale of securities available-for-sale as a source of funds.
31
At December 31, 1997, the Bank had outstanding commitments to originate mortgage
loans of $891,000 compared to $835,000 at December 31, 1996. The Bank
anticipates that it will have sufficient funds available to meet its current
loan origination commitments. Certificate accounts which are scheduled to mature
in less than one year from December 31, 1997 totaled $57.7 million. The Bank
expects that a substantial portion of the maturing certificate accounts will be
retained by the Bank at maturity. However, if a substantial portion of these
deposits are not retained, the Bank may utilize Federal Home Loan Bank advances,
or raise interest rates on deposits to attract new accounts, which may result in
higher levels of interest expense.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and Notes thereto presented herein have
been prepared in accordance with generally accepted accounting principles, which
requires the measurement of financial position and operating results in terms of
historical dollar amounts without considering the changes in the relative
purchasing power of money over time due to inflation. The impact of inflation is
reflected in the increased cost of the Bank's operations. Unlike industrial
companies, nearly all of the assets and liabilities of the Bank are monetary in
nature. As a result, interest rates have a greater impact on the Bank's
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.
IMPACT OF NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 130 (SFAS No. 130), Reporting
Comprehensive Income, will become effective during 1998 and requires that all
components of comprehensive income be presented in a separate statement.
Management does not anticipate that SFAS No. 130 will have a significant impact
on the Company's results of operations or capital.
Statement of Financial Accounting Standards No. 131 (SFAS No. 131), Disclosures
about Segments of an Enterprise and Related Information, will also become
effective during 1998. SFAS No. 131 establishes standards for the way public
companies report information about its operating segments and requires that
these standards be adhered to for interim reporting as well. SFAS No. 131
requires companies to provide more descriptive disclosures about its operating
segments including the way in which the segment was determined, the products and
services provided by the segment, and the profit or loss generated by the
segment. Management does not anticipate that SFAS No. 131 will have a
significant impact on the Company's results of operations or capital.
YEAR 2000 COMPLIANCE
A critical issue facing the financial institution industry is concerns over
computer systems' ability to process year-date data beyond the year 1999. Except
in recently developed year 2000 compliant programs, computer programmers
consistently have abbreviated dates by eliminating the first two digits of a
year, with the assumption that these two digits would always be "19". Unless
corrected, this situation is expected to cause widespread problems on January 1,
2000, when computer systems may recognize this date as January 1, 1900, and
process data incorrectly or stop processing altogether. This issue could affect
a variety of the Company's systems from its data processing system which records
loan and deposit
32
information to other ancillary systems such as alarms and locking devices.
Management has considered this issue internally and receives periodic
correspondence from its data processor regarding their plans to be year 2000
compliant. Management does not anticipate that the Company will incur material
operating expenses or be required to invest heavily in computer system
improvements to be year 2000 compliant. Nevertheless, if not properly addressed,
these issues could result in interruptions in the Company's business and have a
material adverse effect on the Company's results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
The principal objective of the Bank's interest rate risk management function is
to evaluate the interest rate risk included in certain balance sheet accounts;
determine the level of risk appropriate given the Bank's business focus,
operating environment, capital and liquidity requirements, and performance
objectives; and manage the risk consistent with Board approved guidelines.
Through such management, the Bank seeks to reduce the vulnerability of its
operations to changes in interest rates. The Bank monitors its interest rate
risk as such risk relates to its operating strategies. The Bank's executive
committee meets regularly and reviews the Bank's interest rate risk position and
makes recommendations for adjusting such position. In addition, the Bank's Board
of Directors reviews on a quarterly basis the Bank's asset/liability position,
including simulations of the effect on the Bank's capital of various interest
rate scenarios.
The Bank's interest rate sensitivity is monitored by management through the use
of a model which estimates the change in net portfolio value ("NPV") over a
range of interest rate scenarios. NPV is the present value of expected cash
flows from assets, liabilities, and off-balance-sheet contracts. An NPV Ratio,
in any interest rate scenario, is defined as the NPV in that scenario divided by
the market value of assets in the same scenario. The Sensitivity Measure is the
decline in the NPV Ratio, in basis points, caused by a 2% increase or decrease
in rates, whichever produces a larger decline. The higher an institution's
Sensitivity Measure is, the greater its exposure to interest rate risk is
considered to be. The Bank utilizes a market value model prepared by the OTS
(the "OTS NPV model"), which is prepared quarterly, based on the Bank's
quarterly Thrift Financial Reports filed with the OTS. The OTS NPV model
measures the Bank's interest rate risk by approximating the Bank's NPV, which is
the net present value of expected cash flows from assets, liabilities, and any
off-balance-sheet contracts, under various market interest rate scenarios which
range from a 400 basis point increase to a 400 basis point decrease in market
interest rates. The interest rate risk policy of the Bank provides that the
maximum permissible change at a 400 basis point increase or decrease in market
interest rates is a 90% change in the net portfolio value. The OTS has
incorporated an interest rate risk component into its regulatory capital rule.
Under the rule, an institution whose sensitivity measure exceeds 2% would be
required to deduct an interest rate risk component in calculating its total
capital for purpose of the risk-based capital requirement. As of September 30,
1997, the Bank's sensitivity measure, as measured by the OTS, resulting from a
200 basis point increase in interest rates was (0.66)% and would result in a
$1.9 million reduction in the NPV of the Bank. Accordingly, increases in
interest rates would be expected to have a negative impact on the Bank's
operating results. The NPV Ratio sensitivity measure is
33
below the threshold at which the Bank could be required to hold additional
risk-based capital under OTS regulations.
Certain shortcomings are inherent in the methodology used in the above interest
rate risk measurements. Modeling changes in NPV requires the making of certain
assumptions that may tend to oversimplify the manner in which actual yields and
costs respond to changes in market interest rates. First, the models assume that
the composition of the Bank's interest sensitive assets and liabilities existing
at the beginning of a period remains constant over the period being measured.
Second, the models assume that a particular change in interest rates is
reflected uniformly across the yield curve regardless of the duration to
maturity or repricing of specific assets and liabilities. Third, the model does
not take into account the impact of the Bank's business or strategic plans on
the structure of interest-earning assets and interest-bearing liabilities.
Accordingly, although the NPV measurement provides an indication of the Bank's
interest rate risk exposure at a particular point in time, such measurement is
not intended to and does not provide a precise forecast of the effect of changes
in market interest rates on the Bank's net interest income and will differ from
actual results. The results of this modeling are monitored by management and
presented to the Board of Directors, quarterly.
The following table shows the NPV and projected change in the NPV of the Bank at
December 31, 1997 assuming an instantaneous and sustained change in market
interest rates of 100, 200, 300, and 400 basis points.
Interest Rate Sensitivity of Net Portfolio Value (NPV)
NPV as a % of
--------------Net Portfolio Value------------ -----------PV of Assets---------
Change in Rates $ Amount $ Change % Change NPV Ratio Change
--------------- -------- -------- -------- --------- ------
+ 400 bp $ 25,295 $ (5,127) (16.8)% 15.74% - 223 bp
+ 300 bp 26,753 (3,664) (12.0) 16.42 - 155 bp
+ 200 bp 28,181 (2,241) (7.3) 17.05 - 92 bp
+ 100 bp 29,477 (945) (3.1) 17.60 - 37 bp
0 bp 30,422 - - 17.97 -
- 100 bp 30,925 503 1.6 18.11 + 14 bp
- 200 bp 31,124 702 2.3 18.10 + 13 bp
- 300 bp 31,498 1,076 3.5 18.16 + 19 bp
- 400 bp 32,209 1,787 5.8 18.38 + 41 bp
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Information on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
34
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
(a) Directors. This information required in response to this item regarding
directors of the Company will be contained in the Company's definitive
Proxy Statement (the "Proxy Statement") for its Annual Meeting of
Shareholders to be held on April 21, 1998 under the caption "Election of
Directors Information with Respect to the Nominees, Continuing Directors,
and Certain Executive Officers" and is incorporated herein by reference.
