Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2011

 

 

PARK BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

 

0-20867

(Commission File Number)

Delaware

(State of incorporation)

36-4082530

(IRS Employer Identification No.)

5400 South Pulaski Road, Chicago, Illinois

(Address of Principal Executive Offices)

60632

(ZIP Code)

(773) 582-8616

(Registrant’s telephone number, including area code)

 

 

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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicated by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer		¨		Accelerated filer		¨
Non-accelerated filer		¨		Smaller Reporting Company		x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)    Yes  ¨    No  x

As of August 15, 2011, the Registrant had outstanding 1,193,174 shares of common stock.

 

 

 

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TABLE OF CONTENTS

 

						Page
PART I — FINANCIAL INFORMATION
		Item 1.		Financial Statements			3
		Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			25
		Item 3.		Quantitative and Qualitative Disclosures About Market Risk			28
		Item 4.		Controls and Procedures			29
PART II — OTHER INFORMATION
		Item 1.		Legal Proceedings			30
		Item 1A.		Risk Factors			30
		Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			30
		Item 3.		Defaults Upon Senior Securities			30
		Item 4.		[Removed and Reserved]			30
		Item 5.		Other Information			30
		Item 6.		Exhibits			31
SIGNATURES							32

 

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Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995

This Quarterly Report on Form 10-Q contains certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. These forward-looking statements may be identified by the use of words such as “believe,” “expect,” “anticipate,” “intend,” “should,” “planned,” “estimated,” and “potential,” or other similar terms. These forward-looking statements relate to, among other things, expectations of the business environment in which the Company operates, projections of future performance, perceived opportunities in the market, potential future credit experience, and statements regarding the Company’s strategies. These forward-looking statements are based upon current management expectations and may, therefore, involve risks and uncertainties. The Company’s actual results, performance, or achievements may differ materially from those suggested, expressed, or implied by forward-looking statements as a result of a wide variety or range of factors including, but not limited to: interest rate fluctuations; economic conditions in the Company’s primary market area; deposit flows; demand for residential, construction/land development, commercial real estate, consumer, and other types of loans; health of the local real estate market; our ability to manage our levels of our non-performing assets and other loans of concern; real estate values; success of new products; competitive conditions between banks and non-bank financial service providers; regulatory and accounting changes; the Company’s ability to comply with the provisions of any regulatory enforcement actions, including the Memorandum of Understanding and the Cease and Desist Order; legislative changes, including the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act; monetary and fiscal policies of the U.S. government, including policies of the U.S. Treasury and the Federal Reserve Board; the effects of a downgrade in the credit ratings of the U.S. government or a credit default by the U.S. government; competition; accounting principles, policies and guidelines; success of new technology; technological factors affecting operations; costs of technology; pricing of products and services; and other risks detailed from time to time in our filings with the Securities and Exchange Commission. Any of the forward-looking statements that we make in this Form 10-Q and in the other public statements we make may turn out to be wrong because of the inaccurate assumptions we might make, because of the factors illustrated above or because of other factors that we cannot foresee. Because of these and other uncertainties, our actual future results may be materially different from those expressed in any forward-looking statements made by or on behalf of the Company. Therefore, these factors should be considered in evaluating the forward-looking statements, and undue reliance should not be placed on such statements. The Company undertakes no responsibility to update or revise any forward-looking statements unless required to do so under the federal securities laws.

 

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PART I — FINANCIAL INFORMATION

 

Item 1.

Financial Statements.

PARK BANCORP, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(In thousands of dollars, except share data)

(Unaudited)

 

		June 30, 2011				December 31, 2010
Assets
Cash and due from banks		$	3,078			$	2,683
Federal funds sold			2,869				9,708
Interest-bearing deposits with other financial institutions			19,537				6,627
Total cash and cash equivalents			25,484				19,018
Securities available for sale			22,722				30,031
Loans receivable, net of allowance of $5,823 and $5,144			132,678				135,559
Federal Home Loan Bank stock, at cost			5,423				5,423
Premises and equipment, net			8,802				9,018
Accrued interest receivable			738				761
Bank-owned life insurance			8,751				8,596
Real estate owned			2,261				1,794
Other assets			1,414				1,589
Total assets		$	208,273			$	211,789
Liabilities and Stockholders’ Equity
Liabilities
Non-interest bearing deposits		$	8,041			$	6,525
Interest bearing deposits			139,121				142,272
Total deposits			147,162				148,797
Securities sold under repurchase agreements			2,600				2,600
Advances from borrowers for taxes and insurance			1,905				1,932
Federal Home Loan Bank advances			39,800				39,800
Accrued interest payable			118				151
Other liabilities			681				486
Total liabilities			192,266				193,766
Stockholders’ Equity
Preferred stock, $.01 par value, 1,000,000 shares authorized; none issued and outstanding			—				—
Common stock, $.01 par value, 9,000,000 shares authorized; 2,914,028 shares issued; 1,193,174 shares outstanding at June 30, 2011 and December 31, 2010			29				29
Additional paid-in capital			32,108				32,095
Retained earnings			14,670				16,473
Treasury stock, at cost, 1,720,854 shares held at June 30, 2011 and December 31, 2010			(31,025	)			(31,025	)
Accumulated other comprehensive income			225				451
Total stockholders’ equity			16,007				18,023
Total liabilities and stockholders’ equity		$	208,273			$	211,789

See accompanying notes to consolidated financial statements.

 

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PARK BANCORP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands of dollars, except share data)

(Unaudited)

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2011				2010				2011				2010
Interest income
Loans receivable		$	1,978			$	2,067			$	3,963			$	4,208
Securities			165				286				331				601
Interest-bearing deposits with other financial institutions			8				2				14				5
Total			2,151				2,355				4,308				4,814
Interest expense
Deposits			398				534				821				1,130
Federal Home Loan Bank advances and other borrowings			378				402				751				798
Total			776				936				1,572				1,928
Net interest income			1,375				1,419				2,736				2,886
Provision for loan losses			814				869				1,621				1,313
Net interest income after provision for loan losses			561				550				1,115				1,573
Noninterest income
Gain on the sale of securities available for sale			—				—				317				—
Gain on the sale of loans			3				2				5				2
Gain (loss) on the sale of real estate owned			25				(5	)			25				(5	)
Service fee income			61				68				107				119
Earnings on bank-owned life insurance			79				79				156				156
Other operating income			12				10				33				19
Total noninterest income			180				154				643				291
Noninterest expense
Compensation and benefits			701				833				1,435				1,668
Occupancy and equipment expense			228				256				450				527
Professional fees			242				76				435				173
Real estate owned impairment and expenses			154				78				271				199
Federal deposit insurance expenses			89				87				191				176
Other operating expenses			340				449				779				851
Total noninterest expense			1,754				1,779				3,561				3,594
Loss before income taxes			(1,013	)			(1,075	)			(1,803	)			(1,730	)
Income tax benefit			—				—				—				—
Net (loss)		$	(1,013	)		$	(1,075	)		$	(1,803	)		$	(1,730	)
Basic (loss) per share		$	(.85	)		$	(.90	)		$	(1.51	)		$	(1.46	)
Diluted (loss) per share		$	(.85	)		$	(.90	)		$	(1.51	)		$	(1.46	)

See accompanying notes to consolidated financial statements.

 

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PARK BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands of dollars)

(Unaudited)

 

		Six Months Ended June 30,
		2011				2010
Cash Flows From Operating Activities
Net loss		$	(1,803	)		$	(1,730	)
Adjustments to reconcile net loss to net cash from operating activities
Net premium (accretion) amortization on securities			(7	)			18
Gain on sales of securities available for sale			(317	)			—
Gain on sales of loans			(5	)			(2	)
Write-down of real estate owned property			42				27
(Gain) loss on sale or real estate owned			(25	)			5
Earnings on bank-owned life insurance, net			(156	)			(156	)
Provision for loan losses			1,621				1,313
Depreciation			225				245
Stock based compensation			13				34
ESOP compensation expense			—				25
Net change in:
Accrued interest receivable			23				84
Accrued interest payable			(33	)			(15	)
Other assets			175				823
Other liabilities			195				(2	)
Net cash from operating activities			(52	)			669
Cash Flows From Investing Activities
Net change in loans			(161	)			(177	)
Proceeds from sales of loans			512				226
Proceeds from sales of securities available for sale			5,794				—
Purchase of securities available for sale			(4,016	)			(5,000	)
Maturities and calls of securities available for sale			5,629				8,595
Purchase of premises and equipment			(9	)			(12	)
Proceeds from the sale of real estate owned			431				419
Net cash from investing activities			8,180				4,051
Cash Flows From Financing Activities
Net change in deposits			(1,635	)			(3,998	)
Net change in advances from borrowers for taxes and insurance			(27	)			(153	)
Federal Home Loan Bank advances			—				1,500
Repayments of Federal Home Loan Bank advances			—				(615	)
Net cash from financing activities			(1,662	)			(3,266	)
Net change in cash and cash equivalents			6,466				1,454
Cash and cash equivalents at beginning of period			19,018				11,975
Cash and cash equivalents at end of period		$	25,484			$	13,429
Supplemental disclosures of cash flow information
Cash paid during the period for interest		$	1,605			$	1,943
Non-cash activity
Loans transferred to real estate owned			915				917

See accompanying notes to consolidated financial statements.

