UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period ended June 30, 2002

 

OR

 

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For transition period from            to            

 

Commission File Number 0 -17609

 

WEST SUBURBAN BANCORP, INC.

(Exact name of Registrant as specified in its charter)

Illinois

36-3452469

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification Number)

711 South Meyers Road, Lombard, Illinois

60148

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code:

(630) 629-4200

 

 

 

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  ý  No  o.

 

Indicate the number of shares outstanding of each of the Issuer’s class of common stock as of the latest practicable date.

 

15,000,000 shares of Common Stock, no par value, were authorized and 432,495 shares of Common Stock were issued and outstanding as of August 1, 2002.

 

WEST SUBURBAN BANCORP, INC.

 

Form 10-Q Quarterly Report

 

Table of Contents

 

PART I
Item 1.	Financial Statements
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures About Market Risk
PART II
Item 1.	Legal Proceedings
Item 2.	Changes in Securities and Use of Proceeds
Item 3.	Defaults Upon Senior Securities
Item 4.	Submission of Matters to a Vote of Security Holders
Item 5.	Other Information
Item 6.	Exhibits and Reports on Form 8-K
Form 10-Q Signature Page

 

Special Note Concerning Forward-Looking Statements

 

This document (including information incorporated by reference) contains, and future oral and written statements of the Company and its management may contain, forward-looking statements within the meaning of such term in the Private Securities Litigation Reform Act of 1995 with respect to the financial condition, results of operations, plans, objectives, future performance and business of West Suburban Bancorp, Inc. (“West Suburban”) and West Suburban Bank (the “Bank” and collectively with West Suburban and its other subsidiaries, the “Company”). Forward-looking statements, which may be based upon beliefs, expectations and assumptions of the Company’s management and on information currently available to management, are generally identifiable by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “intend,” “estimate,” “may,” “will,” “would,” “could,” “should” or other similar expressions. Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no obligation to update any statement in light of new information or future events.

 

The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries include, but are not limited to, the following:

 

•                                          The strength of the United States economy in general and the strength of the local economies in which the Company conducts its operations which may be less favorable than expected and may result in, among other things, a deterioration in the credit quality and value of the Company’s assets.

 

•                                          The economic impact of the terrorist attacks that occurred on September 11^th, as well as any future threats and attacks and the response of the United States to any such threats and attacks.

 

•                                          The effects of, and changes in, federal, state and local laws, regulations and policies affecting banking, securities, insurance and monetary and financial matters.

 

•                                          The effects of changes in interest rates (including the effects of changes in the rate of prepayments of the

 

 

Company’s assets) and the policies of the Board of Governors of the Federal Reserve System.

 

•                                          The ability of the Company to compete with other financial institutions as effectively as the Company currently intends due to increases in competitive pressures in the financial services sector.

 

•                                          The inability of the Company to obtain new customers and to retain existing customers.

 

•                                          The timely development and acceptance of products and services, including products and services offered through alternative delivery channels such as the Internet.

 

•                                          Technological changes implemented by the Company and by other parties, including third party vendors, which may be more difficult or more expensive than anticipated or which may have unforeseen consequences to the Company and its customers.

 

•                                          The ability of the Company to develop and maintain secure and reliable electronic systems.

 

•                                          The ability of the Company to retain key executives and employees and the difficulty that the Company may experience in replacing key executives and employees in an effective manner.

 

•                                          Consumer spending and saving habits which may change in a manner that affects the Company’s business adversely.

 

•                                          Business combinations and the integration of acquired businesses which may be more difficult or expensive than expected.

 

•                                          The costs, effects and outcomes of existing or future litigation.

 

•                                          Changes in accounting policies and practices, as may be adopted by state and federal regulatory agencies and the Financial Accounting Standards Board.

 

•                                          The ability of the Company to manage the risks associated with the foregoing as well as anticipated.

 

These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Additional information concerning the Company and its business, including other factors that could materially affect the Company’s financial results, is included in the Company’s other filings with the Securities and Exchange Commission.

 

 

PART I

 

ITEM 1.      FINANCIAL STATEMENTS

 

WEST SUBURBAN BANCORP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

(UNAUDITED)

 

		June 30, 2002			December 31, 2001
Assets
Cash and due from banks		$	56,019		$	32,870
Federal funds sold		28,172			14,206
Total cash and cash equivalents		84,191			47,076
Securities
Available for sale (amortized cost of $200,503 in 2002 and $147,181 in 2001)		202,562			147,847
Held to maturity (fair value of $98,168 in 2002 and $121,364 in 2001)		97,315			120,968
Total securities		299,877			268,815
Loans, less allowance for loan losses of $12,408 in 2002 and $12,262 in 2001		1,107,627			1,093,376
Premises and equipment, net		44,792			43,877
Other real estate		1,989			1,410
Accrued interest and other assets		17,005			19,005
Total assets		$	1,555,481		$	1,473,559
Liabilities and shareholders’ equity
Deposits
Noninterest-bearing demand		$	152,051		$	148,044
Interest-bearing		1,240,878			1,161,676
Total deposits		1,392,929			1,309,720
Accrued interest and other liabilities		13,573			18,824
Total liabilities		1,406,502			1,328,544
Common stock in ESOP subject to contingent repurchase obligation		41,517			40,645
Shareholders’ equity
Common stock, no par value; 15,000,000 shares authorized; 432,495 shares issued and outstanding		3,457			3,457
Surplus		38,066			38,066
Retained earnings		106,214			103,091
Accumulated other comprehensive income		1,242			401
Amount reclassified on ESOP shares		(41,517		)	(40,645		)
Total shareholders’ equity		107,462			104,370
Total liabilities and shareholders’ equity		$	1,555,481		$	1,473,559

 

See accompanying notes to condensed consolidated financial statements.

