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Table of Contents
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
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 0-51296
COMMUNITY FINANCIAL SHARES, INC.
(Exact name of registrant as specified in its charter)
Delaware | 36-4387843 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
357 Roosevelt Road Glen Ellyn, Illinois |
60137 | |
(Address of principal executive offices) | (Zip Code) |
(630) 545-0900
(Registrants telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one)
Large Accelerated Filer | ¨ | Accelerated Filer | ¨ | |||
Non-Accelerated Filer | ¨ (Do not check if a smaller reporting company) | Smaller Reporting Company | x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
Class |
Outstanding at November 10, 2009 | |
Common Stock, no par value per share | 1,245,267 shares |
Table of Contents
Form 10-Q Quarterly Report
PART I FINANCIAL INFORMATION
Item 1. |
Financial Statements | 3 | ||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations | 14 | ||
Item 3. |
Quantitative and Qualitative Disclosures About Market Risk | 25 | ||
Item 4(T) |
Controls and Procedures | 26 | ||
PART II OTHER INFORMATION | ||||
Item 1. |
Legal Proceedings | 27 | ||
Item 1A. |
Risk Factors | 27 | ||
Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds | 27 | ||
Item 3. |
Defaults Upon Senior Securities | 27 | ||
Item 4. |
Submission of Matters to a Vote of Security Holders | 27 | ||
Item 5. |
Other Information | 27 | ||
Item 6. |
Exhibits | 27 | ||
Signatures |
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PART I. FINANCIAL INFORMATION
ITEM 1. | FINANCIAL STATEMENTS |
COMMUNITY FINANCIAL SHARES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
September 30, 2009 |
December 31, 2008 |
||||||
(Unaudited) | |||||||
ASSETS |
|||||||
Cash and due from banks |
$ | 8,163 | $ | 7,286 | |||
Interest-bearing deposits |
6,223 | 8,539 | |||||
Cash and cash equivalents |
14,386 | 15,825 | |||||
Interest-bearing time deposits |
| 992 | |||||
Securities available for sale |
41,428 | 25,972 | |||||
Loans held for sale |
2,184 | 1,410 | |||||
Loans, less allowance for loan losses of $3,828 and $3,300 at September 30, 2009 and December 31, 2008, respectively |
231,959 | 219,615 | |||||
Other real estate owned |
2,077 | 112 | |||||
Federal Home Loan Bank stock |
5,398 | 5,398 | |||||
Premises and equipment, net |
15,972 | 16,112 | |||||
Cash value of life insurance |
5,642 | 5,469 | |||||
Interest receivable and other assets |
3,675 | 3,772 | |||||
Total assets |
$ | 322,721 | $ | 294,677 | |||
LIABILITIES AND SHAREHOLDERS EQUITY |
|||||||
Deposits |
$ | 274,309 | $ | 253,515 | |||
Federal Home Loan Bank advances |
17,000 | 17,000 | |||||
Other borrowings |
1,900 | 2,000 | |||||
Subordinated debentures |
3,609 | 3,609 | |||||
Interest payable and other liabilities |
2,046 | 1,940 | |||||
Total liabilities |
298,864 | 278,064 | |||||
Commitments and contingent liabilities |
|||||||
Shareholders equity |
|||||||
Common stockno par value, 5,000,000 shares authorized; 1,245,267 and 1,245,267 shares issued and outstanding at September 30, 2009 and December 31, 2008, respectively |
| | |||||
Preferred stock$1.00 par value, 1,000,000 shares authorized; 7,319 shares outstanding at September 30, 2009, no shares outstanding at December 31, 2008 |
7 | | |||||
Paid-in capital |
11,860 | 4,866 | |||||
Retained earnings |
11,864 | 12,201 | |||||
Accumulated other comprehensive income (loss) |
126 | (454 | ) | ||||
Total shareholders equity |
23,857 | 16,613 | |||||
Total liabilities and shareholders equity |
$322,721 | $ | 294,677 | ||||
See Notes to Condensed Consolidated Financial Statements
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COMMUNITY FINANCIAL SHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three and Nine Months Ended September 30, 2009 and 2008
(In thousands, except share and per share data)
(Unaudited)
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Interest income |
||||||||||||||||
Loans |
$ | 3,148 | $ | 3,314 | $ | 9,338 | $ | 10,530 | ||||||||
Securities: |
||||||||||||||||
Taxable |
339 | 243 | 816 | 717 | ||||||||||||
Exempt from federal income tax |
129 | 129 | 377 | 391 | ||||||||||||
Other interest income |
10 | 2 | 37 | 19 | ||||||||||||
Total interest income |
3,626 | 3,688 | 10,568 | 11,657 | ||||||||||||
Interest expense |
||||||||||||||||
Deposits |
1,080 | 1,275 | 3,499 | 4,531 | ||||||||||||
Federal funds purchased |
| 10 | | 51 | ||||||||||||
Federal Home Loan Bank advances and other borrowed funds |
156 | 205 | 437 | 656 | ||||||||||||
Subordinated debentures |
20 | 41 | 78 | 138 | ||||||||||||
Total interest expense |
1,256 | 1,531 | 4,014 | 5,376 | ||||||||||||
Net interest income |
2,370 | 2,157 | 6,554 | 6,281 | ||||||||||||
Provision for loan losses |
120 | 795 | 1,080 | 1,625 | ||||||||||||
Net interest income after provision for loan losses |
2,250 | 1,362 | 5,474 | 4,656 | ||||||||||||
Non-interest income |
||||||||||||||||
Service charges on deposit accounts |
149 | 190 | 469 | 507 | ||||||||||||
Gain on sale of loans |
233 | 116 | 803 | 431 | ||||||||||||
Gain on sale of securities |
| | 50 | 79 | ||||||||||||
Loss on impairment |
| (485 | ) | | (485 | ) | ||||||||||
Gain (loss) on sale of foreclosed assets |
10 | | (44 | ) | | |||||||||||
Other non-interest income |
152 | 152 | 494 | 422 | ||||||||||||
Total non-interest income |
544 | (27 | ) | 1,772 | 954 | |||||||||||
Non-interest expense |
||||||||||||||||
Salaries and employee benefits |
1,406 | 1,292 | 4,084 | 3,914 | ||||||||||||
Net occupancy and equipment expense |
365 | 353 | 1,077 | 1,027 | ||||||||||||
Data processing expense |
237 | 218 | 678 | 630 | ||||||||||||
Advertising and promotions |
75 | 90 | 214 | 258 | ||||||||||||
Professional fees |
164 | 97 | 464 | 282 | ||||||||||||
FDIC insurance premiums |
166 | 63 | 536 | 204 | ||||||||||||
Other operating expenses |
353 | 330 | 879 | 1,023 | ||||||||||||
Total non-interest expense |
2,766 | 2,443 | 7,932 | 7,338 | ||||||||||||
Income (loss) before income taxes |
28 | (1,108 | ) | (686 | ) | (1,728 | ) | |||||||||
Benefit for income taxes |
(58 | ) | (308 | ) | (464 | ) | (682 | ) | ||||||||
Net income (loss) |
86 | (800 | ) | (222 | ) | (1,046 | ) | |||||||||
Preferred stock dividend and accretion |
(106 | ) | | (163 | ) | | ||||||||||
Net loss available to common shareholders |
$ | (20 | ) | $ | (800 | ) | $ | (385 | ) | $ | (1,046 | ) | ||||
Loss per share |
||||||||||||||||
Basic |
$ | (0.02 | ) | $ | (0.64 | ) | $ | (0.31 | ) | $ | (0.84 | ) | ||||
Diluted |
$ | (0.02 | ) | $ | (0.64 | ) | $ | (0.31 | ) | $ | (0.84 | ) | ||||
Average shares outstanding basic |
1,245,267 | 1,245,267 | 1,245,267 | 1,246,280 | ||||||||||||
Average shares outstanding diluted |
1,245,267 | 1,245,267 | 1,245,328 | 1,246,280 | ||||||||||||
Dividends per share |
$ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.12 |
See Notes to Condensed Consolidated Financial Statements
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COMMUNITY FINANCIAL SHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
Nine Months Ended September 30, 2009 and 2008
(In thousands, except share and per share data)
(Unaudited)
Numbers of Common Shares |
Preferred Stock |
Paid-In Capital |
Retained Earnings |
Accumulated Other Comprehensive Gain (Loss) |
Total Shareholders Equity |
|||||||||||||||||
Balance at January 1, 2009 |
1,245,267 | | $ | 4,866 | $ | 12,201 | $ | (454 | ) | $ | 16,613 | |||||||||||
Net loss |
| | | (222 | ) | | (222 | ) | ||||||||||||||
Change in unrealized net gain on securities available for sale, net of reclassifications and tax effects |
| | | | 580 | 580 | ||||||||||||||||
Total comprehensive income |
358 | |||||||||||||||||||||
TARP dividends |
| | | (95 | ) | | (95 | ) | ||||||||||||||
Preferred stock issued |
| 7 | 6,963 | | | 6,970 | ||||||||||||||||
Discount on preferred stock |
| | 20 | (20 | ) | | | |||||||||||||||
Stock option expense |
| | 11 | | | 11 | ||||||||||||||||
Balance at September 30, 2009 |
1,245,267 | $ | 7 | $ | 11,860 | $ | 11,864 | $ | 126 | $ | 23,857 | |||||||||||
Balance at January 1, 2008 |
1,250,880 | | $ | 4,999 | $ | 13,630 | $ | (124 | ) | $ | 18,505 | |||||||||||
Net loss |
| | | (1,046 | ) | | (1,046 | ) | ||||||||||||||
Change in unrealized net loss on securities available for sale, net of reclassifications and tax effects |
