Attached files
file | filename |
---|---|
EX-31.1 - EX-31.1 - WEST SUBURBAN BANCORP INC | a10-12668_1ex31d1.htm |
EX-31.2 - EX-31.2 - WEST SUBURBAN BANCORP INC | a10-12668_1ex31d2.htm |
EX-10.1 - EX-10.1 - WEST SUBURBAN BANCORP INC | a10-12668_1ex10d1.htm |
EX-32.2 - EX-32.2 - WEST SUBURBAN BANCORP INC | a10-12668_1ex32d2.htm |
EX-32.1 - EX-32.1 - WEST SUBURBAN BANCORP INC | a10-12668_1ex32d1.htm |
EX-10.2 - EX-10.2 - WEST SUBURBAN BANCORP INC | a10-12668_1ex10d2.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended June 30, 2010
Commission File Number 0-17609
WEST SUBURBAN BANCORP, INC.
(Exact name of registrant as specified in its charter)
Illinois |
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36-3452469 |
(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
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711 South Meyers Road, Lombard, Illinois |
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60148 |
(Address of principal executive offices) |
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(Zip Code) |
Registrants telephone number, including area code: (630) 652-2000
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 o
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 o No o
Indicate 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 definitions of large accelerated filer, accelerated filer and small reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o |
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Accelerated filer x |
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Non-accelerated filer o |
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Smaller reporting company o |
(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
As of August 9, 2010, 426,850 shares of West Suburban common stock were outstanding.
WEST SUBURBAN BANCORP, INC.
Form 10-Q Quarterly Report
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Managements Discussion and Analysis of Financial Condition and Results of Operations |
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17 |
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31 |
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32 |
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33 |
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33 |
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34 |
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35 |
Special Note Concerning Forward-Looking Statements
This document (including information incorporated by reference) contains, and future oral and written statements of each of West Suburban Bancorp, Inc. (West Suburban) and West Suburban Bank (the Bank and collectively with West Suburban and its other direct and indirect subsidiaries, 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 the Company. Forward-looking statements, which may be based upon beliefs, expectations and assumptions of the Companys 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 Companys ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors that could have a material adverse effect on the operations and future prospects of the Company include, but are not limited to, those set forth in the Risk Factors section included under Item 1A of Part I of the Companys most recently filed Annual Report on Form 10-K and under Item 1A in Part II of this report and the following:
· The strength of the U.S. and global economies and financial markets in general and the strength of the local economies in which the Company conducts its operations, including the local residential and commercial real estate markets, which may be less favorable than expected and may result in, among other things, a deterioration in the credit quality and value of the Companys assets.
· The effects of, and changes in, federal, state and local laws, regulations and policies affecting banking, securities, taxation, insurance and monetary and financial matters, as well as any laws and regulations otherwise affecting the Company, including the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act and other laws and regulations intended to address the current stresses in the U.S. and global financial markets, national security and money laundering.
· The effects of continued adverse market conditions and further volatility in investment securities generally, which may result in a deterioration in the value of the securities in the Companys securities portfolio.
· The ability of the Company to comply with, and satisfy the requirements of, its formal written agreements with its regulators and the consequences that may result from any inability to comply.
· The ability of the Company to comply with applicable federal, state and local laws, regulations and policies and the consequences that may result from any inability to comply.
· The effects of changes in interest rates, including the effects of changes in the rate of prepayments of the Companys 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 ability of the Company to maintain an acceptable net interest margin.
· The ability 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, including technological changes implemented for, or related to, the Companys website or new products.
· The ability of the Company, and certain of its vendors, to develop and maintain secure and reliable electronic systems, including systems developed for the Companys website or new products.
· The ability of the Company to retain directors, executives and key employees, and the difficulty that the Company may experience in replacing directors, executives and key employees in an effective manner.
· Consumer spending and saving habits which may change in a manner that affects the Companys business adversely.
· The economic impact of past and any future terrorist attacks, acts of war or threats thereof and the response of the U.S. to any such attacks and threats.
· The costs, effects and outcomes of existing or future litigation and disputes with third parties, including, but not limited to, claims in connection with collection actions, employment matters and sales of business units.
· Changes in accounting policies and practices, as may be adopted by state and federal regulatory agencies and the Financial Accounting Standards Board, the Public Company Accounting Oversight Board and the Securities and Exchange Commission.
· Credit risks and the risks from concentrations (by geographic area or industry) within the Companys loan portfolio.
· The failure of the Companys Real Estate Investment Trust (REIT) to qualify as a REIT and the effects of such failure on the Companys consolidated effective tax rate.
· 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 Companys financial results, is included in the Companys filings with the Securities and Exchange Commission, including the risk factors disclosed in the Companys most recently filed Annual Report on Form 10-K and in Part II, Item 1A of this report.
WEST SUBURBAN BANCORP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(UNAUDITED)
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June 30, |
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December 31, |
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2010 |
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2009 |
|
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Assets |
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Cash and due from banks |
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$ |
90,103 |
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$ |
68,610 |
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Federal funds sold |
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200 |
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80,000 |
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Total cash and cash equivalents |
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90,303 |
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148,610 |
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Securities |
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|
|
|
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Available for sale (amortized cost of $346,341 in 2010 and $199,139 in 2009) |
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353,394 |
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205,610 |
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Held to maturity (fair value of $266,015 in 2010 and $273,316 in 2009) |
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255,552 |
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265,908 |
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Federal Home Loan Bank stock |
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7,599 |
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7,599 |
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Total securities |
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616,545 |
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479,117 |
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Loans, less allowance for loan losses of $28,721 in 2010 and $25,922 in 2009 |
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1,127,307 |
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1,167,675 |
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Bank-owned life insurance |
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37,940 |
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37,601 |
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Premises and equipment, net |
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42,658 |
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43,768 |
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Other real estate |
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22,000 |
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25,994 |
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Accrued interest and other assets |
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36,897 |
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35,818 |
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Total assets |
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$ |
1,973,650 |
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$ |
1,938,583 |
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Liabilities and shareholders equity |
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Deposits |
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Demand-noninterest-bearing |
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$ |
131,550 |
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$ |
125,132 |
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Prepaid solutions cards deposits |
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27,997 |
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30,577 |
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Interest-bearing |
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1,624,469 |
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1,601,278 |
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Total deposits |
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1,784,016 |
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1,756,987 |
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Prepaid solutions cards |
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8,140 |
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6,315 |
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Accrued interest and other liabilities |
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20,247 |
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17,288 |
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Common stock in ESOP subject to contingent repurchase obligation |
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36,963 |
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31,230 |
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Shareholders equity |
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Common stock, no par value; 15,000,000 shares authorized; 426,850 shares issued and outstanding |
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3,412 |
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3,412 |
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Surplus |
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35,453 |
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35,453 |
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Retained earnings |
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118,435 |
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115,544 |
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Accumulated other comprehensive income |
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3,947 |
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3,584 |
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Amount reclassified on ESOP shares |
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(36,963 |
) |
(31,230 |
) |
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Total shareholders equity |
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124,284 |
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126,763 |
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Total liabilities and shareholders equity |
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$ |
1,973,650 |
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$ |
1,938,583 |
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See accompanying notes to condensed consolidated financial statements.
WEST SUBURBAN BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(Dollars in thousands, except per share data)
(UNAUDITED)
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2010 |
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2009 |
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Interest income |
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Loans, including fees |
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$ |
29,656 |
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$ |
31,895 |
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Securities |
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Taxable |
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8,486 |
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9,618 |
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Exempt from federal income tax |
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730 |
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555 |
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Federal funds sold |
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54 |
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62 |
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Total interest income |
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38,926 |
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42,130 |
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Interest expense |
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Deposits |
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10,296 |
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12,779 |
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Other |
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43 |
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Total interest expense |
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10,296 |
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12,822 |
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Net interest income |
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28,630 |
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29,308 |
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Provision for loan losses |
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5,550 |
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8,950 |
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Net interest income after provision for loan losses |
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23,080 |
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20,358 |
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Noninterest income |
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Service fees on deposit accounts |
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2,659 |
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2,823 |
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Debit card fees |
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1,046 |
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1,012 |
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Bank-owned life insurance |
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221 |
|
672 |
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Net gain on sale of loans held for sale |
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381 |
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Net realized gains on securities transactions |
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109 |
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Total other-than-temporary impairment losses |
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(5,110 |
) |
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Portion of loss recognized in other comprehensive income - before tax |
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4,219 |
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Net impariment losses recognized in earnings |
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(891 |
) |
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Other |
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1,999 |
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1,716 |
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Total noninterest income |
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5,925 |
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5,822 |
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Noninterest expense |
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Salaries and employee benefits |
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11,251 |
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12,092 |
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Furniture and equipment |
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2,623 |
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2,898 |
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Occupancy |
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2,556 |
|
2,689 |
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FDIC assessments |
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2,268 |
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1,793 |
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Professional fees |
|
1,192 |
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1,829 |
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Other real estate owned |
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1,142 |
|
205 |
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Loan administration |
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1,362 |
|
627 |
|
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Advertising and promotion |
|
455 |
|
358 |
|
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Other |
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2,316 |
|
2,220 |
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Total noninterest expense |
|
25,165 |
|
24,711 |
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|
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Income from continuing operations before income taxes |
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3,840 |
|
1,469 |
|
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Income tax expense |
|
949 |
|
79 |
|
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Net income from continuing operations |
|
2,891 |
|
1,390 |
|
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Discontinued operations, net of tax |
|
|
|
98 |
|
||
Net income |
|
$ |
2,891 |
|
$ |
1,488 |
|
|
|
|
|
|
|
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Comprehensive income from continuing operations |
|
$ |
3,254 |
|
$ |
1,979 |
|
Comprehensive income from discontinued operations |
|
|
|
98 |
|
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Total comprehensive income |
|
$ |
3,254 |
|
$ |
2,077 |
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|
|
|
|
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|
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Earnings from continuing operations per share |
|
$ |
6.77 |
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$ |
3.23 |
|
Earnings from discontinued operations per share |
|
$ |
|
|
$ |
0.23 |
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Earnings per share |
|
$ |
6.77 |
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$ |
3.46 |
|
Average shares outstanding |
|
426,850 |
|
430,040 |
|
See accompanying notes to condensed consolidated financial statements.