(b) Executive Officers of the Company. The information required in response
to this item regarding executive officers of the Company is contained in
Part I of this report and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required in response to this item will be contained in the Proxy
Statement under the captions "Election of Directors - Directors' Compensation"
and "Executive Compensation" and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required in response to this item will be contained in the Proxy
Statement under the captions "Security Ownership of Certain Beneficial Owners"
and "Election of Directors - Information with Respect to the Nominees,
Continuing Directors, and Certain Executive Officers" and is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required in response to this item will be contained in the Proxy
Statement under the caption "Election of Directors - Transactions with Certain
Related Persons" and is incorporated herein by reference.
35
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) Documents filed as part of this report:
1,2 Financial Statements and Schedules
See Index to Financial Information on page F-1.
3 Exhibits
See Exhibit Index on page i.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during 1997.
36
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 on the 13th day of March,
1998.
PARK BANCORP, INC.
By: /s/David A. Remijas
-------------------
David A. Remijas
Chairman of the Board,
President, and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1933, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Name Title Date
/s/ David A. Remijas Chairman of the Board, March 13, 1998
- -------------------------- President, and Chief Executive
David A. Remijas Officer (principal executive officer)
/s/ Steven J. Pokrak Treasurer and Chief Financial March 13, 1998
- -------------------------- Officer (principal financial officer)
Steven J. Pokrak
/s/ Richard J. Remijas, Jr. Executive Vice President, Chief March 13, 1998
- -------------------------- Operating Officer, Corporate
Richard J. Remijas, Jr. Secretary, and Director
/s/ Joseph M. Judickas, Jr. Director March 13, 1998
- --------------------------
Joseph M. Judickas, Jr.
/s/ Charles Paprocki Director March 13, 1998
- --------------------------
Charles Paprocki
/s/ Paul Shukis Director March 13, 1998
- --------------------------
Paul Shukis
37
EXHIBIT INDEX
Park Bancorp, Inc.
Form 10-K for Fiscal Year Ended
December 31, 1997
3.1 Certificate of Incorporation of Park Bancorp, Inc. ("Park
Bancorp") (incorporated by reference to Exhibit 3.1 to Park
Bancorp's Registration Statement No. 333-4380)
3.2 Bylaws of Park Bancorp, Inc. (incorporated by reference to
Exhibit 3.2 to Park Bancorp's Registration Statement No. 333-4380)
3.3 Federal Stock Charter and Bylaws of Park Federal Savings Bank
(incorporated by reference to Exhibit 2.1 to Park Bancorp's
Registration Statement No. 333-4380)
4.0 Stock Certificate of Park Bancorp, Inc. (incorporated by reference
to Exhibit 4.0 to Park Bancorp's Registration Statement No. 333-4380)
10.1* Form of Park Federal Savings Bank Employee Stock Ownership
Plan (incorporated by reference to Exhibit 10.1 to Park
Bancorp's Registration Statement No. 333-4380)
10.2* ESOP Loan Commitment Letter and ESOP Loan Documents
(incorporated by reference to Exhibit 10.2 to Park Bancorp's
Registration Statement No. 333-4380)
10.3* Form of Employment Agreements between Park Federal Savings Bank and
Park Bancorp, Inc. and certain executive officers (incorporated
by reference to Exhibit 10.3 to Park Bancorp's Registration
Statement No. 333-4380)
10.4* Form Proposed Park Federal Savings Bank Employee Severance
Compensation Plan (incorporated by reference to Exhibit 10.4
to Park Bancorp's Registration Statement No. 333-4380)
10.5* Park Federal Savings Bank Supplemental Executive Retirement
Plan (incorporated by reference to Exhibit 10.5 to Park
Bancorp's Registration Statement No. 333-4380)
10.6* Park Bancorp, Inc. 1997 Stock-Based Incentive Plan (incorporated by
reference to Exhibit 99.1 to Park Bancorp's Registration Statement
No. 333-33103)
21.0 Subsidiaries of Registrant (incorporated by reference to
Exhibit 21.0 to the Park Bancorp, Inc. Annual Report on
Form 10-K for the year ended December 31, 1996)
23.0 Consent of Independent Auditors
27.0 Financial Data Schedule
- -----------
* Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this Form 10-K pursuant to Item 14(c) of Form 10-K.
i
PARK BANCORP, INC. AND SUBSIDIARY
Chicago, Illinois
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
INDEX TO FINANCIAL INFORMATION
REPORT OF INDEPENDENT AUDITORS..................................... 1
FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION................ 2
CONSOLIDATED STATEMENTS OF INCOME............................. 3
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY............... 4
CONSOLIDATED STATEMENTS OF CASH FLOWS......................... 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.................... 7
F-1
[LOGO]
CROWE CHIZEK
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Park Bancorp, Inc.
Chicago, Illinois
We have audited the accompanying consolidated statements of financial condition
of Park Bancorp, Inc. and Subsidiary as of December 31, 1997 and 1996, and the
related consolidated statements of income, stockholder's equity, and cash flows
for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Park Bancorp, Inc.
and Subsidiary as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
/s/ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
Oak Brook, Illinois
January 23, 1998
F-2
PARK BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1997 and 1996
(In thousands, except share and per share data)
1997 1996
---- ----
ASSETS
Cash and due from banks $ 1,119 $ 769
Interest-bearing deposits with other financial institutions 6,693 5,444
----------- -----------
Total cash and cash equivalents 7,812 6,213
Securities available-for-sale 37,101 50,109
Securities held-to-maturity (fair value: 1997 - $55,684;
1996 - $47,553) 55,736 47,840
Loans receivable, net 68,327 66,179
Federal Home Loan Bank stock 841 756
Real estate held for development 2,270 2,871
Premises and equipment, net 2,489 2,150
Accrued interest receivable 1,542 1,627
Foreclosed real estate 60 60
Other assets 494 389
----------- -----------
Total assets $ 176,672 $ 178,194
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $ 131,865 $ 128,852
Securities sold under repurchase agreements 4,250 -
Advances from borrowers for taxes and insurance 1,387 1,288
Federal Home Loan Bank advances - 5,000
Accrued interest payable 175 159
Other liabilities 394 438
----------- -----------
Total liabilities 138,071 135,737
Stockholders' equity
Preferred stock $.01 par value authorized 1,000,000 shares;
none issued and outstanding - -
Common stock $.01 par value per share;
authorized 9,000,000 shares, issued 2,701,441 shares 27 27
Additional paid-in capital 26,222 26,088
Retained earnings 20,060 18,517
Treasury stock, 283,652 shares, at cost (4,693) -
Unearned ESOP shares (1,807) (1,993)
Unearned MRP shares (1,226) -
Unrealized gain (loss) on securities
available-for-sale, net of income taxes 18 (182)
----------- -----------
Total stockholders' equity 38,601 42,457
----------- -----------
Total liabilities and stockholders' equity $ 176,672 $ 178,194
=========== ===========
See accompanying notes to consolidated financial statements.
