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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
or
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Transition Period from to
Commission File Number 0-20867
PARK BANCORP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State of incorporation)
36-4082530
(I.R.S. Employer Identification No.)
2740 W. 55TH STREET
CHICAGO, ILLINOIS
(Address of principal executive offices)
60632
(Zip Code)
(773) 434-6040
(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:
TITLE OF EACH CLASS
COMMON STOCK, $.01
PAR VALUE PER SHARE
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 $36,636,469 as of March 14, 1997.
As of March 14, 1997, the Registrant had outstanding 2,701,441 shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Selected portions of the definitive Proxy Incorporated into Part III
Statement for the Registrant's Annual
Meeting of Stockholders to be held on
April 22, 1997.
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PART I
ITEM 1. BUSINESS
Park Bancorp, Inc. (the "Company") is a bank holding company formed on
August 9, 1996 to engage 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
in Chicago and two branches located in Chicago and Westmont, Illinois.
THE BANK
GENERAL
The Bank's principal business is to operate a community oriented savings 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, investment securities, and mortgage-backed
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 investment and mortgage-backed securities. The
Bank's primary sources of funds are deposits and principal and interest
payments on 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 $2.9 million, or 1.6% of total assets at
December 31, 1996. During 1996, the Bank substantially completed sales of its
primary development project, Rose Hill Farm, and continued development of its
latest project, Prairie Ridge. Sales efforts at Prairie Ridge are expected to
commence in the spring of 1997. During the years ended December 31, 1996,
1995, and 1994, the Bank recorded income of $60,000, $523,000, and $1.1
million, 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-family residences and low to middle income families. The Bank's
Westmont office is located in suburban DuPage county which consists
predominantly of middle to upper income families.
The Chicago banking market (Cook and DuPage counties) has experienced below
average growth in population and households in the 1990s. The market area is
characterized by lower unemployment levels than state or national averages and
a median household income level above levels in Illinois and the United States.
The period from 1990 to 1995 was characterized by 5.7% growth in the national
population and 3.4% growth in the population of Illinois, while the population
of the market area grew by 2.0%. The market area had a higher per capita
income than either Illinois or the United States during
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the period from 1990 to 1995. During such period, the per capita income level
in the market area was $20,362 compared to $17,047 for Illinois and $16,405 for
the nation. The median household income level for the market area was $44,288
in 1995, compared to $35,865 and $33,610 in Illinois and the United States,
respectively. Of the housing in the market area, 65.0% is owner-occupied,
compared to 64.2% in Illinois. The median housing value in the market area in
1990 was $119,603, while the value in the state of Illinois was $80,873 and in
the nation, $79,098.
Another key economic indicator is the rate of unemployment. Unemployment has
declined by 25.8% in the market area since 1991, from 6.2% to 4.6%, compared to
declines of 19.7% in Illinois and 13.4% in the United States to 5.7% and 3.8%,
respectively. The source of the statistics disclosed in this and the preceding
paragraph is the 1996 Sourcebook of Demographics, produced by CACI, Inc.
The Bank is one of many financial institutions in the market area which had
total deposits of $123.8 billion at June 30, 1995, with Park Federal's market
share at 0.10%. The Bank does not formally track real estate values 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 banks, mortgage banking companies, commercial banks,
credit unions, and insurance companies. Its most direct competition for
deposits has historically come from savings institutions 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, 1996, the Bank had total gross loans outstanding of $68.1 million,
of which $53.7 million were one-to-four-family residential mortgage loans, or
78.9% of the Bank's total gross loans. The remainder of the portfolio consists
of $8.2 million of multi-family mortgage loans, or 12.0% of total gross loans;
$1.7 million of commercial real estate loans, or 2.5% of total gross loans;
$3.3 million of construction and land loans, or 4.8% of total gross loans; and
consumer loans of $1.2 million, or 1.8% of total gross loans. As a result of
market opportunities, the Bank originated a greater amount of construction and
land loans during the year ended December 31, 1994 as compared to
one-to-four-family loans. During 1994, the Bank originated $9.1 million
construction and land loans as compared to $7.0 million one-to-four-family
loans. This was largely a result of the activity in the Rose Hill joint
venture which was active during 1994 and began to wind down during 1995. The
composition of the loan portfolio with regard to one-to-four-family and
multi-family loans has been
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relatively consistent since 1993. At December 31, 1996, 88% of the Bank's loan
portfolio had fixed interest rates. The Bank had no loans held for sale at
December 31, 1996.
The types of loans that the Bank may originate are subject to federal and state
law 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.
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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.
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------------------
1996 1995 1994
-------------------- -------------------- --------------------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
-------- ---------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Real estate:
Residential:
One-to-four-family $ 53,757 78.88% $ 48,577 77.42% $ 44,655 75.88%
Multi-family 8,168 11.99 6,163 9.82 5,907 10.04
Commercial 1,716 2.52 1,750 2.79 1,426 2.42
Construction and land 3,283 4.82 5,133 8.18 6,038 10.26
Consumer 1,224 1.79 1,119 1.78 825 1.40
-------- ------ -------- ------ -------- ------
Total loans, gross 68,148 100.00% 62,742 100.00% 58,851 100.00%
====== ====== ======
Undisbursed loan funds (1,043) (1,148) (1,493)
Unamortized discounts, net (8) (23) (51)
Deferred loan origination fees (418) (460) (474)
Allowance for estimated loan losses (500) (573) (275)
-------- -------- --------
Loans receivable, net $ 66,179 $ 60,538 $ 56,558
======== ======== ========
<CAPTION>
AT DECEMBER 31,
-------------------------------------------
1993 1992
------------------ ----------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
-------- -------- ---------- ---------
<S> <C> <C> <C> <C>
Real estate:
Residential:
One-to-four-family $ 45,786 77.34% $ 52,968 74.82%
Multi-family 7,483 12.64 12,109 17.11
Commercial 774 1.31 909 1.28
Construction and land 4,213 7.12 3,599 5.08
Consumer 942 1.59 1,205 1.71
-------- ------ -------- ------
Total loans, gross 59,198 100.00% 70,790 100.00%
====== ======
Undisbursed loan funds (1,633) (1,711)
Unamortized discounts, net (86) (166)
Deferred loan origination fees (533) (754)
Allowance for estimated loan losses (250) (175)
-------- --------
Loans receivable, net $ 56,696 $ 67,984
======== ========
</TABLE>
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Loan Maturity. The following table shows the contractual maturity of the
Bank's gross loans at December 31, 1996. There were no loans held for sale at
December 31, 1996. The table does not include principal prepayments.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
----------------------------------------------------------------------------------
ONE-TO- TOTAL
FOUR MULTI- CONSTRUCTION LOANS
FAMILY FAMILY COMMERCIAL AND LAND CONSUMER RECEIVABLE
------------ ----------- -------------- --------------------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Amounts due
One year or less $ 151 $ -- $ -- $ 2,312 $ 98 $ 2,561
After one year
More than one year to
three years 228 -- -- 520 140 888
More than three years
to five years 2,028 157 51 -- 476 2,712
More than five years to
10 years 8,882 797 266 -- 154 10,099
More than 10 years to
20 years 11,283 3,891 622 33 -- 15,829
More than 20 years 31,185 3,323 818 377 356 36,059
------- ------- ------- ------- -------- ---------
Total due after
December 31, 1997 53,606 8,168 1,757 930 1,126 65,587
------- ------- ------- --------- -------- ---------
Gross loans
receivable $ 53,757 $ 8,168 $ 1,757 $ 3,242 $ 1,224 $ 68,148
======== ======= ======== ========== ======== =========
</TABLE>
The following table sets forth at December 31, 1996 the dollar amount of total
gross loans receivable contractually due after December 31, 1997 and whether
such loans have fixed interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
DUE AFTER DECEMBER 31, 1997
--------------------------------------------------
FIXED ADJUSTABLE TOTAL
---------------- ---------------- ----------------
(in thousands)
<S> <C> <C> <C>
Real estate loans
Residential
One-to-four-family $ 45,716 $ 7,890 $ 53,606
Multi-family 8,168 -- 8,168
Commercial 1,719 38 1,757
Construction and land 930 -- 930
Consumer 1,126 -- 1,126
--------- --------- ----------
Total gross loans receivable $ 57,659 $ 7,928 $ 65,587
========= ========= ==========
</TABLE>
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 both adjustable-rate and fixed-rate mortgage loans, the
substantial majority of the Bank's loan originations have been fixed-rate
mortgage
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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. The Bank
has not emphasized the origination of adjustable-rate mortgage loans due to the
relatively low demand for such loans in the Bank's primary market area and
aggressive pricing by competitors offering such loans. 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, 1996,
there were no loans categorized as held for sale. In addition, the Bank also
emphasizes the origination of construction loans. From time to time, the Bank
has purchased loans or participated in loans originated by other institutions
based upon the Bank's investment needs and market opportunities.
The following tables set forth the Bank's loan originations, purchases, and
principal repayments for the periods indicated:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1995 1994
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Gross loans:
Beginning balance $ 62,742 $ 58,851 $ 59,198
Loans originated:
One-to-four-family 14,305 11,571 6,960
Multi-family 3,076 1,104 1,146
Commercial 290 1,767 2,817
Construction and land 6,001 5,484 9,085
Consumer 415 674 648
-------- -------- --------
Total loans originated 24,087 20,600 20,656
Loans purchased 26 182 --
-------- -------- --------
Total 24,113 20,782 20,656
Principal prepayments (20,585) (19,142) (23,411)
Transfer to REO (269) -- --
Change in undisbursed loan funds 105 345 140
Change in allowance for estimated
loan losses 73 (298) (25)
-------- -------- --------
Ending balance, net $ 66,179 $ 60,538 $ 56,558
======== ======== ========
</TABLE>
One-to-Four-Family Mortgage Lending. The Bank offers mortgage loans primarily
secured by one-to-four-family residences located in the Bank's primary market
area. Loan originations are obtained from 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 primarily originates fixed-rate
loans, but also offers adjustable- rate mortgage ("ARM") loans. At
December 31, 1996, one-to-four-family mortgage loans totaled $53.7 million,
or 78.9% of total gross loans at such date. Of the Bank's mortgage loans
secured by one-to-four-family residences, $45.9 million, or 85.3%, were
fixed-rate loans.
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 Bank's
one-to-four-
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family residential mortgage loans do not provide for negative amortization.
Mortgage loans originated by the Bank generally include due-on-sale clauses
which provide the Bank with the contractual right to deem the loan immediately
due and payable in the event the borrower transfers ownership of the property
without the Bank's consent. Due-on-sales clauses are an important means of
adjusting the rates on the Bank's fixed-rate mortgage loan portfolio and the
Bank exercises its rights under these clauses. The residential mortgage loans
originated by the Bank are generally 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 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, demand for ARM
loans in the Bank's primary market area has been weak due to the low interest
rate environment and consumer preference for fixed-rate loans. In addition,
management's strategy has been to emphasize fixed-rate loans. Consequently, in
recent years, the Bank has not originated a significant amount of ARM loans as
compared to its originations of fixed-rate loans. The Bank's ARM loans are
indexed to the one-year Treasury bill. The Bank currently offers ARM loans
with interest rates with initial adjustment periods of one, three, five, and
seven years. The ARM loans have a maximum rate adjustment of 2.0% at each
adjustment period and a 6.0% maximum adjustment over the life of the loan with
payment based on up to a 30-year loan term. These loans may pose a risk to the
Bank because during a period of rising interest rates, the adjustment rate caps
may result in interest rates lagging behind the Bank's funding costs. In
addition, ARM loans generally 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 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.
Multi-Family Lending. The Bank originates multi-family mortgage loans
generally 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 from 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 generally reviews the financial statements and the employment and credit
history of the borrower as well as other related documentation.
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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 multi-family loan portfolio at December 31, 1996 totaled $8.2
million, or 12.0% of total gross loans. The Bank's largest multi- family loan
at December 31, 1996 had an outstanding balance of $1.7 million and was secured
by a forty-eight 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 75% 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, 1996 was
$480,000 and was secured by commercial retail property. The loan was current
and performing in accordance with its contractual terms at December 31, 1996.
At December 31, 1996, the Bank's commercial real estate loan portfolio was $1.7
million, or 2.5% of total gross loans.
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 generally 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. 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, 1996 had a
balance of $472,000 and was secured by improved residential building sites.
This loan is currently performing in accordance with its terms. At December
31, 1996, the Bank had $3.3 million of construction and land loans (excluding
the Bank's joint venture loans related to real estate held for development)
totaling 4.8% of the Bank's total gross loans. Although the amount may vary,
typically the Bank finances construction loans to builders purchasing lots.
These loans require a 25% down payment and typically are repaid in less than
120 days or a period not to exceed one year.
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<PAGE> 10
The joint venture loans are reflected under the caption "Real estate held for
development" in the Company's Consolidated Statements of Financial Condition.
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. At December 31, 1996, the Bank's consumer loan portfolio was $1.2
million, or 1.8% of total gross loans.
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, 1996, the Bank had $798,000 in purchased mortgage loans and
loan participations serviced by others, totaling .3% 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. Loans
purchased by the Bank generally 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 OTS regulations, loans to one borrower cannot exceed
15% of the Bank's unimpaired capital and surplus. The Bank will not make loans
to one borrower that are in excess of regulatory limits.
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 non-payment after the
loan is first past due. In the event payment is not then received, additional
letters and phone calls generally are made. If the loan is still not brought
current and it becomes necessary for the Bank to take legal action, which
typically 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 at a sheriff's sale.
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. An asset is considered
"Substandard" if it is inadequately protected by the current net worth and
paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "Doubtful" have all of the weaknesses
inherent in
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those classified "Substandard" with the added characteristic that the
weaknesses present make "collection or liquidation in full", on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable". 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".
When an insured institution classifies one or more assets, or portions thereof,
as "Substandard" or "Doubtful", under current OTS policy, the Bank is required
to consider establishing a general valuation allowance in an amount deemed
prudent by management. The general valuation allowance, which is a regulatory
term, represents a loss allowance which has been established to recognize the
inherent credit risk associated with lending and investing activities, but
which, unlike specific allowances, has not been allocated to particular problem
assets. When an insured institution classifies one or more assets, or portions
thereof, as "Loss", it is required either to establish a specific allowance for
losses equal to 100% of the amount of the asset so classified or to charge off
such amount.
A savings institution's determination as to the classification of its assets
and the amount of its valuation allowances is subject to review by the OTS
which can order the establishment of additional general or specific loss
allowances. The OTS, in conjunction with the other federal banking agencies,
has adopted an interagency policy statement on the allowance for loan and lease
losses. The policy statement provides guidance for financial institutions on
both the responsibilities of management for the assessment and establishment of
adequate allowances and guidance for banking agency examiners to use in
determining the adequacy of general valuation allowances. Generally, the
policy statement recommends that institutions have effective systems and
controls to identify, monitor, and address asset quality problems; that
management has analyzed all significant factors that affect the collectibility
of the portfolio in a reasonable manner; and that management has established
acceptable allowance evaluation processes that meet the objectives set forth in
the policy statement. As a result of the declines in local and regional real
estate market values and the significant losses experienced by many financial
institutions, there has been a greater level of scrutiny by regulatory
authorities of the loan portfolios of financial institutions undertaken as part
of the examination of institutions by the OTS and the FDIC. While the Bank
believes that it has established an adequate allowance for estimated loan
losses, there can be no assurance that regulators, in reviewing the Bank's loan
portfolio, will not request the Bank to materially increase its allowance for
loan losses, thereby negatively affecting the Bank's financial condition and
earnings. Although management believes that an adequate allowance for loan
losses has been established, actual losses are dependent upon future events
and, as such, further additions to the level of allowances for estimated loan
losses may become necessary.
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,
1996, the Bank had $234,000 of assets classified as "Special Mention", $60,000
of assets classified as "Substandard", and no assets classified as "Doubtful"
or "Loss".
Non-Accrual and Past-Due Loans. The following table sets forth information
regarding non-accrual 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, 1996, 1995, 1994, 1993, and 1992,
respectively, the amount of interest income that would have been recognized on
nonaccrual loans if such
10
<PAGE> 12
loans had continued to perform in accordance with their contractual terms was
$13,000, $83,000, $33,000, $16,000, and $24,000, none of which was recognized.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ----------- ----------- ----------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans:
Residential real estate:
One-to-four-family $ 93 $ 416 $ 603 $ 303 $ --
Multi-family 190 71 67 -- --
Commercial -- 430 -- -- --
Construction and land -- -- -- -- 189
Consumer 16 -- 18 18 31
------ ------ ------ ------ -------
Total nonperforming loans 299 917 688 321 220
REO 60 50 50 157 --
------ ------ ------ ------ -------
Total nonperforming assets $ 359 $ 967 $ 738 $ 478 $ 220
====== ====== ====== ====== =======
Allowance for loan losses as a percent of
gross loans receivable 0.73% 0.91% 0.47% 0.42% 0.25%
Allowance for loan losses as a percent of
total nonperforming loans (1) 167.22 62.49 39.97 77.88 79.55
Nonperforming loans as a percent of gross
loans receivable (1) 0.44 1.46 1.17 0.54 0.31
Nonperforming assets as a percent of
total assets (1) 0.16 0.61 0.51 0.35 0.16
</TABLE>
(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.
11
<PAGE> 13
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 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. As of December 31, 1996, the
Bank's allowance for loan losses was 0.73% of gross loans as compared to 0.91%
as of December 31, 1995. The Bank had nonaccrual loans of $299,000 and
$917,000 at December 31, 1996 and December 31, 1995, respectively. The
increase in the 1995 provision for loan losses resulted largely from a $430,000
increase in commercial nonaccrual loans. As a result of this increased
provision, the Bank's ratio of allowance for loan losses to total nonperforming
loans was 62.49% at December 31, 1995 compared to an average of 65.13% for the
three preceding years. The Bank will continue to monitor and modify the
allowance for loan losses as conditions dictate.
The following table sets forth activity in the Bank's allowance for loan losses
for the period set forth in the table.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1996 1995 1994 1993 1992
------- ------ ------ ------ -----
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 573 $ 275 $ 250 $ 175 $ 75
Provision for loan losses -- 298 48 140 100
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 $ 573 $ 275 $ 250 $ 175
Net charge-offs to average gross 0.12% -- 0.04% 0.11% --
loans outstanding
</TABLE>
12
<PAGE> 14
The following table sets forth delinquencies in the Bank's loan portfolio as of
the dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
----------------------------------------------------------
60-89 DAYS 90 DAYS OR MORE(1)
----------------------------- ----------------------------
PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS
------------- ------------- ------------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
One-to-four-family 6 $ 344 2 $ 93
Multi-family -- -- 2 190
Commercial 2 209 -- --
Construction and land -- -- -- --
Consumer -- -- 2 16
---- ----- ---- -----
Total 8 $ 553 6 $ 299
==== ===== ==== =====
Delinquent loans to total
gross loans 0.81% 0.44%
===== =====
<CAPTION>
AT DECEMBER 31, 1995
----------------------------------------------------------
60-89 DAYS 90 DAYS OR MORE(1)
----------------------------- ----------------------------
PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS
------------- ------------- ------------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
One-to-four-family 3 $ 391 5 $ 416
Multi-family -- -- 1 71
Commercial -- -- 2 430
Construction and land -- -- -- --
Consumer 2 9 -- --
---- ------ ---- -----
Total 5 $ 400 8 $ 917
==== ====== ==== =====
Delinquent loans to total
gross loans 0.64% 1.46%
====== =====
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1994
----------------------------------------------------------
60-89 DAYS 90 DAYS OR MORE(1)
----------------------------- ----------------------------
PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS
-------------- -------------- -------------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
One-to-four-family 4 $ 214 6 $ 603
Multi-family -- -- 1 67
Commercial -- -- -- --
Construction and land -- -- -- --
Consumer -- -- 2 18
----- ----- --- -----
Total 4 $ 214 9 $ 688
===== ===== === =====
Delinquent loans to total
gross loans 0.36% 1.17%
===== =====
<CAPTION>
AT DECEMBER 31, 1993
----------------------------------------------------------
60-89 DAYS 90 DAYS OR MORE(1)
---------------------------- ----------------------------
PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS
------------- ------------- ------------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
One-to-four-family 6 $ 102 7 $ 303
Multi-family -- -- -- --
Commercial -- -- -- --
Construction and land -- -- -- --
Consumer 2 14 2 18
--- ----- --- -----
Total 8 $ 116 9 $ 321
=== ===== === =====
Delinquent loans to total
gross loans 0.20% 0.54%
===== =====
</TABLE>
(1) Loans 90 days or more past due are included in nonaccrual loans.