WEST SUBURBAN BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 2010 AND 2009
(Dollars in thousands, except per share data)
(UNAUDITED)
|
|
2010 |
|
2009 |
|
||
Interest income |
|
|
|
|
|
||
Loans, including fees |
|
$ |
14,612 |
|
$ |
15,891 |
|
Securities |
|
|
|
|
|
||
Taxable |
|
4,611 |
|
4,586 |
|
||
Exempt from federal income tax |
|
275 |
|
279 |
|
||
Federal funds sold |
|
9 |
|
37 |
|
||
Total interest income |
|
19,507 |
|
20,793 |
|
||
|
|
|
|
|
|
||
Interest expense |
|
|
|
|
|
||
Deposits |
|
4,928 |
|
6,295 |
|
||
Total interest expense |
|
4,928 |
|
6,295 |
|
||
Net interest income |
|
14,579 |
|
14,498 |
|
||
Provision for loan losses |
|
3,175 |
|
7,650 |
|
||
Net interest income after provision for loan losses |
|
11,404 |
|
6,848 |
|
||
|
|
|
|
|
|
||
Noninterest income |
|
|
|
|
|
||
Service fees on deposit accounts |
|
1,330 |
|
1,427 |
|
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Debit card fees |
|
540 |
|
532 |
|
||
Bank-owned life insurance |
|
(193 |
) |
893 |
|
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Net gains on loans held for sale |
|
|
|
305 |
|
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Net realized gains on securities transactions |
|
|
|
109 |
|
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Total other-than-temporary impairment losses |
|
|
|
(5,110 |
) |
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Portion of loss recognized in other comprehensive income - before tax |
|
|
|
4,219 |
|
||
Net impariment losses recognized in earnings |
|
|
|
(891 |
) |
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Other |
|
1,117 |
|
868 |
|
||
Total noninterest income |
|
2,794 |
|
3,243 |
|
||
|
|
|
|
|
|
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Noninterest expense |
|
|
|
|
|
||
Salaries and employee benefits |
|
5,302 |
|
6,562 |
|
||
Furniture and equipment |
|
1,275 |
|
1,517 |
|
||
Occupancy |
|
1,226 |
|
1,195 |
|
||
FDIC assessments |
|
1,085 |
|
1,466 |
|
||
Professional fees |
|
607 |
|
985 |
|
||
Other real estate owned |
|
573 |
|
158 |
|
||
Loan administration |
|
796 |
|
508 |
|
||
Advertising and promotion |
|
287 |
|
147 |
|
||
Other |
|
1,236 |
|
1,040 |
|
||
Total noninterest expense |
|
12,387 |
|
13,578 |
|
||
|
|
|
|
|
|
||
Income (loss) from continuing operations before income taxes |
|
1,811 |
|
(3,487 |
) |
||
Income tax expense (benefit) |
|
563 |
|
(1,190 |
) |
||
Net income (loss) from continuing operations |
|
1,248 |
|
(2,297 |
) |
||
Discontinued operations, net of tax |
|
|
|
(109 |
) |
||
Net income (loss) |
|
$ |
1,248 |
|
$ |
(2,406 |
) |
|
|
|
|
|
|
||
Comprehensive income (loss) from continuing operations |
|
$ |
2,122 |
|
$ |
(1,157 |
) |
Comprehensive income (loss) from discontinued operations |
|
|
|
(109 |
) |
||
Total comprehensive income (loss) |
|
$ |
2,122 |
|
$ |
(1,266 |
) |
|
|
|
|
|
|
||
Earnings (loss) from continuing operations per share |
|
$ |
2.92 |
|
$ |
(5.36 |
) |
Earnings (loss) from discontinued operations per share |
|
$ |
|
|
$ |
(0.25 |
) |
Earnings (loss) per share |
|
$ |
2.92 |
|
$ |
(5.61 |
) |
Average shares outstanding |
|
426,850 |
|
428,611 |
|
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, 2010 AND 2009
(Dollars in thousands, except per share data)
(UNAUDITED)
|
|
Common
|
|
Retained |
|
Accumulated |
|
Amount |
|
Total |
|
|||||
Balance, January 1, 2009 |
|
$ |
41,523 |
|
$ |
120,676 |
|
$ |
(1,300 |
) |
$ |
(46,670 |
) |
$ |
114,229 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Repurchase and retirement of 3,884 shares of common stock |
|
(2,008 |
) |
|
|
|
|
|
|
(2,008 |
) |
|||||
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|||||
Net income |
|
|
|
1,488 |
|
|
|
|
|
1,488 |
|
|||||
Change in unrealized loss on available for sale securities, net of reclassification and tax effects |
|
|
|
|
|
575 |
|
|
|
575 |
|
|||||
Change in post-retirement obligation, net of tax effects |
|
|
|
|
|
14 |
|
|
|
14 |
|
|||||
Total comprehensive income |
|
|
|
|
|
|
|
|
|
2,077 |
|
|||||
Cash dividends declared - $10.00 per share |
|
|
|
(4,297 |
) |
|
|
|
|
(4,297 |
) |
|||||
Reclassification due to change in fair value of common stock in ESOP subject to contingent repurchase obligation |
|
|
|
|
|
|
|
10,020 |
|
10,020 |
|
|||||
Balance, June 30, 2009 |
|
$ |
39,515 |
|
$ |
117,867 |
|
$ |
(711 |
) |
$ |
(36,650 |
) |
$ |
120,021 |
|
|
|
Common
|
|
Retained |
|
Accumulated |
|
Amount |
|
Total |
|
|||||
Balance, January 1, 2010 |
|
$ |
38,865 |
|
$ |
115,544 |
|
$ |
3,584 |
|
$ |
(31,230 |
) |
$ |
126,763 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|||||
Net income |
|
|
|
2,891 |
|
|
|
|
|
2,891 |
|
|||||
Change in unrealized gains on available for sale securities, net of reclassification and tax effects |
|
|
|
|
|
351 |
|
|
|
351 |
|
|||||
Change in post-retirement obligation, net of tax effects |
|
|
|
|
|
12 |
|
|
|
12 |
|
|||||
Total comprehensive income |
|
|
|
|
|
|
|
|
|
3,254 |
|
|||||
Reclassification due to change in fair value of common stock in ESOP subject to contingent repurchase obligation |
|
|
|
|
|
|
|
(5,733 |
) |
(5,733 |
) |
|||||
Balance, June 30, 2010 |
|
$ |
38,865 |
|
$ |
118,435 |
|
$ |
3,947 |
|
$ |
(36,963 |
) |
$ |
124,284 |
|
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, 2010 AND 2009
(Dollars in thousands)
(UNAUDITED)
|
|
2010 |
|
2009 |
|
||
Cash flows from operating activities |
|
|
|
|
|
||
Net income |
|
$ |
2,891 |
|
$ |
1,488 |
|
Adjustments to reconcile net income to net cash provided by continuing operating activities |
|
|
|
|
|
||
Depreciation |
|
1,566 |
|
1,660 |
|
||
Provision for loan losses |
|
5,550 |
|
8,950 |
|
||
Deferred income tax provision (benefit) |
|
864 |
|
(2,121 |
) |
||
Net premium amortization and discount (accretion) of securities |
|
1,100 |
|
(140 |
) |
||
Net realized gains on securities transactions |
|
|
|
(109 |
) |
||
Impairment of pooled trust preferred securities |
|
|
|
891 |
|
||
Increase in carrying value of bank-owned life insurance |
|
(221 |
) |
(672 |
) |
||
Net gain on sales of loans held for sale |
|
|
|
(381 |
) |
||
Sales of loans held for sale |
|
|
|
39,216 |
|
||
Origination of loans held for sale |
|
|
|
(48,466 |
) |
||
Net loss on sales of premises and equipment |
|
4 |
|
|
|
||
Net gain on sales of other real estate |
|
(237 |
) |
(14 |
) |
||
Write down of other real estate |
|
516 |
|
|
|
||
Increase in accrued interest and other assets |
|
(2,182 |
) |
(715 |
) |
||
Increase (decrease) in accrued interest and other liabilities |
|
2,980 |
|
(1,451 |
) |
||
Net cash provided by discontinued operating activities |
|
|
|
842 |
|
||
Net cash provided by (used in) continuting operating activities |
|
12,831 |
|
(1,022 |
) |
||
Cash flows from investing activities |
|
|
|
|
|
||
Securities available for sale |
|
|
|
|
|
||
Sales |
|
|
|
19,522 |
|
||
Maturities, calls and redemptions |
|
49,573 |
|
40,047 |
|
||
Purchases |
|
(197,567 |
) |
(32,639 |
) |
||
Securities held to maturity and FHLB stock |
|
|
|
|
|
||
Maturities, calls and redemptions |
|
48,372 |
|
27,197 |
|
||
Purchases |
|
(38,324 |
) |
(6,560 |
) |
||
Net decrease in loans |
|
32,647 |
|
8,148 |
|
||
Investment in bank-owned life insurance |
|
(118 |
) |
39 |
|
||
Purchases of premises and equipment |
|
(460 |
) |
(2,731 |
) |
||
Sales of other real estate |
|
5,885 |
|
1,699 |
|
||
Net cash provided by discontinued investing activities |
|
|
|
371 |
|
||
Net cash (used in) provided by continuing investing activities |
|
(99,992 |
) |
55,093 |
|
||
Cash flows from financing activities |
|
|
|
|
|
||
Net increase in deposits |
|
27,029 |
|
63,531 |
|
||
Net decrease in federal funds purchased |
|
|
|
(55,000 |
) |
||
Repurchase and retirement of common stock |
|
|
|
(2,008 |
) |
||
Net increase in prepaid solutions cards |
|
1,825 |
|
312 |
|
||
Dividends paid |
|
|
|
(4,297 |
) |
||
Net cash provided by financing activities |
|
28,854 |
|
2,538 |
|
||
Net (decrease) increase in cash and cash equivalents |
|
(58,307 |
) |
56,609 |
|
||
Beginning cash and cash equivalents |
|
148,610 |
|
55,474 |
|
||
Ending cash and cash equivalents |
|
$ |
90,303 |
|
$ |
112,083 |
|
Supplemental disclosures |
|
|
|
|
|
||
Cash paid for interest |
|
$ |
10,448 |
|
$ |
12,751 |
|
Cash paid for income taxes |
|
85 |
|
2,264 |
|
||
Other real estate acquired through loan foreclosures |
|
2,170 |
|
14,284 |
|
See accompanying notes to condensed consolidated financial statements.
WEST SUBURBAN BANCORP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollars in thousands, except per share data)
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 and its other direct and indirect subsidiaries, the Company). 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 presentation 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.
On December 4, 2009, the Company sold its prepaid solutions group. The Company anticipates transferring substantially all of the outstanding balances on prepaid solutions cards, which represent the total of prepaid solutions cards deposits and prepaid solutions cards liabilities to another financial institution during 2010.
Note 2 - Securities
At June 30, 2010 and December 31, 2009, the amortized cost, unrealized gains and losses and fair value of securities available for sale were as follows:
|
|
June 30, 2010 |
|
||||||||||
|
|
Amortized |
|
Gross |
|
Gross |
|
Fair |
|
||||
U.S. Treasuries |
|
$ |
19,980 |
|
$ |
549 |
|
$ |
|
|
$ |
20,529 |
|
U.S. government sponsored enterprises |
|
44,706 |
|
749 |
|
(1 |
) |
45,454 |
|
||||
Mortgage-backed: residential |
|
270,474 |
|
5,872 |
|
(458 |
) |
275,888 |
|
||||
States and political subdivisions |
|
11,181 |
|
366 |
|
(24 |
) |
11,523 |
|
||||
Total debt securities |
|
$ |
346,341 |
|
$ |
7,536 |
|
$ |
(483 |
) |
$ |
353,394 |
|
|
|
December 31, 2009 |
|
||||||||||
|
|
Amortized |
|
Gross |
|
Gross |
|
Fair |
|
||||
U.S. government sponsored enterprises |
|
$ |
49,621 |
|
$ |
909 |
|
$ |
(46 |
) |
$ |
50,484 |
|
Mortgage-backed: residential |
|
139,151 |
|
5,313 |
|
(13 |
) |
144,451 |
|
||||
States and political subdivisions |
|
10,367 |
|
314 |
|
(6 |
) |
10,675 |
|
||||
Total debt securities |
|
$ |
199,139 |
|
$ |
6,536 |
|
$ |
(65 |
) |
$ |
205,610 |
|
At June 30, 2010 and December 31, 2009, the amortized cost, unrealized gains and losses and fair value of securities held to maturity were as follows:
|
|
June 30, 2010 |
|
||||||||||
|
|
Amortized |
|
Gross |
|
Gross |
|
Fair |
|
||||
U.S. Treasuries |
|
$ |
9,952 |
|
$ |
343 |
|
$ |
|
|
$ |
10,295 |
|
U.S. government sponsored enterprises |
|
34,391 |
|
677 |
|
|
|
35,068 |
|
||||
Mortgage-backed: residential |
|
162,722 |
|
9,279 |
|
(19 |
) |
171,982 |
|
||||
States and political subdivisions |
|
48,487 |
|
516 |
|
(333 |
) |
48,670 |
|
||||
Total |
|
$ |
255,552 |
|
$ |
10,815 |
|
$ |
(352 |
) |
$ |
266,015 |
|
|
|
December 31, 2009 |
|
||||||||||
|
|
Amortized |
|
Gross |
|
Gross |
|
Fair |
|
||||
U.S. government sponsored enterprises |
|
$ |
41,199 |
|
$ |
392 |
|
$ |
(48 |
) |
$ |
41,543 |
|
Mortgage-backed: residential |
|
178,129 |
|
7,029 |
|
(160 |
) |
184,998 |
|
||||
States and political subdivisions |
|
46,580 |
|
429 |
|
(234 |
) |
46,775 |
|
||||
Total |
|
$ |
265,908 |
|
$ |
7,850 |
|
$ |
(442 |
) |
$ |
273,316 |
|
At June 30, 2010, the amortized cost and fair value of debt securities available for sale and held to maturity by contractual maturity were as follows:
|
|
Available for Sale |
|
Held to Maturity |
|
||||||||
|
|
Amortized |
|
Fair Value |
|
Amortized |
|
Fair Value |
|
||||
Due in 1 year or less |
|
$ |
7,134 |
|
$ |
7,180 |
|
$ |
31,881 |
|
$ |
31,846 |
|
Due after 1 year through 5 years |
|
56,089 |
|
57,331 |
|
39,260 |
|
40,278 |
|
||||
Due after 5 years through 10 years |
|
6,332 |
|
6,414 |
|
12,663 |
|
12,810 |
|
||||
Due after 10 years |
|
6,312 |
|
6,581 |
|
9,026 |
|
9,099 |
|
||||
Mortgage-backed: residential |
|
270,474 |
|
275,888 |
|
162,722 |
|
171,982 |
|
||||
Total |
|
$ |
346,341 |
|
$ |
353,394 |
|
$ |
255,552 |
|
$ |
266,015 |
|
Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
There were no sales of securities during the six months ended June 30, 2010. There were $19,522 in sales for the six months ended June 30, 2009.