 

 

WEST SUBURBAN BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001

(Dollars in thousands, except per share data)

(UNAUDITED)

 

		2002			2001
Interest income
Loans, including fees		$	35,307		$	43,704
Securities
Taxable		6,913			7,179
Exempt from federal income tax		621			670
Federal funds sold		190			512
Commercial paper		—			100
Total interest income		43,031			52,165
Interest expense
Deposits		13,944			22,622
Other		70			90
Total interest expense		14,014			22,712
Net interest income		29,017			29,453
Provision for loan losses		2,150			750
Net interest income after provision for loan losses		26,867			28,703
Noninterest income
Service fees on deposit accounts		2,225			1,828
Debit card fees		740			615
Net realized gains on securities transactions		386			5
Write-down of carrying value of securities available for sale		—			(1,012		)
Net gain on sales of loans held for sale		285			142
Other		2,148			2,631
Total noninterest income		5,784			4,209
Noninterest expense
Salaries and employee benefits		9,945			9,556
Occupancy		1,767			1,768
Furniture and equipment		2,273			2,285
Advertising and promotion		839			433
Other		3,381			3,126
Total noninterest expense		18,205			17,168
Income before income taxes		14,446			15,744
Income tax expense		4,620			4,894
Net income		$	9,826		$	10,850
Earnings per share (432,495 shares outstanding)		$	22.72		$	25.09

 

See accompanying notes to condensed consolidated financial statements.

 

 

WEST SUBURBAN BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED JUNE 30, 2002 AND 2001

(Dollars in thousands, except per share data)

(UNAUDITED)

 

		2002			2001
Interest income
Loans, including fees		$	17,572		$	21,323
Securities
Taxable		3,815			3,477
Exempt from federal income tax		294			340
Federal funds sold		79			218
Commercial paper		—			68
Total interest income		21,760			25,426
Interest expense
Deposits		7,070			10,827
Other		38			50
Total interest expense		7,108			10,877
Net interest income		14,652			14,549
Provision for loan losses		1,025			375
Net interest income after provision for loan losses		13,627			14,174
Noninterest income
Service fees on deposit accounts		1,211			955
Debit card fees		402			338
Net realized gains on securities transactions		17			5
Write-down of carrying value of securities available for sale		—			(629		)
Net gain on sales of loans held for sale		109			99
Other		1,084			1,299
Total noninterest income		2,823			2,067
Noninterest expense
Salaries and employee benefits		4,996			4,824
Occupancy		882			854
Furniture and equipment		1,094			1,166
Advertising and promotion		556			225
Other		1,782			1,677
Total noninterest expense		9,310			8,746
Income before income taxes		7,140			7,495
Income tax expense		2,413			2,360
Net income		$	4,727		$	5,135
Earnings per share (432,495 shares outstanding)		$	10.93		$	11.88

 

See accompanying notes to condensed consolidated financial statements.

 

 

WEST SUBURBAN BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001

(Dollars in thousands, except per share data)

(UNAUDITED)

 

		Common Stock and Surplus			Retained Earnings			Accumulated Other Compre - hensive Income (Loss)			Amount Reclassified on ESOP Shares			Total Share - holders’ Equity			Common Stock in ESOP Subject to Contingent Repurchase Obligation
Balance, January 1, 2001		$	41,523		$	100,208		$	(1,963	)	$	(37,644	)	$	102,124		$	37,644
Comprehensive income
Net income		—			10,850			—			—			10,850			—
Change in unrealized gain (loss) on available for sale securities, net of reclassification and tax effects		—			—			1,839			—			1,839			—
Total comprehensive income		—			—			—			—			12,689			—
Cash dividends declared - $15.00 per share		—			(6,487		)	—			—			(6,487		)	—
Reclassification due to change in fair value of stock subject to contingent repurchase obligation		—			—			—			(1,658		)	(1,658		)	1,658
Balance, June 30, 2001		$	41,523		$	104,571		$	(124	)	$	(39,302	)	$	106,668		$	39,302

 

		Common Stock and Surplus			Retained Earnings			Accumulated Other Compre - hensive Income (Loss)			Amount Reclassified on ESOP Shares			Total Share - holders’ Equity			Common Stock in ESOP Subject to Contingent Repurchase Obligation
Balance, January 1, 2002		$	41,523		$	103,091		$	401		$	(40,645	)	$	104,370		$	40,645
Comprehensive income
Net income		—			9,826			—			—			9,826			—
Change in unrealized gain (loss) on available for sale securities, net of reclassification and tax effects		—			—			841			—			841			—
Total comprehensive income		—			—			—			—			10,667			—
Cash dividends declared - $15.50 per share		—			(6,703		)	—			—			(6,703		)	—
Reclassification due to change in fair value of stock subject to contingent repurchase obligation		—			—			—			(872		)	(872		)	872
Balance, June 30, 2002		$	41,523		$	106,214		$	1,242		$	(41,517	)	$	107,462		$	41,517

 

See accompanying notes to condensed consolidated financial statements.