 

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PARK BANCORP, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Six months ended June 30, 2011 and 2010

(In thousands of dollars, except share data)

(Unaudited)

 

2010		Common Stock				Additional Paid-in Capital				Retained Earnings				Treasury Stock				Unearned ESOP Shares				Accumulated Other Comprehensive Income (Loss)				Total Stockholders’ Equity
Balance at January 1, 2010		$	29			$	32,097			$	21,828			$	(31,043	)		$	(99	)		$	136			$	22,948
Net loss			—				—				(1,730	)			—				—				—				(1,730	)
Change in fair value of securities available for sale, net of income taxes			—				—				—				—				—				458				458
Total comprehensive (loss)																											(1,272	)
Stock based compensation			—				34				—				—				—				—				34
Transfer 1,000 treasury shares for vested RRP shares			—				(18	)			—				18				—				—				—
ESOP shares earned			—				(25	)			—				—				50				—				25
Balance at June 30, 2010		$	29			$	32,088			$	20,098			$	(31,025	)		$	(49	)		$	594			$	21,735
2011		Common Stock				Additional Paid-in Capital				Retained Earnings				Treasury Stock				Accumulated Other Comprehensive Income (Loss)				Total Stockholders’ Equity
Balance at January 1, 2011		$	29			$	32,095			$	16,473			$	(31,025	)		$	451			$	18,023
Net loss			—				—				(1,803	)			—				—				(1,803	)
Change in fair value of securities available for sale, net of income taxes							—				—				—				(226	)			(226	)
Total comprehensive (loss)																							(2,029	)
Stock based compensation			—				13				—				—				—				13
Balance at June 30, 2011		$	29			$	32,108			$	14,670			$	(31,025	)		$	225			$	16,007

See accompanying notes to consolidated financial statements.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2011

(table amounts in thousands of dollars, except share data)

Note 1 – Basis of Presentation

The accompanying unaudited consolidated financial statements include the accounts of Park Bancorp, Inc. (“the Company”, “we” or “us”) and its wholly owned subsidiaries, Park Federal Savings Bank (“the Bank”) and PBI Development Corporation (“PBI”), an inactive entity, and the Bank’s subsidiaries, GPS Corporation which conducts limited insurance activities, and GPS Development Corporation (“GPS”) which conducts real estate development activities, as of June 30, 2011 and December 31, 2010 and for the three and six month periods ended June 30, 2011 and 2010. Significant intercompany accounts and transactions have been eliminated in consolidation.

The accompanying unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain disclosures required by accounting principles generally accepted in the United States of America are not included herein. These interim statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2010 Annual Report on Form 10-K filed with the Securities and Exchange Commission. The December 31, 2010 balance sheet presented herein has been derived from the audited financial statements included in the Company’s 2010 Annual Report on Form 10-K filed with the Securities and Exchange Commission, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

Interim statements are subject to possible adjustment in connection with the annual audit of the Company for the year ending December 31, 2011. In the opinion of management of the Company, the accompanying unaudited interim consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the consolidated financial position and consolidated results of operations for the periods presented.

The results of operations for the six months ended June 30, 2011 are not necessarily indicative of the results to be expected for the full year. In preparing the unaudited financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, the carrying value of securities, recognition of deferred tax assets and the valuation of real estate owned acquired in connection with foreclosures or in satisfaction of loans.

Certain amounts in the unaudited consolidated financial statements for prior periods have been reclassified to conform to the current unaudited financial statement presentation. All financial information in the following tables is in thousands of dollars, except shares and per share data.

Newly Issued But Not Yet Effective Accounting Standards

In April 2011, the FASB issued an accounting standard updated to amend previous guidance with respect to troubled debt restructurings. This updated guidance is designed to assist creditors with determining whether or not a restructuring constitutes a troubled debt restructuring. In particular, additional guidance has been added to help creditors determine whether a concession has been granted and whether a debtor is experiencing financial difficulties. Both of these conditions are required to be met for a restructuring to constitute a troubled debt restructuring. The amendments in the update are effective for the first interim period beginning on or after June 15, 2011, and will be applied retrospectively to the beginning of the annual period of adoption. The provisions of this update are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

In June 2011, the FASB issued an accounting standards update to increase the prominence of items included in Other Comprehensive Income and facilitate the convergence of U.S. GAAP with IFRS. The update prohibits continued presentation of Other Comprehensive Income in the statement of Stockholders’ Equity. The update requires that all non - owner changes in stockholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but continuous statements. The amendments in the update are effective for interim and annual periods beginning on or after December 15, 2011. The provisions of this update are only expected to change the manner in which our other comprehensive income is disclosed.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2011

(table amounts in thousands of dollars, except share data)

 

Note 2 – Loss Per Share

The following table presents a reconciliation of the components used to compute basic and diluted loss per share for the three and six month periods ended June 30, 2011 and 2010. Due to the Company’s net loss in 2011 and 2010, all stock options were considered anti-dilutive and thus were excluded from the computation of diluted loss per share.

 

		Three Months Ended June  30, 2011				Six Months Ended June  30, 2011				Three Months Ended June  30, 2010				Six Months Ended June  30, 2010
Basic loss per share
Net loss as reported		$	(1,013	)		$	(1,803	)		$	(1,075	)		$	(1,730	)
Weighted average common shares outstanding			1,193,174				1,193,174				1,190,551				1,188,939
Basic loss per share		$	(.85	)		$	(1.51	)		$	(.90	)		$	(1.46	)
Diluted loss per share
Net loss as reported		$	(1,013	)		$	(1,803	)		$	(1,075	)		$	(1,730	)
Weighted average common shares outstanding			1,193,174				1,193,174				1,190,551				1,188,939
Dilutive effect of stock options			—				—				—				—
Average common shares and dilutive potential common shares			1,193,174				1,193,174				1,190,551				1,188,939
Diluted loss per share		$	(.85	)		$	(1.51	)		$	(.90	)		$	(1.46	)

Note 3 – Securities Available For Sale

Securities are summarized as follows:

 

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
June 30, 2011
Government sponsored enterprises		$	10,998			$	12			$	(21	)		$	10,989
Municipal			502				44				—				546
Corporate			2,001				9				(5	)			2,005
Equity			17				5				—				22
GSE mortgage-backed-residential			8,908				253				(1	)			9,160
		$	22,426			$	323			$	(27	)		$	22,722
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
December 31, 2010
Government sponsored enterprises		$	12,004			$	19			$	(87	)		$	11,936
Corporate			5,004				77				(8	)			5,073
Municipal			502				31				—				533
Equity			4,486				261				—				4,747
GSE mortgage-backed-residential			7,513				235				(6	)			7,742
		$	29,509			$	623			$	(101	)		$	30,031

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2011

(table amounts in thousands of dollars, except share data)

 

Note 3 – Securities Available For Sale (Continued)

 

Securities with unrealized losses at June 30, 2011 and December 31, 2010 by length of time that individual securities have been in a continuous loss position, are as follows:

 

		Less than 12 Months								12 Months or More								Total
		Fair Value				Unrealized Loss				Fair Value				Unrealized Loss				Fair Value				Unrealized Loss
June 30, 2011
Government sponsored enterprises		$	4,977			$	(21	)		$	—			$	—			$	4,977			$	(21	)
Corporate			—				—				996				(5	)			996				(5	)
GSE mortgage-backed residential			89				(1	)			—				—				89				(1	)
Total temporarily impaired		$	5,066			$	(22	)		$	996			$	(5	)		$	6,062			$	(27	)
December 31, 2010
Government sponsored enterprises		$	8,917			$	(87	)		$	—			$	—			$	8,917			$	(87	)
Corporate			—				—				993				(8	)			993				(8	)
GSE mortgage-backed residential			982				(6	)			—				—				982				(6	)
Total temporarily impaired		$	9,899			$	(93	)		$	993			$	(8	)		$	10,892			$	(101	)

On a quarterly basis, management makes an assessment to determine whether there have been any events or economic circumstances to indicate that any security in its securities available for sale portfolio on which there is an unrealized loss is impaired on an other-than-temporary basis. The amount of the OTTI recognized in earnings depends on whether the Company intends to sell the security or whether it is more likely than not the Company will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss. If the Company intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss, the OTTI is recognized in earnings in an amount equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If the Company does not intend to sell the security and it is not more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis, less any current-period loss, the OTTI is separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the portion of the OTTI recognized in earnings becomes the new amortized cost basis of the investment. For the six months ended June 30, 2011 and 2010, the Company had no impairment losses.

At June 30, 2011, the government enterprises portfolio was backed by securities issued by the Federal Home Loan Mortgage Corporation (“FHLMC”), the Federal National Mortgage Association (“FNMA”), the Federal Home Loan Bank (“FHLB”) and the Federal Farm Credit Bureau (“FFCB”). The Municipal portfolio consists of an investment grade taxable municipal bond due October, 2015. The Corporate portfolio includes investment grade medium term notes issued by financial services companies maturing between July 2011 and November 2018. We had one equity security of a financial institution that had been in a continuous loss position for twelve months or more through the quarter ended March 31, 2011, the fair value of that security increased in value $7,000 during the quarter ended June 30, 2011. We had one corporate note from a financial institution that has been in a continuous loss position for twelve months or more, the security is rated A2 with a fair value of $996,000 at June 30, 2011, which was a $3,000 improvement from its fair value from the previous quarter of 2011, and has a maturity date of February 2012. The decline in fair value is less than 1% of the amortized book value of the security. Management has reviewed this security and believes no impairment charge is required for this security at June 30, 2011.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2011

(table amounts in thousands of dollars, except share data)

 

Note 3 – Securities Available For Sale (Continued)

 

Contractual maturities of securities at June 30, 2011 are listed below. Securities not due at a single maturity date, primarily mortgage-backed and equity securities, are shown separately.