Securities with a carrying value of $102,149 and $114,177 at June 30, 2010 and December 31, 2009, respectively, were pledged to secure public deposits, fiduciary activities and for other purposes required or permitted by law.
Securities with unrealized losses at June 30, 2010 and December 31, 2009 are presented below by the length of time the securities have been in a continuous unrealized loss position:
|
|
June 30, 2010 |
|
||||||||||||||||
|
|
Less than 12 Months |
|
12 Months or More |
|
Total |
|
||||||||||||
|
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
||||||
U.S. government sponsored enterprises |
|
$ |
1,404 |
|
$ |
(1 |
) |
$ |
|
|
$ |
|
|
$ |
1,404 |
|
$ |
(1 |
) |
Mortgage-backed: residential |
|
37,512 |
|
(471 |
) |
605 |
|
(6 |
) |
38,117 |
|
(477 |
) |
||||||
States and political subdivisions |
|
32,394 |
|
(156 |
) |
2,626 |
|
(201 |
) |
35,020 |
|
(357 |
) |
||||||
Total temporarily impaired |
|
$ |
71,310 |
|
$ |
(628 |
) |
$ |
3,231 |
|
$ |
(207 |
) |
$ |
74,541 |
|
$ |
(835 |
) |
|
|
December 31, 2009 |
|
||||||||||||||||
|
|
Less than 12 Months |
|
12 Months or More |
|
Total |
|
||||||||||||
|
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
||||||
U.S. government sponsored enterprises |
|
$ |
25,637 |
|
$ |
(94 |
) |
$ |
|
|
$ |
|
|
$ |
25,637 |
|
$ |
(94 |
) |
Mortgage-backed: residential |
|
21,072 |
|
(136 |
) |
751 |
|
(37 |
) |
21,823 |
|
(173 |
) |
||||||
States and political subdivisions |
|
2,964 |
|
(97 |
) |
1,001 |
|
(143 |
) |
3,965 |
|
(240 |
) |
||||||
Total temporarily impaired |
|
$ |
49,673 |
|
$ |
(327 |
) |
$ |
1,752 |
|
$ |
(180 |
) |
$ |
51,425 |
|
$ |
(507 |
) |
Mortgage-backed: residential securities consist of residential mortgage-backed securities issued by U.S. government sponsored enterprises and agencies, primarily Fannie Mae, Freddie Mac and Ginnie Mae, institutions which the government has affirmed its commitment to support.
Other-Than-Temporary Impairment Evaluation
Management evaluates securities for other-than-temporary impairment (OTTI) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. The investment securities portfolio is evaluated for OTTI by segregating the portfolio into two general segments and applying the appropriate OTTI model. Investment securities classified as available for sale or held to maturity are generally evaluated for OTTI under Financial Accounting Standards Board (FASB) guidance Investments in Debt and Equity Securities. However, certain purchased beneficial interests, including non-agency mortgage-backed securities and collateralized debt obligations that had credit ratings at the time of purchase of below AA are evaluated using the model outlined in FASB guidance Beneficial Interests in Securitized Financial Assets.
In determining OTTI on debt securities, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost; (2) the financial condition and near-term prospects of the issuer; (3) whether the market decline was affected by macroeconomic conditions; and (4) whether the Company has the intent to sell the debt security or whether it is more likely than not the Company will be required to sell the debt security before its anticipated recovery. The assessment of whether OTTI exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.
In determining OTTI on purchased beneficial interests, the Company evaluates the present value of future cash flows to determine if there has been an adverse change in the remaining expected future cash flows.
When management determines that OTTI exists under either model, 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 investments 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.
In accordance with FASB guidance, unrealized losses on the Companys debt securities are not recognized because management does not have the intent to sell the securities and it is not more likely than not that the Company would be required to sell the securities prior to the anticipated recovery. The Company has concluded that as of June 30, 2010, its debt securities were not other-than-temporarily impaired.
As of June 30, 2009, the Company held three pooled trust preferred securities that had total OTTI of $5,110, of which $891 represented the credit component and was charged to expense and $4,219 (before taxes) was recorded in other comprehensive income.
The table below presents a roll-forward of the credit losses recognized in earnings for the six month period ended June 30, 2010:
Beginning Balance, January 1, 2010 |
|
$ |
891 |
|
Additions |
|
|
|
|
Ending Balance, June 30, 2010 |
|
$ |
891 |
|
Note 3 - Loans
Major classifications of loans were as follows:
|
|
June 30, |
|
December 31, |
|
||
Commercial |
|
$ |
246,936 |
|
$ |
267,432 |
|
Consumer |
|
2,717 |
|
3,031 |
|
||
Indirect automobile |
|
1,644 |
|
2,395 |
|
||
Real estate |
|
|
|
|
|
||
Residential |
|
220,625 |
|
219,551 |
|
||
Commercial |
|
285,484 |
|
280,442 |
|
||
Home equity |
|
222,854 |
|
232,607 |
|
||
Construction |
|
164,844 |
|
175,186 |
|
||
Credit card |
|
9,424 |
|
9,874 |
|
||
Other |
|
1,500 |
|
3,079 |
|
||
Total |
|
1,156,028 |
|
1,193,597 |
|
||
Allowance for loan losses |
|
(28,721 |
) |
(25,922 |
) |
||
Loans, net |
|
$ |
1,127,307 |
|
$ |
1,167,675 |
|
The Company makes commercial, consumer and residential real estate loans primarily to customers throughout the western suburbs of Chicago. Construction loans are primarily made to customers engaged in the development and construction of residential real estate projects within the Companys market area. From time to time the Company will make loans outside of its market area.
Changes in the allowance for loan losses were as follows:
|
|
June 30, |
|
December 31, |
|
||
Balance, beginning of year |
|
$ |
25,922 |
|
$ |
15,578 |
|
Provision for loan losses |
|
5,550 |
|
24,925 |
|
||
Loans charged-off |
|
(2,852 |
) |
(14,952 |
) |
||
Recoveries |
|
101 |
|
371 |
|
||
Balance, end of year |
|
$ |
28,721 |
|
$ |
25,922 |
|
Impaired loans are summarized as follows:
|
|
June 30, |
|
December 31, |
|
||
Period-end loans with no allocated allowance for loan losses |
|
$ |
27,373 |
|
$ |
30,754 |
|
Period-end loans with allocated allowance for loan losses |
|
34,084 |
|
14,636 |
|
||
Total |
|
$ |
61,457 |
|
$ |
45,390 |
|
|
|
|
|
|
|
||
Amount of the allowance for loan losses allocated to impaired loans at year-end |
|
$ |
5,697 |
|
$ |
1,527 |
|
Nonperforming loans were as follows:
|
|
June 30, |
|
December 31, |
|
||
Loans past due 90 days or more still on accrual |
|
$ |
464 |
|
$ |
790 |
|
Nonaccrual loans |
|
51,135 |
|
38,038 |
|
||
Total nonperforming loans |
|
$ |
51,599 |
|
$ |
38,828 |
|
At June 30, 2010, the Company had $15.6 million of loans considered troubled debt restructurings, which are considered impaired loans compared to $8.6 million as of December 31, 2009. Modifications for loans classified as troubled debt restructurings primarily changed the timing of cash flows for a short period of time and the Bank has not allocated any specific reserves to customers whose loan terms have been modified in troubled debt restructurings. The Company has not committed to lend additional amounts to customers with outstanding loans that are classified as troubled debt restructurings.
Note 4 - Financial Instruments with Off-Balance Sheet Risk
Unused lines of credit and other commitments to extend credit not reflected in the financial statements are as follows:
|
|
June 30, 2010 |
|
December 31, 2009 |
|
||||||||||||||
|
|
Fixed |
|
Variable |
|
Total |
|
Fixed |
|
Variable |
|
Total |
|
||||||
Commercial loans and lines of credit |
|
$ |
1,239 |
|
$ |
136,875 |
|
$ |
138,114 |
|
$ |
1,434 |
|
$ |
169,158 |
|
$ |
170,592 |
|
Check credit lines of credit |
|
945 |
|
|
|
945 |
|
1,027 |
|
|
|
1,027 |
|
||||||
Mortgage loans |
|
8,509 |
|
|
|
8,509 |
|
8,419 |
|
|
|
8,419 |
|
||||||
Home equity lines of credit |
|
2,573 |
|
144,787 |
|
147,360 |
|
2,508 |
|
152,281 |
|
154,789 |
|
||||||
Letters of credit |
|
|
|
15,990 |
|
15,990 |
|
|
|
14,650 |
|
14,650 |
|
||||||
Credit card lines of credit |
|
|
|
38,385 |
|
38,385 |
|
|
|
38,771 |
|
38,771 |
|
||||||
Total |
|
$ |
13,266 |
|
$ |
336,037 |
|
$ |
349,303 |
|
$ |
13,388 |
|
$ |
374,860 |
|
$ |
388,248 |
|
Fixed rate commercial loan commitments and lines of credit at June 30, 2010 had interest rates ranging from 3.8% to 7.3% with terms ranging from 1 month to 5 years. Fixed rate mortgage loan commitments at June 30, 2010 had interest rates ranging from 4.4% to 5.3% with terms ranging from 10 to 30 years. Fixed rate home equity lines of credit at June 30, 2010 had interest rates ranging from 6.5% to 7.0% with terms ranging from 1 to 3 years. Fixed rate check credit lines of credit at June 30, 2010 had interest rates of 18.0%.
Note 5 - Common Stock in ESOP Subject to Contingent Repurchase Obligation
At June 30, 2010 and December 31, 2009, the Employee Stock Ownership Plan (the ESOP) held 91,267 and 91,317 shares of West Suburban common stock, respectively. Upon termination of their employment, participants who elect to receive their benefit distributions in the form of West Suburban 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 date the benefit is distributed and the second purchase period begins on the first anniversary of the distribution date. This contingent repurchase obligation is reflected in the Companys 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 West Suburban common stock held by the ESOP and allocated to participants, 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.
Note 6 - New Accounting Pronouncements
Adoption of New Accounting Standards
In June 2009, the FASB amended previous guidance relating to transfers of financial assets and eliminated the concept of a qualifying special purpose entity. This guidance must be applied as of the beginning of each reporting entitys first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. This guidance must be applied to transfers occurring on or after the effective date. Additionally, on and after the effective date, the concept of a qualifying special purpose entity is no longer relevant for accounting purposes. Therefore, formerly qualifying special-purpose entities should be evaluated for consolidation by reporting entities on and after the effective date in accordance with the applicable consolidation guidance. The disclosure provisions were also amended and apply to transfers that occurred both before and after the effective date of this guidance. The adoption did not have a material impact on the Companys consolidated financial position, results of operations or cash flows.
In June 2009, the FASB amended guidance for consolidation of variable interest entity guidance by replacing the quantitative-based risks and rewards calculation for determining which enterprise, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity that most significantly impact the entitys economic performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. Additional disclosures about an enterprises involvement in variable interest entities are also required. This guidance was effective as of the beginning of each reporting entitys first annual reporting period that began after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Early adoption was prohibited. The adoption did not have a material impact on the Companys consolidated financial position, results of operations or cash flows.
Note 7 - Retirement Benefits
The Bank maintains the West Suburban Bank 401(k) Profit Sharing Plan (the 401(k) Plan), which serves as the Companys principal retirement plan. The 401(k) Plan was established to address the limited availability of West Suburban common stock for acquisition by the ESOP and to offer participants an avenue to diversify their retirement savings.
The ESOP provides incentives to employees by granting participants an interest in West Suburban common stock, which represents the ESOPs primary investment. An individual account is established for each participant and the benefits payable upon retirement, termination, disability or death are based upon service, the amount of the employers contributions and any income, expenses, gains and losses and forfeitures allocated to the participants account.
The Company also maintains a noncontributory postretirement benefit plan covering certain senior executives. The plan provides postretirement medical, dental and long term care coverage for certain executives and their surviving spouses.