13
<PAGE> 15
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.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------------------------------------------
1996 1995 1994
--------------------------------- ------------------------------ --------------------------------
PERCENT PERCENT PERCENT
OF OF OF
GROSS GROSS GROSS
LOANS IN LOANS IN LOANS IN
EACH PERCENT EACH PERCENT EACH
PERCENT OF CATEGORY OF CATEGORY 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
------ ----------- ---------- ------ ---------- --------- ------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans
- -------
One-to-four-family $269 53.80% 78.88% $245 42.76% 77.93% $112 40.73% 75.88%
Multi-family 82 16.40 11.99 135 23.56 9.82 30 10.91 10.04
Commercial 35 7.00 2.52 35 6.11 2.79 15 5.45 2.42
Construction and
land 65 13.00 4.82 103 17.98 8.18 61 22.18 10.26
Consumer 6 1.20 1.79 17 2.96 1.28 17 6.18 1.40
Unallocated 43 8.60 -- 38 6.63 -- 40 14.55 --
--- ------ ------ --- ------ ------ --- ------ ------
Total allowance
for loan
losses $500 100.00% 100.00% $573 100.00% 100.00% $275 100.00% 100.00%
=== ====== ====== === ====== ====== === ====== ======
<CAPTION>
At December 31,
------------------------------------------------------------------
1993 1992
---------------------------------- ------------------------------
PERCENT PERCENT
OF OF
GROSS GROSS
LOANS IN LOANS IN
EACH PERCENT EACH
PERCENT OF CATEGORY OF CATEGORY
ALLOWANCE TO TOTAL ALLOWANCE TO TOTAL
TO TOTAL GROSS TO TOTAL GROSS
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
------ ----------- ---------- ------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Loans
- -------
One-to-four-family $115 46.00% 77.34% $53 30.29% 74.82%
Multi-family 38 15.20 12.64 31 17.71 17.11
Commercial 8 3.20 1.31 10 5.71 1.28
Construction and
land 43 17.20 7.12 36 20.57 5.08
Consumer 19 7.60 1.59 25 14.29 1.71
Unallocated 27 10.80 -- 20 11.43 --
--- ------ ------ --- ------ ------
Total allowance
for loan
losses $250 100.00% 100.00% $175 100.00% 100.00%
=== ====== ====== === ====== ======
</TABLE>
14
<PAGE> 16
REAL ESTATE
At December 31, 1996, 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.
Thereafter, REO is valued at the lower of the recorded investment or the fair
value of the property 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. The
Bank has also acquired land for real estate development and land for a possible
future branch site.
INVESTMENT ACTIVITIES
Federally chartered savings institutions have the authority to invest in
various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certificates of deposit of insured
banks and savings institutions, bankers' acceptances, and federal funds.
Subject to various restrictions, federally chartered savings institutions may
also invest their assets in commercial paper, investment-grade corporate debt
securities, and mutual funds whose assets conform to the investments that a
federally chartered savings institution is otherwise authorized to make
directly. Additionally, the Bank must maintain minimum levels of investments
that qualify as liquid assets under OTS regulations. Historically, the Bank
has maintained liquid assets above the minimum OTS requirements and at a level
considered to be more than adequate to meet its normal daily activities.
The investment policy of the Bank as established by the Board of Directors
attempts 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 Bank's policies generally limit
investments to government and federal agency securities. The Bank's policies
provide the authority to invest in U.S. Treasury and federal agency securities
meeting the Bank's guidelines and in mortgage-backed securities guaranteed by
the U.S. government and agencies thereof. At December 31, 1996, the Bank had
securities in the aggregate amount of $97.7 million with a market value of
$97.6 million.
At December 31, 1996, the Bank had $73.5 million in government agency
securities. At December 31, 1996, all of the Bank's mortgage-backed securities
were insured or guaranteed by either the FNMA or FHLMC. 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.
15
<PAGE> 17
The following table sets forth certain information regarding the carrying and
fair values of the Bank's securities at the dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------------------------------
1996 1995 1994
-------------------------- -------------------------- --------------------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE VALUE VALUE
------------ ------------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Securities
Available-for-sale
U.S. Treasury bills and $ 1,514 $ 1,514 $ 4,547 $ 4,547 $ 3,951 $ 3,951
notes
U.S. government agency 39,371 39,371 28,358 28,358 10,871 10,871
notes
FNMA 5,078 5,078 1,335 1,335 -- --
FHLMC 4,146 4,146 2,894 2,894 -- --
CMOs -- -- -- -- 136 136
-------- --------- -------- -------- --------- ---------
Total available-for-sale $ 50,109 $ 50,109 $ 37,134 $ 37,134 $ 14,958 $ 14,958
======== ========= ======== ======== ========= =========
Held-to-maturity:
U.S. Treasury bills and $ -- $ -- $ -- $ -- $ 2,505 $ 2,482
notes
U.S. government agency 34,134 34,017 24,635 24,521 44,675 42,489
notes
FNMA 6,290 6,206 7,497 7,431 5,601 5,520
FHLMC 7,416 7,330 10,274 10,249 13,115 12,682
CMOs -- -- 88 92 -- --
-------- ---------- --------- -------- --------- ---------
Total held-to-maturity $ 47,840 $ 47,553 $ 42,494 $ 42,293 $ 65,896 $ 63,173
======== ========== ========= ======== ========= =========
</TABLE>
16
<PAGE> 18
The table below sets forth certain information regarding the carrying value,
weighted average yields, and contractual maturities of the Bank's securities
and mortgage-backed securities as of December 31, 1996.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
----------------------------------------------------------------------------------------------
MORE THAN ONE MORE THAN FIVE MORE THAN
ONE YEAR OR LESS YEAR TO FIVE YEARS YEARS TO TEN YEARS TEN YEARS
---------------------- ----------------------- ----------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
---------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities
Available-for-sale:
U.S. Treasury bills and notes $ 1,514 7.53% $ -- --% $ -- --% $ -- --%
U.S. government agency notes 3,002 6.08 26,454 6.35 9,915 7.15 -- --
-------- ------ -------- ------ ------- ------ ------- ------
Total available-for-sale 4,516 6.57 26,454 6.35 9,915 7.15 -- --
Held-to-maturity
U.S. government agency notes 2,000 4.90 11,994 6.38 18,140 6.41 2,000 8.00
-------- ------ -------- ------ -------- ------ ------- ------
Total securities $ 6,516 6.06% $ 38,448 6.36% $28,055 6.67% $ 2,000 8.00%
======== ====== ======== ====== ======== ====== ======= ======
Mortgage-backed securities:
Available-for-sale:
FNMA $ 95 9.75% $ 3,947 6.68% $ -- --% $ 1,036 6.75%
FHLMC -- -- 4,146 6.34 -- -- -- --
-------- ------ -------- ------ ------- ------ ------- -------
Total available-for-sale 95 9.75 8,093 6.51 -- -- 1,036 6.75
Held-to-maturity:
FNMA -- -- -- -- -- -- 6,290 6.81
FHLMC -- -- -- -- -- -- 7,416 6.98
-------- ------ -------- ------ ------- ------ ------- -------
Total held-to-maturity -- -- -- -- -- -- 13,706 6.90
-------- ------ -------- ------ ------- ------ ------- -------
Total mortgage-backed
securities $ 95 9.75% $ 8,093 6.51% $ -- --% $14,742 6.89%
======== ====== ======== ====== ======= ====== ======= ======
<CAPTION>
-----------------------
TOTAL
----------------------
WEIGHTED
CARRYING AVERAGE
VALUE YIELD
----------- ----------
<S> <C> <C>
Securities
Available-for-sale:
U.S. Treasury bills and notes $ 1,514 7.53%
U.S. government agency notes 39,371 6.53
-------- ----
Total available-for-sale 40,885 6.57
Held-to-maturity
U.S. government agency notes 34,134 7.10
-------- ----
Total securities $ 75,019 6.81%
======== ====
Mortgage-backed securities:
Available-for-sale:
FNMA $ 5,078 6.75%
FHLMC 4,146 6.34
-------- ----
Total available-for-sale 9,224 6.57
Held-to-maturity:
FNMA 6,290 6.81
FHLMC 7,416 6.98
-------- ----
Total held-to-maturity 13,706 6.90
-------- ----
Total mortgage-backed
securities $ 22,930 6.77%
======== ====
</TABLE>
17
<PAGE> 19
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. At December 31,
1996, certificates of deposit constituted 65.7% of total average deposits. The
term of the certificates of deposit offered by the Bank vary from six months to
seven years and the offering rates are established by the Bank on a weekly
basis. Once a certificate of deposit account is established, no additional
amounts are permitted to be deposited in that account. 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, 1996, the Bank had $62.3 million of
certificate accounts maturing in less than one year. The Bank's deposits are
obtained predominantly from the areas in which its banking offices are located.
As part of its marketing strategy and its attempt to increase its deposit base,
the Bank has added two ATMs and has plans to install a third ATM. The Bank may
also consider opening additional branches in its primary market area. 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 competing financial institutions 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:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
------------- ------------- ------------
(in thousands)
<S> <C> <C> <C>
Net deposits (withdrawals) $(7,086) $7,200 $(5,160)
Interest credited on deposit accounts 5,435 4,782 4,002
------- ------- -------
Total increase (decrease) in deposit accounts $(1,651) $11,982 $(1,158)
======= ======= =======
</TABLE>
18
<PAGE> 20
At December 31, 1996, the Bank had approximately $8.4 million in certificate
accounts in amounts of $100,000 or more maturing as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
MATURITY PERIOD AMOUNT RATE
---------------------------------- -------- -------------
(Dollars in thousands)
<S> <C> <C>
Three months or less $2,340 5.74%
Over three through six months 2,548 6.37
Over six through 12 months 963 5.74
Over 12 months 2,562 6.15
-----
Total $8,413 6.06%
======
</TABLE>
19
<PAGE> 21
The following table sets forth the distribution of the Bank's deposit accounts
for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------
1996 1995 1994
------------------------ --------------------------- ----------------------------
PERCENT OF PERCENT OF PERCENT OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
-------- ---------- --------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Passbook accounts $ 33,875 26.29% $ 34,798 26.66% $ 39,087 32.98%
Money market savings accounts 4,041 3.14 4,014 3.08 3,913 3.30
NOW accounts 5,672 4.40 5,630 4.31 5,358 4.52
Non-interest-bearing accounts 1,088 0.84 1,352 1.04 342 0.29
-------- ------ --------- ------ -------- ------
Total 44,676 34.67 45,794 35.09 48,700 41.09
Certificate accounts:
3.00% to 3.99% -- -- -- -- 13,983 11.80
4.00% to 4.99% 1,056 0.82 5,513 4.22 24,166 20.39
5.00% to 5.99% 56,516 43.86 42,123 32.28 21,279 17.95
6.00% to 6.99% 25,785 20.01 34,436 26.39 4,751 4.01
7.00% to 7.99% 354 0.28 1,270 0.97 1,866 1.57
8.00% to 8.99% 465 0.36 1,108 0.85 3,519 2.97
9.00% and over -- -- 259 0.20 257 0.22
-------- ------ --------- ------ -------- ------
Total certificate accounts 84,176 65.33 84,709 64.91 69,821 58.91
-------- ------ --------- ------ -------- ------
Total deposits $128,852 100.00% $ 130,503 100.00% $118,521 100.00%
======== ====== ========= ====== ======== ======
</TABLE>
20
<PAGE> 22
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, 1996.
<TABLE>
<CAPTION>
PERIOD TO MATURITY FROM DECEMBER 31,
---------------------------------------------------------------------
TWO TO AT DECEMBER 31,
LESS THAN ONE TO THREE THREE TO FOUR TO MORE THAN ---------------------------------
ONE YEAR TWO YEARS YEARS FOUR YEARS FIVE YEARS FIVE YEARS 1996 1995 1994
--------- --------- ------- ---------- ---------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Certificate accounts:
0% to 3.99% $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $13,983
4.00% to 4.99% 1,056 -- -- -- -- -- 1,056 5,513 24,166
5.00% to 5.99% 39,624 12,219 2,599 911 1,007 156 56,516 42,123 21,279
6.00% to 6.99% 21,127 613 2,457 915 216 457 25,785 34,436 4,751
7.00% to 7.99% 33 321 -- -- -- -- 354 1,270 1,866
8.00% to 8.99% 465 -- -- -- -- -- 465 1,108 3,519
9.00% and over -- -- -- -- -- -- -- 259 257
------- ------- ------ ------ ------ ----- ------- ------- -------
Total $62,305 $13,153 $5,056 $1,826 $1,223 $ 613 $84,176 $84,709 $69,821
======= ======= ====== ====== ====== ===== ======= ======= =======
</TABLE>
21
<PAGE> 23
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. FHLB advances may also
be used to acquire certain other assets as may be deemed appropriate for
investment purposes. These advances are collateralized primarily by certain of
the Bank's mortgage loans and mortgage-backed securities and secondarily by the
Bank's investment in capital stock of the FHLB. 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, including the Bank, fluctuates in accordance
with the policies of the OTS and the FHLB.
SUBSIDIARY ACTIVITIES
The Bank has two wholly-owned subsidiaries. GPS Development Corp. is an
Illinois corporation which participates in 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.,
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 Development Corp. acts as joint venture partner in its
developments. For those joint ventures it is engaged in, GPS Development Corp.
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 Development Corp. only invests in
real estate development projects which it believes it can monitor effectively.
GPS Development Corp. 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 on such capital contribution.
At December 31, 1996, GPS Development Corp. was involved in two real estate
development projects. The Rose Hill Venture, located in Naperville, Illinois,
consisted of 259 single-family residential lots, 132 townhouse lots, and a
commercial parcel. As of December 31, 1996, only two single-family lots
remained for sale. In addition, the Bank expects to begin sales in 1997 of the
Prairie Ridge Venture, located in Naperville, Illinois. This project consists
of 88 single-family residential lots.
Real estate development activities involve risks that could have an adverse
effect on the profitability of the Bank. GPS Development Corp. 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
22
<PAGE> 24
years, there can be no assurance that such economy will continue to be
favorable. For the years ended December 31, 1996, 1995, and 1994, gain on the
sale of real estate held for development totaled $60,000, $523,000, and
$1,114,000, respectively.
FEDERAL AND STATE TAXATION
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. The statute of limitations has closed all years for both
Federal and Illinois purposes through the 1992 tax year.
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, small thrifts such as the Bank must
recapture that portion of the reserve that exceeds the amount that could have
been taken under the experience method for post-1987 tax years. The
legislation also requires thrifts to account for bad debts for federal income
tax purposes on the same basis as commercial banks for tax years beginning
after December 31, 1995. The recapture will occur over a six-year period, the
commencement of which will be delayed until the first taxable year beginning
after December 31, 1997 provided the institution meets certain residential
lending requirements. The management of the Company does not believe that the
legislation will 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, 1996, the Company's Excess for tax purposes
totaled approximately $3.3 million.
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 the AMTI.
Dividends Received Deduction and Other Matters. The Company may exclude from
its income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. The corporate dividends received deduction
is generally 70% in the case of dividends received from unaffiliated
corporations with which the Company and the Bank will not file a consolidated
tax return, except that if the Company or the Bank own more than 20% of the
stock of a corporation distributing a dividend, then 80% of any dividends
received may be deducted.
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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
agency obligations). The exclusion of income on United States Treasury and
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
GENERAL
The Bank is subject to extensive regulation, examination, and supervision by
the OTS, as its chartering agency, and the FDIC, as the deposit insurer. The
Bank is a member of the FHLB System. The Bank's deposit accounts are insured
up to applicable limits by the SAIF administered 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 and loan 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 (the "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 structure also gives the regulatory authorities
extensive discretion in connection with their supervisory and enforcement
activities and examination policies, including policies 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, or the Congress, could
have a material impact on the Company, the Bank, and their operations. The
following discussion is intended to be a summary of the material statutes and
regulation applicable to savings institutions and their holding companies, and
it does not purport to be a comprehensive description of all such statutes and
regulations.
FEDERAL SAVINGS INSTITUTION REGULATION
Business Activities. The activities of the Bank are governed by the Home
Owners' Loan Act, as amended (the "HOLA"), and, in certain respects, the
Federal Deposit Insurance Act, as amended ("FDI Act"), and the regulations
issued by the agencies to implement these statutes. These laws and regulations
delineate the nature and extent of the activities in which institutions may
engage. In particular, many types of lending authority for federal
associations (e.g., commercial, nonresidential real property loans and consumer
loans) are limited to a specified percentage of the institution's capital or
assets.
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Loans-to-One Borrower. Under the HOLA, savings institutions are generally
subject to the national bank limit on loans-to-one borrower. Generally, this
limit is 15% of the Bank's unimpaired capital and surplus, plus an additional
10% of unimpaired capital and surplus, if such loan is secured by
readily-marketable collateral. Such collateral is defined to include certain
financial instruments and bullion but generally does not include real estate.
At December 31, 1996, the Bank's limit on loans-to-one borrower was $6.4
million. At December 31, 1996, the Bank's largest aggregate amount of
loans-to-one borrower consisted of $1.7 million. The Bank is in compliance
with all applicable limitations on loans-to-one borrower.
QTL Test. The HOLA requires savings institutions to meet a Qualified Thrift
Lender (" QTL") test. Under the QTL test, a savings institution is required to
maintain at least 65% of its "portfolio assets" [total assets less: (i)
specified liquid assets up to 20% of total assets; (ii) intangibles, including
goodwill and credit card and purchased mortgage servicing rights; and (iii) the
value of property used to conduct the institution's business] in certain
"qualified thrift investments" (primarily residential mortgages and related
investments, including certain mortgage-backed and related securities) in at
least 9 months out of each 12-month period. A savings association that fails
the QTL test must either convert to a bank charter or operate under certain
restrictions. As of December 31, 1996, the Bank maintained 69% of its
portfolio assets in qualified thrift investments and, therefore, met the QTL
test.
Limitation on Capital Distributions. OTS regulations currently impose
limitations upon capital distributions by savings institutions, such as cash
dividends, payments to repurchase or otherwise acquire its shares, payments to
shareholders of another institution in a cash-out merger, and other
distributions charged against capital. The rule establishes three tiers of
institutions, which are based primarily on an institution's capital level. An
institution that exceeds all fully phased-in regulatory capital requirements
before and after a proposed capital distribution ("Tier I Bank") and has not
been advised by the OTS that it is in need of more than normal supervision,
could, after prior notice to, but without the approval of the OTS, make capital
distributions during a calendar year equal to the greater of: (i) 100% of its
net earnings to date during the calendar year plus the amount that would reduce
by one-half its "surplus capital ratio" (the excess capital over its fully
phased-in capital requirements) at the beginning of the calendar year or (ii)
75% of its net earnings for the previous four quarters. Any additional capital
distributions would require prior OTS approval. In the event the Bank's
capital fell below its capital requirements or the OTS notified it that it was
in need of more than normal supervision, the Bank's ability to make capital
distributions could be restricted. In addition, the OTS could prohibit a
proposed capital distribution by any institution, which would otherwise be
permitted by the regulation, if the OTS determines that such distribution would
constitute an unsafe or unsound practice. Furthermore, under the OTS prompt
corrective action regulations, the Bank would be prohibited from making any
capital distribution if, after the distribution, the Bank failed to meet its
minimum capital requirements, as described above.
Liquidity. The Bank is required to maintain an average daily balance of
specified liquid assets equal to a monthly average of not less than a specified
percentage (currently 5%) of its net withdrawable deposit accounts plus
short-term borrowings. OTS regulations also require each savings institution
to maintain an average daily balance of short-term liquid assets at a specified
percentage (currently 1%) of the total of its net withdrawable deposit accounts
and borrowings payable in one year or less. Monetary penalties may be imposed
for failure to meet these liquidity requirements. The Bank's average liquidity
ratio for the year ended December 31, 1996 was 53%, which exceeded the
applicable requirements. The Bank has never been subject to monetary penalties
for failure to meet its liquidity requirement.
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Assessments. Savings institutions are required by regulation to pay
assessments to the OTS to fund the agency's operations. The general
assessment, paid on a semi-annual basis, is computed upon the savings
institution's total assets, including consolidated subsidiaries, as reported in
the Bank's latest quarterly Thrift Financial Report. The assessments paid by
the Bank for the year ended December 31, 1996 totaled $45,000.
Branching. Subject to certain limitations, the HOLA and OTS regulations permit
federally chartered savings institutions to branch nationwide. Generally,
federal savings institutions may establish interstate networks and
geographically diversify their loan portfolios and lines of business. The
authority under the HOLA and OTS regulations preempts any state law purporting
to regulate branching by federal savings associations.
Community Reinvestment. Under the Community Reinvestment Act (the "CRA"), as
implemented by OTS regulations, an institution has a continuing and affirmative
obligation consistent with its safe and sound operation to help meet the credit
needs of its entire community, including low and moderate income neighborhoods.
The CRA does not establish specific lending requirements or programs for
financial institutions nor does it limit an institution's discretion to develop
the types of products and services that it believes are best suited to its
particular community, consistent with the CRA. The CRA requires the OTS, in
connection with its examination of an institution, to assess the institution's
record of meeting the credit needs of its community and to take such record
into account in its evaluation of certain applications by such institution.
The CRA also requires all institutions to make public disclosure of their CRA
ratings. The Bank received a "satisfactory" CRA rating in its most recent
examination.
In April 1995, the OTS and the other federal banking agencies adopted
amendments revising their CRA regulations. Among other things, the amended CRA
regulations substitute for the prior process-based assessment factors a new
evaluation system that would rate an institution based on its actual
performance in meeting community needs. In particular, the proposed system
would focus on three tests: (a) a lending test, to evaluate the institution's
record of making loans in its assessment areas; (b) an investment test, to
evaluate the institution's record of investing in community development
projects; affordable housing, and programs benefiting low or moderate income
individuals and businesses; and (c) a service test, to evaluate the
institution's delivery of services through its branches, ATMs, and other
offices. The amended CRA regulations also clarify how an institution's CRA
performance would be considered in the application process.