 

		Amortized Cost				Fair Value
Due within one year		$	1,001			$	996
Due one to five years			1,502				1,546
Due five years to ten years			8,000				8,001
Due after ten years			2,998				2,997
			13,501				13,540
Equity			17				22
GSE mortgage-backed-residential			8,908				9,160
		$	22,426			$	22,722

Securities with a carrying value of $3.0 million and $8.0 million at June 30, 2011 and December 31, 2010, respectively, were pledged to secure securities sold under repurchase agreements at June 30, 2011 and securities sold under repurchase agreements and public deposits at December 31, 2010, as required or permitted by law.

There was no security sales during the quarter ended June 30, 2011. For the six months ended June 30, 2011, the Company had gross proceeds from security sales of $5.8 million and generated gains from the sales of $317,000. There was no security sales during the six months ended June 30, 2010.

Note 4 – Loans

The Company originates mortgage and installment loans to customers located 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.

Loans receivable are summarized as follows at the period end:

 

		June 30, 2011				December 31, 2010
One-to-four-family residential		$	96,999			$	98,179
Multi-family residential			14,976				15,135
Commercial, construction and land			15,776				16,828
Consumer loans			5,787				5,738
Participations and loans purchased			6,009				6,106
Total loans, gross			139,547				141,986
Undisbursed portion of loans (LIP)			(839	)			(1,091	)
Net deferred loan origination fees			(207	)			(192	)
Total loans, net of LIP and deferred fees			138,501				140,703
Allowance for loan losses			(5,823	)			(5,144	)
Total loans, net		$	132,678			$	135,559

During the quarter, the Bank continued to participate in the Federal Home Loan Bank’s MPFXtra program with the sale of one performing one-to-four-family residential loan totaling $281,200, generating a $3,000 gain on the sale. Under this program all loans are sold with recourse, therefore the Federal Home Loan Bank has the right to return the loan to the Bank if underwriting guidelines do not meet their standards. Management intends to continue with this program to the extent that future loan originations meet the guidelines for the program. For the six months ended June 30, 2011 the Bank has generated $5,000 in gains on the sales of loans under this program. No loans were sold during the six months ended June 30, 2010.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2011

(table amounts in thousands of dollars, except share data)

 

Note 4 – Loans (Continued)

 

Loan Origination/Risk Management. Single family real estate loans are originated using secondary market underwriting guidelines. We originate both fixed rate and adjustable rate loans in our residential lending program. We typically base our decision on whether to sell or retain secondary market quality loans on the rate and fees for each loan, market conditions and liquidity needs.

Multi-family and commercial real estate loans have higher loan balances, are more difficult to evaluate and monitor, and involve a greater degree of risk than one-to-four-family residential loans. Often payments on loans secured by multi-family or commercial properties are dependent on the successful operation and management of the property; therefore, repayment of these loans may be affected by adverse conditions in the real estate market or the economy. We generally require and obtain loan guarantees from financially capable parties based upon the review of personal financial statements. If the borrower is a corporation, we generally require and obtain personal guarantees from the corporate principals based upon a review of their personal financial statements, tax returns and individual credit reports.

Multi-family and commercial real estate loans are originated with rates that generally adjust after an initial period ranging from three to seven years. Adjustable rate multi-family residential and commercial real estate loans are generally fixed rate with terms of three to five years after which they adjust annually to an index tied to the one year treasury rates plus an acceptable margin. These loans are typically amortized for up to 30 years with a prepayment penalty. The maximum loan to value ratio for multi-family and commercial real estate loans is generally 75% on purchases and refinancings. We require appraisals of all properties securing commercial and multi-family real estate loans, performed by independent appraisers designated by us. We require our multi-family and commercial real estate loan borrowers to submit annual financial statements and rent rolls for the subject property. We generally require a minimum pro forma debt coverage ratio of 1.20 times for loans secured by multi-family and commercial properties.

We originate construction and site development loans to contractors and builders primarily to finance the construction of single-family homes and subdivisions. Loans to finance the construction of single-family homes and subdivisions are generally offered to experienced builders in our primary market areas. All builders are qualified using the same standards as other commercial loan credits, requiring minimum debt service coverage ratios and established cash reserves to carry projects through construction completion and sale of the project. The maximum loan-to-value limit on both pre-sold and speculative projects is generally up to 75% of the appraised market value or sales price upon completion of the project. We may not require any cash equity from the borrower if there is sufficient equity in the land being used as collateral. Development plans are required from builders prior to making the loan. We require that builders maintain adequate insurance coverage.

We also originate land loans to individuals. Land loans are secured by a first lien on the property; generally have a maximum loan to value ratio of 70% at a fixed rate of interest on one to five year balloon notes with a maximum amortization of thirty years.

Our consumer loans are risk priced based on credit score and overall credit quality of the applicant. Home equity loans are made for, among other purposes, the improvement of residential properties, debt consolidation and education expenses. The majority of these loans are secured by a second mortgage on residential property. Fixed rate terms are available up to 120 months, and our equity line of credit is generally a prime rate based loan. Maximum loan to value ratios are dependent on credit worthiness and may be originated at up to 80% of collateral value.

Concentrations of Credit. The Bank’s lending activity primarily occurs within the geographic areas which we serve through our branch network, generally described as south and southwest Chicago, Illinois and the western suburbs of Chicago. Our loan portfolio mix includes 69.5% in one-to-four family mortgages, 10.7% in multifamily residential mortgages, 11.3% in commercial real estate mortgages, construction loans and land loans, 4.2% in direct consumer loans, and 4.3% in participations and loans purchased which are split close to equally between one-to-four family and commercial real estate as of June 30, 2011.

Outstanding commitments to borrowers for loans as of June 30, 2011 and December 31, 2010 totaled $1.4 million and $1.7 million, respectively. Unfunded commitments under lines of credit as of June 30, 2011 and December 31, 2010 totaled $2.3 million and $2.0 million, respectively.

Credit Quality Indicators. Federal regulations provide for the classification of lower quality loans and other assets, such as debt and equity securities, as substandard, doubtful or loss. An asset is considered substandard if it is inadequately protected by the current net worth and pay capacity of the borrower or of any collateral pledged. Substandard assets include those characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses present make collection or liquidation in full highly questionable and improbable, on the basis of currently existing facts, conditions and values. 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 reserve is not warranted.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2011

(table amounts in thousands of dollars, except share data)

 

Note 4 – Loans (Continued)

 

Senior management performs a quarterly review of the classification of all of the Bank’s assets. When we classify problem assets as either substandard or doubtful, we may consider the loans to be impaired and establish a specific allowance in an amount we deem prudent and approved by senior management or the Audit Committee or we may allow the loss to be addressed in the general allowance. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been specifically allocated to particular problem assets. When an insured institution classifies problem assets as a loss, it is required to charge off such assets in the period in which they are deemed uncollectible. Assets that do not currently expose us to sufficient risk to warrant classification as substandard or doubtful but possess identified weaknesses are required to be classified as either watch or special mention assets. Our determination as to the classification of our assets and the amount of our valuation allowances is subject to review by our regulators, which can order the establishment of additional loss allowances.

Early indicator loan grades are used by the Bank to identify and track potential problem loans which do not rise to the levels described for substandard, doubtful or loss. The grades for watch and special mention are assigned to loans which have been criticized based upon known characteristics such as periodic payment delinquency or stale financial information from the borrower and/or guarantors. Loans identified as criticized (watch and special mention) or classified (substandard, doubtful, or loss) are subject to problem loan reporting not less than every three months. At June 30, 2011 and December 31, 2010 the Bank had no loans classified as doubtful or loss.

The following tables present a summary of loans, net of LIP and deferred fees, by class and risk category at June 30, 2011 and December 31, 2010.

 

June 30, 2011
		One-to-Four Family				Multi- Family				Commercial, Construction and Land				Consumer				Participations and Loans Purchased				Total
Grade:
Pass		$	88,814			$	12,750			$	12,543			$	5,308			$	5,447			$	124,862
Special mention			—				—				944				444				—				1,388
Substandard			8,057				2,180				1,430				22				562				12,251
Total		$	96,871			$	14,930			$	14,917			$	5,774			$	6,009			$	138,501
December 31, 2010
		One-to-Four Family				Multi- Family				Commercial, Construction and Land				Consumer				Participations and Loans Purchased				Total
Grade:
Pass		$	90,084			$	12,234			$	14,018			$	4,968			$	5,501			$	126,805
Special mention			—				675				147				770				—				1,592
Substandard			7,950				2,195				1,556				—				605				12,306
Total		$	98,034			$	15,104			$	15,721			$	5,738			$	6,106			$	140,703

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2011

(table amounts in thousands of dollars, except share data)

 

Note 4 – Loans (Continued)

 

Nonperforming loans include both smaller dollar balance homogeneous loans that are collectively evaluated for impairment and individually classified loans. The following tables present a summary of the loan portfolio, net of LIP and deferred fees, by class and credit quality at June 30, 2011 and December 31, 2010.