The eligible retirement age under the plan is age 62 and the plan is unfunded. Net postretirement benefit costs are summarized in the following table:
|
|
Six Months Ended |
|
||||
|
|
June 30, |
|
||||
|
|
2010 |
|
2009 |
|
||
Service cost |
|
$ |
17 |
|
$ |
20 |
|
Interest cost |
|
29 |
|
30 |
|
||
Amortization of prior service cost |
|
11 |
|
10 |
|
||
Recognized net actuarial gain |
|
10 |
|
14 |
|
||
Net periodic benefit cost |
|
$ |
67 |
|
$ |
74 |
|
|
|
Three Months Ended |
|
||||
|
|
June 30, |
|
||||
|
|
2010 |
|
2009 |
|
||
Service cost |
|
$ |
9 |
|
$ |
10 |
|
Interest cost |
|
14 |
|
15 |
|
||
Amortization of prior service cost |
|
5 |
|
5 |
|
||
Recognized net actuarial gain |
|
5 |
|
7 |
|
||
Net periodic benefit cost |
|
$ |
33 |
|
$ |
37 |
|
Note 8 - Income Taxes
The Company files income tax returns in the U.S. federal jurisdiction and in Illinois. The Company is no longer subject to examination by the U.S. federal tax authorities or by Illinois tax authorities for years prior to 2006.
Income tax expense increased $.9 million for the first six months of 2010 compared to the first six months of 2009. The effective tax rates for the first six months of 2010 and 2009 were 24.7% and 8.8%, respectively. The increase was due to the increase in taxable income.
Note 9 - Fair Value
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 companys own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:
Securities: The fair value of securities is determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair value is calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair value is calculated using discounted cash flows or other market indicators (Level 3). Discounted cash flows are calculated using spread to swap and LIBOR curves that are updated to incorporate loss severities, volatility, credit spread and optionality.
During times when trading is more liquid, broker quotes are used (if available) to validate the model. Rating agency and industry research reports, as well as defaults and deferrals on individual securities are reviewed and incorporated into the calculations.
Impaired Loans: The fair value of impaired loans secured by real estate with specific allocations of the allowance for loan losses 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 usually significant and typically result in a Level 3 classification of the inputs for determining fair value.
Other Real Estate: Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate are measured at the lower of carrying amount or fair value, less costs to sell. Fair values are generally based on third party appraisals of the property, resulting in a Level 3 classification. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.
Assets and liabilities measured at fair value on a recurring basis and a non-recurring basis are as follows:
|
|
Carrying |
|
Quoted
Prices in |
|
Significant |
|
Significant |
|
||||
June 30, 2010 Recurring basis |
|
|
|
|
|
|
|
|
|
||||
U.S. Treasuries |
|
$ |
20,529 |
|
$ |
20,529 |
|
$ |
|
|
$ |
|
|
U.S. government sponsored enterprises |
|
45,454 |
|
|
|
45,454 |
|
|
|
||||
Mortgage-backed: residential |
|
275,888 |
|
|
|
275,888 |
|
|
|
||||
State and political subdivisions |
|
11,523 |
|
|
|
11,523 |
|
|
|
||||
Total securities available for sale |
|
$ |
353,394 |
|
$ |
20,529 |
|
$ |
332,865 |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
||||
June 30, 2010 Non-recurring basis |
|
|
|
|
|
|
|
|
|
||||
Impaired loans |
|
$ |
28,387 |
|
$ |
|
|
$ |
|
|
$ |
28,387 |
|
Other real estate |
|
624 |
|
|
|
|
|
624 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
December 31, 2009 Recurring basis |
|
|
|
|
|
|
|
|
|
||||
U.S. government sponsored enterprises |
|
$ |
50,484 |
|
$ |
|
|
$ |
50,484 |
|
$ |
|
|
Mortgage-backed: residential |
|
144,451 |
|
|
|
144,451 |
|
|
|
||||
State and political subdivisions |
|
10,675 |
|
|
|
10,675 |
|
|
|
||||
Total securities available for sale |
|
$ |
205,610 |
|
$ |
|
|
$ |
205,610 |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
||||
December 31, 2009 Non-recurring basis |
|
|
|
|
|
|
|
|
|
||||
Impaired loans |
|
$ |
13,109 |
|
$ |
|
|
$ |
|
|
$ |
13,109 |
|
Other real estate |
|
25,994 |
|
|
|
|
|
25,994 |
|
Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $34,084 with a valuation allowance of $5,697 at June 30, 2010, resulting in an additional provision for loan losses of $4,253 during the first six months of 2010. The majority of the additional provision was due to further deterioration in the collateral value of loans that had been classified as impaired at December 31, 2009. At December 31, 2009, impaired loans had a carrying amount of $14,636, with a valuation allowance of $1,527.
At June 30, 2010, other real estate which is measured at fair value less costs to sell, had a net carrying amount of $624, which was made up of the outstanding balance of $846, net of a valuation
allowance of $222, resulting in expense of $471 for the first six months of 2010. At December 31, 2009, other real estate, had a net carrying amount of $25,994, which was made up of the outstanding balance of $26,390, net of a valuation allowance of $396, resulting in expense of $449 for 2009.
Carrying values and estimated fair values of the Companys financial instruments as of June 30, 2010 and December 31, 2009 are set forth in the table below:
|
|
2010 |
|
2009 |
|
||||||||
|
|
Carrying |
|
Estimated |
|
Carrying |
|
Estimated |
|
||||
Financial assets |
|
|
|
|
|
|
|
|
|
||||
Cash and cash equivalents |
|
$ |
90,303 |
|
$ |
90,303 |
|
$ |
148,610 |
|
$ |
148,610 |
|
Securities |
|
|
|
|
|
|
|
|
|
||||
Available for sale |
|
353,394 |
|
353,394 |
|
205,610 |
|
205,610 |
|
||||
Held to maturity |
|
255,552 |
|
266,015 |
|
265,908 |
|
273,316 |
|
||||
Federal Home Loan Bank stock |
|
7,599 |
|
N/A |
|
7,599 |
|
N/A |
|
||||
Loans, less allowance for loan losses |
|
1,127,307 |
|
1,132,722 |
|
1,167,675 |
|
1,166,369 |
|
||||
Accrued interest receivable |
|
6,484 |
|
6,484 |
|
6,048 |
|
6,048 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Financial liabilities |
|
|
|
|
|
|
|
|
|
||||
Deposits |
|
1,784,016 |
|
1,798,868 |
|
1,756,987 |
|
1,774,132 |
|
||||
Accrued interest payable |
|
4,842 |
|
4,842 |
|
4,994 |
|
4,994 |
|
||||
Estimated fair value for cash and cash equivalents, accrued interest receivable and payable, demand deposits and variable rate loans or deposits that reprice frequently and fully are each based on carrying value. 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 estimated life and credit. Fair value of debt is based on current rates for similar financing. It was not practical to determine the fair value of FHLB stock due to the restrictions placed on its transferability. The fair value of off-balance-sheet items is not considered material.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Executive Overview
At the end of 2007, the United States economy experienced a downturn that continued throughout 2009 and into 2010. During this period, the United States economy experienced rising unemployment, declining home values, extremely low liquidity in the debt markets and declining values and high volatility in the equity markets. As a result of these conditions, consumer confidence and spending decreased substantially and asset values declined. Like many other financial institutions, the Companys financial results in recent reporting periods, including the first six months of 2010, were impacted by the continuing economic downturn.
The economic downturn has impacted the entire state of Illinois, including the Companys primary market area, located in the western suburbs of Chicago, Illinois. The unemployment rate in the state of Illinois currently exceeds 11%, and during 2009 and the first part of 2010, job cuts were prevalent in the Companys market area. Rising unemployment has adversely impacted the ability of certain of the Companys borrowers to meet their ongoing debt obligations. In addition, real estate demand in the Companys market area remains weak, resulting in declines in the values of the real estate serving as collateral for certain of the Companys loans. Although management believes that single family residential property values are beginning to stabilize, many other types of properties, including commercial real estate and raw land, remain at extremely weak levels.
As a result of the continuing economic downturn in the national and local economies and declining real estate values, management has focused its attention primarily on improving the performance of the Banks loan portfolio. During the first six months of 2010, the Banks nonaccrual loans increased, which adversely impacted its interest income. The deterioration in the Banks loan portfolio has forced the Bank to increase its allowance for loan losses
to absorb additional losses in the loan portfolio. The Banks board of directors reviews the level of its allowance for loan losses on a monthly basis, and the Bank consults with its registered public accountant on a quarterly basis. The board responds as promptly as practicable to new developments in the Banks loan portfolio, but it often takes time to implement appropriate changes to the Banks allowance. Although management has aggressively increased the Banks allowance for loan losses in response to increasing levels of nonaccrual loans, management cannot be certain that it has established the allowance at the correct level, and loan losses in excess of the allowance for loan losses would adversely affect the Banks financial condition and results of operations. In addition, as a result of increasing levels of foreclosures, the Banks other real estate owned portfolio increased dramatically in 2009 and remained at a historically high level in the first six months of 2010, further decreasing the Banks interest income. Management has had to focus additional time and effort on selling these properties, and the Bank has incurred significant costs in connection with maintaining the properties, including real estate taxes, management fees and insurance costs. Management continues to aggressively pursue sales of the foreclosed assets in the Banks portfolio, but due to weak real estate demand in the Banks market area, management is not able to dispose of these properties as promptly as desired.
In response to issues regarding credit quality in the Banks loan portfolio, the Bank has limited the amount of credit that has been extended, particularly in areas of higher loan concentration, such as real estate construction loans. The Bank continues to see low levels of quality demand for credit but will continue to evaluate credit requests using the Banks traditional, prudent lending standards.
In response to the economic downturn, the Federal Reserve has maintained interest rates at historical low levels and has used various forms of monetary policy in an attempt to drive down long-term interest rates. The presence of these historically low interest rates has created net interest challenges for the banking industry in general and the Bank in particular. This interest rate environment has resulted in low-yielding investment opportunities, adding to the downward pressure on the Banks interest income. Because management believes that interest rates will increase over the next few years, management has been focused on investments for the Banks securities portfolio that are expected to retain their value in a rising rate environment. Specifically, the Bank has invested in mortgage-backed securities issued by United States government sponsored enterprises with average maturities of less than five years. In addition, movements in general market interest rates are a key element in changes in the Banks interest rate margin, and the Banks interest rate margin has declined in this environment. Management expects the interest rate environment to remain at historically low levels throughout most, if not all, of 2010, which will likely cause these trends to continue in the short-term.
During the first six months of 2010, management remained focused on resolving the issues raised by the Banks regulators in two Cease and Desist Orders. On December 3, 2008, the Bank entered into an Order to Cease and Desist with the FDIC and the DFPR, which is based on FDIC and DFPR findings that the Banks Secrecy Act/Anti-Money Laundering Program was inadequate and that the Bank had violated various laws and regulations related to the Bank Secrecy Act. On April 23, 2009, the Bank entered into a second Order to Cease and Desist with the FDIC based on FDIC findings that the Banks program to implement consumer protection related laws and regulations was inadequate and that the Bank had violated certain consumer protection related laws and regulations. Both of the orders require the Bank to take certain corrective actions aimed at resolving any outstanding violations of laws or regulations and to implement revised programs intended to address future compliance. Neither of the orders relates to the Banks asset quality, capital position or its financial operations. The Banks regulators recently completed an examination of the Banks compliance with the Bank Secrecy Act and other laws and regulations, and in connection with this examination, the Bank expects that the FDIC and DFPR will evaluate whether the orders should be terminated.
Recent Regulatory Developments
On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Act), which is perhaps the most significant financial reform since the Great Depression. Among other things, the law:
· Creates a Financial Services Oversight Council to identify emerging systemic risks and improve interagency cooperation;
· Creates a Consumer Financial Protection Agency authorized to promulgate and enforce consumer protection regulations relating to financial products, which would affect both banks and non-bank finance companies;
· Establishes strengthened capital standards for banks and bank holding companies, and disallows trust preferred securities from being included in the Tier 1 capital determination for certain financial institutions;
· Enhances regulation of financial markets, including derivatives and securitization markets;
· Contains a series of provisions covering mortgage loan original standards affecting, among other things, originator compensation, minimum repayment standards and pre-payments;
· Grants the Board of Governors of the Federal Reserve System the power to regulate debit card interchange fees;
· Prohibits certain trading activities by banks;
· Permanently increases the maximum standard FDIC deposit insurance amount to $250,000; and
· Creates an Office of National Insurance with the U.S. Department of Treasury.