F-3
PARK BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1997, 1996, and 1995
(In thousands, except share and per share data)
1997 1996 1995
---- ---- ----
Interest income
Loans receivable $ 5,649 $ 5,398 $ 5,090
Securities 6,640 5,499 4,304
Interest-bearing deposits with other
financial institutions 175 438 361
---------- ---------- ----------
12,464 11,335 9,755
Interest expense
Deposits 6,119 6,202 5,604
Federal Home Loan Bank advances and
other borrowings 271 118 102
---------- ---------- ----------
6,390 6,320 5,706
---------- ---------- ----------
NET INTEREST INCOME 6,074 5,015 4,049
Provision for loan losses - - 298
---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 6,074 5,015 3,751
Noninterest income
Gain on sale of securities 18 - 14
Gain on sale of real estate held for development 276 60 523
Service fee income 251 177 102
Other operating income 40 70 55
---------- ---------- ----------
585 307 694
Noninterest expense
Compensation and benefits 2,575 1,664 1,782
Occupancy and equipment expense 475 374 361
Federal deposit insurance premiums 132 342 316
Special SAIF assessment - 736 -
Data processing services 128 125 115
Advertising 172 64 134
Stationery, printing, and supplies 109 84 103
Loss on sale of foreclosed real estate 6 4 -
Other operating expense 664 325 285
---------- ---------- ----------
4,261 3,718 3,096
---------- ---------- ----------
INCOME BEFORE INCOME TAXES 2,398 1,604 1,349
Income tax expense 855 543 413
---------- ---------- ----------
NET INCOME $ 1,543 $ 1,061 $ 936
========== ========== ==========
Basic earnings per share $ .67 $ .15 N/A
======== ========
Diluted earnings per share $ .67 $ .15 N/A
======== ========
See accompanying notes to consolidated financial statements.
F-4
PARK BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1997, 1996, and 1995
(In thousands, except share and per share data)
Unrealized
Gain (Loss)
Additional Unearned Unearned on Securities Total
Common Paid-in Retained Treasury ESOP MRP Available- Stockholders'
Stock Capital Earnings Stock Shares Shares For-Sale Equity
----- ------- -------- ----- ------ ------ -------- -------
Balance at January 1, 1995 $ - $ - $ 16,520 $ - $ - $ - $ (107) $16,413
Net income - - 936 - - - - 936
Effect of transfer to available-
for-sale at December 12,
1995, net of income taxes
of $88,000 (Note 2) - - - - - - 139 139
Change in fair value
of securities classified as
available-for-sale, net of
income taxes of $28,000 - - - - - - 45 45
-------- -------- -------- -------- -------- ------- ------- -------
Balance at December 31, 1995 - - 17,456 - - - 77 17,533
Issuance of common stock,
net of conversion costs of
$950,000 27 26,038 - - (2,161) - - 23,904
ESOP shares released - 50 - - 168 - - 218
Net income - - 1,061 - - - - 1,061
Change in fair value of
securities classified as
available-for-sale, net of
income taxes of $142,000 - - - - - - (259) (259)
-------- -------- -------- -------- -------- ------- ------- -------
Balance at December 31, 1996 27 26,088 18,517 - (1,993) (182) 42,457
Purchase of 391,709 shares
of treasury stock at cost - - - (6,395) - - - (6,395)
ESOP shares released - 129 - - 186 - - 315
Grant of shares under
Management Recognition
Plan (MRP) - - - 1,702 - (1,702) - -
MRP shares earned - 5 - - - 476 - 481
Net income - - 1,543 - - - - 1,543
Change in fair value
of securities classified as
available-for sale, net of
income taxes of $104,000 - - - - - - 200 200
-------- -------- -------- -------- -------- ------- ------- -------
Balance at December 31, 1997 $ 27 $ 26,222 $ 20,060 $ (4,693) $ (1,807) $ (1,226) $ 18 $ 38,601
======== ======== ======== ======== ======== ========= ======== =======
See accompanying notes to consolidated financial statements.
F-5
PARK BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1997, 1996, and 1995
(In thousands)
1997 1996 1995
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,543 $ 1,061 $ 936
Adjustments to reconcile net income to net
cash from operating activities
Net premium amortization (discount accretion) (3) 23 42
Loss on sale of foreclosed real estate 6 4 -
Gain on sale of securities available-for-sale (18) - (14)
Depreciation 104 124 102
Deferred income tax expense (benefit) 8 78 (69)
Deferred loan fees (81) 42 14
Provision for loan losses - - 298
Net change in accrued interest receivable 85 (436) (129)
Net change in other assets (105) (35) 79
Net change in accrued interest payable 16 (25) 101
Net change in other liabilities (156) (99) 26
ESOP expense 315 218 -
Stock award earned 481 - -
Gain on sale of real estate held for
development (276) (60) (523)
-------------- --------------- --------------
Net cash from operating activities 1,919 895 863
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in loans (2,196) (5,952) (4,111)
Proceeds from maturities and calls of securities
available-for-sale 22,000 15,850 11,002
Proceeds from maturities and calls of securities
held-to-maturity 25,150 24,635 6,002
Purchase of securities available-for-sale (11,652) (30,700) (27,337)
Purchase of securities held-to-maturity (35,963) (34,121) -
Proceeds from sale of securities available-for-sale 1,001 - 8,013
Principal repayments on mortgage-backed
securities held-to-maturity 2,917 1,719 3,687
Principal repayments on mortgage-backed
securities available-for-sale 1,984 3,872 132
Purchase of consumer loans - - (182)
Purchase of Federal Home
Loan Bank stock (85) (80) (10)
Proceeds from sales of real estate held for
development 1,144 384 2,172
(Continued)
F-6
PARK BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1997, 1996, and 1995
(In thousands)
1997 1996 1995
---- ---- ----
CASH FLOWS FROM INVESTING ACTIVITIES (Continued)
Investment in real estate held for development $ (267) $ (1,405) $ (1,897)
Payments to participants in real estate held for
development - (165) (376)
Proceeds from sale of foreclosed real estate 123 265 -
Expenditures for premises and equipment (443) (186) (280)
Acquisition of land held for sale - - (318)
Expenditures on foreclosed real estate - (10) -
------------- ------------- -------------
Net cash from investing activities 3,713 (25,894) (3,503)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 3,013 (1,651) 11,982
Net change in securities sold under repurchase
agreements 4,250 - -
Net change in advances from borrowers for
taxes and insurance 99 170 (125)
Net proceeds from sale of common stock - 23,903 -
Purchase of treasury stock (6,395) - -
Federal Home Loan Bank advances - - 12,000
Repayment of Federal Home Loan Bank advances (5,000) (4,000) (11,000)
------------- ------------- -------------
Net cash from financing activities (4,033) 18,422 12,857
------------- ------------- -------------
Increase (decrease) in cash and cash equivalents 1,599 (6,577) 10,217
Cash and cash equivalents at beginning of year 6,213 12,790 2,573
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 7,812 $ 6,213 $ 12,790
============= ============= =============
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ 6,374 $ 6,344 $ 5,605
Income taxes 1,025 396 427
Supplemental disclosures of noncash investing activities
Real estate acquired through foreclosure 129 269 -
Transfer of debt securities on December 12, 1995
to available-for-sale from held-to-maturity - - 13,904
See accompanying notes to consolidated financial statements.
F-7
PARK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(Table amounts in thousands, except share and per share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The accompanying consolidated financial statements
include the accounts of Park Bancorp, Inc. (the Company), its wholly-owned
subsidiary Park Federal Savings Bank (the Bank) and the Bank's wholly-owned
subsidiaries, GPS Corporation, which conducts limited insurance activities, and
GPS Development Corp., which conducts real estate development activities. All
significant intercompany transactions and balances are eliminated in
consolidation.
BUSINESS: The only business of the Company is the ownership of the Bank. The
Bank is engaged in the business of retail banking, with operations conducted
through its main office and two branches located in Chicago and Westmont,
Illinois. The Bank's revenues primarily arise from interest income from retail
lending activities and investments and revenue derived from real estate through
the development and sales of residential lots to home builders.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS: The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
income and expenses during the reporting period. Actual results could differ
from those estimates. The collectibility of loans, fair value of financial
instruments, and status of contingencies are particularly subject to change.
SECURITIES: Securities are classified as held-to-maturity when the Company's
management has the positive intent and the Company has the ability to hold those
securities to maturity. Accordingly, they are stated at cost, adjusted for
amortization of premiums and accretion of discounts. Securities are classified
as available-for-sale when management may decide to sell those securities in
response to changes in market interest rates, liquidity needs, changes in yields
on alternative investments, and for other reasons. They are carried at fair
value. Unrealized gains and losses on securities available-for-sale are charged
or credited to a valuation allowance and included as a separate component of
equity, net of income taxes. Realized gains and losses on disposition are based
on the net proceeds and the adjusted carrying amount of the securities sold,
using the specific identification method.