Transactions with Related Parties. The Bank's authority to engage in
transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with an institution, including the Company
and its non-savings institution subsidiaries) is limited by Sections 23A and
23B of the Federal Reserve Act ("FRA"). The OTS regulations prohibit a savings
institution (a) from lending to any of its affiliates that are engaged in
activities that are not permissible for bank holding companies under Section
4(c) of the BHC act and (b) from purchasing securities of any affiliate other
than a subsidiary. Section 23A limits the aggregate amount of covered
transactions with any individual affiliate to 10% of the capital and surplus of
the savings institution and also limits the aggregate amount of transactions
with all affiliates to 20% of the savings institution's capital and surplus.
Certain transactions with affiliates are required to be secured by collateral
in an amount and of a type described in Section 23A and the purchase of low
quality assets from affiliates is generally prohibited. Section 23B generally
requires that certain transactions with affiliates, including loan and asset
purchases, must be on terms and under circumstances, including credit
standards, that are substantially the same or at least as favorable to the
institution as those prevailing at the time for comparable transactions with
nonaffiliated companies. In
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the absence of comparable transactions, such transactions may occur under terms
and conditions including credit standards that in good faith would be offered
to or would apply to nonaffiliated companies.
The Bank's authority to extend credit to its directors, executive officers, and
10% shareholders, as well as to entities controlled by such persons, is
currently governed by the requirements of Section 22(g) and 22(h) of the FRA
and Regulation O of the FRB thereunder. Among other things, these provisions
require that extensions of credit to insiders (a) be made on terms that are
substantially the same as, and follow credit underwriting procedures that are
not less stringent than, those prevailing for comparable transactions with
unaffiliated persons and that do not involve more than the normal risk of
repayment or present other unfavorable features and (b) not exceed certain
limitations on the amount of credit extended to such persons, individually and
in the aggregate, which limits are based, in part, on the amount of the
institution's capital. In addition, extensions of credit in excess of certain
limits must be approved by the institution's board of directors.
Enforcement. Under the FDI Act, the OTS has primary enforcement responsibility
over savings institutions and has the authority to bring enforcement action
against all "institution-affiliated parties," including stockholders and any
attorneys, appraisers, and accountants who knowingly or recklessly participate
in wrongful action likely to have an adverse effect on an insured institution.
Formal enforcement action may range from the issuance of a capital directive or
cease and desist order to removal of officers or directors, receivership,
conservatorship, or termination of deposit insurance. Civil penalties cover a
wide range of violations and can amount to $25,000 per day or $1 million per
day in especially egregious cases. Under the FDI Act, the FDIC has the
authority to recommend to the Director of the OTS that enforcement action be
taken with respect to a particular savings institution. If action is not taken
by the Director, the FDIC has authority to take such action under certain
circumstances. Federal law also establishes criminal penalties for certain
violations.
Capital Requirements. The OTS capital regulations require savings institutions
to meet three minimum capital standards: a 1.5% tangible capital standard, a
3% leverage (core capital) ratio, and an 8% risk-based capital standard.
Tangible capital is defined, generally, as common stockholder's equity
(including retained earnings), certain noncumulative perpetual preferred stock,
and related earnings and minority interests in equity accounts of fully
consolidated subsidiaries, less intangibles (other than certain purchased
mortgage servicing rights) and investments in and loans to subsidiaries engaged
in activities not permissible for a national bank. In addition, the OTS prompt
corrective action regulation provides that a savings institution that has a
leverage capital ratio of less than 4% (3% for institutions receiving the
highest CAMEL examination rating) will be deemed to be "undercapitalized" and
may be subject to certain restrictions.
The risk-based capital standard for savings institutions requires the
maintenance of total capital (which is defined as core capital and
supplementary capital) to risk-weighted assets of 8%. In determining the
amount of risk-weighted assets, all assets, including certain off-
balance-sheet assets, are multiplied by a risk weight of 0% to 100%, as
assigned by the OTS capital regulation based on the risks OTS believes are
inherent in the type of asset. Core capital is defined similarly to tangible
capital, but core capital also includes certain qualifying supervisory goodwill
and certain purchased credit card relationships. Supplementary capital
currently includes cumulative preferred stock, long-term perpetual preferred
stock, mandatory convertible securities, subordinated debt, and intermediate
preferred stock and, within specified limits, the allowance for loan and lease
losses. Overall, the amount of supplementary capital included as part of total
capital cannot exceed 100% of core capital.
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The OTS has incorporated an interest rate risk component into its regulatory
capital rule. The final interest rate risk rule also adjusts the risk
weighting for certain mortgage derivative securities. Under the rule,
institutions with "above normal" interest rate risk exposure would be subject
to a deduction from total capital for purposes of calculating their risk-based
capital requirements. An institution's interest rate risk is measured by the
decline in the net portfolio value of its assets (i.e., the difference between
incoming and outgoing discounted cash flows from assets, liabilities, and
off-balance-sheet contracts) that would result from a hypothetical 2% increase
or decrease in market interest rates divided by the estimated economic value of
the association's assets, as calculated in accordance with guidelines set forth
by the OTS. An institution whose measured interest rate risk exposure exceeds
2% must deduct an interest rate component in calculating its total capital
under the risk-based capital rule. The interest rate risk component is an
amount equal to one-half of the difference between the institution's measured
interest rate risk and 2%, multiplied by the estimated economic value of the
institution's assets. That dollar amount is deducted from an association's
total capital in calculating compliance with its risk-based capital
requirement. Under the rule, there is a two quarter lag between the reporting
date of an institution's financial data and the effective date for the new
capital requirement based on that data. An institution with assets of less
than $300 million and risk-based capital ratios in excess of 12% is not subject
to the interest rate risk component, unless the OTS determines otherwise. The
rule also provides that the Director of the OTS may waive or defer an
institution's interest rate risk component on a case-by-case basis. The OTS
has postponed the date that the component will first be deducted from an
institution's total capital to provide it with an opportunity to review the
interest rate risk proposals recently issued by the other federal banking
agencies.
At December 31, 1996, the Bank met each of its capital requirements.
PROMPT CORRECTIVE REGULATORY ACTION
Under the OTS prompt corrective action regulations, the OTS is required to take
certain supervisory actions against undercapitalized institutions, the severity
of which depends upon the institution's degree of capitalization. Generally,
an institution that has a total risk- based capital of less than 8.0% or a
leverage ratio or a Tier I capital ratio that is less than 4.0% is considered
to be undercapitalized. A savings institution that has a Total risk-based
capital less than 6.0%, a Tier I risk-based capital ratio of less than 3% or a
leverage ratio that is less than 3.0% is considered to be "significantly
undercapitalized" and a savings institution that has a tangible capital to
assets ratio equal to or less than 2% is deemed to be "critically
undercapitalized." Subject to a narrow exception, the banking regulator is
required to appoint a receiver or conservator for an institution that is
critically undercapitalized. The regulation also provides that a capital
restoration plan must be filed with the OTS within 45 days of the date an
institution receives notice that it is "undercapitalized," "significantly
undercapitalized", or "critically undercapitalized." Compliance with the plan
must be guaranteed by any parent holding company. In addition, numerous
mandatory supervisory actions may become immediately applicable to the
institution depending upon its category, including, but not limited to,
increased monitoring by regulators, restrictions on growth, and capital
distributions and limitations on expansion. The OTS could also take any one of
a number of discretionary supervisory actions, including the issuance of a
capital directive and the replacement of senior executive officers and
directors. When appropriate, the OTS can require corrective action by a
savings association holding company under the prompt corrective action
regulations. As of December 31, 1996, the Bank met the standards for "well
capitalized."
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INSURANCE OF DEPOSIT ACCOUNTS
The FDIC has adopted a risk-based insurance assessment system. The FDIC
assigns an institution to one of three capital categories based on the
institution's financial information, as of the reporting period ending seven
months before the assessment period, consisting of (1) well capitalized, (2)
adequately capitalized, or (3) undercapitalized, and one of three supervisory
subcategories within each capital group. The supervisory subgroup to which an
institution is assigned is based on a supervisory evaluation provided to the
FDIC by the institution's primary federal regulator and information which the
FDIC determines to be relevant to the institution's financial condition and the
risk posed to the deposit insurance funds. An institution's assessment rate
depends on the capital category and supervisory category to which it is
assigned. The FDIC is authorized to raise the assessment rates in certain
circumstances. The FDIC has exercised this authority several times in the past
and may raise insurance premiums in the future. If such action is taken by the
FDIC, it could have an adverse effect on the earnings of the Bank. The Bank's
assessment rate for the years ended December 31, 1995 and 1994 was .23% of
assessable deposits.
The FDI Act requires that each of the Bank Insurance Fund ("BIF") and the SAIF
be recapitalized until its reserves are at least 1.25% of the deposits insured
by that fund. After a fund reached the 1.25% reserve ratio, the assessment
rates for that fund could be reduced. The FDIC has reported that the BIF
reached the required reserve ratio during May 1995. As a result of the
recapitalization of the BIF, the FDIC reduced BIF assessment rates. The FDIC
reduced the BIF assessment rate for "well capitalized" institutions without any
significant supervisory concerns to the statutory minimum of $2,000 annually
beginning with the first half of 1996, and the rates for other BIF-insured
institutions will range from zero to 0.27% of deposits.
In response to the SAIF/BIF assessment disparity, the Deposit Funds Insurance
Act of 1996 (the "1996 Act") was enacted into law on September 30, 1996. The
1996 Act amended the FDI Act in several ways to recapitalize the SAIF and
reduce the disparity in the assessment rates for the BIF and the SAIF. The
1996 Act authorized the FDIC to impose a special assessment on all institutions
with SAIF-assessable deposits in the amount necessary to recapitalize the SAIF.
As implemented by the FDIC, institutions with SAIF-assessable deposits paid a
special assessment, subject to adjustment, of 65.7 basis points per $100 of the
institution's SAIF-assessable deposits. The special assessment was based on
the amount of the SAIF-assessment deposits held on March 31, 1995. The 1996
Act provides the amount of the special assessment will be deductible for
federal income tax purposes for the taxable year in which the special
assessment is paid.
In view of the recapitalization of the SAIF, the FDIC proposed on October 8,
1996 to reduce the assessment rate for SAIF-assessable deposits for periods
beginning on October 1, 1996. As would be effective for the SAIF-assessable
deposits of SAIF-insured savings associations, such as the Bank, the proposed
assessment rates would range from .18% to .27% for the last quarter of 1996 and
would range from 0% to .27% for the subsequent assessment periods.
In addition, the 1996 Act expanded the assessment base for the payments on the
bonds (the "FICO bonds") issued in the late 1980s by the Financing Corporation
to recapitalize the now defunct Federal Savings and Loan Insurance Corporation
to include the deposits for both BIF and SAIF-insured institutions beginning
January 1, 1997. Until December 31, 1999, or such earlier date on which the
last savings association ceases to exist, the rate of assessment for
BIF-assessable deposits will be one-fifth of the rate imposed on
SAIF-assessable deposits. It has been estimated that the rates of assessment
for the
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payment of interest on the FICO bonds will be approximately 1.3 basis points
for BIF-assessable deposits and approximately 6.4 basis points for
SAIF-assessable deposits.
The 1996 Act also provides that the FDIC cannot assess regular insurance
assessments for an insurance fund unless required to maintain or to achieve the
designated reserve ratio of 1.25%, except on those of its member institutions
that are not classified as "well capitalized" or that have been found to have
"moderately severe" or "unsatisfactory" financial, operational, or compliance
weaknesses. The Bank has not been so classified by the FDIC or the OTS.
Accordingly, assuming that the designated reserve ratio is maintained by the
BIF and by the SAIF after the collection of the special SAIF assessment, the
Bank, as long as it maintains its regulatory status, will have to pay
substantially lower regular SAIF and FICO assessments compared to those paid by
the Bank in recent years.
Under the FDI Act, insurance of deposits may be terminated by the FDIC upon a
finding that the institution has engaged in unsafe or unsound practices; is in
an unsafe or unsound condition to continue operations; or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. The management of the Bank does not know of any practice, condition, or
violation that might lead to termination of deposit insurance.
FEDERAL HOME LOAN BANK SYSTEM
The Bank is a member of the FHLB System, which consists of 12 regional FHLBs.
The FHLB provides a central credit facility primarily for member institutions.
The Bank, as a member of the FHLB is required to acquire and hold shares of
capital stock in the FHLB in an amount at least equal to 1% of the aggregate
principal amount of its unpaid residential mortgage loans and similar
obligations at the beginning of each year, or 1/20 of its advances (borrowings)
from the FHLB, whichever is greater. The Bank was in compliance with this
requirement with an investment in FHLB stock at December 31, 1996 of $756,000.
FHLB advances must be secured by specified types of collateral and all
long-term advances may only be obtained for the purpose of providing funds for
residential housing finance.
The FHLBs are required to provide funds for the resolution of insolvent thrifts
and to contribute funds for affordable housing programs. These requirements
could reduce the amount of dividends that the FHLBs pay to their members and
could also result in the FHLBs imposing a higher rate of interest on advances
to their members. For the years ended December 31, 1996, 1995, and 1994,
dividends from the FHLB to the Bank amounted to $50,000, $45,000, and $43,000,
respectively. If dividends were reduced, the Bank's net interest income would
likely also be reduced. Further, there can be no assurance that the impact of
recent legislation on the FHLBs will not also cause a decrease in the value of
the FHLB stock held by the Bank.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board regulations require savings institutions to maintain
non-interest-earning reserves against their transaction accounts (primarily NOW
and regular checking accounts). The Federal Reserve Board regulations
generally require that reserves be maintained against aggregate transaction
accounts as follows: for accounts aggregating $52.0 million or less (subject to
adjustment by the Federal Reserve Board) the reserve requirement is 3%; and for
accounts greater than $52.0 million, the reserve requirement is $1.6 million
plus 10% (subject to adjustment by the Federal Reserve Board between 8% and
12%) against that portion of total transaction accounts in excess of $52.0
million. The first $4.3 million of otherwise reservable balances (subject to
adjustments by the Federal Reserve Board) are exempted from the reserve
requirements. The Bank is in compliance with the foregoing requirements.
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Because required reserves must be maintained in the form of either vault cash,
a non-interest-bearing account at a Federal Reserve Bank, or a pass-through
account as defined by the Federal Reserve Board, the effect of this reserve
requirement is to reduce the Bank's interest-earning assets. The balances
maintained to meet the reserve requirements imposed by the Federal Reserve
Board may be used to satisfy liquidity requirements imposed by the OTS. FHLB
System members are also authorized to borrow from the Federal Reserve "discount
window," but Federal Reserve Board regulations require institutions to exhaust
all FHLB sources before borrowing from a Federal Reserve Bank.
HOLDING COMPANY REGULATION
The Company is a non-diversified unitary savings and loan holding company
within the meaning of the HOLA. As such, the Company is required to register
with the OTS and is subject to OTS regulations, examinations, supervision, and
reporting requirements. In addition, the OTS has enforcement authority over
the Company and its non-savings institution subsidiaries. Among other things,
this authority permits the OTS to restrict or prohibit activities that are
determined to be a serious risk to the subsidiary savings institution.
As a unitary savings and loan holding company, the Company generally will not
be restricted under existing laws as to the types of business activities in
which it may engage, provided that the Bank continues to be a QTL. Upon any
non-supervisory acquisition by the Company of another savings association, the
Company would become a multiple savings and loan holding company (if the
acquired institution is held as a separate subsidiary) and would be subject to
extensive limitations on the types of business activities in which it could
engage. The HOLA limits the activities of a multiple savings and loan holding
company and its noninsured institution subsidiaries primarily to activities
permissible for bank holding companies under Section 4(c)(8) of the Bank
Holding Company Act, subject to the prior approval of the OTS, and to other
activities authorized by OTS regulation.
The HOLA prohibits a savings and loan holding company, directly or indirectly,
or through one or more subsidiaries, from acquiring more than 5% of the voting
stock of another savings institution, or holding company thereof, without prior
written approval of the OTS: and from acquiring or retaining, with certain
exceptions, more than 5% of a non-subsidiary holding company, or a
non-subsidiary company engaged in activities other than those permitted by the
HOLA; or acquiring or retaining control of a depository institution that is not
insured by the FDIC. In evaluating applications by holding companies to
acquire savings institutions, the OTS must consider their financial and
managerial resources and future prospects of the company and institution
involved, the effect of the acquisition on the risk to the insurance funds, the
convenience and needs of the community, and competitive factors.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, except: (i) the approval of interstate supervisory
acquisitions by savings and loan holding companies and (ii) the acquisition of
a savings institution in another state if the laws of the state of the target
savings institution specifically permit such acquisitions. The states vary in
the extent to which they permit interstate savings and loan holding company
acquisitions.
Transactions between the Bank and the Company and its other subsidiaries are
subject to various conditions and limitations. The Bank must give 30 days
written notice to the OTS prior to any declaration of the payment of any
dividends or other capital distributions to the Company.
31
<PAGE> 33
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 for future ATM sites and parking facilities
with a net book value of $161,816 and a property for a possible future branch
office with a net book value of $145,515.
The following table sets forth certain information regarding the Bank's three
banking offices, all of which are owned by the Bank.
<TABLE>
<CAPTION>
NET BOOK VALUE OF
DATE PROPERTY AT
LOCATION ACQUIRED DECEMBER 31, 1996
-------- -------- -----------------
<S> <C> <C>
HOME OFFICE:
2740 West 55th Street 1954 $ 14,947
Chicago, Illinois 60632
BRANCH OFFICES:
5400 South Pulaski Road 1985 926,016
Chicago, Illinois 60632
21 East Ogden Avenue 1975 663,054
Westmont, Illinois 60559
</TABLE>
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, 1996.
32
<PAGE> 34
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 for over
23 years and has held various positions during that time. Mr. Remijas is the
brother of Richard J. Remijas, Jr.
RICHARD J. REMIJAS, JR., age 47, 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 37, joined the Bank in 1985 as the Controller 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 35, joined the Bank in 1986 as a loan processor. Mrs.
Remijas has held various positions with the Bank and currently serves as
Assistant Vice President-Lending. Mrs. Remijas is the wife of David A.
Remijas.
33
<PAGE> 35
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the NASDAQ National Market under the
symbol "PFED". The table below shows the reported high and low sales price of
the common stock during the period indicated in 1996. The common stock began
trading on August 12, 1996. Therefore, prices for the first and second
quarters are not applicable.
<TABLE>
<S> <C> <C>
First quarter N/A N/A
Second quarter N/A N/A
Third quarter 11 3/8 10
Fourth quarter 13 1/4 11 1/8
</TABLE>
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 Condition Data (In thousands)
<TABLE>
<CAPTION>
At December 31 1996 1995 1994 1993 1992
-------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Total assets $178,194 $158,939 $144,788 $136,422 $136,003
Cash and cash equivalents 6,213 12,790 2,573 13,252 8,278
Securities available-for-sale (1) 50,109 37,134 14,958 -- --
Securities held-to-maturity (1) 47,840 42,494 65,896 58,528 50,837
Loans receivable, net (2) 66,179 60,538 56,558 56,696 67,984
Deposits 128,852 130,503 118,521 119,679 121,154
FHLB advances 5,000 9,000 8,000 -- --
Stockholders' equity(3) 42,457 17,533 16,413 14,770 13,034
</TABLE>
34
<PAGE> 36
Summary of Operations (In thousands)
<TABLE>
<CAPTION>
Year Ended December 31 1996 1995 1994 1993 1992
---------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Interest income
Loans receivable $5,398 $5,090 $4,889 $6,177 $7,889
Securities 5,767 4,665 3,972 3,077 3,177
Interest-bearing deposits with other
financial institutions 170 -- -- -- --
------ ---- ------ ------ ------
Total interest income 11,335 9,755 8,861 9,254 11,066
Interest expense
Deposits 6,202 5,604 4,531 4,890 6,356
Federal Home Loan Bank advances and
other borrowings 118 102 112 -- --
------ ---- ------ ------ ------
Total interest expense 6,320 5,706 4,643 4,890 6,356
Net interest income 5,015 4,049 4,218 4,364 4,710
Provision for loan losses -- 298 48 140 100
------ ---- ------ ------ ------
Net interest income after provision for
loan losses 5,015 3,751 4,170 4,224 4,610
Noninterest income
Gain on sale of securities -- 14 -- 138 215
Gain on sale of real estate held for
development 60 523 1,114 856 875
Service fee income 177 102 123 160 230
Other operating income 70 55 47 69 84
------ ---- ------ ------ ------
Total noninterest income 307 694 1,284 1,223 1,404
Noninterest expense
Compensation and benefits 1,664 1,782 1,635 1,485 1,403
Occupancy and equipment 375 361 363 371 335
Federal deposit insurance premiums 1,078 316 317 287 306
Data processing services 125 115 104 111 83
Advertising 64 134 40 13 17
Stationery, printing, and supplies 84 103 74 52 32
Other operating expense 328 285 289 279 250
------ ---- ------ ------ ------
Total noninterest expense 3,718 3,096 2,822 2,598 2,426
Income before income taxes 1,604 1,349 2,632 2,849 3,588
Income taxes 543 413 881 1,113 (4) 1,268
------ ---- ------ ------ ------
Net income $1,061 $936 $1,751 $1,736 $2,320
====== ==== ====== ====== ======
</TABLE>
35
<PAGE> 37
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS AND OTHER DATA (5)
Performance Ratios:
Return on average assets 0.65% 0.65% 1.25% 1.27% 1.72%
Return on average equity 3.92 5.49 11.15 12.52 19.61
Average equity to average assets 16.48 11.82 11.26 10.16 8.78
Equity to total assets at end of period 23.83 11.03 11.34 10.83 9.58
Average interest rate spread (6) 2.48 2.38 2.80 3.22 3.69
Net interest margin (7) 3.19 2.90 3.15 3.44 3.81
Average interest-earning assets to average interest- 117.70 112.63 110.09 105.40 102.51
bearing liabilities
Efficiency ratio (8) 69.86 65.28 51.28 46.50 39.68
Noninterest expense to average assets 2.26 2.15 2.02 1.90 1.80
REGULATORY CAPITAL RATIOS:
Tangible capital 16.50% 10.20% 10.80% 9.20% 8.60%
Core capital 16.50 10.20 10.80 9.20 8.60
Risk-based capital 58.20 36.00 43.20 26.70 25.60
ASSET QUALITY RATIOS:
Nonperforming loans as a percent of gross loans 0.44% 1.46% 1.17% 0.54% 0.31%
receivable (9) (10)
Nonperforming assets as a percent of total assets (10) 0.16 0.61 0.51 0.35 0.16
Allowance for loan losses as a percent of gross loans 0.73 0.91 0.47 0.42 0.25
receivable (9)
Allowance for loan losses as a percent of nonperforming 167.22 62.49 39.97 77.88 79.55
loans (10)
Number of full-service customer facilities 3 3 3 3 3
</TABLE>
(1) The Bank adopted Statement of Financial Accounting Standards ("SFAS") No.