While the provisions of the Act receiving the most public attention have generally been those more likely to affect larger institutions, the Act also contains many provisions which will affect smaller institutions such as the Company in substantial and unpredictable ways. Consequently, compliance with the Acts provisions may curtail the Companys revenue opportunities, increase its operating costs, require it to hold higher levels of regulatory capital and/or liquidity or otherwise adversely affect the Companys business or financial results in the future. The Companys management is actively reviewing the provisions of the Act and assessing its probable impact on the Companys business, financial condition, and result of operations. However, because many aspects of the Act are subject to future rulemaking, it is difficult to precisely anticipate its overall financial impact on the Company and the Bank at this time.
Critical Accounting Policies
The Companys financial statements are prepared in conformity with accounting principles generally accepted in the U.S. These accounting principles, which can be complex, are significant to the Companys financial condition and results of operations and require management to apply significant judgment with respect to various accounting, reporting and disclosure matters. Management must use estimates, assumptions and judgments to apply these principles where actual measurements are not possible or practical. These estimates, assumptions and judgments are based on information available as of the date of this report and, as this information changes, actual results could differ from the estimates, assumptions and judgments reflected in the financial statements. Changes in such estimates may have a significant impact on the financial statements. Management has reviewed the application of these policies with the Audit Committee of West Suburbans Board of Directors. This Managements Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction the Companys Condensed Consolidated Financial Statements and Notes to the Condensed Consolidated Financial Statements included in this quarterly report.
In managements view, the accounting policies that are critical to the Company are those relating to estimates, assumptions and judgments regarding the determination of the adequacy of the allowance for loan losses, the Companys federal and state tax obligations, the determination of the fair value of certain of the Companys investment securities and the determination of the carrying value of the Companys other real estate.
Allowance for Loan Losses. The Company maintains an allowance for loan losses at a level management believes is sufficient to absorb probable incurred credit losses in the loan portfolio. The allowance for loan losses represents the Companys estimate of probable incurred credit losses in the loan portfolio at each balance sheet date and is based on the review of available and relevant information. The allowance contains allocations for probable incurred credit losses that have been identified relating to specific borrowing relationships, as well as probable incurred credit losses for pools of loans. The allowance for loan losses is reassessed monthly by the Company to determine the appropriate level of the allowance. The amount of the allowance for loan losses is determined based on a variety of factors, including assessment of the credit risk of the loans in the loan portfolio, volume of the loans, delinquent loans, evaluation of current economic conditions in the market area, actual charge-offs during the period and historical loss experience. Loan quality is continually monitored by management and reviewed by the loan committee on a monthly basis.
Loans are evaluated on a category-by-category basis to determine the appropriate allocation of the allowance to each category. In addition, individual commercial, construction and commercial mortgage loans are evaluated to determine if a specific loss allocation is needed for problem loans deemed to have a shortfall in collateral. Management also considers the borrowers current economic status, including liquidity and future business viability. Other factors used in the allocation of the allowance include levels and trends of past dues and charge-offs along with concentrations of credit within the commercial and commercial real estate loan portfolios. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available or as future developments occur. Along with the allocation of the allowance on a category-by-category basis and the specific allocations for individual borrowing relationships, the allowance includes a relatively small portion that remains unallocated. Management adjusts the allowance for loan losses by an amount sufficient to maintain the allowance at the level determined appropriate. A loan is fully or partially charged-off when all or a portion of the loan is deemed to be uncollectible by management. The Company believes that the allowance for loan losses is adequate to provide for estimated probable incurred credit losses in the loan portfolio.
Income Taxes. The Company is subject to income tax laws of the U.S. and the State of Illinois. These laws are complex and subject to different interpretations by the taxpayer and the various taxing authorities. Management makes certain judgments and estimates about the application of these inherently complex laws when determining the provision for income taxes. Federal and state taxing authorities have recently become increasingly aggressive in challenging tax positions taken by financial institutions, including positions that may be taken by the Company. During the preparation of the Companys tax returns, management makes reasonable interpretations of the tax laws which are subject to challenge upon audit by the tax authorities. These interpretations are also subject to reinterpretation based on managements ongoing assessment of facts and evolving case law.
On a quarterly basis, management evaluates the reasonableness of its effective tax rate based upon its current best estimate of net income and applicable taxes expected for the full year. Deferred tax assets and liabilities are evaluated on a quarterly basis, or more frequently if necessary.
Temporary Decline in Fair Value of Securities. The Company evaluates its debt and equity securities for other-than-temporary impairment under FASB guidance Investments in Debt and Equity Securities. The guidance applies to debt securities, as well as equity securities not accounted for under the equity method (i.e., cost method investments), unless the investments are subject to other accounting guidance, such as FASB guidance Beneficial Interest in Securitized Financial Assets. Investments in securitized structures such as collateralized mortgage obligations and collateralized debt obligations that are not high quality investment grade securities upon acquisition are subject to this guidance. High quality investment grade securities are defined as securities with an investment grade of AA or higher.
In accordance with FASB guidance Investments in Debt and Equity Securities, declines in the fair value of securities below their cost that are other-than-temporary are reflected as realized losses. In determining OTTI on debt securities, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost; (2) the financial condition and near-term prospects of the issuer; (3) whether the market decline was affected by macroeconomic conditions; and (4) whether the Company has the intent to sell the debt security or whether it is more likely than not the Company will be required to sell the debt security before its anticipated recovery. The assessment of whether OTTI exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.
Other Real Estate. Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Operating costs after acquisition are expensed as incurred.
Contractual Obligations, Commitments, Off-Balance Sheet Arrangements and Contingent Liabilities
Through the normal course of operations, the Company has entered into certain contractual obligations and other commitments. These obligations generally relate to the funding of operations through deposits and prepaid solutions cards, as well as leases for premises and equipment. As a financial services provider, the Company routinely enters into commitments to extend credit. While contractual obligations represent future cash requirements of the Company, a significant portion of commitments to extend credit may expire without being drawn upon. Commitments to extend credit are subject to the same credit policies and approval procedures as comparable loans made by the Company.
The following table presents the Companys significant fixed and determinable contractual obligations and significant commitments by payment date as of June 30, 2010 (dollars in thousands). The payment amounts represent those amounts contractually due to the recipient and do not include any carrying value adjustments.
|
|
One
Year |
|
Over
One |
|
Over
Three |
|
Over |
|
Total |
|
|||||
Deposits without a stated maturity |
|
$ |
1,221,844 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
1,221,844 |
|
Time deposits |
|
360,602 |
|
121,439 |
|
51,963 |
|
171 |
|
534,175 |
|
|||||
Prepaid solutions cards deposits |
|
27,997 |
|
|
|
|
|
|
|
27,997 |
|
|||||
Operating leases |
|
488 |
|
669 |
|
457 |
|
248 |
|
1,862 |
|
|||||
Prepaid solutions cards liabilities |
|
8,140 |
|
|
|
|
|
|
|
8,140 |
|
|||||
Commitments to extend credit |
|
|
|
|
|
|
|
|
|
|
|
|||||
Fixed rate |
|
|
|
|
|
|
|
|
|
13,266 |
|
|||||
Variable rate |
|
|
|
|
|
|
|
|
|
336,037 |
|
|||||
Deferred compensation |
|
|
|
|
|
|
|
|
|
7,153 |
|
|||||
Postretirement benefit plan |
|
|
|
|
|
|
|
|
|
1,039 |
|
|||||
At June 30, 2010 and December 31, 2009, the ESOP held 91,267 and 91,317 shares of West Suburban common stock, respectively. Upon termination of their employment, participants who elect to receive their benefit distributions in the form of West Suburban common stock may require the Company to purchase the common stock distributed at fair value. A more detailed discussion concerning this obligation is presented in Note 5 to the Companys Condensed Consolidated Financial Statements included in this report. At June 30, 2010 and December 31, 2009, this contingent repurchase obligation reduced shareholders equity by $37.0 million and $31.2 million, respectively.
Balance Sheet Analysis
Total Assets. Total consolidated assets at June 30, 2010 increased 1.8% from December 31, 2009. This increase was primarily due to an increase in the securities portfolio, offset by decreases in federal funds sold and the loan portfolio.
Cash and Cash Equivalents. Cash and cash equivalents at June 30, 2010 decreased 39.2% from December 31, 2009, primarily due to a decrease in federal funds sold partially offset by an increase in cash and due from banks. As rates on federal funds sold remained at historically low levels, the Company increased its available for sale securities portfolio. This was done in order to earn a higher rate of return compared to the rate paid on federal funds sold while maintaining a high level of liquidity in response to the uncertain economy.
Securities. The Companys securities portfolio increased 28.7% during the first six months of 2010. This increase was primarily due to investments in U.S. government sponsored enterprise issued mortgage-backed securities and U.S. Treasury securities. The Company manages its securities portfolio to maximize the return on invested funds within acceptable risk guidelines, to meet pledging and liquidity requirements, and to adjust balance sheet interest rate sensitivity in an effort to insulate net interest income against the impact of interest rate changes. The Company will continue to monitor its level of available for sale and held to maturity securities and will classify new securities purchased in the appropriate category at the time of purchase. At June 30, 2010, the Companys accumulated
comprehensive income due to unrealized gains and losses on securities available for sale was $4.2 million compared to $3.9 million at December 31, 2009.
Securities available for sale are carried at fair value, securities held to maturity are carried at amortized cost and Federal Home Loan Bank stock is carried at historical cost. The carrying values of the Companys major categories of securities are summarized in the following table (dollars in thousands):
|
|
June 30, |
|
December 31, |
|
Dollar |
|
Percent |
|
|||
Securities available for sale |
|
|
|
|
|
|
|
|
|
|||
U.S. Treasuries |
|
$ |
20,529 |
|
$ |
|
|
$ |
20,529 |
|
N/A |
|
U.S. government sponsored enterprises |
|
45,454 |
|
50,484 |
|
(5,030 |
) |
(10.0 |
)% |
|||
Mortgage-backed: residential |
|
275,888 |
|
144,451 |
|
131,437 |
|
91.0 |
% |
|||
States and political subdivisions |
|
11,523 |
|
10,675 |
|
848 |
|
7.9 |
% |
|||
Total securities available for sale |
|
353,394 |
|
205,610 |
|
147,784 |
|
71.9 |
% |
|||
|
|
|
|
|
|
|
|
|
|
|||
Securities held to maturity |
|
|
|
|
|
|
|
|
|
|||
U.S. Treasuries |
|
9,952 |
|
|
|
9,952 |
|
N/A |
|
|||
U.S. government sponsored enterprises |
|
34,391 |
|
41,199 |
|
(6,808 |
) |
(16.5 |
)% |
|||
Mortgage-backed: residential |
|
162,722 |
|
178,129 |
|
(15,407 |
) |
(8.6 |
)% |
|||
States and political subdivisions |
|
48,487 |
|
46,580 |
|
1,907 |
|
4.1 |
% |
|||
Total securities held to maturity |
|
255,552 |
|
265,908 |
|
(10,356 |
) |
(3.9 |
)% |
|||
Federal Home Loan Bank stock |
|
7,599 |
|
7,599 |
|
|
|
0.0 |
% |
|||
Total securities |
|
$ |
616,545 |
|
$ |
479,117 |
|
$ |
137,428 |
|
28.7 |
% |
Mortgage-backed: residential securities consist of residential mortgage-backed securities issued by U.S. government sponsored enterprises and agencies, primarily Fannie Mae, Freddie Mac and Ginnie Mae, institutions which the government has affirmed its commitment to support.
Fair values for U.S. Treasuries and U.S. government sponsored enterprise issued securities are determined using a combination of daily closing prices, evaluations, income data, security master (descriptive) data and terms and conditions data. Additional data used to compute the fair value of U.S. government sponsored enterprise issued residential mortgage-backed pass-through securities (FHLMC, FNMA, and GNMA pools) includes daily composite seasoned, pool-specific, and generic coupon evaluations, and factors and descriptive data for individual pass-through pools. Additional data used to compute the fair value of U.S. government sponsored entity issued collateralized mortgage obligations include daily evaluations and descriptive data.
Fair values for states and political subdivisions securities are generally determined by 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. Characteristics utilized by matrix pricing include insurer, credit support, state of issuance and bond rating. These factors are used to incorporate additional spreads and municipal curves. A separate curve structure is used for bank-qualified municipal bonds. This structure is different than the approach used for general market municipals. For the bank-qualified municipal bonds, active quotes are obtained when available.
Loans. Total loans outstanding at June 30, 2010 decreased 3.1% from December 31, 2009, primarily due to decreases in the commercial, construction and home equity loan portfolios. The decrease in the commercial loan portfolio was primarily due to customers paying down their commercial revolving lines of credit. The decrease in the construction loan portfolio was primarily due to the payoff of four accounts. The decrease in the home equity loan portfolio was primarily due to payoffs resulting from refinancing activity, as well as a decrease in home equity loan originations.