LOANS RECEIVABLE: Loans receivable are stated at unpaid principal balances,
less the allowance for loan losses, deferred loan origination fees, and
discounts.
ALLOWANCE FOR LOAN LOSSES: Because some loans may not be repaid in full, an
allowance for loan losses is maintained. Increases to the allowance are recorded
by a provision for loan losses charged to expense. Estimating the risk of the
loss and the amount of loss on any loan is necessarily subjective. Accordingly,
the allowance is maintained by management at a level
(Continued)
F-8
PARK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(Table amounts in thousands, except share and per share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
considered adequate to cover possible losses that are currently anticipated
based on past loss experience, general economic conditions, information about
specific borrower situations including their financial position and collateral
values, and other factors and estimates which are subject to change over time.
While management may periodically allocate portions of the allowance for
specific problem loan situations, including impaired loans discussed below, the
whole allowance is available for any charge-offs that occur. Loans are charged
off in whole or in part when management's estimate of the undiscounted cash
flows from the loan are less than the recorded investment in the loan, although
collection efforts continue and future recoveries may occur.
Loans are considered impaired if full principal or interest payments are not
anticipated. Impaired loans are carried at the present value of expected cash
flows discounted at the loan's effective interest rate or at the fair value of
the collateral if the loan is collateral dependent. A portion of the allowance
for loan losses is allocated to an impaired loan if the present value of cash
flows or collateral value indicate the need for an allowance.
Smaller balance homogeneous loans are defined as residential first mortgage
loans secured by one-to-four-family residences, residential construction loans,
second mortgage loans, and consumer loans and are evaluated collectively for
impairment. Commercial real estate loans are evaluated individually for
impairment. Normal loan evaluation procedures are used to identify loans which
must be evaluated for impairment. In general, loans classified as doubtful or
loss are considered impaired while loans classified as substandard are
individually evaluated for impairment. A loan is placed in nonaccrual when
payments are more than 90 days past due unless the loan is adequately
collateralized and in the process of collection. Although impaired loan and
nonaccrual loan balances are measured differently, impaired loan disclosures do
not differ significantly from nonaccrual and renegotiated loan disclosures.
INTEREST INCOME: Interest on loans is accrued over the term of the loans based
upon the principal outstanding. Management reviews loans delinquent 90 days or
more to determine if the interest accrual should be discontinued. The carrying
values of impaired loans are periodically adjusted to reflect cash payments,
revised estimates of future cash flows, and increases in the present value of
expected cash flows due to the passage of time. Cash payments representing
interest income are reported as such. Other cash payments are reported as
reductions in carrying value, while increases or decreases due to changes in
estimates of future payments and due to the passage of time are reported as
adjustments to the provision for loan losses.
(Continued)
F-9
PARK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(Table amounts in thousands, except share and per share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
LOAN ORIGINATION FEES: Loan origination fees, net of certain direct loan
origination costs, are deferred and recognized over the contractual life of the
loan as a yield adjustment.
REAL ESTATE HELD FOR DEVELOPMENT: The Company, through the Bank's GPS
Development Corp. subsidiary, engages in the development of residential real
estate lots in partnership with local developers. Since the Bank provides
substantially all of the financing for these projects, they have been reflected
as wholly-owned investments in real estate held for development. Land
inventories and real estate projects under development are valued at the lower
of acquisition cost plus development costs, or net realizable value. The cost of
each unit sold includes a proportionate share of the total projected development
expense cost. Holding costs associated with undeveloped land, completed units,
and suspended construction activities are expensed. General and administrative
costs related to the real estate development projects are expensed when
incurred.
INCOME RECOGNITION ON REAL ESTATE: Gains on real estate sales, including those
financed by the Company, are recorded in the period that sales contracts are
executed. Loans made by the Company to builders purchasing developed lots
require a 25% down payment and mature in one year or less. Gains on sales are
reported net of all related costs, except for certain insignificant general and
administrative expenses borne by the Company.
PREMISES AND EQUIPMENT: Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets, which range from 5 to 40
years.
FORECLOSED REAL ESTATE: Real estate acquired through foreclosure and similar
proceedings is carried at cost (fair value at the date of foreclosure) or at
fair value less estimated costs to sell. Losses on disposition, including
expenses incurred in connection with the disposition, are charged to operations.
INCOME TAXES: The provision for income taxes is based on an asset and liability
approach that requires recognition of deferred tax assets and liabilities for
the expected future consequences of temporary differences between the carrying
amounts and the tax bases of assets and liabilities.
(Continued)
F-10
PARK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(Table amounts in thousands, except share and per share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
EMPLOYEE STOCK OWNERSHIP PLAN: The cost of shares issued to the Employee Stock
Ownership Plan (ESOP) but not yet allocated to participants is presented in the
consolidated balance sheet as a reduction of stockholders' equity. Compensation
expense is recorded based on the market price of the shares as they are
committed to be released for allocation to participant accounts. The difference
between the market price and the cost of shares committed to be released is
recorded as an adjustment to additional paid-in capital.
Shares are considered outstanding for earnings per share calculations as they
are committed to be released; unallocated shares are not considered outstanding.
STATEMENT OF CASH FLOWS: For the purpose of this statement, cash and cash
equivalents are defined to include the Company's cash on hand, demand balances,
and interest-bearing deposits with other financial institutions, and investments
in certificates of deposit with maturities of less than three months.
EARNINGS PER SHARE: Basic and diluted earnings per share are computed under a
new accounting standard which became effective in the quarter ended December 31,
1997. All prior amounts have been restated to be comparable. Basic earnings per
share is based on net income divided by weighted average number of shares
outstanding during the period. Diluted earnings per share shows the dilutive
effect of additional common shares issuable under stock options and unearned
Management Recognition Plan (MRP) shares. In 1996, earnings per share is
computed using net earnings from August 9, 1996, the date that the Bank
converted to stock ownership.
FAIR VALUES OF FINANCIAL INSTRUMENTS: Fair values of financial instruments are
estimated using relevant market information and other assumptions as more fully
disclosed elsewhere. Fair value estimates involve uncertainties and matters of
significant judgment regarding interest rates, credit risk, prepayments, and
other factors, especially in the absence of broad markets for particular items.
Changes in assumptions or in market conditions could significantly affect the
estimates. The fair value estimates of existing on- and off-balance-sheet
financial instruments does not include the value of anticipated future business
or the values of assets and liabilities not considered financial instruments.