115, "Accounting for Certain Investments in Debt and Equity Securities",
effective as of January 1, 1994. Prior to the adoption of SFAS No. 115,
investment securities and mortgage-backed securities held for sale were
carried at the lower of amortized cost or market value, as adjusted for
amortization of premiums and accretion of discounts over the remaining
terms of the securities from the dates of purchase.
(2) The allowance for loan losses at December 31, 1996, 1995, 1994, 1993, and
1992 was $500,000, $573,000, $275,000, $250,000, and $175,000,
respectively.
(3) Retained earnings for years prior to 1996.
(4) 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.
(5) Asset Quality Ratios and Regulatory Capital Ratios are end of period
ratios. With the exception of end of period ratios, all ratios are based
on average monthly balances during the indicated periods and are
annualized where appropriate.
(6) 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.
(7) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(8) The efficiency ratio represents noninterest expense as a percent of net
interest income before provision for loan losses and noninterest income.
(9) Gross loans receivable are stated at unpaid principal balances.
(10) Nonperforming assets consist of nonperforming loans and REO.
Nonperforming assets do not include loans which have been restructured and
are presently accruing interest in accordance with their restructured
terms. Nonperforming loans consist of all loans 90 days or more past due
and all other non-accrual loans. It is the Bank's policy to cease
accruing interest on loans 90 days or more past due.
-36-
<PAGE> 38
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ORGANIZATION
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 Park Bancorp, Inc. (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 $13.6
million, was used to purchase the common stock of the Bank.
GENERAL
The only 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
primarily consist of employee compensation and benefits. 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.
MANAGEMENT STRATEGY
Management's primary goal has been to improve profitability and its capital
position, so that the Bank can have greater flexibility in providing the
products and services desired by the customers in the communities it serves.
To accomplish this, the Bank has employed an operating strategy which has: (1)
emphasized the origination of fixed-rate one-to-four-family residential
mortgage loans secured by properties located in its primary market area; (2)
sought to enhance net income and manage interest rate risk by maintaining high
liquidity through the purchase of adjustable-rate mortgage-backed securities
and other short- and intermediate-term securities; (3) concentrated on its
asset quality by limiting its commercial real estate and multi-family lending;
(4) enhanced net income by increasing noninterest income primarily through real
estate development; and (5) sought to control asset growth to a level
sustainable by its capital position. The Bank intends to continue this
operating strategy to enhance its long-term profitability while managing the
level of interest rate risk.
Highlights of the Company's management strategy are as follows:
o Fixed-Rate Residential Mortgage Lending. Historically, the Bank has
emphasized the origination of fixed-rate residential mortgage loans as a
result of market conditions and consumer preference for such loans in its
primary market area. At December 31, 1996, fixed-rate mortgage loans
totaled $60.7 million or 88.6% of total gross loans. Management believes
that investing in fixed-rate mortgage loans results in a higher net
interest margin than investment in adjustable-rate mortgage loans.
However, investment in fixed-rate
37
<PAGE> 39
mortgage loans generally results in increased interest rate risk as such
loans generally do not reprice as quickly as adjustable-rate mortgage loans
during periods of rising interest rates.
o Maintaining High Liquidity. Management of the Bank seeks to limit interest
rate risk by maintaining high liquidity through the purchase of
adjustable-rate mortgage-backed securities and other short- and
intermediate-term securities. At December 31, 1996, adjustable-rate
mortgage-backed securities and other securities totaled $97.9 million or
55.0% of total assets.
o Concentration on Asset Quality. The Company has limited its commercial
real estate and multi-family lending activities in an effort to maintain a
high level of asset quality. At December 31, 1996, commercial real estate
loans and multi-family loans were $12,124,400, or 18.3% of the total loan
portfolio. The Company has historically maintained a conservative lending
strategy that has limited the level of non-performing assets and net
charge-offs. The Company's ratio of non-performing assets to total assets
at December 31, 1996 and 1995 was 0.16%, and 0.61%, respectively.
o Real Estate Development. Through its wholly-owned subsidiary, GPS
Development Corp., the Bank is engaged in the business of purchasing
unimproved land for development into residential subdivisions of primarily
single-family lots. 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. GPS
Development Corp. or the Bank has provided essentially all of the joint
venture's capital in exchange for an ownership interest which entitles them
to a percentage of the profit or loss generated by the joint venture.
At December 31, 1996, GPS Development Corp. was involved in two real estate
development projects. The Rose Hill Venture, located in Naperville,
Illinois consisted of 259 single-family residential lots, 132 townhouse
lots, and a commercial parcel. As of December 31, 1996, only two single-
family lots remained for sale. The Prairie Ridge Venture, also located in
Naperville, is currently under development and will consist of 88 single-
family residential lots.
o Controlled Asset Growth. Bank management is attempting to increase the
level of the Bank's core and longer-term deposits through marketing efforts
and by expanding its deposit products and services. As part of this
expansion, the Bank has recently added two ATMs and has plans to install a
third ATM. Bank management is also considering branch expansion within its
primary market area.
MANAGEMENT OF INTEREST RATE 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.
38
<PAGE> 40
NET PORTFOLIO VALUE
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 Office of Thrift Supervision ("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 purposes of the
risk-based capital requirement. As of December 31, 1996, the Bank's
sensitivity measure, as measured by the OTS NPV model, resulting from a 200
basis point increase in interest rates was (1.40)% and would result in a $3.2
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 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 model assumes
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 model assumes 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.
39
<PAGE> 41
The following table shows the NPV and projected change in the NPV of the Bank
at December 31, 1996 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)
<TABLE>
<CAPTION>
NET PORTFOLIO VALUE NPV AS A % OF PV OF ASSETS
CHANGE IN ----------------------------------- ------------------------------------------------------
RATES $ AMOUNT $ CHANGE % CHANGE NPV RATIO CHANGE
----------------- ----------------- ---------------- ----------------- ---------------- -----------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
+400bp $27,197 $(6,816) (20)% 16.73% -306bp
+300bp 28,969 (5,044) (15) 17.57 -222bp
+200bp 30,765 (3,249) (10) 18.38 -140bp
+100bp 32,489 (1,524) (4) 19.14 -64bp
0bp 34,013 -- -- 19.79 --
-100bp 35,108 1,095 320 20.22 +43bp
-200bp 35,683 1,669 520 20.40 +61bp
-300bp 36,414 2,400 720 20.65 +86bp
-400bp 37,576 3,563 102 21.08 +129bp
</TABLE>
40
<PAGE> 42
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, 1996,
1995, and 1994. 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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 YEAR ENDED DECEMBER 31, 1995 YEAR ENDED DECEMBER 31, 1994
--------------------------------- ---------------------------------- ---------------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
---------- ----------- ---------- ----------- ---------- ----------- ---------- ----------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets
Interest-earning
deposits and other
investments $ 9,595 $ 438 4.56% $ 6,971 $ 361 5.18% $ 5,210 $ 178 3.42%
Securities, net (1) 62,868 4,022 6.40 55,390 3,175 5.73 56,100 2,964 5.28
Loans receivable (2) 62,447 5,398 8.64 58,830 5,090 8.65 55,166 4,889 8.86
Mortgage-backed
securities, net (1) 22,541 1,477 6.55 18,560 1,129 6.08 17,410 830 4.77
------- ------ ------- ------ ------- -----
Total interest-
earning
assets 157,451 11,335 7.20 139,751 9,755 6.98 133,886 8,861 6.62
------ ------ -----
Non-interest-earning
assets 6,672 4,418 5,650
-------- -------- --------
Total assets $164,123 $144,169 $139,536
======== ======== ========
LIABILITIES AND
STOCKHOLDERS'EQUITY
Interest-bearing
liabilities
Passbook accounts $ 34,266 949 2.77 $ 36,761 1,059 2.88 $ 40,787 1,124 2.76
Money market savings
accounts 4,121 138 3.35 3,656 120 3.28 4,569 127 2.78
NOW accounts 5,887 111 1.89 5,336 103 1.93 5,536 103 1.86
Certificate accounts 84,740 5,003 5.90 75,640 4,322 5.71 68,186 3,177 4.66
--------- ------ -------- ------ -------- ------
Total 129,014 6,201 4.81 121,393 5,604 4.62 119,078 4,531 3.81
FHLB advances and other
borrowings 4,758 118 2.48 2,692 102 3.79 2,539 112 4.41
-------- ------ -------- ------ ------- ------
Total interest-bearing
liabilities 133,772 6,319 4.72 124,085 5,706 4.60 121,617 4,643 3.82
------ ------ ------
Non-interest-bearing
liabilities 3,298 3,038 2,213
-------- -------- --------
Total liabilities 137,070 127,123 123,830
Stockholders' equity 27,053 17,046 15,706
-------- -------- --------
Total liabilities and
stockholders' equity $164,123 $144,169 $139,536
======== ======== ========
Net interest income
before provision for
estimated loan losses $5,016 $4,049 $4,218
====== ====== ======
Net interest rate
spread(3) 2.48% 2.38% 2.80%
==== ==== ====
Net interest margin(4) 3.19% 2.90% 3.15%
==== ==== ====
Ratio of average
interest-earning assets
to average interest-
bearing liabilities 117.70% 112.63% 110.09%
======= ======== ======
</TABLE>
(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.
41
<PAGE> 43
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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 YEAR ENDED DECEMBER 31, 1995
COMPARED TO COMPARED TO
YEAR ENDED DECEMBER 31, 1995 YEAR ENDED DECEMBER 31, 1994
------------------------------------ ------------------------------------
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
------------------------------------ ------------------------------------
VOLUME RATE NET VOLUME RATE NET
----------- ---------- ----------- ----------- ---------- -----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets
Interest-earning deposits and other
investments $ 124 $ (47) $ 77 $ 72 $ 111 $ 183
Securities, net (1) 455 392 847 (38) 249 211
Loans receivable, net 313 (5) 308 319 (118) 201
Mortgage-backed securities,
net (1) 257 91 348 58 241 299
------ ----- ------ ------ ----- -----
Total interest-earning assets 1,149 431 1,580 411 483 894
------ ----- ------ ------ ----- -----
Interest-bearing liabilities
Passbook savings accounts (70) (40) (110) (114) 49 (65)
Money market savings accounts 16 2 18 (28) 21 (7)
NOW accounts 10 (2) 8 (4) 4 --
Certificate accounts 534 147 681 373 772 1,145
FHLB advances and other
borrowings 60 (44) 16 6 (16) (10)
------ ----- ------ ------ ----- -----
Total interest-bearing
liabilities 550 63 613 233 830 1,063
------ ----- ------ ------ ----- -----
Change in net interest income $ 599 $ 368 $ 967 $ 178 $(347) $(169)
====== ===== ====== ====== ====== =====
</TABLE>
(1) Includes assets available-for-sale.
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
million at December 31, 1995, a decrease of $5.7 million. The decrease is
attributable to a $4.0 million decrease in Federal Home
42
<PAGE> 44
Loan Bank advances and a $1.7 million decrease in deposits. Savings deposits
decreased by $0.9 million while certificates of deposit decreased by $0.5
million.
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, 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.
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 15.3%. The increase in interest income was
primarily due to a $17.7 million increase in average interest-earning assets
primarily due to investment of the stock offering proceeds. A contributing
factor in the increase in interest income was a 22-basis point increase in the
average yield on interest-earning assets.
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 19 basis point increase in the average rate paid on certificates of
deposit from 5.71% for the year ended December 31, 1995 to 5.90% for the year
ended December 31, 1996.
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, seven 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 $622,000. 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. This expense was
partially mitigated by a $70,000 decrease in advertising expenses from the year
ended December 31, 1996 as compared to the year ended December 31, 1995 due to
advertising efforts related to the Bank's name change in 1995.
43
<PAGE> 45
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.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1995 AND DECEMBER 31, 1994
Total assets at December 31, 1995 were $158.9 million compared to $144.8
million at December 31, 1994, an increase of $14.1 million or 9.7%. The Bank
increased the amount of net loans receivable by $3.9 million, from $56.6
million at December 31, 1994 to $60.5 million at December 31, 1995, primarily
due to lower levels of mortgage interest rates in 1995, which spurred increased
customer demand. The Bank also increased the amount of cash and cash
equivalents from $2.6 million at December 31, 1994 to $12.8 million at December
31, 1995.
Total liabilities at December 31, 1995 were $141.4 million compared to $128.4
million at December 31, 1994, an increase of $13.0 million. Total deposit
accounts of the Bank increased by $12.0 million from $118.5 million at December
31, 1994 to $130.5 million at December 31, 1995 due to higher rates paid to
meet rates offered by competitors.
Equity at December 31, 1995 was $17.5 million compared to $16.4 million at
December 31, 1994, an increase of $1.1 million, or 6.7%, reflecting income of
$936,000 for the year ended December 31, 1995 and a change of $184,000 in
unrealized gains on investment securities available-for-sale, pursuant to the
provisions of SFAS No. 115.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1995 AND
DECEMBER 31, 1994
General. Net income for the year ended December 31, 1995 was $936,000 compared
to $1.8 million for the year ended December 31, 1994. The operating results
were primarily affected by the decrease in the average interest rate spread
from 2.80% for the year ended December 31, 1994 to 2.38% for the year ended
December 31, 1995 resulting from the differing impact of the change in the
interest rate environment on the Bank's assets and liabilities coupled with
changes in the composition of the Bank's deposits. Gains on the sale of real
estate held for development declined to $523,000 for the year ended December
31, 1995 compared to $1.1 million for the same period in 1994 as the Bank's
Rose Hill Venture neared completion. Net interest income was $4.0 million for
the year ended December 31, 1995 compared to $4.2 million for the year ended
December 31, 1994. The reduction in net interest income was accompanied by a
$250,000 increase in the provision for loan losses on loans from $48,000 for
the year ended December 31, 1994 to $298,000 for the year ended December 31,
1995. The provision for losses on loans for the year ended December 31, 1995
reflects an increase in non-accrual loans in 1995 and other factors.
Interest Income. Interest income for the year ended December 31, 1995 was $9.8
million compared to $8.9 million for the year ended December 31, 1994, an
increase of $894,000 or 10.0%. The increase in interest income was primarily
due to a 36 basis point increase in the average yield on interest-earning
assets from 6.62% for the year ended December 31, 1994 to 6.98% for the year
ended December 31, 1995. A contributing factor in the increase in interest
income was a $5.9 million increase in average interest-earning assets. The
increase in average interest-earning assets during the year ended December 31,
1995 was primarily due to a $3.6 million increase in the average balance of
loans receivable from $55.2 million for the year ended December 31, 1994 to
$58.8 million for the year ended December 31, 1995. Although average loans
receivable increased in 1995, which was the result of
44
<PAGE> 46
planned growth of the loan portfolio, the average yield on loans declined by 21
basis points from 8.86% for the year ended December 31, 1994 to 8.65% for the
year ended December 31, 1995. This decrease in average yield was primarily due
to the general decline in mortgage rates in 1995 as compared to 1994.
Non-performing assets increased from $738,000 at December 31, 1994 to $967,000
at December 31, 1995, reflecting an increase in non-performing commercial real
estate loans. Investment and mortgage-backed securities income increased by
$510,000 due primarily to a 66 basis point increase in the average yield from
5.16% to 5.82% for the year ended December 31, 1995, resulting from the
repricing of mortgage-backed securities and the purchase of higher-yielding
securities.
Interest Expense. Interest expense for the year ended December 31, 1995 was
$5.7 million compared to $4.6 million for the year ended December 31, 1994, an
increase of $1.1 million or 23.9%. The increase in interest expense was due
primarily to an increase in the average cost of interest-bearing liabilities
from 3.82% for the year ended December 31, 1994 to 4.60% for the year ended
December 31, 1995 due to a change in the composition of the Bank's deposit
accounts. Due to the change in the interest rate environment and the change in
the composition of deposit accounts, the average cost of funds for deposit
accounts increased from 3.81% for the year ended December 31, 1994 to 4.62% for
the year ended December 31, 1995.
Provision for Loan Losses. During the year ended December 31, 1995, the Bank's
provision for losses on loans was $298,000, compared to $48,000 for the year
ended December 31, 1994. The provision for losses on loans reflects an
increase in non-performing assets in 1995 and management's evaluation of the
credit risk inherent in the loan portfolio. As a result, during the year ended
December 31, 1995, the allowance for losses on loans increased from $275,000 at
December 31, 1994 to $573,000 at December 31, 1995.Noninterest Income.
Noninterest income for the year ended December 31, 1995 was $694,000 compared
to $1.3 million for the year ended December 31, 1994, a decrease of $590,000 or
46.0%. The decrease was primarily due to a $591,000 decline in gains from the
sale of real estate held for development from $1.1 million for 1994 to $523,000
in 1995 as the Bank's Rose Hill Venture neared completion. During 1995, ten
single-family and 60 townhouse lots in the Rose Hill Venture were sold, as
compared to a total of 72 single-family and 65 townhouse lot sales in 1994.
Gains on sales of real estate held for development are reported net of all
related costs, except for certain insignificant general and administrative
costs incurred by the Bank.
Noninterest Expense. Noninterest expense for the year ended December 31, 1995
was $3.1 million compared to $2.8 million for the year ended December 31, 1994,
an increase of $274,000 or 9.8%. This increase was primarily due to a $147,000
increase in compensation expense resulting from normal pay increases and a
$93,000 increase in advertising expense related to the Bank's name change in
1995.
Income Taxes. Income tax expense was $413,000 for the year ended December 31,
1995 compared to $881,000 for the year ended December 31, 1994. The decrease
in income tax expense was primarily the result of the decrease in income before
income taxes from $2.6 million for the year ended December 31, 1994 to $1.3
million for the year ended December 31, 1995, and the realization of a state
income tax refund in 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Bank's primary sources of funds are deposits, principal and interest
payments on loans and securities, and proceeds from the maturation of
securities. 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
45
<PAGE> 47
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 52.98%, 52.72%, 52.07%, 40.11%, and 26.37% for the years
ended December 31, 1996, 1995, 1994, 1993, and 1992, 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 $895,000,
$863,000, and $511,000 for the years ended December 31, 1996, 1995, and 1994,
respectively. Net cash from investing activities consisted primarily of
disbursements for loan originations and the purchase of investments and
mortgage-backed 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 net
proceeds from the sale of common stock in 1996 and the activity in deposit
accounts and FHLB borrowings in 1995 and 1994. The net cash from financing
activities was $18.4 million, $12.9 million, and $6.8 million for the years
ended December 31, 1996, 1995, and 1994, respectively.
At December 31, 1996, the Bank exceeded all of its regulatory capital
requirements with a tangible capital level of $27.1 million or 16.5% of
adjusted total assets, which is above the required level of $2.5 million or
1.5%; core capital of $27.1 million or 16.5% of adjusted total assets, which is
above the required level of $5.0 million or 3.0%; and risk-based capital of
$27.6 million or 58.2% of risk-weighted assets, which is above the required
level of $3.8 million or 8%.
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, 1996, cash and
short- term investments totaled $6.2 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. At
December 31, 1996, the Bank had $5.0 million in advances outstanding from the
FHLB.
The Bank currently has no contractual obligations or commitments for capital
expenditures; however, the Board of Directors has approved expenditures for
1997 estimated to be $650,000 for the upgrade of data processing systems in
order to provide new technology based products and services to its customers,
installation of an ATM, additional parking facilities, and office improvements.
The installation of the ATM and parking facility are being undertaken to
increase the access and convenience of the Bank's facilities by the Bank's
customers by providing 24-hour access to funds and other financial transactions
and a more accessible branch facility. In addition, management anticipates
that the improvements to the Bank's office space will enable it to more
efficiently deliver services to customers. As a result, management believes
that the Bank will be better positioned to continue to serve its customers. At
December 31, 1996, the Bank had outstanding commitments to originate mortgage
loans of $835,000 compared to $699,000 at December 31, 1995. 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, 1996 totaled $62.3 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.