 

 

WEST SUBURBAN BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001

(Dollars in thousands)

(UNAUDITED)

 

		2002			2001
Cash flows from operating activities
Net income		$	9,826		$	10,850
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation		1,918			1,910
Provision for loan losses		2,150			750
Deferred income tax expense (benefit)		130			(271		)
Net premium amortization of securities		230			47
Net realized gains on securities transactions		(386		)	(5		)
Write-down of carrying value of securities available for sale		—			1,012
Federal Home Loan Bank stock dividends		(120		)	(156		)
Net gain on sales of loans held for sale		(285		)	(142		)
Sales of loans held for sale		22,959			17,214
Origination of loans held for sale		(18,076		)	(19,127		)
Net gain on sales of premises and equipment		(8		)	(3		)
Net gain on sales of other real estate		—			(11		)
Decrease (increase) in accrued interest and other assets		1,359			(946		)
Decrease in accrued interest and other liabilities		(1,142		)	(1,808		)
Net cash provided by operating activities		18,555			9,314
Cash flows from investing activities
Securities available for sale
Sales		100,492			2,910
Maturities and calls		49,975			41,654
Purchases		(203,473		)	(78,075		)
Securities held to maturity
Maturities and calls		33,088			123,399
Purchases		(9,475		)	(50,209		)
Net increase in loans		(21,578		)	(48,833		)
Purchases of premises and equipment		(2,868		)	(4,554		)
Sales of premises and equipment		43			3
Proceeds from sale of other real estate		—			715
Investment in company-owned life insurance policies		(41		)	(740		)
Net cash used in investing activities		(53,837		)	(13,730		)
Cash flows from financing activities
Net increase in deposits		83,209			27,267
Dividends paid		(10,812		)	(10,812		)
Net cash provided by financing activities		72,397			16,455
Net increase in cash and cash equivalents		37,115			12,039
Beginning cash and cash equivalents		47,076			61,267
Ending cash and cash equivalents		$	84,191		$	73,306
Supplemental disclosures
Cash paid for
Interest		$	15,756		$	24,665
Income taxes		3,358			4,749
Other real estate acquired through loan foreclosures		579			327

 

See accompanying notes to condensed consolidated financial statements.

 

 

WEST SUBURBAN BANCORP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 1 - BASIS OF PRESENTATION

 

The condensed consolidated financial statements include the accounts of West Suburban Bancorp, Inc. (“West Suburban”) and West Suburban Bank (the “Bank” and collectively with West Suburban, the “Company”). Significant intercompany accounts and transactions have been eliminated. The unaudited interim consolidated financial statements are prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain information and footnote disclosures normally accompanying the annual financial statements have been omitted. The interim financial statements and notes should be read in conjunction with the consolidated financial statements and notes thereto included in the latest Annual Report on Form 10-K filed by the Company. The condensed consolidated financial statements include all adjustments (none of which were other than normal recurring adjustments) necessary for a fair statement of the results for the interim periods. The results for the interim periods are not necessarily indicative of the results to be expected for the entire fiscal year. Certain amounts reported in prior periods have been reclassified to conform to the 2002 presentation.

 

NOTE 2 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK - (dollars in thousands)

 

Unused lines of credit and other commitments to extend credit not reflected in the financial statements are as follows:

 

		June 30, 2002									December 31, 2001
		Fixed Rate			Variable Rate			Total			Fixed Rate			Variable Rate			Total
Home equity lines		$	—		$	177,917		$	177,917		$	—		$	161,824		$	161,824
Commercial loans		10,912			187,234			198,146			12,399			185,304			197,703
Mortgage loans		6,805			3,256			10,061			12,806			4,470			17,276
Letters of credit		—			23,758			23,758			—			20,736			20,736
Check credit loans		118			—			118			116			—			116
Credit card lines		—			95,169			95,169			—			58,974			58,974
Total		$	17,835		$	487,334		$	505,169		$	25,321		$	431,308		$	456,629

 

Fixed rate commercial loan commitments at June 30, 2002 generally had interest rates ranging from 4.75% to 10.15% with terms ranging from 1 to 15 years. Fixed rate mortgage loan commitments at June 30, 2002 generally had interest rates ranging from 6.25% to 7.875% with terms ranging from 10 to 30 years. Fixed rate check credit loans had an interest rate of 18.00% as of June 30, 2002.

 

NOTE 3 - NEW ACCOUNTING PRONOUNCEMENTS

 

In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“Statement”) 141, “Business Combinations,” which requires that all business combinations initiated after June 30, 2001 be accounted for under a single accounting method, the purchase method. Use of the pooling-of-interests method is no longer permitted. Statement 141 will have no effect on the Company’s financial statements unless the Company enters into a business combination transaction.

 

In July 2001, the FASB also issued Statement 142, “Goodwill and Other Intangible Assets,” which generally requires that goodwill no longer be amortized to earnings, but instead be reviewed for impairment and written down if impaired. However, the goodwill arising from certain transactions (including goodwill arising from the acquisition of financially troubled institutions accounted for under the guidance in Statement 72, “Accounting for Certain Acquisitions of Banking or Thrift Institutions,”) is excluded from the scope of Statement 142. Accordingly, the Company’s goodwill will continue to be amortized to earnings.