 

June 30, 2011
		One-to-Four Family				Multi-Family				Commercial, Construction and Land				Consumer				Participations and Loans Purchased				Total
Performing		$	88,432			$	12,750			$	13,487			$	5,732			$	5,447			$	125,848
Nonperforming			8,439				2,180				1,430				42				562				12,653
Total		$	96,871			$	14,930			$	14,917			$	5,774			$	6,009			$	138,501
December 31, 2010
		One-to-Four Family				Multi-Family				Commercial, Construction and Land				Consumer				Participations and Loans Purchased				Total
Performing		$	89,452			$	12,909			$	14,165			$	5,738			$	5,435			$	127,699
Nonperforming			8,582				2,195				1,556				—				671				13,004
Total		$	98,034			$	15,104			$	15,721			$	5,738			$	6,106			$	140,703

The following is a summary of information pertaining to nonaccrual loans, net of LIP and deferred fees:

 

		June 30, 2011				December 31, 2010
Nonperforming loans:
Nonaccrual loans		$	12,073			$	12,113
Nonaccrual troubled debt restructured loans			178				193
Total nonaccrual loans			12,251				12,306
Loans past due 90 days still on accrual			145				698
Substandard loans less than 90 days nonperforming			257				—
Total nonperforming loans		$	12,653			$	13,004
Performing troubled debt restructured loans		$	2,197				1,413
Nonperforming troubled debt restructured loans			178				193
Total troubled debt restructured loans		$	2,375			$	1,606

The Company has not committed additional funds to customers whose loans are classified as troubled debt restructurings.

Nonaccrual and Past Due Loans. Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on non-accrual when they become greater than 90 days past due, as well as when required by regulatory provisions.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2011

(table amounts in thousands of dollars, except share data)

 

Note 4 – Loans (Continued)

 

The following table is a summary of nonaccrual loan balances, net of LIP and deferred fees, by class of loan at June 30, 2011 and December 31, 2010.

 

		June 30, 2011				December 31, 2010
One-to-four family		$	8,057			$	7,950
Multi-family			2,180				2,195
Commercial, construction and land			1,430				1,556
Consumer			22				—
Participations and loans purchased			562				605
Total nonaccrual loans			12,251				12,306
Loans past due 90 days still on accrual			145				698
Substandard loans less than 90 days nonperforming			257				—
Total nonperforming loans		$	12,653			$	13,004

The following tables summarize the aging of loans, net of LIP and deferred fees, by class at June 30, 2011 and December 31, 2010.

 

June 30, 2011
Loans Past Due
		30-59 Days				60-89  Days(1)				90 Days  and Greater(2)				Total				Current				Total Loans
Real estate:
One-to-four family		$	1,658			$	1,001			$	8,478			$	11,137			$	85,734			$	96,871
Multi-family			428				—				2,019				2,447				12,483				14,930
Commercial, construction and land			—				—				1,431				1,431				13,486				14,917
Total real estate			2,086				1,001				11,928				15,015				111,703				126,718
Consumer			—				65				22				87				5,687				5,774
Participations and loans purchased			170				107				611				888				5,121				6,009
Total		$	2,256			$	1,173			$	12,561			$	15,990			$	122,511			$	138,501

 

(1)	Loans of $257,000 are performing under a payment plan classified as substandard because they do not have enough payment history to remove them from the nonperforming classification and are included in the 60-89 day aging category.

(2)	Includes one loan of $145,000 that is 90 days past due and still accruing interest. There were no loans over 90 days past due and still accruing interest.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2011

(table amounts in thousands of dollars, except share data)

 

Note 4 – Loans (Continued)

 

 

December 31, 2010
Loans Past Due
		30-59 Days				60-89 Days				90 Days  and Greater(1)				Total				Current				Total Loans
Real estate:
One-to-four family		$	2,062			$	732			$	8,582			$	11,376			$	86,658			$	98,034
Multi-family			359				204				2,195				2,758				12,346				15,104
Commercial, construction and land			363				—				1,556				1,919				13,802				15,721
Total real estate			2,784				936				12,333				16,053				112,819				128,872
Consumer			109				20				—				129				5,609				5,738
Participations and loans purchased			14				84				671				769				5,337				6,106
Total		$	2,907			$	1,040			$	13,004			$	16,951			$	123,752			$	140,703

 

(1)	Includes $698,000 of loans that are 90 days past due and still accruing interest. There were no other loans over 90 days past due and still accruing interest.

A loan is considered impaired when we have determined that we may be unable to collect payments of principal or interest when due under the terms of the loan. In the process of identifying loans as impaired, management takes into consideration factors which include payment history and status, collateral value, financial condition of the borrower, and the probability of collecting scheduled payments in the future. Minor payment delays and insignificant payment shortfalls typically do not result in a loan being classified as impaired. The significance of payment delays and shortfalls is considered by management on a case by case basis, after taking into consideration the totality of circumstances surrounding the loans and the borrowers, including payment history and amounts of any payment shortfall, length and reason for delay, and likelihood of return to stable performance. Impairment is measured on a loan by loan basis for all loans in the portfolio except for the smaller groups of homogeneous consumer loans in the portfolio.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2011

(table amounts in thousands of dollars, except share data)

 

Note 4 – Loans (Continued)

 

The following tables present loans individually evaluated for impairment by class of loan, net of LIP and deferred fees, as of June 30, 2011 and December 31, 2010.

 

		June 30, 2011
		Recorded Investment (1)				Unpaid Principal Balance (1)				Related Allowance
Loans with no related allowance:
One-to-four family		$	1,721			$	1,721			$	—
Multi-family			1,108				1,108				—
Commercial, construction and land			1,018				1,018				—
Consumer			18				18				—
Total		$	3,865			$	3,865			$	—
Loans with an allowance:
One-to-four family		$	8,656			$	8,656			$	2,862
Multi-family			910				910				160
Commercial, construction and land			673				673				301
Consumer			24				24				24
Participations and purchased loans			562				562				13
Total		$	10,825			$	10,825			$	3,360
Total impaired loans:
One-to-four family		$	10,377			$	10,377			$	2,862
Multi-family			2,018				2,018				160
Commercial, construction and land			1,691				1,691				301
Consumer			42				42				24
Participations and purchased loans			562				562				13
Total		$	14,690			$	14,690			$	3,360

 

(1)	Based on the methods utilized by the Company related to impaired loans, the Recorded Investment and the Unpaid Principal Balance in the above table are the same.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2011

(table amounts in thousands of dollars, except share data)

 

Note 4 – Loans (Continued)

 

		December 31, 2010
		Recorded Investment (1)				Unpaid Principal Balance (1)				Related Allowance
Loans with no related allowance:
One-to-four family		$	1,250			$	1,250			$	—
Multi-family			913				913				—
Commercial, construction and land			760				760				—
Total		$	2,923			$	2,923			$	—
Loans with an allowance:
One-to-four family		$	8,279			$	8,279			$	2,518
Multi-family			1,285				1,285				263
Commercial, construction and land			733				733				392
Participations and purchased loans			605				605				13
Total		$	10,902			$	10,902			$	3,186
Total impaired loans:
One-to-four family		$	9,529			$	9,529			$	2,518
Multi-family			2,198				2,198				263
Commercial, construction and land			1,493				1,493				392
Participations and purchased loans			605				605				13
Total		$	13,825			$	13,825			$	3,186

 

(1)	Based on the methods utilized by the Company related to impaired loans, the Recorded Investment and the Unpaid Principal Balance in the above table are the same.

The following table is a summary of interest recognized and cash-basis interest income on impaired loans:

 

		Three Months Ended June 30, 2011																								Three Months Ended June 30, 2010 Total
		One-to-four Family				Multifamily				Commercial, Construction and Land				Consumer				Participation and Loans Purchased				Total
Average of impaired loans during the period		$	11,024			$	2,022			$	1,495			$	39			$	587			$	15,167			$	10,424
Interest income during the impairment			71				16				11				1				—				99				52
Cash basis interest earned			71				16				11				1				—				99				52

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2011

(table amounts in thousands of dollars, except share data)

 

Note 4 – Loans (Continued)

 

		Six Months Ended June 30, 2011																								Six Months Ended June 30, 2010 Total
		One-to-four Family				Multifamily				Commercial, Construction and Land				Consumer				Participation and Loans Purchased				Total
Average of impaired loans during the period		$	10,664			$	2,066			$	1,494			$	27			$	603			$	14,854			$	11,144
Interest income during the impairment			132				28				13				1				—				174				106
Cash basis interest earned			132				28				13				1				—				174				106

Allowance for Possible Loan Losses. Management recognizes that loan losses may occur over the life of a loan and that the allowance for loan losses must be maintained at a level necessary to absorb specific losses on impaired loans and probable losses inherent in the loan portfolio. The assessment includes analysis of several different factors, including delinquency, charge-off rates and the changing risk profile of our loan portfolio, as well as local economic conditions such as unemployment rates, bankruptcies and vacancy rates of business and residential properties.

Our methodology for analyzing the allowance for loan losses consists of two components: formula and specific allowances. The formula allowance is determined by applying an estimated loss percentage to various groups of loans. The loss percentages are generally based on various historical measures such as the amount and class of classified loans, past due ratios and loss experience, which could affect the collectability of the respective loan classes.

The specific allowance component is created when management believes that the collectability of a specific large loan, such as a real estate, multi-family or commercial real estate loan, has been impaired and a loss is probable. The allowance is increased by the provision for loan losses, which is charged against current period earnings and decreased by the amount of actual loan charge-offs, net of recoveries.