46
<PAGE> 48
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 require 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
In May 1993, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 114, "Accounting by Creditors for
Impairment of a Loan" ("SFAS No. 114"), which has been amended by SFAS No. 118.
Under the provisions of SFAS No. 114, as amended, a loan is considered impaired
when, based on current information and events, it is probable that a creditor
will be unable to collect all amounts due according to the contractual terms of
the loan agreement. SFAS No. 114 requires creditors to measure impairment of a
loan based on the present value of expected future cash flows discounted at the
loan's effective interest rate or, as a practical expedient, at the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. If the measure of the impaired loan is less than the
recorded investment in the loan, a creditor shall recognize an impairment by
recording a valuation allowance with a corresponding charge to the provision
for loan losses. The Company adopted the provisions of SFAS No. 114 and SFAS
No. 118 effective in 1995. The adoption of SFAS No. 114 and SFAS No. 118 did
not have a material impact on the results of operations or financial condition
of the Company.
In March 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121
requires that long-lived assets and certain identifiable intangibles be
reviewed for impairment whenever events or circumstances indicate that the
carrying amount of an asset may not be recoverable. However, SFAS No. 121 does
not apply to financial instruments, core deposit intangibles, mortgage and
other servicing rights, or deferred tax assets. The adoption of SFAS No. 121
in 1996 did not have a material effect on the Company's income or financial
condition.
In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage Servicing
Rights." SFAS No. 122 requires an institution that purchases or originates
mortgage loans and sells or securitizes those loans with servicing rights
retained to allocate the total cost of the mortgage loans to the mortgage
servicing rights and the loans (without the mortgage servicing rights) based on
their relative fair values. In addition, institutions are required to assess
impairment of the capitalized mortgage servicing portfolio based on the fair
value of those rights. SFAS No. 122 is effective for fiscal years beginning
after December 15, 1995. SFAS No. 122 had no material impact on the Company's
earnings or financial condition. SFAS No. 122 will be superceded by SFAS No.
125 after December 31, 1996.
In November 1995, the FASB issued SFAS No. 123, "Accounting for Stock Based
Compensation." This statement establishes financial accounting standards for
stock-based employee compensation plans. SFAS No. 123 permits the Company to
choose either a new fair value based method or the current APB Opinion 25
intrinsic value based method of accounting for its stock-based compensation
arrangements. SFAS No. 123 requires pro forma disclosures of net earnings and
earnings per share computed as if the
47
<PAGE> 49
fair value based method had been applied in financial statements of companies
that continue to follow current practice in accounting for such arrangements
under Opinion 25. SFAS No. 123 applies to all stock-based employee
compensation plans in which an employer grants shares of its stock or other
equity instruments to employees except for employee stock ownership plans. Any
effect that this statement will have on the Company will be applicable upon the
grant of its stock or other equity instruments under a stock-based employee
compensation plan.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." This
statement provides authoritative guidance as to the accounting and financial
reporting for transfers and servicing of financial assets and extinguishments
of liabilities. Example transactions covered by SFAS No. 125 include asset
securitizations, repurchase agreements, wash sales, loan participations,
transfers of loans with recourse and servicing of loans. SFAS No. 125 is based
on a consistent application of a financial-components approach that focuses on
control and provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings.
The Statement also requires measuring instruments that have a substantial
prepayment risk at fair value, much like debt instruments classified as
available-for-sale or trading. While SFAS No. 125 supersedes SFAS No. 122,
"Accounting for Mortgage Servicing Rights," it only marginally modifies the
accounting and disclosure requirements of SFAS No. 122. SFAS No. 125, as
amended by SFAS No. 127, is effective on a prospective basis for some
transactions in 1997 and others in 1998.
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.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
(a) Directors. The 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 22, 1997 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.
48
<PAGE> 50
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.
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 beginning on page i.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company
during the last quarter of its fiscal year.
49
<PAGE> 51
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.
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.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ David A. Remijas Chairman of the Board, President and Chief March 26, 1997
------------------------------------ Executive Officer (principal executive
David A. Remijas officer)
/s/ Steven J. Pokrak Treasurer and Chief Financial Officer March 26, 1997
------------------------------------ (principal financial officer and principal
Steven J. Pokrak accounting officer)
/s/ Richard J. Remijas, Jr. Executive Vice President, Chief Operating March 26, 1997
------------------------------------ Officer, Corporate Secretary and Director
Richard J. Remijas, Jr.
/s/ Joseph M. Judickas, Jr. Director March 26, 1997
------------------------------------
Joseph M. Judickas, Jr.
/s/ Charles Paprocki Director March 26, 1997
------------------------------------
Charles Paprocki
/s/ Paul Shukis Director March 26, 1997
------------------------------------
Paul Shukis
/s/ Glenn Zajicek Director March 26, 1997
------------------------------------
Glenn Zajicek
</TABLE>
50
<PAGE> 52
PARK BANCORP, INC.
INDEX TO FINANCIAL INFORMATION
<TABLE>
<S> <C>
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Statements of Financial Condition, December 31, 1996 and 1995 . . . . . . . . . . . . F-3
Consolidated Statements of Income, years ended December 31, 1996, 1995 and 1994 . . . . . . . . . . F-4
Consolidated Statements of Stockholders' Equity, years ended December 31, 1996,
1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows, years ended December 31, 1996,
1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
</TABLE>
F-1
<PAGE> 53
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, 1996 and 1995, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 1996. 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, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
Crowe, Chizek and Company LLP
Oak Brook, Illinois
January 25, 1997
F-2
<PAGE> 54
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1996 1995
-------------------- --------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 768,711 $ 1,022,730
Interest-bearing deposits with other financial institutions 5,444,704 11,767,256
------------ ------------
Total cash and cash equivalents 6,213,415 12,789,986
Securities available-for-sale (Note 2) 50,109,055 37,134,427
Securities held-to-maturity (Note 2) 47,839,961 42,493,838
Loans receivable, net (Note 3) 66,179,009 60,538,247
Federal Home Loan Bank stock 756,000 675,700
Real estate held for development (Note 4) 2,871,142 1,624,809
Premises and equipment, net (Note 5) 2,149,732 2,088,311
Accrued interest receivable 1,626,503 1,189,922
Foreclosed real estate 59,801 49,801
Other assets 389,497 354,298
------------ ------------
Total assets $178,194,115 $158,939,339
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits (Note 6) $128,851,653 $130,502,992
Advances from borrowers for taxes and insurance 1,287,543 1,117,384
Federal Home Loan Bank advances (Note 7) 5,000,000 9,000,000
Accrued interest payable 159,217 183,867
Other liabilities 438,906 601,798
------------ ------------
Total liabilities 135,737,319 141,406,041
Commitments (Note 12)
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 27,014 --
shares, issued and outstanding 2,701,441 shares
Additional paid-in capital 26,087,667 --
Retained earnings, substantially restricted (Notes 10 and 11) 18,517,660 17,456,619
Unearned ESOP shares (Note 9) (1,993,420) --
Unrealized appreciation (depreciation) on securities
available-for-sale, net of income taxes (Note 2) (182,125) 76,679
------------ ------------
Total stockholders' equity 42,456,796 17,533,298
------------ ------------
Total liabilities and stockholders' equity $178,194,115 $158,939,339
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 55
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1996 1995 1994
---------------- ---------------- ----------------
<S> <C> <C> <C>
Interest income
Loans receivable $ 5,398,198 $ 5,090,146 $4,889,649
Interest-bearing deposits with other financial
institutions 438,172 360,800 177,756
Securities 5,498,549 4,303,889 3,793,964
----------- ----------- ----------
11,334,919 9,754,835 8,861,369
Interest expense
Deposits 6,201,679 5,603,503 4,530,599
Federal Home Loan Bank advances and other borrowings 117,630 102,340 111,996
----------- ----------- ----------
6,319,309 5,705,843 4,642,595
----------- ----------- ----------
Net interest income 5,015,610 4,048,992 4,218,774
Provision for loan losses (Note 3) -- 298,057 48,514
----------- ----------- ----------
Net interest income after provision for loan losses 5,015,610 3,750,935 4,170,260
Noninterest income
Gain on sale of securities -- 14,264 --
Gain on sale of real estate held for development (Note
4) 60,162 522,746 1,114,267
Service fee income 177,181 102,177 123,055
Other operating income 69,907 55,314 47,083
----------- ----------- ----------
307,250 694,501 1,284,405
Noninterest expense
Compensation and benefits 1,664,277 1,781,861 1,634,769
Occupancy and equipment expense 374,435 360,817 362,933
Federal deposit insurance premiums 341,764 316,136 317,206
Special SAIF assessment 736,376 -- --
Data processing services 125,202 115,332 104,103
Advertising 64,314 133,735 40,522
Stationery, printing, and supplies 83,775 103,507 74,252
Loss on sale of foreclosed real estate 3,572 -- 9,769
Other operating expense 324,717 285,085 279,105
----------- ----------- ----------
3,718,432 3,096,473 2,822,659
----------- ----------- ----------
Income before income taxes 1,604,428 1,348,963 2,632,006
Income tax expense (Note 11) 543,387 412,917 881,311
----------- ----------- ----------
Net income $ 1,061,041 $ 936,046 $1,750,695
=========== =========== ==========
Earnings per share $ .15 N/A N/A
===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 56
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION
(DEPRECIATION)
RETAINED ON
ADDITIONAL EARNINGS, SECURITIES TOTAL
COMMON PAID-IN SUBSTANTIALLY UNEARNED- AVAILABLE-FOR STOCKHOLDER'
STOCK CAPITAL RESTRICTED ESOP SHARES SALE EQUITY
------------- ------------- -------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994 $ -- $ -- $14,769,878 $ -- $ -- $14,769,878
Effect of adopting Statement of
Financial Accounting Standards No. 115,
net of income taxes of $57,432 as of
January 1, 1994 (Note 2) -- -- -- -- 90,818 90,818
Net income -- -- 1,750,695 -- -- 1,750,695
Depreciation in fair value of
securities classified as
available-for-sale, net of income
taxes of $125,193 -- -- -- -- (197,969) (197,969)
------- ----------- ---------- ----------- --------- -----------
Balance at December 31, 1994 -- -- 16,520,573 -- (107,151) 16,413,422
Net income -- -- 936,046 -- -- 936,046
Effect of transfer to
available-for-sale at December 12,
1995, net of income taxes of $87,750
(Note 2) -- -- -- -- 138,758 138,758
Appreciation in fair value of
securities classified as
available-for-sale, net of income
taxes of $28,502 -- -- -- -- 45,072 45,072
------- ---------- ---------- ---------- -------- -----------
Balance at December 31, 1995 -- -- 17,456,619 -- 76,679 17,533,298
Issuance of common stock, net of
conversion costs of $950,000 27,014 26,037,396 -- (2,160,990) -- 23,903,420
ESOP shares released -- 50,271 -- 167,570 -- 217,841
Net income -- -- 1,061,041 -- -- 1,061,041
Depreciation in fair value of
securities classified as
available-for-sale, net of income
taxes of $142,313 -- -- -- -- (258,804) (258,804)
------- -- -------- ----------- ----------- --------- -----------
Balance at December 31, 1996 $27,014 $26,087,667 $18,517,660 $(1,993,420) $(182,125) $42,456,796
======= =========== =========== =========== ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 57
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------
1996 1995 1994
---------------- ---------------- ----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,061,041 $ 936,046 $ 1,750,695
Adjustments to reconcile net income to net cash from operating activities
Net premium amortization 23,255 41,677 27,645
Loss on sale of foreclosed real estate 3,572 -- 9,769
Gain on sale of securities available-for-sale -- (14,264) --
Depreciation 124,281 102,294 86,067
Deferred income tax expense (benefit) 78,173 (68,589) 56,391
Deferred loan fees 42,382 14,214 58,308
Provision for loan losses -- 298,057 48,514
Net change in accrued interest receivable (436,581) (129,448) (313,688)
Net change in other assets (35,199) 79,575 (12,926)
Net change in accrued interest payable (24,650) 100,622 12,269
Net change in other liabilities (98,752) 25,907 (97,940)
ESOP compensation expense 217,841 -- --
Gain on sale of real estate held for development (60,162) (522,746) (1,114,267)
------------ ----------- ------------
Net cash from operating activities 895,201 863,345 510,837
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in loans (5,951,908) (4,111,239) 31,147
Proceeds from maturities of securities available-for-sale 15,850,000 11,001,705 --
Proceeds from maturities of securities held-to-maturity 24,635,000 6,001,542 7,500,000
Purchase of securities available-for-sale (30,699,632) (27,337,335) (5,998,750)
Purchase of securities held-to-maturity (34,121,388) -- (28,004,511)
Proceeds from sale of securities available-for-sale -- 8,013,125 --
Principal repayments on mortgage-backed securities held-to-maturity 1,719,137 3,686,821 3,864,175
Principal repayments on mortgage-backed securities available-for-sale 3,871,760 132,172 110,780
Purchase of consumer loans -- (181,526) --
(Purchase) redemption of Federal Home Loan Bank stock (80,300) (10,200) 276,000
Proceeds from sales of real estate held for development 383,608 2,172,004 5,197,843
Investment in real estate held for development (1,404,661) (1,896,504) (180,679)
Payments to participants in real estate held for development (165,108) (375,734) (620,562)
Proceeds from sale of foreclosed real estate 265,192 -- --
Expenditures for premises and equipment (185,712) (279,851) (182,228)
Acquisition of land held for sale -- (318,530) --
Expenditures on foreclosed real estate (10,000) -- (2,254)
------------ ----------- ------------
Net cash from investing activities (25,894,012) (3,503,550) (18,009,039)
CASH FLOWS FROM FINANCING ACTIVITIES
NET change in deposits (1,651,339) 11,981,829 (1,157,689)
Net change in advances from borrowers for taxes and insurance 170,159 (124,870) (22,792)
Federal Home Loan Bank advances - 12,000,000 16,000,000
Net proceeds from sale of common stock 23,903,420 -- --
Payment on Federal Home Loan Bank advances (4,000,000) (11,000,000) (8,000,000)
----------- ------------ ------------
Net cash from financing activities 18,422,240 12,856,959 6,819,519
----------- ----------- ------------
Net change in cash and cash equivalents (6,576,571) 10,216,754 (10,678,683)
Cash and cash equivalents at beginning of year 12,789,986 2,573,232 13,251,915
----------- ------------ ------------
Cash and cash equivalents at end of year $ 6,213,415 $ 12,789,986 $ 2,573,232
============ ============= ============
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ 6,343,959 $ 5,605,221 $ 4,630,326
Income taxes 396,198 426,628 918,162
Supplemental disclosures of noncash investing activities
Real estate acquired through foreclosure 268,764 -- --
Foreclosed real estate transferred to premises and equipment -- -- 100,000
Transfer of debt securities on January 1, 1994 to
Held-to-maturity -- -- 49,284,117
Available-for-sale -- -- 9,243,760
Transfer of debt securities on December 12, 1995 to available-for-sale
from held-to-maturity -- 13,904,209 --
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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.
F-7
<PAGE> 59
In May 1993, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 114, "Accounting by Creditors for
Impairment of a Loan" (SFAS No. 114). SFAS No. 114 (as modified by SFAS No.
118), effective for the Bank beginning January 1, 1995, requires the
measurement of impaired loans, based on the present value of expected cash
flows discounted at the loan's effective interest rate or, as a practical
expedient, at the loan's observable market price or the fair value of
collateral if the loan is collateral dependent. Under this standard, loans
considered to be impaired are reduced to the present value of expected future
cash flows or to the fair value of collateral, by allocating a portion of the
allowance for loan losses to such loans. If these allocations indicate the
need for an increase in the allowance for loan losses, such increase is
reported as a provision for loan losses. The effect of adopting SFAS No. 114
was not material to the Bank's consolidated financial position or results of
operations during 1995.
Smaller balance homogeneous loans are defined as residential first mortgage
loans secured by one-to-four-family residences, residential construction loans,
student loans, home equity and second mortgage loans, and automobile loans and
are evaluated collectively for impairment. Commercial real estate loans and
other commercial loans are evaluated individually for impairment. Normal loan
evaluation procedures, as described in the second preceding paragraph, 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. Depending on the
relative size of the credit relationship, late or insufficient payments of 30
to 90 days will cause management to reevaluate the credit under its normal loan
evaluation procedures. While the factors which identify a credit for
consideration for measurement of impairment, or nonaccrual, are similar, the
measurement considerations differ. A loan is impaired when the economic value
estimated to be received is less than the value implied in the original credit
agreement. 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 under SFAS Nos. 114 and 118 are not
expected to 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. Under SFAS
No. 114 as amended by SFAS No. 118, 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.
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 (including construction period
interest and taxes incurred to date), or net realizable value. The cost of
each unit sold includes a proportionate share of the total projected
development expense cost. Holding costs associated
F-8
<PAGE> 60
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.
Retirement Plans: The Company sponsors noncontributory defined benefit pension
and defined contribution profit sharing plans covering substantially all of its
employees. Benefits from the pension plan are based on years of service and
the employee's compensation. The Company's funding policy is to fund the
actuarially determined amount which can be deducted for income tax purposes.
Profit sharing plan contributions are charged to expense annually.
Employee Stock Ownership Plan: The Company accounts for its employee stock
ownership plan (ESOP) in accordance with American Institute of Certified Public
Accountants (AICPA) Statement of Position 93-6. The cost of shares issued to
the 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 paid-in capital. Dividends on allocated ESOP shares are recorded
as a reduction of retained earnings; dividends on unallocated ESOP shares are
reflected as a reduction of debt.
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.
Impact of New Accounting Standards: In March 1995, the FASB issued SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." SFAS No. 121, effective for the Company in 1996,
requires that long-lived assets and certain identifiable intangibles be
reviewed for impairment whenever events or circumstances indicate that the
carrying amount of an asset may not be recoverable. However, SFAS No. 121 does
not apply to financial instruments, core deposit
F-9
<PAGE> 61
intangibles, mortgage and other servicing rights, or deferred tax assets. The
adoption of SFAS No. 121 had no material effect on the Company's income or
financial condition.
In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage Servicing
Rights." SFAS No. 122, effective for the Company in 1996, requires an
institution that purchases or originates mortgage loans and sells or
securitizes those loans with servicing rights retained to allocate the total
cost of the mortgage loans to the mortgage servicing rights and the loans
(without the mortgage servicing rights) based on their relative fair values.
In addition, institutions are required to assess impairment of the capitalized
mortgage servicing portfolio based on the fair value of those rights. SFAS No.
122 is effective for fiscal years beginning after December 15, 1995. The
adoption of this SFAS No. 122 had no material impact on the Company's earnings
or financial condition. SFAS No. 122 will be superceded by SFAS No. 125 after
December 31, 1996.
In November 1995, the FASB issued SFAS No. 123, "Accounting for Stock Based
Compensation." This statement, effective for the Company in 1996, establishes
financial accounting standards for stock-based employee compensation plans.
SFAS No. 123 permits the Company to choose either a new fair value based method
or the current APB Opinion 25 intrinsic value based method of accounting for
its stock-based compensation arrangements. SFAS No. 123 requires pro forma
disclosures of net income and earnings per share computed as if the fair value
based method had been applied in financial statements of companies that
continue to follow the current practice in accounting for such arrangements
under Opinion 25. SFAS No. 123 applies to all stock-based employee
compensation plans in which an employer grants shares of its stock or other
equity instruments to employees except for employee stock ownership plans. Any
effect that this statement will have on the Company will be applicable upon the
grant of its stock or other equity instruments under a stock-based employee
compensation plan.
Earnings Per Common Share: Earnings per share is calculated by dividing the net
earnings by the weighted average number of common shares outstanding and common
stock equivalents attributable to outstanding stock options, when dilutive. In
1996, earnings per share is computed using net earnings from August 9, 1996,
the date that the Bank converted to stock ownership. The weighted average
number of the Company's shares of common stock used to calculate the 1996
earnings per share was 2,493,680.
Reclassification: Certain items in 1995 and 1994 were reclassified to conform
with the 1996 presentation.