| | | | (438 | ) | (438 | ) | ||||||||||||||
Total comprehensive loss |
(1,484 | ) | ||||||||||||||||||||
Cash dividends ($0.12 per share) |
| | | (149 | ) | | (149 | ) | ||||||||||||||
Tax benefit of stock options exercised |
| | 1 | | | 1 | ||||||||||||||||
Stock repurchased |
(6,333 | ) | | (165 | ) | | | (165 | ) | |||||||||||||
Stock option expense |
| | 13 | | | 13 | ||||||||||||||||
Stock options exercised |
720 | | 15 | | | 15 | ||||||||||||||||
Balance at September 30, 2008 |
1,245,267 | | $ | 4,863 | $ | 12,435 | $ | (562 | ) | $ | 16,736 | |||||||||||
See Notes to Condensed Consolidated Financial Statements
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COMMUNITY FINANCIAL SHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2009 and 2008
(In thousands)
(Unaudited)
Nine Months Ended September 30, |
||||||||
2009 | 2008 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||
Net loss |
$ | (222 | ) | $ | (1,046 | ) | ||
Adjustments to reconcile net loss to net cash from operating activities |
||||||||
Amortization on securities, net |
71 | 12 | ||||||
Depreciation |
497 | 505 | ||||||
Provision for loan losses |
1,080 | 1,625 | ||||||
Gain on sale of securities |
(50 | ) | (79 | ) | ||||
Loss on sale of foreclosed assets |
44 | | ||||||
Change in other real estate owned |
(1,966 | ) | | |||||
Gain on sale of loans |
(803 | ) | (431 | ) | ||||
Loss on impairment of securities |
| 485 | ||||||
Originations of loans for sale |
(44,284 | ) | (20,276 | ) | ||||
Proceeds from sales of loans |
45,087 | 20,708 | ||||||
Compensation cost of stock options |
11 | 13 | ||||||
Change in cash value of life insurance |
(172 | ) | (165 | ) | ||||
Change in interest receivable and other assets |
(314 | ) | 296 | |||||
Change in interest payable and other liabilities |
106 | (1,350 | ) | |||||
Net cash from (used in) operating activities |
(915 | ) | 297 | |||||
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||
Purchases of securities available for sale |
(28,660 | ) | (9,187 | ) | ||||
Maturities and calls of securities available for sale |
12,067 | 11,316 | ||||||
Proceeds from sales of securities available for sale |
3,054 | 2,118 | ||||||
Net change in loans |
(14,198 | ) | 4,327 | |||||
Property and equipment expenditures, net |
(357 | ) | (891 | ) | ||||
Net cash from (used in) investing activities |
(28,094 | ) | 7,683 | |||||
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||
Change in: |
||||||||
Non-interest bearing and interest bearing demand deposits and savings |
19,213 | 8,720 | ||||||
Certificates and other time deposits |
1,582 | (14,804 | ) | |||||
Short term borrowings |
| (5,500 | ) | |||||
Proceeds of borrowings |
6,000 | 10,500 | ||||||
Repayments of borrowings |
(6,100 | ) | (9,000 | ) | ||||
Proceeds from issuance of preferred stock |
6,970 | | ||||||
Purchase of stock |
| (165 | ) | |||||
Exercise of stock options |
| 15 | ||||||
Tax benefit of stock options exercised |
| 1 | ||||||
Dividends paid on preferred stock |
(95 | ) | | |||||
Dividends paid on common stock |
| (149 | ) | |||||
Net cash from (used in) financing activities |
27,570 | (10,382 | ) | |||||
Change in cash and cash equivalents |
(1,439 | ) | (2,402 | ) | ||||
Cash and cash equivalents at beginning of period |
15,825 | 7,789 | ||||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
$ | 14,386 | $ | 5,387 | ||||
See Notes to Condensed Consolidated Financial Statements
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COMMUNITY FINANCIAL SHARES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands)
September 30, 2009 and 2008
NOTE 1 BASIS OF PRESENTATION
The accounting policies followed in the preparation of the interim condensed consolidated financial statements included in this Quarterly Report on Form 10-Q are consistent with those used in the preparation of annual consolidated financial statements. The interim condensed consolidated financial statements reflect all normal and recurring adjustments, which are necessary, in the opinion of management of Community Financial Shares, Inc. (the Company), for a fair statement of results for the interim periods presented. Results for the three and nine months ended September 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009 or any other period.
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for the interim financial period and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Companys Annual Report on Form 10-K for the year ended December 31, 2008, which was filed with the U.S. Securities and Exchange Commission on March 31, 2009. The condensed consolidated balance sheet of the Company as of December 31, 2008 has been derived from the audited consolidated balance sheet as of that date.
NOTE 2 EARNINGS PER SHARE
The number of shares used to compute basic and diluted earnings per share were as follows:
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(in thousands) |
||||||||||||||||
Net income (loss) |
$ | 86 | $ | (800 | ) | $ | (222 | ) | $ | (1,046 | ) | |||||
Less: Accretion of discount on preferred stock |
(10 | ) | | (20 | ) | | ||||||||||
Dividends on preferred stock |
(96 | ) | | (143 | ) | | ||||||||||
Loss available to common shareholders |
$ | (20 | ) | $ | (800 | ) | $ | (385 | ) | $ | (1,046 | ) | ||||
Weighted Average Shares outstanding |
1,245,267 | 1,245,267 | 1,245,267 | 1,246,280 | ||||||||||||
Effect of dilutive securities: |
||||||||||||||||
Stock options |
| | | | ||||||||||||
Shares used to compute diluted loss per share |
1,245,267 | 1,245,267 | 1,245,328 | 1,246,280 | ||||||||||||
Loss per share: |
||||||||||||||||
Basic |
$ | (0.02 | ) | $ | (0.64 | ) | $ | (0.31 | ) | $ | (0.84 | ) | ||||
Diluted |
(0.02 | ) | (0.64 | ) | (0.31 | ) | (0.84 | ) |
There were 32,630 anti-dilutive shares for both the three and nine months ended September 30, 2009 included in the above table. In addition, there were 3,340 and 2,140 anti-dilutive shares for the three and nine months ended September 30, 2008, respectively, included in the above table.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands)
September 30, 2009 and 2008
NOTE 3 CAPITAL RATIOS
At the dates indicated, the capital ratios of Community Bank-Wheaton/Glen Ellyn, the Companys wholly owned subsidiary (the Bank), were as follows:
September 30, 2009 | December 31, 2008 | |||||||||||
Amount | Ratio | Amount | Ratio | |||||||||
Total capital (to risk-weighted assets) |
$ | 29,031 | 11.7 | % | $ | 24,930 | 10.5 | % | ||||
Tier I capital (to risk-weighted assets) |
25,928 | 10.5 | % | 21,965 | 9.3 | % | ||||||
Tier I capital (to average assets) |
25,928 | 8.1 | % | 21,965 | 7.6 | % |
Without prior approval, current regulations allow the Bank to pay dividends to the Company not exceeding net profits (as defined in such regulations) for the current year plus those for the previous two years. The Bank normally restricts dividends to a lesser amount because of the need to maintain an adequate capital structure. At September 30, 2009, regulatory approval is required for all dividend declarations by both the Bank and the Company. As a result of discussions with the Banks regulators, management has agreed to maintain a ratio of total capital to risk-weighted assets of 10.5% at December 31, 2008 and to work towards a ratio of 11.0%, which was exceeded as of September 30, 2009.
At both September 30, 2009 and December 31, 2008, the Bank was categorized by its regulators as well capitalized in accordance with all regulatory capital requirements.
NOTE 4 SECURITIES AVAILABLE FOR SALE
The fair value of securities available for sale at September 30, 2009 is as follows:
Fair Value |
Gross Unrealized Gains |
Gross Unrealized Losses |
||||||||
U. S. government agencies |
$ | 14,931 | $ | 68 | $ | (134 | ) | |||
State and political subdivisions |
14,733 | 366 | (254 | ) | ||||||
Mortgage-backed securities |
11,364 | 152 | (6 | ) | ||||||
Preferred stock |
32 | 17 | | |||||||
SBA guaranteed |
368 | | (4 | ) | ||||||
$ | 41,428 | $ | 603 | $ | (398 | ) | ||||
Securities classified as U. S. government agencies include notes issued by government-sponsored enterprises such as the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, and the Federal Home Loan Bank. The SBA-guaranteed securities are pools of loans guaranteed by the Small Business Administration.