Balances in the Companys loans are summarized in the following table (dollars in thousands):
|
|
June 30, |
|
December 31, |
|
||
Commercial |
|
$ |
246,936 |
|
$ |
267,432 |
|
Consumer |
|
2,717 |
|
3,031 |
|
||
Indirect automobile |
|
1,644 |
|
2,395 |
|
||
Real Estate |
|
|
|
|
|
||
Residential |
|
220,625 |
|
219,551 |
|
||
Commercial |
|
285,484 |
|
280,442 |
|
||
Home equity |
|
222,854 |
|
232,607 |
|
||
Construction |
|
164,844 |
|
175,186 |
|
||
Credit card |
|
9,424 |
|
9,874 |
|
||
Other |
|
1,500 |
|
3,079 |
|
||
Total |
|
1,156,028 |
|
1,193,597 |
|
||
Allowance for loan losses |
|
(28,721 |
) |
(25,922 |
) |
||
Loans, net |
|
$ |
1,127,307 |
|
$ |
1,167,675 |
|
The Bank does not originate, and it has no current plans to originate, subprime, alt-A, no documentation or stated income loans. Although there is no industry standard definition of subprime loans, the Bank categorizes certain loans as subprime for its purposes using a set of factors that the Banks management believes are consistent with industry practice, relating to, among other things, credit ratings, ratios of debt to income or assets, ratios of loan to value and loan amounts.
Although the Bank held approximately $19 million of residential mortgage loans purchased from third party originators as of June 30, 2010, the Bank has not purchased any loans since August 2008. The Banks general policy is to originate only residential mortgage loans that conform with the underwriting standards of the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation and which would qualify for sale into the secondary mortgage market.
Allowance for Loan Losses and Asset Quality. The level of the allowance for loan losses is determined by evaluating the general allowance, which is allocated to pools of loans, as well as the specific allowance allocated to impaired loans. The Company utilizes a matrix which tracks changes in various categories that management has determined to have direct effects on the performance of the loan portfolio. These categories include charge-off history, trends in the national and local economies, loan concentrations, past due trends, loan volume trends and loan risk migration. The matrix assigns factors to each loan category which is used to determine the amount of the general allowance. The specific allowance allocated to impaired loans is based on the present value of expected future cash flows discounted at the loans effective interest rate or the fair value of the loans collateral, if repayment of the loan is collateral dependent. A loan is considered impaired when, based on current information and events, full payment under the loan terms is not expected. Loans for which the terms have been modified and for which the borrower is experiencing financial difficulties are considered troubled debt restructurings and classified as impaired.
At June 30, 2010, the allowance for loan losses was $28.7 million, compared to $25.9 million at December 31, 2009. The increase in the allowance for loan losses was primarily due to the increase in the specific allowance allocated to impaired loans. The majority of the increase in the specific allowance was due to further deterioration in the collateral values in loans classified as impaired at December 31, 2009. Net loan charge-offs were $2.8 million and $3.3 million for the six months ended June 30, 2010 and 2009, respectively. Nonperforming loans (nonaccrual and loans past due 90 days or more still on accrual) increased to $51.6 million at June 30, 2010, from $38.8 million at December 31, 2009. Nonaccrual loans increased to $51.1 million at June 30, 2010 from $38.0 million at December 31, 2009. This increase was primarily due to classifying three large commercial relationships totaling $6.9 million and five large commercial real estate relationships totaling $8.0 million as nonaccrual during the second quarter of 2010. These increases were partially offset by a principal payment on one large commercial account of $2.5 million.
Loans past due 90 days or more still on accrual decreased to $.5 million at June 30, 2010 from $.8 million at December 31, 2009. This was primarily due to one commercial account being classified as nonaccrual in 2010.
Loans past due 90 days or more still on accrual decreased to $.5 million at June 30, 2010 from $6.0 million at March 31, 2010. This was primarily due to two commercial real estate loan relationships totaling $3.7 million along with one commercial loan relationship totaling $1.5 million becoming 90 days or more past due in the first three months of 2010 and being classified as nonaccrual in the second quarter of 2010.
The Companys ratio of nonperforming loans to total loans was 4.5% at June 30, 2010 and 3.3% at December 31, 2009. The ratio of nonperforming assets to total assets increased to 3.7% at June 30, 2010 from 3.3% at December 31, 2009.
The ratio of the allowance for loan losses to total loans was 2.5% at June 30, 2010 and 2.2% December 31, 2009. The following table presents an analysis of the Companys nonperforming loans and other real estate as of the dates indicated (dollars in thousands):
|
|
June 30, |
|
December 31, |
|
||
Loans past due 90 days or more still on accrual |
|
$ |
464 |
|
$ |
790 |
|
Nonaccrual loans |
|
51,135 |
|
38,038 |
|
||
Total nonperforming loans |
|
$ |
51,599 |
|
$ |
38,828 |
|
Nonperforming loans as a percent of total loans |
|
4.5 |
% |
3.3 |
% |
||
Allowance for loan losses as a percent of nonperforming loans |
|
55.7 |
% |
66.8 |
% |
||
Other real estate |
|
$ |
22,000 |
|
$ |
25,994 |
|
Nonperforming assets as a percent of total assets |
|
3.7 |
% |
3.3 |
% |
Impaired loans, which consist of loans past due 90 days or more still on accrual, nonaccrual loans and troubled debt restructurings, are summarized as follows (dollars in thousands):
|
|
June 30, |
|
December 31, |
|
||
Period-end loans with no allocated allowance for loan losses |
|
$ |
27,373 |
|
$ |
30,754 |
|
Period-end loans with allocated allowance for loan losses |
|
34,084 |
|
14,636 |
|
||
Total |
|
$ |
61,457 |
|
$ |
45,390 |
|
Impaired loans as of June 30, 2010 increased $16.1 million from December 31, 2009, primarily due to the classification of 37 loan relationships as impaired. The allowance on impaired loans was $5.7 million at June 30, 2010 and $1.5 million at December 31, 2009. Loans considered troubled debt restructurings as of June 30, 2010 increased $7.0 million from December 31, 2009.
The following table presents an analysis of the Companys allowance for loan losses for the periods stated (dollars in thousands):
|
|
2010 |
|
2009 |
|
|||||||||||
|
|
2nd Qtr |
|
1st Qtr |
|
4th Qtr |
|
3rd Qtr |
|
2nd Qtr |
|
|||||
Provision - quarter |
|
$ |
3,175 |
|
$ |
2,375 |
|
$ |
10,375 |
|
$ |
5,600 |
|
$ |
7,650 |
|
Provision - year to date |
|
5,550 |
|
2,375 |
|
24,925 |
|
14,550 |
|
8,950 |
|
|||||
Net charge-offs - quarter |
|
1,619 |
|
1,132 |
|
9,599 |
|
1,694 |
|
2,646 |
|
|||||
Net charge-offs - year to date |
|
2,751 |
|
1,132 |
|
14,581 |
|
4,982 |
|
3,288 |
|
|||||
Allowance at period end |
|
28,721 |
|
27,165 |
|
25,922 |
|
25,146 |
|
21,240 |
|
|||||
Allowance at period end to total loans |
|
2.5 |
% |
2.3 |
% |
2.2 |
% |
2.1 |
% |
1.7 |
% |
|||||
Other Real Estate. At June 30, 2010, the Company had $22.0 million in other real estate, compared to $26.0 million at December 31, 2009. During the first six months of 2010, the Company acquired properties with an aggregate carrying value of $2.2 million, and the Company sold properties with an aggregate carrying value of $5.6
million. These sales produced $.3 million in gains and $.1 million in losses. On a monthly basis, the Company evaluates the carrying value of all other real estate properties and takes write-downs on these properties as necessary. During the first six months of 2010, the Company recorded aggregate write-downs of $.5 million on eight commercial loan properties. The Company is actively marketing the properties it holds in its other real estate portfolio in a continuing effort to reduce this portfolio.
Deposits. Total deposits at June 30, 2010, increased 1.5% from December 31, 2009, primarily due to increased balances in money market checking and savings deposits. Management believes that due to the current state of the economy, some customers have migrated from non-liquid time deposits to more liquid deposit products such as money market checking and savings. In general, management promotes the Companys deposit products when it believes appropriate and prices its products in a manner intended to retain the Companys current customers as well as attract new customers while maintaining an acceptable net interest margin. The Company currently holds $28.0 million of deposits related to balances on cards issued by the Companys former prepaid solutions group. The Company expects to transfer these balances at carrying value during 2010 in connection with the transfer of the Companys issuing bank responsibilities under the prepaid card programs originated by the Companys former prepaid solutions group.
Balances in the Companys major categories of deposits are summarized in the following table (dollars in thousands):
|
|
June 30, |
|
December 31, |
|
Dollar |
|
Percent |
|
|||
Demand-noninterest-bearing |
|
$ |
131,550 |
|
$ |
125,132 |
|
$ |
6,418 |
|
5.1 |
% |
Prepaid solutions cards deposits |
|
27,997 |
|
30,577 |
|
(2,580 |
) |
(8.4 |
)% |
|||
NOW |
|
324,748 |
|
328,405 |
|
(3,657 |
) |
(1.1 |
)% |
|||
Money market checking |
|
420,243 |
|
403,155 |
|
17,088 |
|
4.2 |
% |
|||
Savings |
|
345,303 |
|
330,197 |
|
15,106 |
|
4.6 |
% |
|||
Time deposits |
|
|
|
|
|
|
|
|
|
|||
Less than $100,000 |
|
387,008 |
|
392,501 |
|
(5,493 |
) |
(1.4 |
)% |
|||
$100,000 and greater |
|
147,167 |
|
147,020 |
|
147 |
|
0.1 |
% |
|||
Total |
|
$ |
1,784,016 |
|
$ |
1,756,987 |
|
$ |
27,029 |
|
1.5 |
% |
As of June 30, 2010, in accordance with applicable regulatory call report instructions, the Bank reported that it had no brokered deposits.
Prepaid Solutions Cards. Outstanding balances on prepaid solutions cards, which represent the total of prepaid solution cards deposits and prepaid solutions cards liabilities, decreased 2.0% at June 30, 2010 from December 31, 2009. On December 4, 2009, the Company sold its prepaid solutions cards division. The Bank remains the card issuing bank under the card programs transferred, although the Bank intends to transfer such responsibilities, and the related assets and liabilities to another financial institution during 2010. Although the outstanding balances on prepaid solutions cards will remain on the Companys balance sheet for a period of time, the Company will no longer record the income and expense associated with the prepaid solutions cards.
CAPITAL RESOURCES
Shareholders equity at June 30, 2010 decreased 2.0% from December 31, 2009. The decrease resulted from a $5.7 million increase in the amount reclassified on ESOP shares, partially offset by an increase in accumulated comprehensive income of $.4 million and net income of $2.9 million.
Banking regulations require the Company and the Bank to maintain minimum capital amounts and ratios. As of June 30, 2010, all capital ratios were in excess of the regulatory capital requirements, which call for a minimum total risk-based capital ratio of 8% for each of the Company and the Bank, a minimum Tier 1 risk-based capital ratio of 4% for each of 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 each
of the Company and the Bank. Bank holding companies and their subsidiaries are generally expected to operate at or above the minimum capital requirements.
As of June 30, 2010 and December 31, 2009, the Bank exceeded the minimum capital ratios required for it to qualify as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the Bank must maintain minimum ratios for total capital to risk weighted assets, Tier 1 capital to risk weighted assets and Tier 1 capital to average assets as set forth in the following table. There are no conditions or events since June 30, 2010 that management believes would result in a change of it being considered well-capitalized under the regulatory framework for prompt corrective action. On a consolidated basis, the Company also exceeded regulatory capital requirements as of these dates. In accordance with applicable regulations, the appraised fair value of West Suburban common stock owned by the ESOP is included in Tier 1 capital.