F-10
<PAGE> 62
NOTE 2. SECURITIES
Securities are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------------------------------------------------------------
GROSS UNREALIZED GROSS UNREALIZED
AMORTIZED COST GAINS LOSSES FAIR VALUE
------------------ ------------------ ------------------ ----------------
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE-FOR-SALE
U.S. Treasury bills and notes $ 1,499,663 $14,482 $ -- $ 1,514,145
U.S. government agency notes 39,679,298 2,350 (310,274) 39,371,374
----------- ------- --------- -----------
41,178,961 16,832 (310,274) 40,885,519
Mortgage-backed securities:
FNMA 5,055,759 23,696 (1,430) 5,078,025
FHLMC 4,150,282 7,328 (12,099) 4,145,511
----------- ------- --------- -----------
9,206,041 31,024 (13,529) 9,223,536
----------- ------- --------- -----------
$50,385,002 $47,856 $(323,803) $50,109,055
=========== ======= ========= ===========
SECURITIES HELD-TO-MATURITY
U.S. government agency notes $34,133,686 $77,706 $(194,434) $34,016,958
Mortgage-backed securities:
FNMA 6,289,705 -- (84,049) 6,205,656
FHLMC 7,416,570 1,861 (87,877) 7,330,554
----------- ------- --------- -----------
13,706,275 1,861 (171,926) 13,536,210
----------- ------- ---------- -----------
$47,839,961 $79,567 $(366,360) $47,553,168
=========== ======= ========= ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------------------------------------------------------------------------
GROSS UNREALIZED GROSS UNREALIZED
AMORTIZED COST GAINS LOSSES FAIR VALUE
----------------- ------------------- ------------------- ------------------
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE-FOR-SALE
U.S. Treasury bills and notes $ 4,482,950 $ 63,725 $ -- $ 4,546,675
U.S. government agency notes 28,342,860 50,982 (35,992) 28,357,850
32,825,810 114,707 (35,992) 32,904,525
Mortgage-backed securities:
FNMA 1,298,444 37,116 -- 1,335,560
FHLMC 2,885,003 9,339 -- 2,894,342
----------- -------- --------- -----------
4,183,447 46,455 -- 4,229,902
----------- -------- --------- -----------
$37,009,257 $161,162 $ (35,992) $37,134,427
=========== ======== ========= ===========
SECURITIES HELD-TO-MATURITY
U.S. government agency notes $24,634,636 $ 4,535 $(117,698) $24,521,473
Collateralized mortgage obligations 88,256 3,899 -- 92,155
Mortgage-backed securities:
FNMA 7,496,860 -- (66,224) 7,430,636
FHLMC 10,274,086 -- (24,599) 10,249,487
----------- -------- --------- -----------
17,859,202 3,899 (90,823) 17,772,278
----------- -------- --------- -----------
$42,493,838 $ 8,434 $(208,521) $42,293,751
=========== ======== ========= ===========
</TABLE>
F-11
<PAGE> 63
Sales of securities are summarized as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------
1996 1995 1994
-------------- ------------- --------------
<S> <C> <C> <C>
Proceeds from sales $ -- $ 8,013,125 $ --
Gross realized gains -- 14,264 --
</TABLE>
The amortized cost and fair value of debt securities, by contractual maturity,
are shown below by available-for-sale and held-to-maturity portfolios.
Securities not due at a single maturity date, primarily mortgage-backed
securities, are shown separately. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------------
1996 1996 1995 1995
---------------- ----------------- ---------------- -----------------
AMORTIZED COST FAIR VALUE AMORTIZED COST FAIR VALUE
---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
Due in one year or less $ 4,499,746 $ 4,516,175 $ 12,034,735 $ 12,044,960
Due after one year through five years 26,682,165 26,454,454 15,791,446 15,847,145
Due after five years through ten years 9,997,050 9,914,890 4,999,629 5,012,420
------------ ----------- ------------ ------------
41,178,961 40,885,519 32,825,810 32,904,525
Mortgage-backed securities 9,206,041 9,223,536 4,183,447 4,229,902
------------ ----------- ------------ ------------
$ 50,385,002 $ 50,109,055 $ 37,009,257 $ 37,134,427
============ ============ ============ ============
HELD-TO-MATURITY
Due in one year or less $ 2,000,000 $ 1,988,120 $ -- $ --
Due after one year through five years 11,993,934 11,967,950 22,634,636 22,518,973
Due after five years through ten years 18,139,752 18,076,208 2,000,000 2,002,500
Due after ten years through fifteen years 2,000,000 1,984,680 -- --
------------ ------------ ------------ ------------
34,133,686 34,016,958 24,634,636 24,521,473
Mortgage-backed securities 13,706,275 13,536,210 17,859,202 17,772,278
------------ ------------ ------------ ------------
$ 47,839,961 $ 47,553,168 $ 42,493,838 $ 42,293,751
============ ============ ============ ============
</TABLE>
Pursuant to new guidance issued by the Financial Accounting Standards Board in
November 1995, the Company transferred securities on December 12, 1995 with an
amortized cost of $13,677,701 and an unrealized gain of $226,508 from the
held-to-maturity to the available-for-sale classification. The cumulative
effect of the transfer was to increase retained earnings, net of taxes of
$87,750, by $138,758. There were no gains or losses realized on the transfer.
F-12
<PAGE> 64
NOTE 3. LOANS RECEIVABLE
Loans receivable are summarized as follows at:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1996 1995
----------------- -----------------
<S> <C> <C>
FIRST MORTGAGE LOANS
Principal balances
Secured by one-to-four-family residences $ 53,757,280 $ 48,577,283
Secured by other properties 8,168,033 6,163,035
Commercial, construction, and land 4,999,388 6,883,450
------------- -------------
66,924,701 61,623,768
Undistributed portion of construction loans (1,043,021) (1,148,424)
Net deferred loan origination fees (417,864) (460,246)
------------- -------------
Total first mortgage loans 65,463,816 60,015,098
Consumer loans 1,223,646 1,119,562
Unearned discounts (8,453) (23,356)
------------- -------------
Total consumer loans 1,215,193 1,096,206
Allowance for loan losses (500,000) (573,057)
------------- -------------
$ 66,179,009 $ 60,538,247
============= =============
</TABLE>
At December 31, 1996 and 1995, impaired loans totaled $136,000 and $501,000.
The average balance of impaired loans was approximately $319,000 for the year
ended December 31, 1996 and approximately $143,000 for the year ended December
31, 1995. No portion of the allowance for loan losses was allocated to
impaired loans at December 31, 1996 or December 31, 1995. Interest income
recognized on impaired loans was approximately $10,000 for the year ended
December 31, 1996 and $24,000 for the year ended December 31, 1995, which
included cash basis income of approximately $10,000 and $24,000, respectively.
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.
Activity in the loan accounts of officers, directors, and their related
interests follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
1996 1995
------------------- -------------------
<S> <C> <C>
Balance at beginning of year $1,272,737 $1,676,970
Loans disbursed 35,520 199,698
Principal repayments (684,919) (603,931)
---------- ----------
Balance at end of year $ 623,338 $1,272,737
========== ==========
</TABLE>
F-13
<PAGE> 65
Activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1996 1995 1994
------------------ ----------------- -----------------
<S> <C> <C> <C>
Balance at beginning of year $573,057 $275,000 $250,000
Provision for loan losses -- 298,057 48,514
Charge-offs (73,057) -- (23,514)
Recoveries -- -- --
-------- -------- --------
Balance at end of year $500,000 $573,057 $275,000
======== ======== ========
</TABLE>
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
primarily in Naperville, Illinois.
The following summarizes the Bank's real estate development activities:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1996 1995 1994
------------------ ------------------ ------------------
<S> <C> <C> <C>
Proceeds from sale of real estate held for
development $383,608 $2,172,004 $5,197,843
Gain on sale of real estate held for development 60,162 522,746 1,114,267
</TABLE>
During 1995, the Company's primary project, Rose Hill Farm, was substantially
completed. On December 22, 1995, the Company purchased an additional parcel of
land known as Prairie Ridge, also located in Naperville. It is management's
intention to develop this property in much the same manner as Rose Hill Farm.
The Company's investment in the projects totaled $2,871,142 and $1,624,809 at
December 31, 1996 and 1995, respectively.
During 1995, the Company acquired a parcel of land for $436,544 from the Rose
Hill Farm project as a possible future branch site. Land totaling $291,000,
not required for the branch, will be sold for commercial development. The
portion of the land to be sold is included with other assets on the
Consolidated Statements of Financial Condition.
F-14
<PAGE> 66
NOTE 5. PREMISES AND EQUIPMENT
Premises and equipment consists of the following at:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1996 1995
------------------ ------------------
<S> <C> <C>
Cost
Land $ 849,956 $ 849,956
Buildings and improvements 1,776,544 1,776,544
Furniture and fixtures 549,218 392,830
----------- ----------
Total cost 3,175,718 3,019,330
Less accumulated depreciation (1,025,986) (931,019)
----------- ----------
$ 2,149,732 $2,088,311
=========== ==========
</TABLE>
NOTE 6. DEPOSITS
Certificate of deposit accounts with balances $100,000 or more totaled
$8,413,366 at December 31, 1996 and $8,040,979 at December 31, 1995.
At December 31, 1996, scheduled maturities of certificates of deposit are as
follows:
<TABLE>
<S> <C>
1997 $62,304,605
1998 13,153,371
1999 5,056,258
2000 1,825,578
2001 and thereafter 1,836,363
-----------
$84,176,175
===========
</TABLE>
NOTE 7. ADVANCES FROM FEDERAL HOME LOAN BANK
At December 31, 1996, the Company had advances from the Federal Home Loan Bank
of Chicago (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.
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.
F-15
<PAGE> 67
NOTE 8. RETIREMENT PLANS
The Company committed to terminate 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. The Company expects to terminate the plan and
settle the pension obligations in 1997 with no material gain or loss.
The following table sets forth the pension plan's funded status and amounts
actuarially determined at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Actuarial present value of benefit obligations
Accumulated benefit obligation, all vested $(246,753) $(222,041)
========= =========
Projected benefit obligation for service rendered to date $(328,752) $(685,728)
Plan assets at estimated fair market value, consisting primarily of
interest-bearing deposits and marketable securities 328,752 316,820
Projected benefit obligation in excess of plan assets -- (368,908)
--------- ---------
Unrecognized net loss from past experience different from that
assumed and effects of changes in assumptions -- 179,064
Unrecognized transition amount, being recognized over 31 years -- 44,823
--------- ---------
Net pension liability $ -- $(145,021)
========= =========
</TABLE>
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Net pension cost included the following components
Service cost--benefits earned during the year $ 23,425 $ 42,074 $ 43,890
Interest cost on projected benefit obligation 26,435 38,577 35,700
Actual return on plan assets (25,598) (44,879) (17,044)
Net amortization and deferral 8 24,341 1,238
-------- -------- --------
Net pension cost $ 24,270 $ 60,113 $ 63,784
======== ======== ========
Assumptions used by the actuaries for the defined
benefit plan were
Discount rate
Pre-retirement 7.25% 7.25% 8.5%
Post-retirement 6.0% 6.0% 6.0%
Rate of increase in compensation levels N/A 5.0% 5.0%
Expected long-term rate of return on assets 8.0% 8.0% 8.0%
</TABLE>
There were no contributions to the plan in 1996, 1995, or 1994.
The Bank maintains a profit sharing plan which covers substantially all
employees. Contributions to the profit sharing plan are made at the discretion
of the Board of Directors and charged to expense annually. Plan contributions
for 1996, 1995, and 1994 were $0, $141,451, and $118,882, respectively.
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
F-16
<PAGE> 68
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 1996, there were no such contributions.
NOTE 9. STOCK-BASED COMPENSATION PLAN
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.
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.
During 1996, 16,757 shares of stock with an average fair value of $13 per share
were committed to be released, resulting in ESOP compensation expense of
$217,841. Shares held by the ESOP at December 31, 1996 are as follows:
<TABLE>
<S> <C>
Allocated shares 16,757
Unallocated shares 199,342
----------
Total ESOP shares 216,099
==========
Fair value of unallocated shares $2,591,446
==========
</TABLE>
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.
F-17
<PAGE> 69
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. At year end, actual
capital levels (in thousands) and minimum required levels were:
<TABLE>
<CAPTION>
1996
----------------------------------------------------------------------------
MINIMUM REQUIRED
TO BE WELL
MINIMUM REQUIRED CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION REGULATIONS
------------------------ ------------------------ ------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
----------- ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
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% N/A N/A
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) $27,134 16.6% $6,530 4.0% $8,163 5.0%
</TABLE>
<TABLE>
<CAPTION>
1995
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total capital
(to risk-weighted assets) $16,404 36.0% $3,640 8.0% $4,550 10.0%
Tier 1 (core) capital
(to risk-weighted assets) $15,831 34.8% $1,820 4.0% $1,820 4.0%
Tier 1 (core) capital
(to adjusted total assets) $15,831 10.2% $4,717 3.0% N/A N/A
Tangible capital
(to adjusted total assets) $15,831 10.2% $2,359 1.5% N/A N/A
Tier 1 (leverage) capital
(to average total assets) $15,831 11.0% $5,767 4.0% $7,208 5.0%
</TABLE>
The Bank at December 31, 1996 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, 1996.
F-18
<PAGE> 70
NOTE 11. INCOME TAXES
Income tax expense consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1996 1995 1994
------------------ ------------------ -----------------
<S> <C> <C> <C>
Currently payable tax
Federal $465,214 $551,949 $845,920
State -- (70,443) (21,000)
Deferred tax expense 78,173 (68,589) 56,391
-------- -------- --------
Income tax expense $543,387 $412,917 $881,311
======== ======== ========
</TABLE>
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:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------------
PERCENTAGE PERCENTAGE PERCENTAGE
OF INCOME OF INCOME OF INCOME
BEFORE BEFORE BEFORE
INCOME INCOME INCOME
AMOUNT TAXES AMOUNT TAXES AMOUNT TAXES
---------- ---------- ---------- ---------- ---------- -----------
1996 1995 1994
---------------------- ---------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Income tax computed at the $545,506 34.0% $458,647 34.0% $894,882 34.0%
statutory rate
State income tax expense (benefit)
net of federal tax -- -- (45,353) (3.4) (6,507) (.2)
ESOP contribution 17,092 1.1 -- -- -- --
Other items, net (19,211) (1.2) (377) -- (7,064) (.3)
-------- ------ -------- ---- -------- ----
$543,387 33.9% $412,917 30.6% $881,311 33.5%
======== ==== ======== ==== ======== ====
</TABLE>
The Company has qualified under provisions of the Internal Revenue Code which
historically allowed it to deduct from taxable income a provision for bad debts
which differed from the provision charged to income on the financial
statements. Retained earnings at December 31, 1996 and 1995 include
approximately $3,298,000 of such excess deductions, which arose through 1987,
for which no deferred federal income tax liability has been recorded.
F-19
<PAGE> 71
Deferred tax assets (liabilities) are comprised of the following at:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
1996 1995
------------------- --------------------
<S> <C> <C>
Other $ 22,350 $ --
Deferred loan fees 161,881 178,299
Pension expense -- 56,181
Unrealized loss on securities
available-for-sale 93,822 --
-------- --------
278,053 234,480
Bad debt deduction (275,871) (248,952)
Federal Home Loan Bank stock
dividend (36,921) (36,921)
Depreciation (117,334) (116,329)
Unrealized gain on securities
available-for-sale -- (48,491)
-------- ---------
(430,126) (450,693)
--------- ---------
Net deferred tax liability $(152,073) $(216,213)
========= =========
</TABLE>
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.
These financial instruments are summarized as follows at:
<TABLE>
<CAPTION>
CONTRACT AMOUNT DECEMBER 31,
----------------------------------
1996 1995
--------------- -----------------
<S> <C> <C>
Financial instruments whose contract
amounts represent credit risk
Commitments to make loans
(all fixed rate) $ 835,000 $ 699,000
Standby letters of credit 1,665,000 597,000
Loans in process 1,043,000 1,148,000
</TABLE>
The fixed rate loan commitments at December 31, 1996 have original terms of 45
to 152 days and rates in the range of 7.00% to 8.90%. Fixed rate loan
commitments at December 31, 1995 have original terms of 45 to 152 days and
rates in the range of 7.00% to 8.50%.
F-20
<PAGE> 72
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.
The deposits of savings associations are presently insured by the Savings
Association Insurance Fund (SAIF), which, along with the Bank Insurance Fund
(BIF), is one of the two insurance funds administered by the Federal Deposit
Insurance Corporation (FDIC). Due to the inadequate capitalization of SAIF, a
recapitalization plan was signed into law on September 30, 1996 which required
a special assessment of .657% of all SAIF-insured deposit balances as of March
31, 1995. The Company's assessment of $736,376 is reflected in the 1996
Consolidated Statement of Income.
Interest-bearing deposit accounts in other financial institutions potentially
subject the Company to concentrations of credit risk. At December 31, 1996,
the Company had deposit accounts at the Federal Home Loan Bank of Chicago with
balances totaling approximately $5,445,000. At December 31, 1995, the balance
was approximately $11,767,000.
NOTE 13. FAIR VALUES OF FINANCIAL INSTRUMENTS
The approximate carrying amount and estimated fair value of financial
instruments is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------
1995 1996
--------------------------------- ---------------------------------
APPROXIMATE APPROXIMATE
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------------- ---------------- ---------------- ----------------
(in thousands)
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 6,213 $ 6,213 $ 12,790 $ 12,790
Securities available-for-sale 50,109 50,109 37,134 37,134
Securities held-to-maturity 47,840 47,553 42,494 42,294
Loans receivable, net 66,179 67,168 60,538 61,587
Federal Home Loan Bank stock 756 756 676 676
Accrued interest receivable 1,626 1,626 1,190 1,190
LIABILITIES
Demand and NOW (6,760) (6,760) (6,981) (6,981)
Money market (4,041) (4,041) (4,014) (4,014)
Passbook savings (33,875) (33,875) (34,798) (34,798)
Certificates of deposit (84,176) (84,505) (84,709) (85,410)
Advances from borrowers for taxes
and insurance (1,288) (1,288) (1,117) (1,117)
Federal Home Loan Bank advances (5,000) (5,000) (9,000) (9,000)
Accrued interest payable (159) (159) (184) (184)
</TABLE>
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.
F-21
<PAGE> 73
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.
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, 1996 or December 31, 1995, the fair values would
have been achieved, because the market value may differ depending on the
circumstances. The estimated fair values at December 31, 1996 and December 31,
1995 should not necessarily be considered to apply at subsequent dates.
F-22
<PAGE> 74
NOTE 14. PARENT COMPANY FINANCIAL STATEMENTS
Presented below are the condensed balance sheet, statement of income and
statement of cash flows for Park Bancorp, Inc. The Company was formed on
August 9, 1996. Accordingly, the statements of income and statement of cash
flows reflect the period August 9, 1996 through December 31, 1996.
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEET DECEMBER 31, 1996
------------------------
<S> <C>
ASSETS
Cash and cash equivalents $ 4,566,350
Securities available-for-sale 2,997,050
Securities held-to-maturity 3,149,084
ESOP loan 1,980,907
Investment in bank subsidiary 29,822,990
Accrued interest receivable and other assets 47,415
-------------
$ 42,563,796
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses and other liabilities $ 107,000
Stockholders' equity
Common stock 27,014
Additional paid-in capital 26,087,667
Retained earnings 18,517,660
Unearned ESOP shares (1,993,420)
Unrealized depreciation on securities available-for-sale (182,125)
-------------
$ 42,563,796
=============
</TABLE>
<TABLE>
<CAPTION>
FOR THE PERIOD
AUGUST 9, 1996 TO
CONDENSED STATEMENTS OF CASH FLOWS DECEMBER 31, 1996
------------------------
<S> <C>
Interest income
Securities $ 65,056
ESOP loan 79,409
Interest bearing deposits with other financial institutions 169,673
-------------
Total income 314,138
Other expenses 42
-------------
INCOME BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED EARNINGS OF BANK SUBSIDIARY 314,096
Income taxes 107,000
-------------
INCOME BEFORE EQUITY IN UNDISTRIBUTED EARNINGS OF BANK SUBSIDIARY 207,096
Equity in undistributed earnings of bank subsidiary 156,406
-------------
NET INCOME $ 363,502
=============
</TABLE>
F-23
<PAGE> 75
<TABLE>
<CAPTION>
FOR THE PERIOD
AUGUST 9, 1996 TO
CONDENSED STATEMENT OF INCOME DECEMBER 31, 1996
------------------------
<S> <C>
OPERATING ACTIVITIES
Net income $ 363,502
Adjustments to reconcile net income to net cash provided by operating activities
Equity in undistributed earnings of bank subsidiary (156,406)
Change in
Other assets (47,415)
Other liabilities 107,000
------------
Net cash from operating activities 266,681
INVESTING ACTIVITIES
Purchase of bank subsidiary stock (13,637,700)
Purchase of securities available-for-sale (2,997,050)
Purchase of securities held-to-maturity (3,149,084)
Payment received on loan to ESOP 180,083
------------
Net cash from investing activities (19,603,751)
FINANCING ACTIVITIES
Net proceeds from sale of common stock 23,903,420
------------
Net change in cash and cash equivalents 4,566,350
Cash and cash equivalents at beginning of period ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,566,350
============
</TABLE>
F-24
<PAGE> 76
NOTE 15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
1996 -- THREE MONTHS ENDED
---------------------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------------- ----------------- ------------------ ------------------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
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 taxes (130) (130) 4 (287)
------- ------- -------- --------
NET INCOME $ 254 $ 241 $ 12 $ 554
======= ======= ======== ========
Earnings per common share(1) N/A N/A $ (.07) $ .22
</TABLE>
<TABLE>
<CAPTION>
1995 -- THREE MONTHS ENDED
---------------------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------------- ----------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Interest income $ 2,366 $ 2,430 $ 2,433 $ 2,526
Interest expense (1,329) (1,385) (1,444) (1,547)
------- -------- -------- --------
NET INTEREST INCOME 1,037 1,045 989 979
Provision for loan losses (15) (10) -- (273)
Other income 308 95 64 226
Other expense (754) (770) (837) (736)
------- -------- -------- --------
INCOME BEFORE INCOME TAXES 576 360 216 196
Income taxes (200) (106) (74) (32)
------- -------- -------- --------
NET INCOME $ 376 $ 254 $ 142 $ 164
======= ======== ======== ========
Earnings Per Common Share N/A N/A N/A N/A
</TABLE>
(1) Earnings per common 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.
F-25
<PAGE> 77
EXHIBIT INDEX
Park Bancorp, Inc.
