Attached files
file | filename |
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EX-31.1 - EX-31.1 - WEST SUBURBAN BANCORP INC | a09-30850_1ex31d1.htm |
EX-31.2 - EX-31.2 - WEST SUBURBAN BANCORP INC | a09-30850_1ex31d2.htm |
EX-32.2 - EX-32.2 - WEST SUBURBAN BANCORP INC | a09-30850_1ex32d2.htm |
EX-32.1 - EX-32.1 - WEST SUBURBAN BANCORP INC | a09-30850_1ex32d1.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended September 30, 2009
Commission File Number 0-17609
WEST SUBURBAN BANCORP, INC.
(Exact name of registrant as specified in its charter)
Illinois |
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36-3452469 |
(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
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711 South Meyers Road, Lombard, Illinois |
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60148 |
(Address of principal executive offices) |
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(Zip Code) |
Registrants telephone number, including area code: (630) 652-2000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of large accelerated filer, accelerated filer and small reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o |
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Accelerated filer x |
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Non-accelerated filer o |
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Smaller reporting company o |
(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
As of November 6, 2009, 428,611 shares of West Suburban common stock were outstanding.
WEST SUBURBAN BANCORP, INC.
Form 10-Q Quarterly Report
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4 |
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Managements Discussion and Analysis of Financial Condition and Results of Operations |
19 |
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30 |
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32 |
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33 |
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33 |
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33 |
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33 |
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34 |
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34 |
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34 |
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35 |
Special Note Concerning Forward-Looking Statements
This document (including information incorporated by reference) contains, and future oral and written statements of each of West Suburban Bancorp, Inc. (West Suburban) and West Suburban Bank (the Bank and collectively with West Suburban and its other direct and indirect subsidiaries, the Company) and its management may contain, forward-looking statements, within the meaning of such term in the Private Securities Litigation Reform Act of 1995, with respect to the financial condition, results of operations, plans, objectives, future performance and business of the Company. Forward-looking statements, which may be based upon beliefs, expectations and assumptions of the Companys management and on information currently available to management, are generally identifiable by the use of words such as believe, expect, anticipate, plan, intend, estimate, may, will, would, could, should or other similar expressions. Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no obligation to update any statement in light of new information or future events.
The Companys ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors that could have a material adverse effect on the operations and future prospects of the Company include, but are not limited to, those set forth in the Risk Factors section included under Item 1A and the following:
· The strength of the U.S. and global economies and financial markets in general and the strength of the local economies in which the Company conducts its operations, including the local residential and commercial real estate markets, which may be less favorable than expected and may result in, among other things, a deterioration in the credit quality and value of the Companys assets.
· The effects of, and changes in, federal, state and local laws, regulations and policies affecting banking, securities, taxation, insurance and monetary and financial matters, as well as any laws and regulations otherwise affecting the Company, including laws and regulations intended to address the current stresses in the U.S. and global financial markets, national security and money laundering.
· The effects of continued adverse market conditions and further volatility in investment securities generally, which may result in a deterioration in the value of the securities in the Companys investment portfolio.
· The ability of the Company to comply with, and satisfy the requirements of, its formal written agreements with its regulators and the consequences that may result from any inability to comply.
2
· The ability of the Company to comply with applicable federal, state and local laws, regulations and policies and the consequences that may result from any inability to comply.
· The effects of changes in interest rates, including the effects of changes in the rate of prepayments of the Companys assets, and the policies of the Board of Governors of the Federal Reserve System.
· The ability of the Company to compete with other financial institutions as effectively as the Company currently intends due to increases in competitive pressures in the financial services sector.
· The ability of the Company to maintain an acceptable net interest margin.
· The ability of the Company to obtain new customers and to retain existing customers.
· The timely development and acceptance of products and services, including products and services offered through alternative delivery channels such as the Internet.
· Technological changes implemented by the Company and by other parties, including third party vendors, which may be more difficult or more expensive than anticipated or which may have unforeseen consequences to the Company and its customers, including technological changes implemented for, or related to, the Companys website or new products such as prepaid solutions cards, payroll cards and other similar products and services.
· The ability of the Company, and certain of its vendors, to develop and maintain secure and reliable electronic systems, including systems developed for the Companys website or new products such as prepaid solutions cards, payroll cards and other similar products and services.
· The ability of the Company to retain key executives and employees, and the difficulty that the Company may experience in replacing key executives and employees in an effective manner.
· Consumer spending and saving habits which may change in a manner that affects the Companys business adversely.
· The economic impact of past and any future terrorist attacks, acts of war or threats thereof and the response of the U.S. to any such attacks and threats.
· 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 disputes with third parties, including, but not limited to, claims in connection with collection actions, employment matters and sales of business units.
· Changes in accounting policies and practices, as may be adopted by state and federal regulatory agencies and the Financial Accounting Standards Board, the Public Company Accounting Oversight Board and the Securities and Exchange Commission.
· Credit risks and the risks from concentrations (by geographic area or industry) within the Companys loan portfolio.
· The failure of the Companys Real Estate Investment Trust (REIT) to qualify as a REIT and the effects of such failure on the Companys consolidated effective tax rate.
· The ability of the Company to manage the risks associated with the foregoing as well as anticipated.
These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Additional information concerning the Company and its business, including other factors that could materially affect the Companys financial results, is included in the Companys filings with the Securities and Exchange Commission, including the risk factors disclosed in the Companys most recently filed Annual Report on Form 10-K.
3
ITEM 1. FINANCIAL STATEMENTS
WEST SUBURBAN BANCORP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(UNAUDITED)
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September 30, |
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December 31, |
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2009 |
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2008 |
|
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Assets |
|
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Cash and due from banks |
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$ |
30,285 |
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$ |
33,174 |
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Federal funds sold |
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72,300 |
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22,300 |
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Total cash and cash equivalents |
|
102,585 |
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55,474 |
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Securities |
|
|
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|
|
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Available for sale (amortized cost of $197,759 in 2009 and $227,333 in 2008) |
|
204,486 |
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225,814 |
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Held to maturity (fair value of $250,412 in 2009 and $244,928 in 2008) |
|
241,822 |
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240,234 |
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Federal Home Loan Bank stock |
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7,599 |
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6,144 |
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Total securities |
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453,907 |
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472,192 |
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Loans, less allowance for loan losses of $25,146 in 2009 and $15,578 in 2008 |
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1,195,517 |
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1,233,595 |
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Bank-owned life insurance |
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36,990 |
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35,442 |
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Premises and equipment, net |
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45,479 |
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45,298 |
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Other real estate |
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18,414 |
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4,658 |
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Accrued interest and other assets |
|
22,676 |
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20,761 |
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Total assets |
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$ |
1,875,568 |
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$ |
1,867,420 |
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Liabilities and shareholders equity |
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Deposits |
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|
|
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Demand-noninterest-bearing |
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$ |
127,459 |
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$ |
132,664 |
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Prepaid solutions cards deposits |
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30,157 |
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34,360 |
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Interest-bearing |
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1,537,341 |
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1,458,901 |
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Total deposits |
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1,694,957 |
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1,625,925 |
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Federal funds purchased |
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55,000 |
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Prepaid solutions cards liabilities |
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4,558 |
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3,604 |
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Accrued interest and other liabilities |
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17,715 |
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21,992 |
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Common stock in ESOP subject to contingent repurchase obligation |
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33,725 |
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46,670 |
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Shareholders equity |
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Common stock, no par value; 15,000,000 shares authorized; 428,611 shares issued and outstanding as of September 30, 2009 and 432,495 shares issued and outstanding as of December 31, 2008 |
|
3,426 |
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3,457 |
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Surplus |
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36,089 |
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38,066 |
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Retained earnings |
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115,134 |
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120,676 |
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Accumulated other comprehensive income (loss) |
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3,689 |
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(1,300 |
) |
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Amount reclassified on ESOP shares |
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(33,725 |
) |
(46,670 |
) |
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Total shareholders equity |
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124,613 |
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114,229 |
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Total liabilities and shareholders equity |
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$ |
1,875,568 |
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$ |
1,867,420 |
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See accompanying notes to condensed consolidated financial statements.
4
WEST SUBURBAN BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(Dollars in thousands, except per share data)
(UNAUDITED)
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2009 |
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2008 |
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Interest income |
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Loans, including fees |
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$ |
47,471 |
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$ |
55,621 |
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Securities |
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Taxable |
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13,850 |
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15,852 |
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Exempt from federal income tax |
|
842 |
|
869 |
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Federal funds sold |
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112 |
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184 |
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Total interest income |
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62,275 |
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72,526 |
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Interest expense |
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Deposits |
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18,861 |
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25,930 |
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Other |
|
43 |
|
474 |
|
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Total interest expense |
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18,904 |
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26,404 |
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Net interest income |
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43,371 |
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46,122 |
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Provision for loan losses |
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14,550 |
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7,110 |
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Net interest income after provision for loan losses |
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28,821 |
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39,012 |
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Noninterest income |
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|
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Prepaid solutions cards |
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13,432 |
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12,067 |
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Service fees on deposit accounts |
|
4,408 |
|
4,702 |
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Debit card fees |
|
1,528 |
|
1,635 |
|
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Bank-owned life insurance |
|
1,506 |
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(477 |
) |
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Net gains on sale of loans held for sale |
|
547 |
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34 |
|
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Net realized gains on securities transactions |
|
109 |
|
75 |
|
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Write down of trust preferred securities (all credit) |
|
(8,320 |
) |
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|
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Gain on redemption and interest in escrow fund of VISA stock |
|
|
|
1,894 |
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Other |
|
2,529 |
|
2,886 |
|
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Total noninterest income |
|
15,739 |
|
22,816 |
|
||
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Noninterest expense |
|
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|
|
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Salaries and employee benefits |
|
20,753 |
|
17,647 |
|
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Prepaid solutions cards |
|
9,188 |
|
8,899 |
|
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Furniture and equipment |
|
4,948 |
|
4,656 |
|
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Occupancy |
|
3,919 |
|
3,936 |
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Advertising and promotion |
|
543 |
|
1,736 |
|
||
Professional fees |
|
3,077 |
|
1,601 |
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FDIC assessments |
|
2,455 |
|
262 |
|
||
Loan expense |
|
1,003 |
|
277 |
|
||
Other |
|
4,689 |
|
4,921 |
|
||
Total noninterest expense |
|
50,575 |
|
43,935 |
|
||
|
|
|
|
|
|
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(Loss) income before income taxes |
|
(6,015 |
) |
17,893 |
|
||
Income tax (benefit) expense |
|
(4,770 |
) |
3,491 |
|
||
Net (loss) income |
|
$ |
(1,245 |
) |
$ |
14,402 |
|
|
|
|
|
|
|
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Total comprehensive income |
|
$ |
3,744 |
|
$ |
14,473 |
|
|
|
|
|
|
|
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(Loss) earnings per share |
|
$ |
(2.90 |
) |
$ |
33.30 |
|
Average shares outstanding |
|
429,559 |
|
432,495 |
|
See accompanying notes to condensed consolidated financial statements.
5
WEST SUBURBAN BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(Dollars in thousands, except per share data)
(UNAUDITED)
|
|
2009 |
|
2008 |
|
||
Interest income |
|
|
|
|
|
||
Loans, including fees |
|
$ |
15,576 |
|
$ |
18,019 |
|
Securities |
|
|
|
|
|
||
Taxable |
|
4,231 |
|
5,454 |
|
||
Exempt from federal income tax |
|
287 |
|
305 |
|
||
Federal funds sold |
|
51 |
|
7 |
|
||
Total interest income |
|
20,145 |
|
23,785 |
|
||
|
|
|
|
|
|
||
Interest expense |
|
|
|
|
|
||
Deposits |
|
6,082 |
|
7,688 |
|
||
Other |
|
|
|
263 |
|
||
Total interest expense |
|
6,082 |
|
7,951 |
|
||
Net interest income |
|
14,063 |
|
15,834 |
|
||
Provision for loan losses |
|
5,600 |
|
4,060 |
|
||
Net interest income after provision for loan losses |
|
8,463 |
|
11,774 |
|
||
|
|
|
|
|
|
||
Noninterest income |
|
|
|
|
|
||
Prepaid solutions cards |
|
4,345 |
|
4,249 |
|
||
Service fees on deposit accounts |
|
1,585 |
|
1,695 |
|
||
Debit card fees |
|
516 |
|
542 |
|
||
Bank-owned life insurance |
|
833 |
|
(391 |
) |
||
Net gains on loans held for sale |
|
166 |
|
14 |
|
||
Write down of trust preferred securties (all credit) |
|
(7,429 |
) |
|
|
||
Other |
|
813 |
|
967 |
|
||
Total noninterest income |
|
829 |
|
7,076 |
|
||
|
|
|
|
|
|
||
Noninterest expense |
|
|
|
|
|
||
Salaries and employee benefits |
|
7,158 |
|
5,650 |
|
||
Prepaid solutions cards |
|
3,108 |
|
2,886 |
|
||
Furniture and equipment |
|
1,628 |
|
1,638 |
|
||
Occupancy |
|
1,184 |
|
1,298 |
|
||
Advertising and promotion |
|
150 |
|
521 |
|
||
Professional fees |
|
1,140 |
|
570 |
|
||
FDIC assessments |
|
625 |
|
67 |
|
||
Loan expense |
|
376 |
|
78 |
|
||
Other |
|
1,570 |
|
1,593 |
|
||
Total noninterest expense |
|
16,939 |
|
14,301 |
|
||
|
|
|
|
|
|
||
(Loss) income before income taxes |
|
(7,647 |
) |
4,549 |
|
||
Income tax (benefit) expense |
|
(4,913 |
) |
72 |
|
||
Net (loss) income |
|
$ |
(2,734 |
) |
$ |
4,477 |
|
|
|
|
|
|
|
||
Total comprehensive income |
|
$ |
1,666 |
|
$ |
4,962 |
|
|
|
|
|
|
|
||
(Loss) earnings per share |
|
$ |
(6.38 |
) |
$ |
10.35 |
|
Average shares outstanding |
|
428,611 |
|
432,495 |
|
See accompanying notes to condensed consolidated financial statements.