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The following table shows gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2009:
Less than 12 Months | 12 Months or More | Total | |||||||||||||||||||
Description of Securities |
Fair Value | Unrealized Losses |
Fair Value | Unrealized Losses |
Fair Value | Unrealized Losses |
|||||||||||||||
U.S. government agencies |
$ | 8,861 | $ | (134 | ) | $ | | $ | | $ | 8,861 | $ | (134 | ) | |||||||
State and political subdivisions |
| | 4,646 | (254 | ) | 4,646 | (254 | ) | |||||||||||||
Mortgage-backed securities |
401 | (3 | ) | 558 | (3 | ) | 959 | (6 | ) | ||||||||||||
SBA guaranteed |
| | 316 | (4 | ) | 316 | (4 | ) | |||||||||||||
Total temporarily impaired securities |
$ | 9,262 | $ | (137 | ) | $ | 5,520 | $ | (261 | ) | $ | 14,782 | $ | (398 | ) | ||||||
The unrealized losses on the Companys investments in direct obligations of U.S. government agencies were caused by changes in interest rates. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. Because the Company does not intend to sell the investments and it is not more likely than not the Company will be required to sell the investments before recovery of their amortized costs basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2009.
The unrealized losses on the Companys investment in mortgage-backed securities were caused by changes in interest rates. The Company expects to recover the amortized cost basis over the term of the securities. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2009.
Unrealized gains and losses within the investment portfolio are determined to be temporary. The Company has performed an evaluation of its investments for other than temporary impairment and there was no impairment identified during the third quarter of 2009. The entire portfolio is classified as available for sale, however, management has no specific intent to sell any securities, and it is more likely than not that the Company will not have to sell any security before recovery of its amortized cost basis.
Sales activities for securities for the nine months ended September 30, 2009 are shown in the following table. All sales were of securities identified as available for sale.
Sales proceeds |
$ | 3,054 | |
Gross gains on sales |
50 | ||
Loss from other than temporary impairment |
| ||
Tax expense |
10 |
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The fair values of securities available for sale at September 30, 2009, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity are shown separately.
Amortized Cost |
Fair Value | |||||
Due in one year or less |
$ | 1,120 | $ | 1,124 | ||
Due after one year through five years |
1,184 | 1,199 | ||||
Due after five years through ten years |
2,738 | 2,740 | ||||
Due after ten years |
24,576 | 24,601 | ||||
Mortgage-backed securities |
11,218 | 11,364 | ||||
Preferred stock |
15 | 32 | ||||
SBA guaranteed |
372 | 368 | ||||
$ | 41,223 | $ | 41,428 | |||
Securities with a carrying value of approximately $15.2 million at September 30, 2009 were pledged to secure public deposits, Federal Home Loan Bank advances and for other purposes as required or permitted by law.
NOTE 5 ACCUMULATED OTHER COMPREHENSIVE INCOME
Other comprehensive income components and related taxes for the nine months ended September 30, 2009 were as follows:
Net unrealized gains on securities available for sale |
$ | 946 | |
Tax expense |
366 | ||
Other comprehensive income |
$ | 580 | |
The components of accumulated other comprehensive income included in shareholders equity at September 30, 2009 were as follows:
Net unrealized gains on securities available for sale |
$ | 205 | |
Tax expense |
79 | ||
Other comprehensive income |
$ | 126 | |
NOTE 6 DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES
The Company measures fair value according to the Financial Accounting Standards Board Accounting Standards Codification (ASC) Fair Value Measurements and Disclosures (ASC 820-10). ASC 820-10 establishes a fair value hierarchy that prioritizes the inputs used in valuation techniques, but not the valuation techniques themselves. The fair value hierarchy is designed to indicate the relative reliability of the fair value measure. The highest priority given to quoted prices in active markets and the lowest to unobservable data such as the Companys internal information. ASC 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. There are three levels of inputs into the fair value hierarchy (Level 1 being the highest priority and Level 3 being the lowest priority):
Level 1 | Quoted prices in active markets for identical assets or liabilities. | |
Level 2 | Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
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Level 3 | Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
The following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying balance sheet, as well as the general classification of such instruments pursuant to the valuation hierarchy.
Available for Sale Securities
If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include certain collateralized mortgage and debt obligations and certain municipal securities. Third party vendors compile prices from various sources and may apply such techniques as matrix pricing to determine the value of identical or similar investment securities (Level 2). Matrix pricing is a mathematical technique widely used in the banking industry to value investment securities without relying exclusively on quoted prices for specific investment securities but rather on the investment securities relationship to other benchmark quoted investment securities. The following tables are as of September 30, 2009 and December 31, 2008, respectively:
At September 30, 2009 | ||||||||||
Fair Value Measurements Using | ||||||||||
Fair Value |
Level 1 | Level 2 | Level 3 | |||||||
Available for sale securities: |
||||||||||
U.S. government agencies |
$ | 14,931 | $ | 14,931 | ||||||
State and political subdivisions |
14,733 | 14,733 | ||||||||
Mortgage-backed securities |
11,364 | 11,364 | ||||||||
Preferred stock |
32 | 32 | ||||||||
SBA guaranteed |
368 | 368 | ||||||||
Total available for sale securities |
$ | 41,428 | | $ | 41,428 | | ||||
At December 31, 2008 | ||||||||||
Fair Value Measurements Using | ||||||||||
Fair Value |
Level 1 | Level 2 | Level 3 | |||||||
Available for sale securities: |
||||||||||
U.S. government agencies |
$ | 10,110 | $ | 10,110 | ||||||
State and political subdivisions |
10,745 | 10,745 | ||||||||
Mortgage-backed securities |
4,723 | 4,723 | ||||||||
Preferred stock |
6 | 6 | ||||||||
SBA guaranteed |
388 | 388 | ||||||||
Total available for sale securities |
$ | 25,972 | | $ | 25,972 | | ||||
The following is a description of the valuation methodologies used for instruments measured at fair value on a non-recurring basis and recognized in the accompanying September 30, 2009 and December 31, 2008 balance sheets, as well as the general classification of such instruments pursuant to the valuation hierarchy.
Impaired Loans
Loan impairment is reported when scheduled payments under contractual terms are deemed uncollectible. Impaired loans are carried at fair value as estimated using current and prior appraisals, discounting factors, the borrowers financial ability to repay, estimated cash flows from the property and other relevant factors. A portion of the allowance for loan losses is allocated to impaired loans if the value of such loans is deemed to be less than the unpaid balance. Adjustments to the estimated fair value of impaired loans may result in increases or decreases to the
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provision for loan losses recorded in current earnings. The following tables are as of September 30, 2009 and December 31, 2008, respectively:
At September 30, 2009 | ||||||||||
Fair Value Measurements Using | ||||||||||
Fair Value |
Level 1 | Level 2 | Level 3 | |||||||
Impaired loans |
$ | 3,770 | | | $ | 3,770 |
At December 31, 2008 | ||||||||||
Fair Value Measurements Using | ||||||||||
Fair Value |
Level 1 | Level 2 | Level 3 | |||||||
Impaired loans |
$ | 2,572 | | | $ | 2,572 |
The carrying amount 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 Value |
Fair Value |
Carrying Value |
Fair Value | |||||||||
Financial assets |
||||||||||||
Cash and cash equivalents |
$ | 14,386 | $ | 14,386 | $ | 15,825 | $ | 15,825 | ||||
Interest bearing time deposits |
| | 992 | 992 | ||||||||
Securities available for sale |
41,428 | 41,428 | 25,972 | 25,972 | ||||||||
Loans held for sale |
2,184 | 2,184 | 1,410 | 1,410 | ||||||||
Loans receivable, net |
231,959 | 232,232 | 219,615 | 220,502 | ||||||||
Federal Home Loan Bank stock |
5,398 | 5,398 | 5,398 | 5,398 | ||||||||
Interest receivable |
1,331 | 1,331 | 1,089 | 1,089 | ||||||||
Financial liabilities |
||||||||||||
Deposits |
274,309 | 280,151 | 253,515 | 253,792 | ||||||||
Federal Home Loan Bank advances |
17,000 | 17,223 | 17,000 | 17,097 | ||||||||
Other borrowings |
1,900 | 1,900 | 2,000 | 2,000 | ||||||||
Subordinated debentures |
3,609 | 3,609 | 3,609 | 3,609 | ||||||||
Interest payable |
382 | 382 | 499 | 499 |
The methods and assumptions used to estimate fair value are described as follows:
Carrying amount is the estimated fair value for cash and cash equivalents, loans held for sale, Federal Home Loan Bank stock, interest receivable and payable, deposits due on demand, variable rate loans, other borrowings and subordinated debentures. Security fair values are based on market prices or dealer quotes and, if no such information is available, on the rate and term of the security and information about the issuer. For fixed rate loans and time deposits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. Fair values for impaired loans are estimated using discounted cash flow analysis or underlying collateral values. The fair value of fixed rate Federal Home Loan Bank advances is based on current rates for similar financing. The fair value of off-balance-sheet items, which is based on the current fees or cost that would be charged to enter into or terminate such arrangements, is immaterial.