Form 10-K for fiscal year ended
December 31, 1996
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 of 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
21.0 Subsidiaries of Registrant
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
<PAGE> 1
EXHIBIT 10.6
PARK BANCORP, INC.
1997 STOCK-BASED INCENTIVE PLAN
1. DEFINITIONS.
Whenever used in the Plan, the following terms shall have the meanings set
forth below, and when the meaning is intended, the initial letter of the word
shall be capitalized:
"AFFILIATE" means (i) a member of a controlled group of corporations of
which the Holding Company is a member or (ii) an unincorporated trade or
business which is under common control with the Holding Company as determined
in accordance with Section 414(c) of the Code and the regulations issued
thereunder. For purposes hereof, a "controlled group of corporations" shall
mean a controlled group of corporations as defined in Section 1563(a) of the
Code determined without regard to Section 1563(a)(4) and (e)(3)(C).
"ALTERNATE OPTION PAYMENT MECHANISM" refers to one of several methods
available to a Participant to fund the exercise of a stock option set out in
Section 14. These mechanisms include: broker assisted cashless exercise and
stock for stock exchange.
"AWARD" means a grant of one or some combination of one or more
Non-statutory Stock Options, Incentive Stock Options and Stock Awards under the
provisions of this Plan.
"BANK" means Park Federal Savings Bank.
"BOARD OF DIRECTORS" or "BOARD" means the board of directors of the Holding
Company.
"CHANGE IN CONTROL" means: (i) a change in control of the Holding Company
of a nature that (A) would be required to be reported in response to Item 1 of
the current report on Form 8-K, as in effect on the Effective Date hereof,
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"); or (B) results in a change in control within the
meaning of the Home Owners' Loan Act of 1933, as amended ("HOLA") and the Rules
and Regulations promulgated by the Office of Thrift Supervision ("OTS") (or its
predecessor agency), as in effect on the date hereof (provided, that in
applying the definition of change in control as set forth under such rules and
regulations the Board shall substitute its judgment for that of the OTS); or
(ii) any "person" or "group" (as such terms are used in Sections 13(d) and
14(d) of the Exchange Act and the rules and regulations promulgated thereunder)
is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act and the rules and regulations promulgated thereunder), directly or
indirectly, of securities of the Holding Company representing 20% or more of
the Holding Company's then outstanding voting securities, other than a trustee
or fiduciary holding securities under any employee benefit plan of the Company
or Bank; or (iii) individuals who constitute the Board on the date hereof (the
"Incumbent Board") cease for any reason to constitute at least a majority
thereof, provided that any person becoming a director subsequent to the date
hereof whose election was approved by a vote of at least three-quarters of the
directors comprising the Incumbent Board, or whose nomination for election by
the Holding Company's stockholders was approved by the same Nominating
Committee serving under an Incumbent Board, shall be, for purposes of this
clause (iii), considered as through he were a member of the Incumbent Board; or
(iv) the Holding Company is merged or consolidated or reorganized into or with
another corporation or other legal person (an "Acquiror") and as a result of
such merger, consolidation or reorganization less
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than 50% of the outstanding voting securities or other capital interests of the
surviving, resulting or acquiring corporation or other legal person are owned
in the aggregate by the stockholders of the Holding Company, directly or
indirectly, immediately prior to such merger, consolidation or reorganization,
other than by the Acquiror or any corporation or other legal person
controlling, controlled by or under common control with the Acquiror; or (v)
the Holding Company sells or otherwise transfers all or substantially all of
the shares of the Bank, or all or substantially all of the business and/or
assets of the Holding Company, to an Acquiror, of which less than 50% of the
outstanding voting securities are owned in the aggregate by stockholders of the
Holding Company, directly or indirectly, immediately prior to such sale or
transfer, other than by the Acquiror or any corporation or legal person
controlling, controlled by or under common control with the Acquiror; or (vi) a
solicitation of stockholders of the Holding Company, by someone other than the
current management of the Holding Company, seeking stockholder approval of a
plan of reorganization, merger or consolidation of the Holding Company, seeking
stockholder approval of a plan of reorganization, merger or consolidation of
the Holding Company or Bank or similar transaction with one or more
corporations, as a result of which the outstanding shares of the class of
securities then subject to the plan are exchanged for or converted into cash or
property or securities not issued by the Holding Company; or (vii) a tender
offer is made for 20% or more of the voting securities of the Holding Company.
"CODE" means the Internal Revenue Code of 1986, as amended from time to
time, or any successor legislation thereto.
"COMMITTEE" means a committee consisting of at least two members of the
Board of Directors who are defined as Outside Directors, all of whom are
"non-employee directors" as such term is defined under Rule 16b-3 under the
Exchange Act as promulgated by the Securities and Exchange Commission.
"COMMON STOCK" means the common stock of the Holding Company, par value
$.01 per share, or any stock exchanged for shares of Common Stock pursuant to
Section 18 hereof.
"DATE OF GRANT" means the effective date of an Award.
"DIRECTORS' AWARDS" means awards of Non-statutory Stock Options and/or
Stock Awards pursuant to the terms of Section 12.
"DISABILITY" means the permanent and total inability by reason of mental or
physical infirmity, or both, of a Participant to perform the work customarily
assigned. Additionally, a medical doctor selected or approved by the Board of
Directors must advise the Committee that it is either not possible to determine
when such Disability will terminate or that it appears probable that such
Disability will be permanent during the remainder of said Participant's
lifetime.
"DIVIDEND EQUIVALENT RIGHTS" means the right to receive an amount of cash
based upon the terms set forth in Section 10.
"EFFECTIVE DATE" means , 1997 or if later, the date on which this Plan
is approved by the stockholders of the Holding Company.
"EMPLOYEE" means any person who is employed by the Holding Company
Affiliate, including officers.
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"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended from
time to time, or any successor legislation thereto.
"EXERCISE PRICE" means the purchase price per share of Common Stock
deliverable upon the exercise of each Option in order for the option to be
exchanged for shares of Common Stock.
"FAIR MARKET VALUE" means, when used in connection with the Common Stock on
a certain date, the average of the high and low bid prices of the Common Stock
as reported by the Nasdaq Stock Market ("Nasdaq") (as published by The Wall
Street Journal, if published) on such date or if the Common Stock was not
traded on such date, on the next preceding day on which the Common Stock was
traded thereon or the last previous date on which a sale is reported. If the
Common Stock is not reported on the Nasdaq, the Fair Market Value of the Common
Stock is the value so determined by the Board in good faith.
"HOLDING COMPANY" means Park Bancorp, Inc., a Delaware corporation.
"INCENTIVE STOCK OPTION" means an Option granted by the Committee to a
Participant, which Option is designated by the Committee as an Incentive Stock
Option pursuant to Section 7.
"LIMITED RIGHT" means the right to receive an amount of cash based upon the
terms set forth in Section 8.
"NON-STATUTORY STOCK OPTION" means an Option granted by the Committee to a
Participant pursuant to Section 6, which is not designated by the Committee as
an Incentive Stock Option or which is redesignated by the Committee under
Section 7 as a Non-Statutory Stock Option.
"OPTION" means the right to buy a fixed amount of Common Stock at the
Exercise Price within a limited period of time designated as the term of the
option as granted under Sections 6, 7 or 12 of the Plan.
"OTS" means the Office of Thrift Supervision, or any successor agency.
"OUTSIDE DIRECTOR" means a member of the Board of Directors of the Holding
Company or its Affiliates, who is not also an Employee. The term "Outside
Director" also includes any Director Emeritus who has executed a consulting
agreement with the Holding Company or the Bank.
"PARTICIPANT" means any Employee or Outside Director who holds an
outstanding Award under the terms of the Plan.
"RETIREMENT" means the Participant's termination of employment with the
Company and all Affiliates on or after the date the Participant is eligible to
receive an immediately annuity under the Bank's Retirement Plan. With respect
to an Outside Director, "Retirement" means the termination of service from the
Board of Directors of the Holding Company or its Affiliates following written
notice to the Board as a whole of such Outside Director's intention to retire
or retirement as determined by the Holding Company or applicable Affiliate's
bylaws.
"STOCK AWARDS" are Awards of Common Stock which may vest immediately or
over a period of time. Vesting of Stock Awards under Section 9 of this Plan
may be contingent upon the occurrence of specified events or the attainment of
specified performance goals as determined by the Committee.
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"TERMINATION FOR CAUSE" shall mean termination because of a material loss
to the Holding Company or one of its subsidiaries caused by the Participant's
intentional failure to perform stated duties, personal dishonesty, willful
violation of any law, rule, regulation, (other than traffic violations or
similar offenses) or final cease and desist order. No act, or the failure to
act, on Participant's part shall be "willful" unless done, or omitted to be
done, not in good faith and without reasonable belief that the action or
omission was in the best interest of the Holding Company or its affiliates.
"TRUST" means a trust established by the Board in connection with this Plan
to hold Common Stock and other assets relating to Plan Awards.
"TRUSTEE" means that person or persons and entity or entities approved by
the Board to hold legal title to any of the Trust assets for the purposes set
forth herein.
2. ADMINISTRATION.
(a) COMMITTEE. The Plan as regards Awards to Employees shall be
administered by the Committee. The Committee is authorized, subject to the
provisions of the Plan, to establish such rules and regulations as it deems
necessary for the proper administration of the Plan and to make whatever
determinations and interpretations in connection with the Plan it deems
necessary or advisable. All determinations and interpretations made by the
Committee shall be binding and conclusive on all Participants and on their
legal representatives and beneficiaries.
(b) DIRECTORS' AWARDS. The Plan in regards to Awards to Outside Directors
is self-administering. The grant of Awards to Outside Directors are made
herein by the terms of this Plan. Actual transference of any Award to Outside
Directors requires no, nor allows any, discretion by the Trustee or Committee.
3. TYPES OF AWARDS.
The following Awards may be granted under the Plan:
(a) Non-statutory Stock Options;
(b) Incentive Stock Options;
(c) Limited Rights;
(d) Employee Stock Awards;
(e) Dividend Equivalent Rights;
(f) Equitable Adjustment Rights; and
(g) Directors' Stock Awards;
as described below in paragraphs 6 through 13 of the Plan.
4. STOCK SUBJECT TO THE PLAN.
Subject to adjustment as provided in Section 18, the maximum number of
shares reserved for Awards under the Plan is 378,201 which number may not be
excess of 14% of the outstanding shares of the Common Stock as of the Effective
Date. Subject to adjustment as provided in Section 18, the maximum number of
shares reserved hereby for purchase pursuant to the exercise of Options and
Option-related Awards granted under the Plan is 270,144, which number is not in
excess of the 10% of the outstanding
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shares of Common Stock as of the Effective Date. The maximum number of the
shares reserved for award as Stock Awards is 108,057 which number is not in
excess of 4% of the outstanding shares of Common Stock as of the Effective
Date. These shares of Common Stock may be either authorized but unissued
shares or authorized shares previously issued and reacquired by the Holding
Company or by the Trust. To the extent that Options and Stock Awards are
granted under the Plan, the shares underlying such Awards will be unavailable
for any other use including future grants under the Plan except that upon:
(a) a cancellation, termination, expiration, forfeiture, or lapse for any
reason of any Award; or
(b) payment of an Option Price and/or payment of any taxes arising upon
the exercise of an Option or payout of an Award with previously acquired Common
Stock or by withholding of shares of Common Stock which otherwise would be
acquired on exercise or issued upon such payout; or
(c) a payout of a Limited Right in the form of cash,
then the number of shares of Common Stock underlying any such Award which were
not issued as a result of any of the foregoing actions shall again be available
for purposes of Awards under the Plan. Subject to adjustment as provided in
Section 18, the maximum aggregate number of shares of Common Stock (including
Options, Limited Rights and Stock Awards) that may be granted or that may vest
with respect to Awards granted hereunder to an Employee shall be 94,550.
5. ELIGIBILITY.
All Employees shall be eligible to receive Awards under the Plan. Outside
Directors shall not be eligible to receive Awards under the Plan except for
Directors' Awards under Section 12 of this Plan. An Outside Director who is a
former Employee may, however, continue to hold unexercised or unvested Awards
granted while such person was an Employee.
6. NON-STATUTORY STOCK OPTIONS.
The Committee may, subject to the limitations of the Plan, from time to
time, grant Non-statutory Stock Options to Employees and, upon such terms and
conditions as the Committee may determine, grant Non-statutory Stock Options in
exchange for and upon surrender of previously granted Awards under this Plan.
Non-statutory Stock Options granted under this Plan are subject to the
following terms and conditions:
(a) EXERCISE PRICE. The Exercise Price of each Non-statutory Stock Option
shall be determined by the Committee on the date the option is granted. Such
Exercise Price shall not be less than 100% of the Fair Market Value of the
Common Stock on the Date of Grant. Common Stock underlying such Non-statutory
Stock Options may be purchased only upon full payment of the Exercise Price or
upon operation of an Alternate Option Payment Mechanism
(b) TERMS OF OPTIONS. The term during which each Non-statutory Stock
Option may be exercised shall be determined by the Committee, but in no event
shall a Non-statutory Stock Option be exercisable in whole or in part more than
10 years from the Date of Grant. The Committee shall determine the date on
which each Non-statutory Stock Option shall become exercisable; provided,
however, that to the extent so limited by applicable OTS regulations, the
Committee shall not make any determination to grant a Non-statutory Stock
Option which provides for: (1) exercisability at a rate in excess of 20% per
year;
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or (2) the acceleration of the exercisability of a Non-statutory Stock Option
except in the case of death or Disability. The acceleration of any
Non-statutory Stock Option under the authority of this paragraph will create no
right, expectation or reliance on the part of any other Participant or that
certain Participant regarding any other unaccelerated Non-statutory Stock
Options.
(c) NSO AGREEMENT. The terms and conditions of any Non-statutory Stock
Options shall be evidenced by an agreement (the "NSO Agreement") which such NSO
Agreement will be subject to the terms and conditions of the Plan.
(d) TERMINATION OF EMPLOYMENT. Unless otherwise determined by the
Committee, upon termination of the Participant's employment for any reason
other than death, Disability, Retirement or Termination for Cause, the
Participant's Nonstatutory Stock Options shall be exercisable only as to those
shares that were immediately exercisable at the date of termination and only
for a period three months following termination. Notwithstanding any
provisions set forth herein or contained in any NSO Agreement relating to an
award of an Option, in the event of termination for Disability or death, all
Options shall immediately vest and be exercisable for one year after such
termination, in the event of termination for Retirement, all exercisable
Non-statutory Stock Options shall be exercisable for one year after Retirement,
and in the event of Termination for Cause all rights under the Participant's
Non-Statutory Stock Options shall expire immediately upon termination.
Notwithstanding the foregoing, a Participant whose termination of employment
would be a Retirement shall not be deemed to have incurred a termination of
employment for purposes determining vesting and exercisability of Non-Statutory
Stock Options under the Plan in the event he continues to serve as a consultant
or advisory director to the Holding Company or any of its Affiliates. In such
event, the Participant's Retirement shall not be deemed to occur until service
as a consultant or advisory director terminates.
7. INCENTIVE STOCK OPTIONS.
The Committee may, subject to the limitations of the Plan, from time to
time, grant Incentive Stock Options to Employees. Incentive Stock Options
granted pursuant to the Plan shall be subject to the following terms and
conditions:
(a) EXERCISE PRICE. The Exercise Price of each Incentive Stock Option
shall be not less than 100% of the Fair Market Value of the Common Stock on the
Date of Grant. However, if at the time an Incentive Stock Option is granted to
a Participant, the Participant owns Common Stock representing more than 10% of
the total combined voting securities of the Holding Company (or, under Section
424(d) of the Code, is deemed to own Common Stock representing more than 10% of
the total combined voting power of all classes of stock of the Holding Company,
by reason of the ownership of such classes of stock, directly or indirectly, by
or for any brother, sister, spouse, ancestor or lineal descendent of such
Participant, or by or for any corporation, partnership, estate or trust of
which such Participant is a shareholder, partner or beneficiary) ("10% Owner"),
the Exercise Price per share of Common Stock deliverable upon the exercise of
each Incentive Stock Option shall not be less than 110% of the Fair Market
Value of the Common Stock on the Date of Grant. Shares may be purchased only
upon payment
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<PAGE> 7
of the full Exercise Price or upon operation of an Alternate Option Exercise
Mechanism set out in Section 14 of the Plan.
(b) AMOUNTS OF INCENTIVE STOCK OPTIONS. Incentive Stock Options may be
granted to any Employee in such amounts as determined by the Committee;
provided that the amount granted is consistent with the terms of Section 422 of
the Code. In the case of a stock option intended to qualify as an Incentive
Stock Option, the aggregate Fair Market Value (determined as of the time the
Option is granted) of the Common Stock with respect to which Incentive Stock
Options granted are exercisable for the first time by the Participant during
any calendar year (under all plans of the Participant's employer corporation
and its parent and subsidiary corporations) shall not exceed $100,000. The
provisions of this Section 7(b) shall be construed and applied in accordance
with Section 422(d) of the Code and the regulations, if any, promulgated
thereunder. To the extent an Award of an Incentive Stock Option under this
Section 7 exceeds this $100,000 limit, the portion of the Award of an Incentive
Stock Option in excess of such limit shall be deemed a Non-statutory Stock
Option. The Committee shall have discretion to redesignate Stock Options
granted as Incentive Stock Options as Non-statutory Stock Options. Such
Non-statutory Stock Options shall be subject to Section 6 of the Plan.
(c) TERMS OF INCENTIVE STOCK OPTIONS. The term during which each
Incentive Stock Option may be exercised shall be determined by the Committee,
but in no event shall an Incentive Stock Option be exercisable in whole or in
part more than 10 years from the Date of Grant. If at the time an Incentive
Stock Option is granted to a Participant who is a 10% Owner, the Incentive
Stock Option granted to such Participant shall not be exercisable after the
expiration of five years from the Date of Grant. No Incentive Stock Option
granted under this Plan is transferable except by will or the laws of descent
and distribution and is exercisable in his lifetime only by the Participant to
whom it is granted.
The Committee shall determine the date on which each Incentive Stock Option
shall become exercisable; provided, however, that to the extent so limited by
OTS regulations, the Committee shall not make any determination to grant an
Incentive Stock Option which provides for: (1) exercisability at a rate in
excess of 20% per year; or (2) acceleration of exercisability except in the
case of death or Disability. The Committee may also determine as of the Date
of Grant any other specific conditions or specific performance goals which must
be satisfied prior to the Incentive Stock Option becoming exercisable. The
shares comprising each installment may be purchased in whole or in part at any
time during the term of such Incentive Stock Option after such installment
becomes exercisable. The Committee may, in its sole discretion, accelerate the
time at which any Incentive Stock Option may be exercised in whole or in part;
provided, however, that to the extent so limited by OTS regulations, the
Committee shall not make any determination which will result in: (1) an
Incentive Stock Option becoming exercisable at a rate in excess of 20% per
year; or (2) the acceleration of the exercisability of an Incentive Stock
Option except in the case of death or Disability. To the extent that such
acceleration, through the operation of law, destroys incentive treatment under
the Code, then such accelerated Stock Option shall be deemed to be a
Non-statutory Stock Option. The acceleration of any Incentive Stock Option
under the authority of this paragraph will create no right, expectation or
reliance on the part of any other Participant or that certain Participant
regarding any other unaccelerated Incentive Stock Options.
(d) ISO AGREEMENT. The terms and conditions of any Incentive Stock Option
shall be evidenced by an agreement (the "ISO Agreement") which such Incentive
Stock Option Agreement will be subject to the terms and conditions of the Plan.
(e) TERMINATION OF EMPLOYMENT. Unless otherwise determined by the
Committee, upon the termination of a Participant's service for any reason other
than Disability, death or Termination for
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Cause, the Participant's Incentive Stock Options shall be exercisable only as
to those shares that were immediately exercisable by the Participant at the
date of termination and only for a period of three months following
termination. Notwithstanding any provisions set forth herein or contained in
any Agreement relating to an award of an Incentive Stock Option, in the event
of termination for Disability or death, all Incentive Stock Options shall
immediately vest and be exercisable for one year after such termination, and in
the event of Termination for Cause all rights under the Participant's Incentive
Stock Options shall expire immediately upon termination.
(f) COMPLIANCE WITH CODE. The Incentive Stock Options granted under this
Section 7 of the Plan are intended to qualify as "incentive stock options"
within the meaning of Section 422 of the Code, but the Holding Company makes no
warranty as to the qualification of any option as an incentive stock option
within the meaning of Section 422 of the Code. All Incentive Stock Options
that do not so quality shall be treated as Non-statutory Stock Options.
8. LIMITED RIGHTS.
Simultaneously with the grant of any Option to an Employee, the Committee
may grant a Limited Right with respect to all or some of the shares covered by
such Option. Limited Rights granted under this Plan are subject to the
following terms and conditions:
(a) TERMS OF RIGHTS. A Limited Right may be exercised only in the event
of a Change in Control.
The Limited Right may be exercised only when the underlying Option is
eligible to be exercised, and only when the Fair Market Value of the underlying
shares on the day of exercise is greater than the Exercise Price of the
underlying Option.
Upon exercise of a Limited Right, the underlying Option shall cease to be
exercisable. Upon exercise or termination of an Option, any related Limited
Rights shall terminate. The Limited Right is transferable only when the
underlying option is transferable and under the same conditions.