(Continued)
F-11
PARK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(Table amounts in thousands, except share and per share data)
NOTE 2 - SECURITIES
Securities are summarized as follows:
---------------------December 31, 1997-------------------
Gross Gross
Amortized Unrealized Unrealized Fair
SECURITIES AVAILABLE-FOR-SALE Cost Gains Losses Value
- ----------------------------- ---- ----- ------ -----
U.S. government agency notes $ 29,183 $ 36 $ (52) $ 29,167
Municipal securities 288 - (1) 287
----------- ----------- ----------- -----------
29,471 36 (53) 29,454
Equity securities 400 8 - 408
Mortgage-backed securities:
FNMA 4,141 30 (5) 4,166
FHLMC 3,061 12 - 3,073
----------- ----------- ----------- -----------
7,202 42 (5) 7,239
----------- ----------- ----------- -----------
$ 37,073 $ 86 $ (58) $ 37,101
=========== =========== =========== ===========
SECURITIES HELD-TO-MATURITY
- ---------------------------
U.S. government agency notes $ 44,975 $ 146 $ (33) $ 45,088
Mortgage-backed securities:
FNMA 5,651 - (85) 5,566
FHLMC 5,110 - (80) 5,030
----------- ----------- ----------- -----------
10,761 - (165) 10,596
----------- ----------- ----------- -----------
$ 55,736 $ 146 $ (198) $ 55,684
=========== =========== =========== ===========
(Continued)
F-12
PARK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(Table amounts in thousands, except share and per share data)
NOTE 2 - SECURITIES (Continued)
---------------------DECEMBER 31, 1996-------------------
Gross Gross
Amortized Unrealized Unrealized Fair
SECURITIES AVAILABLE-FOR-SALE Cost Gains Losses Value
- ----------------------------- ---- ----- ------ -----
U.S. Treasury bills and notes $ 1,500 $ 15 $ - $ 1,515
U.S. government agency notes 39,679 2 (310) 39,371
----------- ----------- ----------- -----------
41,179 17 (310) 40,886
Mortgage-backed securities:
FNMA 5,056 24 (2) 5,078
FHLMC 4,150 7 (12) 4,145
----------- ----------- ----------- -----------
9,206 31 (14) 9,223
----------- ----------- ----------- -----------
$ 50,385 $ 48 $ (324) $ 50,109
=========== =========== =========== ===========
SECURITIES HELD-TO-MATURITY
- ---------------------------
U.S. government agency notes $ 34,134 $ 77 $ (194) $ 34,017
Mortgage-backed securities:
FNMA 6,290 - (84) 6,206
FHLMC 7,416 2 (88) 7,330
----------- ----------- ----------- -----------
13,706 2 (172) 13,536
----------- ----------- ----------- -----------
$ 47,840 $ 79 $ (366) $ 47,553
=========== =========== =========== ===========
Sales of securities are summarized as follows:
For the Year Ended
-------------December 31,-------------
1997 1996 1995
---- ---- ----
Proceeds from sales $ 1,001 $ - $ 8,013
Gross realized gains 18 - 14
(Continued)
F-13
PARK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(Table amounts in thousands, except share and per share data)
NOTE 2 - SECURITIES (Continued
Contractual maturities of debt securities at December 31, 1997 were as follows.
Securities not due at a single maturity date, primarily mortgage-backed and
equity securities, are shown separately.
Amortized Fair
Securities Available-For-Sale Cost Value
----------------------------- ---- -----
Due in one year or less $ 2,000 $ 1,991
Due after one year through five years 17,186 17,166
Due after five years through ten years 6,000 6,020
Due after ten years 4,285 4,277
---------- -----------
29,471 29,454
Equity securities 400 408
Mortgage-backed securities 7,202 7,239
---------- -----------
$ 37,073 $ 37,101
========== ===========
SECURITIES HELD-TO-MATURITY
---------------------------
Due in one year or less $ 6,000 $ 5,987
Due after one year through five years 3,999 4,024
Due after five years through ten years 19,987 20,090
Due after ten years 14,989 14,987
---------- -----------
44,975 45,088
Mortgage-backed securities 10,761 10,596
---------- -----------
$ 55,736 $ 55,684
========== ===========
Securities with a book value of $4,750,000 at December 31, 1997 were
pledged to secure securities sold under repurchase agreements.
(Continued)
F-14
PARK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(Table amounts in thousands, except share and per share data)
NOTE 3 - LOANS RECEIVABLE
Loans receivable are summarized as follows at:
--------December 31,--------
1997 1996
---- ----
First mortgage loans
Principal balances
Secured by one-to-four-family residences $ 55,634 $ 53,757
Secured by other properties 7,860 8,168
Commercial, construction, and land 5,215 5,000
------------ ------------
68,709 66,925
Undistributed portion of construction loans (1,042) (1,043)
Net deferred loan origination fees (337) (418)
------------ ------------
Total first mortgage loans 67,330 65,464
Consumer loans 1,501 1,223
Unearned discounts (4) (8)
------------ ------------
Total consumer loans 1,497 1,215
Allowance for loan losses (500) (500)
------------ ------------
$ 68,327 $ 66,179
============ ============
At December 31, 1997 and 1996, impaired loans totaled $99,000 and $190,000. The
average balance of impaired loans was approximately $145,000 for the year ended
December 31, 1997 and approximately $346,000 for the year ended December 31,
1996. No portion of the allowance for loan losses was allocated to impaired
loans at December 31, 1997 or December 31, 1996. Interest income recognized on
impaired loans was approximately $10,000 for the year ended December 31, 1997
and $13,000 for the year ended December 31, 1996, which was received in cash for
both years.
The Company has granted loans to certain bank officers, directors, and their
related interests. Related party loans are made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with unrelated persons and do not involve more than
normal risk of collectibility. All loans are current in their contractual
payments for both principal and interest.
(Continued)
F-15
PARK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(Table amounts in thousands, except share and per share data)
NOTE 3 - LOANS RECEIVABLE (Continued)
Activity in the loan accounts of officers, directors, and their related
interests follows:
For the Year Ended
December 31,
------------
1997 1996
---- ----
Balance at beginning of year $ 623 $ 1,273
Loans disbursed 23 35
Principal repayments (64) (685)
----------- -----------
Balance at end of year $ 582 $ 623
=========== ===========
Activity in the allowance for loan losses is as follows:
For the Year Ended
--------------December 31,----------------
1997 1996 1995
---- ---- ----
Balance at beginning of year $ 500 $ 573 $ 275
Provision for loan losses - - 298
Charge-offs - (73) -
Recoveries - - -
----------- ----------- -----------
Balance at end of year $ 500 $ 500 $ 573
=========== =========== ===========
NOTE 4 - REAL ESTATE HELD FOR DEVELOPMENT
The Company, through the Bank's subsidiary, GPS Development Corp., participates
with local real estate developers in developing residential lots located in
Naperville, Illinois.
The following summarizes the Bank's real estate development activities:
For the Year Ended
--------------December 31,----------------
1997 1996 1995
---- ---- ----
Proceeds from sale of real estate held
for development $ 1,144 $ 384 $ 2,172
Gain on sale of real estate held for development 276 60 523
(Continued)
F-16
PARK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(Table amounts in thousands, except share and per share data)
NOTE 4 - REAL ESTATE HELD FOR DEVELOPMENT (Continued)
The Company's primary investment in real estate held for development is a
single-family housing subdivision located in Naperville known as Prairie Ridge.
This development consists of 88 single family lots, of which 14 have been sold
through December 31, 1997
NOTE 5 - PREMISES AND EQUIPMENT
Premises and equipment consist of the following at:
-------December 31,-------
1997 1996
---- ----
Cost
Land$ $ 850 $ 850
Buildings and improvements 1,839 1,777
Furniture and fixtures 930 549
---------- -----------
Total cost 3,619 3,176
Less accumulated depreciation (1,130) (1,026)
---------- -----------
$ 2,489 $ 2,150
========== ===========
NOTE 6 - DEPOSITS
Certificate of deposit accounts with balances $100,000 or more totaled
$11,634,000 at December 31, 1997 and $8,413,000 at December 31, 1996.
At December 31, 1997, scheduled maturities of certificates of deposit are as
follows:
1998 $ 57,743
1999 22,518
2000 5,285
2001 1,255
2002 and thereafter 2,084
----------
$ 88,885
==========
NOTE 7 - ADVANCES FROM FEDERAL HOME LOAN BANK
There were no advances from the Federal Home Loan Bank of Chicago (FHLB)
outstanding at December 31, 1997. At December 31, 1996, the Company had advances
from the FHLB of $5,000,000. FHLB advances consist of an open line of credit and
bear an interest rate which adjusts daily. The interest rate was 6.95% as of
December 31, 1996.
(Continued)
F-17
PARK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(Table amounts in thousands, except share and per share data)
NOTE 7 - ADVANCES FROM FEDERAL HOME LOAN BANK (Continued)
The Company maintains a collateral pledge agreement covering secured advances
whereby the Company has agreed to at all times keep on hand, free of all other
pledges, liens, and encumbrances, fully disbursed, whole first mortgages on
improved residential property not more than 90 days delinquent, aggregating no
less than 167% of the outstanding secured advances from the FHLB.