The following table sets forth the actual and minimum capital ratios of the Company and the Bank as of the dates indicated (dollars in thousands):
|
|
Actual |
|
Minimum |
|
Excess |
|
|||||||
|
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
Amount |
|
|||
As of June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|||
Total capital (to risk weighted assets) |
|
|
|
|
|
|
|
|
|
|
|
|||
Company |
|
$ |
174,170 |
|
12.5 |
% |
N/A |
|
N/A |
|
N/A |
|
||
Bank |
|
162,366 |
|
11.7 |
% |
$ |
139,220 |
|
10.0 |
% |
$ |
23,146 |
|
|
Tier 1 capital (to risk weighted assets) |
|
|
|
|
|
|
|
|
|
|
|
|||
Company |
|
156,587 |
|
11.2 |
% |
N/A |
|
N/A |
|
N/A |
|
|||
Bank |
|
144,824 |
|
10.4 |
% |
83,532 |
|
6.0 |
% |
61,292 |
|
|||
Tier 1 capital (to average assets) |
|
|
|
|
|
|
|
|
|
|
|
|||
Company |
|
156,587 |
|
7.9 |
% |
N/A |
|
N/A |
|
N/A |
|
|||
Bank |
|
144,824 |
|
7.3 |
% |
98,809 |
|
5.0 |
% |
46,015 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|||
As of December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|||
Total capital (to risk weighted assets) |
|
|
|
|
|
|
|
|
|
|
|
|||
Company |
|
$ |
171,609 |
|
12.0 |
% |
N/A |
|
N/A |
|
N/A |
|
||
Bank |
|
159,818 |
|
11.2 |
% |
$ |
142,385 |
|
10.0 |
% |
$ |
17,433 |
|
|
Tier 1 capital (to risk weighted assets) |
|
|
|
|
|
|
|
|
|
|
|
|||
Company |
|
153,696 |
|
10.8 |
% |
N/A |
|
N/A |
|
N/A |
|
|||
Bank |
|
141,920 |
|
10.0 |
% |
85,431 |
|
6.0 |
% |
56,489 |
|
|||
Tier 1 capital (to average assets) |
|
|
|
|
|
|
|
|
|
|
|
|||
Company |
|
153,696 |
|
8.1 |
% |
N/A |
|
N/A |
|
N/A |
|
|||
Bank |
|
141,920 |
|
7.5 |
% |
95,114 |
|
5.0 |
% |
46,806 |
|
LIQUIDITY
Effective liquidity management ensures the availability of funding sources at minimum cost to meet fluctuating deposit balances, loan demand needs 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 Companys liquidity position. Liquidity is enhanced by a securities portfolio structured to provide liquidity as needed. The Company also maintains relationships with correspondent banks to purchase federal funds subject to underwriting and collateral requirements. Additionally, subject to credit underwriting, collateral, capital stock, and other requirements of the Federal Home Loan Bank of Chicago (the FHLB), the Company is able to borrow from the FHLB on a same day basis. As of June 30, 2010, the Company could have borrowed up to approximately $152 million from the FHLB secured by certain of its real estate loans and securities. Furthermore, the Company has agreements in place to borrow up to $61 million in federal funds. The Company manages its liquidity position through continuous monitoring of profitability trends, asset quality, interest rate sensitivity and maturity schedules of interest-earning assets and interest-bearing liabilities.
Generally, the Company uses cash and cash equivalents and securities available for sale to meet its liquidity needs. As of June 30, 2010 and December 31, 2009, these liquid assets represented 22.5% and 18.3% of total assets, respectively.
During the first six months of 2010, the Companys cash and cash equivalents decreased $58.3 million, as the Company increased its available for sale securities portfolio to earn a higher rate of return compared to federal funds sold. Net cash provided by operating activities was $12.8 million. Net cash used in investing activities was $100.0 million. Net cash provided by financing activities for this period was $28.9 million.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
Net Income. The Companys net income increased 94.3% to $2.9 million for the first six months of 2010 compared to $1.5 million for the first six months of 2009. This increase resulted primarily from a decrease in the provision for loan losses of $3.4 million. This decrease was partially offset by a decrease in net interest income of $.7 million and an increase in total noninterest expense and income tax expense of $.5 million and $.8 million, respectively.
Net Interest Income. Net interest income (on a fully tax-equivalent basis) decreased 2.3% for the first six months of 2010 compared to the first six months of 2009. 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 incurred on interest-bearing liabilities. Net interest income is affected by changes in volume and yield on interest-earning assets and the volume and rates on interest-bearing liabilities. Interest-earning assets consist of federal funds sold, 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 Companys net interest margin (on a fully tax-equivalent basis) decreased to 3.4% for the six-month period ended June 30, 2010 compared to 3.5% for the six-month period ended June 30, 2009.
Total interest income (on a tax-equivalent basis) decreased 7.6% for the first six months of 2010 compared to the first six months of 2009, primarily due to decreasing yields in the Companys securities portfolio. Securities average balances increased 22.0% for the first six months of 2010 and the average yield on the securities portfolio decreased 120 basis points. Average loan balances decreased 7.3% for the first six months of 2010 and the average yield on the loan portfolio increased 1 basis point. Yields on the Companys home equity portfolio and residential real estate portfolio decreased by 26 and 21 basis points, respectively, primarily due to a significant increase in nonaccrual loans. Yields on the Companys commercial loan portfolio increased 39 basis points primarily due to loans that are 45 days or more past due triggering a higher default rate.
Total interest expense decreased 19.7% for the first six months of 2010 compared to the first six months of 2009. Lower interest on deposits, resulting from lower yields on interest-bearing deposits, accounted for most of the decrease. The average yield on interest-bearing deposits decreased 43 basis points to 1.3% at June 30, 2010, from 1.7% at June 30, 2009. Approximately 68% of time deposits are scheduled to mature within one year.
The following table reflects the impact of changes in volume and interest rates on interest-earning assets and interest-bearing liabilities (on a fully tax-equivalent basis) for the first six months ended June 30, 2010 as compared to the same period in 2009 (dollars in thousands):
|
|
Change due to |
|
Total |
|
|||||
|
|
Volume |
|
Rate |
|
Change |
|
|||
Interest Income |
|
|
|
|
|
|
|
|||
Federal funds sold |
|
$ |
1 |
|
$ |
(9 |
) |
$ |
(8 |
) |
Securities |
|
1,716 |
|
(2,679 |
) |
(963 |
) |
|||
Loans |
|
(2,350 |
) |
101 |
|
(2,249 |
) |
|||
Total interest income |
|
(633 |
) |
(2,587 |
) |
(3,220 |
) |
|||
Interest Expense |
|
|
|
|
|
|
|
|||
Interest-bearing deposits |
|
801 |
|
(3,284 |
) |
(2,483 |
) |
|||
Other interest-bearing liabilities |
|
(42 |
) |
(1 |
) |
(43 |
) |
|||
Total interest expense |
|
759 |
|
(3,285 |
) |
(2,526 |
) |
|||
Net interest income |
|
$ |
(1,392 |
) |
$ |
698 |
|
$ |
(694 |
) |
The following table presents an analysis of the Companys year-to-date average interest-earning assets, demand-noninterest-bearing deposits and interest-bearing liabilities as of the dates indicated (dollars in thousands):
|
|
2010 |
|
2009 |
|
|||||||||||
|
|
June 30 |
|
March 31 |
|
December 31 |
|
September 30 |
|
June 30 |
|
|||||
Federal funds sold |
|
$ |
45,061 |
|
$ |
78,227 |
|
$ |
61,280 |
|
$ |
55,339 |
|
$ |
44,024 |
|
Securities |
|
545,377 |
|
486,596 |
|
449,239 |
|
443,848 |
|
446,955 |
|
|||||
Loans |
|
1,131,278 |
|
1,144,915 |
|
1,201,646 |
|
1,210,884 |
|
1,220,487 |
|
|||||
Total interest-earning assets |
|
$ |
1,721,716 |
|
$ |
1,709,738 |
|
$ |
1,712,165 |
|
$ |
1,710,071 |
|
$ |
1,711,466 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Demand-noninterest-bearing deposits |
|
$ |
157,093 |
|
$ |
154,976 |
|
$ |
152,332 |
|
$ |
148,988 |
|
$ |
144,088 |
|
Interest-bearing deposits |
|
1,624,952 |
|
1,608,878 |
|
1,525,659 |
|
1,512,697 |
|
1,498,593 |
|
|||||
Total deposits |
|
$ |
1,782,045 |
|
$ |
1,763,854 |
|
$ |
1,677,991 |
|
$ |
1,661,685 |
|
$ |
1,642,681 |
|
Total interest-bearing liabilities |
|
$ |
1,624,952 |
|
$ |
1,608,878 |
|
$ |
1,534,127 |
|
$ |
1,524,018 |
|
$ |
1,515,663 |
|
Provision for Loan Losses. . A provision for loan loss is recorded when the Companys evaluation of the general and specific reserve categories of the allowance for loan loss are not deemed sufficient to absorb probable incurred credit losses in the loan portfolio. Provision for loan losses decreased $3.4 million for the first six months of 2010 compared to the first six months of 2009. This decrease was primarily due to continued declining balances in the Companys loan portfolio during the first six months of 2010. Although the percent of the general allowance to total loans increased at June 30, 2010 compared to June 30, 2009, it was not necessary for the Company to make provisions for loan losses during the first six months of 2010 at the same level as the first six months of 2009 due to declining loan balances in the general reserve category. The $5.5 million provision during the first six months of 2010 was primarily the result of an increase in the specific reserves allocated to impaired loans. A more detailed discussion of 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 1.8% for the first six months of 2010 compared to the first six months of 2009. Although the Company has not recorded any OTTI on its securities portfolio in 2010, during 2009, the Company recorded OTTI on certain pooled trust preferred securities in the amount of $.9 million, which reduced noninterest income. The Company recorded BOLI income of $.2 million for the first six months of 2010 compared to $.7 million for the first six months of 2009. This was primarily due to a decrease in the market value of the underlying investments with specific account assets. Other income increased $.3 million primarily due to gains on sales of OREO. These components were partially offset by decreases to other items. Service fees on deposit accounts decreased $.2 million primarily due to decreased fees associated with the overdraft honors program. Additionally, the Company experienced a decrease in gains on sale of loans held for sale of $.4 million, as loans are no longer sold in the secondary market.
Noninterest Expense. Total noninterest expense increased 1.8% for the first six months of 2010 compared to the first six months of 2009. Salaries and employee benefits decreased $.8 million primarily due to a decrease in the market value of the underlying investments associated with the insurance policies that are tied to the Companys deferred compensation plans. Occupancy expense decreased $.1 million primarily due to decreased building maintenance expenses. Advertising and promotion expense increased $.1 million primarily due to advertising on cable television. FDIC assessments increased $.5 million due to several factors, including increased assessments issued by the FDIC in support of the deposit insurance fund as well as the Temporary Liquidity Guarantee Program and the Companys participation in the FDICs Transaction Account Guarantee Program. Professional fees decreased $.6 million primarily due to reduced costs associated with the Companys compliance with the enforcement action related to the Bank Secrecy Act and other compliance related matters. Other real estate owned expense increased $.9 million due to costs of maintaining other real estate owned properties including real estate taxes and a $.5 million write down in asset value. Loan administration expense increased $.7 million primarily due to real estate tax payments on several commercial loans along with expenses incurred in connection with the collection of lease payments from one large commercial loan customer.
Income Taxes. Income tax expense increased $.9 million for the first six months of 2010 compared to the first six months of 2009. The effective tax rates for the first six months of 2010 and 2009 were 24.7% and 8.8%, respectively. The increase is due to the increased taxable income.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2010 AND 2009
Net Income (Loss). The Company experienced net income of $1.2 million during the second quarter of 2010 compared to a net loss of $2.4 million during the second quarter of 2009. Net income was positively affected by a decrease in the provision for loan losses of $4.5 million along with a decrease in total noninterest expense of $1.2 million. Net income was negatively affected by a decrease in total noninterest income of $.4 million and an increase in income tax expense of $1.8 million.
Net Interest Income. Net Interest income (on a fully tax-equivalent basis) increased .5% for the second quarter of 2010 compared to the second quarter of 2009. The Companys net interest margin (on a fully tax-equivalent basis) for the second quarter of 2010 decreased to 3.4% compared to 3.5% for the second quarter of 2009.
Total interest income (on a fully tax-equivalent basis) decreased 6.2% for the second quarter of 2010 compared to the second quarter of 2009, primarily due to decreasing yields in the Companys securities portfolio. Securities average balances increased 39.8% during this period and the average yield on the securities portfolio decreased 132 basis points. Average loan balances decreased 8.3% during this period and the average yield on the loan portfolio increased 1 basis point. Yields on the Companys home equity portfolio and real estate portfolio decreased by 22 and 30 basis points, respectively, primarily due to a significant increase in nonaccrual loans. Yields on the Companys commercial loan portfolio increased 42 basis points primarily due to loans that are 45 days or more past due triggering a higher default rate.
Total interest expense decreased 21.7% for the second quarter of 2010 compared to the second quarter of 2009. Interest paid on deposit accounts accounted for the decrease. The average yield on interest-bearing deposits decreased 46 basis points to 1.2% for the second quarter of 2010 from 1.7% for the second quarter of 2009.