(b) PAYMENT. Upon exercise of a Limited Right, the holder shall promptly
receive from the Holding Company an amount of cash or, in the sole discretion
of the Committee, shares of Common Stock or other payment alternative found in
Section 13, equal to the difference between the Exercise Price of the
underlying option and the Fair Market Value of the Common Stock subject to the
underlying Option on the date the Limited Right is exercised, multiplied by the
number of shares with respect to which such Limited Right is being exercised.
Payments shall be less any applicable tax withholding as set forth in Section
19.
9. STOCK AWARDS.
The Committee may, subject to the limitations of the Plan from time to
time, make Awards of some number of shares of Common Stock. The Awards shall
be made subject to the following terms and conditions:
(a) PAYMENT OF THE STOCK AWARD. A Stock Award may only be made in whole
shares of Common Stock. Shares used in payment may only be granted from shares
reserved under the Plan but not yet awarded at the time the new Stock Award is
made.
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(b) STOCK AWARD AGREEMENT. The terms and conditions of any Stock Award
shall evidenced by an agreement (the "Stock Award Agreement") which such Stock
Award Agreement will be subject to the terms and conditions of the Plan. Each
Stock Award Agreement shall set forth:
(i) the period over which the Stock Award may vest; and
(ii) the performance goals, if any, which must be satisfied
prior to the vesting of any portion of the Stock Award. The
performance goals may be set by the Committee on an individual level,
for all Participants, for all Awards made during a given period of
time, or for all Awards for indefinite periods.
(c) CERTIFICATION OF ATTAINMENT OF THE PERFORMANCE GOAL. No Stock Award
that is subject to a performance goal is to be distributed to the Participant
until the Committee certifies that the underlying performance goal has been
achieved.
(d) TERMS OF STOCK AWARDS. The Committee shall determine the dates on
which Stock Awards granted to a Participant shall vest, provided that all Stock
Awards shall immediately vest in full upon the termination of employment due to
Disability or the death of the Participant; further provided, however, that to
the extent so limited by OTS regulations, the Committee shall not make any
determination to grant a Stock Award which provides for: (1) exercisability at
a rate in excess of 20% per year; or (2) acceleration of exercisability except
in the case of Death or Disability. The Committee, notwithstanding other
paragraphs in this Section, in its sole discretion may accelerate the vesting
of any Stock Award; provided, however, that to the extent so limited by OTS
regulations, the Committee shall not make any determination which will result
in: (1) a Stock Award becoming exercisable at a rate in excess of 20% per year;
or (2) the acceleration of the exercisability of a Stock Award except in the
case of Death or Disability. The acceleration of any Stock Award under the
authority of this paragraph will create no right, expectation or reliance on
the part of any other Participant or that certain Participant regarding any
other unaccelerated Stock Awards.
(e) ACCRUAL OF DIVIDENDS. Whenever Stock Awards are distributed to a
Participant or a beneficiary under the Plan, such recipient or beneficiary
shall also be entitled to receive, with respect to each such Stock Award, a
payment equal to any cash dividends and a number of shares of Common Stock
equal to any stock dividends, declared and paid with respect to a share of the
Common Stock between the date the relevant Stock Award was granted and the date
the Stock Awards are being distributed. To the extent applicable, there shall
also be distributed an appropriate amount of net earnings, if any, of the Trust
with respect to any cash dividends paid out.
(f) VOTING OF STOCK AWARDS. After a Stock Award has been granted, the
Participant shall be entitled to direct the Trustee as to the voting of the
Common Stock which the Stock Award covers but which has not yet been earned and
distributed to the Participant pursuant to the Plan, subject to the rules and
procedures adopted by the Committee for this purpose. All shares of Common
Stock held by the Trust as to which Participants are not entitled to direct, or
have not directed, the voting, shall be voted by the Trustee in the same
proportion as Common Stock covered by Stock Awards which have been awarded and
voted.
(g) FORFEITURE. If the Participant's employment terminates for any other
reason than death or Disability, to the extent that the Participant has not
become vested in a Stock Award as provided in this Section 9, such
Participant's Award shall be forfeited immediately upon such termination and
the Participant shall have no further rights with respect to such Award.
Notwithstanding the foregoing, a
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Participant whose termination of employment would be a Retirement shall not be
deemed to have incurred a termination of employment for purposes determining
vesting or forfeiture of a Stock Award under the Plan in the event he continues
to serve as a consultant or advisory director to the Holding Company or any of
its Affiliates. In such event, the Participant's termination of employment
shall not be deemed to occur until service as a consultant or advisory director
terminates.
10. DIVIDEND EQUIVALENT RIGHTS.
Simultaneously with the grant of any Incentive Stock Option or a
Non-statutory Stock Option to Participants, the Committee may to the extent not
limited by OTS regulations, grant a Dividend Equivalent Right with respect to
all or some of the shares covered by such Option. Dividend Equivalent Rights
granted under this Plan are subject to the following terms and conditions:
(a) EXTRAORDINARY DIVIDEND. For purposes of this Section 10, an
extraordinary dividend is any dividend paid on shares of Common Stock where the
rate of the dividend exceeds the Bank's weighted average cost of funds on
interest-bearing liabilities for the current and preceding three quarters.
(b) TERMS OF RIGHTS. The Dividend Equivalent Right provides the
Participant with a cash benefit equal to the amount of any extraordinary
dividend declared by the Holding Company on shares of Common Stock subject to
an Option. The Dividend Equivalent Right is transferable only when the
underlying option is transferable and under the same conditions.
(c) DIVIDEND EQUIVALENT RIGHTS AGREEMENT. The terms and conditions of any
Dividend Equivalent Rights shall be evidenced by an agreement (the "Dividend
Equivalent Rights Agreement") which such Dividend Equivalent Rights Agreement
shall be subject to the terms and conditions of the Plan.
(d) PAYMENT. Upon the payment of an extraordinary dividend, the holder of
a Dividend Equivalent Right shall promptly receive from the Holding Company an
amount of cash or some other payment option found in Section 13, equal to the
amount of the extraordinary dividend paid on one share of Common Stock,
multiplied by the number of shares of Common Stock subject to the underlying
Option. Payments shall be decreased by the amount of any applicable tax
withholding prior to distribution to the Participant as set forth in Section
19.
11. EQUITABLE ADJUSTMENT RIGHT.
Simultaneously with the grant of any Option under this Plan, in the
alternative to a Dividend Equivalent Right, the Committee may to the extent not
limited by OTS regulations, grant an Equitable Adjustment Right.
Upon the payment of an extraordinary dividend (as such term is defined in
Section 10(a)), the Committee may adjust the number of shares and/or the
Exercise Price of the Options underlying the Equitable Adjustment Right, as the
Committee deems appropriate.
12. DIRECTORS' AWARDS.
Awards to Outside Directors under this Plan ("Directors' Awards") are made
in the form of Non-statutory Stock Options and Stock Awards. Directors' Awards
shall be made subject to the following terms and conditions:
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(a) INITIAL GRANT OF THE DIRECTORS' AWARD. Each Outside Director who is
serving on the Board of Directors on the Effective Date of this Plan shall
receive (1) Non-statutory Stock Options for 13,507 shares of Common Stock, each
together, to the extent not limited by OTS regulations, with a Dividend
Equivalent Right pursuant to Section 10, and (2) Stock Awards of 5,402 shares
of Common Stock.
(b) GRANTS TO SUBSEQUENT OUTSIDE DIRECTORS. To the extent shares are
available for grant under the Plan, each Outside Director who is first
appointed as a director subsequent to the Effective Date ("Subsequent Outside
Director") is hereby granted, as of the date on which such Subsequent Outside
Director is qualified and first begins to serve as an Outside Director,
Nonstatutory Stock Options for 13,507 shares of Common Stock, each together, to
the extent not limited by OTS regulations, with a Dividend Equivalent Right
pursuant to Section 10, and Stock Awards of 5,402 shares of Common Stock,
subject to adjustment pursuant to Section 18, or pro rata amounts of
Non-statutory Stock Options and Stock Awards of such lesser number of shares of
Common Stock as remain under reserve but not granted the Plan.
If shares for sufficient Non-statutory Stock Options and Stock Awards are
not available under the Plan to fulfill the grant of Options and Stock Awards
under this paragraph (b) to any Subsequent Outside Director, and thereafter
shares become available, such Subsequent Outside Director shall then receive
pro rata amounts of Non-statutory Stock Options and Stock Awards, determined by
dividing pro rata among each Subsequent Outside Director, the number of shares
of Common Stock then available, not to exceed the amount granted with respect
to Subsequent Outside Directors, subject to adjustment under Section 18 as
appropriate. The date of grant shall be the date shares for such Directors'
Awards become available.
(c) VESTING. The Non-statutory Stock Options and the Stock Awards made
under this Section will vest over a five-year period, with 20% of the initial
number of Non-statutory Stock Options and Stock Awards vesting each year in
which the Outside Director remains an Outside Director or serves as an advisory
director or consultant to the Holding Company or an Affiliate of the Holding
Company, commencing with the first anniversary of the date of the grant of the
Directors' Award.
(d) EXERCISE PRICE. The Exercise Price of each Non-statutory Stock Option
awarded to an Outside Director shall equal the Fair Market Value of the Common
Stock on the date of the grant of the Option. Shares may be purchased only
upon full payment of the Exercise Price or upon operation of an Alternate
Option Payment Mechanism set out in Section 14 of the Plan.
(e) TERMS OF NON-STATUTORY STOCK OPTIONS AWARDS TO DIRECTORS. The term
during which each Non-statutory Stock Option awarded to a director may be
exercised shall be 10 years from the Date of Grant. The shares comprising each
installment may be purchased in whole or in part at any time during the term of
such Non-statutory Stock Option.
(f) ACCRUAL OF DIVIDENDS ON STOCK AWARDS. Whenever Stock Awards are
distributed to an Outside Director or a beneficiary under this Section, such
Outside Director or beneficiary shall also be entitled to receive, with respect
to each such Stock Award, a payment equal to any cash dividends and a number of
shares of Common Stock equal to any stock dividends, declared and paid with
respect to a share of the Common Stock between the date the relevant Stock
Award was granted and the date the Stock Awards are being distributed. To the
extent applicable, there shall also be distributed an appropriate amount of net
earnings, if any, of the Trust with respect to any cash dividends paid out.
(g) VOTING OF STOCK AWARDS. After a Stock Award has been granted under
this Section, the Outside Director shall be entitled to instruct the Trustee as
to the voting of the Common Stock that the Stock
11
<PAGE> 12
Award covers but which has not yet been earned and distributed to him pursuant
to the Plan, subject to the rules and procedures adopted by the Committee for
this purpose. Shares underlying a Stock Award regarding which an Outside
Director has not issued instructions, shall be voted by the Trustee in
accordance with the terms of paragraph 9(g) of the Plan.
(h) DEATH OR DISABILITY OF A DIRECTOR. If the service of an Outside
Director as a member of the Board is terminated due to death or Disability, and
the Directors' Award made has not yet vested as provided in this Section 12,
such Directors' Award shall be deemed to be fully vested upon the date of
termination from service on the Board.
(i) FORFEITURE. If the service of an Outside Director as a member of the
Board is terminated for any other reason than death or Disability, to the
extent that the Outside Director has not become vested in a Directors' Award as
provided in this Section 12, such Directors' Award shall be forfeited
immediately upon such termination and the Outside Director shall have no
further rights with respect to such Directors' Award.
(j) DIRECTORS' AWARD AGREEMENT. The terms and conditions of any
Directors' Award will be evidenced by an agreement (the "Directors' Award
Agreement") which such Directors' Award Agreement shall be subject to the terms
and conditions of the Plan.
13. PAYOUT ALTERNATIVES.
Payments due to a Participant upon the exercise or redemption of an Award,
may be made under the following terms and conditions:
(a) DISCRETION OF THE COMMITTEE. The Committee has the sole discretion to
determine what form of payment (whether monetary, Common Stock, a combination
of payout alternatives or otherwise) it shall use in making distributions or
payments for all Awards. If the Committee requests any or all Participants to
make an election as to form of payment or distribution, it shall not be
considered bound by the election.
(b) PAYMENT IN THE FORM OF COMMON STOCK. Any shares of Common Stock
tendered in satisfaction of an obligation arising under this Plan shall be
valued at the Fair Market Value of the Common Stock at the time of the
distribution. The Committee may use authorized but unissued Shares, Common
Stock in treasury or may direct the market purchase of Common Stock to satisfy
its obligations under this Plan.
14. ALTERNATE OPTION PAYMENT MECHANISM.
The Committee has sole discretion to determine what form of payment it will
accept for the exercise of an Option. The Committee may indicate acceptable
forms in the Incentive Stock Option or Non-statutory Stock Option Agreement
covering such Options or may reserve its decision to the time of exercise. No
Option is to be considered exercised until payment in full is accepted by the
Committee or its agent.
(a) CASH PAYMENT. The exercise price may be paid in cash or by certified
check.
(b) BORROWED FUNDS. To the extent permitted by law, the Committee may
permit all or a portion of the exercise price of an Option to be paid through
borrowed funds.
12
<PAGE> 13
(c) EXCHANGE OF COMMON STOCK. The Committee may, in its sole discretion,
permit payment by the tendering of previously acquired shares of Common Stock.
Any shares of Common Stock tendered in payment of the exercise price of an
Option shall be valued at the Fair Market Value of the Common Stock on the date
prior to the date of exercise.
15. RIGHTS OF A STOCKHOLDER: DEFERRAL; LIMITED TRANSFERABILITY.
No Participant or Outside Director shall have any rights as a stockholder
with respect to any shares of Common Stock covered by an Option until the date
of issuance of a stock certificate for such Common Stock. Nothing in this Plan
or in any Award granted confers on any person any right to continue in the
employ or service of the Holding Company or its Affiliates or interferes in any
way with the right of the Holding Company or its Affiliates to terminate a
Participant's services as an officer or other employee at any time.
Except as expressly provided in the Award Agreement in accordance with this
Section 15, no Award under the Plan shall be transferable by the Participant or
Outside Director other than by will or the laws of intestate succession or
pursuant to a qualified domestic relations order.
The Committee may, in its discretion, authorize all or a portion of the
Options (other than Incentive Stock Options) granted to a Participant to be on
terms which permit transfer by such Participant to (a) the spouse, children or
grandchildren of the Participant ("Immediate Family Members"), (b) a trust or
trusts for the exclusive benefit of such Immediate Family Members, or (c) a
partnership in which such Immediate Family Members are the only partners,
provided that (i) there may be no consideration for any such transfer, (ii) the
Award Agreement pursuant to which such Options are granted expressly provides
for transferability in a manner consistent with this Section 15, and (iii)
subsequent transfers of transferred Options shall be prohibited except those in
accordance with Section 17. Following transfer, any such Options shall
continue to be subject to the same terms and conditions as were applicable
immediately prior to transfer, provided that for purposes of Section 17 hereof
the term "Participant" shall be deemed to refer to the transferee. The
provisions of Sections 6 and 12 relating to the period of exercisability and
expiration of the Option shall continue to be applied with respect to the
original Participant, and the Options shall be exercisable by the transferee
only to the extent, and for the periods, set forth in said Sections 6 and 12.
16. AGREEMENT WITH PARTICIPANTS.
Each Award will be evidenced by a written agreement ("Agreement"), executed
by the Participant and the Holding Company or its Affiliates that describes the
terms and conditions for receiving the Award including the date of Award, the
Exercise Price if any, the term or other applicable periods, and other terms
and conditions as may be required or imposed by the Plan, the Board of
Directors, tax law consideration or applicable securities law.
17. DESIGNATION OF BENEFICIARY.
A Participant may, with the consent of the Committee, designate a person or
persons to receive, in the event of death, any Award to which the Participant
would then be entitled. Such designation will be made upon forms supplied by
and delivered to the Holding Company and may be revoked in writing. If a
Participant fails effectively to designate a beneficiary, then the
Participant's estate will be deemed to be the beneficiary.
13
<PAGE> 14
18. ADJUSTMENTS.
In the event of any change in the outstanding shares of Common Stock by
reason of any stock dividend, split, recapitalization, merger, consolidation,
spinoff, reorganization, combination or exchange of shares, or other similar
corporate change, or other increase or decrease in such shares without receipt
or payment of consideration by the Holding Company, the Committee will make
such adjustments to previously granted Awards, to prevent dilution or
enlargement of the rights of the Participant, including any or all of the
following:
(a) adjustments in the aggregate number or kind of shares of Common Stock
or other securities that may underlie future Awards under the Plan;
(b) adjustments in the aggregate number or kind of shares of Common Stock
or other securities underlying Awards already made under the Plan; and
(c) adjustments in the purchase price of outstanding Incentive and/or
Non-statutory Stock Options, or any Limited Rights attached to such Options.
No such adjustments may, however, materially change the value of benefits
available to a Participant under a previously granted Award. All awards under
this Plan shall be binding upon any successors or assigns of the Holding
Company.
19. TAX WITHHOLDING.
(a) TAX WITHHOLDING. The Company shall have the power and the right to
deduct or withhold, or require a Participant to remit to the Company, an amount
sufficient to satisfy Federal, state, and local taxes, domestic or foreign,
required by law or regulation to be withheld with respect to any taxable event
arising as a result of the Plan.
(b) SHARE WITHHOLDING. With respect to withholding required upon the
exercise of Options, or upon any other taxable event arising as a result of
Awards granted hereunder, Participants may elect to satisfy the withholding
requirement, in whole or in part, by having the Company withhold Shares having
a Fair Market Value on the date the tax is to be determined equal to the
minimum statutory total tax which would be imposed on the transaction. All
such elections shall be irrevocable, made in writing, signed by the
Participant, and shall be subject to any restrictions or limitations that the
Committee, in its sole discretion, deems appropriate.
20. AMENDMENT OF THE PLAN.
The Board of Directors may at any time, and from time to time, modify or
amend the Plan in any respect, prospectively or retroactively; provided
however, no such modification or amendment may adversely affect the rights of a
Participant under an outstanding Award without the written permission of such
Participant.
Notwithstanding any other provision of the Plan, to the extent so limited
by OTS regulations, no amendment shall be made which implements the Plan having
provisions contrary to those set forth in Section 6(b), 7(c) or 9(d) of the
Plan prior to August 9, 1997.
14
<PAGE> 15
21. EFFECTIVE DATE OF PLAN.
The Plan shall become effective upon approval by the stockholders.
22. TERMINATION OF THE PLAN.
The right to grant Awards under the Plan will terminate upon the earlier of
(i) ten (10) years after the Effective Date or (ii) the issuance of Common
Stock and/or the exercise of Options, or related Limited Rights equivalent to
the maximum number of shares reserved under the Plan as set forth in Section 4.
The Board of Directors has the right to suspend or terminate the Plan at any
time, provided that no such action will, without the consent of a Participant,
adversely affect his vested rights under a previously granted Award.
23. APPLICABLE LAW.
The Plan will be administered in accordance with the laws of the state of
Delaware and applicable federal law.
24. DELEGATION OF AUTHORITY.
The Committee may delegate all authority for: the determination of forms of
payment to be made by or received by the Plan; the execution of Agreements; the
determination of Fair Market Value; the determination of all other aspects of
administration of the Plan to the executive officer(s) of the Holding Company.
The Committee may rely on the descriptions, representations, reports and
estimates provided to it by the management of the Holding Company for
determinations to be made pursuant to the Plan, including the attainment of
performance goals. However, only the Committee or a portion of the Committee
may certify the attainment of a performance goal.
IN WITNESS WHEREOF, Park Bancorp, Inc. has established this Plan, to be
executed by a designee of the Board of Directors and its duly corporate seal to
be affixed and duly attested, effective as of the day of , 1997.
[CORPORATE SEAL] PARK BANCORP, INC.
ADOPTED BY THE BOARD OF DIRECTORS:
Date By:
Chairman of the Board of Directors
For the Board of Directors
APPROVED BY STOCKHOLDERS:
Date By:
Secretary
15
<PAGE> 1
EXHIBIT 21
SUBSIDIARY OF PARK BANCORP, INC.
1. Park Federal Savings Bank
SUBSIDIARIES OF PARK FEDERAL SAVINGS BANK
1. GPS Development Corp., an Illinois corporation
2. GPS Corporation, an Illinois corporation
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<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 769
<INT-BEARING-DEPOSITS> 5,444
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 50,109
<INVESTMENTS-CARRYING> 47,840
<INVESTMENTS-MARKET> 47,553
<LOANS> 66,679
<ALLOWANCE> (500)
<TOTAL-ASSETS> 178,194
<DEPOSITS> 128,852
<SHORT-TERM> 5,000
<LIABILITIES-OTHER> 1,886
<LONG-TERM> 0
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<COMMON> 27
<OTHER-SE> 42,430
<TOTAL-LIABILITIES-AND-EQUITY> 178,194
<INTEREST-LOAN> 5,398
<INTEREST-INVEST> 5,499
<INTEREST-OTHER> 438
<INTEREST-TOTAL> 11,335
<INTEREST-DEPOSIT> 6,202
<INTEREST-EXPENSE> 6,319
<INTEREST-INCOME-NET> 5,016
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,718
<INCOME-PRETAX> 1,604
<INCOME-PRE-EXTRAORDINARY> 1,604
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,061
<EPS-PRIMARY> .15
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<YIELD-ACTUAL> 7.20
<LOANS-NON> 299
<LOANS-PAST> 0
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<ALLOWANCE-CLOSE> 500
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