 

 

NOTE 4 - COMMON STOCK IN ESOP SUBJECT TO CONTINGENT REPURCHASE OBLIGATION

 

At June 30, 2002 and December 31, 2001, the ESOP held 76,318 and 75,972 shares of Company common stock, respectively, and substantially all shares held by the ESOP were allocated to the accounts maintained for participants. Participants who elect to receive their benefit payments in the form of Company common stock may require the Company to purchase the common stock distributed at fair value during two 60-day periods. The first purchase period begins on the distribution date and the second purchase period begins on the first anniversary of the distribution date. This contingent repurchase obligation is reflected in the Company’s financial statements as “Common stock in ESOP subject to contingent repurchase obligation” and reduces shareholders’ equity by an amount that represents the independently appraised fair value of all the Company common stock held by the ESOP, without regard to whether it is likely that the shares would be distributed or that the recipients of the shares would be likely to exercise their right to require the Company to purchase the shares. At June 30, 2002 and December 31, 2001, this contingent repurchase obligation reduced shareholders’ equity by $41,517 and $40,645, respectively. The Company believes that the ESOP will continue to have a sufficient amount of cash to distribute benefit payments to former employees and that the exercise of the right of former employees to cause the Company to purchase Company common stock is unlikely.

 

ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

BALANCE SHEET ANALYSIS

 

Asset Distribution. Total consolidated assets at June 30, 2002 increased 5.6% from December 31, 2001. An increase in securities available for sale was the largest component of the increase in total assets and was partially offset by a decrease in securities held to maturity. Total year-to-date average assets at June 30, 2002 increased 5.0% from December 31, 2001. Asset growth was funded primarily by higher levels of deposits.

 

Cash and cash equivalents at June 30, 2002 increased 78.8% from December 31, 2001. The increase in cash and due from banks was primarily the result of the end of the quarter occurring on a weekend. Increases in federal funds sold were partially due to available proceeds from maturing and called securities as well as increases in deposits.

 

The Company’s available for sale securities portfolio increased 37.0% during the first six months of 2002. The Company made a significant investment in U.S. government agency securities, which was partially offset by sales of corporate securities. Holdings of corporate debt securities decreased $88.3 million during the first six months of 2002 because of the Company’s concerns regarding the risk-adjusted credit quality of this category of investments. The Company recorded approximately $.4 million in net gains on securities transactions in 2002. These gains included approximately $.5 million of recoveries on securities written off in 1998 and losses of $.5 million on the sales of all holdings of debt securities issued by Comdisco, Inc. and Enron Corp., which were partially offset by gains on the sales of corporate and U.S. government agency securities. The Company’s held to maturity portfolio decreased 19.6% during the first six months of 2002, primarily due to calls of U.S. government agency securities. During the same period, the Company’s accumulated other comprehensive income increased $.8 million due to appreciation in the value of securities available for sale, net of deferred tax.

 

The Company’s objectives in managing the securities portfolio include maximizing yield over an entire interest rate cycle while providing liquidity. Aggregate holdings in securities at June 30, 2002 increased 11.6% from December 31, 2001, due to the significant increase in securities available for sale. Increased holdings in securities available for sale have allowed the Company to maintain an adequate level of liquidity while realizing higher yields compared to alternative investments.

 

 

The carrying value of the Company’s major categories of securities are summarized in the following table (dollars in thousands):

 

		June 30, 2002			December 31, 2001			Dollar Change			Percent Change
Securities available for sale
Corporate		$	37,400		$	125,728		$	(88,328	)	(70.3	)%
U.S. government agencies and corporations		153,978			9,509			144,469			1,519.3
States and political subdivisions		1,778			411			1,367			332.6
Total debt securities		193,156			135,648			57,508			42.4
Preferred stock and other equity securities		9,406			12,199			(2,793		)	(22.9	)
Total securities available for sale		$	202,562		$	147,847		$	54,715		37.0
Securities held to maturity
U.S. government agencies and corporations		$	71,907		$	93,524		$	(21,617	)	(23.1	)
States and political subdivisions		25,408			27,444			(2,036		)	(7.4	)
Total securities held to maturity		$	97,315		$	120,968		$	(23,653	)	(19.6	)%

 

Total loans outstanding at June 30, 2002 increased 1.3% from December 31, 2001 primarily due to an increase in the home equity loan portfolio of $17.7 million. Management believes this was primarily due to the increased promotional efforts for this product which included very competitive rates. Total average loans outstanding increased 3.5% in the first six months of 2002 compared to the first six months of 2001 primarily due to a more favorable rate environment and continued economic and demographic growth in the Company’s market area.

 

Balances in the Company’s major categories of loans are summarized in the following table (dollars in thousands):

 

		June 30, 2002			December 31, 2001			Dollar Change			Percent Change
Commercial		$	314,499		$	323,036		$	(8,537	)	(2.6	)%
Consumer		11,702			10,514			1,188			11.3
Indirect automobile		102,245			102,183			62			0.1
Real estate
Residential		146,593			152,495			(5,902		)	(3.9	)
Commercial		199,308			195,800			3,508			1.8
Home Equity		163,637			145,972			17,665			12.1
Construction		168,166			157,328			10,838			6.9
Held for sale		1,242			5,840			(4,598		)	(78.7	)
Credit card		11,693			10,437			1,256			12.0
Other		950			2,033			(1,083		)	(53.3	)
Total		1,120,035			1,105,638			14,397			1.3
Allowance for loan losses		(12,408		)	(12,262		)	(146		)	1.2
Loans, net		$	1,107,627		$	1,093,376		$	14,251		1.3	%

 

Allowance for Loan Losses and Asset Quality.  The Company’s provision for loan losses is based on management’s quarterly evaluations of the adequacy of the allowance for loan losses. In these evaluations, management considers numerous factors including, but not limited to, historical loan loss experience, the nature and volume of the loan portfolio, information about specific borrower situations and estimated collateral values 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 occur.