6
WEST SUBURBAN BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(Dollars in thousands, except per share data)
(UNAUDITED)
|
|
Common |
|
Retained |
|
Accumulated |
|
Amount |
|
Total |
|
|||||
Balance, January 1, 2008 |
|
$ |
41,523 |
|
$ |
121,160 |
|
$ |
(1,415 |
) |
$ |
(56,907 |
) |
$ |
104,361 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|||||
Net income |
|
|
|
14,402 |
|
|
|
|
|
14,402 |
|
|||||
Change in unrealized loss on available for sale securities, net of reclassification and tax effects |
|
|
|
|
|
59 |
|
|
|
59 |
|
|||||
Change in post-retirement obligation, net of tax effects |
|
|
|
|
|
12 |
|
|
|
12 |
|
|||||
Total comprehensive income |
|
|
|
|
|
|
|
|
|
14,473 |
|
|||||
Cash dividends declared - $30.00 per share |
|
|
|
(12,975 |
) |
|
|
|
|
(12,975 |
) |
|||||
Reclassification due to change in fair value of common stock in ESOP subject to contingent repurchase obligation |
|
|
|
|
|
|
|
7,904 |
|
7,904 |
|
|||||
Balance, September 30, 2008 |
|
$ |
41,523 |
|
$ |
122,587 |
|
$ |
(1,344 |
) |
$ |
(49,003 |
) |
$ |
113,763 |
|
|
|
Common |
|
Retained |
|
Accumulated |
|
Amount |
|
Total |
|
|||||
Balance, January 1, 2009 |
|
$ |
41,523 |
|
$ |
120,676 |
|
$ |
(1,300 |
) |
$ |
(46,670 |
) |
$ |
114,229 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Repurchase and retirement of 3,884 shares of common stock |
|
(2,008 |
) |
|
|
|
|
|
|
(2,008 |
) |
|||||
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|||||
Net loss |
|
|
|
(1,245 |
) |
|
|
|
|
(1,245 |
) |
|||||
Change in unrealized (loss) gains on available for sale securities, net of reclassification and tax effects |
|
|
|
|
|
4,968 |
|
|
|
4,968 |
|
|||||
Change in post-retirement obligation, net of tax effects |
|
|
|
|
|
21 |
|
|
|
21 |
|
|||||
Total comprehensive income |
|
|
|
|
|
|
|
|
|
3,744 |
|
|||||
Cash dividends declared - $10.00 per share |
|
|
|
(4,297 |
) |
|
|
|
|
(4,297 |
) |
|||||
Reclassification due to change in fair value of common stock in ESOP subject to contingent repurchase obligation |
|
|
|
|
|
|
|
12,945 |
|
12,945 |
|
|||||
Balance, September 30, 2009 |
|
$ |
39,515 |
|
$ |
115,134 |
|
$ |
3,689 |
|
$ |
(33,725 |
) |
$ |
124,613 |
|
See accompanying notes to condensed consolidated financial statements.
7
WEST SUBURBAN BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(Dollars in thousands)
(UNAUDITED)
|
|
2009 |
|
2008 |
|
||
Cash flows from operating activities |
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(1,245 |
) |
$ |
14,402 |
|
Adjustments to reconcile net income to net cash provided by operating activities |
|
|
|
|
|
||
Depreciation |
|
2,749 |
|
2,717 |
|
||
Provision for loan losses |
|
14,550 |
|
7,110 |
|
||
Deferred income tax (benefit) provision |
|
(7,124 |
) |
213 |
|
||
Net discount accretion and premium amortization of securities |
|
113 |
|
(83 |
) |
||
Net realized gains on securities transactions |
|
(109 |
) |
(75 |
) |
||
Write down of pooled trust preferred securities |
|
8,320 |
|
|
|
||
Gain on redemption and interest in escrow fund of VISA stock |
|
|
|
(1,894 |
) |
||
(Increase) decrease in carrying value of bank-owned life insurance |
|
(1,506 |
) |
477 |
|
||
Amortization of deferred loan fees |
|
4 |
|
8 |
|
||
Net gains on sales of loans held for sale |
|
(547 |
) |
(34 |
) |
||
Sales of loans held for sale |
|
52,960 |
|
2,689 |
|
||
Origination of loans held for sale |
|
(50,847 |
) |
(2,546 |
) |
||
Net (gains) loss on sales of other real estate |
|
(13 |
) |
1 |
|
||
Write down of fair value of other real estate |
|
103 |
|
|
|
||
Decrease in accrued interest and other assets |
|
1,918 |
|
1,515 |
|
||
Decrease in accrued interest and other liabilities |
|
(4,242 |
) |
(4,796 |
) |
||
Net cash provided by operating activities |
|
15,084 |
|
19,704 |
|
||
Cash flows from investing activities |
|
|
|
|
|
||
Securities available for sale |
|
|
|
|
|
||
Sales |
|
19,522 |
|
85,854 |
|
||
Maturities, calls and redemptions |
|
63,634 |
|
155,449 |
|
||
Purchases |
|
(63,509 |
) |
(21,607 |
) |
||
Securities held to maturity and restricted securities |
|
|
|
|
|
||
Maturities and calls |
|
46,704 |
|
17,755 |
|
||
Purchases |
|
(48,145 |
) |
(236,776 |
) |
||
Net decrease (increase) in loans |
|
5,949 |
|
(14,000 |
) |
||
Investment in bank-owned life insurance policies |
|
(42 |
) |
(252 |
) |
||
Purchases of premises and equipment |
|
(2,930 |
) |
(3,640 |
) |
||
Sales of premises and equipment |
|
|
|
149 |
|
||
Sales of other real estate |
|
2,163 |
|
168 |
|
||
Net cash provided by (used in) investing activities |
|
23,346 |
|
(16,900 |
) |
||
Cash flows from financing activities |
|
|
|
|
|
||
Net increase (decrease) in deposits |
|
69,032 |
|
(48,678 |
) |
||
Net (decrease) increase in federal funds purchased |
|
(55,000 |
) |
50,500 |
|
||
Net increase in prepaid solutions cards liabilities |
|
954 |
|
11,473 |
|
||
Repurchase and retirement of common stock |
|
(2,008 |
) |
|
|
||
Dividends paid |
|
(4,297 |
) |
(12,975 |
) |
||
Net cash provided by financing activities |
|
8,681 |
|
320 |
|
||
Net increase in cash and cash equivalents |
|
47,111 |
|
3,124 |
|
||
Beginning cash and cash equivalents |
|
55,474 |
|
33,183 |
|
||
Ending cash and cash equivalents |
|
$ |
102,585 |
|
$ |
36,307 |
|
|
|
|
|
|
|
||
Supplemental disclosures |
|
|
|
|
|
||
Cash paid for interest |
|
$ |
19,265 |
|
$ |
28,402 |
|
Cash paid for income taxes |
|
2,354 |
|
5,245 |
|
||
Other real estate acquired through loan foreclosure |
|
16,009 |
|
472 |
|
See accompanying notes to condensed consolidated financial statements.
8
WEST SUBURBAN BANCORP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollars in thousands, except per share data)
Note 1 - Basis of Presentation
The condensed consolidated financial statements include the accounts of West Suburban Bancorp, Inc. (West Suburban) and West Suburban Bank (the Bank and collectively with West Suburban and its other direct and indirect subsidiaries, the Company). Intercompany accounts and transactions have been eliminated. The unaudited interim consolidated financial statements are prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain information and footnote disclosures normally accompanying the annual financial statements have been omitted. The interim financial statements and notes should be read in conjunction with the consolidated financial statements and notes thereto included in the latest Annual Report on Form 10-K filed by the Company. The condensed consolidated financial statements include all adjustments (none of which were other than normal recurring adjustments) necessary for a fair statement of the results for the interim periods. The results for the interim periods are not necessarily indicative of the results to be expected for the entire fiscal year. The Company has evaluated subsequent events for potential recognition and/or disclosure through November 6, 2009.
Note 2 - Reclassifications
To conform with the balance sheet presentation as of September 30, 2009, the Company reclassified $34,360 of December 31, 2008 prepaid solutions cards balances from liabilities to demand-noninterest-bearing deposits. This reclassification is in accordance with the Federal Deposit Insurance Corporations (FDIC) General Counsel Opinion No. 8 Stored Value Cards, which became effective in the fourth quarter of 2008 and clarifies which prepaid card balances are classified as deposits. The balances that have been reclassified as deposits are eligible for FDIC insurance coverage to the maximum extent permitted by law. The reclassification of the December 31, 2008 balances did not change the Companys consolidated assets disclosed in the December 31, 2008 consolidated financial statements and had no impact on the December 31, 2008 consolidated statement of income, statement of changes in shareholders equity or statement of cash flows.
Note 3 - Securities
At September 30, 2009 and December 31, 2008, the amortized cost and fair value of securities available for sale were as follows:
|
|
September 30, 2009 |
|
||||||||||
|
|
Amortized |
|
Gross |
|
Gross |
|
Fair |
|
||||
Pooled trust preferred |
|
$ |
255 |
|
$ |
|
|
$ |
|
|
$ |
255 |
|
U.S. government sponsored entities |
|
43,103 |
|
992 |
|
(2 |
) |
44,093 |
|
||||
Residential mortgage-backed |
|
143,245 |
|
5,380 |
|
(13 |
) |
148,612 |
|
||||
States and political subdivisions |
|
11,156 |
|
378 |
|
(8 |
) |
11,526 |
|
||||
Total debt securities |
|
$ |
197,759 |
|
$ |
6,750 |
|
$ |
(23 |
) |
$ |
204,486 |
|
|
|
December 31, 2008 |
|
||||||||||
|
|
Amortized |
|
Gross |
|
Gross |
|
Fair |
|
||||
Corporate |
|
$ |
24,430 |
|
$ |
|
|
$ |
(753 |
) |
$ |
23,677 |
|
Pooled trust preferred |
|
8,511 |
|
|
|
(5,048 |
) |
3,463 |
|
||||
U.S. government sponsored entities |
|
22,170 |
|
1,084 |
|
|
|
23,254 |
|
||||
Residential mortgage-backed |
|
162,062 |
|
3,385 |
|
(153 |
) |
165,294 |
|
||||
States and political subdivisions |
|
10,160 |
|
57 |
|
(91 |
) |
10,126 |
|
||||
Total debt securities |
|
$ |
227,333 |
|
$ |
4,526 |
|
$ |
(6,045 |
) |
$ |
225,814 |
|
9
At September 30, 2009 and December 31, 2008, the amortized cost and fair value of securities held to maturity were as follows:
|
|
September 30, 2009 |
|
||||||||||
|
|
Amortized |
|
Gross |
|
Gross |
|
Fair |
|
||||
U.S. government sponsored entities |
|
$ |
52,404 |
|
$ |
499 |
|
$ |
(34 |
) |
$ |
52,869 |
|
Residential mortgage-backed |
|
171,640 |
|
7,846 |
|
(28 |
) |
179,458 |
|
||||
States and political subdivisions |
|
17,778 |
|
512 |
|
(205 |
) |
18,085 |
|
||||
Total |
|
$ |
241,822 |
|
$ |
8,857 |
|
$ |
(267 |
) |
$ |
250,412 |
|
|
|
December 31, 2008 |
|
||||||||||
|
|
Amortized |
|
Gross |
|
Gross |
|
Fair |
|
||||
U.S. government sponsored entities |
|
$ |
28,072 |
|
$ |
759 |
|
$ |
|
|
$ |
28,831 |
|
Residential mortgage-backed |
|
193,187 |
|
4,499 |
|
(26 |
) |
197,660 |
|
||||
States and political subdivisions |
|
18,975 |
|
98 |
|
(636 |
) |
18,437 |
|
||||
Total |
|
$ |
240,234 |
|
$ |
5,356 |
|
$ |
(662 |
) |
$ |
244,928 |
|
At September 30, 2009, the amortized cost and fair value of debt securities available for sale and held to maturity by contractual maturity are as follows:
|
|
Available for Sale |
|
Held to Maturity |
|
||||||||
|
|
Amortized |
|
Fair Value |
|
Amortized |
|
Fair Value |
|
||||
Due in 1 year or less |
|
$ |
9,080 |
|
$ |
9,314 |
|
$ |
1,275 |
|
$ |
1,276 |
|
Due after 1 year through 5 years |
|
24,096 |
|
24,895 |
|
22,120 |
|
22,432 |
|
||||
Due after 5 years through 10 years |
|
6,707 |
|
6,756 |
|
33,859 |
|
34,293 |
|
||||
Due after 10 years |
|
14,631 |
|
14,909 |
|
12,928 |
|
12,953 |
|
||||
Residential mortgage-backed |
|
143,245 |
|
148,612 |
|
171,640 |
|
179,458 |
|
||||
Total |
|
$ |
197,759 |
|
$ |
204,486 |
|
$ |
241,822 |
|
$ |
250,412 |
|
Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
Sales of securities available for sale were as follows during the nine months ended September 30:
|
|
2009 |
|
2008 |
|
||
Proceeds from sales |
|
$ |
19,522 |
|
$ |
85,854 |
|
Gross realized gains |
|
245 |
|
172 |
|
||
Gross realized losses |
|
(136 |
) |
(97 |
) |
||
Net realized gains on securities transactions in 2008 include recoveries of $63 on securities written down in 2001. The tax benefit/expense recorded on securities transactions was not material.