A summary of activity in the allowance for loan losses follows:

 

		Three Months Ended June 30, 2011																								Three Months Ended June 30, 2010 Total
		One-to-four Family				Multifamily				Commercial, Construction and Land				Consumer				Participation and Loans Purchased				Total
Beginning balance		$	4,576			$	310			$	628			$	73			$	136			$	5,723			$	3,135
Provision for loan losses			802				5				7				14				(14	)			814				869
Recoveries			—				—				—				—				6				6				2
Loans charged off			(719	)			—				—				—				(1	)			(720	)			(158	)
Ending balance		$	4,659			$	315			$	635			$	87			$	127			$	5,823			$	3,848
		Six Months Ended June 30, 2011																								Six Months Ended June 30, 2010 Total
		One-to-four Family				Multifamily				Commercial, Construction and Land				Consumer				Participation and Loans Purchased				Total
Beginning balance		$	3,839			$	410			$	720			$	52			$	123			$	5,144			$	2,851
Provision for loan losses			1,539				10				18				35				19				1,621				1,313
Recoveries			—				—				—				—				9				9				2
Loans charged off			(719	)			(105	)			(103	)			—				(24	)			(951	)			(318	)
Ending balance		$	4,659			$	315			$	635			$	87			$	127			$	5,823			$	3,848

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2011

(table amounts in thousands of dollars, except share data)

 

Note 4 – Loans (Continued)

 

The following tables present a summary of our allowance for loan losses and loan portfolio, net of LIP and deferred fees, by loan class and impairment method at June 30, 2011 and December 31, 2010.

 

June 30, 2011
		One-to-four Family				Multi-family				Commercial, Construction and Land				Consumer				Participation and Loans Purchased				Total
Ending allowance balance attributable to loans:
Individually evaluated for impairment		$	2,862			$	160			$	301			$	24			$	13			$	3,360
Collectively evaluated for impairment			1,797				155				334				63				114				2,463
Total ending allowance balance		$	4,659			$	315			$	635			$	87			$	127			$	5,823
Loans:
Individually evaluated for impairment		$	10,377			$	2,018			$	1,691			$	42			$	562			$	14,690
Collectively evaluated for impairment			86,494				12,912				13,226				5,732				5,447				123,811
Total ending allowance balance		$	96,871			$	14,930			$	14,917			$	5,774			$	6,009			$	138,501
December 31, 2010
		One-to-four Family				Multi-family				Commercial, Construction and Land				Consumer				Participation and Loans Purchased				Total
Ending allowance balance attributable to loans:
Individually evaluated for impairment		$	2,518			$	263			$	392			$	—			$	13			$	3,186
Collectively evaluated for impairment			1,321				147				328				52				110				1,958
Total ending allowance balance		$	3,839			$	410			$	720			$	52			$	123			$	5,144
Loans:
Individually evaluated for impairment		$	9,529			$	2,198			$	1,493			$	—			$	605			$	13,825
Collectively evaluated for impairment			88,513				12,907				14,232				5,725				5,501				126,878
Total ending allowance balance		$	98,042			$	15,105			$	15,725			$	5,725			$	6,106			$	140,703

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2011

(table amounts in thousands of dollars, except share data)

 

Note 5 – Income Taxes

Realization of deferred tax assets is dependent upon generating sufficient future taxable income to utilize the deferred tax assets, and for net operating losses or other tax credits, prior to their expiration. Based on forecasted earnings and available tax strategies, a valuation allowance to reflect management’s estimate of the temporary deductible differences that may expire prior to their utilization has been recorded since the first quarter of 2009. In making this determination, management considered all evidence currently available, both positive and negative, including forecasts of future income, applicable tax planning strategies, and assessments of the current and future economic and business conditions. Positive evidence includes the Company’s ability to carry-back losses to prior years and other tax planning strategies that, if needed, would enable the Company to realize deferred tax assets associated with capital loss carryforwards. Negative evidence includes the cumulative losses in the current year and the immediately preceding three fiscal years, the generally declining economic and business trends, the volatility of earnings in the current economic environment relative to additions to the provision for loan losses and the fact the Company has a three year cumulative loss for financial reporting purposes.

During the six months ended June 30, 2011, the Company continued to recognize a full valuation allowance against net deferred taxes recognized from operating losses. On a quarterly basis, the Company will determine whether this valuation allowance is necessary and whether the allowance should be adjusted based on then available evidence.

To the extent that the Company has a three year cumulative loss for financial reporting purposes, projections of future taxable income are generally not permitted to be utilized in determining that a valuation allowance related to deferred tax assets is not necessary. Therefore, the effective tax rate or benefit in future quarters may be higher or lower than expected due to future adjustments to the valuation allowance associated with deferred tax assets.

Note 6 – Employee Benefit Plans

Employee Stock Ownership Plan

The Employee Stock Ownership Plan (ESOP) terminated at December 31, 2010. There were 167,264 allocated shares held by the ESOP at December 31, 2010.

Stock Option Plans

The Company adopted an Incentive Compensation Plan during 2003, which is in addition to the original stock option plan of 1997. Of the shares authorized for issuance under the plan, up to 40,000 shares may be issued with respect to awards of restricted stock and restricted units and up to 40,000 shares may be issued pursuant to stock options under which the exercise price was less than the fair market value (but not less than 50% of the fair market value) of a share of common stock on the date the award was granted. In addition, as required by Internal Revenue Code Section 162(m), the plan includes a limit of 50,000 shares of common stock as the maximum number of shares that may be subject to awards made to any one individual.

As of June 30, 2011 and December 31, 2010, there were 93,820 shares and 79,320 shares, respectively, available for future grants, of which up to 35,000 shares may be available for future restricted stock awards under the 2003 Plan. The table below is a summary of the status of all stock options under the 2003 Plan.

 

		Shares				Weighted Average Exercise Price				Weighted Average Remaining Contractual Term				Aggregate Intrinsic Value
Outstanding at January 1, 2011			73,237			$	11.83
Granted			—				—
Exercised			—				—
Expired/forfeitures			10,500				6.77
Vested and expected to vest at December 31, 2011			62,737			$	12.68				5.2			$	—
Options exercisable at June 30, 2011			35,537			$	19.32				2.8			$	—

As of June 30, 2011 and December 31, 2010, there was $41,600 and $70,000, respectively, of total unrecognized compensation costs related to nonvested stock options granted under the 2003 Plan. The cost is expected to be recognized over the remaining weighted-average vesting period of 3.6 years.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2011

(table amounts in thousands of dollars, except share data)

 

Note 6 – Employee Benefit Plans (Continued)

 

Restricted Stock Awards

The Company granted 5,000 shares of its common stock on April 21, 2009. The grant price was $5.68. Under the terms of the agreement, 20% of the restricted shares were to vest each year. The fair value of the stock award at the grant date was $28,000. Only 1,000 shares vested and the remaining 4,000 shares were forfeited due to the resignation of the director who was granted the stock awards.

Note 7 – Fair Value of Assets and Liabilities

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing and asset or liability.

Assets and Liabilities Measured on a Recurring Basis

The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).

Assets measured at fair value on a recurring basis are summarized below:

 

		Balance				Fair Value Measurements Using
						Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Available for Sale Securities
June 30, 2011
Government sponsored enterprises		$	10,989			$	—			$	10,989			$	—
Corporate			2,005				—				2,005				—
Municipal			546				—				546				—
Equity			22				—				22				—
GSE mortgage-backed residential			9,160				—				9,160				—
		$	22,722			$	—			$	22,722			$	—
December 31, 2010
Government sponsored enterprises		$	11,936			$	—			$	11,936			$	—
Corporate			5,073				—				5,073				—
Municipal			533				—				533				—
Equity			4,747				4,730				17				—
GSE mortgage-backed residential			7,742				—				7,742				—
		$	30,031			$	4,730			$	25,301			$	—

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2011

(table amounts in thousands of dollars, except share data)

 

Note 7 – Fair Value of Assets and Liabilities (Continued)

 

The Company’s mutual fund investment, classified as an equity security, is determined using Level 1 inputs. All other equity securities and the other types of the securities portfolio are determined using Level 2 inputs.

Assets Measured on a Non-Recurring Basis

The fair value of impaired loans and real estate owned is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.

Assets and liabilities measured at fair value on a non-recurring basis are summarized below:

 

		Balance				Fair Value Measurements Using
						Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Assets:
June 30, 2011
Impaired loans, net
One-to-four Family		$	5,794			$	—			$	—			$	5,794
Multi-family			750				—				—				750
Commercial, construction and land			372				—				—				372
Participations and purchased loans			549				—				—				549
		$	7,465			$	—			$	—			$	7,465
Real estate owned
One-to-four Family		$	1,295			$	—			$	—			$	1,295
Multi-family			922				—				—				922
Commercial, construction and land			44				—				—				44
		$	2,261			$	—			$	—			$	2,261
December 31, 2010
Impaired loans, net:
One-to-four Family		$	5,761			$	—			$	—			$	5,761
Multi-family			1,022				—				—				1,022
Commercial, construction and land			341				—				—				341
Participation and purchased loans			592				—				—				592
		$	7,716			$	—			$	—			$	7,716
Real estate owned
One-to-four Family		$	1,120			$	—			$	—			$	1,120
Multi-family			652				—				—				652
Commercial, construction and land			22				—				—				22
		$	1,794			$	—			$	—			$	1,794

Impaired loans, which are measured primarily for impairment using the fair market value of collateral or the present value of future cash flows, were $10.8 million, with an allowance for loan losses of $3.4 million at June 30, 2011, compared to $10.9 million with an allowance for loan losses of $3.2 million at December 31, 2010. Changes in specific allowance allocations on impaired loans carried at fair value during the three month periods ended June 30, 2011 and June 30, 2010 resulted in a decrease in the provision of $210,000 and an increase of $99,000, respectively. For the six month periods ended June 30, 2011 and June 30, 2010 specific allowance allocations resulted in an additional provision of $174,000 and $677,000, respectively.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2011

(table amounts in thousands of dollars, except share data)

 

Note 7 – Fair Value of Assets and Liabilities (Continued)

 

Real estate owned, which is carried at lower of cost or fair value, was written down to a fair value of $2.3 million as of June 30, 2011. Impairment charges of $14,000 and $42,000 were included in earnings for the three and six months ended June 30, 2011. Impairment charges of $27,000 were included in earnings for the three and six months ended June 30, 2010.