 

 

The provision for loan losses increased 186.7% for the six months ended June 30, 2002 compared to June 30, 2001. The Company’s provision for loan losses reflected management’s evaluation of the loan portfolio within the context of the factors previously discussed. The increase was primarily the result of increasing levels of nonperforming loans and net loan charge-offs. Net loan charge-offs were $2.0 million and $.1 million for the six months ended June 30, 2002 and 2001, respectively. The increase in net loan charge-offs was primarily due to charge-offs relating to two borrowing relationships during the first six months of 2002 totaling $1.5 million.

 

The ratio of the allowance for loan losses to total loans outstanding was 1.11% at June 30, 2002 and December 31, 2001. Nonperforming loans at June 30, 2002 increased 26.2% from December 31, 2001. Most of the nonperforming loan amounts relate to three commercial loan relationships at June 30, 2002 and two relationships at December 31, 2001. The accrual status of loans past due over 90 days still on accrual is based on management’s evaluation of the respective collateral values and collection efforts. Most of the nonperforming loans still on accrual status are secured by real estate.

 

The following table presents an analysis of the Company’s nonperforming loans and other real estate as of the dates indicated (dollars in thousands):

 

 

The following table presents an analysis of the Company’s provision for loan losses for the periods stated (dollars in thousands):

 

 

Liability Distribution.  Total liabilities at June 30, 2002 increased 5.9% from December 31, 2001. The increase in total liabilities was primarily the result of an increase in interest-bearing deposits. Management believes the growth of NOW and savings deposits reflects the tendency of its customers to maintain a higher level of short-term liquid investments during periods of low interest rates. Management believes the growth in time deposits is directly correlated to promotional efforts and the uncertainty of financial markets. Beginning in February 2002, promotions have generated approximately $53.6 million of time deposit growth as of June 30, 2002.

 

 

Balances in the Company’s major categories of deposits are summarized in the following table (dollars in thousands):

 

 

During 2002, average balances in interest-bearing deposits and noninterest-bearing demand deposits increased $58.0 million and $13.1 million, respectively, compared to the first six months of 2001.

 

CAPITAL RESOURCES

 

Shareholders’ equity at June 30, 2002 increased 3.0% from December 31, 2001 as a result of $9.8 million of net income for the year, reduced by dividends declared of $6.7 million and an increase in the fair value of securities available for sale of $.8 million, net of deferred taxes. Additionally, shareholders’ equity was reduced by a $.9 million increase in the appraised fair value of common stock in ESOP subject to contingent repurchase obligation.

 

The Company’s capital ratios as well as those of the Bank as of June 30, 2002 are presented below. All capital ratios are in excess of the regulatory capital requirements which call for a minimum total risk-based capital ratio of 8% for the Company and the Bank, a minimum Tier 1 risk-based capital ratio of 4% for the Company and the Bank and a minimum leverage ratio (3% for the most highly rated banks and bank holding companies that do not expect significant growth; all other institutions are required to maintain a minimum leverage capital ratio of 4% to 5% depending on their particular circumstances and risk and growth profiles) for the Company and the Bank. Bank holding companies and their subsidiaries are generally expected to operate at or above the minimum capital requirements. The ratios shown below are in excess of regulatory minimums and should allow the Company and the Bank to operate without significant capital adequacy concerns.

 

The following table sets forth the regulatory capital ratios of the Company and the Bank at June 30, 2002:

 

		Total Risk-Based Capital		Tier 1 Risk-Based Capital		Leverage Capital
West Suburban Bancorp, Inc.		12.0	%	11.1	%	9.7	%
West Suburban Bank		10.9	%	10.0	%	8.7	%

 

Management has been advised that as of June 30, 2002 and December 31, 2001, the Bank was categorized as a “well-capitalized” institution.  The Company’s capital ratios were also well in excess of the required levels as of June 30, 2002 and December 31, 2001.  In accordance with applicable federal regulations, the appraised fair value of the Company’s common stock owned by the ESOP is included in Tier 1 capital.

 

LIQUIDITY

 

Effective liquidity management ensures there is sufficient cash flow to satisfy demand for credit, deposit withdrawals and to take advantage of earnings enhancement opportunities. A large, stable core deposit base and a strong capital position are the solid foundation for the Company’s liquidity position. Liquidity is enhanced by a securities portfolio structured to provide liquidity as needed. Additionally, the Company maintains lines of credit to purchase federal

 

 

funds in the amount of $85 million from other financial institutions as well as an additional line of credit of approximately $91 million at the Federal Home Loan Bank of Chicago. The Company manages its liquidity position through continuous monitoring of profitability trends, asset quality, interest rate sensitivity and maturity schedules of earning assets and liabilities.

 

Generally, the Company uses cash and cash equivalents and securities available for sale to meet its liquidity needs. As of June 30, 2002 and December 31, 2001, these liquid assets represented 18.4% and 13.2% of total assets, respectively. During 2002, the Company’s cash and cash equivalents increased $37.1 million. The Company has reinvested the majority of these funds in the securities portfolio. Net cash provided by operating activities was $18.5 million, while net cash used in investing activities was $53.8 million. The net cash used in investing activities was primarily used to purchase securities available for sale and fund loan growth. Net cash flows provided by financing activities was $72.4 million. Management expects operations to be a continuing source of cash flows in the future.