10
Securities with unrealized losses at September 30, 2009 and December 31, 2008 are presented below by the length of time the securities have been in a continuous unrealized loss position:
|
|
September 30, 2009 |
|
||||||||||||||||
|
|
Less than 12 Months |
|
12 Months or More |
|
Total |
|
||||||||||||
|
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
||||||
U.S. government sponsored entities |
|
$ |
13,275 |
|
$ |
(36 |
) |
$ |
|
|
$ |
|
|
$ |
13,275 |
|
$ |
(36 |
) |
Residential mortgage-backed |
|
4,226 |
|
(21 |
) |
774 |
|
(20 |
) |
5,000 |
|
(41 |
) |
||||||
States and political subdivisions |
|
2,707 |
|
(80 |
) |
996 |
|
(133 |
) |
3,703 |
|
(213 |
) |
||||||
Total temporarily impaired |
|
$ |
20,208 |
|
$ |
(137 |
) |
$ |
1,770 |
|
$ |
(153 |
) |
$ |
21,978 |
|
$ |
(290 |
) |
|
|
December 31, 2008 |
|
||||||||||||||||
|
|
Less than 12 Months |
|
12 Months or More |
|
Total |
|
||||||||||||
|
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
||||||
Corporate |
|
$ |
4,839 |
|
$ |
(79 |
) |
$ |
18,838 |
|
$ |
(674 |
) |
$ |
23,677 |
|
$ |
(753 |
) |
Pooled trust preferred |
|
|
|
|
|
3,463 |
|
(5,048 |
) |
3,463 |
|
(5,048 |
) |
||||||
Residential mortgage-backed |
|
20,607 |
|
(143 |
) |
3,836 |
|
(36 |
) |
24,443 |
|
(179 |
) |
||||||
States and political subdivisions |
|
15,297 |
|
(727 |
) |
|
|
|
|
15,297 |
|
(727 |
) |
||||||
Total temporarily impaired |
|
$ |
40,743 |
|
$ |
(949 |
) |
$ |
26,137 |
|
$ |
(5,758 |
) |
$ |
66,880 |
|
$ |
(6,707 |
) |
Other-Than-Temporary Impairment Evaluation
Management evaluates securities for other-than-temporary impairment (OTTI) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. The investment securities portfolio is evaluated for OTTI by segregating the portfolio into two general segments and applying the appropriate OTTI model. Investment securities classified as available for sale or held to maturity are generally evaluated for OTTI under Financial Accounting Standards Boards (FASB) Accounting Standards Codification (FASC) 320 Investments in Debt and Equity Securities. However, certain purchased beneficial interests, including non-agency mortgage-backed securities, asset-backed securities, and collateralized debt obligations, that had credit ratings at the time of purchase of below AA are evaluated using the model outlined in FASC 325-40 Beneficial Interests in Securitized Financial Assets.
In determining OTTI under the FASC 320 model, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost; (2) the financial condition and near-term prospects of the issuer; (3) whether the market decline was affected by macroeconomic conditions; and (4) whether the Company has the intent to sell the debt security or whether it is more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether OTTI exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.
The second segment of the portfolio uses the OTTI guidance provided by FASC 325-40 that is specific to purchased beneficial interests that, on the purchase date, were rated below AA. Under FASC 325-40, the Company evaluates the present value of future cash flows to determine if there has been an adverse change in the remaining expected future cash flows.
When management determines that OTTI exists under either model, the amount of the OTTI recognized in earnings depends on whether the Company intends to sell the security or it is more likely than not the Company will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss. If the Company intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss, the OTTI is recognized in earnings in an amount equal to the entire difference between the investments amortized cost basis and its fair value at the balance sheet date. If the Company does not intend to sell the security and it is not more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis less any current-period loss, the OTTI is separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is
11
recognized in earnings. The amount of the total OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the portion of the OTTI recognized in earnings becomes the new amortized cost basis of the investment.
The Company currently holds pooled trust preferred securities which are evaluated for OTTI under FASC 325-40. The evaluation under this subtopic includes an analysis to determine whether there has been an adverse change in the expected cash flows. The evaluation also includes monitoring the ratings assigned by national rating agencies such as Moodys Investor Service to determine if any downgrades have occurred, and a detailed review of the underlying collateral to determine a break in yield point.
These securities were investment grade at purchase, but at June 30, 2009 Moodys rated these securities as Ca, which are highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and interest, and C, which are judged to be of poor standing and are subject to very high credit risk. The issuers in these securities are primarily banks, but some of the pools do include a limited number of insurance companies.
The OTTI model considers the structure and term of the Collateralized Debt Obligation (CDO) and the financial condition of the underlying issuers. Specifically, the model details interest rates, principal balances of note classes and underlying issuers, the timing and amount of interest and principal payments of the underlying issuers, and the allocation of the payments to the note classes. The current estimate of expected cash flows is based on the most recent trustee reports and any other relevant market information, including announcements of interest payment deferrals or defaults of underlying trust preferred securities. Assumptions used in the model include expected future default rates, prepayments, and recovery. Management treats all interest payment deferrals as defaults. In addition, management uses the model to stress each CDO, or make assumptions more severe than expected activity, to determine the degree to which assumptions could deteriorate before the CDO could no longer fully support repayment of the Companys note class. As of June 30, 2009, the Company analysis resulted in the Company concluding that OTTI existed on some of these investments, and accordingly, the Company recognized $891 of credit OTTI for the quarter ended June 30, 2009. Upon completion of the September 30, 2009 analysis, managements model indicated that all of these securities had continued to experience significant additional defaults or deferrals during the third quarter of 2009 and additional OTTI existed on all of these securities. Based on this analysis, management determined that it had the intent to sell the pooled trust preferred securities and wrote down these investments to fair value as of September 30, 2009. The fair value was calculated using bid prices obtained from independent brokerage houses. For the five pooled trust preferred securities owned by the Company, only one of the securities received multiple bids and the Company wrote this investment, with an amortized cost of $2,779, down to $255 as of September 30, 2009. On October 27, 2009, the Company sold this pooled trust preferred security for $255. The remaining four pooled trust preferred securities, with an aggregate amortized cost of $4,905, received a bid totaling $19, which management considered to be inconsequential and thus wrote these securities down to $0.
The table below presents a roll-forward of the credit losses recognized in earnings for the period ended September 30, 2009:
Beginning Balance, April 1, 2009 |
|
$ |
|
|
Additional credit losses not previously recorded |
|
8,320 |
|
|
Reductions for securities that are planned to be sold |
|
(8,320 |
) |
|
Ending Balance, September 30, 2009 |
|
$ |
|
|
12
Note 4 - Financial Instruments with Off-Balance Sheet Risk
Unused lines of credit and other commitments to extend credit not reflected in the financial statements are as follows:
|
|
September 30, 2009 |
|
December 31, 2008 |
|
||||||||||||||
|
|
Fixed |
|
Variable |
|
Total |
|
Fixed |
|
Variable |
|
Total |
|
||||||
Commercial loans and lines of credit |
|
$ |
2,665 |
|
$ |
202,810 |
|
$ |
205,475 |
|
$ |
4,940 |
|
$ |
224,216 |
|
$ |
229,156 |
|
Check credit lines of credit |
|
1,026 |
|
|
|
1,026 |
|
1,033 |
|
|
|
1,033 |
|
||||||
Mortgage loans |
|
8,684 |
|
|
|
8,684 |
|
6,712 |
|
|
|
6,712 |
|
||||||
Home equity lines of credit |
|
3,043 |
|
154,881 |
|
157,924 |
|
|
|
174,739 |
|
174,739 |
|
||||||
Letters of credit |
|
|
|
19,722 |
|
19,722 |
|
|
|
22,795 |
|
22,795 |
|
||||||
Credit card lines of credit |
|
|
|
39,592 |
|
39,592 |
|
|
|
40,267 |
|
40,267 |
|
||||||
Total |
|
$ |
15,418 |
|
$ |
417,005 |
|
$ |
432,423 |
|
$ |
12,685 |
|
$ |
462,017 |
|
$ |
474,702 |
|
Fixed rate commercial loan commitments at September 30, 2009 had interest rates ranging from 3.8% to 7.3% with terms ranging from 1 month to 5 years. Fixed rate mortgage loan commitments at September 30, 2009 had interest rates ranging from 4.3% to 5.8% with terms ranging from 10 to 30 years. Fixed rate home equity lines of credit at September 30, 2009 had interest rates ranging from 6.0% to 7.0% with terms ranging from 2 to 5 years. Fixed rate check credit lines of credit at September 30, 2009 had interest rates of 18.0%.
Note 5 - Common Stock in ESOP Subject to Contingent Repurchase Obligation
At September 30, 2009 and December 31, 2008, the Employee Stock Ownership Plan (the ESOP) held 91,397 and 90,270 shares of West Suburban common stock, respectively. Upon termination of their employment, participants who elect to receive their benefit distributions in the form of West Suburban common stock may require the Company to purchase the common stock distributed at fair value during two 60-day periods. The first purchase period begins on the date the benefit is distributed and the second purchase period begins on the first anniversary of the distribution date. This contingent repurchase obligation is reflected in the Companys financial statements as Common stock in ESOP subject to contingent repurchase obligation and reduces shareholders equity by an amount that represents the independently appraised fair value of all West Suburban common stock held by the ESOP and allocated to participants, without regard to whether it is likely that the shares would be distributed or that the recipients of the shares would be likely to exercise their right to require the Company to purchase the shares.
Note 6 - New Accounting Pronouncements
Adoption of New Accounting Standards
On July 1, 2009, the FASB Generally Accepted Accounting Principles (GAAP) Codification (the Codification) became effective as the sole authoritative source of US GAAP. The Codification was issued under Statement of Financial Accounting Standards (SFAS) 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principlesa replacement of SFAS 162. The Codification reorganizes current GAAP for non-governmental entities into a topical index to facilitate accounting research and to provide users additional assurance that they have referenced all related literature pertaining to a given topic. Existing GAAP prior to the Codification was not altered in compilation of the Codification. The Codification encompasses all FASB SFASs, EITF statements, FASB Staff Positions, FASB Interpretations, FASB Derivative Implementation Guides, American Institute of Certified Public Accountants Statement of Positions, Accounting Principles Board Opinions and Accounting Research Bulletins, along with the remaining body of GAAP, effective as of June 30, 2009. Financial statements issued for all interim and annual periods ending after September 15, 2009 will reference accounting guidance embodied in the Codification as opposed to referencing the previously authoritative pronouncements. Accounting literature included in the Codification is referenced by Topic, Subtopic, Section, Paragraph and Subparagraph.
13
Newly Issued But Not Yet Effective Accounting Standards
In June 2009, the FASB issued new guidance referenced at FASC 105-10-65-1-d-2 (subparagraph 105-10-65-1-d-2), Transition Related to FASB 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles. Subparagraph 105-10-65-1-d-2 provides that FASB 166 Accounting for the Transfer of Financial Assets and Amendment of FASB shall remain authoritative until such time that it is integrated into the Codification. SFAS 166 removes the concept of a special purpose entity (SPE), including variable interest entities that are SPEs. It limits the circumstances in which a transferor derecognizes a financial asset. The statement amends the requirements for the transfer of a financial asset to meet the requirements for sale accounting. The statement is effective for all interim and annual periods beginning after November 15, 2009. The Company does not expect the adoption to have a material impact on the Companys consolidated financial position, results of operations or cash flows.
In June 2009, the FASB issued new guidance referenced at FASC 105-10-65-1-d-3 (subparagraph 105-10-65-1-d-3), Transition Related to FASB 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles. Subparagraph 105-10-65-1-d-3 provides that SFAS 167 Amendments to FIN 46(R) shall remain authoritative until such time that it is integrated into the Codification. SFAS 167 amends prior variable interest entity guidance and requires an enterprise to perform an analysis to determine whether the enterprises variable interest gives it a controlling financial interest in the variable interest entity. The statement is effective for all interim and annual periods beginning after November 15, 2009. The Company does not expect the adoption to have a material impact on the Companys consolidated financial position, results of operations or cash flows.
Note 7 - Fair Value
FASC 820 establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value as follows:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a reporting entitys own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing (Level 2 inputs), which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities relationship to other benchmark quoted securities.
14
Assets and liabilities measured at fair value on a recurring basis are summarized below:
|
|
|
|
Fair Value Measurements at |
|
|||||
|
|
September 30, 2009 |
|
Significant Other |
|
Significant |
|
|||
Assets |
|
|
|
|
|
|
|
|||
Available for sale securities |
|
|
|
|
|
|
|
|||
Pooled trust preferred |
|
$ |
255 |
|
$ |
|
|
$ |
255 |
|
U.S. government sponsored entities |
|
44,093 |
|
44,093 |
|
|
|
|||
Residential mortgage-backed |
|
148,612 |
|
148,612 |
|
|
|
|||
States and political subdivisions |
|
11,526 |
|
11,526 |
|
|
|
|||
|
|
$ |
204,486 |
|
$ |
204,231 |
|
$ |
255 |
|
|
|
|
|
Fair Value Measurements at |
|
|||||
|
|
December 31, 2008 |
|
Significant Other |
|
Significant Unobservable |
|
|||
Assets |
|
|
|
|
|
|
|
|||
Available for sale securities |
|
|
|
|
|
|
|
|||
Corporate |
|
$ |
23,677 |
|
$ |
23,677 |
|
$ |
|
|
Pooled trust preferred |
|
3,463 |
|
|
|
3,463 |
|
|||
U.S. government sponsored entities |
|
23,254 |
|
23,254 |
|
|
|
|||
Residential mortgage-backed |
|
165,294 |
|
165,294 |
|
|
|
|||
States and political subdivisions |
|
10,126 |
|
10,126 |
|
|
|
|||
|
|
$ |
225,814 |
|
$ |
222,351 |
|
$ |
3,463 |
|
The table below presents a reconciliation and income statement classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended September 30, 2009:
|
|
Securities Available |
|
|
Beginning balance, January 1, 2009 |
|
$ |
3,463 |
|
Increase in unrealized loss |
|
5,048 |
|
|
Included in earnings - realized |
|
(8,320 |
) |
|
Interest income on securities |
|
64 |
|
|
Ending balance, September 30, 2009 |
|
$ |
255 |
|
15
Assets and liabilities measured at fair value on a non-recurring basis are summarized below:
|
|
|
|
Fair Value Measurements at |
|
|||||
|
|
September 30, 2009 |
|
Significant Other |
|
Significant |
|
|||
Assets |
|
|
|
|
|
|
|
|||
Impaired loans |
|
$ |
22,229 |
|
$ |
|
|
$ |
22,229 |
|
|
|
|
|
Fair Value Measurements at |
|
|||||
|
|
December 31, 2008 |
|
Significant Other |
|
Significant |
|
|||
Assets |
|
|
|
|
|
|
|
|||
Impaired loans |
|
$ |
7,352 |
|
$ |
|
|
$ |
7,352 |
|
Impaired loans are evaluated and valued at the lower of cost or fair value at the time the loan is identified as impaired. Fair value is measured based on the value of the collateral securing these loans and is classified at Level 3 in the fair value hierarchy. Collateral may include real estate and business assets, including equipment, inventory and accounts receivable, and is determined based on appraisals by qualified licensed appraisers retained by the Company. Appraised and reported values may be discounted based on managements historical knowledge, changes in market conditions from the time of valuation, and/or managements expertise and knowledge of the borrower and the borrowers business. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the factors identified above.
Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $27,419 at September 30, 2009 and $9,036 at December 31, 2008. The allowance on impaired loans was $5,190 at September 30, 2009 and $1,684 at December 31, 2008. The provision for loan losses made for impaired loans during the third quarter of 2009 was $3,345 compared to $960 for the third quarter of 2008.
Nonfinancial assets and liabilities measured at fair value on a non-recurring basis are summarized below:
|
|
|
|
Fair Value Measurements at |
|
|||||
|
|
September 30, 2009 |
|
Significant Other |
|
Significant |
|
|||
Assets |
|
|
|
|
|
|
|
|||
Other real estate |
|
$ |
18,414 |
|
$ |
|
|
$ |
18,414 |
|
Other real estate is valued at the time the loan is foreclosed upon and the asset is transferred to other real estate owned at the determined value. The value is based primarily on third party appraisals, less estimated costs to sell. The appraisals are generally discounted based on managements historical knowledge and changes in market conditions from the time of valuation. These discounts are typically significant and result in a Level 3 classification of the inputs for determining fair value. Other real estate is reviewed and evaluated on at least an annual basis for additional impairment and adjusted accordingly, based on the same factors identified above. Write-downs of other real estate for the three and nine month periods ended September 30, 2009 was $103.
16
The carrying value and estimated fair value of financial instruments at September 30, 2009 and December 31, 2008 are as follows:
|
|
September 30, 2009 |
|
December 31, 2008 |
|
||||||||
|
|
Carrying |
|
Estimated |
|
Carrying |
|
Estimated |
|
||||
Financial assets |
|
|
|
|
|
|
|
|
|
||||
Cash and cash equivalents |
|
$ |
102,585 |
|
$ |
102,585 |
|
$ |
55,474 |
|
$ |
55,474 |
|
Securities |
|
|
|
|
|
|
|
|
|
||||
Available for sale |
|
204,231 |
|
204,231 |
|
225,814 |
|
225,814 |
|
||||
Held to maturity |
|
241,822 |
|
250,412 |
|
240,234 |
|
244,928 |
|
||||
Federal Home Loan Bank stock |
|
7,599 |
|
N/A |
|
6,144 |
|
N/A |
|
||||
Loans, less allowance for loan losses |
|
1,195,517 |
|
1,195,945 |
|
1,233,595 |
|
1,218,633 |
|
||||
Accrued interest |
|
6,391 |
|
6,391 |
|
6,136 |
|
6,136 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Financial liabilities |
|
|
|
|
|
|
|
|
|
||||
Deposits |
|
1,694,957 |
|
1,712,012 |
|
1,625,925 |
|
1,639,214 |
|
||||
Federal funds purchased |
|
|
|
|
|
55,000 |
|
55,000 |
|
||||
Accrued interest |
|
4,595 |
|
4,595 |
|
5,007 |
|
5,007 |
|
||||
The methods and assumptions used by the Company in estimating the fair value of the financial instruments are described in the Companys Annual Report on Form 10-K.
Note 8 - Retirement Benefits
The Bank maintains the West Suburban Bank 401(k) Profit Sharing Plan (the 401(k) Plan), which serves as the Companys principal retirement plan. The 401(k) Plan was established to address the limited availability of West Suburban common stock for acquisition by the ESOP and to offer participants an avenue to diversify their retirement savings.
The ESOP provides incentives to employees by granting participants an interest in West Suburban common stock, which represents the ESOPs primary investment. An individual account is established for each participant and the benefits payable upon retirement, termination, disability or death are based upon service, the amount of the employers contributions and any income, expenses, gains and losses and forfeitures allocated to the participants account.
The Company also maintains a noncontributory postretirement benefit plan covering certain senior executives. The plan provides postretirement medical, dental and long term care coverage for certain executives and their surviving spouses. The eligible retirement age under the plan is age 62 and the plan is unfunded. Net postretirement benefit costs are summarized in the following table:
|
|
Nine Months Ended |
|
||||
|
|
September 30, |
|
||||
|
|
2009 |
|
2008 |
|
||
Service cost |
|
$ |
31 |
|
$ |
27 |
|
Interest cost |
|
45 |
|
39 |
|
||
Amortization of prior service cost |
|
16 |
|
16 |
|
||
Recognized net actuarial gain |
|
20 |
|
15 |
|
||
Net periodic benefit cost |
|
$ |
112 |
|
$ |
97 |
|
17
|
|
Three Months Ended |
|
||||
|
|
September 30, |
|
||||
|
|
2009 |
|
2008 |
|
||
Service cost |
|
$ |
11 |
|
$ |
9 |
|
Interest cost |
|
15 |
|
13 |
|
||
Amortization of prior service cost |
|
6 |
|
5 |
|
||
Recognized net actuarial gain |
|
6 |
|
5 |
|
||
Net periodic benefit cost |
|
$ |
38 |
|
$ |
32 |
|
Note 9 - Income Taxes
The Company files income tax returns in the U.S. federal jurisdiction and in Illinois. The Company is no longer subject to examination by the U.S. federal tax authorities or by Illinois tax authorities for years prior to 2004.
During the third quarter of 2008, a new State of Illinois tax law was passed which provided clarification on an uncertain tax position previously adopted by the Company. As a result, the Company determined that the FASC 740-10 reserve on the uncertain tax position was no longer necessary and $1,311 of unrecognized tax positions was reversed. As of September 30, 2009, the Company, based on its evaluation of tax positions, has determined that no FASC 740-10 reserve was necessary.
A reconciliation of the beginning and ending amount of unrecognized tax benefits and related disclosures for the period ended September 30, 2008 is as follows:
|
|
2008 |
|
|
Balance at January 1, |
|
$ |
1,500 |
|
Adjustments based on tax positions |
|
(1,500 |
) |
|
Balance at September 30, |
|
$ |
|
|
Income tax expense decreased 236.6% for the first nine months of 2009 compared to the first nine months of 2008. The effective tax rates for the first nine months of 2009 and 2008 were (79.3%) and 19.5%, respectively. The decline is due to the pretax loss and the impact of permanent differences resulting from, among other items, ESOP dividends, municipal income and BOLI income.
18
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Critical Accounting Policies
The Companys financial statements are prepared in conformity with accounting principles generally accepted in the U.S. These accounting principles, which can be complex, are significant to the Companys financial condition and results of operations and require management to apply significant judgment with respect to various accounting, reporting and disclosure matters. Management must use estimates, assumptions and judgments to apply these principles where actual measurements are not possible or practical. These estimates, assumptions and judgments are based on information available as of the date of this report and, as this information changes, actual results could differ from the estimates, assumptions and judgments reflected in the financial statements. Changes in such estimates may have a significant impact on the financial statements. Management has reviewed the application of these policies with the Audit Committee of West Suburbans Board of Directors. This Managements Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction the Companys Condensed Consolidated Financial Statements and Notes to the Condensed Consolidated Financial Statements included in this quarterly report.
In managements view, the accounting policies that are critical to the Company are those relating to estimates, assumptions and judgments regarding the determination of the adequacy of the allowance for loan losses, the Companys federal and state tax obligations and the determination of the fair value of certain of the Companys investment securities.
Allowance for Loan Losses. The Company maintains an allowance for loan losses at a level management believes is sufficient to absorb probable incurred credit losses in the loan portfolio. The allowance for loan losses represents the Companys estimate of probable incurred credit losses in the loan portfolio at each balance sheet date and is based on the review of available and relevant information. The allowance contains allocations for probable incurred credit losses that have been identified relating to specific borrowing relationships, as well as probable incurred credit losses for pools of loans. The allowance for loan losses is reassessed monthly by the Company to determine the appropriate level of the allowance. The amount of the allowance for loan losses is determined based on a variety of factors, including assessment of the credit risk of the loans in the loan portfolio, volume of the loans, delinquent loans, evaluation of current economic conditions in the market area, actual charge-offs during the period and historical loss experience. Loan quality is continually monitored by management and reviewed by the loan committee on a monthly basis.
Loans are evaluated on a category by category basis to determine the appropriate allocation of the allowance to each category. In addition, individual commercial, construction and commercial mortgage loans are evaluated to determine if a specific loss allocation is needed for problem loans deemed to have a shortfall in collateral. Management also considers the borrowers current economic status, including liquidity and future business viability. Other factors used in the allocation of the allowance include levels and trends of past dues and charge-offs along with concentrations of credit within the commercial and commercial real estate loan portfolios. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available or as developments occur. Along with the allocation of the allowance on a category by category basis and the specific allocations for individual borrowing relationships, the allowance includes a relatively small portion that remains unallocated. Management adjusts the allowance for loan losses by an amount sufficient to maintain the allowance at the level determined appropriate. Loans are fully or partially charged-off when all or a portion of the loan is deemed to be uncollectible by management. The Company believes that the allowance for loan losses is adequate to provide for estimated probable incurred credit losses in the loan portfolio.
Income Taxes. The Company is subject to income tax laws of the U.S. and the State of Illinois. These laws are complex and subject to different interpretations by the taxpayer and the various taxing authorities. Management makes certain judgments and estimates about the application of these inherently complex laws when determining the provision for income taxes. Federal and state taxing authorities have recently become increasingly aggressive in challenging tax positions taken by financial institutions, including positions that may be taken by the Company. During the preparation of the Companys tax returns, management makes reasonable interpretations of the tax laws which are subject to challenge upon audit by the tax authorities. These interpretations are also subject to reinterpretation based on managements ongoing assessment of facts and evolving case law.
19
On a quarterly basis, management evaluates the reasonableness of its effective tax rate based upon its current best estimate of net income and applicable taxes expected for the full year. Deferred tax assets and liabilities are evaluated on a quarterly basis, or more frequently if necessary.
Temporary Decline in Fair Value of Securities. The Company evaluates its securities for other-than-temporary impairment under FASC 320 or FASC 325-40. FASC 320 applies to debt securities, as well as equity securities not accounted for under the equity method (i.e., cost method investments), unless the investments are subject to other accounting guidance, such as FASC 325-40. Investments in securitized structures such as collateralized mortgage obligations and collateralized debt obligations that are not high quality investment grade securities upon acquisition are subject to FASC 325-40. High quality investment grade securities are defined as securities with an investment grade of AA or higher.
In accordance with FASC 320, declines in the fair value of securities below their cost that are other-than-temporary are reflected as realized losses. Management evaluates all debt securities, except for pooled trust preferred securities, to determine if management has the intent and ability to hold the securities until their maturity date and no concerns exist with the respect to the ability of the issuer to satisfy its obligations at maturity.
Management evaluates pooled trust preferred securities in accordance with FASC 325-40, which requires the evaluation of the expected cash flows to determine whether there has been an adverse change in the expected cash flows. Additionally, the Company monitors investment grades on the pooled trust preferred securities to determine whether there has been an adverse change in the investment grades and performs an analysis of the underlying collateral to determine a break in yield point. Any adverse changes in expected cash flows that are other-than-temporary are reflected as realized losses.
Contractual Obligations, Commitments, Off-Balance Sheet Arrangements and Contingent Liabilities
Through the normal course of operations, the Company has entered into certain contractual obligations and other commitments. These obligations generally relate to the funding of operations through deposits and prepaid solutions cards, as well as leases for premises and equipment. As a financial services provider, the Company routinely enters into commitments to extend credit. While contractual obligations represent future cash requirements of the Company, a significant portion of commitments to extend credit may expire without being drawn upon. Commitments to extend credit are subject to the same credit policies and approval procedures as comparable loans made by the Company.
The following table presents the Companys significant fixed and determinable contractual obligations and significant commitments by payment date as of September 30, 2009 (dollars in thousands). The payment amounts represent those amounts contractually due to the recipient and do not include any carrying value adjustments.
|
|
One Year |
|
Over One |
|
Over Three |
|
Over |
|
Total |
|
|||||
Deposits without a stated maturity |
|
$ |
1,185,989 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
1,185,989 |
|
Prepaid solutions cards deposits |
|
30,157 |
|
|
|
|
|
|
|
30,157 |
|
|||||
Time deposits |
|
303,483 |
|
111,513 |
|
93,692 |
|
280 |
|
508,968 |
|
|||||
Operating leases |
|
650 |
|
817 |
|
469 |
|
384 |
|
2,320 |
|
|||||
Prepaid solutions cards liabilities |
|
4,558 |
|
|
|
|
|
|
|
4,558 |
|
|||||
Deferred compensation |
|
6,976 |
|
|
|
|
|
|
|
6,976 |
|
|||||
Commitments to extend credit |
|
|
|
|
|
|
|
|
|
|
|
|||||
Fixed rate |
|
|
|
|
|
|
|
|
|
15,418 |
|
|||||
Variable rate |
|
|
|
|
|
|
|
|
|
417,005 |
|
|||||
At September 30, 2009 and December 31, 2008, the ESOP held 91,397 and 90,270 shares of West Suburban common stock, respectively. Upon termination of their employment, participants who elect to receive their benefit distributions in the form of West Suburban common stock may require the Company to purchase the common stock distributed at fair value. A more detailed discussion concerning this obligation is presented in Note 5 to the Companys Condensed Consolidated Financial Statements included in this report. At September 30, 2009 and
20
December 31, 2008, this contingent repurchase obligation reduced shareholders equity by $33.7 million and $46.7 million, respectively. The Company believes the ESOP will continue to have a sufficient amount of cash to distribute benefit payments to former employees and that the exercise of the rights of former employees to cause the Company to repurchase West Suburban common stock is unlikely.
Balance Sheet Analysis
Total Assets. Total consolidated assets at September 30, 2009 increased .4% from December 31, 2008. This increase was primarily due to an increase in federal funds sold offset by decreased balances in the securities and loan portfolios.
Cash and Cash Equivalents. Cash and cash equivalents at September 30, 2009 increased 84.9% from December 31, 2008, due to an increase in federal funds sold. Although rates paid on federal funds sold are currently at historically low levels, the Company believes that it is prudent to maintain a higher level of liquidity given the current state of the economy.
Securities. The Companys securities portfolio decreased 3.9% during the first nine months of 2009. This decrease was primarily due to the Company liquidating its holdings in corporate securities in order to reduce credit risk in the securities portfolio, as well as the write down of all of its pooled trust preferred securities to fair value. Additionally, the Company experienced a decrease in residential mortgage-backed securities as a result of paydowns. The Company increased its holdings of securities of U.S. government sponsored entities in order to earn a higher yield when compared to alternative investments such as federal funds sold. These securities were purchased due to their low risk and probability of being called prior to maturity. The Company manages its investment portfolio to maximize the return on invested funds within acceptable risk guidelines, to meet pledging and liquidity requirements, and to adjust balance sheet interest rate sensitivity in an effort to insulate net interest income against the impact of interest rate changes. At September 30, 2009, the Companys balance of accumulated other comprehensive income was $3.7 million compared to an accumulated other comprehensive loss of $1.3 million at December 31, 2008. This change was primarily the result of the write down of the Companys holdings in pooled trust preferred securities.
Securities available for sale are carried at fair value, securities held to maturity are carried at amortized cost and Federal Home Loan Bank stock is carried at historical cost. The carrying values of the Companys major categories of securities are summarized in the following table (dollars in thousands):
|
|
September 30, |
|
December 31, |
|
Dollar |
|
Percent |
|
|||
Securities available for sale |
|
|
|
|
|
|
|
|
|
|||
Corporate |
|
$ |
|
|
$ |
23,677 |
|
$ |
(23,677 |
) |
(100.0 |
)% |
Pooled trust preferred |
|
255 |
|
3,463 |
|
(3,208 |
) |
(92.6 |
)% |
|||
U.S. government sponsored entities |
|
44,093 |
|
23,254 |
|
20,839 |
|
89.6 |
% |
|||
Mortgage-backed |
|
148,612 |
|
165,294 |
|
(16,682 |
) |
(10.1 |
)% |
|||
States and political subdivisions |
|
11,526 |
|
10,126 |
|
1,400 |
|
13.8 |
% |
|||
Total securities available for sale |
|
204,486 |
|
225,814 |
|
(21,328 |
) |
(9.4 |
)% |
|||
|
|
|
|
|
|
|
|
|
|
|||
Securities held to maturity |
|
|
|
|
|
|
|
|
|
|||
U.S. government sponsored entities |
|
52,404 |
|
28,072 |
|
24,332 |
|
86.7 |
% |
|||
Mortgage-backed |
|
171,640 |
|
193,187 |
|
(21,547 |
) |
(11.2 |
)% |
|||
States and political subdivisions |
|
17,778 |
|
18,975 |
|
(1,197 |
) |
(6.3 |
)% |
|||
Total securities held to maturity |
|
241,822 |
|
240,234 |
|
1,588 |
|
0.7 |
% |
|||
Federal Home Loan Bank stock |
|
7,599 |
|
6,144 |
|
1,455 |
|
23.7 |
% |
|||
Total securities |
|
$ |
453,907 |
|
$ |
472,192 |
|
$ |
(18,285 |
) |
(3.9 |
)% |
Fair values for states and political subdivisions securities are generally determined by matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted
21
prices for the specific securities but rather by relying on the securities relationship to other benchmark quoted securities. Characteristics utilized by matrix pricing include insurer, credit support, state of issuance and bond rating. These factors are used to incorporate additional spreads and municipal curves. A separate curve structure is used for bank-qualified municipal bonds. This structure is different than the approach used for general market municipals. For the bank-qualified municipal bonds, active quotes are obtained when available.
Fair values for U.S. government sponsored entity issued securities are determined using a combination of daily closing prices, evaluations, income data, security master (descriptive) data and terms and conditions data. Additional data used to compute the fair value of U.S. government sponsored entity issued residential mortgage-backed pass-through securities (FHLMC, FNMA, and GNMA pools) includes daily composite seasoned, pool-specific, and generic coupon evaluations, and factors and descriptive data for individual pass-through pools. Additional data used to compute the fair value of U.S. government sponsored entity issued collateralized mortgage obligations include daily evaluations and descriptive data.
Loans. Total loans outstanding at September 30, 2009 decreased 2.3% from December 31, 2008, primarily due to decreases in the home equity, residential real estate and commercial loan portfolios. These decreases were partially offset by an increase in the construction loan portfolio, which was primarily due to the increase in the outstanding balance of one borrower with strong financial resources and a favorable relationship with the Company. The decrease in the home equity loan portfolio was primarily due to payoffs resulting from refinancing activity, as well as a decrease in home equity loan originations. The decrease in the residential real estate loan portfolio was primarily due to refinancing activity in the mortgage loan portfolio. Additionally, the Company discontinued its purchase of mortgage loans from the secondary market.
Balances in the Companys loans are summarized in the following table (dollars in thousands):
|
|
September 30, 2009 |
|
December 31, |
|
Dollar |
|
Percent |
|
|||
Commercial |
|
$ |
279,286 |
|
$ |
288,234 |
|
$ |
(8,948 |
) |
(3.1 |
)% |
Consumer |
|
3,540 |
|
4,276 |
|
(736 |
) |
(17.2 |
)% |
|||
Indirect automobile |
|
2,870 |
|
4,454 |
|
(1,584 |
) |
(35.6 |
)% |
|||
Real estate |
|
|
|
|
|
|
|
|
|
|||
Residential |
|
220,972 |
|
242,947 |
|
(21,975 |
) |
(9.0 |
)% |
|||
Commercial |
|
278,156 |
|
276,995 |
|
1,161 |
|
0.4 |
% |
|||
Home equity |
|
239,334 |
|
257,150 |
|
(17,816 |
) |
(6.9 |
)% |
|||
Construction |
|
183,265 |
|
161,532 |
|
21,733 |
|
13.5 |
% |
|||
Held for sale |
|
202 |
|
1,768 |
|
(1,566 |
) |
(88.6 |
)% |
|||
Credit card |
|
9,872 |
|
10,484 |
|
(612 |
) |
(5.8 |
)% |
|||
Other |
|
3,166 |
|
1,333 |
|
1,833 |
|
137.5 |
% |
|||
Total |
|
1,220,663 |
|
1,249,173 |
|
(28,510 |
) |
(2.3 |
)% |
|||
Allowance for loan losses |
|
(25,146 |
) |
(15,578 |
) |
(9,568 |
) |
61.4 |
% |
|||
Loans, net |
|
$ |
1,195,517 |
|
$ |
1,233,595 |
|
$ |
(38,078 |
) |
(3.1 |
)% |
Allowance for Loan Losses and Asset Quality. The level of the allowance for loan losses is determined by evaluating the general allowance, which is allocated to pools of loans, as well as the specific allowance allocated to impaired loans. The Company utilizes a matrix which tracks changes in various categories that management has determined to have direct effects on the performance of the loan portfolio. These categories include; charge-off history, trends in the national and local economies, loan concentrations, past due trends, loan volume trends and loan risk migration. The matrix assigns factors to each loan category which is used to determine the amount of the general allowance. The specific allowance allocated to impaired loans is based on the present value of expected future cash flows discounted at the loans effective interest rate or the fair value of the loans collateral, is repayment of the loan is collateral dependent.
Net loan charge-offs were $5.0 million and $2.1 million for the nine months ended September 30, 2009 and 2008, respectively. This increase was primarily due to the increase in the level of nonperforming loans and declines in collateral values. Nonperforming loans (nonaccrual and loans past due 90 days or more still on accrual) increased to $47.6 million at September 30, 2009, from $25.3 million at December 31, 2008. This increase was primarily due to
22
the classification of two commercial relationships totaling $19.5 million as nonaccrual during the second quarter of 2009, which was offset by the transfer of one $10.7 million commercial relationship to other real estate owned. Additionally, during the third quarter of 2009, commercial relationships totaling $13.2 million were classified as nonaccrual. The Companys loan past due 90 days or more still on accrual decreased to $.2 million at September 30, 2009 from $1.7 million at December 31, 2008. This decrease was primarily due to the classification of three residential real estate loans along with one commercial real estate loan as nonaccrual. Additionally, three other residential real estate loans and two home equity loans were repaid.
The Companys ratio of nonperforming loans to total loans was 3.9% at September 30, 2009 and 2.0% at December 31, 2008. The ratio of nonperforming assets to total assets increased to 3.5% at September 30, 2009 from 1.6% at December 31, 2008.
The ratio of the allowance for loan losses to total loans was 2.1% at September 30, 2009 and 1.2% December 31, 2008. The following table presents an analysis of the Companys nonperforming loans and other real estate as of the dates indicated (dollars in thousands):
|
|
September 30, |
|
December 31, |
|
||
Loans past due 90 days or more still on accrual |
|
$ |
207 |
|
$ |
1,705 |
|
Nonaccrual loans |
|
47,438 |
|
23,569 |
|
||
Total nonperforming loans |
|
$ |
47,645 |
|
$ |
25,274 |
|
Nonperforming loans as a percent of total loans |
|
3.9 |
% |
2.0 |
% |
||
Allowance for loan losses as a percent of nonperforming loans |
|
52.8 |
% |
61.6 |
% |
||
Other real estate |
|
$ |
18,414 |
|
$ |
4,658 |
|
Nonperforming assets as a percent of total assets |
|
3.5 |
% |
1.6 |
% |
Impaired loans are summarized as follows (dollars in thousands):
|
|
September 30, |
|
December 31, |
|
||
Period-end loans with no allocated allowance for loan losses |
|
$ |
22,013 |
|
$ |
21,187 |
|
Period-end loans with allocated allowance for loan losses |
|
27,419 |
|
9,036 |
|
||
Total |
|
$ |
49,432 |
|
$ |
30,223 |
|
Impaired loans as of September 30, 2009 increased $31.4 million from December 31, 2008, primarily due to the classification of six loan relationships as impaired. This increase was offset by $10.3 million of impaired loans being transferred to other real estate. The allowance on impaired loans was $5.2 million at September 30, 2009 and $1.7 million at December 31, 2008.
The following table presents an analysis of the Companys allowance for loan losses for the periods stated (dollars in thousands):
|
|
2009 |
|
2008 |
|
|||||||||||
|
|
3rd Qtr |
|
2nd Qtr |
|
1st Qtr |
|
4th Qtr |
|
3rd Qtr |
|
|||||
Provision - quarter |
|
$ |
5,600 |
|
$ |
7,650 |
|
$ |
1,300 |
|
$ |
3,250 |
|
$ |
4,060 |
|
Provision - year to date |
|
14,550 |
|
8,950 |
|
1,300 |
|
10,360 |
|
7,110 |
|
|||||
Net charge-offs - quarter |
|
1,694 |
|
2,646 |
|
642 |
|
1,956 |
|
1,659 |
|
|||||
Net charge-offs - year to date |
|
4,982 |
|
3,288 |
|
642 |
|
4,051 |
|
2,095 |
|
|||||
Allowance at period end |
|
25,146 |
|
21,240 |
|
16,236 |
|
15,578 |
|
14,284 |
|
|||||
Allowance at period end to total loans |
|
2.1 |
% |
1.7 |
% |
1.3 |
% |
1.2 |
% |
1.2 |
% |
|||||
Other Real Estate. During the first nine months of 2009, the Company transferred properties with an aggregate fair value of $16.0 million. Included in this amount were properties with an aggregate fair value of $10.7 million relating
23
to one commercial loan relationship. The transfers to other real estate were at fair value less costs to sell. During the third quarter of 2009, the Company transferred one commercial property with a fair value of $.4 million, as well as six residential properties with an aggregate fair value of $1.3 million. During the first nine months of 2009, the Company sold properties with an aggregate carrying value of $2.3 million of which $1.4 million was related to construction properties. On a monthly basis, the Company evaluates the carrying value of all other real estate properties and takes write-downs on these properties as necessary. During the first nine months of 2009, the Company recorded a write-down of $.1 million on one commercial property. The Company is actively marketing the properties it holds in its other real estate portfolio in a continuing effort to reduce this portfolio.
Deposits. Total deposits at September 30, 2009 increased 4.2% from December 31, 2008, primarily due to a significant increase in money market checking along with increased balances in savings and time deposits less than $100,000. These increases were partially offset by a decrease in non-interest-bearing deposits, prepaid solutions cards deposits, NOW accounts and time deposits $100,000 and greater. Management believes that due to the current state of the economy, some customers have migrated from non-liquid time deposits to more liquid deposit products such as money market checking and savings. The increase in time deposits less than $100,000 was primarily in time deposits with short maturities. In general, management promotes the Companys deposit products when it believes appropriate and prices its products in a manner intended to retain the Companys current customers as well as attract new customers while maintaining an acceptable net interest margin.
Balances in the Companys major categories of deposits are summarized in the following table (dollars in thousands):
|
|
September 30, |
|
December 31, |
|
Dollar |
|
Percent |
|
|||
Demand-noninterest-bearing |
|
$ |
127,459 |
|
$ |
132,664 |
|
$ |
(5,205 |
) |
(3.9 |
)% |
Prepaid solutions cards deposits |
|
30,157 |
|
34,360 |
|
(4,203 |
) |
(12.2 |
)% |
|||
NOW |
|
303,755 |
|
310,178 |
|
(6,423 |
) |
(2.1 |
)% |
|||
Money market checking |
|
395,842 |
|
322,207 |
|
73,635 |
|
22.9 |
% |
|||
Savings |
|
328,776 |
|
320,763 |
|
8,013 |
|
2.5 |
% |
|||
Time deposits |
|
|
|
|
|
|
|
|
|
|||
Less than $100,000 |
|
376,314 |
|
361,313 |
|
15,001 |
|
4.2 |
% |
|||
$100,000 and greater |
|
132,654 |
|
144,440 |
|
(11,786 |
) |
(8.2 |
)% |
|||
Total |
|
$ |
1,694,957 |
|
$ |
1,625,925 |
|
$ |
69,032 |
|
4.2 |
% |
Federal Funds Purchased. The Company did not have any federal funds purchased at September 30, 2009, compared to $55.0 million at December 31, 2008. This decrease was the result of the maturity of 90-day term funds purchased by the Company in the fourth quarter of 2008 to take advantage of attractive interest rates available from the Federal Reserve. Purchases of federal funds are infrequent, but the Company accesses its various federal funds lines from time to time in order to meet liquidity needs when necessary.
Prepaid Solutions Cards. Outstanding balances on prepaid solutions cards, which represent the total of prepaid solution cards deposits and prepaid solutions cards liabilities, decreased 8.6% at September 30, 2009 from December 31, 2008. This decrease was primarily due to declines in two existing programs, which were partially offset by growth in one existing program. The Company is in process of exploring various strategic alternatives regarding its prepaid solutions business unit, including the sale of the business unit. However, at this time, the likelihood of any particular outcome with respect to this business unit is unknown.
CAPITAL RESOURCES
Shareholders equity at September 30, 2009 increased 9.1% from December 31, 2008. The increase was primarily due to a $12.9 million decrease in the amount reclassified on ESOP shares and a change in accumulated comprehensive income to a $5.0 million unrealized gain from an unrealized loss position of $1.3 million at December 31, 2008. This increase was partially offset by a net loss of $1.2 million, dividends declared of $4.3 million and the repurchase and retirement of common stock of $2.0 million.
24
Banking regulations require the Company and the Bank to maintain minimum capital amounts and ratios. As of September 30, 2009, all capital ratios were in excess of the regulatory capital requirements, which call for a minimum total risk-based capital ratio of 8% for each of the Company and the Bank, a minimum Tier 1 risk-based capital ratio of 4% for each of the Company and the Bank and a minimum leverage ratio (3% for the most highly rated banks and bank holding companies that do not expect significant growth; all other institutions are required to maintain a minimum leverage capital ratio of 4% to 5% depending on their particular circumstances and risk and growth profiles) for each of the Company and the Bank. Bank holding companies and their subsidiaries are generally expected to operate at or above the minimum capital requirements. As of September 30, 2009, all capital ratios were in excess of regulatory minimums and should allow the Company and the Bank to operate without significant capital adequacy concerns. In addition, the Bank operates a subsidiary that participates in the Banks real estate lending business and is intended to qualify as a real estate investment trust. This subsidiary is also intended to facilitate capital raising efforts, if such efforts become necessary, by enabling the Bank to access the capital markets through the subsidiary.
As of September 30, 2009 and December 31, 2008, the Bank exceeded the minimum capital ratios required for it to qualify as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the Bank must maintain minimum ratios for total capital to risk weighted assets, Tier 1 capital to risk weighted assets and Tier 1 Capital to average assets as set forth in the following table. There are no conditions or events since September 30, 2009 that management believes would result in a change of it being considered well-capitalized. On a consolidated basis, the Company also exceeded regulatory capital requirements as of these dates. In accordance with applicable regulations, the appraised fair value of West Suburban common stock owned by the ESOP is included in Tier 1 capital.
The following table sets forth the actual and minimum capital ratios of the Company and the Bank as of the dates indicated (dollars in thousands):
|
|
Actual |
|
Minimum |
|
Excess |
|
|||||||
|
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
Amount |
|
|||
As of September 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|||
Total capital (to risk weighted assets) |
|
|
|
|
|
|
|
|
|
|
|
|||
Company |
|
$ |
171,941 |
|
12.0 |
% |
N/A |
|
N/A |
|
N/A |
|
||
Bank |
|
159,503 |
|
11.1 |
% |
$ |
143,206 |
|
10.0 |
% |
$ |
16,297 |
|
|
Tier 1 capital (to risk weighted assets) |
|
|
|
|
|
|
|
|
|
|
|
|||
Company |
|
153,936 |
|
10.7 |
% |
N/A |
|
N/A |
|
N/A |
|
|||
Bank |
|
141,513 |
|
9.9 |
% |
85,924 |
|
6.0 |
% |
55,589 |
|
|||
Tier 1 capital (to average assets) |
|
|
|
|
|
|
|
|
|
|
|
|||
Company |
|
153,936 |
|
8.2 |
% |
N/A |
|
N/A |
|
N/A |
|
|||
Bank |
|
141,513 |
|
7.5 |
% |
93,719 |
|
5.0 |
% |
47,794 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|||
As of December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|||
Total capital (to risk weighted assets) |
|
|
|
|
|
|
|
|
|
|
|
|||
Company |
|
$ |
177,062 |
|
12.1 |
% |
N/A |
|
N/A |
|
N/A |
|
||
Bank |
|
161,575 |
|
11.0 |
% |
$ |
146,421 |
|
10.0 |
% |
$ |
15,154 |
|
|
Tier 1 capital (to risk weighted assets) |
|
|
|
|
|
|
|
|
|
|
|
|||
Company |
|
161,484 |
|
11.0 |
% |
N/A |
|
N/A |
|
N/A |
|
|||
Bank |
|
145,997 |
|
10.0 |
% |
87,852 |
|
6.0 |
% |
58,145 |
|
|||
Tier 1 capital (to average assets) |
|
|
|
|
|
|
|
|
|
|
|
|||
Company |
|
161,484 |
|
8.7 |
% |
N/A |
|
N/A |
|
N/A |
|
|||
Bank |
|
145,997 |
|
7.9 |
% |
92,581 |
|
5.0 |
% |
53,416 |
|
LIQUIDITY
Effective liquidity management ensures the availability of funding sources at minimum cost to meet fluctuating deposit balances, loan demand needs and to take advantage of earnings enhancement opportunities. A large, stable core deposit base and a strong capital position are the solid foundation for the Companys liquidity position. Liquidity is enhanced by a securities portfolio structured to provide liquidity as needed. The Company also
25
maintains relationships with correspondent banks to purchase federal funds subject to underwriting and collateral requirements. Additionally, subject to credit underwriting, collateral, capital stock, and other requirements of the Federal Home Loan Bank of Chicago (the FHLB), the Company is able to borrow from the FHLB on a same day basis. As of September 30, 2009, the Company could have borrowed up to approximately $152 million from the FHLB secured by certain of its real estate loans and securities. Furthermore, the Company has agreements in place to borrow up to $79 million in federal funds. The Company manages its liquidity position through continuous monitoring of profitability trends, asset quality, interest rate sensitivity and maturity schedules of interest-earning assets and interest-bearing liabilities.
Generally, the Company uses cash and cash equivalents and securities available for sale to meet its liquidity needs. As of September 30, 2009 and December 31, 2008, these liquid assets represented 16.4% and 15.1% of total assets, respectively.
During the first nine months of 2009, the Companys cash and cash equivalents increased $47.1 million. Net cash provided by operating activities, investing activities and financing activities for this period were $15.1 million, $23.3 million and $8.7 million, respectively.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
Net (Loss) Income. The Company experienced a net loss of $1.2 million for the first nine months of 2009 compared to net income of $14.4 million the first nine months of 2008. The net loss resulted primarily from an increase in the provision for loan losses of $7.4 million, a decrease in total noninterest income of $7.1 million resulting primarily from the write-down of the Companys pooled trust preferred securities, a decrease in net interest income before provision for loan losses of $2.8 million and an increase in total noninterest expense of $6.6 million.