The carrying amount and estimated fair value of financial instruments, not previously presented, are as follows:

 

		June 30, 2011								December 31, 2010
		Carrying Amount				Estimated Fair Value				Carrying Amount				Estimated Fair Value
Financial assets
Cash and cash equivalents		$	25,484			$	25,484			$	19,018			$	19,018
Loans receivable, net*			132,678				134,451				135,559				137,379
FHLB stock			5,423				NA				5,423				NA
Accrued interest receivable			738				738				761				761
Financial liabilities
Deposits with no fixed maturity dates		$	(60,135	)		$	(60,135	)		$	(58,042	)		$	(58,042	)
Deposits with fixed maturity dates			(87,027	)			(88,798	)			(90,755	)			(92,323	)
Securities sold under repurchase agreements			(2,600	)			(2,600	)			(2,600	)			(2,600	)
Advances from borrowers for taxes and insurance			(1,905	)			(1,905	)			(1,932	)			(1,932	)
FHLB advances			(39,800	)			(43,598	)			(39,800	)			(43,277	)
Accrued interest payable			(118	)			(118	)			(151	)			(151	)

 

*	Includes impaired loans

The methods and assumptions used to estimate fair value are described as follows:

Carrying amount is the estimated fair value for cash and cash equivalents, accrued interest receivable and payable, demand deposits, short-term debt, and variable rate loans or deposits that reprice frequently and fully. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. The fair value of FHLB advances is based on current rates for similar financing. It was not practicable to determine the fair value of FHLB stock due to restrictions placed on its transferability. The fair value of off-balance-sheet items, based on the current fees or cost that would be charged to enter into or terminate such arrangements is immaterial.

Note 8 – Regulatory Agreements

On January 24, 2011, the Company entered into a Memorandum of Understanding (“MOU”) with the Office of Thrift Supervision (“OTS”). Under the terms of the MOU, the Company agreed with the OTS to, among other things:

 

•

Provide the OTS with periodic cash flow plans;

 

•

Not incur or redeem any debt or declare or pay dividends without prior OTS approval;

 

•

Submit any proposed Board or management changes to the OTS for prior approval; and

 

•

Not enter into, revise or renew any existing compensation or employment agreements without OTS approval.

Prior to the issuance of the MOU, the Company had already undertaken a number of the steps specified in the MOU including, but not limited to, the Company’s prior suspension of dividends and redemption of stock. The Company believes that it is currently in compliance with the MOU.

The MOU requires that a number of the above items be completed over various time frames. Failure to meet these time deadlines or comply with the MOU could result in the initiation of a formal enforcement action by the Federal Reserve Board (“FRB”), as successor as of July 21, 2011, to the powers and responsibilities of the OTS. The MOU will remain in effect until terminated, modified, or suspended in writing by the FRB.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2011

(table amounts in thousands of dollars, except share data)

 

Note 8 – Regulatory Agreements (Continued)

 

On January 24, 2011, the Bank entered into a Stipulation and Consent to Issuance of an Order to Cease and Desist (“Order”) with the OTS. Under the terms of the Order, the Bank cannot declare dividends without the prior written approval of the Office of the Comptroller of the Currency (“OCC”), as successor as of July 21, 2011, to the powers and responsibilities of the OTS. Other material provisions of the Order require the Bank to:

 

•

Submit a revised Capital and Business Plan;

 

•

Revise its policy with respect to the allowance for loan losses;

 

•

Revise its internal asset review and classification program;

 

•

Develop a plan for the resolution of all REO properties and any adversely classified loans in excess of $500,000;

 

•

Not extend additional credit to borrowers whose loan had been charged off or classified as “loss” and is uncollected;

 

•

Revise its Credit Concentration Program;

 

•

Limit its quarterly growth of average assets to net interest credited on deposits;

 

•

Revise its lending and collection policies and practices;

 

•

Enhance its written funds management and liquidity policy;

 

•

Obtain an independent study of management and the personnel structure of the Bank; and

 

•

Prepare and submit progress reports to the OTS.

The Order requires that a number of the above items be completed over various time frames. Failure to meet these time deadlines or comply with the Order could result in the initiation of further enforcement actions by the OCC. The Order will remain in effect until terminated, modified, or suspended in writing by the OCC.

Note 9 – Total Comprehensive Income (Loss)

The following table presents the components of other comprehensive income and total comprehensive income (loss) for the periods presented:

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2011				2010				2011				2010
		(In thousands)
Net income (loss)		$	(1,013	)		$	(1,075	)		$	(1,803	)		$	(1,730	)
Other comprehensive income:
Change in fair value of securities available for sale, net of income taxes			161				179				(226	)			458
Total comprehensive income (loss)		$	(852	)		$	(896	)		$	(2,029	)		$	(1,272	)

 

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Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Executive Summary

The following discussion compares the financial condition of Park Bancorp, Inc. (“Company”) and its wholly owned subsidiaries, Park Federal Savings Bank (“Bank”) and PBI Development Corporation, an inactive entity, and the Bank’s subsidiaries, GPS Corporation, which conducts limited insurance activities, and GPS Development Corporation (“GPS”) which conducts real estate development activities, at June 30, 2011 to its financial condition at December 31, 2010, and the results of operations for the three and six months ended June 30, 2011 to the same period in 2010. This discussion should be read in conjunction with the interim financial statements and footnotes included herein.

Financial Condition

Total assets at June 30, 2011 decreased $3.5 million, or 1.7%, to $208.3 million from $211.8 million at December 31, 2010. The primary reasons for the change from December 31, 2010 were decreases of $7.3 million and $2.9 million in securities available for sale and loans receivable, net, respectively, offset by an increase of $6.5 million in total cash and cash equivalents during the six months ended June 30, 2011.

The securities portfolio is primarily government sponsored enterprise debt securities and residential mortgage-backed securities issued by government sponsored enterprises. The total portfolio decreased $7.3 million to $22.7 million, or 24.3%, at June 30,2011 from $30.0 million at December 31, 2010 primarily as a result of security sales with a carrying value of $5.5 million, which included the sale of the Company’s interest in an ultra short mortgage mutual fund with a fair value of $4.5 million, debt security maturities and calls of $5.6 million and a $226,000 decrease in the market value of existing investments, partially offset by $4.0 million in securities purchases. Excess liquidity generated from the securities portfolio was invested in interest-bearing deposits with other financial institutions.

Loans receivable, net decreased $2.9 million, or 2.1% to $132.7 million at June 30, 2011 from $135.6 million at December 31, 2010. During the period, loan originations and advances were $6.2 million, which were offset by $7.2 million of loan repayments and payoffs, a net increase in allowance for loan losses of $679,000, loan sales of $507,000 and transfers to real estate owned of $915,000.

The allowance for loan losses was $5.8 million at June 30, 2011 compared to $5.1 million at December 31, 2010, while nonperforming loans were $12.5 million and $13.0 million for the comparable periods. The establishment of the allowance for loan losses is determined based on general factors such as the economy, charge off history, geographic loan concentrations, underwriting, the turnover in the Bank’s management and staff and specific reserves required due to anticipated losses on certain loans. During the first six months of 2011, the factor for historical charge offs was increased due to the effect of the rolling average charge off experience of the Company over the last twenty-four months. The other general factors remained the same compared to December 31, 2010. The portion of the allowance that pertains to these general factors at June 30, 2011 was $2.5 million or 2.00% of total loans, excluding those designated as specific, with the remaining $3.3 million pertaining to specific loans, which represents 22.87% of the impaired loans. Impaired loans, which are measured primarily for impairment using the fair market value of collateral or the present value of future cash flows, were $14.7 million, with an allowance for loan losses of $3.3 million at June 30, 2011, compared to $13.8 million with an allowance for loan losses of $3.2 million at December 31, 2010. Changes in specific allowance allocations during the three months ended June 30, 2011 on impaired loans carried at fair value resulted in a decrease in the provision of $210,000. For the six months ended June 30, 2011, specific allowance allocations resulted in an additional provision of $174,000.

The Company believes that the increase in the allowance for loan losses is consistent with the performance of the loan portfolio during the three and six months ended June 30, 2011 and the related credit risks inherent in the portfolio. Approximately 66.70% of the Company’s nonperforming loans are one-to-four family loans. Approximately 19.54% of the nonperforming one-to-four family loans were related to rental investment properties owned by investment companies controlled by two individuals. Multi-family loans represent 17.23% of nonperforming loans, commercial, construction and land loans comprise 11.30% of nonperforming loans, consumer loans represent approximately 0.33% of nonperforming loans and participations and loans purchased represent approximately 4.44% of the nonperforming loans at June 30, 2011. Total nonperforming loans as a percentage of total loans, net of LIP and deferred fees, were 9.14% at June 30, 2011 compared to 8.75% at December 31, 2010.