 

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001

 

Net Income.  The Company’s net income for the first six months of 2002 decreased 9.4% compared to the first six months of 2001 primarily due to a $1.4 million increase in the provision for loan losses. Net interest income decreased $.4 million and total noninterest expense increased $1.0 million. These decreases to income and increases to expense were partially offset by an increase to total noninterest income of $1.6 million and a decrease to income tax expense of $.3 million.

 

Net interest income is the primary source of income for the Company. Net interest income is the difference between interest income earned on interest-earning assets and interest expense on interest-bearing liabilities. Net interest income is affected by changes in the volume and yield on interest-earning assets and the volume and rates on interest-bearing liabilities. Interest-earning assets consist of federal funds sold, commercial paper, securities and loans. Interest-bearing liabilities primarily consist of deposits. The net interest margin is the percentage of tax equivalent net interest income to average earning assets. The Company’s net interest margin for the first six months of 2002 decreased to 4.22% compared to 4.48% for the first six months of 2001.

 

Interest Income.  Total interest income, on a tax equivalent basis, for the first six months of 2002 decreased 17.3% compared to the first six months of 2001 primarily due to declining yields on the loan portfolio.  Average loans in 2002 increased 3.5% while the yield on the portfolio decreased 184 basis points. This was primarily due to the declining yields on the commercial loan portfolio which declined 296 basis points during this period. The majority of commercial loans have adjustable rates that are tied to one of a number of rate indices. Generally, these interest rate indices have declined due to the significant reduction in interest rates during 2001. Yields on home equity lines of credit, which vary with the prime rate, decreased 260 basis points in the six months ended June 30, 2002 compared to June 30, 2001. The average prime rate during the first six months of 2002 was 4.75% compared to 7.96% during the first six months of 2001. The yield on average interest-earning assets during the first six months of 2002 decreased 167 basis points to 6.23% compared to 7.90% during the first six months of 2001.

 

Interest Expense.  Total interest expense for the first six months of 2002 decreased 38.3% compared to the first six months of 2001. Interest on deposits, which accounted for substantially all of this decrease, decreased primarily due to lower market interest rates resulting from the Federal Reserve’s actions during 2001 to lower short-term interest rates. The Company lowered interest rates on all categories of deposits in response to the significant decline in market rates. The yield on average interest-bearing deposits for the first six months of 2002 decreased 166 basis points to 2.35% compared to 4.01% for the first six months of 2001.

 

 

The following table reflects the impact of changes in volume and interest rates on interest-earning assets and interest-bearing liabilities on a tax equivalent basis for the six-month period ended June 30, 2002, as compared to the same period in 2001 (dollars in thousands):

 

 

The following table presents an analysis of the Company’s year-to-date average interest-earning assets, interest-bearing liabilities and noninterest-bearing demand deposits, for the quarters ended as of the dates indicated (dollars in thousands):

 

		2002						2001
		June 30			March 31			December 31			September 30			June 30
Federal funds sold		$	22,594		$	37,938		$	20,570		$	19,967		$	20,680
Commercial paper		—			—			1,521			2,034			3,068
Securities		291,227			260,335			261,330			264,150			263,371
Loans		1,089,711			1,087,625			1,065,944			1,059,130			1,052,703
Total interest-earning assets		$	1,403,532		$	1,385,898		$	1,349,365		$	1,345,281		$	1,339,822
Noninterest-bearing demand		$	141,956		$	139,807		$	134,219		$	131,540		$	128,873
Interest-bearing		1,196,462			1,176,777			1,141,645			1,140,950			1,138,481
Total deposits		$	1,338,418		$	1,316,584		$	1,275,864		$	1,272,490		$	1,267,354
Total interest-bearing liabilities		$	1,201,579		$	1,181,275		$	1,145,202		$	1,144,675		$	1,142,118

 

Provision for Loan Losses.  The Company’s provision for loan losses increased 186.7% in the first six months of 2002 compared to the first six months of 2001. A more detailed discussion concerning the allowance for loan losses is presented in the “Allowance for Loan Losses and Asset Quality” section of this report.

 

Noninterest Income. Total noninterest income increased 37.4% in the first six months of 2002 compared to the first six months of 2001. During the first six months of 2001, the Company wrote down its investment in debt securities issued by FINOVA Group, Inc. and Comdisco, Inc. by $1.0 million, in aggregate, after making a determination that the value of the debt securities had become impaired. During the first six months of 2002, the Company experienced an increase in service fees on deposit accounts of $.4 million as a result of customers earning lower credits on their balances due to the lower interest rate environment in 2002. Debit card fees increased $.1 million as a result of increased usage of debit cards. The Company also experienced an increase in net gain on sale of loans held for sale of $.1 million due to higher activity resulting from a strong mortgage refinance market. Net realized gains on securities transactions increased $.4 million primarily due to recoveries of a security written-down in a prior year. These increases were offset by a decrease in other noninterest income of $.5 million primarily due to reduced

 

 

recoveries in prior years’ expenses incurred in connection with a problem loan, and reduced mortgage application fees during this period.

 

Noninterest Expense.  Total noninterest expense increased 6.0% in the first six months of 2002 compared to the first six months of 2001. Advertising and promotion increased $.4 million during this period primarily due to advertising promoting the Company’s brand and image. Salaries and employee benefits increased $.4 million during this period primarily as a result of increases in salary and employee benefits due to normal salary increases and the opening of the South Elgin, Chicago Avenue (Naperville), and Oswego facilities. The South Elgin facility opened in December 2001. The Chicago Avenue and Oswego facilities opened in March and June of 2002, respectively. Other noninterest expense increased $.3 million primarily due to increased other loss expense and reduced recoveries of problem loan expenses compared to the 2001 period.