NOTE 8 - EMPLOYEE BENEFIT PLANS
The Company terminated its Defined Benefit Pension Plan in 1996. All
participants became fully vested as of May 31, 1996 and no credit was given for
service after that date. All participant balances were paid in 1997.
Prior to 1996, the Bank maintained a Profit Sharing Plan covering substantially
all employees. Contributions to the Profit Sharing Plan were made at the
discretion of the Board of Directors and charged to expense annually. In 1996,
the Bank added a 401(k) feature to the Plan to allow for participant salary
deferrals into the Plan along with a matching contribution provided by the Bank.
The matching contributions were $36,000 and $18,000 for 1997 and 1996. Plan
contributions for 1995 were $141,000.
During 1996, the Bank established a non-qualified Supplemental Executive
Retirement Plan (SERP) to provide certain officers and highly compensated
employees with additional retirement benefits. The SERP is designed to restore
benefits to participants in the qualified plan whose retirement benefits had
been reduced as the result of changes in the Internal Revenue Code. Benefits to
be provided under the SERP will be funded with proportional contributions from
the Company and the Bank. During 1997 and 1996, there were no such
contributions.
As part of the conversion transaction, the Bank established an Employee Stock
Ownership Plan (ESOP) for the benefit of substantially all employees. The ESOP
borrowed $2,160,990 from the Company and used those funds to acquire 216,099
shares of the Company's stock at $10 per share, the initial public offering
price.
Shares issued to the ESOP are allocated to ESOP participants based on principal
repayments made by the ESOP on the loan from the Company. The loan is secured by
shares purchased with the loan proceeds and will be repaid by the ESOP with
funds from the Bank's discretionary contributions to the ESOP and earnings on
ESOP assets. Principal payments are scheduled to occur over a fifteen-year
period. However, in the event the Bank's contributions exceed the minimum debt
service requirements, additional principal payments will be made. Dividends on
allocated ESOP shares are recorded as a reduction of retained earnings;
dividends on unallocated ESOP shares are used to release shares.
(Continued)
F-18
PARK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(Table amounts in thousands, except share and per share data)
NOTE 8 - EMPLOYEE BENEFIT PLANS (Continued)
During 1997 and 1996, 18,582 and 16,757 shares of stock with an average fair
value of $17 and $13 per share, respectively, were committed to be released,
resulting in ESOP compensation expense of $315,000 and $218,000.
Shares held by the ESOP at December 31, 1997 and 1996 are as follows:
1997 1996
---- ----
Allocated shares 35,339 16,757
Unallocated shares 180,760 199,342
---------- -----------
Total ESOP shares 216,099 216,099
========== ===========
Fair value of unallocated shares $ 3,367 $ 2,591
========== ===========
Also in connection with the conversion to stock ownership, the Company adopted a
Management Recognition Plan (MRP) during 1997. The Bank contributed $1.7 million
allowing the MRP to acquire 108,057 shares of common stock of the Company, at a
cost of $15.75 per share. Under the MRP, 92,925 shares of common stock were
awarded to certain employees and directors at the time of adoption. The
remaining 15,132 shares are held for future awards. The stock awards vest over
five years. The amortized cost of the shares which vested in 1997 was $476,000.
The Company also adopted a stock option plan in 1997 under the terms of which
270,141 shares of the Company's common stock were reserved for issuance. The
options become exercisable on a cumulative basis in equal installments over a
five-year period from the date of grant. The options expire ten years from the
date of grant. During 1997, options for 232,324 shares of Company common stock
were granted at an exercise price of $15.75 per share. None of the options were
forfeited or exercised during 1997. The options have a weighted average life of
9.2 years and a fair value of $6.38 per share.
Statement of Financial Accounting Standards No. 123 requires pro forma
disclosures for companies that do not adopt its fair value accounting method for
stock-based employee compensation. Accordingly, the following pro forma
information presents 1997 net income and earnings per share had the fair value
method been used to measure compensation cost for stock option plans. There was
no compensation expense recorded for stock options in 1997.
Pro forma net income $ 1,361
Basic earnings per share $ .59
Diluted earnings per share $ .59
(Continued)
F-19
PARK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(Table amounts in thousands, except share and per share data)
NOTE 8 - EMPLOYEE BENEFIT PLANS (Continued)
The fair value of options granted in 1997 was estimated using a Black-Scholes
option pricing model using the following assumptions: divided yield of 0%;
expected volatility factor of the expected market price of the Company's common
stock of 11%; and risk-free interest rate of 5.50%.
NOTE 9 - EARNINGS PER SHARE
The following table presents a reconciliation of the components used to compute
basic and diluted earnings per share for the year ended December 31, 1997 and
the period from August 9, 1996 to December 31, 1996.
1997 1996
---- ----
BASIC EARNINGS PER SHARE
Net income as reported $ 1,543 $ 1,061
Earnings prior to conversion to
a stock form of ownership - (697)
-------------- --------------
Net income available to
common shareholders 1,543 364
Weighted average common
shares outstanding 2,296,427 2,493,680
-------------- --------------
Basic earnings per share $ .67 $ .15
============== ==============
DILUTED EARNINGS PER SHARE
Net income available to
common shareholders $ 1,543 $ 364
Weighted average common
shares outstanding 2,296,427 2,493,686
Dilutive effect of MRP 3,476 -
Dilutive effect of stock options 15,197 -
-------------- --------------
2,315,100 2,493,680
-------------- --------------
Dilutive earnings per share $ .67 $ .15
============== ==============
(Continued)
F-20
PARK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(Table amounts in thousands, except share and per share data)
NOTE 10 - REGULATORY CAPITAL
On March 21, 1996, the Board of Directors of the Bank adopted a Plan of
Conversion to convert from a federal chartered mutual savings bank to a federal
chartered stock savings bank with the concurrent formation of a holding company.
On August 9, 1996, the Company sold 2,701,441 shares of common stock at $10 per
share and received proceeds of $23,903,420, net of conversion expenses and ESOP
shares. Approximately 50% of the gross proceeds were used by the Company to
acquire all of the capital stock of the Bank. The conversion was accounted for
as an internal reorganization with historical account balances carried forward.
At the time of conversion, the Bank established a liquidation account totaling
$17,646,000. The liquidation account is maintained for the benefit of eligible
depositors who continue to maintain their accounts at the Bank after the
conversion. The liquidation account will be reduced annually to the extent that
eligible depositors have reduced their qualifying deposits. Subsequent increases
will not restore an eligible account holder's interest in the liquidation
account. In the event of a complete liquidation, each eligible depositor will be
entitled to receive a distribution from the liquidation account in an amount
proportionate to the current adjusted qualifying balances for accounts then
held. The liquidation account balance is not available for payment of dividends.
The Bank is subject to regulatory capital requirements administered by federal
regulatory agencies. Capital adequacy guidelines and prompt corrective action
regulations involve quantitative measures of assets, liabilities, and certain
off-balance-sheet items calculated under regulatory accounting practices.
Capital amounts and classifications are also subject to qualitative judgments by
regulators about components, risk weightings, and other factors, and the
regulators can lower classifications in certain cases. Failure to meet various
capital requirements can initiate regulatory action that could have a direct
material effect on the financial statements.
The prompt corrective action regulations provide five classifications, including
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not
used to represent overall financial condition. If adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required.