Real estate owned (“REO”) increased $467,000 to $2.3 million at June 30, 2011 from $1.8 million at December 31, 2010 predominately due to $915,000 of one-to-four family loans transferred into REO, with REO sales during the six month period of $431,000. The values of the properties in the Company’s REO inventory were written-down $43,000 as a result of a decline in property values during the first six months of 2011. Based on recent appraisals and sales contract negotiations, management believes the properties are recorded at fair value, less cost to sell, as of June 30, 2011.

 

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The following table sets forth information regarding nonaccrual loans, net of LIP and deferred fees, and other real estate owned at the dates indicated. It is the policy of the Bank to cease accruing interest on loans more than 90 days past due.

 

		June 30, 2011				December 31, 2010
Nonaccrual loans
One-to-four family		$	8,057			$	7,950
Multi-family			2,180				2,195
Commercial, construction and land			1,430				1,556
Consumer			22				—
Participations and loans purchased			562				605
Total nonaccrual loans			12,251				12,306
Loans past due 90 days still on accrual			145				698
Substandard loans less than 90 days nonperforming			257				—
Total nonperforming loans			12,653				13,004
Real estate owned			2,261				1,794
Total nonperforming assets		$	14,914			$	14,798

The following table sets forth the amount of the Company’s allowance for loan losses by class, the percent of allowance for loan losses by class to total allowance, and the percent of gross loans by class to total gross loans in each of the categories listed at the dates indicated.

 

		June 30, 2011												December 31, 2010
		Amount				Percentage of Allowance to Total Allowance				Percentage of Net Loans to Total Net Loans(1)				Amount				Percentage of Allowance to Total Allowance				Percentage of Net Loans to Total Net Loans(1)
One-to-four Family		$	4,659				80.01	%			69.94	%		$	3,839				74.63	%			69.68	%
Multi-family			315				5.41				10.78				410				7.97				10.74
Commercial, construction and land			635				10.91				10.77				720				14.00				11.17
Consumer			87				1.49				4.17				52				1.01				4.07
Participation and loans purchased			127				2.18				4.34				123				2.39				4.34
Total allowance for loan losses		$	5,823				100.00	%			100.00	%		$	5,144				100.00	%			100.00	%

 

(1)	Net loans are net of LIP and deferred fees before allowance for loan losses.

Total liabilities at June 30, 2011 were $192.3 million, a decrease of $1.5 million, or 0.8%, from $193.8 million at December 31, 2010. The change was due primarily to a $1.6 million, or 1.1%, decrease in deposits to $147.2 million at June 30, 2011 from $148.8 million at December 31, 2010. Deposits decreased as the Company continued to follow its interest rate risk strategy of allowing higher rate deposits to mature.

Stockholders’ equity decreased $2.0 million, or 11.2%, to $16.0 million at June 30, 2011 from $18.0 million at December 31, 2010. The decrease was primarily attributable to the net loss for the six months ended June 30, 2011 of $1.8 million and a decrease of $226,000 in accumulated other comprehensive income due to gains realized on security sales during the six month period and a decrease in the market value of investments included in securities available for sale.

Results of Operations

The net loss for the quarter ended June 30, 2011 was $1.0 million, or $0.85 per diluted share, an improvement of $62,000 from the net loss of $1.1 million, or $0.90 per diluted share, for the same quarter in 2010. The change was due to a decrease in net interest income of $44,000, offset by a decrease in the provision for loan loss of $55,000, an increase in non-interest income of $26,000 and a decrease in non-interest expense of $25,000. For the six months ended June 30, 2011 the net loss was $1.8 million, or $1.51 per diluted share compared to a net loss of $1.7 million, or $1.46 per diluted share for the six months ended June 30, 2010.

 

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Net interest income for the quarter ended June 30, 2011 remained relatively unchanged at $1.4 million from the same quarter in 2010. The average yield on interest-earning assets decreased 33 basis points to 4.66% for the quarter ended June 30, 2011 compared to 4.99% for the same quarter in 2010, while average interest-earning assets decreased $4.3 million during the same time period. The average yield decreased partially as a result of the net increase in foregone interest on nonaccrual loans of approximately $152,000 during the quarter ended June 30, 2011 compared to the quarter ended June 30, 2010. Also, the average yield on interest-earning assets decreased due to the decline in the average yield on adjustable rate investments and lower reinvestment rates in the securities available for sale portfolio. The average cost of interest-bearing liabilities decreased 34 basis points to 1.70% compared to 2.04% for the quarters ended June 30, 2011 and 2010, respectively. Average interest-bearing liabilities decreased $1.1 million during the second quarter of 2011 compared to the second quarter of 2010. The interest rate spread increased one (1) basis point to 2.96% for the quarter ended June 30, 2011 compared to the second quarter in 2010 while the net interest margin decreased to 2.98% compared to 3.01% for the same period. The minor increase in the interest rate spread and decrease in margin were primarily due to the decrease in average interest-earning assets, the reallocation of interest-earning assets between asset categories and the decreases in the yield on those assets during the quarter ended June 30, 2011 compared to the same quarter in 2010.

Net interest income for the six months ended June 30, 2011 decreased $150,000 to $2.7 million from $2.9 million for the same period in 2010. The average yield on interest-earning assets decreased 45 basis points to 4.63% for the six months ended June 30, 2011 compared to 5.08% for the six months ended June 30, 2010, while average interest-earning assets decreased $3.4 million during the same time period. The average yield decreased partially as a result of the net increase in foregone interest on nonaccrual loans of approximately $306,000 during the six months ended June 30, 2011 compared to the six months ended June 30, 2010. Also, the average yield on interest-earning assets decreased due to the decline in the average yield on adjustable rate investments and lower reinvestment rates in the securities available for sale portfolio. The average cost of interest-bearing liabilities decreased 39 basis points to 1.71% compared to 2.10% for the six months ended June 30, 2011 and 2010, respectively. Average interest-bearing liabilities decreased $294,000 during the first six months of 2011 compared to the same period of 2010. The interest rate spread decreased seven (7) basis points to 2.91% for the six months ended June 30, 2011 from the comparable period in 2010 while the net interest margin decreased to 2.94% compared to 3.04% for the same period.

Management establishes provisions for loan losses, which are charged to operations, to maintain the allowance for loan losses at a level management believes is appropriate to absorb probable incurred credit losses in the loan portfolio. In evaluating the level of the allowance for loan losses, management considers historical loss experience, the classes of loans and the amount of loans in the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, peer group information, and prevailing economic conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available or as future events change. Based on management’s estimates, an $814,000 provision for loan loss was established for the quarter ended June 30, 2011 compared to $869,000 for the same quarter in 2010. For the six months ended June 30, 2011 and 2010 the provision for loan losses was $1.6 million and $1.3 million, respectively.

Management assesses the allowance for loan losses on a quarterly basis and makes provisions for loan losses as necessary in order to maintain the allowance. While management uses available information to recognize losses on loans, future loan loss provisions may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses and may require us to recognize additional provisions based on their judgment of information available to them at the time of their examination. The allowance for loan losses as of June 30, 2011 is maintained at a level that represents management’s best estimate of incurred losses in the loan portfolio, and such losses were both probable and reasonably estimable.

Noninterest income increased $26,000 to $180,000 for the quarter ended June 30, 2011 compared to $154,000 for the quarter ended June 30, 2010. The increase was primarily due to a $25,000 gain on the sales of $406,000 of REO during the second quarter of 2011, a $5,000 loss was incurred on the sale of REO during the same quarter in 2010. For the six months ended June 30, 2011, noninterest income increased $352,000 to $643,000 from $291,000 for the same period in 2010. The increase in noninterest income was the result of $317,000 of gains recognized on the sales of securities that took place during the first quarter of 2011 with no security sales occurring during the first six months of 2010. These securities were sold to recognize into income the significant unrealized gains that were carried as other comprehensive gains on the balance sheet.

Noninterest expense decreased $25,000 during the quarter ended June 30, 2011 and remained at $1.8 million for the three month periods ended June 30, 2011 and 2010, respectively. Compensation and benefits decreased $132,000 during the quarter from the same quarter in 2010 due to the reduction in staffing levels and the decrease in payroll costs during the quarter. Other operating expenses decreased $109,000 during the quarter as a result of the Bank continuing to seek ways to lower controllable costs. These decreases were offset by a $166,000 increase in professional fees the result of additional expenses incurred to address the issues involving the C&D Order and a $76,000 increase in REO related expenses created with the increase in the REO properties the Bank now has in its possession. For the six months ended June 30, 2011 noninterest expense decreased $33,000 from the comparable period in 2010.

There was no federal income tax benefit recorded for the three or six months ended June 30, 2011 and 2010, respectively due to the deferred tax asset valuation allowance which was established in 2009.

 

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Liquidity and Capital Resources

The Company’s primary sources of funds are deposits, principal and interest payments on loans and securities, proceeds from maturities and calls of securities, FHLB advances, and securities sold under repurchase agreements. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions, and competition. The Bank’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. Management believes the Bank maintains sufficient liquidity to ensure a safe and sound operation.