 

Income Taxes.  Income tax expense decreased 5.6% in the first six months of 2002 compared to the first six months of 2001 primarily due to lower pre-tax income. The effective tax rates for these periods were 32.0% and 31.1%, respectively.

 

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2002 AND 2001

 

Net Income.  The Company’s net income for the second quarter of 2002 decreased 7.9% compared to the second quarter of 2001 primarily due to a $.7 million increase in the provision for loan losses. Noninterest expense increased $.6 million. These increases to expense were partially offset by an increase to noninterest income of $.8 million and greater net interest income of $.1 million.

 

The Company’s net interest margin on a full tax-equivalent basis for the second quarter of 2002 decreased to 4.14% compared to 4.36% for the second quarter of 2001.

 

Interest Income.  Total interest income, on a tax equivalent basis, for the second quarter of 2002 decreased 14.4% compared to the second quarter of 2001 primarily due to declining yields on the loan portfolio. Average loans for the period increased 3.1% and the average yields on the loan portfolio decreased 160 basis points. This was primarily due to the decline in yields on the commercial and home equity portfolios of 234 and 245 basis points, respectively. Average balances in securities increased 24.0% during this period primarily due to the significant investment the Company made in U.S. government agency securities. The yield on average interest-earning assets in the second quarter of 2002 decreased 146 basis points to 6.12% compared to 7.58% in the second quarter of 2001.

 

Interest Expense.  Total interest expense for the second quarter of 2002 decreased 34.7% compared to the second quarter of 2001. Interest on deposits, which accounted for substantially all of this decrease, decreased primarily due to lower interest rates as discussed earlier. The yield on interest-bearing deposits for the second quarter of 2002 decreased 145 basis points to 2.33% compared to 3.78% for the second quarter of 2001.

 

 

The following table reflects the impact of changes in volume and interest rates on interest-earning assets and interest-bearing liabilities on a tax equivalent basis for the three-month period ended June 30, 2002, as compared to the same period in 2001 (dollars in thousands):

 

 

The following table presents an analysis of the Company’s quarterly average interest-earning assets, interest-bearing liabilities and noninterest-bearing demand deposits, for the dates indicated (dollars in thousands):

 

 

Provision for Loan Losses.  The Company’s provision for loan losses increased 173.3% in the second quarter of 2002 compared to the second quarter of 2001. A more detailed discussion concerning the allowance for loan losses is presented in the “Allowance for Loan Losses and Asset Quality” section of this report.

 

Noninterest Income.  Total noninterest income increased 36.6% in the second quarter of 2002 compared to the second quarter of 2001. During the second quarter of 2001, the Company wrote down its investment in debt securities issued by Comdisco, Inc. after it made a determination that the value of the debt securities had become impaired. This impairment loss totaled $.6 million in the second quarter of 2001. During the second quarter of 2002 the Company experienced an increase in service fees on deposit accounts of $.3 million as a result of customers earning lower credits on their balances due to the lower interest rate environment in 2002. Debit card fees increased $.1 million due to increased usage of debit cards. Other noninterest income decreased $.2 million primarily due to reduced recoveries in expenses incurred in prior periods in connection with a problem loan.

 

Noninterest Expense.  Total noninterest expense increased 6.4% in the second quarter of 2002 compared to the second quarter of 2001. Advertising and promotion increased $.3 million during this period primarily for the new initiatives that are intended to promote the Company’s brand and image. Salaries and employee benefits increased $.2 million during this period primarily as a result of the Chicago Avenue and South Elgin facilities being operational for a full quarter and the opening of the Oswego facility in June of 2002. Other noninterest expense

 

 

increased $.1 million primarily due to expenses related to the development of a new stored value product now being offered by the Company.

 

Income Taxes.  Income tax expense was level for the second quarter of 2002 compared to the second quarter of 2001. The effective tax rates for the second quarter of 2002 and 2001 were 33.8% and 31.5%, respectively.

 

ITEM 3.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The Company attempts to maintain a conservative posture with regard to interest rate risk by actively managing its asset/liability GAP position and monitoring the direction and magnitude of gaps and risk. The Company attempts to moderate the effects of changes in interest rates by adjusting its asset and liability mix to achieve desired relationships between rate sensitive assets and rate sensitive liabilities. Rate sensitive assets and liabilities are those instruments that reprice within a given time period. An asset or liability reprices when its interest rate is subject to change or upon maturity.

 

Movements in general market interest rates are a key element in changes in the net interest margin. The Company’s policy is to manage its balance sheet so that fluctuations in the net interest margin are minimized regardless of the level of interest rates, although the net interest margin does vary somewhat due to management’s response to increasing competition from other financial institutions.

 

The Company measures rate sensitivity through a net interest income analysis. The net interest income analysis measures the change in net interest income in the event of hypothetical changes in interest rates. This analysis assesses the risk of changes in net interest income in the event of a sudden and sustained 100 to 200 basis point increase or decrease in market interest rates. This analysis is subject to certain assumptions made by the Company including the following:

 

•		Balance sheet volume reflects the current balances and does not project future growth or changes. This establishes the base case from which all percentage changes are calculated.
•		The replacement rate for loan and deposit items that mature is the current rate offered by the Company. The replacement rate for securities is the current market rate.
•		The repricing rate for balance sheet data is determined by utilizing individual account statistics provided by the Company’s data processing systems.
•		The maturity and repricing dates for balance sheet data are determined by utilizing individual account statistics provided by the Company’s data processing systems.