(Continued)
F-21
NOTE 10 - REGULATORY CAPITAL (Continued)
At year end, the Bank's actual capital levels and minimum required levels were:
Minimum Required
to Be Well
Minimum Required Capitalized
for Capital Under Prompt Corrective
Actual Adequacy Purposes Action Regulations
------- ----------------- ------------------
1997 Amount Ratio Amount Ratio Amount Ratio
- ---- ------ ----- ------ ----- ------ -----
Total capital (to risk-weighted assets) $ 24,221 38.6% $ 5,022 8.0% $ 6,278 10.0%
Tier 1 (core) capital (to risk-weighted
assets) $ 23,721 37.8% $ 2,511 4.0% $ 2,511 4.0%
Tier 1 (core) capital (to adjusted total
assets) $ 23,721 14.5% $ 4,892 3.0% $ 6,523 4.0%
Tangible capital (to adjusted total
assets) $ 23,721 14.5% $ 2,446 1.5% N/A N/A
Tier 1 (leverage) capital (to average
total assets) $ 25,991 15.6% $ 6,658 4.0% $ 8,323 5.0%
1996
- ----
Total capital (to risk-weighted assets) $ 27,634 58.2% $ 3,797 8.0% $ 4,797 10.0%
Tier 1 (core) capital (to risk-weighted
assets) $ 27,134 57.2% $ 1,899 4.0% $ 1,899 4.0%
Tier 1 (core) capital (to adjusted total
assets) $ 27,134 16.5% $ 4,947 3.0% $ 6,596 4.0%
Tangible capital (to adjusted total
assets) $ 27,134 16.5% $ 2,473 1.5% N/A N/A
Tier 1 (leverage) capital (to average
total assets) $ 29,823 18.3% $ 6,530 4.0% $ 8,163 5.0%
The Bank at December 31, 1997 was categorized as well capitalized.
Federal regulations require the Qualified Thrift Lender (QTL) test, which
mandates that approximately 65% of assets be maintained in housing-related
finance and other specified areas. If the QTL test is not met, limits are placed
on growth, branching, new investments, and Federal Home Loan Bank advances or
the Bank must convert to a commercial bank charter. The Bank meets the
requirements of the QTL test at December 31, 1997.
(Continued)
F-22
PARK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(Table amounts in thousands, except share and per share data)
NOTE 11 - INCOME TAXES
Income tax expense consists of the following:
For the Year Ended
--------------December 31,---------------
1997 1996 1995
---- ---- ----
Currently payable tax
Federal $ 847 $ 465 $ 552
State - - (70)
Deferred tax expense 8 78 (69)
----------- ----------- -----------
Income tax expense $ 855 $ 543 $ 413
=========== =========== ===========
The federal income tax expense differs from the amounts determined by applying
the statutory federal income tax rate to income before income taxes as a result
of the following items:
----------------------------------December 31,----------------------------------
-----------1 9 9 7------- ----------1 9 9 6------- ----------1 9 9 5---------
Percentage Percentage Percentage
of Income of Income of Income
Before Before Before
Income Income Income
Amount Taxes Amount Taxes Amount Taxes
------- ----- ------ ----- ------ -----
Income tax computed at
the statutory rate $ 815 34.0% $ 545 34.0% $ 459 34.0%
State income tax benefit,
net of federal tax - - - - (45) (3.4)
ESOP expense 44 1.8 17 1.1 - -
Other items, net (4) (.1) (19) (1.2) (1) -
----------- ------ ----------- --------- ----------- ------
$ 855 35.7% $ 543 33.9% $ 413 30.6%
=========== ====== =========== ========= =========== ======
Prior to 1996, the Bank had qualified under provisions of the Internal Revenue
Code which allowed it to deduct from taxable income a provision for bad debts
which differs from the provision charged to income in the financial statements.
Retained earnings at December 31, 1997 include approximately $3,298,000 for
which no deferred federal income tax liability has been recorded. Tax
legislation passed in August 1996 now requires all thrift institutions to deduct
a provision for bad debts for tax purposes based on the actual loss experience.
(Continued)
F-23
PARK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(Table amounts in thousands, except share and per share data)
NOTE 11 - INCOME TAXES (Continued)
Deferred tax assets (liabilities) are comprised of the following at:
---------December 31,---------
1997 1996
---- ----
Deferred loan fees $ 115 $ 162
ESOP and MRP expense 27 -
Unrealized loss on securities available for sale - 94
Other - 22
------------ ------------
142 278
Bad debt deduction (243) (276)
Federal Home Loan Bank stock dividend (32) (37)
Depreciation (106) (117)
Unrealized gain on securities available for sale (10) -
Other (15) -
------------ ------------
(406) (430)
------------ ------------
Net deferred tax liability $ (264) $ (152)
============ ============
NOTE 12 - COMMITMENTS, FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET
RISK, AND CONCENTRATIONS OF CREDIT RISK
The Company grants mortgages and installment loans to, and obtains deposits
from, customers primarily in Cook, DuPage, and Will Counties, Illinois.
Substantially all loans are secured by specific items of collateral, primarily
residential real estate and consumer assets. The Company also develops
residential housing lots in DuPage and Will counties for sale to local home
builders.
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments consist of standby letters of credit and commitments
to make loans and fund loans in process. The Company's exposure to credit loss
in the event of nonperformance by the other party to these financial instruments
is represented by the contractual amount of these instruments. The Company
follows the same credit policy to make such commitments as is followed for those
loans recorded on the statement of financial condition.
(Continued)
F-24
PARK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(Table amounts in thousands, except share and per share data)
NOTE 12 - COMMITMENTS, FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET
RISK, AND CONCENTRATIONS OF CREDIT RISK (Continued)
These financial instruments are summarized as follows at:
Contract Amount
------------December 31,---------
1997 1996
---- ----
Financial instruments whose contract
amounts represent credit risk
Commitments to make loans (all fixed rate) $ 891 $ 835
Standby letters of credit 793 1,665
Loans in process 1,042 1,043
The fixed rate loan commitments at December 31, 1997 have terms of 75 to 180
days and rates in the range of 7.125% to 10.50%. Fixed rate loan commitments at
December 31, 1996 have terms of 75 to 180 days and rates in the range of 7.00%
to 8.90%.
Since certain commitments to make loans and fund loans in process expire without
being used, the amounts above do not necessarily represent future cash
commitments. No losses are anticipated as a result of these transactions.
Interest-bearing deposit accounts in other financial institutions potentially
subject the Company to concentrations of credit risk. At December 31, 1997, the
Company had deposit accounts at the Federal Home Loan Bank of Chicago with
balances totaling approximately $6,693,000. At December 31, 1996, the balance
was approximately $5,444,000.
NOTE 13 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The approximate carrying amount and estimated fair value of financial
instruments is as follows:
---------DECEMBER 31, 1997----- ------DECEMBER 31, 1996-----
Approximate Approximate
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
ASSETS
Cash and cash equivalents $ 7,812 $ 7,812 $ 6,213 $ 6,213
Securities available-for-sale 37,101 37,101 50,109 50,109
Securities held-to-maturity 55,736 55,684 47,840 47,553
Loans receivable, net 68,327 70,307 66,179 67,168
Federal Home Loan Bank stock 841 841 756 756
Accrued interest receivable 1,542 1,542 1,627 1,627
(Continued)
F-25
PARK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(Table amounts in thousands, except share and per share data)
NOTE 13 - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
---------December 31, 1997----- ------December 31, 1996-----
Approximate Approximate
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------- ---------- ------ ----------
LIABILITIES
Demand and NOW $ (6,823) $ (6,823) $ (6,760) $ (6,760)
Money market (4,002) (4,002) (4,041) (4,041)
Passbook savings (32,155) (32,155) (33,875) (33,875)
Certificates of deposit (93,135) (93,540) (84,176) (84,505)
Advances from borrowers for taxes
and insurance (1,387) (1,387) (1,288) (1,288)
Federal Home Loan Bank advances - - (5,000) (5,000)
Accrued interest payable (175) (175) (159) (159)
For purposes of the above, the following assumptions were used:
CASH AND CASH EQUIVALENTS: The estimated fair values for cash and cash
equivalents are based on their carrying value due to the short-term nature of
these assets.