The Company’s cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided by (used in) operating activities were $(51) and $669,000 for the six months ended June 30, 2011 and 2010, respectively. Net cash from investing activities consisted primarily of disbursements for the purchase of securities, offset by proceeds from the sale of securities, principal collections on loans, and proceeds from maturing securities, and repayments on mortgage-backed securities. Net cash provided by investing activities were $8.2 million and $4.1 million for the six months ended June 30, 2011 and 2010, respectively. Net cash from financing activities consisted primarily of the activity in deposit accounts. The net cash used in financing activities was $(1.7) million and $(3.3) million for the six months ended June 30, 2011 and 2010, respectively.

At June 30, 2011, the Bank exceeded all of the minimum regulatory capital adequacy requirements with a Tier 1 (core) capital level of $15.4 million, or 7.39% of adjusted total assets and total risk-based capital of $16.8 million, or 14.61% of risk-weighted assets. At December 31, 2010, the Bank exceeded all of the minimum regulatory capital adequacy requirements with a Tier 1 (core) capital level of $16.9 million, or 8% of adjusted total assets and total risk-based capital of $18.5 million, or 15.1% of risk-weighted assets.

At June 30, 2011, the Bank had outstanding commitments to originate mortgage loans of $1.4 million, commitments under unused lines of credit of $2.3 million and undisbursed portions of construction loans of $801,000. The Bank anticipates that it will have sufficient funds available to meet its current loan origination commitments. Certificate accounts that are scheduled to mature in less than one year from June 30, 2011 totaled $47.8 million. Management expects that a substantial portion of the maturing certificate accounts will be renewed at the Bank. However, if a substantial portion of these deposits is not retained, the Bank may utilize FHLB advances or raise interest rates on deposits to attract new accounts, which may result in higher levels of interest expense.

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

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. 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 March 31, 2011 the latest date for which information is available, the Bank’s sensitivity measure resulting from a 200 basis point increase in interest rates was (14) % and would result in a $3.4 million decrease 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.

Certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in NPV requires the making of certain assumptions that may tend to oversimplify the manner in which actual yields and costs respond to changes in market interest rates. First, the models assume that the composition of the Bank’s interest sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured. Second, the models assume that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities. Third, the model does not take into account the impact of the Bank’s business or strategic plans on the structure of interest-earning assets and interest-bearing liabilities.

Accordingly, although the NPV measurement provides an indication of the Bank’s interest rate risk exposure at a particular point in time, such measurement is not intended to, and does not provide a precise forecast of, the effect of changes in market interest rates on the Bank’s net interest income and will differ from actual results. The results of this modeling are monitored by management and presented to the Board of Directors quarterly.

The following table shows the NPV and projected change in the NPV of the Bank at March 31, 2011, the latest date for which information is available, assuming an instantaneous and sustained change in market interest rates of 100, 200 and 300 basis points and a decline of 100 basis points. Due to the current economic conditions and level of interest rates, a 200 and 300 basis point decline would not apply.

 

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Interest Rate Sensitivity of Net Portfolio Value (NPV)

 

		Net Portfolio Value												NPV as a % of PV of Assets
Change in Rates		$ Amount				$ Change				% Change				NPV Ratio				Change
+ 300 bp		$	16,901			$	(6,649	)			(28	)%			8.19	%			(251	)bp
+ 200 bp			20,167				(3,383	)			(14	)			9.52				(117	)bp
+ 100 bp			22,580				(970	)			(4	)			10.43				(26	)bp
0 bp			23,550				—				—				10.69				—
– 100 bp			23,442				(108	)			—				10.53				(16	)bp
– 200 bp			N/A				N/A				N/A				N/A				N/A
– 300 bp			N/A				N/A				N/A				N/A				N/A

The Bank and the Company do not maintain any securities for trading purposes. The Bank and the Company do not currently engage in trading activities or use derivative instruments in a material amount to control interest rate risk. In addition, interest rate risk is the most significant market risk affecting the Bank and the Company. Other types of market risk, such as foreign currency exchange risk and commodity price risk, do not arise in the normal course of the Company’s business activities and operations.

Management is in the process of completing the computation of NPV as of June 30, 2011, but estimates that the results would not be materially different than those presented above.

 

Item 4.

Controls and Procedures.

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

As of the end of the period covered by this report, we carried out an evaluation, under the supervision, and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as contemplated by Exchange Act Rule 13a-15. Based upon, and as of the date of that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective, in all material respects, in timely alerting them to material information relating to the Company (and its consolidated subsidiaries) required to be included in the periodic reports the Company is required to file and submit to the SEC under the Exchange Act.

There was no change in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ended June 30, 2011, that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II — OTHER INFORMATION

 

Item 1.

Legal Proceedings.

From time to time, we may be party to various legal proceedings arising in the normal course of our business. Since we act as a depository of funds, we may also be named as a defendant in various lawsuits (such as garnishment proceedings) involving claims to the ownership of funds in particular accounts. We are not a party to any legal proceedings that we currently believe will have, individually or in the aggregate, a material adverse effect on our business, results of operations, financial condition or cash flows.

 

Item 1A.

Risk Factors.

In addition to the other information set forth in this report, you should carefully consider the risk factors discussed in response to Item 1A to Part I in our Annual Report on Form 10-K for the year ended December 31, 2010 which could materially affect our business, financial condition or future results. There have been no material changes from the risk factors as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2010, except as noted below.

Concerns regarding the recent downgrade of the U.S. government’s credit rating could have a material adverse effect on our business, financial condition, liquidity, and results of operations.

On August 5, 2011, Standard & Poor’s lowered its long term sovereign credit rating on the United States of America from AAA to AA+. On August 8, 2011 Standard & Poor’s also lowered the credit rating of several related government agencies and institutions, including FHLMC, FNMA, the FFCB and FHLB’s, from AAA to AA+. While U.S. lawmakers reached an agreement to raise the federal debt ceiling on August 2, 2011, the downgrade, according to Standard & Poor’s, reflects its view that the fiscal consolidation plan within that agreement fell short of what would be necessary to stabilize the U.S. government’s medium term debt dynamics. This downgrade could have material adverse impacts on financial and banking markets and economic conditions in the United States and throughout the world and, in turn, the market’s anticipation of these impacts could have a material adverse effect on our business, financial condition and liquidity. In particular, it could increase interest rates and disrupt payment systems, money markets, and long-term or short-term fixed income markets, adversely affecting the cost and availability of funding, which could negatively affect our profitability. It may also negatively affect the value and liquidity of the government securities we hold in our investment portfolio.

At June 30, 2011, the GSE portfolio was backed by securities issued by FHLMC, FNMA, FHLB and FFCB. The Bank owns $5.4 million of FHLB stock, which is also a primary source of our borrowing capacity. It is uncertain as to what, if any, impact the downgrade will have on these securities as sources of liquidity and funding. Also, the adverse consequences as a result of the downgrade could extend to the borrowers of the loans we make and, as a result, could adversely affect our borrowers’ ability to repay their loans and, accordingly, affect our credit quality. Because of the unprecedented nature of the negative credit rating actions with respect to U.S. government obligations, the ultimate impacts on markets and our business, financial condition, liquidity, and results of operations are unpredictable and may not be immediately apparent. These consequences could be exacerbated if other statistical rating agencies, particularly Moody’s and Fitch, decide to downgrade the U.S. government’s credit rating in the future, or if the United States defaults on any of its obligations.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

Issuer Repurchases of Equity Securities

The Company’s Board of Directors approved the repurchase by the Company of up to 50,000 shares of its common stock pursuant to a repurchase program that was publicly announced on July 31, 2008. No shares were repurchased during the quarter ended June 30, 2011 under the program. A total of 43,682 shares remain available for repurchase under the program.

 

Item 3.

Defaults Upon Senior Securities.

None.

 

Item 4.

[Removed and Reserved.]

 

Item 5.

Other Information.

Effective August 15, 2011, Paul J. Lopez, formerly the Senior Vice President and Chief Lending Officer of the Bank, is no longer employed by the Bank or the Company.

 

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Item 6.

Exhibits.

 

(a)

Exhibits.

 

31.1		Rule 13(a)-14(a) Certification (Chief Executive Officer) (attached as an exhibit and incorporated herein by reference).
31.2		Rule 13(a)-14(a) Certification (Chief Financial Officer) (attached as an exhibit and incorporated herein by reference).
32.1		Certification Pursuant to 18 U.S.C. Section 1350, as adopted to Section 906 of the Sarbanes-Oxley Act of 2002 from the Company’s Chief Executive Officer (attached as an exhibit and incorporated herein by reference).
32.2		Certification Pursuant to 18 U.S.C. Section 1350, as adopted to Section 906 of the Sarbanes-Oxley Act of 2002 from the Company’s Financial Officer (attached as an exhibit and incorporated herein by reference).
101.1		The following financial statements from the Park Bancorp, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, formatted in Extensive Business Reporting Language (XBRL): (i) consolidated statements of financial condition, (ii) consolidated statements of operations, (iii) consolidated statements of cash flows, (iv) consolidated statements of stockholders’ equity, and (v) the notes to consolidated financial statements.*

 

*

Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files submitted under Exhibit 101.1 are not deemed “filed” for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of those Sections. Such exhibit shall not be deemed incorporated into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.

 

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SIGNATURES

Pursuant to the requirements 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.
Date: August 15, 2011		/S/    DAVID A. REMIJAS
		David A. Remijas
		Chairman and Chief Executive Officer
Date: August 15, 2011		/S/    VICTOR E. CAPUTO
		Victor E. Caputo
		Treasurer and Chief Financial Officer

 

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