 

 

Listed below are the Company’s projected changes in net interest income over a twelve-month horizon for the various rate shock levels as of the periods indicated (dollars in thousands):

 

 

 

 

PART II

 

ITEM 1.      LEGAL PROCEEDINGS

 

There are no material pending legal proceedings to which West Suburban or the Bank are a party other than ordinary course, routine litigation incidental to their respective businesses.

 

ITEM 2.      CHANGES IN SECURITIES AND USE OF PROCEEDS

 

None

 

ITEM 3.      DEFAULTS UPON SENIOR SECURITIES

 

None

 

ITEM 4.      SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

A.                 The Annual Meeting of Shareholders was held on May 8, 2002.

 

B.                   The following individuals were elected to serve as directors of West Suburban for a term of one year at the Annual Meeting.  The votes for such individuals and those withholding authority are set forth below:

 

 

C.                   Ratification of Crowe, Chizek and Company LLP as the Company’s independent auditors.

 

 

ITEM 5.      OTHER INFORMATION

 

None

 

ITEM 6.      EXHIBITS AND REPORTS ON FORM 8-K

 

                a.             The exhibits required by Item 601 of Regulation S-K are included with this Form 10-Q and are listed on the "Index to Exhibits" immediately following the Signature page.

 

                b.             No reports on Form 8-K were filed by West Suburban during the three month period ended June 30, 2002

 

 

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.

 

	WEST SUBURBAN BANCORP, INC.
	(Registrant)
Date: August 13, 2002
	/s/  Kevin J. Acker
	KEVIN J. ACKER
	CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
	/s/  Duane G. Debs
	DUANE G. DEBS
	PRESIDENT AND CHIEF FINANCIAL OFFICER

 

 

INDEX TO EXHIBITS

 

Exhibit Number		Description
3.1		Articles of Incorporation – Incorporated by reference from Exhibits 3.1 of Form S-1 of West Suburban dated November 10, 1988, under Registration No. 33-25225
3.2		Form of Certificate of Amendment to Article of Incorporation – Incorporated by reference from Exhibit 3.2 of Form S-1 of West Suburban dated November 10, 1988, under Registration No. 33-25525
3.3		Certificate of Amendment to Articles of Incorporation dated May 10, 1990 – Incorporated by reference from Exhibit 3.3 of the Form 10-K of West Suburban dated March 28, 1991, Commission file No. 0-17609
3.4		Certificate of Amendment to Articles of Incorporation dated June 8, 1998 – Incorporated by reference from Exhibit 3.4 of the Form 10-K of West Suburban dated March 29, 1999, Commission file No. 0-17609
3.5		By-laws – Incorporated by reference from Exhibit 3.3 of Form S-1 of West Suburban dated November 10, 1988, Registration No. 33-25225
4.1		Specimen of Common Stock certificate – Incorporated by reference from Exhibit 4.1 of the Form 10-K of West Suburban dated March 29, 1999, Commission file No. 0-17609
4.2		Articles of Incorporation of West Suburban (see Exhibits 3.1, 3.2, 3.3, 3.4 and 3.5 above)
4.3		By-laws of West Suburban (see Exhibit 3.5 above)
10.1		Employment Agreement dated May 1, 1997 between West Suburban and Mr. Kevin J. Acker – Incorporated by reference from Exhibit 10.2 of Form 10-Q of West Suburban dated August 14, 1997, Commission File No. 0-17609
10.2		Employment Agreement dated May 1, 1997 between West Suburban and Mr. Keith W. Acker – Incorporated by reference from Exhibit 10.2 of Form 10-Q of West Suburban dated August 14, 1997, Commission File No. 0-17609
10.3		Employment Agreement dated May 1, 1997 between West Suburban and Mr. Duane G. Debs – Incorporated by reference from Exhibit 10.2 of Form 10-Q of West Suburban dated August 14, 1997, Commission File No. 0-17609
10.4		Employment Agreement dated May 1, 1997 between West Suburban and Mr. Michael P. Brosnahan – Incorporated by reference from Exhibit 10.2 of Form 10-Q of West Suburban dated August 14, 1997, Commission File No. 0-17609

 

 

 

Exhibit Number		Description
10.5		Form of Amended Deferred Compensation Agreement between West Suburban and Messrs. Kevin J. Acker, Keith W. Acker, Duane G. Debs and Michael P. Brosnahan – Incorporated by reference from Exhibit 10.5 of Form 10-Q of West Suburban dated August 14, 1997, Commission File No. 0-17609
10.6		Employment Agreement dated December 24, 1998 between West Suburban and Mr. James Chippas – Incorporated by reference from Exhibit 10.6 of Form 10-K of West Suburban dated March 29, 1999, Commission File No. 0-17609
10.7		Form of Amendment to Employment Agreement dated January 21, 1999 between West Suburban and Messrs. Kevin J. Acker, Keith W. Acker, Duane G. Debs and Michael P. Brosnahan – Incorporated by reference from Exhibit 10.7 of Form 10-K of West Suburban dated March 29, 1999, Commission File No. 0-17609
10.8		Employment Agreement dated January 1, 2001 between West Suburban and Mr. Daniel P. Grotto – Incorporated by reference from Exhibit 10.8 of Form 10-K of West Suburban dated March 27, 2002, Commission File No. 0-17609
99.1		Certification of Kevin J. Acker, Chief Executive Officer
99.2		Certification of Duane G. Debs, Chief Financial Officer