SECURITIES: The fair values of securities are based on the quoted market value
for the individual security or its equivalent. The fair value of Federal Home
Loan Bank stock is based on its redemption value.
LOANS: The estimated fair value for loans has been determined by calculating the
present value of future cash flows based on the current rate the Company would
charge for similar loans with similar maturities, applied for an estimated time
period until the loan is assumed to be repriced or repaid.
DEPOSITS: The estimated fair value for time deposits has been determined by
calculating the present value of future cash flows based on estimates of rates
the Company would pay on such deposits, applied for the time period until
maturity. The estimated fair values of demand and NOW, money market, and
passbook savings deposits are assumed to approximate their carrying values as
management establishes rates on these deposits at a level that approximates the
local market area.
(Continued)
F-26
PARK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(Table amounts in thousands, except share and per share data)
NOTE 13 - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
FEDERAL HOME LOAN BANK ADVANCES: The advances are at current market rates.
Accordingly, fair value is assumed to equal carrying value.
ACCRUED INTEREST AND ADVANCES FROM BORROWERS FOR TAXES AND INSURANCE: The fair
values of accrued interest receivable and payable and advances from borrowers
for taxes and insurance are assumed to equal their carrying value.
OFF-BALANCE-SHEET INSTRUMENTS: Off-balance-sheet items consist principally
of unfunded loan commitments and standby letters of credit. The fair value
of these items is not material.
Other assets and liabilities of the Company not defined as financial
instruments, such as property and equipment, are not included in the above
disclosures. Also not included are nonfinancial instruments typically not
recognized in financial statements such as the value of core deposits, customer
goodwill, and similar items.
While the above estimates are based on management's judgment of the most
appropriate factors, there is no assurance that if the Company disposed of these
items on December 31, 1997 or December 31, 1996, the fair values would have been
achieved, because the market value may differ depending on the circumstances.
The estimated fair values at December 31, 1997 and December 31, 1996 should not
necessarily be considered to apply at subsequent dates.
(Continued)
F-27
PARK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(Table amounts in thousands, except share and per share data)
NOTE 14 - PARENT COMPANY FINANCIAL STATEMENTS
Presented below are the condensed balance sheets, statements of income, and
statements of cash flows for Park Bancorp, Inc. The Company was formed on August
9, 1996. Accordingly, the statements of income and cash flows reflect year ended
December 31, 1997 and the period August 9, 1996 through December 31, 1996.
CONDENSED BALANCE SHEET
December 31, 1997 and 1996
1997 1996
---- ----
ASSETS
Cash and cash equivalents $ 743 $ 4,566
Securities available-for-sale 8,713 2,997
Securities held-to-maturity 1,000 3,149
ESOP loan 1,839 1,981
Investment in bank subsidiary 25,991 29,823
Accrued interest receivable and other assets 389 48
----------- -----------
Total assets $ 38,675 $ 42,564
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses and other liabilities $ 74 $ 107
Stockholders' equity
Common stock 27 27
Additional paid-in capital 26,222 26,088
Retained earnings 20,060 18,517
Treasury stock (4,693) -
Unearned ESOP shares (1,807) (1,993)
Unearned MRP shares (1,226) -
Unrealized gain (loss) on securities available-for-sale 18 (182)
----------- -----------
Total liabilities and stockholders' equity $ 38,675 $ 42,564
=========== ===========
(Continued)
F-28
PARK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(Table amounts in thousands, except share and per share data)
NOTE 14 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENT OF INCOME
For the year ended December 31, 1997 and the period August 9, 1996
to December 31, 1996
1997 1996
---- ----
Operating income
Dividends from subsidiary $ 6,000 $ -
Gain on sale of securities 18 -
Interest income
Securities 687 65
ESOP loan 143 79
Interest-bearing deposits with other financial institutions 79 170
------------ ------------
Total operating income 6,927 314
Operating expenses
Interest on other borrowings 89 -
Other expenses 321 -
------------ ------------
Total operating expenses 410 -
------------ ------------
INCOME BEFORE INCOME TAXES AND EQUITY IN
UNDISTRIBUTED EARNINGS OF BANK SUBSIDIARY 6,517 314
Income taxes 164 107
------------ -------------
INCOME BEFORE EQUITY IN UNDISTRIBUTED EARNINGS
OF BANK SUBSIDIARY 6,353 207
Equity in undistributed (overdistributed) earnings
of bank subsidiary (4,810) 157
------------ ------------
NET INCOME $ 1,543 $ 364
============ ============
(Continued)
F-29
PARK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(Table amounts in thousands, except share and per share data)
NOTE 14 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENT OF CASH FLOWS
For the year ended December 31, 1997 and the period August 9, 1996
to December 31, 1996
1997 1996
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,543 $ 364
Adjustments to reconcile net income to net cash
provided by operating activities
Net discount accretion (7) -
Gain on sale of securities available-for-sale (18) -
Equity in (undistributed) overdistributed earnings
of bank subsidiary 4,810 (157)
Change in
Other assets (341) (47)
Other liabilities (43) 107
----------- -----------
Net cash from operating activities 5,944 267
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of bank subsidiary stock - (13,638)
Purchase of securities available-for-sale (11,652) (2,997)
Purchase of securities held-to-maturity - (3,149)
Proceeds from sale of securities available-for-sale 1,001 -
Proceeds from maturities and calls of securities
available-for-sale 4,988 -
Proceeds from maturities and calls of securities
held-to-maturity 2,149 -
Payment received on ESOP loan 142 180
----------- -----------
Net cash from investing activities (3,372) (19,604)
CASH FLOWS FROM FINANCING ACTIVITIES
Purchase of treasury stock (6,395) -
Net proceeds from sale of common stock - 23,903
----------- -----------
Net cash from financing activities (6,395) 23,903
----------- -----------
Net change in cash and cash equivalents (3,823) 4,566
Cash and cash equivalents at beginning of period 4,566 -
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 743 $ 4,566
=========== ===========
(Continued)
F-30
PARK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(Table amounts in thousands, except share and per share data)
NOTE 15 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
1997
- ----
----------------------Three Months Ended------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
Interest income $ 3,150 $ 3,130 $ 3,118 $ 3,066
Interest expense 1,569 1,602 1,603 1,616
----------- ----------- ----------- -----------
NET INTEREST INCOME 1,581 1,528 1,515 1,450
Provision for loan losses - - - -
Other income 88 216 189 92
Other expense 925 1,050 1,029 1,257
----------- ----------- ------------ ---------
INCOME BEFORE INCOME TAXES 744 694 675 285
Income tax expense 253 234 226 142
----------- ----------- ----------- -----------
NET INCOME $ 491 $ 460 $ 449 $ 143
=========== =========== =========== ===========
Basic earnings per share $ .20 $ .20 $ .20 $ .07
Diluted earnings per share $ .20 $ .20 $ .20 $ .07
1996
- ----
----------------------Three Months Ended------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
Interest income $ 2,643 $ 2,612 $ 2,970 $ 3,110
Interest expense 1,553 1,561 1,579 1,626
----------- ----------- ----------- -----------
NET INTEREST INCOME 1,090 1,051 1,391 1,484
Provision for loan losses - - - -
Other income 77 80 79 71
Other expense 783 760 1,462 714
---------- --------- --------- -----------
INCOME BEFORE INCOME TAXES 384 371 8 841
Income tax expense (benefit) 130 130 (4) 287
----------- ----------- ----------- -----------
NET INCOME $ 254 $ 241 $ 12 $ 554
=========== =========== =========== ===========
Basic earnings per share 1 N/A N/A $ (.07) $ .22
Diluted earnings per share 1 N/A N/A $ (.07) $ .22
1 Earnings per share for the three months ended September 30, 1996 is
computed on a net loss of $190,000 from August 9, 1996, the date that
the Bank converted to stock ownership.