Net Interest Income. Net interest income (on a fully tax-equivalent basis) decreased 5.9% for the first nine months of 2009 compared to the first nine months of 2008. Net interest income is the primary source of income for the Company. Net interest income is the difference between interest income earned on interest-earning assets and interest expense incurred on interest-bearing liabilities. Net interest income is affected by changes in volume and yield on interest-earning assets and the volume and rates on interest-bearing liabilities. Interest-earning assets consist of federal funds sold, securities and loans. Interest-bearing liabilities primarily consist of deposits. The net interest margin is the percentage of tax-equivalent net interest income to average earning assets. The Companys net interest margin (on a fully tax-equivalent basis) decreased to 3.5% for the nine month period ended September 30, 2009 compared to 3.6% for the nine month period ended September 30, 2008.
Total interest income (on a fully tax-equivalent basis) decreased 14.0% for the first nine months of 2009 compared to the first nine months of 2008, primarily due to decreasing yields in the Companys loan portfolio. Average loan balances decreased 1.9% for the first nine months of 2009 and the average yield on the loan portfolio decreased 78 basis points. Yields on the Companys home equity loan portfolio decreased 69 basis points during this period, primarily due to decreases in the interest rates charged for home equity lines of credit that adjusted as a result of decreases in the prime rate. The prime rate decreased due to decreases in interest rates initiated by the Federal Reserve. The average prime rate for the first nine months of 2009 was 3.3% compared to 5.4% for the first nine months of 2008. Yields on the Companys commercial loan portfolio decreased 165 basis points during this period. This decrease was partially due to decreases in the interest rates charged for a majority of adjustable rate commercial loans tied to the prime rate that adjusted as a result of decreases in the prime rate. Yields on federal funds sold decreased 267 basis points due to decreases in interest rates initiated by the Federal Reserve. The average of the federal funds rate set by the Federal Reserve was 18 basis points for the first nine months of 2009 compared to 220 basis points for the first nine months of 2008.
Total interest expense decreased 28.4% for the first nine months of 2009 compared to the first nine months of 2008. Lower interest on deposits, resulting from lower yields on interest-bearing deposits, accounted for most of the decrease. The decline was primarily due to the lower cost of funds on interest-bearing deposits which decreased 66 basis points to 1.7% at September 30, 2009, from 2.3% at September 30, 2008. Approximately 60% of time deposits are scheduled to mature within one year.
26
The following table reflects the impact of changes in volume and interest rates on interest-earning assets and interest-bearing liabilities (on a fully tax-equivalent basis) for the first nine months ended September 30, 2009, as compared to the same period in 2008 (dollars in thousands):
|
|
Change due to |
|
Total |
|
|||||
|
|
Volume |
|
Rate |
|
Change |
|
|||
Interest Income |
|
|
|
|
|
|
|
|||
Federal funds sold |
|
$ |
95 |
|
$ |
(167 |
) |
$ |
(72 |
) |
Securities |
|
(1,947 |
) |
(97 |
) |
(2,044 |
) |
|||
Loans |
|
(932 |
) |
(7,238 |
) |
(8,170 |
) |
|||
Total interest income |
|
(2,784 |
) |
(7,502 |
) |
(10,286 |
) |
|||
Interest Expense |
|
|
|
|
|
|
|
|||
Interest-bearing deposits |
|
238 |
|
(7,307 |
) |
(7,069 |
) |
|||
Other interest-bearing liabilities |
|
(55 |
) |
(376 |
) |
(431 |
) |
|||
Total interest expense |
|
183 |
|
(7,683 |
) |
(7,500 |
) |
|||
Net interest income |
|
$ |
(2,967 |
) |
$ |
181 |
|
$ |
(2,786 |
) |
The following table presents an analysis of the Companys year-to-date average interest-earning assets, demand-noninterest-bearing deposits and interest-bearing liabilities as of the dates indicated (dollars in thousands):
|
|
2009 |
|
2008 |
|
|||||||||||
|
|
September 30 |
|
June 30 |
|
March 31 |
|
December 31 |
|
September 30 |
|
|||||
Federal funds sold |
|
$ |
55,339 |
|
$ |
44,024 |
|
$ |
31,722 |
|
$ |
7,898 |
|
$ |
8,406 |
|
Securities |
|
443,848 |
|
446,955 |
|
462,309 |
|
495,983 |
|
500,889 |
|
|||||
Loans |
|
1,210,884 |
|
1,220,487 |
|
1,222,363 |
|
1,231,226 |
|
1,234,550 |
|
|||||
Total interest-earning assets |
|
$ |
1,710,071 |
|
$ |
1,711,466 |
|
$ |
1,716,394 |
|
$ |
1,735,107 |
|
$ |
1,743,845 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Demand-noninterest-bearing deposits |
|
$ |
148,988 |
|
$ |
144,088 |
|
$ |
129,196 |
|
$ |
138,106 |
|
$ |
139,236 |
|
Interest-bearing deposits |
|
1,512,697 |
|
1,498,593 |
|
1,473,667 |
|
1,483,101 |
|
1,493,632 |
|
|||||
Total deposits |
|
$ |
1,661,685 |
|
$ |
1,642,681 |
|
$ |
1,602,863 |
|
$ |
1,621,207 |
|
$ |
1,632,868 |
|
Total interest-bearing liabilities |
|
$ |
1,524,018 |
|
$ |
1,515,663 |
|
$ |
1,507,430 |
|
$ |
1,515,476 |
|
$ |
1,519,509 |
|
Provision for Loan Losses. Provision for loan losses increased $7.4 million for the first nine months of 2009 compared to the first nine months of 2008. The Company determined that additional loan loss provisions were necessary due to the increased levels of charge-offs and nonperforming loans and continued downward trends in the national and local economies. A more detailed discussion of the allowance for loan losses is presented in the Allowance for Loan Losses and Asset Quality section of this report.
During the first nine months of 2009 specific reserves of $3.5 million were made on impaired loans and a provision for loan losses of $6.1 million was made for charge-offs and the general component of the allowance for loan losses. Based on the continued deterioration of the local and national economy and its impact on the Companys loan portfolio, the Company has determined that a higher general component of the allowance is necessary to absorb the probable losses inherent in the loan portfolio.
At September 30, 2009, the overall general component of the allowance for loan losses was 1.7% of total loans as compared to 1.4% at June 30, 2009 and 1.1% at December 31, 2008.
Noninterest Income. Total noninterest income decreased 31.0% for the first nine months of 2009 compared to the first nine months of 2008. This decrease was primarily due to the write-down of $8.3 million of the Companys pooled trust preferred securities during the first nine months of 2009. Prepaid solutions cards income increased $1.4
27
million primarily due to continued growth in three existing programs. Service fees on deposit accounts decreased $.3 million primarily due to decreased fees associated with the overdraft honors program. The Bank-owned life insurance (BOLI) investment increased $2.0 million to a gain of $1.5 million from a loss of $.5 million for 2008 primarily due to an increase in the market value of the underlying investments associated with the insurance policies that are tied to the deferred compensation plans. Net gains on loans held for sale increased $.5 million primarily due to increased sales of loans held for sale in the secondary market. During 2008, the Company recorded a one-time gain of $1.9 million related to the redemption of the VISA stock as part of the VISA initial public offering and recovery of expenses recorded for the Companys obligation to indemnify VISA during the fourth quarter of 2007. Other income decreased $.4 million primarily due to the Company closing its travel department at the end of 2008 as well as the write-down of the fair value of a property held in other real estate.
Noninterest Expense. Total noninterest expense increased 15.1% for the first nine months of 2009 compared to the first nine months of 2008. Salaries and employee benefits increased $3.1 million primarily due to an increase in the market value of the underlying investments associated with the insurance policies that are tied to the Companys deferred compensation plans. Additionally, the Company incurred increased salary and employee benefits expense related to Bank Secrecy compliance and other compliance related matters. Prepaid solutions card expense increased $.3 million primarily due to expenses associated with the production and processing of cards. Furniture and equipment expense increased $.3 million primarily due to increased data processing expense. Advertising and promotions expense decreased $1.2 million primarily due to the Company reducing its use of an advertising agency and reduced newspaper advertising. Professional fees expense increased $1.5 million primarily due to increased costs related to Bank Secrecy compliance and other compliance related matters. Professional fees expense also increased due to increased legal costs related to commercial lending matters which were offset by decreased fees for Prepaid Solutions. FDIC assessments increased $2.2 million due to several factors, including increased assessments issued by the FDIC in support of the deposit insurance fund as well as the Temporary Liquidity Guarantee Program, the Companys participation in the FDICs Transaction Account Guarantee Program, the Prepaid Solutions deposits becoming eligible for FDIC Insurance and the use of a credit balance the Company had with the FDIC in prior years. A portion of the increase in FDIC assessments is due to a one-time special assessment of $.9 million recognized during the second quarter of 2009. The Company anticipates additional special assessments which could continue to negatively impact noninterest expense. Loan expense increased $.7 million primarily due to real estate tax payments made for several commercial accounts.
Income Taxes. For the first nine months of 2009, the Company recorded an income tax benefit of $4.8 million compared to an income tax expense of $3.5 million for the first nine months of 2008. The effective tax rates for the first nine months of 2009 and 2008 were (79.3%) and 19.5%, respectively. The decline is due to a pretax loss and the impact of permanent differences resulting from, among other items, ESOP dividends, municipal income and BOLI income.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
Net (Loss) Income. The Company experienced a net loss of $2.7 million during the third quarter of 2009 compared to net income of $4.5 million during the third quarter of 2008. The net loss was primarily a result of a decrease in total noninterest income of $6.2 million, resulting primarily from the write-down of the Companys pooled trust preferred securities, a decrease in net interest income of $1.8 million, an increase in the provision for loan losses of $1.5 million and an increase in total noninterest expense of $2.6 million.
Net Interest Income. Net interest income (on a fully tax-equivalent basis) decreased 11.1% for the third quarter of 2009 compared to the third quarter of 2008. The Companys net interest margin (on a fully tax-equivalent basis) for the third quarter of 2009 decreased to 3.3% compared to 3.7% for the third quarter of 2008.
Total interest income (on a fully tax-equivalent basis) decreased 15.2% for the third quarter of 2009 compared to the third quarter of 2008 primarily due to decreasing yields in the Companys loan portfolio. Average loan balances decreased 3.0% during this period and the average yield on the portfolio decreased 63 basis points. Yields on the Companys home equity portfolio decreased 54 basis points during this period. This decrease was primarily due to decreases in the interest rates charged for home equity lines of credit that adjusted as a result of decreases in the prime rate. The prime rate decreased due to decreases in interest rates initiated by the Federal Reserve. The average prime rate for the third quarter of 2009 was 3.25% compared to 5.00% for the third quarter of 2008. Yields on the Companys commercial loan portfolio decreased 126 basis points during this period. The majority of commercial
28
loans have adjustable rates that are tied to the prime rate. The Company increased its average balances of federal funds sold as a result of decreased balances in the investment securities portfolio in order to maintain a high level of liquidity during this period of economic uncertainty. These activities caused a decline in the income from the investment securities portfolio.
Total interest expense decreased 23.5% for the third quarter of 2009 compared to the third quarter of 2008. Interest paid on deposits accounted for the majority of the decrease. The yield on interest-bearing deposits decreased 50 basis points to 1.6% for the third quarter of 2009 from 2.1% for the third quarter of 2008.
The following table reflects the impact of changes in volume and interest rates on interest-earning assets and interest-bearing liabilities (on a fully tax-equivalent basis) for the third quarter ended September 30, 2009, as compared to the same period in 2008 (dollars in thousands):
|
|
Change due to |
|
Total |
|
|||||
|
|
Volume |
|
Rate |
|
Change |
|
|||
Interest Income |
|
|
|
|
|
|
|
|||
Federal funds sold |
|
$ |
133 |
|
$ |
(89 |
) |
$ |
44 |
|
Securities |
|
(676 |
) |
(576 |
) |
(1,252 |
) |
|||
Loans |
|
(487 |
) |
(1,961 |
) |
(2,448 |
) |
|||
Total interest income |
|
(1,030 |
) |
(2,626 |
) |
(3,656 |
) |
|||
Interest Expense |
|
|
|
|
|
|
|
|||
Interest-bearing deposits |
|
257 |
|
(1,863 |
) |
(1,606 |
) |
|||
Other interest-bearing liabilities |
|
(176 |
) |
(87 |
) |
(263 |
) |
|||
Total interest expense |
|
81 |
|
(1,950 |
) |
(1,869 |
) |
|||
Net interest income |
|
$ |
(1,111 |
) |
$ |
(676 |
) |
$ |
(1,787 |
) |
The following table presents an analysis of the Companys quarterly average interest-earning assets, demand-noninterest-bearing deposits and interest-bearing liabilities as of the dates indicated (dollars in thousands):
|
|
September 30, 2009 |
|
September 30, 2008 |
|
||
Federal funds sold |
|
$ |
77,598 |
|
$ |
466 |
|
Securities |
|
437,752 |
|
501,101 |
|
||
Loans |
|
1,192,232 |
|
1,229,358 |
|
||
Total interest-earning assets |
|
$ |
1,707,582 |
|
$ |
1,730,925 |
|
|
|
|
|
|
|
||
Demand-noninterest-bearing deposits |
|
$ |
158,627 |
|
$ |
139,276 |
|
Interest-bearing deposits |
|
1,540,445 |
|
1,475,466 |
|
||
Total deposits |
|
$ |
1,699,072 |
|
$ |
1,614,742 |
|
Total interest-bearing liabilities |
|
$ |
1,540,456 |
|
$ |
1,518,583 |
|
Provision for Loan Losses. Provision for loan losses increased $1.5 million for the third quarter of 2009 compared to the third quarter of 2008. The increase in the provision for loan losses was a direct result of increased nonperforming loans and charge-offs, as well as an increase in the general allowance due to current economic conditions. Nonperforming loans (nonaccrual and loans past due 90 days or more still on accrual) increased to $47.6 million at September 30, 2009 from $35.1 million at June 30, 2009. Nonaccrual loans increased to $47.4 million at September 30, 2009 from $34.8 million at June 30, 2009.