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While the above estimates are based on managements judgment of the most appropriate factors, there is no assurance that were the Company to have disposed of these items on the respective dates, the fair values would have been achieved, because the market value may differ depending on the circumstances. The estimated fair values at year end should not necessarily be considered to apply at subsequent dates.
Other assets and liabilities that are not financial instruments, such as premises and equipment, are not included in the above disclosures. Also, nonfinancial instruments typically not recognized on the balance sheet may have value but are not included in the above disclosures. These include, among other items, the estimated earnings power of core deposits, the trained workforce, customer goodwill, and similar items.
NOTE 7 TARP CAPITAL PURCHASE PROGRAM
On May 15, 2009, the Company entered into a Letter Agreement and the related Securities Purchase Agreement, with the United States Department of the Treasury (the Department of Treasury) in accordance with the terms of the Department of Treasurys TARP Capital Purchase Program. Pursuant to the Letter Agreement and Securities Purchase Agreement, the Company issued 6,970 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, and a warrant for the purchase of 349 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series B, to the Department of Treasury for an aggregate purchase price of $6,970,000 in cash.
The Series A preferred stock qualifies as Tier 1 capital and will pay cumulative dividends at a rate of 5% per annum until February 15, 2014. Beginning February 16, 2014, the dividend rate will increase to 9% per annum. The Series A preferred stock may be redeemed, in whole or in part, at any time from time to time, at the option of the Company, subject to consultation with the Companys primary federal banking regulator, provided that any partial redemption must be for at least 25% of the issue price of the Series A preferred stock.
As part of the transaction, the Department of Treasury exercised the Warrant and received 349 shares of Series B preferred stock. The Series B preferred stock will pay cumulative dividends at a rate of 9% per annum. The Series B preferred stock may also be redeemed, in whole or in part, at any time from time to time, at the option of the Company, subject to consultation with the Companys primary federal regulator, provided that any partial redemption must be for at least 25% of the liquidation value of the Series B preferred stock. The Series B preferred stock cannot be redeemed until all of the outstanding shares of Series A preferred stock have been redeemed.
The Purchase Agreement also subjects the Company to certain of the executive compensation limitations included in the Emergency Economic Stabilization Act of 2008 (EESA), as modified by the American Recovery and Reinvestment Act of 2009. The Company will take all necessary action to ensure that its benefit plans with respect to senior executive officers continue to comply with Section 111(b) of the EESA and has agreed to not adopt any benefit plans with respect to, or which cover, its senior executive officers that do not comply with the EESA, and the applicable executives have consented to the foregoing.
NOTE 8 FUTURE ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 166, Accounting for Transfers of Financial Assets, an amendment of FASB Statement No. 140 (SFAS 166). On June 12, 2009, the FASB issued SFAS 166 which removes the concept of a qualifying special-purpose entity (QSPE) from Statement 140, and eliminates the exception for QSPEs from the consolidation guidance of FASB Interpretation No. 46 (R), Consolidation of Variable Interest Entities (FIN 46 (R)). Concurrent with the issuance of SFAS 166, the FASB issued SFAS 167, Amendment to FASB Interpretation No. 46(R) (SFAS 167). SFAS 167 addresses the effect of eliminating the QSPE concept from Statement 140 and enhances the transparency of an entitys involvement in a variable interest entity (VIE). SFAS 166 is effective as of the beginning of the Corporations first annual reporting period beginning after November 15, 2009. Earlier adoption is prohibited. The Corporation does not expect the adoption of the provisions of SFAS 166 to have a material effect on the Corporations financial condition and results of operations.
Statement of Financial Accounting Standards No. 167, Amendment to FASB Interpretation No. 46 (R) (SFAS 167). On June 12, 2009, the FASB issued SFAS 167 to address the effects of eliminating the QSPE concept from FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Liabilities
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and enhance the transparency of an entitys involvement in a variable interest entity (VIE). SFAS 167 is effective as of the beginning of the Corporations first annual reporting period beginning after November 15, 2009. Earlier adoption is prohibited. The Corporation does not expect the adoption of the provisions of SFAS 167 to have a material effect on the Corporations financial condition and results of operations.
NOTE 9 SUBSEQUENT EVENTS
Subsequent events have been evaluated through November 13, 2009, which is the date the Companys condensed consolidated financial statements included in this Form 10-Q were issued.
ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis is intended as a review of significant factors affecting the financial condition and results of operations of the Company for the periods indicated. The discussion should be read in conjunction with the Condensed Consolidated Financial Statements and Notes included in this Form 10-Q. In addition to historical information, the following Managements Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. The Companys actual results could differ significantly from those anticipated in these forward-looking statements as a result of certain factors discussed elsewhere in this report.
Safe Harbor Statement
This report (including information incorporated herein by reference) contains, and future oral and written statements of the Company and its management may contain, forward-looking statements, within the meaning of such as defined term in the Private Securities Litigation Reform Act of 1995, with respect to the financial condition, results of operations, plans, objectives, future performance and business of the Company. Forward-looking statements, which may be based upon beliefs, expectations and assumptions of the 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 which could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries include, but are not limited to, the following:
| The strength of the United States economy in general and the strength of the local economies in which the Company conducts its operations which may be less favorable than expected and may result in, among other things, a deterioration in the credit quality and value of the Companys assets. |
| The potential impact of the Companys participation in the U.S. Department of Treasurys Troubled Asset Relief Programs Capital Purchase Program. |
| The economic impact of past and any future terrorist attacks, acts of war or threats thereof and the response of the United States to any such threats and attacks. |
| The effects of, and changes in, federal, state and local laws, regulations and policies affecting banking, securities, insurance and monetary and financial matters. |
| The effects of changes in interest rates (including the effects of changes in the rate of prepayments of the Companys assets) and the policies of the Board of Governors of the Federal Reserve System. |
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| The ability of the Company to compete with other financial institutions as effectively as the Company currently intends due to increases in competitive pressures in the financial services sector. |
| The inability of the Company to obtain new customers and to retain existing customers. |
| The timely development and acceptance of products and services, including products and services offered through alternative delivery channels such as the Internet. |
| Technological changes implemented by the Company and by other parties, including third party vendors, which may be more difficult or more expensive than anticipated or which may have unforeseen consequences to the Company and its customers. |
| The ability of the Company to develop and maintain secure and reliable electronic systems. |
| The ability of the Company to retain key executives and employees and the difficulty that the Company may experience in replacing key executives and employees in an effective manner. |
| Consumer spending and saving habits which may change in a manner that affects the Companys business adversely. |
| Business combinations and the integration of acquired businesses which may be more difficult or expensive than expected. |
| The costs, effects and outcomes of existing or future litigation. |
| Changes in accounting policies and practices, as may be adopted by state and federal regulatory agencies and the Financial Accounting Standards Board. |
| The ability of the Company to manage the risks associated with the foregoing as well as anticipated. |
These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Additional information concerning the Company and its business, including other factors that could materially affect the Companys financial results, is included in the Companys filings with the Securities and Exchange Commission.
Overview
Community Financial Shares, Inc. (the Company) is the holding company for Community Bank- Wheaton/Glen Ellyn (the Bank). The Company is headquartered in Glen Ellyn, Illinois and operates four offices in its primary market area, which is comprised of Glen Ellyn, Illinois and Wheaton, Illinois. One location is in Glen Ellyn and three are located in Wheaton.
The Companys principal business is conducted by the Bank and consists of offering a full range of community-based financial services, including commercial and retail banking services. The profitability of the Companys operations depends primarily on its net interest income, provision for loan losses, other income, and other expenses. Net interest income is the difference between the income the Company receives on its loan and securities portfolios and its cost of funds, which consists of interest paid on deposits and borrowings. The provision for loan losses reflects the cost of credit risk in the Companys loan portfolio. Other income consists of service charges on deposit accounts, gains on loan sales, securities gains (losses), and other income. Other expenses include salaries and employee benefits expenses, as well as occupancy and equipment expenses and other noninterest expenses.
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Net interest income is dependent on the amounts and yields of interest-earning assets as compared to the amounts and rates of interest-bearing liabilities. Net interest income is sensitive to changes in market rates of interest and the Companys asset/liability management procedures in coping with such changes. The provision for loan losses is dependent upon managements assessment of the collectibility of the loan portfolio under current economic conditions.
Comparison of Financial Condition at September 30, 2009 and December 31, 2008
Total assets at September 30, 2009 were $322.7 million, which represented an increase of $28.0 million, or 9.5%, compared to $294.7 million at December 31, 2008. The change in total assets was primarily due to increases in investment securities and loans receivable. Investment securities increased by $15.5 million, or 59.5%, to $41.4 million at September 30, 2009. The increase in investment securities is primarily due to a $20.8 million increase in deposits and a decrease in loan demand in early 2009 however, the Company experienced an increase in overall loan demand. Loans receivable increased by $12.4 million, or 5.6%, to $232.0 million at September 30, 2009 from $219.6 million at December 31, 2008. This increase is primarily due to continued strong lending and business relationships within our community maintained by our loan staff. Partially offsetting these increases was a decrease in cash and cash equivalents of $1.4 million, or 9.1%, to $14.4 million at September 30, 2009 from $15.8 million at December 31, 2008.
Total liabilities at September 30, 2009 were $298.9 million, which represented an increase of $20.8 million, or 7.5%, compared to $278.1 million at December 31, 2008. Deposits increased $20.8 million, or 8.2%, to $274.3 million at September 30, 2009 as compared to $253.5 million at December 31, 2008. The increase in deposits primarily consists of increases in the Banks core deposit accounts. Interest bearing demand deposit accounts increased by $13.2 million, or 23.7%, to $69.0 million at September 30, 2009 from $55.8 million at December 31, 2008 and money market accounts increased $4.1 million, or 10.6%, to $42.9 million at September 30, 2009 from $38.8 at December 31, 2008. The Banks commercial loan staff continues to place an emphasis on developing and maintaining deposit relationships with our current commercial loan clients. The percentage of interest bearing deposit accounts to total deposits increased to 24.9% at September 30, 2009 from 22.0% at December 31, 2008 and the percentage of certificates of deposit decreased to 39.7% at September 30, 2009 from 42.8% at December 31, 2008. Borrowed money, consisting of Federal Home Loan Bank (FHLB) advances and other borrowings, decreased $100,000, or 0.53%, to $18.9 million at September 30, 2009 from $19.0 million at December 31, 2009.
Shareholders equity increased by $7.3 million, or 43.6%, to $23.9 million at September 30, 2009 as compared to $16.6 million at December 31, 2008. The increase in shareholders equity was primarily the result of the receipt of a $6.97 million investment from the U.S. Department of the Treasury in May 2009 in exchange for 6,970 shares of the Companys preferred stock pursuant to the TARP Capital Purchase Program provided for under the Emergency Economic Stabilization Act of 2008 and an increase of $580,000 in the Companys accumulated other comprehensive income relating to the change in fair value of its available-for-sale investment portfolio. Partially offsetting these increases was the Companys net loss for the nine months ended September 30, 2009.
Comparison of Operating Results for the Three Months Ended September 30, 2009 and 2008
General. The Companys net income (loss) improved $886,000 to $86,000 for the three months ended September 30, 2009, from ($800,000) for the three months ended September 30, 2008. This represents a 96.9% improvement in basic and diluted loss per share to ($0.02) per share for the three months ended September 30, 2009 from ($0.64) per share for the three months ended September 30, 2008. The increase in net income during the third quarter of 2009 is the result of the combined effect of i) a $571,000 increase in non interest income; ii) a $675,000 decrease in the Banks provision for loan losses; iii) a $213,000 increase in net interest income and iv) a $323,000 increase in noninterest expenses.
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Net interest income. The following table summarizes interest and dividend income and interest expense for the three months ended September 30, 2009 and 2008.
Three Months Ended September 30, | |||||||||||||
2009 | 2008 | $ Change | % Change | ||||||||||
(Dollars in thousands) | |||||||||||||
Interest and dividend income: |
|||||||||||||
Interest and fees on loans |
$ | 3,148 | $ | 3,314 | $ | (166 | ) | (5.00 | %) | ||||
Securities: |
|||||||||||||
Taxable |
339 | 243 | 96 | 39.51 | |||||||||
Exempt from federal tax |
129 | 129 | | | |||||||||
Other interest income |
10 | 2 | 8 | 400.00 | |||||||||
Total interest and dividend income |
3,626 | 3,688 | (62 | ) | (1.68 | ) | |||||||
Interest expense: |
|||||||||||||
Deposits |
1,080 | 1,275 | (195 | ) | (15.29 | ) | |||||||
Federal funds purchased |
| 10 | (10 | ) | (100.00 | ) | |||||||
Federal Home Loan Bank advances and other borrowings |
156 | 205 | (49 | ) | (23.90 | ) | |||||||
Subordinated debentures |
20 | 41 | (21 | ) | (51.22 | ) | |||||||
Total interest expense |
1,256 | 1,531 | (275 | ) | (17.96 | ) | |||||||
Net interest income |
$ | 2,370 | $ | 2,157 | $ | 213 | 9.88 | ||||||
The following table summarizes average balances and annualized average yields or costs for the three months ended September 30, 2009 and 2008.
Three Months Ended September 30, | ||||||||||||||||||
2009 | 2008 | |||||||||||||||||
Average Balance |
Interest | Average Yield/ Cost |
Average Balance |
Interest | Average Yield/ Cost |
|||||||||||||
(Dollars in thousands) | ||||||||||||||||||
Interest-earning assets: |
||||||||||||||||||
Taxable securities |
$ | 30,639 | $ | 339 | 4.39 | % | $ | 18,868 | $ | 243 | 5.10 | % | ||||||
Tax-exempt securities |
12,092 | 129 | 4.21 | 12,241 | 129 | 4.19 | ||||||||||||
Loan receivables, net |
234,077 | 3,148 | 5.34 | 224,840 | 3,314 | 5.85 | ||||||||||||
Interest-bearing deposits |
12,580 | 10 | 0.31 | 153 | 2 | 5.23 | ||||||||||||
FHLB stock |
5,398 | | 0.00 | 5,398 | | 0.00 | ||||||||||||
Total interest-earning assets |
294,786 | 3,626 | 4.88 | 261,500 | 3,688 | 5.60 | ||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||
NOW accounts |
68,994 | 175 | 1.01 | 48,121 | 138 | 1.14 | ||||||||||||
Regular savings |
24,514 | 9 | 0.15 | 25,745 | 16 | 0.25 | ||||||||||||
Money market accounts |
42,880 | 157 | 1.45 | 39,989 | 235 | 2.33 | ||||||||||||
Certificates of deposit |
110,637 | 739 | 2.65 | 101,862 | 886 | 3.45 | ||||||||||||
FHLB advances and other |
18,966 | 156 | 3.25 | 19,000 | 205 | 4.28 | ||||||||||||
Federal funds purchased |
| | | 1,947 | 10 | 2.08 | ||||||||||||
Subordinated debentures |
3,609 | 20 | 2.23 | 3,609 | 41 | 4.46 | ||||||||||||
Total interest-bearing deposits |
$ | 269,600 | 1,256 | 1.85 | $ | 240,273 | 1,531 | 2.53 | ||||||||||
Net interest income |
$ | 2,370 | $ | 2,157 | ||||||||||||||
Net interest spread |
3.03 | % | 3.07 | % | ||||||||||||||
Net interest income to average interest-earning assets |
3.19 | % | 3.27 | % | ||||||||||||||
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Interest Income. Interest income decreased $62,000, or 1.7%, to $3.6 million for the three months ended September 30, 2009, compared to $3.7 million for the same period in 2008. This decrease resulted primarily from a decrease in average loan yield, which was primarily the result of a $166,000 decrease in interest income on loans for the three months ended September 30, 2009 compared to the comparable prior year period.
Loan interest income decreased $166,000, or 5.0%, to $3.1 million for the three months ended September 30, 2009, compared to $3.3 million for the comparable prior year period. This decrease resulted from a decrease in the average loan yield of 51 basis points to 5.34% for the three months ended September 30, 2009 from 5.85% for the comparable prior year period. Partially offsetting this decrease was an increase in the average balance of loans of $9.3 million to $234.1 million for the three months ended September 30, 2009 from $224.8 million for the comparable prior year period. There was a 225 basis point decrease in the federal funds interest rate since April 2008, which has negatively impacted interest income due to approximately one half of the Banks portfolio being comprised of adjustable rate loans. In addition, interest on taxable securities increased $96,000 for the three months ended September 30, 2009 compared to the comparable prior year period. This increase is primarily due to an increase in the average balance of taxable securities of $11.7 million to $30.6 million for the three months ended September 30, 2009 from $18.9 million for the three months ended September 30, 2008. Partially offsetting the increase in the average balance of loans was a decrease in the average yield on taxable securities of 71 basis points to 4.39% for the three months ended September 30, 2009 from 5.10% for the comparable prior year period.
Interest Expense. Interest expense decreased by $275,000, or 18.0%, to $1.3 million for the three months ended September 30, 2009, from $1.5 million for the three months ended September 30, 2008. This decrease resulted from a decrease in the average rate paid on interest bearing liabilities of 68 basis points to 1.85% for the three months ended September 30, 2009 from 2.53% for the comparable prior year period. This decrease was partially offset by an increase in the average balance of interest bearing liabilities of $29.3 million to $269.6 million for the three months ended September 30, 2009 from $240.3 million for the three months ended September 30, 2008. Interest expense resulting from Federal Home Loan Bank advances and other borrowings decreased $49,000 during the three months ended September 30, 2009. The average cost on these borrowings decreased 103 basis points to 3.25% for the three months ended September 30, 2009 from 4.28% for the comparable period in 2008.
Net Interest Income before Provision for Loan Losses. Net interest income before provision for loan losses increased $213,000, or 9.9%, to $2.4 million for the three months ended September 30, 2009 compared to the comparable period in 2008. The Companys net interest margin expressed as a percentage of average earning assets decreased to 3.19% for the three months ended September 30, 2009 as compared to 3.27% for the three months ended September 30, 2008. The yield on average earning assets decreased 72 basis points to 4.88% for the three months ended September 30, 2009 from 5.60% for the comparable period ended September 30, 2008. This decrease in the yield on average earning assets was primarily due to a decrease in loan yield, which resulted from the 225 basis point decrease in the federal funds interest rate since April 2008. The yield on average loans decreased to 5.34% for the three months ended September 30, 2009 from 5.85% for the three months ended September 30, 2008. In addition, there was a 68 basis point decrease in the cost of average interest-bearing liabilities to 1.85% for the three months ended September 30, 2009 as compared to 2.53% for the comparable 2008 period.
Provision for Loan Losses. The Banks provision for loan losses decreased to $120,000 for the three months ended September 30, 2009 from $795,000 for the comparable period in 2008. The decrease in the provision was the result of managements quarterly analysis of the allowance for loan loss. At September 30, 2009, December 31, 2008 and September 30, 2008, non-performing loans totaled $10.0 million, $2.8 million and $5.0 million, respectively. At September 30, 2009, the ratio of the allowance for loan losses to non-performing loans was 38.4% compared to 119.7% at December 31, 2008 and 69.8% at September 30, 2008. The ratio of the allowance to total loans was 1.62%, 1.48% and 1.55%, at September 30, 2009, December 31, 2008 and September 30, 2008, respectively.
The amounts of the provision and allowance for loan losses are influenced by a number of factors, including current economic conditions, actual loss experience, industry trends and other factors, including real estate values in the Companys market area and managements assessment of current collection risks within the loan portfolio. Should the local economic climate continue to deteriorate, borrowers may experience increased difficulties paying off loans and the level of non-performing loans, charge-offs, and delinquencies could continue to rise, which would require us to further increase the provision. The allowance for loan losses represents
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managements estimate of probable incurred losses based on information available as of the date of the financial statements. The allowance for loan losses is based on managements evaluation of the collectibility of the loan portfolio, including past loan loss experience, known and inherent risks in the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, and economic conditions. Management believes that, based on information available at September 30, 2009, the Banks allowance for loan losses was adequate to cover probable incurred losses inherent in its loan portfolio at that time. However, no assurances can be given that the Banks level of allowance for loan losses will be sufficient to cover loan losses incurred by the Bank or that future adjustments to the allowance will not be necessary if economic or other conditions differ substantially from the economic and other conditions used by management to determine the current level of the allowance. In addition, the FDIC as an integral part of its examination processes, periodically reviews the Banks allowance for loan losses and may require the Bank to make additional provisions for estimated loan losses based upon judgments different from those of management. The FDIC examines the Bank periodically and, accordingly, as part of this examination the allowance is reviewed utilizing specific guidelines. Based upon its review, the FDIC may accordingly from time to time require reserves in addition to those previously provided.
Noninterest Income
Three Months Ended September 30, | ||||||||||||||
2009 | 2008 | $ Change | % Change | |||||||||||
(Dollars in thousands) | ||||||||||||||
Non-interest income: |
||||||||||||||
Service charges on deposit accounts |
$ | 149 | $ | 190 | $ | (41 | ) | (21.58 | %) | |||||
Gain on sale of loans |
233 | 116 | 117 | 100.86 | ||||||||||
Loss on impairment |
| (485 | ) | 485 | (100.00 | ) | ||||||||
Other non-interest income |
162 | 152 | 10 | 6.58 | ||||||||||
Total non-interest income |
$ | 544 | $ | (27 | ) | $ | 571 | 2,114.82 | ||||||
Noninterest income (loss) totaled $544,000 and ($27,000) for the three months ended September 30, 2009 and 2008, respectively. For the three months ended September 30, 2008 the loss on impairment relates to the $485,000 other than temporary write-down of our investment in Federal Home Loan Mortgage Corporation preferred stock. Gain on sale of loans increased $117,000 to $233,000 for the three months ended September 30, 2009 from $116,000 for the comparable prior year period. The Banks mortgage department has experienced an increase in loan applications during the third quarter of 2009 due to the lower interest rate environment for mortgage loans. Partially offsetting these increases was a decrease in service charges on deposit accounts of $41,000 to $149,000 for the three months ended September 30, 2009 from $190,000 for the comparable prior year period. This decrease was primarily due to lower volume of overdraft fees.
Noninterest Expense
Three Months Ended September 30, | |||||||||||||
2009 | 2008 | $ Change | % Change | ||||||||||
(Dollars in thousands) | |||||||||||||
Non-interest expenses: |
|||||||||||||
Salaries and employee benefits |
$ | 1,406 | $ | 1,292 | $ | 114 | 8.82 | % | |||||
Net occupancy and equipment expense |
365 | 353 | 12 | 3.40 | |||||||||
Data processing expense |
237 | 218 | 19 | 8.72 | |||||||||
Advertising and promotions |
75 | 90 | (15 | ) | (16.67 | ) | |||||||
FDIC insurance premiums |
166 | 97 | 69 | 71.13 | |||||||||
Professional fees |
164 | 63 | 101 | 160.32 | |||||||||
Other operating expenses |
353 | 330 | 23 | 6.97 | |||||||||
Total non-interest expenses |
$ | 2,766 | $ | 2,443 | $ | 323 | 13.22 | ||||||
Noninterest expense increased by $323,000 to $2.8 million for the three months ended September 30, 2009 from $2.4 million for the comparable prior year period. This increase is partially due to an increase in FDIC premiums of $69,000 for the three months ended September 30, 2009 as compared to the prior year period. Salaries and employee benefits expenses increased by $114,000, or 8.8%, to $1.4 million for the three months ended September 30, 2009. This increase is the result of annual merit increases and higher commissions paid to mortgage department personnel. Professional fees, including legal and audit expenses, increased by $101,000 to $164,000 for
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the three months ended September 30, 2009. This increase is partially due to higher legal fees associated with foreclosure actions. Other operating expenses, including occupancy, data processing, and marketing and advertising expenses, increased by a net $16,000, or 2.4%, to $677,000 for the three months ended September 30, 2009 from $661,000 for the prior year period. Of this increase, $19,000 is related to data processing expense, which is primarily due to increased volume resulting from deposit account growth, and $12,000 is related to occupancy expense, which is primarily due to higher real estate taxes. These increases were partially offset by lower advertising and promotion expenses, which decreased $15,000 from the prior year period. Management continues to emphasize the importance of expense management and control in order to continue to provide expanded banking services to a growing market base.
Income Tax Expense. Income tax benefit totaled $58,000 and $308,000 for the three months ended September 30, 2009 and 2008, respectively. The decrease in income tax benefit is the result of an increase in income (loss) before income taxes of $1.1 million to $28,000 for the three months ended September 30, 2009 compared to ($1.1 million) for the comparable prior year period.
Comparison of Operating Results for the Nine Months Ended September 30, 2009 and 2008
General. The Companys net loss improved $824,000 to ($222,000) for the nine months ended September 30, 2009, from ($1.0 million) for the nine months ended September 30, 2008. This represents a 63.1% improvement in basic and diluted loss per share to ($0.31) per share for the nine months ended September 30, 2009 from ($0.84) per share for the nine months ended September 30, 2008. The improvement in net loss during the nine months of 2009 is the result of the combined effect of i) a $818,000 increase in non interest income; ii) a $545,000 decrease in the Banks provision for loan losses; iii) a $273,000 increase in net interest income and iv) a $593,000 increase in noninterest expenses.
Net interest income. The following table summarizes interest and dividend income and interest expense for the nine months ended September 30, 2009 and 2008.
Nine Months Ended September 30, | |||||||||||||
2009 | 2008 | $ Change | % Change | ||||||||||
(Dollars in thousands) | |||||||||||||
Interest and dividend income: |
|||||||||||||
Interest and fees on loans |
$ | 9,338 | $ | 10,530 | $ | (1,192 | ) | (11.32 | %) | ||||
Securities: |
|||||||||||||
Taxable |
816 | 717 | 99 | 13.81 | |||||||||
Exempt from federal tax |
377 | 391 | (14 | ) | (3.58 | ) | |||||||
Other interest income |
37 | 19 | 18 | 94.74 | |||||||||
Total interest and dividend income |
10,568 | 11,657 | (1,089 | ) | (9.34 | ) | |||||||
Interest expense: |
|||||||||||||
Deposits |
3,499 | 4,531 | (1,032 | ) | (22.78 | ) | |||||||
Federal funds purchased |
| 51 | (51 | ) | (100.00 | ) | |||||||
Federal Home Loan Bank advances and other borrowings |
437 | 656 | (219 | ) | (33.38 | ) | |||||||
Subordinated debentures |
78 | 138 | (60 | ) | (43.48 | ) | |||||||
Total interest expense |
4,014 | 5,376 | (1,362 | ) | (25.34 | ) | |||||||
Net interest income |
$ | 6,554 | $ | 6,281 | $ | 273 | 4.35 | ||||||
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The following table summarizes average balances and annualized average yields or costs for the nine months ended September 30, 2009 and 2008.
Nine Months Ended September 30, | ||||||||||||||||||
2009 | 2008 | |||||||||||||||||
Average Balance |
Interest | Average Yield/ Cost |
Average Balance |
Interest | Average Yield/ Cost |
|||||||||||||
(Dollars in thousands) | ||||||||||||||||||
Interest-earning assets: |
||||||||||||||||||
Taxable securities |
$ | 23,968 | $ | 816 | 4.55 | % | $ | 18,152 | $ | 717 | 5.26 | % | ||||||
Tax-exempt securities |
11,709 | 377 | 4.30 | 12,234 | 391 | 4.26 | ||||||||||||
Loan receivables, net |
225,992 | 9,338 | 5.52 | 229,290 | 10,530 | 6.12 | ||||||||||||
Interest-bearing deposits |
15,932 | 37 | 0.31 | 956 | 19 | 2.69 | ||||||||||||
FHLB stock |
5,398 | | 0.00 | 5,398 | | 0.00 | ||||||||||||
Total interest-earning assets |
282,999 | 10,568 | 4.99 | 266,030 | 11,657 | 5.84 | ||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||
NOW accounts |
65,560 | 526 | 1.07 | 45,346 | 359 | 1.05 | ||||||||||||
Regular savings |
25,092 | 28 | 0.15 | 25,840 | 58 | 0.30 | ||||||||||||
Money market accounts |
40,247 | 475 | 1.58 | 40,280 | 730 | 2.41 | ||||||||||||
Certificates of deposit |
109,592 | 2,470 | 3.01 | 108,873 | 3,384 | 4.14 | ||||||||||||
FHLB advances and other |
18,989 | 437 | 3.08 | 19,189 | 656 | 4.55 | ||||||||||||
Federal funds purchased |
| | | 2,373 | 51 | 2.86 | ||||||||||||
Subordinated debentures |
3,609 | 78 | 2.88 | 3,609 | 138 | 5.10 | ||||||||||||
Total interest-bearing deposits |
$ | 263,089 | 4,014 | 2.04 | $ | 245,510 | 5,376 | 2.92 | ||||||||||
Net interest income |
$ | 6,554 | $ | 6,281 | ||||||||||||||
Net interest spread |
2.95 | % | 2.92 | % | ||||||||||||||
Net interest income to average interest-earning assets |
3.10 | % | 3.15 | % | ||||||||||||||
Interest Income. Interest income decreased $1.1 million, or 9.3%, to $10.6 million for the nine months ended September 30, 2009, compared to $11.7 million for the same period in 2008. This decrease resulted primarily from a decrease in average loan yield, which was primarily the result of a $1.2 million decrease in interest income on loans for the nine months ended September 30, 2009 compared to the comparable prior year period.
Loan interest income decreased $1.2 million, or 11.3%, to $9.3 million for the nine months ended September 30, 2009, compared to $10.5 million for the comparable prior year period. This decrease resulted from a decrease in the average loan yield of 60 basis points to 5.52% for the nine months ended September 30, 2009 from 6.12% for the comparable prior year period and a decrease in the average balance of loans of $3.3 million to $226.0 million for the nine months ended September 30, 2009 from $229.3 million for the comparable prior year period. There was a 225 basis point decrease in the federal funds interest rate since April 2008, which has negatively impacted interest income due to approximately one half of the Banks portfolio being comprised of adjustable rate loans. In addition, interest on tax-exempt securities decreased $14,000 for the nine months ended September 30, 2009 compared to the comparable prior year period. This decrease is primarily due to a decrease in the average balance of tax exempt securities of $525,000 to $11.7 million for the nine months ended September 30, 2009 from $12.2 million for the nine months ended September 30, 2008. Partially offsetting this decrease was an increase in the average yield on tax-exempt securities of 4 basis points to 4.30% for the nine months ended September 30, 2009 from 4.26% for the comparable prior year period.
Interest Expense. Interest expense decreased by $1.4 million, or 25.3%, to $4.0 million for the nine months ended September 30, 2009, from $5.4 million for the nine months ended September 30, 2008. This decrease resulted from a decrease in the average rate paid on interest bearing liabilities of 88 basis points to 2.04% for the nine months ended September 30, 2009 from 2.92% for the comparable prior year period. This decrease was partially offset by an increase in the average balance of interest bearing liabilities of $17.6 million to $263.1 million
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for the nine months ended September 30, 2009 from $245.5 million for the nine months ended September 30, 2008. Interest expense resulting from Federal Home Loan Bank advances and other borrowings decreased $219,000 during the nine months ended September 30, 2009. The average cost on these borrowings decreased 147 basis points to 3.08% for the nine months ended September 30, 2009 from 4.55% for the comparable period in 2008.
Net Interest Income before Provision for Loan Losses. Net interest income before provision for loan losses increased $273,000, or 4.3%, to $6.6 million for the nine months ended September 30, 2009 compared to the comparable period in 2008. The Companys net interest margin expressed as a percentage of average earning assets decreased to 3.10% for the nine months ended September 30, 2009 as compared to 3.15% for the nine months ended September 30, 2008. The yield on average earning assets decreased 85 basis points to 4.99% for the nine months ended September 30, 2009 from 5.84% for the comparable period ended September 30, 2008. This decrease in the yield on average earning assets was primarily due to a decrease in loan yield, which resulted from the 225 basis point decrease in the federal funds interest rate since April 2008. The yield on average loans decreased to 5.52% for the nine months ended September 30, 2009 from 6.12% for the nine months ended September 30, 2008. In addition, there was an 88 basis point decrease in the cost of interest-bearing liabilities to 2.04% for the nine months ended September 30, 2009 as compared to 2.92% for the comparable 2008 period.
Provision for Loan Losses. The Banks provision for loan losses decreased to $1.1 million for the nine months ended September 30, 2009 from $1.6 million for the comparable period in 2008. The decrease in the provision was the result of managements quarterly analysis of the allowance for loan loss. At September 30, 2009, December 31, 2008 and September 30, 2008, non-performing loans totaled $10.0 million, $2.8 million and $5.0 million, respectively. At September 30, 2009, the ratio of the allowance for loan losses to non-performing loans was 38.4% compared to 119.7% at December 31, 2008 and 69.8% at September 30, 2008. The ratio of the allowance to total loans was 1.62%, 1.48% and 1.55%, at September 30, 2009, December 31, 2008 and September 30, 2008, respectively.
Noninterest Income
Nine Months Ended September 30, | |||||||||||||||
2009 | 2008 | $ Change | % Change | ||||||||||||
(Dollars in thousands) | |||||||||||||||
Non-interest income: |
|||||||||||||||
Service charges on deposit accounts |
$ | 469 | $ | 507 | $ | (38 | ) | (7.50 | %) | ||||||
Gain on sale of loans |
803 | 431 | 372 | 86.31 | |||||||||||
Gain on sale of securities |
50 | 79 | (29 | ) | (36.71 | ) | |||||||||
Loss on impairment |
| (485 | ) | 485 | 100.00 | ||||||||||
Loss on sale of foreclosed assets |
(44 | ) | | (44 | ) | 100.00 | |||||||||
Other non-interest income |
494 | 422 | 72 | 17.06 | |||||||||||
Total non-interest income |
$ | 1,772 | $ | 954 | $ | 818 | 85.74 | ||||||||
Noninterest income totaled $1.8 million and $954,000 for the nine months ended September 30, 2009 and 2008, respectively. For the nine months ended September 30, 2008 the loss on impairment relates to the $485,000 other than temporary write-down of our investment in FHLMC preferred stock. Gain on sale of loans increased $372,000 to $803,000 for the nine months ended September 30, 2009 from $431,000 for the comparable prior year period. The Banks mortgage department has experienced an increase in loan applications during the first nine months of 2009 due to the lower interest rate environment for mortgage loans. In addition, fees generated from the Companys investment center increased $15,000 to $34,000 for the nine months ended September 30, 2008 as compared to $19,000 for the prior year period. Partially offsetting these increases was a decrease in gain on sale of securities of $29,000 to $50,000 for the nine months ended September 30, 2009 from $79,000 for the comparable prior year period.
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Noninterest Expense
Nine Months Ended September 30, | |||||||||||||
2009 | 2008 | $ Change | % Change | ||||||||||
(Dollars in thousands) | |||||||||||||
Non-interest expenses: |
|||||||||||||
Salaries and employee benefits |
$ | 4,084 | $ | 3,914 | $ | 170 | 4.34 | % | |||||
Net occupancy and equipment expense |
1,077 | 1,027 | 50 | 4.87 | |||||||||
Data processing expense |
678 | 630 | 48 | 7.62 | |||||||||
Advertising and promotions |
214 | 258 | (44 | ) | (17.05 | ) | |||||||
FDIC insurance premiums |
536 | 204 | 332 | 162.74 | |||||||||
Professional fees |
464 | 282 | 182 | 64.54 | |||||||||
Other operating expenses |
879 | 1,023 | (144 | ) | (14.08 | ) | |||||||
Total non-interest expenses |
$ | 7,932 | $ | 7,338 | $ | 594 | 8.10 | ||||||
Noninterest expense increased by $594,000 to $7.9 million for the nine months ended September 30, 2009 from $7.3 million for the comparable prior year period. This increase is primarily due to an increase in FDIC premiums of $184,000 and a special FDIC assessment totaling $148,000 for the nine months ended September 30, 2009. Salaries and employee benefits expenses increased by $170,000, or 4.3%, to $4.1 million for the nine months ended September 30, 2009. This increase is primarily the result of annual merit increases. Professional fees, including legal and audit expenses, increased by $182,000 to $464,000 for the nine months ended September 30, 2009. This increase is partially due to legal fees associated with the Companys participation in the TARP Capital Purchase Program. Other operating expenses, including occupancy, data processing, and marketing and advertising expenses, increased slightly by a net $54,000, or 2.8%, during the 2009 period and totaled $2.0 million for the nine months ended September 30, 2009 compared to $1.9 million for the comparable prior year period. Of this increase, $48,000 is related to data processing expense, which is primarily due to increased volume resulting from deposit account growth, and $50,000 is related to occupancy expenses, which is primarily due to higher real estate taxes. These increases were partially offset by lower advertising and promotion expenses, which decreased $44,000 from the prior year period. Management continues to emphasize the importance of expense management and control in order to continue to provide expanded banking services to a growing market base.
Income Tax Expense. Income tax benefit totaled $464,000 and $682,000 for the nine months ended September 30, 2009 and 2008, respectively. The decrease in income tax benefit is the result of an increase in income (loss) before income taxes of $1.0 million to ($686,000) for the nine months ended September 30, 2009 compared to ($1.7 million) for the comparable prior year period.
Critical Accounting Policies
The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States and conform to general practices within the banking industry. The Companys significant accounting policies are described in detail in the notes to the consolidated financial statements included in the Companys Form 10-K for the year ended December 31, 2008, which was filed with the U.S. Securities and Exchange Commission on March 31, 2009. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. The financial position and results of operations can be affected by these estimates and assumptions and are integral to the understanding of reported results. Critical accounting policies are those policies that management believes are the most important to the portrayal of the Companys financial condition and results, and they require management to make estimates that are difficult, subjective, or complex.
Allowance for Credit Losses. The allowance for credit losses provides coverage for probable losses inherent in the Companys loan portfolio. Management evaluates the adequacy of the allowance for credit losses each quarter based on changes, if any, in underwriting activities, the loan portfolio composition (including product mix and geographic, industry or customer-specific concentrations), trends in loan performance, regulatory guidance and economic factors. This evaluation is inherently subjective, as it requires the use of significant management estimates. Many factors can affect managements estimates of specific and expected losses, including volatility of default probabilities, rating migrations, loss severity and economic and political conditions. The allowance is increased through provisions charged to operating earnings and reduced by net charge-offs.
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The Company determines the amount of the allowance based on relative risk characteristics of the loan portfolio. The allowance recorded for commercial loans is based on reviews of individual credit relationships and an analysis of the migration of commercial loans and actual loss experience. The allowance recorded for homogeneous consumer loans is based on an analysis of loan mix, risk characteristics of the portfolio, fraud loss and bankruptcy experiences, and historical losses, adjusted for current trends, for each homogeneous category or group of loans. The allowance for credit losses relating to impaired loans is based on the loans observable market price, the collateral for certain collateral-dependent loans, or the discounted cash flows using the loans effective interest rate.
Regardless of the extent of the Companys analysis of customer performance, portfolio trends or risk management processes, certain inherent but undetected losses are probable within the loan portfolio. This is due to several factors including inherent delays in obtaining information regarding a customers financial condition or changes in their unique business conditions, the judgmental nature of individual loan evaluations, collateral assessments and the interpretation of economic trends. Volatility of economic or customer-specific conditions affecting the identification and estimation of losses for larger non-homogeneous credits and the sensitivity of assumptions utilized to establish allowances for homogenous groups of loans are among other factors. The Company estimates a range of inherent losses related to the existence of these exposures. The estimates are based upon the Companys evaluation of imprecision risk associated with the commercial and consumer allowance levels and the estimated impact of the current economic environment.
Liquidity and Capital Resources
The Companys primary sources of funds are deposits, FHLB advances, and proceeds from principal and interest payments on loans and securities. While maturities, and scheduled amortization of loans and securities, and calls of securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions, and competition. The Company generally manages the pricing of its deposits to be competitive and to increase core deposit relationships.
Liquidity management is both a daily and long-term responsibility of management. The Company adjusts its investments in liquid assets based upon managements assessment of (i) expected loan demand, (ii) expected deposit flows, (iii) yields available on interest-earning deposits and securities, and (iv) the objectives of its asset/liability management program. Excess liquid assets are invested generally in interest-earning overnight deposits and short- and intermediate-term U.S. government and agency obligations.
The Companys most liquid assets are cash and short-term investments. The levels of these assets are dependent on the Companys operating, financing, lending, and investing activities during any given year. The Company has other sources of liquidity if a need for additional funds arises, including securities maturing within one year and the repayment of loans. The Company may also utilize the sale of securities available for sale, federal funds lines of credit from correspondent banks, and borrowings from the Federal Home Loan Bank of Chicago and M&I Bank.
The Company is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its operating expenses, the Company is responsible for paying any dividends declared to its shareholders. The Companys primary source of income is dividends received from the Bank. The amount of dividends that the Bank may declare and pay to the Company is generally restricted under applicable law to net profits in the current year plus those for the previous two years. At September 30, 2009, the Company had liquid assets of $3.0 million.
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Contractual Obligations
The following table discloses contractual obligations of the Company as of September 30, 2009:
(Dollars in Thousands) |
2009 | 2010 | 2011 | 2012 | 2013 | 2014 and after |
Total | ||||||||||||||
Federal Home Loan Bank advances |
$ | 4,000 | $ | 6,500 | $ | | $ | 2,000 | $ | 4,500 | $ | | $ | 17,000 | |||||||
Line of credit Subordinated debentures |
|
|
|
|
|
|
|
|
|
1,900 |
|
3,609 |
|
1,900 3,609 | |||||||
Data Processing (1), (2) |
135 | 561 | 581 | 601 | | | 1,878 | ||||||||||||||
Total |
$ | 4,135 | $ | 7,061 | $ | 581 | $ | 2,601 | $ | 6,400 | $ | 3,609 | $ | 24,387 | |||||||
(1) | Estimated contract amount based on transaction volume. Actual expense was $551,000 and $461,000 in 2008 and 2007, respectively. |
(2) | Contract expires September 30, 2012. |
Off-Balance Sheet Arrangements
In the normal course of operations, we engage in a variety of financial transactions that, in accordance with U.S. generally accepted accounting principles, are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers requests for funding and take the form of loan commitments, letters of credit and lines of credit. For information about our loan commitments and unused lines of credit, see Note 15 of the notes to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2008, as filed with the SEC on March 31, 2009. We currently have no plans to engage in hedging activities in the future. For the year ended December 31, 2008 and for the nine months ended September 30, 2009, we engaged in no off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary impact of inflation on the operations of the Company is reflected in increased operating costs. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates, generally, have a more significant impact on a financial institutions performance than does inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
ITEM 3: | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Interest Rate Risk
For a discussion of the potential impact of interest rate changes upon the market value of the Companys portfolio equity, see Item 7A in the Companys Annual Report on Form 10-K for the year ended December 31, 2008. Management, as part of its regular practices, performs periodic reviews of the impact of interest rate changes upon net interest income and the market value of the Companys portfolio equity. Based on, among other factors, such reviews, management believes that there have been no material changes in the market risk of the Companys asset and liability position since December 31, 2008.
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ITEM 4(T): | CONTROLS AND PROCEDURES |
The Companys management, including the Companys principal executive officer and principal financial officer, have evaluated the effectiveness of the Companys disclosure controls and procedures, as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Companys disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the SEC) (1) is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, and (2) is accumulated and communicated to the Companys management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. In addition, based on that evaluation, no change in the Companys internal control over financial reporting occurred during the nine months ended September 30, 2009 that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.
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PART II
ITEM 1. | LEGAL PROCEEDINGS |
There are no material pending legal proceedings to which the Company or its subsidiaries are a party other than ordinary routine litigation incidental to their respective businesses.
ITEM 1A. | RISK FACTORS |
There are no material changes to the risk factors disclosed in the Companys Form 10-K for the year ended December 31, 2008.
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
None
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
None
ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
None
ITEM 5. | OTHER INFORMATION |
None
ITEM 6. | EXHIBITS |
31.1 | Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) | |
31.2 | Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) | |
32.1 | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2 | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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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.
COMMUNITY FINANCIAL SHARES, INC. |
(Registrant) |
/s/ Scott W. Hamer |
Scott W. Hamer |
Dated: November 13, 2009 |
President and Chief Executive Officer |
(Principal Executive Officer) |
/s/ Eric J. Wedeen |
Eric J. Wedeen |
Dated: November 13, 2009 |
Chief Financial Officer |
(Principal Financial Officer) |