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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, 2011

OR

 

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

For the transition period from              to             

Commission file number: 0-51296

COMMUNITY FINANCIAL SHARES, INC.

(Exact name of registrant as specified in its charter)

 

Delaware		36-4387843
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
357 Roosevelt Road Glen Ellyn, Illinois		60137
(Address of principal executive offices)		(Zip Code)

(630) 545-0900

(Registrant’s telephone number, including area code)

None

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

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

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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)

 

Large Accelerated Filer		¨		Accelerated Filer		¨
Non-Accelerated Filer		¨  (Do not check if a smaller reporting company)		Smaller Reporting Company		x

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class		Outstanding at August 10, 2011
Common Stock, no par value per share		1,245,267 shares

 

 

 

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Form 10-Q Quarterly Report

Table of Contents

 

PART I – FINANCIAL INFORMATION
Item 1.		Financial Statements			3
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			22
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			35
Item 4		Controls and Procedures			35
PART II – OTHER INFORMATION
Item 1.		Legal Proceedings			36
Item 1A.		Risk Factors			36
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			36
Item 3.		Defaults Upon Senior Securities			36
Item 4.		(Removed and Reserved)			36
Item 5.		Other Information			36
Item 6.		Exhibits			36
		Signatures			37

 

 

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PART I. FINANCIAL INFORMATION

 

ITEM 1.

FINANCIAL STATEMENTS

COMMUNITY FINANCIAL SHARES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

 

		June 30, 2011				December 31, 2010
		(Unaudited)
ASSETS
Cash and due from banks		$	4,635			$	4,553
Interest-bearing deposits			13,174				27,934
Cash and cash equivalents			17,809				32,487
Interest-bearing time deposits			5,076				4,827
Securities available for sale			49,257				43,175
Loans held for sale			309				1,770
Loans, less allowance for loan losses of $6,604 and $7,679 at June 30, 2011 and December 31, 2010, respectively			212,071				221,607
Foreclosed assets, net			3,626				3,008
Real estate held for investment			4,304				4,318
Prepaid FDIC assessment			1,029				1,506
Federal Home Loan Bank stock			5,398				5,398
Premises and equipment, net			15,279				15,535
Cash value of life insurance			6,059				5,938
Interest receivable and other assets			7,886				7,527
Total assets		$	328,103			$	347,096
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits		$	291,544			$	309,080
Federal Home Loan Bank advances			13,000				13,000
Other borrowings			1,300				1,500
Subordinated debentures			3,609				3,609
Interest payable and other liabilities			2,606				2,152
Total liabilities			312,059				329,341
Commitments and contingent liabilities
Shareholders’ equity
Common stock—no par value, 5,000,000 shares authorized; 1,245,267 shares issued and outstanding			—				—
Preferred stock—$1.00 par value, 1,000,000 shares authorized; 7,319 shares issued and outstanding			7				7
Paid-in capital			11,995				11,954
Retained earnings			3,683				6,046
Accumulated other comprehensive income (loss)			359				(252	)
Total shareholders’ equity			16,044				17,755
Total liabilities and shareholders’ equity		$	328,103			$	347,096

See Notes to Condensed Consolidated Financial Statements

 

 

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COMMUNITY FINANCIAL SHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Three and Six Months Ended June 30, 2011 and 2010

(In thousands, except share and per share data)

(Unaudited)

 

 

		Three Months Ended June  30,								Six Months Ended June  30,
		2011				2010				2011				2010
Interest and dividend income
Interest and fees on loans		$	2,970			$	2,922			$	5,924			$	6,054
Securities:
Taxable			280				307				521				636
Exempt from federal income tax			110				138				222				279
Other interest income			29				21				60				37
Total interest and dividend income			3,389				3,388				6,727				7,006
Interest expense
Deposits			518				746				1,073				1,582
Federal Home Loan Bank advances and other borrowed funds			101				127				201				254
Subordinated debentures			17				17				35				34
Total interest expense			636				890				1,309				1,870
Net interest income			2,753				2,498				5,418				5,136
Provision for loan losses			2,521				4,425				2,694				4,665
Net interest (loss) after provision for loan losses			232				(1,927	)			2,724				471
Non-interest income
Service charges on deposit accounts			115				133				215				262
Gain on sale of loans			114				184				341				350
Gain on sale of securities			—				—				104				—
Write-down on other real estate owned			(255	)			(185	)			(255	)			(185	)
Gain (loss) on sale of foreclosed assets			(13	)			(12	)			5				4
Other non-interest income			277				176				537				347
Total non-interest income			238				296				947				778
Non-interest expense
Salaries and employee benefits			1,370				1,310				2,862				2,721
Net occupancy and equipment expense			343				324				693				672
Data processing expense			300				277				588				545
Advertising and promotions			65				71				116				134
Professional fees			254				267				515				444
FDIC insurance premiums			266				186				533				370
Other real estate owned expenses			174				128				260				229
Other operating expenses			314				315				614				591
Total non-interest expense			3,086				2,878				6,181				5,706
Loss before income taxes			(2,616	)			(4,509	)			(2,510	)			(4,457	)
Benefit for income taxes			(347	)			(1,824	)			(370	)			(1,882	)
Net loss			(2,269	)			(2,685	)			(2,140	)			(2,575	)
Preferred stock dividend and accretion			(112	)			(110	)			(223	)			(221	)
Net loss available to common shareholders		$	(2,381	)		$	(2,795	)		$	(2,363	)		$	(2,796	)
Loss per share
Basic		$	(1.91	)		$	(2.24	)		$	(1.90	)		$	(2.24	)
Diluted		$	(1.91	)		$	(2.24	)		$	(1.90	)		$	(2.24	)
Average shares outstanding basic			1,245,267				1,245,267				1,245,267				1,245,267
Average shares outstanding diluted			1,245,267				1,245,267				1,245,267				1,245,267
Dividends per share		$	0.00			$	0.00			$	0.00			$	0.00

See Notes to Condensed Consolidated Financial Statements

 

 

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COMMUNITY FINANCIAL SHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

Six Months Ended June 30, 2011 and 2010

(In thousands, except share and per share data)

(Unaudited)

 

 

		Number of Common Shares				Preferred Stock				Paid-In Capital				Retained Earnings				Accumulated Other Comprehensive Income (Loss)				Total Shareholders’ Equity
Balance at January 1, 2011			1,245,267			$	7			$	11,954			$	6,046			$	(252	)		$	17,755
Net loss			—				—				—				(2,140	)			—				(2,140	)
Change in unrealized net gain on securities available for sale, net of reclassification adjustment of $104 and tax effects $21			—				—				—				—				611				611
Total comprehensive loss																							(1,529	)
Preferred stock dividends (5%)			—				—				—				(190	)			—				(190	)
Discount on preferred stock			—				—				33				(33	)			—				—
Stock option expense			—				—				8				—				—				8
Balance at June 30, 2011			1,245,267			$	7			$	11,995			$	3,683			$	359			$	16,044
Balance at January 1, 2010			1,245,267			$	7			$	11,877			$	11,064			$	(241	)		$	22,707
Net loss			—				—				—				(2,575	)			—				(2,575	)
Change in unrealized net gain on securities available for sale, net of tax effects			—				—				—				—				495				495
Total comprehensive income																							(2,079	)
Preferred stock dividends (5%)			—								—				(190	)			—				(190	)
Discount on preferred stock			—				—				31				(31	)			—				—
Stock option expense			—				—				9				—				—				9
Balance at June 30, 2010			1,245,267			$	7			$	11,917			$	8,268			$	254			$	20,446

See Notes to Condensed Consolidated Financial Statements

 

 

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COMMUNITY FINANCIAL SHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Six Months Ended June 30, 2011 and 2010

(In thousands)

(Unaudited)

 

 

		Six Months Ended June  30,
		2011				2010
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss		$	(2,140	)		$	(2,575	)
Adjustments to reconcile net loss to net cash from operating activities
Amortization on securities, net			76				64
Depreciation			318				328
Provision for loan losses			2,694				4,665
Gain on sale of securities			(104	)			—
Write-down on other real estate owned			255				185
Gain on sale of foreclosed assets			(5	)			(4	)
Gain on sale of loans			(341	)			(350	)
Originations of loans for sale			(17,648	)			(19,253	)
Proceeds from sales of loans			17,989				19,603
Compensation cost of stock options			8				9
Change in cash value of life insurance			(120	)			(119	)
Change in interest receivable and other assets			(872	)			(4,625	)
Change in interest payable and other liabilities			452				243
Net cash from (used in) operating activities			562				(1,829	)
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in interest-bearing time deposits			(249	)			(2,370	)
Purchases of securities available for sale			(11,511	)			(7,504	)
Proceeds from maturities and calls of securities available for sale			3,928				11,281
Proceeds from sales of securities available for sale			2,526				—
Proceeds from sale other real estate owned			6,527				1,821
Net change in loans			1,526				(501	)
Property and equipment expenditures, net			(62	)			(74	)
Net cash from investing activities			2,685				2,653
CASH FLOWS FROM FINANCING ACTIVITIES
Change in:
Non-interest bearing and interest bearing demand deposits and savings			(7,097	)			11,215
Certificates and other time deposits			(10,438	)			(12,855	)
Proceeds of borrowings			—				6,500
Repayments of borrowings			(200	)			(6,700	)
Dividends paid on preferred stock			(190	)			(190	)
Net cash used in financing activities			(17,925	)			(2,030	)
Change in cash and cash equivalents			(14,678	)			(1,206	)
Cash and cash equivalents at beginning of period			32,487				25,848
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	17,809			$	24,642
Supplemental disclosures
Interest paid		$	1,254			$	2,012
Income taxes paid			—				—
Transfers from loans to foreclosed assets and real estate held for investment			4,053				5,942

See Notes to Condensed Consolidated Financial Statements

 

 

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COMMUNITY FINANCIAL SHARES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Table dollars in thousands)

June 30, 2011 and 2010

 

NOTE 1 – BASIS OF PRESENTATION

The accounting policies followed in the preparation of the interim condensed consolidated financial statements included in this Quarterly Report on Form 10-Q are consistent with those used in the preparation of annual consolidated financial statements. The interim condensed consolidated financial statements reflect all normal and recurring adjustments, which are necessary, in the opinion of management of Community Financial Shares, Inc. (the “Company”), for a fair statement of results for the interim periods presented. Results for the three and six months ended June 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011 or any other period.

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for the interim financial period and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, which was filed with the U.S. Securities and Exchange Commission on March 31, 2011. The condensed consolidated balance sheet of the Company as of December 31, 2010 has been derived from the audited consolidated balance sheet as of that date.

NOTE 2 – LOSS PER SHARE

The number of shares used to compute basic and diluted loss per share were as follows:

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2011				2010				2011				2010
(in thousands)
Net loss		$	(2,269	)		$	(2,685	)		$	(2,140	)		$	(2,575	)
Less: Accretion of discount on preferred stock			(17	)			(15	)			(33	)			(31	)
Dividends on preferred stock			(95	)			(95	)			(190	)			(190	)
Loss available to common shareholders		$	(2,381	)		$	(2,795	)		$	(2,363	)		$	(2,796	)
Weighted Average Shares outstanding			1,245,267				1,245,267				1,245,267				1,245,267
Effect of dilutive securities:
Stock options			—				—				—				—
Shares used to compute diluted loss per share			1,245,267				1,245,267				1,245,267				1,245,267
Loss per share:
Basic		$	(1.91	)		$	(2.24	)		$	(1.90	)		$	(2.24	)
Diluted			(1.91	)			(2.24	)		$	(1.90	)		$	(2.24	)

There were 32,730 and 36,330 anti-dilutive shares at June 30, 2011 and 2010, respectively.

 

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Table dollars in thousands)

June 30, 2011 and 2010

 

NOTE 3 – CAPITAL RATIOS

At the dates indicated, the capital ratios of Community Bank-Wheaton/Glen Ellyn, the Company’s wholly owned subsidiary (the “Bank”), were as follows:

 

		June 30, 2011								December 31, 2010
		Amount				Ratio				Amount				Ratio
Total capital (to risk-weighted assets)		$	18,792				7.7	%		$	21,219				8.6	%
Tier I capital (to risk-weighted assets)			15,708				6.5	%			18,072				7.3	%
Tier I capital (to average assets)			15,708				4.9	%			18,072				5.4	%

At June 30, 2011, regulatory approval is required for all dividend declarations by both the Bank and the Company.

On January 21, 2011, the Bank entered into a Stipulation and Consent to the Issuance of a Consent Order with the FDIC and IDFPR, whereby the Bank consented to the issuance of a Consent Order (the “Order”) by the FDIC and IDFPR, without admitting or denying that grounds exist for the FDIC and IDFPR to initiate an administrative proceeding against the Bank. The Order requires the Bank to achieve Tier 1 capital at least equal to 8% of total assets and total capital at least equal to 12% of risk-weighted assets within 120 days. At June 30, 2011, these capital ratios were 4.9% and 7.7%, respectively. The Bank is actively working to comply with these new requirements, which may require us to raise capital. Our ability to raise any additional capital is contingent on the current capital markets and on our financial performance.

NOTE 4 – SECURITIES AVAILABLE FOR SALE

The fair value of securities available for sale at June 30, 2011 and December 31, 2010 are as follows:

 

		June 30, 2011
		Fair Value				Gross Unrealized Gains				Gross Unrealized Losses
U. S. government agencies		$	17,044			$	57			$	(9	)
State and political subdivisions			13,254				272				(128	)
Mortgage-backed securities – Government sponsored entities (GSE) residential			18,625				360				—
Preferred stock			49				34				—
SBA guaranteed			285				1				(2	)
		$	49,257			$	724			$	(139	)
		December 31, 2010
		Fair Value				Gross Unrealized Gains				Gross Unrealized Losses
U. S. government agencies		$	11,801			$	13			$	(216	)
State and political subdivisions			12,868				173				(470	)
Mortgage-backed securities – GSE residential			18,198				248				(154	)
Preferred stock			11				—				(3	)
SBA guaranteed			297				—				(3	)
		$	43,175			$	434			$	(846	)

 

 

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Securities classified as U. S. government agencies include notes issued by government-sponsored enterprises such as the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, and the Federal Home Loan Bank. The SBA-guaranteed securities are pools of loans guaranteed by the Small Business Administration.

The following tables show gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2011 and December 31, 2010:

 

		June 30, 2011
		Less than 12 Months								12 Months or More								Total
Description of Securities		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
U.S. government agencies		$	3,987			$	(9	)		$	—			$	—			$	3,987			$	(9	)
State and political subdivisions			3,934				(80	)			1,080				(48	)			5,014				(128	)
SBA guaranteed			—				—				239				(2	)			239				(2	)
Total temporarily impaired securities		$	7,921			$	(89	)		$	1,319			$	(50	)		$	9,240			$	(139	)
		December 31, 2010
		Less than 12 Months								12 Months or More								Total
Description of Securities		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
U.S. government agencies		$	7,788			$	(216	)		$	—			$	—			$	7,788			$	(216	)
State and political subdivisions			8,411				(365	)			1,568				(105	)			9,979				(470	)
Mortgage-backed securities – GSE residential			9,002				(154	)			—				—				9,002				(154	)
Preferred stock			11				(3	)			—				—				11				(3	)
SBA guaranteed			136				(1	)			113				(2	)			249				(3	)
Total temporarily impaired securities		$	25,348			$	(739	)		$	1,681			$	(107	)		$	27,029			$	(846	)

U.S. Government Agencies, State and Political Subdivisions, and Mortgage-backed securities

The unrealized losses on the Company’s investments in direct obligations of U.S. government agencies, state and political subdivisions and mortgage-backed securities were caused by interest rate changes. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Company does not intend to sell the investments and it is not more likely than not the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at June 30, 2011.

Unrealized gains and losses within the investment portfolio are determined to be temporary. The Company has performed an evaluation of its investments for other than temporary impairment and there was no impairment identified during the second quarter of 2011. The entire portfolio is classified as available for sale, however, management has no specific intent to sell any securities, and it is more likely than not that the Company will not have to sell any security before recovery of its amortized cost basis.

 

 

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The fair values of securities available for sale at June 30, 2011, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity are shown separately.

 

		Amortized Cost				Fair Value
Due in one year or less		$	67			$	68
Due after one year through five years			623				660
Due after five years through ten years			10,770				10,834
Due after ten years			18,645				18,736
Mortgage-backed securities			18,265				18,625
Preferred stock			15				49
SBA guaranteed			287				285
		$	48,672			$	49,257

Securities with a carrying value of approximately $23.0 million at June 30, 2011 were pledged to secure public deposits, Federal Home Loan Bank advances and for other purposes as required or permitted by law.

Sales activities for securities for the three and six months ended June 30, 2011 and 2010 is shown in the following table:

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2011				2010				2011				2010
Sales proceeds		$	—			$	—			$	2,526			$	—
Gross gains on sales			—				—				104				—

NOTE 5 – LOANS

Loans and Loan Income: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoffs are reported at their outstanding principal balances adjusted for unearned income, charge-offs, the allowance for loan losses, any unamortized deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans.

For loans amortized at cost, interest income is accrued based on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, as well as premiums and discounts, are deferred and amortized as a level yield adjustment over the respective term of the loan.

The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.

All interest accrued but not collected for loans that are placed on nonaccrual or charged off are reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Discounts and premiums on purchased residential real estate loans are amortized to income using the interest method over the remaining period to contractual maturity, adjusted for anticipated prepayments. Discounts and premiums on purchased consumer loans are recognized over the expected lives of the loans using methods that approximate the interest method.

Allowance for Loan Losses: The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

 

 

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The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers nonclassified loans and is based on historical charge-off experience and expected loss given default derived from the Company’s internal risk rating process. Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent.

Groups of loans with similar risk characteristics are collectively evaluated for impairment based on the group’s historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment measurements, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower.

The Company has a geographic concentration of loan and deposit customers within the Chicago metropolitan area. Most of the loans are secured by specific items of collateral including commercial and residential real estate and other business and consumer assets. Commercial loans are expected to be repaid from cash flow from operations of businesses.

Loans consisted of the following at June 30, 2011 and December 31, 2010, respectively:

 

		June 30, 2011				December 31, 2010
Real estate
Commercial		$	94,693			$	94,356
Construction			7,519				15,435
Residential			25,339				25,964
Home equity			62,730				66,243
Total real estate loans			190,281				201,998
Commercial			26,677				25,572
Consumer			1,416				1,399
Total loans			218,374				228,969
Deferred loan costs, net			301				317
Allowance for loan losses			(6,604	)			(7,679	)
Loans, net		$	212,071			$	221,607

 

 

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The risk characteristics of each loan portfolio segment are as follows:

Commercial

Commercial loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

Commercial Real Estate

These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s commercial real estate portfolio are diverse in terms of type and geographic location. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. As a general rule, the Company avoids financing single purpose projects unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans.

Construction

Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analysis of the developers and property owners. Construction loans are generally based on estimates of costs and value associated with the completed project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.

Residential and Consumer

With respect to residential loans that are secured by one-to-four family residences and are generally owner occupied, the Company generally establishes a maximum loan-to-value ratio and may require private mortgage insurance if that ratio is exceeded. Home equity loans are typically secured by a subordinate interest in one-to-four family residences, and consumer loans are secured by consumer assets such as automobiles or recreational vehicles. Some consumer loans are unsecured such as small installment loans and certain lines of credit. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

Policy for charging off loans:

Management’s general practice is to proactively charge down loans individually evaluated for impairment to the fair value of the underlying collateral.

Consistent with regulatory guidance, charge-offs on all loan segments are taken when specific loans, or portions thereof, are considered uncollectible. The Company’s policy is to promptly charge these loans off in the period the uncollectible loss is reasonably determined.

 

 

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For all loan portfolio segments except one-to-four family residential loans and consumer loans, the Company promptly charges-off loans, or portions thereof, when available information confirms that specific loans are uncollectible based on information that includes, but is not limited to, (1) the deteriorating financial condition of the borrower, (2) declining collateral values, and/or (3) legal action, including bankruptcy, that impairs the borrower’s ability to adequately meet its obligations. For impaired loans that are considered to be solely collateral dependent, a partial charge-off is recorded when a loss has been confirmed by an updated appraisal or other appropriate valuation of the collateral.

The Company charges-off one-to-four family residential and consumer loans, or portions thereof, when the Company reasonably determines the amount of the loss. The Company adheres to timeframes established by applicable regulatory guidance which provides for the charge-down of one-to-four family first and junior lien mortgages to the net realizable value less costs to sell when the loan is 180 days past due, charge-off of unsecured open-end loans when the loan is 180 days past due, and charge down to the net realizable value when other secured loans are 120 days past due. Loans at these respective delinquency thresholds for which the Company can clearly document that the loan is both well-secured and in the process of collection, such that collection will occur regardless of delinquency status, need not be charged off.

Policy for determining delinquency:

The entire balance of a loan is considered delinquent if the minimum payment contractually required to be made is not received by the specified due date.

Period utilized for determining historical loss factors:

The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the prior three years. Management believes the three year historical loss experience methodology is appropriate in the current economic environment, as it captures loss rates that are comparable to the current period being analyzed.

Policy for recognizing interest income on impaired loans:

Interest income on loans individually classified as impaired is recognized on a cash basis after all past due and current principal payments have been made.

Policy for recognizing interest income on non-accrual loans:

Subsequent payments on non-accrual loans are recorded as a reduction of principal, and interest income is recorded only after principal recovery is reasonably assured. Nonaccrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal. The Company requires a period of satisfactory performance of not less than six months before returning a nonaccrual loan to accrual status.

The Bank has entered into transactions, including the making of direct and indirect loans, with certain directors and their affiliates (related parties). Such transactions were made in the ordinary course of business and were made on substantially the same terms (including interest rates and collateral) as those prevailing at the time for comparable transactions with other persons. Further, in management’s opinion, these loans did not involve more than normal risk of collectibility or present other unfavorable features.

The aggregate amount of loans, as defined, to such related parties were as follows:

 

Balances, January 1, 2011		$	3,353
New loans including renewals			1
Payments, etc., including renewals			(39	)
Balances, June 30, 2011		$	3,315

 

 

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The following table presents the balance in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method for the six months ended June 30, 2011:

 

		Commercial				Commercial Real Estate				Construction				Consumer				Residential				HELOC				Unallocated				Total				2010
Balance at beginning of period		$	791			$	1,200			$	3,877			$	19			$	661			$	838			$	293			$	7,679			$	4,812
Provision for loan losses			(25	)			1,774				467				(3	)			267				507				(293	)			2,694				4,665
Charge-offs			(109	)			(194	)			(2,801	)			—				(139	)			(530	)			—				(3,773	)			(5,122	)
Recoveries			1				—				—				3				—				—				—				4				19
Balance at end of period		$	658			$	2,780			$	1,543			$	19			$	789			$	815			$	—			$	6,604			$	4,374
Ending balance: individually evaluated for impairment		$	—			$	1,698			$	1,450			$	—			$	526			$	449			$	—			$	4,123
Ending balance: collectively evaluated for impairment		$	658			$	1,082			$	93			$	19			$	263			$	366			$	—			$	2,481
Total Loans:
Ending balance		$	26,677			$	94,693			$	7,519			$	1,416			$	25,339			$	62,730			$	—			$	218,374
Ending balance: individually evaluated for impairment		$	—			$	5,841			$	2,722			$	—			$	7,967			$	1,777			$	—			$	18,307
Ending balance: collectively evaluated for impairment		$	26,677			$	88,852			$	4,797			$	1,416			$	17,372			$	60,953			$	—			$	200,067

The following table presents the changes in the allowance for loan losses for the three months ended June 30, 2011:

 

		Commercial				Commercial Real  Estate				Construction				Consumer				Residential				HELOC				Unallocated				Total				2010
Balance at beginning of period		$	653			$	1,889			$	1,107			$	19			$	482			$	1,024			$	16			$	5,190			$	4,799
Provision for loan losses			3				1,085				895				—				319				235				(16	)			2,521				4,425
Charge-offs			—				(194	)			(459	)			—				(12	)			(443	)			—				(1,108	)			(4,853	)
Recoveries			—				—				—				1				—				—				—				1				3
Balance at end of period		$	656			$	2,780			$	1,543			$	20			$	789			$	816			$	—			$	6,604			$	4,374

The following table presents the balance in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method as of December 31, 2010:

 

		Commercial				Commercial Real Estate				Construction				Consumer				Residential				HELOC				Unallocated				Total
Balance at beginning of period		$	762			$	2,245			$	619			$	24			$	770			$	390			$	2			$	4,812
Provision for loan losses			1,287				(589	)			6,342				(7	)			(2	)			1,018				291				8,340
Charge-offs			(1,280	)			(456	)			(3,084	)			(15	)			(107	)			(570	)			—				(5,512	)
Recoveries			22				—				—				17				—				—				—				39
Balance at end of period		$	791			$	1,200			$	3,877			$	19			$	661			$	838			$	293			$	7,679
Ending balance: individually evaluated for impairment		$	109			$	315			$	3,647			$	—			$	387			$	469			$	—			$	4,927
Ending balance: collectively evaluated for impairment		$	682			$	885			$	230			$	19			$	274			$	369			$	293			$	2,752
Total Loans:
Ending balance		$	25,572			$	94,356			$	15,435			$	1,399			$	25,964			$	66,243			$	—			$	228,969
Ending balance: individually evaluated for impairment		$	351			$	5,707			$	11,189			$	—			$	6,928			$	2,174			$	—			$	26,349
Ending balance: collectively evaluated for impairment		$	25,221			$	88,649			$	4,246			$	1,399			$	19,036			$	64,069			$	—			$	202,620

 

 

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The following table summarizes the Company’s nonaccrual loans by class at June 30, 2011 and December 31, 2010.

 

		June 30, 2011				December 31, 2010
Commercial and industrial		$	—			$	351
Real estate loans:
Construction			2,722				9,789
Commercial and farm land			—				1,052
Residential mortgage			8,008				6,928
Home equity			1,736				2,174
Total		$	12,466			$	20,294

The following table presents impaired loans as of June 30, 2011:

 

														Three Months Ended								Six Months Ended
		Recorded Balance				Unpaid Principal Balance				Specific Allowance				Average Investment  in Impaired Loans				Interest Income Recognized				Average Investment  in Impaired Loans				Interest Income Recognized
With no related allowance recorded:
Commercial real estate		$	—			$	—			$	—			$	—			$	—			$	—			$	—
Construction			572				1,323				—				572				—				572				—
Residential			2,565				2,576				—				2,576				—				2,578				—
HELOC			525				525				—				526				—				523				1
Subtotal		$	3,662			$	4,424			$	—			$	3,674			$	—			$	3,673			$	1
With an allowance recorded:
Commercial real estate		$	5,841			$	5,841			$	1,698			$	4,563			$	76			$	4,182			$	117
Construction			2,150				2,150				1,450				2,150				—				2,150				—
Residential			5,403				5,403				526				5,400				15				5,400				34
HELOC			1,251				1,252				449				1,254				4				1,256				4
Subtotal		$	14,645			$	14,646			$	4,123			$	13,367			$	95			$	12,988			$	155
Total Impaired Loans		$	18,307			$	19,070			$	4,123			$	17,041			$	95			$	16,661			$	156

The following table presents impaired loans as of December 31, 2010:

 

		Recorded Balance				Unpaid Principal Balance				Specific Allowance
With no related allowance recorded:
Commercial		$	109			$	109			$	—
Commercial real estate			464				464				—
Construction			572				1,323				—
Residential			2,588				2,588				—
HELOC			636				636				—
Subtotal		$	4,369			$	5,120			$	—
With an allowance recorded:
Commercial		$	242			$	242			$	109
Commercial real estate			5,243				5,243				315
Construction			10,617				12,440				3,647
Residential			4,340				4,340				387
HELOC			1,538				1,679				469
Subtotal		$	21,980			$	23,944			$	4,927
Total Impaired Loans		$	26,349			$	29,064			$	4,927

 

 

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The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed during the loan approval process and is updated as circumstances warrant. The Company uses the following definitions for risk ratings:

Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Bank’s credit position at some future date.

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Loans so classified have a well defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

The following tables summarize credit quality of the Company at June 30, 2011 and December 31, 2010:

 

		June 30, 2011
		Pass				Special Mention				Substandard				Doubtful				Loss				Total				Nonperforming
Commercial and industrial		$	25,039			$	949			$	689			$	—			$	—			$	26,677			$	—
Real estate loans:
Construction			3,741				—				3,778				—				—				7,519				2,722
Commercial real estate			85,447				3,405				5,841				—				—				94,693				—
Residential mortgage			14,049				2,110				9,180				—				—				25,339				8,008
Home equity			59,119				530				3,081				—				—				62,730				1,736
Individuals loans for household and other personal expenditures			1,416				—				—				—				—				1,416				—
Total		$	188,811			$	6,994			$	22,569			$	—			$	—			$	218,374			$	12,466
		December 31, 2010
		Pass				Special Mention				Substandard				Doubtful				Loss				Total				Nonperforming
Commercial and industrial		$	22,241			$	2,238			$	1,093			$	—			$	—			$	25,572			$	351
Real estate loans:
Construction			2,077				773				12,585				—				—				15,435				9,789
Commercial real estate			85,412				3,203				5,741				—				—				94,356				1,052
Residential mortgage			14,685				1,285				9,994				—				—				25,964				6,928
Home equity			62,635				526				3,082				—				—				66,243				2,174
Individuals loans for household and other personal expenditures			1,399				—				—				—				—				1,399				—
Total		$	188,449			$	8,025			$	32,495			$	—			$	—			$	228,969			$	20,294

 

 

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The following tables summarize past due aging of the Company’s loan portfolio at June 30, 2011 and December 31, 2010:

 

		June 30, 2011
		30-59 Days Past Due				60-89 Days Past Due				Greater Than 90 Days				Total Past Due				Current				Total Loans				Loans > 90 Days and Accruing
Commercial and industrial		$	—			$	—			$	—			$	—			$	26,677			$	26,677			$	—
Real estate loans:
Construction			—				—				2,722				2,722				4,797				7,519				—
Commercial real estate			920				2,039				—				2,959				91,734				94,693				—
Residential mortgage			19				27				8,008				8,054				17,286				25,339				—
Home equity			1,192				131				1,736				3,059				59,671				62,730				—
Individuals loans for household and other personal expenditures			—				7				—				7				1,409				1,416				—
Total		$	2,131			$	2,204			$	12,466			$	16,801			$	201,574			$	218,374			$	—
		December 31, 2010
		30-59 Days Past Due				60-89 Days Past Due				Greater Than 90 Days				Total Past Due				Current				Total Loans				Loans > 90 Days and Accruing
Commercial and industrial		$	—			$	—			$	351			$	351			$	25,221			$	25,572			$	—
Real estate loans:
Construction			1,154				—				9,789				10,943				4,492				15,435				—
Commercial real estate			1,958				—				1,052				3,010				91,346				94,356				—
Residential mortgage			104				168				6,928				7,200				18,764				25,964				—
Home equity			687				298				2,174				3,159				63,084				66,243				—
Individuals loans for household and other personal expenditures			12				—				—				12				1,387				1,399				—
Total		$	3,915			$	466			$	20,294			$	24,675			$	204,294			$	228,969			$	—

NOTE 6 – OTHER COMPREHENSIVE INCOME

Other comprehensive income components and related taxes for the six months ended June 30, 2011 and 2010 were as follows:

 

		2011				2010
Net unrealized gains on securities available for sale		$	736			$	529
Less reclassification adjustment for realized gains included in income			(104	)			—
Other comprehensive gain, before tax effect			632				529
Tax expense			21				34
Other comprehensive income		$	611			$	495

 

 

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NOTE 7 – DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES

The Company measures fair value according to the Financial Accounting Standards Board Accounting Standards Codification (ASC) Fair Value Measurements and Disclosures (ASC 820-10). ASC 820-10 establishes a fair value hierarchy that prioritizes the inputs used in valuation techniques, but not the valuation techniques themselves. The fair value hierarchy is designed to indicate the relative reliability of the fair value measure. The highest priority given to quoted prices in active markets and the lowest to unobservable data such as the Company’s internal information. ASC 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. There are three levels of inputs into the fair value hierarchy (Level 1 being the highest priority and Level 3 being the lowest priority):

 

Level 1		Quoted prices in active markets for identical assets or liabilities.
Level 2		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 for substantially the full term of the assets or liabilities.
Level 3		Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Available-for-sale Securities

If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 1 security includes preferred stock. Level 2 securities include certain collateralized mortgage and debt obligations, municipal securities, U.S. government agencies and SBA securities. Third party vendors compile prices from various sources and may apply such techniques as matrix pricing to determine the value of identical or similar investment securities (Level 2). Matrix pricing is a mathematical technique widely used in the banking industry to value investment securities without relying exclusively on quoted prices for specific investment securities but rather on the investment securities’ relationship to other benchmark quoted investment securities. The following tables are as of June 30, 2011 and December 31, 2010, respectively:

 

						At June 30, 2011
						Fair Value Measurements Using
		Fair Value				Level 1				Level 2				Level 3
Available for sale securities:
U.S. government agencies		$	17,044			$	—			$	17,044			$	—
State and political subdivisions			13,254				—				13,254				—
Mortgage-backed securities – GSE residential			18,625				—				18,625				—
Preferred stock			49				49				—				—
SBA guaranteed			285				—				285				—
Total available for sale securities		$	49,257			$	49			$	49,208			$	—

 

 

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						At December 31, 2010
						Fair Value Measurements Using
		Fair Value				Level 1				Level 2				Level 3
Available for sale securities:
U.S. government agencies		$	11,801			$	—			$	11,801			$	—
State and political subdivisions			12,868				—				12,868				—
Mortgage-backed securities – GSE residential			18,198				—				18,198				—
Preferred stock			11				11				—				—
SBA guaranteed			297				—				297				—
Total available for sale securities		$	43,175			$	11			$	43,164			$	—

The following is a description of the valuation methodologies used for instruments measured at fair value on a non-recurring basis and recognized in the accompanying June 30, 2011 and December 31, 2010 balance sheets, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Impaired Loans (Collateral Dependent)

Loans for which it is probable that the Bank will not collect all principal and interest due according to contractual terms are measured for impairment. Allowable methods for determining the amount of impairment include estimating fair value using the fair value of the collateral for collateral-dependent loans.

If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value.

Impaired loans that are collateral dependent are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method. The following tables are as of June 30, 2011 and December 31, 2010, respectively:

 

						At June 30, 2011
						Fair Value Measurements Using
		Fair Value				Level 1				Level 2				Level 3
Impaired loans		$	18,307				—				—			$	18,307
						At December 31, 2010
						Fair Value Measurements Using
		Fair Value				Level 1				Level 2				Level 3
Impaired loans		$	11,587				—				—			$	11,587

 

 

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The carrying amount and estimated fair value of financial instruments at June 30, 2011 and December 31, 2010 are as follows:

 

		June 30, 2011								December 31, 2010
		Carrying Value				Fair Value				Carrying Value				Fair Value
Financial assets
Cash and cash equivalents		$	17,809			$	17,809			$	32,487			$	32,487
Interest bearing time deposits			5,076				5,076				4,827				4,827
Securities available for sale			49,527				49,527				43,175				43,175
Loans held for sale			309				309				1,770				1,770
Loans receivable, net			212,071				211,838				221,607				224,054
Federal Home Loan Bank stock			5,398				5,398				5,398				5,398
Interest receivable			1,187				1,187				1,116				1,116
Financial liabilities
Deposits			291,544				293,453				309,080				309,575
Federal Home Loan Bank advances			13,000				13,359				13,000				12,929
Other borrowings			1,300				1,300				1,500				1,500
Subordinated debentures			3,609				1,152				3,609				1,163
Interest payable			232				232				245				245

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

Carrying amount is the estimated fair value for cash and cash equivalents, interest-bearing time deposits, loans held for sale, Federal Home Loan Bank stock, interest receivable and payable, deposits due on demand, variable rate loans and other borrowings. For fixed rate loans and time deposits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. The fair value of fixed rate Federal Home Loan Bank advances and subordinated debentures are based on current rates for similar financing. The fair value of off-balance-sheet items, which is based on the current fees or cost that would be charged to enter into or terminate such arrangements, is immaterial.

While the above estimates are based on management’s judgment of the most appropriate factors, there is no assurance that were the Company to have disposed of these items on the respective dates, the fair values would have been achieved, because the market value may differ depending on the circumstances. The estimated fair values at year end should not necessarily be considered to apply at subsequent dates.

Other assets and liabilities that are not financial instruments, such as premises and equipment, are not included in the above disclosures. Also, nonfinancial instruments typically not recognized on the balance sheet may have value but are not included in the above disclosures. These include, among other items, the estimated earnings power of core deposits, the trained workforce, customer goodwill, and similar items.

 

 

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NOTE 8 – TARP CAPITAL PURCHASE PROGRAM

On May 15, 2009, the Company entered into a Letter Agreement and the related Securities Purchase Agreement, with the United States Department of the Treasury (the “Department of Treasury”) in accordance with the terms of the Department of Treasury’s TARP Capital Purchase Program. Pursuant to the Letter Agreement and Securities Purchase Agreement, the Company issued 6,970 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, and a warrant for the purchase of 349 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series B, to the Department of Treasury for an aggregate purchase price of $6,970,000 in cash.

The Series A preferred stock qualifies as Tier 1 capital and will pay cumulative dividends at a rate of 5% per annum until February 15, 2014. Beginning February 16, 2014, the dividend rate will increase to 9% per annum. The Series A preferred stock may be redeemed, in whole or in part, at any time from time to time, at the option of the Company, subject to consultation with the Company’s primary federal banking regulator, provided that any partial redemption must be for at least 25% of the issue price of the Series A preferred stock.

As part of the transaction, the Department of Treasury exercised the Warrant and received 349 shares of Series B preferred stock. The Series B preferred stock will pay cumulative dividends at a rate of 9% per annum. The Series B preferred stock may also be redeemed, in whole or in part, at any time from time to time, at the option of the Company, subject to consultation with the Company’s primary federal regulator, provided that any partial redemption must be for at least 25% of the liquidation value of the Series B preferred stock. The Series B preferred stock cannot be redeemed until all of the outstanding shares of Series A preferred stock have been redeemed.

The Securities Purchase Agreement also subjects the Company to certain of the executive compensation limitations included in the Emergency Economic Stabilization Act of 2008 (EESA), as modified by the American Recovery and Reinvestment Act of 2009. The Company will take all necessary action to ensure that its benefit plans with respect to senior executive officers continue to comply with Section 111(b) of the EESA and has agreed to not adopt any benefit plans with respect to, or which cover, its senior executive officers that do not comply with the EESA, and the applicable executives have consented to the foregoing.

On January 14, 2011, the Company was notified by the Federal Reserve Bank of Chicago (the “FRB”) that the overall condition of the Company and the Bank is less than satisfactory. As a result, the Company must now obtain prior written approval from the FRB prior to, among other things, the payment of any capital distribution, including stockholder dividends on the shares of Company preferred stock issued to the Department of Treasury pursuant to the TARP Capital Purchase Program. The Company has notified the Department of Treasury that, beginning with the February 15, 2011 dividend payment, the Company will defer all payments of dividends on its Series A preferred stock for an indefinite period of time.

NOTE 9 – RECENT ACCOUNTING PRONOUNCEMENTS

In July 2010, the FASB issued ASU No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. ASU 2010-20 requires that more information be disclosed about the credit quality of a company’s loans and the allowance for loan losses held against those loans. A company will need to disaggregate new and existing disclosures based on how it develops its allowance for loan losses and how it manages credit exposures. The existing disclosures to be presented on a disaggregated basis include a rollforward of the allowance for loan losses, the related recorded investment in such loans, the nonaccrual status of loans, and impaired loans. Additional disclosure is also required about the credit quality indicators of loans by class at the end of the reporting period, the aging of past due loans, information about troubled debt restructurings, and significant purchases and sales of loans during the reporting period by class. For public companies, ASU 2010-20 requires certain disclosures as of the end of a reporting period effective for periods ending on or after December 15, 2010. Other required disclosures about activity that occurs during a reporting period are effective for periods beginning on or after December 15, 2010. The Company adopted this standard effective December 31, 2010. Since the adoption of this standard was disclosure related, it did not have a material effect on its financial position or results of operations.

 

 

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In April 2011, the FASB issued ASU No. 2011-02, Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. ASU 2011-02 clarifies the guidance in ASC 310-40 Receivables: Troubled Debt Restructurings by Creditors. Creditors are required to identify a restructuring as a troubled debt restructuring if the restructuring constitutes a concession and the debtor is experiencing financial difficulties. ASU 2011-02 clarifies guidance on whether a creditor has granted a concession and clarifies the guidance on a creditor’s evaluation of whether a debtor is experiencing financial difficulties. In addition, ASU 2011-02 also precludes the creditor from using the effective interest rate test in the debtor’s guidance on restructuring of payables when evaluating whether a restructuring constitutes a troubled debt restructuring. The effective date of ASU 2011-2 for public entities is effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. If, as a result of adoption, an entity identifies newly impaired receivables, an entity should apply the amendments for purposes of measuring impairment prospectively for the first interim or annual period beginning on or after June 15, 2011. The Company is currently evaluating the effect of this standard on the Company’s financial statements.

ASU No. 2011-05; Amendments to Topic 220, Comprehensive Income. In June, 2011 FASB issued ASU No. 2011-05. Under the amendments in this ASU, an entity has the option to present the total comprehensive income, the components of net income, and the components of other comprehensive income either in a continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This ASU eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments in this ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendments in this ASU should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted, because compliance with the amendments is already permitted. The amendments do not require any transition disclosures. Due to the recency of this pronouncement, the Company is evaluating its timing of adoption of ASU 2011-05, but will adopt the ASU retrospectively by the due date.

NOTE 10 – INCOME TAXES

The provision for income taxes represents income tax expense (benefit) calculated using estimated annualized rates on taxable income or loss generated during the respective periods. During the three months ended June 30, 2011, the Company incurred a net loss due to continued elevated provision expense as a result of declining collateral values. Due to these recent losses, the Company was unable to ascertain it would generate sufficient taxable income combined with available tax strategies to fully realize its deferred tax assets in the near term and therefore, established a deferred tax valuation allowance of $767,000 during the three months ended June 30, 2011.

 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis is intended as a review of significant factors affecting the financial condition and results of operations of the Company for the periods indicated. The discussion should be read in conjunction with the Condensed Consolidated Financial Statements and Notes included in this Form 10-Q. In addition to historical information, the following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. The Company’s actual results could differ significantly from those anticipated in these forward-looking statements as a result of certain factors discussed elsewhere in this report.

Safe Harbor Statement

This report (including information incorporated herein by reference) contains, and future oral and written statements of the Company and its management may contain, forward-looking statements, within the meaning of

 

 

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such as defined 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 Company’s management and on information currently available to management, are generally identifiable by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “intend,” “estimate,” “may,” “will,” “would,” “could,” “should” or other similar expressions. Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no obligation to update any statement in light of new information or future events.

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

 

•

The strength of the United States economy in general and the strength of the local economies in which the Company conducts its operations which may be less favorable than expected and may result in, among other things, an escalation in problem assets and foreclosures, a deterioration in the credit quality and value of the Company’s assets, especially real estate, which, in turn would likely reduce our customers’ borrowing power and the value of assets and collateral associated with our existing loans;

 

•

The potential impact of the Company’s participation in the U.S. Department of Treasury’s Troubled Asset Relief Program’s Capital Purchase Program;

 

•

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

 

•

The failure of assumptions underlying the establishment of our allowance for loan losses, that may prove to be materially incorrect or may not be borne out by subsequent events;

 

•

The success and timing of our business strategies and our ability to effectively carry out our business plan;

 

•

An inability to meet our liquidity needs;

 

•

The effect of changes in accounting policies and practices, as may be adopted from time-to-time by bank regulatory agencies, the Securities and Exchange Commission, the Public Company Accounting Oversight Board, the Financial Accounting Standards Board or other accounting standards setters;

 

•

The effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System, inflation, interest rate, market and monetary fluctuations;

 

•

The risks of changes in interest rates on the level and composition of deposits, loan demand and the values of loan collateral, securities and interest sensitive assets and liabilities;

 

•

The effect of changes to our regulatory ratings or the imposition of enforcement action by bank regulatory authorities upon the Bank or the Company as a result of our inability to comply with regulatory orders and agreements;

 

•

Our ability to effectively manage market risk, credit risk and operational risk;

 

•

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

 

•

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

 

 

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•

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

 

•

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

 

•

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

 

•

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

 

•

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

 

•

The costs, effects and outcomes of existing or future litigation; and

 

•

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

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

Overview

Community Financial Shares, Inc. (the “Company”) is the holding company for Community Bank- Wheaton/Glen Ellyn (the “Bank”). The Company is headquartered in Glen Ellyn, Illinois and operates four offices in its primary market area, which is comprised of Glen Ellyn, Illinois and Wheaton, Illinois. One location is in Glen Ellyn and three are located in Wheaton.

The Company’s principal business is conducted by the Bank and consists of offering a full range of community-based financial services, including commercial and retail banking services. The profitability of the Company’s operations depends primarily on its net interest income, provision for loan losses, other income, and other expenses. Net interest income is the difference between the income the Company receives on its loan and securities portfolios and its cost of funds, which consists of interest paid on deposits and borrowings. The provision for loan losses reflects the cost of credit risk in the Company’s loan portfolio. Other income consists of service charges on deposit accounts, gains on loan sales, securities gains (losses), and other income. Other expenses include salaries and employee benefits expenses, as well as occupancy and equipment expenses and other noninterest expenses.

Net interest income is dependent on the amounts and yields of interest-earning assets as compared to the amounts and rates of interest-bearing liabilities. Net interest income is sensitive to changes in market rates of interest and the Company’s asset/liability management procedures in coping with such changes. The provision for loan losses is dependent upon management’s assessment of the collectibility of the loan portfolio under current economic conditions.

Comparison of Financial Condition at June 30, 2011 and December 31, 2010

Total assets at June 30, 2011 were $328.1 million, which represented a decrease of $19.0 million, or 5.5%, compared to $347.1 million at December 31, 2010. The decrease in total assets was primarily due to decreases in loans receivable and cash and cash equivalents. These decreases were partially offset by increases in investment securities and other real estate owned. Loans receivable decreased $9.5 million, or 4.3%, to $212.1 million at June 30, 2011 from $221.6 million at December 31, 2010 and cash and cash equivalents decreased $14.7 million, or 45.2%, to $17.8 million at June 30, 2011 from $32.5 million at December 31, 2010. Investment securities increased

 

 

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$6.1 million, or 14.1%, to $49.3 million at June 30, 2011 from $43.2 million at December 31, 2010. Interest-bearing time deposits increased $249,000 to $5.1 million at June 30, 2011 from $4.8 million at December 31, 2010. Other real estate owned increased $618,000, or 20.6%, to $3.6 million at June 30, 2011 from $3.0 million at December 31, 2010. The decrease in loans and increase in other real estate owned during the six months ended June 30, 2011 is partially due to the Bank taking possession of five properties totaling $4.1 million through foreclosure and transferring them to other real estate owned. Included in other real estate owned at June 30, 2011 are two one-to-four family residences, a mixed-use commercial/residential property, two commercial properties and one small parcel of land. In addition, the decrease in loans receivable was partially due to the write-off of $3.8 million in balances. These write-downs were primarily due to the recognition of decreases in valuations on a portion of the Bank’s nonperforming commercial real estate loans.

Total liabilities at June 30, 2011 were $312.1 million, which represented a decrease of $17.3 million, or 5.3%, compared to $329.3 million at December 31, 2010. Deposits decreased $17.5 million, or 5.7%, to $291.5 million at June 30, 2011 from $309.1 million at December 31, 2010. The decrease in deposits is partially due to the Bank’s inability to renew certificates of deposit under the CDARS program as a result of the outstanding Consent Order. This decrease in deposits primarily consists of decreases in: (1) interest bearing demand deposit accounts of $6.9 million, or 8.6%, to $73.4 million at June 30, 2011 from $80.3 million at December 31, 2010; (2) certificates of deposit of $10.4 million, or 9.5%, to $99.0 million at June 30, 2011 from $109.4 million at December 31, 2010; and (3) noninterest-bearing deposit accounts of $2.6 million, or 7.8%, to $31.4 million at June 30, 2011 from $34.0 million at December 31, 2010. These decreases were partially offset by an increase in regular savings accounts of $2.7 million, or 5.3%, to $53.5 million at June 30, 2011 from $50.8 million at December 31, 2010. The percentage of regular savings accounts to total deposits increased to 18.5% at June 30, 2011 from 16.4% at December 31, 2010 and the percentage of certificates of deposit to total deposits decreased to 33.9% at June 30, 2011 from 35.4% at December 31, 2010. Borrowed money, consisting of Federal Home Loan Bank advances and other borrowings, decreased $200,000, or 1.4%, to $14.3 million at June 30, 2011 from $14.5 million at December 31, 2010.

Stockholders’ equity decreased $1.7 million, or 9.6%, to 16.0 million at June 30, 2011 from $17.8 million at December 31, 2010. The decrease in stockholders’ equity was primarily due to the Company’s net loss for the six months ended June 30, 2011 partially offset by an increase of $611,000 in the Company’s accumulated other comprehensive loss relating to the change in fair value of its available-for-sale investment portfolio. As of June 30, 2011 there were 1,245,267 shares of Company common stock outstanding, resulting in a book value of $12.88 and a tangible book value of $7.29 per share at that date.

 

		June 30, 2011				December 31, 2010
Tangible book value per share:
Total capital		$	16,044			$	17,755
Less: Preferred equity			6,970				6,970
Tangible common equity		$	9,074			$	10,785
Outstanding common shares			1,245,267				1,245,267
Tangible book value per share		$	7.29			$	8.66

Tangible book value provides a method to assess the level of tangible net assets on a per share basis. Tangible book value is determined by methods other than in accordance with Accounting Principles Generally Accepted in the United States (“GAAP”). The Company’s management uses this non-GAAP measure in its analysis of the Company’s performance. This measure should not be considered a substitute for book value per share value, a GAAP basis measure, nor should it be viewed as a substitute for operating results determined in accordance with GAAP. Management believes the presentation of tangible book value per share provides useful supplemental information that is essential to a proper understanding of the financial results of the Company.

Comparison of Operating Results for the Three Months Ended June 30, 2011 and 2010

General. The Company’s net loss improved $416,000 to $2.3 million for the three months ended June 30, 2011, from $2.7 million for the three months ended June 30, 2010. Due to the effect of preferred stock dividends, net loss available to common shareholders totaled $2.4 million for the three months ended June 30, 2011. This represents a basic and diluted loss per share of $1.91 for the three months ended June 30, 2011 compared to a basic and diluted loss per share of $2.24 for the three months ended June 30, 2010. The improvement in net loss during

 

 

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the second quarter of 2011 is the result of the combined effect of a $255,000 increase in net interest income, a $58,000 decrease in noninterest income, a $208,000 increase in noninterest expense and a $1.9 million decrease in provision for loan losses. In addition, management determined that realization of a portion of the Company’s deferred tax asset was more likely than not to occur. As a result, the Company incurred a non-cash income tax expense of $767,000 related to a valuation allowance on deferred tax assets in the second quarter of 2011.

Net interest income. The following table summarizes interest and dividend income and interest expense for the three months ended June 30, 2011 and 2010.

 

		Three Months Ended June 30,
		2011				2010				$ Change				% Change
		(Dollars in thousands)
Interest and dividend income:
Interest and fees on loans		$	2,970			$	2,922			$	48				1.64	%
Securities:
Taxable			280				307				(27	)			(8.80	)
Exempt from federal tax			110				138				(28	)			(20.29	)
Other interest income			29				21				8				38.10
Total interest and dividend income			3,389				3,388				1				0.03
Interest expense:
Deposits			518				746				(228	)			(30.56	)
Federal Home Loan Bank advances and other borrowings			101				127				(26	)			(20.47	)
Subordinated debentures			17				17				—				—
Total interest expense			636				890				(254	)			(28.54	)
Net interest income		$	2,753			$	2,498			$	255				10.21

The following table summarizes average balances and annualized average yields or costs for the three months ended June 30, 2011 and 2010.

 

		Three Months Ended June 30,
		2011												2010
		Average Balance				Interest				Average Yield/ Cost				Average Balance				Interest				Average Yield/ Cost
		(Dollars in thousands)
Interest-earning assets:
Taxable securities		$	39,420			$	280				2.84	%		$	32,110			$	307				3.83	%
Tax-exempt securities			10,102				110				4.37				12,743				138				4.34
Loan receivables			216,988				2,970				5.49				233,579				2,922				5.02
Interest-bearing deposits			21,122				28				0.55				22,140				21				0.38
FHLB stock			5,398				1				0.10				5,398				—				0.00
Total interest-earning assets			293,030				3,389				4.64				305,970				3,388				4.44
Interest-bearing liabilities:
NOW accounts			73,903				68				0.37				77,069				119				0.62
Regular savings			53,132				52				0.39				44,355				63				0.57
Money market accounts			34,971				57				0.66				36,068				58				0.64
Certificates of deposit			101,399				341				1.35				111,202				506				1.83
FHLB advances and other			14,300				101				2.84				14,699				127				3.46
Subordinated debentures			3,609				17				1.88				3,609				17				1.88
Total interest-bearing liabilities		$	281,314				636				0.91			$	287,002				890				1.24
Net interest income						$	2,753											$	2,498
Net interest spread											3.73	%											3.20	%
Net interest income to average interest-earning assets											3.77	%											3.27	%

 

 

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Interest Income. Interest income remained unchanged at $3.4 million for the three months ended June 30, 2011 and for the three months ended June 30, 2010. The average yield on earning assets increased 20 basis points to 4.64% for the three months ended June 30, 2011 from 4.44% for the comparable prior year period. This increase was offset by a $12.9 million decrease in interest-earning assets to $293.0 million for the three months ended June 30, 2011 from $306.0 million for the prior year period.

Interest and fees on loans increased $48,000, or 1.6%, to $3.0 million for the three months ended June 30, 2011, compared to $2.9 million for the comparable prior year period. This increase resulted from an increase in the average loan yield of 47 basis points to 5.49% for the three months ended June 30, 2011 from 5.02% for the comparable prior year period. In addition, there was a decrease in the average balance of loans of $16.6 million to $217.0 million for the three months ended June 30, 2011 from $233.6 million for the comparable prior year period. Interest on taxable securities decreased $27,000 for the three months ended June 30, 2011 compared to the comparable prior year period. This decrease is primarily due to a decrease in the average yield on taxable securities of 99 basis points to 2.84% for the three months ended June 30, 2011 from 3.83% for the comparable prior year period. This decrease was partially offset by an increase in the average balance of taxable securities of $7.3 million to $39.4 million for the three months ended June 30, 2011 from $32.1 million for the three months ended June 30, 2010.

Interest Expense. Interest expense decreased by $254,000, or 28.5%, to $636,000 for the three months ended June 30, 2011, from $890,000 for the three months ended June 30, 2010. This decrease resulted from a decrease in the average rate paid on interest bearing liabilities of 33 basis points to 0.91% for the three months ended June 30, 2011 from 1.24% for the comparable prior year period. This decrease is primarily due a decrease in overall market rates. In addition, the average balance of interest bearing liabilities decreased $5.7 million to $281.3 million for the three months ended June 30, 2011 from $287.0 million for the comparable prior year period. Interest expense resulting from Federal Home Loan Bank advances, subordinated debentures and other borrowings decreased $26,000 during the three months ended June 30, 2011. The average balance on these borrowings decreased $399,000 to $14.3 million for the three months ended June 30, 2011 from $14.7 million for the comparable prior year period. In addition, there was a decrease in the average cost on these borrowings of 62 basis points to 2.84% for the three months ended June 30, 2011 from 3.46% for the comparable period in 2010.

Net Interest Income before Provision for Loan Losses. Net interest income before provision for loan losses increased $255,000, or 10.2%, to $2.8 million for the three months ended June 30, 2011 compared to $2.5 million for the comparable period in 2010. The Company’s net interest margin expressed as a percentage of average earning assets increased to 3.77% for the three months ended June 30, 2011 as compared to 3.27% for the three months ended June 30, 2010. The yield on average earning assets increased 20 basis points to 4.64% for the three months ended June 30, 2011 from 4.44% for the comparable period ended June 30, 2010. The yield on average loans increased to 5.49% for the three months ended June 30, 2011 from 5.02% for the three months ended June 30, 2010. In addition, there was a 33 basis point decrease in the cost of average interest-bearing liabilities to 0.91% for the three months ended June 30, 2011 as compared to 1.24% for the comparable 2010 period.

Provision for Loan Losses. The Bank’s provision for loan losses decreased to $2.5 million for the three months ended June 30, 2011 from $4.4 million for the comparable period in 2010. The $1.9 million decrease in the provision was the result of management’s quarterly analysis of the allowance for loan loss. At June 30, 2011, December 31, 2010 and June 30, 2010, nonperforming loans totaled $12.5 million, $20.3 million and $21.6 million, respectively. At June 30, 2011, the ratio of the allowance for loan losses to nonperforming loans was 53.0% compared to 37.8% at December 31, 2010 and 20.3% at June 30, 2010. The ratio of the allowance to total loans was 3.02%, 3.35% and 1.90%, at June 30, 2011, December 31, 2010 and June 30, 2010, respectively.

Nonperforming loans decreased $7.8 million, or 38.6%, to $12.5 million at June 30, 2011 from $20.3 million at December 31, 2010. The largest component of nonperforming loans is residential real estate, which increased $642,000, or 7.1%, to $9.7 million at June 30, 2011, or 78.2% of total nonperforming loans, from $9.1 million at December 31, 2010. Nonperforming real estate construction loans decreased $7.1 million, or 72.2%, to $2.7 million at June 30, 2011 from $9.8 million at December 31, 2010. In addition, nonperforming commercial real estate loans decreased $1.1 million, or 100.0%, to zero at June 30, 2011 from $1.1 million at December 31, 2010. Charge-offs, net of recoveries, totaled $1.1 million for the three months ended June 30, 2011 compared to $4.9 million for the three months ended June 30, 2010. Management continues to take aggressive actions in identifying and disposing of problem credits.

 

 

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The amounts of the provision and allowance for loan losses are influenced by a number of factors, including current economic conditions, actual loss experience, industry trends and other factors, including real estate values in the Company’s market area and management’s assessment of current collection risks within the loan portfolio. Should the local economic climate continue to deteriorate, borrowers may experience increased difficulties paying off loans and the level of non-performing loans, charge-offs, and delinquencies could continue to rise, which would require us to further increase the provision. The allowance for loan losses represents management’s estimate of probable incurred losses based on information available as of the date of the financial statements. The allowance for loan losses is based on management’s evaluation of the collectibility of the loan portfolio, including past loan loss experience, known and inherent risks in the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, and economic conditions. Management believes that, based on information available at June 30, 2011, the Bank’s allowance for loan losses was adequate to cover probable incurred losses inherent in its loan portfolio at that time. However, no assurances can be given that the Bank’s level of allowance for loan losses will be sufficient to cover loan losses incurred by the Bank or that future adjustments to the allowance will not be necessary if economic or other conditions differ substantially from the economic and other conditions used by management to determine the current level of the allowance. In addition, the FDIC as an integral part of its examination processes, periodically reviews the Bank’s allowance for loan losses and may require the Bank to make additional provisions for estimated loan losses based upon judgments different from those of management. The FDIC examines the Bank periodically and, accordingly, as part of this examination the allowance is reviewed utilizing specific guidelines. Based upon its review, the FDIC may accordingly from time to time require reserves in addition to those previously provided.

Noninterest Income

 

		Three Months Ended June 30,
		2011				2010				$ Change				% Change
		(Dollars in thousands)
Non-interest income:
Service charges on deposit accounts		$	115			$	133			$	(18	)			(13.53	%)
Gain on sale of loans			114				184				(70	)			(38.04	)
Write-down on other real estate owned			(255	)			(185	)			(70	)			(37.84	)
Loss on sale of foreclosed assets			(13	)			(12	)			(1	)			(8.33	)
Other non-interest income			277				176				101				57.39
Total non-interest income		$	238			$	296			$	(58	)			(19.60	)

Noninterest income totaled $238,000 and $296,000 for the three months ended June 30, 2011 and 2010, respectively. Gain on sale of loans decreased $70,000 to $114,000 for the three months ended June 30, 2011 from $184,000 for the comparable prior year period. Other non-interest income increased $101,000 to $277,000 for the three months ended June 30, 2011 from $176,000 for the three months ended June 30, 2010. This increase is primarily due to rents received on real estate held for investment and other foreclosed assets. In addition, write-downs on other real estate owned increased $70,000 to $255,000 for the three months ended June 30, 2011 from $185,000 for the comparable prior year period.

 

 

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Noninterest Expense

 

		Three Months Ended June 30,
		2011				2010				$ Change				% Change
		(Dollars in thousands)
Non-interest expenses:
Salaries and employee benefits		$	1,370			$	1,310			$	60				4.58	%
Net occupancy and equipment expense			343				324				19				5.86
Data processing expense			300				277				23				8.30
Advertising and promotions			65				71				(6	)			(8.45	)
Professional fees			254				267				(13	)			(4.87	)
FDIC insurance premiums			266				186				80				43.01
Other real estate owned expenses			174				128				46				35.94
Other operating expenses			314				315				(1	)			(0.32	)
Total non-interest expenses		$	3,086			$	2,878			$	208				7.23

Noninterest expense increased by $208,000 to $3.1 million for the three months ended June 30, 2011 from $2.9 million for the comparable prior year period. Salaries and employee benefits expenses increased by $60,000, or 4.6%, to $1.4 million for the three months ended June 30, 2011. This increase is primarily the result of higher health insurance costs. Professional fees, including legal expenses, decreased by $13,000 to $254,000 for the three months ended June 30, 2011. In addition, other real estate owned expenses increased to $174,000 for the three months ended June 30, 2011 compared to $128,000 for the prior year period. Other operating expenses, including occupancy, data processing, and marketing and advertising expenses, increased by a net $36,000, or 5.4%, to $708,000 for the three months ended June 30, 2011 from $672,000 for the prior year period. Of this increase, $23,000 is related to increases in data processing expense, which is primarily due to increased volume of clients utilizing the Bank’s on-line banking product. This increase was partially offset by lower marketing and advertising expenses, which decreased $6,000. Finally, FDIC insurance premiums increased by $80,000, or 43.0%, to $266,000 for the three months ended June 30, 2011 compared to $186,000 for the prior year period. Management continues to emphasize the importance of expense management and control in order to continue to provide expanded banking services to a growing market base.

Income Tax Benefit. The Company recorded an income tax benefit of $347,000 for the three months ended June 30, 2011, despite a $2.6 million pre-tax loss during that period due to the establishment of a valuation allowance against a portion of the Company’s deferred tax assets. Under generally accepted accounting principles, income tax benefits and the related tax assets are only allowed to be recognized if they will more likely than not be fully utilized. In each future accounting period, the Company’s management will consider both positive and negative evidence when considering the ability of the Company to utilize its net deferred tax asset. Any subsequent reduction in the valuation allowance would lower the amount of income tax expense recognized in the Company’s consolidated statements of operations in future periods. However, if operating losses continue into the future, there can be no guarantee that an additional valuation allowance against the deferred tax assets will be necessary. Income tax benefit totaled $1.8 million for the three months ended June 30, 2010.

Comparison of Operating Results for the Six Months Ended June 30, 2011 and 2010

General. The Company’s net loss improved $435,000 to $2.1 million for the six months ended June 30, 2011, from $2.6 million for the six months ended June 30, 2010. Due to the effect of preferred stock dividends, net loss available to common shareholders totaled $2.4 million for the six months ended June 30, 2011. This represents a basic and diluted loss per share of $1.90 for the six months ended June 30, 2011 compared to a basic and diluted loss per share of $2.24 for the six months ended June 30, 2010. The improvement in net loss during the six months ended June 30, 2011 is the result of the combined effect of a $282,000 increase in net interest income, a $169,000 increase in noninterest income, a $475,000 increase in noninterest expense and a $2.0 million decrease in provision for loan losses. In addition, management determined that realization of a portion of the Company’s deferred tax asset was more likely than not to occur. As a result, the Company incurred a non-cash income tax expense of $767,000 related to a valuation allowance on deferred tax assets in the second quarter of 2011.

 

 

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Net interest income. The following table summarizes interest and dividend income and interest expense for the six months ended June 30, 2011 and 2010.

 

		Six Months Ended June 30,
		2011				2010				$ Change				% Change
		(Dollars in thousands)
Interest and dividend income:
Interest and fees on loans		$	5,924			$	6,054			$	(130	)			(2.15	%)
Securities:
Taxable			521				636				(115	)			(18.08	)
Exempt from federal tax			222				279				(57	)			(20.43	)
Other interest income			60				37				23				62.16
Total interest and dividend income			6,727				7,006				(279	)			(3.98	)
Interest expense:
Deposits			1,073				1,582				(509	)			(32.17	)
Federal Home Loan Bank advances and other borrowings			201				254				(53	)			(20.87	)
Subordinated debentures			35				34				1				2.94
Total interest expense			1,309				1,870				(561	)			(30.00	)
Net interest income		$	5,418			$	5,136			$	282				5.49

The following table summarizes average balances and annualized average yields or costs for the six months ended June 30, 2011 and 2010.

 

		Six Months Ended June 30,
		2011												2010
		Average Balance				Interest				Average Yield/ Cost				Average Balance				Interest				Average Yield/ Cost
		(Dollars in thousands)
Interest-earning assets:
Taxable securities		$	38,072			$	521				2.76	%		$	32,112			$	636				3.99	%
Tax-exempt securities			10,108				222				4.42				12,869				279				4.38
Loan receivables			220,809				5,924				5.41				234,877				6,054				5.20
Interest-bearing deposits			23,153				57				0.53				21,357				37				0.35
FHLB stock			5,398				3				0.10				5,398				—				0.00
Total interest-earning assets			297,540				6,727				4.56				306,613				7,006				4.61
Interest-bearing liabilities:
NOW accounts			75,022				146				0.39				76,776				245				0.64
Regular savings			52,584				106				0.41				38,501				98				0.51
Money market accounts			34,932				114				0.66				38,003				122				0.65
Certificates of deposit			104,281				707				1.37				114,372				1,117				1.97
FHLB advances and other			14,366				201				2.82				14,749				254				3.48
Subordinated debentures			3,609				35				1.95				3,609				34				1.88
Total interest-bearing deposits		$	284,794				1,309				0.93			$	286,010				1,870				1.32
Net interest income						$	5,418											$	5,136
Net interest spread											3.63	%											3.29	%
Net interest income to average interest-earning assets											3.67	%											3.38	%

Interest Income. Interest income decreased $279,000, or 4.0%, to $6.7 million for the six months ended June 30, 2011, compared to $7.0 million for the comparable prior year period. The average yield on earning assets decreased 5 basis points to 4.56% for the six months ended June 30, 2011 from 4.61% for the comparable prior year period. In addition, average interest-earning assets decreased $9.1 million to $297.5 million for the six months ended June 30, 2011 compared to $306.6 million for the six months ended June 30, 2010.

 

 

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Interest and fees on loans decreased $130,000, or 2.2%, to $5.9 million for the six months ended June 30, 2011, compared to $6.1 million for the comparable prior year period. This decrease resulted from a decrease in the average balance of loans of $14.1 million to $220.8 million for the six months ended June 30, 2011 from $234.9 million for the comparable prior year period. Partially offsetting this decrease was an increase in the average yield on loans of 21 basis points to 5.41% for the six months ended June 30, 2011 from 5.20% for the comparable prior year period. Interest on taxable securities decreased $115,000 for the six months ended June 30, 2011 compared to the comparable prior year period. This decrease is primarily due to a decrease in the average yield on taxable securities of 123 basis points to 2.76% for the six months ended June 30, 2011 from 3.99% for the comparable prior year period. This decrease was partially offset by an increase in the average balance of taxable securities of $6.0 million to $38.1 million for the six months ended June 30, 2011 from $32.1 million for the six months ended June 30, 2010.

Interest Expense. Interest expense decreased by $561,000, or 30.0%, to $1.3 million for the six months ended June 30, 2011, from $1.9 million for the six months ended June 30, 2010. This decrease resulted from a decrease in the average rate paid on interest bearing liabilities of 39 basis points to 0.93% for the six months ended June 30, 2011 from 1.32% for the comparable prior year period. In addition, the average balance of interest bearing liabilities decreased $1.2 million to $284.8 million for the six months ended June 30, 2011 from $286.0 million for the comparable prior year period. Interest expense resulting from Federal Home Loan Bank advances, subordinated debentures and other borrowings decreased $53,000 during the six months ended June 30, 2011. The average balance on these borrowings decreased $383,000 to $14.4 million for the six months ended June 30, 2011 from $14.7 million for the comparable prior year period. In addition, there was a decrease in the average cost on these borrowings of 66 basis points to 2.82% for the six months ended June 30, 2011 from 3.48% for the comparable period in 2010.

Net Interest Income before Provision for Loan Losses. Net interest income before provision for loan losses increased $282,000, or 5.5%, to $5.4 million for the six months ended June 30, 2011 compared to $5.1 million for the comparable period in 2010. The Company’s net interest margin expressed as a percentage of average earning assets increased to 3.67% for the six months ended June 30, 2011 as compared to 3.38% for the six months ended June 30, 2010. The yield on average earning assets decreased 5 basis points to 4.56% for the six months ended June 30, 2011 from 4.61% for the comparable period ended June 30, 2010. The yield on average loans increased to 5.41% for the six months ended June 30, 2011 from 5.20% for the six months ended June 30, 2010. In addition, there was a 39 basis point decrease in the cost of average interest-bearing liabilities to 0.93% for the six months ended June 30, 2011 as compared to 1.32% for the comparable 2010 period.

Provision for Loan Losses. The Bank’s provision for loan losses decreased to $2.7 million for the six months ended June 30, 2011 from $4.7 million for the comparable period in 2010. The $2.0 million decrease in the provision was the result of management’s quarterly analysis of the allowance for loan loss. At June 30, 2011, December 31, 2010 and June 30, 2010, nonperforming loans totaled $12.5 million, $20.3 million and $21.6 million, respectively. At June 30, 2011, the ratio of the allowance for loan losses to nonperforming loans was 53.0% compared to 37.8% at December 31, 2010 and 20.3% at June 30, 2010. The ratio of the allowance to total loans was 3.02%, 3.35% and 1.90%, at June 30, 2011, December 31, 2010 and June 30, 2010, respectively.

Nonperforming loans decreased $7.8 million, or 38.6%, to $12.5 million at June 30, 2011 from $20.3 million at December 31, 2010. The largest component of nonperforming loans is residential real estate, which increased $642,000, or 7.1%, to $9.7 million at June 30, 2011, or 78.2% of total nonperforming loans, from $9.1 million at December 31, 2010. Nonperforming real estate construction loans decreased $7.1 million, or 72.2%, to $2.7 million at June 30, 2011 from $9.8 million at December 31, 2010. In addition, nonperforming commercial real estate loans decreased $1.1 million, or 100.0%, to zero at June 30, 2011 from $1.1 million at December 31, 2010. Charge-offs, net of recoveries, totaled $3.8 million for the six months ended June 30, 2011 compared to $5.1 million for the six months ended June 30, 2010. Management continues to take aggressive actions in identifying and disposing of problem credits.

 

 

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Noninterest Income

 

		Six Months Ended June 30,
		2011				2010				$ Change				% Change
		(Dollars in thousands)
Non-interest income:
Service charges on deposit accounts		$	215			$	262			$	(47	)			(17.94	%)
Gain on sale of loans			341				350				(9	)			(2.57	)
Gain on sale of securities			104				—				104
Write-down on other real estate owned			(255	)			(185	)			(70	)			(37.84	)
Gain on sale of foreclosed assets			5				4				1				25.00
Other non-interest income			537				347				190				54.76
Total non-interest income		$	947			$	778			$	169				21.72

Noninterest income totaled $947,000 and $778,000 for the six months ended June 30, 2011 and 2010, respectively. Gain on sale of securities increased to $104,000 for the six months ended June 30, 2011 compared to zero for the comparable prior year period. Gain on sale of loans decreased $9,000 to $341,000 for the six months ended June 30, 2011 from $350,000 for the comparable prior year period. Other non-interest income increased $190,000 to $537,000 for the six months ended June 30, 2011 from $347,000 for the six months ended June 30, 2010. This increase is primarily due to rents received on real estate held for investment and other foreclosed assets. In addition, write-downs on other real estate owned increased $70,000 to $255,000 for the six months ended June 30, 2011 from $185,000 for the comparable prior year period.

Noninterest Expense

 

		Six Months Ended June 30,
		2011				2010				$ Change				% Change
		(Dollars in thousands)
Non-interest expenses:
Salaries and employee benefits		$	2,862			$	2,721			$	141				5.18	%
Net occupancy and equipment expense			693				672				21				3.13
Data processing expense			588				545				43				7.89
Advertising and promotions			116				134				(18	)			(13.43	)
Professional fees			515				444				71				15.99
FDIC insurance premiums			533				370				163				44.05
Other real estate owned expenses			260				229				31				13.54
Other operating expenses			614				591				23				3.89
Total non-interest expenses		$	6,181			$	5,706			$	475				8.33

Noninterest expense increased by $475,000 to $6.2 million for the six months ended June 30, 2011 from $5.7 million for the comparable prior year period. Salaries and employee benefits expenses increased by $141,000, or 5.2%, to $2.9 million for the six months ended June 30, 2011. This increase is primarily the result of higher health insurance costs. Professional fees, including legal expenses, increased by $71,000 to $515,000 for the six months ended June 30, 2011. This increase is primarily due to higher legal fees associated with foreclosure actions. In addition, other real estate owned expenses increased to $260,000 for the six months ended June 30, 2011 compared to $229,000 for the prior year period. Other operating expenses, including occupancy, data processing, and marketing and advertising expenses, increased by a net $46,000, or 3.4%, to $1.4 million for the six months ended June 30, 2011 from $1.3 million for the prior year period. Of this increase, $43,000 is related to increases in data processing expense, which is primarily due to increased volume of clients utilizing the Bank’s on-line banking product. This increase was partially offset by lower marketing and advertising expenses, which decreased $18,000. Finally, FDIC insurance premiums increased by $163,000, or 44.1%, to $533,000 for the six months ended June 30, 2011 compared to $370,000 for the prior year period. This increase is primarily due to a downgrade in the Bank’s risk category as determined by the FDIC. Management continues to emphasize the importance of expense management and control in order to continue to provide expanded banking services to a growing market base.

Income Tax Benefit. The Company recorded an income tax benefit of $370,000 for the six months ended June 30, 2011, despite a $2.5 million pre-tax loss during that period due to the establishment of a valuation allowance against a portion of the Company’s deferred tax assets. Under generally accepted accounting principles, income tax benefits and the related tax assets are only allowed to be recognized if they will more likely than not be

 

 

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fully utilized. In each future accounting period, the Company’s management will consider both positive and negative evidence when considering the ability of the Company to utilize its net deferred tax asset. Any subsequent reduction in the valuation allowance would lower the amount of income tax expense recognized in the Company’s consolidated statements of operations in future periods. However, if operating losses continue into the future, there can be no guarantee that an additional valuation allowance against the deferred tax assets will be necessary. Income tax benefit totaled $1.9 million for the six months ended June 30, 2010.

Critical Accounting Policies

The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States and conform to general practices within the banking industry. The Company’s significant accounting policies are described in detail in the notes to the consolidated financial statements included in the Company’s Form 10-K for the year ended December 31, 2010, which was filed with the U.S. Securities and Exchange Commission on March 31, 2011. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. The financial position and results of operations can be affected by these estimates and assumptions and are integral to the understanding of reported results. Critical accounting policies are those policies that management believes are the most important to the portrayal of the Company’s financial condition and results, and they require management to make estimates that are difficult, subjective, or complex.

Allowance for Credit Losses. The allowance for credit losses provides coverage for probable losses inherent in the Company’s loan portfolio. Management evaluates the adequacy of the allowance for credit losses each quarter based on changes, if any, in underwriting activities, the loan portfolio composition (including product mix and geographic, industry or customer-specific concentrations), trends in loan performance, regulatory guidance and economic factors. This evaluation is inherently subjective, as it requires the use of significant management estimates. Many factors can affect management’s estimates of specific and expected losses, including volatility of default probabilities, rating migrations, loss severity and economic and political conditions. The allowance is increased through provisions charged to operating earnings and reduced by net charge-offs.

The Company determines the amount of the allowance based on relative risk characteristics of the loan portfolio. The allowance recorded for commercial loans is based on reviews of individual credit relationships and an analysis of the migration of commercial loans and actual loss experience. The allowance recorded for homogeneous consumer loans is based on an analysis of loan mix, risk characteristics of the portfolio, fraud loss and bankruptcy experiences, and historical losses, adjusted for current trends, for each homogeneous category or group of loans. The allowance for credit losses relating to impaired loans is based on the loan’s observable market price, the collateral for certain collateral-dependent loans, or the discounted cash flows using the loan’s effective interest rate.

Regardless of the extent of the Company’s analysis of customer performance, portfolio trends or risk management processes, certain inherent but undetected losses are probable within the loan portfolio. This is due to several factors including inherent delays in obtaining information regarding a customer’s financial condition or changes in their unique business conditions, the judgmental nature of individual loan evaluations, collateral assessments and the interpretation of economic trends. Volatility of economic or customer-specific conditions affecting the identification and estimation of losses for larger non-homogeneous credits and the sensitivity of assumptions utilized to establish allowances for homogenous groups of loans are among other factors. The Company estimates a range of inherent losses related to the existence of these exposures. The estimates are based upon the Company’s evaluation of imprecision risk associated with the commercial and consumer allowance levels and the estimated impact of the current economic environment.

Liquidity and Capital Resources

The Company’s primary sources of funds are deposits, FHLB advances, and proceeds from principal and interest payments on loans and securities. While maturities, and scheduled amortization of loans and securities, and calls of securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions, and competition. The Company generally manages the pricing of its deposits to be competitive and to increase core deposit relationships.

 

 

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Liquidity management is both a daily and long-term responsibility of management. The Company adjusts its investments in liquid assets based upon management’s assessment of (i) expected loan demand, (ii) expected deposit flows, (iii) yields available on interest-earning deposits and securities, and (iv) the objectives of its asset/liability management program. Excess liquid assets are invested generally in interest-earning overnight deposits and short- and intermediate-term U.S. government and agency obligations.

The Company’s most liquid assets are cash and short-term investments. The levels of these assets are dependent on the Company’s operating, financing, lending, and investing activities during any given year. The Company has other sources of liquidity if a need for additional funds arises, including securities maturing within one year and the repayment of loans. The Company may also utilize the sale of securities available for sale, federal funds lines of credit from correspondent banks, and borrowings from the Federal Home Loan Bank of Chicago and M&I Bank.

The Company is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its operating expenses, the Company is responsible for paying any dividends declared to its shareholders. The Company’s primary source of funds is dividends received from the Bank. The amount of dividends that the Bank may declare and pay to the Company is generally restricted under applicable law to net profits in the current year plus those for the previous two years. At June 30, 2011, the Company had liquid assets of $1.0 million.

Contractual Obligations

The following table discloses contractual obligations of the Company as of June 30, 2011:

 

(Dollars in Thousands)		2011				2012				2013				2014				2015				2016 and after				Total
Federal Home Loan Bank advances		$	2,000			$	2,000			$	4,500			$	2,500			$	2,000			$	—			$	13,000
Other borrowing			—				1,300				—				—				—				—				1,300
Subordinated debentures			—				—				—				—				—				3,609				3,609
Data Processing (1), (2)			291				601				—				—				—				—				892
Total		$	2,291			$	3,901			$	4,500			$	2,500			$	2,000			$	3,609			$	18,801

 

(1)	Estimated contract amount based on transaction volume. Actual expense was $712,000 and $590,000 in 2010 and 2009, respectively.

(2)	Contract expires September 30, 2013.

Off-Balance-Sheet Arrangements

In the normal course of operations, we engage in a variety of financial transactions that, in accordance with U.S. generally accepted accounting principles, are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments, letters of credit and lines of credit. For information about our loan commitments and unused lines of credit, see Note 16 of the notes to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2010, as filed with the SEC on March 31, 2011. We currently have no plans to engage in hedging activities in the future. For the year ended December 31, 2010 and for the six months ended June 30, 2011, we engaged in no off-balance-sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.

 

 

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Impact of Inflation and Changing Prices

The financial statements and related data presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary impact of inflation on the operations of the Company is reflected in increased operating costs. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates, generally, have a more significant impact on a financial institution’s performance than does inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

 

ITEM 3:

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

For a discussion of the potential impact of interest rate changes upon the market value of the Company’s portfolio equity, see Item 7A in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. Management, as part of its regular practices, performs periodic reviews of the impact of interest rate changes upon net interest income and the market value of the Company’s portfolio equity. Based on, among other factors, such reviews, management believes that there have been no material changes in the market risk of the Company’s asset and liability position since December 31, 2010.

 

ITEM 4:

CONTROLS AND PROCEDURES

The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. In addition, based on that evaluation, no change in the Company’s internal control over financial reporting occurred during the six months ended June 30, 2011 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

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PART II

 

ITEM 1.

LEGAL PROCEEDINGS

There are no material pending legal proceedings to which the Company or its subsidiaries are a party other than ordinary routine litigation incidental to their respective businesses.

 

ITEM 1A.

RISK FACTORS

There are no material changes to the risk factors disclosed in the Company’s Form 10-K for the year ended December 31, 2010.

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None

 

ITEM 4.

(REMOVED AND RESERVED)

 

ITEM 5.

OTHER INFORMATION

None

 

ITEM 6.

EXHIBITS

 

31.1		Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a)
31.2		Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a)
32.1		Certification of 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 Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.0*		The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Shareholders’ Equity; (iv) the Consolidated Statements of Cash Flows; and (v) the Notes to the Consolidated Financial Statements, tagged as blocks of text.

 

*	Furnished, not filed.

 

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

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