Noninterest Income. Total noninterest income decreased 88.3% for the third quarter of 2009 compared to the third quarter of 2008. This decrease was primarily due to the write-down of $7.4 million of the Companys pooled trust preferred securities during the third quarter of 2009. Service fees on deposit accounts decreased $.1 million primarily due to decreased fees associated with the overdraft honors program. The BOLI investment increased $1.2 million to a gain of $.8 million from a loss of $.4 million for the third quarter of 2008 primarily due to the increase in the market value of the underlying investments associated with the insurance policies that are tied to the
29
Companys deferred compensation plans. Net gains on loans held for sale increased $.2 million primarily due to increased sales of loans held for sale in the secondary market. Other income decreased $.2 million primarily due to the Company writing down the fair value of a property held in other real estate.
Noninterest Expense. Total noninterest expense increased 18.4% for the third quarter of 2009 compared to the third quarter of 2008. Salaries and employee benefits increased $1.5 million primarily due to an increase in the market value of the underlying investments associated with the insurance policies that are tied to the Companys deferred compensation plans. Prepaid solutions card expense increased $.2 million primarily due to increased revenue share expense. Occupancy expense decreased $.1 million primarily due to reduced utilities expense. Advertising and promotions expense decreased $.4 million primarily due to the Company reducing its use of an advertising agency and reduced newspaper advertising. Professional fees expense increased $.6 million primarily due to increased costs related to Bank Secrecy compliance and other compliance related matters, as well as commercial lending matters. These increases were partially offset by reduced legal costs for Prepaid Solutions. FDIC assessments increased $.5 million due to several factors, including increased assessments issued by the FDIC in support of the deposit insurance fund as well as the Temporary Liquidity Guarantee Program, the Companys participation in the FDICs Transaction Account Guarantee Program, the Prepaid Solutions deposits becoming eligible for FDIC Insurance and the use of a credit balance the Company had with the FDIC in prior years. The Company anticipates additional special assessments which could continue to negatively impact noninterest expense. Loan expense increased $.3 million primarily due to real estate taxes paid for several commercial accounts.
Income Taxes. Income tax expense decreased for the third quarter of 2009 compared to the third quarter of 2008, as the Company recorded a benefit during the third quarter of 2009 due to the pre-tax net loss. The effective tax rates for the third quarter of 2009 and 2008 were (64.2%) and 1.6%.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company attempts to maintain a conservative posture with regard to interest rate risk by actively managing its asset/liability GAP position and monitoring the direction and magnitude of gaps and risk. The Company attempts to moderate the effects of changes in interest rates by adjusting its asset and liability mix to achieve desired relationships between rate sensitive assets and rate sensitive liabilities. Rate sensitive assets and liabilities are those instruments that reprice within a given time period. An asset or liability reprices when its interest rate is subject to change or upon maturity.
Movements in general market interest rates are a key element in changes in the net interest margin. The Companys policy is to manage its balance sheet so that fluctuations in the net interest margin are minimized regardless of the level of interest rates, although the net interest margin does vary somewhat due to managements response to increasing competition from other financial institutions.
The Company measures interest rate sensitivity through a net interest income analysis. The net interest income analysis measures the change in net interest income in the event of hypothetical changes in interest rates. This analysis assesses the risk of changes in net interest income in the event of a sudden and sustained 100 to 200 basis point increase or decrease in market interest rates. This analysis is subject to certain assumptions made by the Company, including the following:
· Balance sheet volume reflects the current balances and does not project future growth or changes. This establishes the base case from which all percentage changes are calculated.
· The replacement rate for loan and deposit items that mature is the current rate offered by the Company as adjusted for the assumed rate increase or decrease. The replacement rate for securities is the current market rate as adjusted for the assumed rate increase or decrease.
· The repricing rate for balance sheet data is determined by utilizing individual account statistics provided by the Companys data processing systems.
· The maturity and repricing dates for balance sheet data are determined by utilizing individual account statistics provided by the Companys data processing systems.
30
Presented below are the Companys projected changes in net interest income over a twelve-month horizon for the various rate shock levels as of the periods indicated (dollars in thousands):
September 30, 2009 |
|
Amount |
|
Dollar |
|
Percent |
|
||
+200 basis points |
|
$ |
58,719 |
|
$ |
5,187 |
|
9.7 |
% |
+100 basis points |
|
55,857 |
|
2,325 |
|
4.3 |
% |
||
Base |
|
53,532 |
|
|
|
|
|
||
-100 basis points |
|
49,945 |
|
(3,587 |
) |
(6.7 |
)% |
||
-200 basis points |
|
46,399 |
|
(7,133 |
) |
(13.3 |
)% |
||
December 31, 2008 |
|
Amount |
|
Dollar |
|
Percent |
|
||
+200 basis points |
|
$ |
59,584 |
|
$ |
1,772 |
|
3.1 |
% |
+100 basis points |
|
58,976 |
|
1,164 |
|
2.0 |
% |
||
Base |
|
57,812 |
|
|
|
|
|
||
-100 basis points |
|
52,497 |
|
(5,315 |
) |
(9.2 |
)% |
||
-200 basis points |
|
46,324 |
|
(11,488 |
) |
(19.9 |
)% |
||
In a falling rate environment, the Company is projected to have a decrease in net interest income. However, it is not possible for many of the Companys deposit rates to fall 100 or 200 basis points due to their current rates already being below 100 basis points at September 30, 2009. The target federal funds rate is currently set by the Federal Reserve at a rate between 0 and 25 basis points. As a result, a 200 basis point decline in overall rates would only have between a 0 and 25 basis point decline in both federal funds and the prime rate. Further, other rates that are currently below 1% or 2% (e.g. U.S. Treasuries and LIBOR) would not fall below 0% with an overall 100 or 200 basis point decrease in rates. Many of the Companys variable rate loans are set to an index tied to prime, federal funds or LIBOR, and as a result, a further decrease in rates would not have a substantial impact on loan yields. Accordingly, management believes that the analyses resulting from 100 and 200 basis point downward changes are not meaningful in light of current interest rate levels.
31
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the participation of the Companys management, including the Chairman and Chief Executive Officer and the President and Chief Financial Officer, of the effectiveness of the design and operation of the Companys disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended) as of September 30, 2009. Based on that evaluation, the Companys Chairman and Chief Executive Officer and the President and Chief Financial Officer concluded that the Companys disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified. That evaluation did not identify any changes in the Companys internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.
32
ITEM 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is a party other than ordinary course, routine litigation incidental to the Companys business.
Except as set forth below, there have been no material changes in the risk factors applicable to the Company from those disclosed in the Companys 2008 Annual Report on Form 10-K.
Government regulation can result in limitations on the Companys operations.
The Company and its operating subsidiaries operate in a highly regulated environment and are subject to supervision and regulation by a number of governmental regulatory agencies, including the Federal Reserve, the FDIC and the Illinois Department of Financial and Professional Regulation (DFPR). Regulations adopted by these agencies, which are generally intended to provide protection for depositors and customers rather than for the benefit of shareholders, govern a comprehensive range of matters relating to ownership and control of the Companys shares, its acquisition of other companies and businesses, permissible activities in which the Company may engage, maintenance of adequate capital levels and other aspects of the Companys operations. These bank regulators possess broad authority to prevent or remedy unsafe or unsound practices or violations of law. The laws and regulations applicable to the banking industry could change at any time, and the Company cannot predict the effects of these changes on its business and profitability. Increased regulation could increase the Companys cost of compliance and adversely affect profitability. For example, new legislation or regulation may limit the manner in which the Company may conduct its business, including its ability to offer new products, obtain financing, attract deposits, make loans and achieve satisfactory interest spreads.
As a financial institution, the Company is required to develop programs to implement numerous consumer protection related laws and regulations and to prevent the Company from being used for money laundering and terrorist activities. The Company is also obligated to file suspicious activity reports with the U.S. Treasurys Office of Financial Crimes Enforcement Network in certain circumstances. On December 3, 2008, the Bank entered into an Order to Cease and Desist (the 2008 Order) with the FDIC and the DFPR that requires the Bank to take certain corrective actions intended to resolve outstanding violations of the USA PATRIOT Act and Bank Secrecy Act related laws or regulations and to implement a revised Bank Secrecy Act/Anti-Money Laundering program. In addition, on April 23, 2009, the Bank entered into an Order to Cease and Desist (the 2009 Order and together with the 2008 Order, the Orders) with the FDIC which requires the Bank to take corrective actions intended to resolve outstanding violations of certain consumer protection related laws and regulations and to implement an improved compliance program. Although the Orders do not relate to the Banks asset quality, capital position or the safety and soundness of its financial operations, the Orders require the Bank to, among other things, assess its staffing needs, provide for independent testing, conduct a review of certain historical activity and submit periodic reports of progress to the FDIC and DFPR. As a result, the Company expects the Orders to increase the Companys cost of regulatory compliance, which may adversely affect its earnings. In addition, if the Bank is not successful in its efforts to comply with the Orders, the FDIC and the DFPR may take further regulatory actions, which could significantly limit the Companys operations and growth.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
33
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
The exhibits required by Item 601 of Regulation S-K are included with this Form 10-Q and are listed on the Index to Exhibits immediately following the Signatures.
34
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
WEST SUBURBAN BANCORP, INC. |
|
(Registrant) |
|
|
|
|
Date: November 6, 2009 |
|
|
/s/ Kevin J. Acker |
|
KEVIN J. ACKER |
|
CHAIRMAN AND CHIEF EXECUTIVE OFFICER |
|
|
|
|
|
/s/ Duane G. Debs |
|
DUANE G. DEBS |
|
PRESIDENT AND CHIEF FINANCIAL OFFICER |
35
INDEX TO EXHIBITS
Exhibit |
|
|
Number |
|
Description |
|
|
|
3.1 |
|
Articles of Incorporation of West Suburban filed March 14, 1986 Incorporated by reference from Exhibit 3.1 of Form 10-K of West Suburban dated March 21, 2003, under Commission File No. 0-17609. |
|
|
|
3.2 |
|
Articles of Amendment to Articles of Incorporation of West Suburban filed November 2, 1988 Incorporated by reference from Exhibit 3.2 of Form 10-K of West Suburban dated March 21, 2003, under Commission File No. 0-17609. |
|
|
|
3.3 |
|
Articles of Amendment to Articles of Incorporation of West Suburban filed June 20, 1990 Incorporated by reference from Exhibit 3.3 of Form 10-K of West Suburban dated March 21, 2003, under Commission File No. 0-17609. |
|
|
|
3.4 |
|
Articles of Amendment to Articles of Incorporation of West Suburban filed June 8, 1998 Incorporated by reference from Exhibit 3.4 of Form 10-K of West Suburban dated March 21, 2003, under Commission File No. 0-17609. |
|
|
|
3.5 |
|
Articles of Amendment to Articles of Incorporation of West Suburban filed May 27, 2003 Incorporated by reference from Exhibit 3.5 of Form 10-Q of West Suburban dated August 14, 2003, under Commission File No. 0-17609. |
|
|
|
3.6 |
|
Amended and Restated By-laws of West Suburban Incorporated by reference from Exhibit 3.5 of Form 10-K of West Suburban dated March 21, 2003, under Commission File No. 0-17609. |
|
|
|
4.1 |
|
Specimen of Common Stock certificate Incorporated by reference from Exhibit 4.1 of Form 10-K of West Suburban dated March 14, 2006, Commission File No. 0-17609. |
|
|
|
31.1 |
|
Certification of Kevin J. Acker, Chairman and Chief Executive Officer, Pursuant to Rule 13a-14(a) and Rule 15d-14(a). |
|
|
|
31.2 |
|
Certification of Duane G. Debs, President and Chief Financial Officer, Pursuant to Rule 13a-14(a) and Rule15d-14(a). |
|
|
|
32.1 |
|
Certification of Kevin J. Acker, Chairman and Chief Executive Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.2 |
|
Certification of Duane G. Debs, President and Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
36