The following table reflects the impact of changes in volume and interest rates on interest-earning assets and interest-bearing liabilities (on a fully tax-equivalent basis) for the second quarter ended June 30, 2010, as compared to the same period in 2009 (dollars in thousands):
|
|
Change due to |
|
Total |
|
|||||
|
|
Volume |
|
Rate |
|
Change |
|
|||
Interest Income |
|
|
|
|
|
|
|
|||
Federal funds sold |
|
$ |
50 |
|
$ |
(78 |
) |
$ |
(28 |
) |
Securities |
|
1,432 |
|
(1,414 |
) |
18 |
|
|||
Loans |
|
(1,333 |
) |
49 |
|
(1,284 |
) |
|||
Total interest income |
|
149 |
|
(1,443 |
) |
(1,294 |
) |
|||
Interest Expense |
|
|
|
|
|
|
|
|||
Interest-bearing deposits |
|
353 |
|
(1,719 |
) |
(1,366 |
) |
|||
Other interest-bearing liabilities |
|
(176 |
) |
175 |
|
(1 |
) |
|||
Total interest expense |
|
177 |
|
(1,544 |
) |
(1,367 |
) |
|||
Net interest income |
|
$ |
(28 |
) |
$ |
101 |
|
$ |
73 |
|
The following table presents an analysis of the Companys quarterly average interest-earning assets, demand-noninterest-bearing deposits and interest-bearing liabilities as of the dates indicated (dollars in thousands):
|
|
June 30, 2010 |
|
June 30, 2009 |
|
||
Federal funds sold |
|
$ |
12,260 |
|
$ |
56,191 |
|
Securities |
|
603,511 |
|
431,769 |
|
||
Loans |
|
1,118,962 |
|
1,220,511 |
|
||
Total interest-earning assets |
|
$ |
1,734,733 |
|
$ |
1,708,471 |
|
|
|
|
|
|
|
||
Demand-noninterest-bearing deposits |
|
$ |
159,531 |
|
$ |
158,822 |
|
Interest-bearing deposits |
|
1,640,847 |
|
1,523,244 |
|
||
Total deposits |
|
$ |
1,800,378 |
|
$ |
1,682,066 |
|
Total interest-bearing liabilities |
|
$ |
1,640,847 |
|
$ |
1,523,804 |
|
Provision for Loan Losses. Provision for loan losses decreased $4.5 million for the second quarter of 2010 compared to the second quarter of 2009. This decrease was primarily due to continued declining balances in the Companys loan portfolio during the second quarter of 2010. Although the percent of the general allowance to total loans increased for the second quarter of 2010 compared to the second quarter of 2009, it was not necessary for the Company to make provisions for loan losses during the second quarter of 2010 at the same level as the second quarter of 2009 due to declining loan balances in the general reserve category. The $3.2 million provision during the second quarter of 2010 was primarily the result of an increase in the specific reserves allocated to impaired loans. A more detailed discussion of 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 decreased 13.8% for the second quarter of 2010 compared to the second quarter of 2009. Although the Company has not recorded any OTTI on its securities portfolio in 2010, during the second quarter of 2009, the Company recorded OTTI on certain pooled trust preferred securities in the amount of $.9 million, which reduced noninterest income. The Company recorded BOLI expense of $.2 million for the second quarter of 2010 compared to BOLI income of $.9 million for the second quarter of 2009. This was primarily due to a decrease in the market value of the underlying investments with the specific account assets. Additionally, other income increased $.2 million primarily due to gains on sales of OREO. These components were offset by decreases to other items. Service fees on deposit accounts decreased $.1 million primarily due to decreased fees associated with the overdraft honors program. Additionally, the Company experienced a decrease in gains on sale of loans held for sale of $.3 million, as loans are no longer being sold on the secondary market.
Noninterest Expense. Total noninterest expense decreased 8.8% for the second quarter of 2010 compared to the second quarter of 2009. Salaries and employee benefits decreased $1.3 million primarily due to a decrease in the market value of the underlying investments associated with the insurance policies that are tied to the Companys deferred compensation plans. Advertising and promotion expense increased $.1 million primarily due to advertising on cable television. FDIC assessments decreased $.4 million during this period primarily due to a special assessment being recorded during the second quarter of 2009. Professional fees decreased $.4 million primarily due to reduced costs associated with the Companys compliance with the enforcement action related to the Bank Secrecy Act and other compliance related matters. Other real estate owned expense increased $.4 million due to costs of maintaining other real estate owned properties including real estate taxes. Loan administration expense increased $.3 million primarily due to real estate tax payments on several commercial loans. Other expense increased $.2 million due to a credit existing on state examination fees during the 2009 period.
Income Taxes. Income tax expense increased $1.8 million for the second quarter of 2010 compared to the second quarter of 2009. The effective tax rates for the second quarter of 2010 and 2009 were 31.1% and (34.4%), respectively. The increase is due to the Company recording pretax income for the second quarter of 2010 compared to a pretax loss for the second quarter of 2009.
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 Companys 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 managements response to increasing competition from other financial institutions.
The Company measures interest 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 as adjusted for the assumed rate increase or decrease. The replacement rate for securities is the current market rate as adjusted for the assumed rate increase or decrease.
· The repricing rate for balance sheet data is determined by utilizing individual account statistics provided by the Companys data processing systems.
· The maturity and repricing dates for balance sheet data are determined by utilizing individual account statistics provided by the Companys data processing systems.
Presented below are the Companys 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):
June 30, 2010 |
|
Amount |
|
Dollar |
|
Percent |
|
||
+200 basis points |
|
$ |
59,474 |
|
$ |
1,092 |
|
1.9 |
% |
+100 basis points |
|
58,980 |
|
598 |
|
1.0 |
% |
||
Base |
|
58,382 |
|
|
|
|
|
||
-100 basis points |
|
51,000 |
|
(7,382 |
) |
(12.6 |
)% |
||
-200 basis points |
|
47,733 |
|
(10,649 |
) |
(18.2 |
)% |
||
December 31, 2009 |
|
Amount |
|
Dollar |
|
Percent |
|
||
+200 basis points |
|
$ |
58,194 |
|
$ |
2,388 |
|
4.3 |
% |
+100 basis points |
|
56,317 |
|
511 |
|
0.9 |
% |
||
Base |
|
55,806 |
|
|
|
|
|
||
-100 basis points |
|
49,048 |
|
(6,758 |
) |
(12.1 |
)% |
||
-200 basis points |
|
44,371 |
|
(11,435 |
) |
(20.5 |
)% |
||
In a falling rate environment, the Company is projected to have a decrease in net interest income. However, it is not possible for many of the Companys deposit rates to fall 100 or 200 basis points due to their current rates already being below 100 basis points at June 30, 2010. The target federal funds rate is currently set by the Federal Reserve
at a rate between 0 and 25 basis points. As a result, a 200 basis point decline in overall rates would only have between a 0 and 25 basis point decline in both federal funds and the prime rate. Further, other rates that are currently below 1% or 2% (e.g. U.S. Treasuries and LIBOR) would not fall below 0% with an overall 100 or 200 basis point decrease in rates. Many of the Companys variable rate loans are set to an index tied to prime, federal funds or LIBOR, and as a result, a further decrease in rates would not have a substantial impact on loan yields. Accordingly, management believes that the analyses resulting from 100 and 200 basis point downward changes are not meaningful in light of current interest rate levels.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the participation of the Companys management, including the Chairman and Chief Executive Officer and the President and Chief Financial Officer, of the effectiveness of the design and operation of the Companys disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended) as of June 30, 2010. Based on that evaluation, the Companys Chairman and Chief Executive Officer and the President and Chief Financial Officer concluded that the Companys disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified. That evaluation did not identify any changes in the Companys internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.
There are no material pending legal proceedings to which the Company is a party other than ordinary course, routine litigation incidental to the Companys business.
Except as set forth below, there have been no material changes in the risk factors applicable to the Company from those disclosed in the Companys 2009 Annual Report on Form 10-K.
Recently enacted regulatory reforms could have a significant impact on the Companys business, financial condition and results of operations.
On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Act), which is perhaps the most significant financial reform since the Great Depression and contains numerous and wide-ranging reforms to the United States financial system. The Act contains many provisions which will affect institutions such as the Company in substantial and unpredictable ways. Consequently, compliance with the Acts provisions may curtail the Companys revenue opportunities, increase its operating costs, require it to hold higher levels of regulatory capital and/or liquidity and otherwise adversely affect the Companys business or financial results in the future. The Companys management is actively reviewing the provisions of the Act and assessing its probable impact on the Companys business, financial condition, and result of operations. However, because many aspects of the Act are subject to future rulemaking, it is difficult to precisely anticipate its overall impact, financially and otherwise, on the Company and the Bank at this time.
Members of the Acker family may have a controlling influence on the Company.
As of August 6, 2010, members of the Acker family, which consists of Ralph L. and Arlis Acker, Keith W. Acker, Kevin J. Acker, Craig R. Acker and Alana S. Acker and their related interests, beneficially owned, in the aggregate, 92,682 shares, or 21.7%, of the Companys outstanding common stock. As of the same date, Kevin Acker, Chairman and Chief Executive Officer of the Company, Keith Acker, Chief Operations Officer of the Company and President of the Bank, and Craig Acker, a director of the Bank, together beneficially owned 72,976 shares, or 17.1% of the Companys outstanding common stock. As a result, the members of the Acker family may have the ability to influence significantly the election of the Companys directors and the outcome of certain corporate actions requiring shareholder approval. In addition, because of their positions as executive officers and/or directors of the Company and/or the Bank, each of Kevin Acker, Keith Acker and Craig Acker have the ability to influence the operations of the Company and the Bank.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. (REMOVED AND RESERVED)
None
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 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 9, 2010 |
|
|
/s/ Kevin J. Acker |
|
KEVIN J. ACKER |
|
CHAIRMAN 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 of West Suburban filed March 14, 1986 Incorporated by reference from Exhibit 3.1 of Form 10-K of West Suburban dated March 21, 2003, under Commission File No. 0-17609. |
|
|
|
3.2 |
|
Articles of Amendment to Articles of Incorporation of West Suburban filed November 2, 1988 Incorporated by reference from Exhibit 3.2 of Form 10-K of West Suburban dated March 21, 2003, under Commission File No. 0-17609. |
|
|
|
3.3 |
|
Articles of Amendment to Articles of Incorporation of West Suburban filed June 20, 1990 Incorporated by reference from Exhibit 3.3 of Form 10-K of West Suburban dated March 21, 2003, under Commission File No. 0-17609. |
|
|
|
3.4 |
|
Articles of Amendment to Articles of Incorporation of West Suburban filed June 8, 1998 Incorporated by reference from Exhibit 3.4 of Form 10-K of West Suburban dated March 21, 2003, under Commission File No. 0-17609. |
|
|
|
3.5 |
|
Articles of Amendment to Articles of Incorporation of West Suburban filed May 27, 2003 Incorporated by reference from Exhibit 3.5 of Form 10-Q of West Suburban dated August 14, 2003, under Commission File No. 0-17609. |
|
|
|
3.6 |
|
Amended and Restated By-laws of West Suburban Incorporated by reference from Exhibit 3.5 of Form 10-K of West Suburban dated March 21, 2003, under Commission File No. 0-17609. |
|
|
|
4.1 |
|
Specimen of Common Stock certificate Incorporated by reference from Exhibit 4.1 of Form 10-K of West Suburban dated March 14, 2006, Commission File No. 0-17609. |
|
|
|
10.1 |
|
Stipulation and Consent to the Issuance of an Order to Cease and Desist, dated December 2, 2008, and the related Order to Cease and Desist issued by the FDIC and the Illinois Department of Financial and Professional Regulation, dated December 3, 2008. |
|
|
|
10.2 |
|
Stipulation and Consent to the Issuance of an Order to Cease and Desist, dated April 20, 2009, and the related Order to Cease and Desist issued by the FDIC, dated April 23, 2009. |
|
|
|
31.1 |
|
Certification of Kevin J. Acker, Chairman and Chief Executive Officer, Pursuant to Rule 13a-14(a) and Rule 15d-14(a). |
|
|
|
31.2 |
|
Certification of Duane G. Debs, President and Chief Financial Officer, Pursuant to Rule 13a-14(a) and Rule15d-14(a). |
|
|
|
32.1 |
|
Certification of Kevin J. Acker, Chairman and Chief Executive Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.2 |
|
Certification of Duane G. Debs, President and Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |