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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 June 30, 2010

 

Commission File Number 0-17609

 

WEST SUBURBAN BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

Illinois

 

36-3452469

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

711 South Meyers Road, Lombard, Illinois

 

60148

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (630) 652-2000

 

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

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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 issuer’s classes of common stock, as of the latest practicable date.

 

As of August 9, 2010, 426,850 shares of West Suburban common stock were outstanding.

 

 

 



Table of Contents

 

WEST SUBURBAN BANCORP, INC.

Form 10-Q Quarterly Report

 

Table of Contents

 

 

 

 

Page

 

 

 

Number

PART I

 

 

 

Item 1.

Financial Statements

 

4

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

17

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

31

Item 4.

Controls and Procedures

 

32

 

 

 

 

PART II

 

 

 

Item 1.

Legal Proceedings

 

33

Item 1A.

Risk Factors

 

33

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

33

Item 3.

Defaults Upon Senior Securities

 

33

Item 4.

(Removed and Reserved)

 

33

Item 5.

Other Information

 

33

Item 6.

Exhibits

 

34

 

 

 

 

Form 10-Q Signatures

 

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

 

The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors that could have a material adverse effect on the operations and future prospects of the Company include, but are not limited to, those set forth in the “Risk Factors” section included under Item 1A of Part I of the Company’s most recently filed Annual Report on Form 10-K and under Item 1A in Part II of this report and the following:

 

·            The strength of the U.S. and global economies and financial markets in general and the strength of the local economies in which the Company conducts its operations, including the local residential and commercial real estate markets, which may be less favorable than expected and may result in, among other things, a deterioration in the credit quality and value of the Company’s assets.

 

·            The effects of, and changes in, federal, state and local laws, regulations and policies affecting banking, securities, taxation, insurance and monetary and financial matters, as well as any laws and regulations otherwise affecting the Company, including the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act and other laws and regulations intended to address the current stresses in the U.S. and global financial markets, national security and money laundering.

 

·            The effects of continued adverse market conditions and further volatility in investment securities generally, which may result in a deterioration in the value of the securities in the Company’s securities portfolio.

 

2



Table of Contents

 

·            The ability of the Company to comply with, and satisfy the requirements of, its formal written agreements with its regulators and the consequences that may result from any inability to comply.

 

·            The ability of the Company to comply with applicable federal, state and local laws, regulations and policies and the consequences that may result from any inability to comply.

 

·            The effects of changes in interest rates, including the effects of changes in the rate of prepayments of the Company’s assets, and the policies of the Board of Governors of the Federal Reserve System.

 

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

 

·            The 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 Company’s website or new products.

 

·            The ability of the Company, and certain of its vendors, to develop and maintain secure and reliable electronic systems, including systems developed for the Company’s website or new products.

 

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

 

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

 

·            The economic impact of past and any future terrorist attacks, acts of war or threats thereof and the response of the U.S. to any such attacks and threats.

 

·            The costs, effects and outcomes of existing or future litigation and disputes with third parties, including, but not limited to, claims in connection with collection actions, employment matters and sales of business units.

 

·            Changes in accounting policies and practices, as may be adopted by state and federal regulatory agencies and the Financial Accounting Standards Board, the Public Company Accounting Oversight Board and the Securities and Exchange Commission.

 

·            Credit risks and the risks from concentrations (by geographic area or industry) within the Company’s loan portfolio.

 

·            The failure of the Company’s Real Estate Investment Trust (“REIT”) to qualify as a REIT and the effects of such failure on the Company’s 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 Company’s financial results, is included in the Company’s filings with the Securities and Exchange Commission, including the risk factors disclosed in the Company’s most recently filed Annual Report on Form 10-K and in Part II, Item 1A of this report.

 

3



Table of Contents

 

PART I

 

ITEM 1.      FINANCIAL STATEMENTS

 

WEST SUBURBAN BANCORP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

(UNAUDITED)

 

 

 

June 30,

 

December 31,

 

 

 

2010

 

2009

 

Assets

 

 

 

 

 

Cash and due from banks

 

$

90,103

 

$

68,610

 

Federal funds sold

 

200

 

80,000

 

Total cash and cash equivalents

 

90,303

 

148,610

 

Securities

 

 

 

 

 

Available for sale (amortized cost of $346,341 in 2010 and $199,139 in 2009)

 

353,394

 

205,610

 

Held to maturity (fair value of $266,015 in 2010 and $273,316 in 2009)

 

255,552

 

265,908

 

Federal Home Loan Bank stock

 

7,599

 

7,599

 

Total securities

 

616,545

 

479,117

 

Loans, less allowance for loan losses of $28,721 in 2010 and $25,922 in 2009

 

1,127,307

 

1,167,675

 

Bank-owned life insurance

 

37,940

 

37,601

 

Premises and equipment, net

 

42,658

 

43,768

 

Other real estate

 

22,000

 

25,994

 

Accrued interest and other assets

 

36,897

 

35,818

 

Total assets

 

$

1,973,650

 

$

1,938,583

 

 

 

 

 

 

 

Liabilities and shareholders’ equity

 

 

 

 

 

Deposits

 

 

 

 

 

Demand-noninterest-bearing

 

$

131,550

 

$

125,132

 

Prepaid solutions cards deposits

 

27,997

 

30,577

 

Interest-bearing

 

1,624,469

 

1,601,278

 

Total deposits

 

1,784,016

 

1,756,987

 

Prepaid solutions cards

 

8,140

 

6,315

 

Accrued interest and other liabilities

 

20,247

 

17,288

 

 

 

 

 

 

 

Common stock in ESOP subject to contingent repurchase obligation

 

36,963

 

31,230

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

Common stock, no par value; 15,000,000 shares authorized; 426,850 shares issued and outstanding

 

3,412

 

3,412

 

Surplus

 

35,453

 

35,453

 

Retained earnings

 

118,435

 

115,544

 

Accumulated other comprehensive income

 

3,947

 

3,584

 

Amount reclassified on ESOP shares

 

(36,963

)

(31,230

)

Total shareholders’ equity

 

124,284

 

126,763

 

Total liabilities and shareholders’ equity

 

$

1,973,650

 

$

1,938,583

 

 

See accompanying notes to condensed consolidated financial statements.

 

4



Table of Contents

 

WEST SUBURBAN BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009

(Dollars in thousands, except per share data)

(UNAUDITED)

 

 

 

2010

 

2009

 

Interest income

 

 

 

 

 

Loans, including fees

 

$

29,656

 

$

31,895

 

Securities

 

 

 

 

 

Taxable

 

8,486

 

9,618

 

Exempt from federal income tax

 

730

 

555

 

Federal funds sold

 

54

 

62

 

Total interest income

 

38,926

 

42,130

 

 

 

 

 

 

 

Interest expense

 

 

 

 

 

Deposits

 

10,296

 

12,779

 

Other

 

 

43

 

Total interest expense

 

10,296

 

12,822

 

Net interest income

 

28,630

 

29,308

 

Provision for loan losses

 

5,550

 

8,950

 

Net interest income after provision for loan losses

 

23,080

 

20,358

 

 

 

 

 

 

 

Noninterest income

 

 

 

 

 

Service fees on deposit accounts

 

2,659

 

2,823

 

Debit card fees

 

1,046

 

1,012

 

Bank-owned life insurance

 

221

 

672

 

Net gain on sale of loans held for sale

 

 

381

 

Net realized gains on securities transactions

 

 

109

 

Total other-than-temporary impairment losses

 

 

(5,110

)

Portion of loss recognized in other comprehensive income - before tax

 

 

4,219

 

Net impariment losses recognized in earnings

 

 

(891

)

Other

 

1,999

 

1,716

 

Total noninterest income

 

5,925

 

5,822

 

 

 

 

 

 

 

Noninterest expense

 

 

 

 

 

Salaries and employee benefits

 

11,251

 

12,092

 

Furniture and equipment

 

2,623

 

2,898

 

Occupancy

 

2,556

 

2,689

 

FDIC assessments

 

2,268

 

1,793

 

Professional fees

 

1,192

 

1,829

 

Other real estate owned

 

1,142

 

205

 

Loan administration

 

1,362

 

627

 

Advertising and promotion

 

455

 

358

 

Other

 

2,316

 

2,220

 

Total noninterest expense

 

25,165

 

24,711

 

 

 

 

 

 

 

Income from continuing operations before income taxes

 

3,840

 

1,469

 

Income tax expense

 

949

 

79

 

Net income from continuing operations

 

2,891

 

1,390

 

Discontinued operations, net of tax

 

 

98

 

Net income

 

$

2,891

 

$

1,488

 

 

 

 

 

 

 

Comprehensive income from continuing operations

 

$

3,254

 

$

1,979

 

Comprehensive income from discontinued operations

 

 

98

 

Total comprehensive income

 

$

3,254

 

$

2,077

 

 

 

 

 

 

 

Earnings from continuing operations per share

 

$

6.77

 

$

3.23

 

Earnings from discontinued operations per share

 

$

 

$

0.23

 

Earnings per share

 

$

6.77

 

$

3.46

 

Average shares outstanding

 

426,850

 

430,040

 

 

See accompanying notes to condensed consolidated financial statements.

 

5



Table of Contents

 

WEST SUBURBAN BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED JUNE 30, 2010 AND 2009

(Dollars in thousands, except per share data)

(UNAUDITED)

 

 

 

2010

 

2009

 

Interest income

 

 

 

 

 

Loans, including fees

 

$

14,612

 

$

15,891

 

Securities

 

 

 

 

 

Taxable

 

4,611

 

4,586

 

Exempt from federal income tax

 

275

 

279

 

Federal funds sold

 

9

 

37

 

Total interest income

 

19,507

 

20,793

 

 

 

 

 

 

 

Interest expense

 

 

 

 

 

Deposits

 

4,928

 

6,295

 

Total interest expense

 

4,928

 

6,295

 

Net interest income

 

14,579

 

14,498

 

Provision for loan losses

 

3,175

 

7,650

 

Net interest income after provision for loan losses

 

11,404

 

6,848

 

 

 

 

 

 

 

Noninterest income

 

 

 

 

 

Service fees on deposit accounts

 

1,330

 

1,427

 

Debit card fees

 

540

 

532

 

Bank-owned life insurance

 

(193

)

893

 

Net gains on loans held for sale

 

 

305

 

Net realized gains on securities transactions

 

 

109

 

Total other-than-temporary impairment losses

 

 

(5,110

)

Portion of loss recognized in other comprehensive income - before tax

 

 

4,219

 

Net impariment losses recognized in earnings

 

 

(891

)

Other

 

1,117

 

868

 

Total noninterest income

 

2,794

 

3,243

 

 

 

 

 

 

 

Noninterest expense

 

 

 

 

 

Salaries and employee benefits

 

5,302

 

6,562

 

Furniture and equipment

 

1,275

 

1,517

 

Occupancy

 

1,226

 

1,195

 

FDIC assessments

 

1,085

 

1,466

 

Professional fees

 

607

 

985

 

Other real estate owned

 

573

 

158

 

Loan administration

 

796

 

508

 

Advertising and promotion

 

287

 

147

 

Other

 

1,236

 

1,040

 

Total noninterest expense

 

12,387

 

13,578

 

 

 

 

 

 

 

Income (loss) from continuing operations before income taxes

 

1,811

 

(3,487

)

Income tax expense (benefit)

 

563

 

(1,190

)

Net income (loss) from continuing operations

 

1,248

 

(2,297

)

Discontinued operations, net of tax

 

 

(109

)

Net income (loss)

 

$

1,248

 

$

(2,406

)

 

 

 

 

 

 

Comprehensive income (loss) from continuing operations

 

$

2,122

 

$

(1,157

)

Comprehensive income (loss) from discontinued operations

 

 

(109

)

Total comprehensive income (loss)

 

$

2,122

 

$

(1,266

)

 

 

 

 

 

 

Earnings (loss) from continuing operations per share

 

$

2.92

 

$

(5.36

)

Earnings (loss) from discontinued operations per share

 

$

 

$

(0.25

)

Earnings (loss) per share

 

$

2.92

 

$

(5.61

)

Average shares outstanding

 

426,850

 

428,611

 

 

See accompanying notes to condensed consolidated financial statements.

 

6



Table of Contents

 

WEST SUBURBAN BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009

(Dollars in thousands, except per share data)

(UNAUDITED)

 

 

 

Common
Stock
and
Surplus

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
Loss

 

Amount
Reclassified
on ESOP
Shares

 

Total
Shareholders’
Equity

 

Balance, January 1, 2009

 

$

41,523

 

$

120,676

 

$

(1,300

)

$

(46,670

)

$

114,229

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchase and retirement of 3,884 shares of common stock

 

(2,008

)

 

 

 

 

 

 

(2,008

)

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

1,488

 

 

 

 

 

1,488

 

Change in unrealized loss on available for sale securities, net of reclassification and tax effects

 

 

 

 

 

575

 

 

 

575

 

Change in post-retirement obligation, net of tax effects

 

 

 

 

 

14

 

 

 

14

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

2,077

 

Cash dividends declared - $10.00 per share

 

 

 

(4,297

)

 

 

 

 

(4,297

)

Reclassification due to change in fair value of common stock in ESOP subject to contingent repurchase obligation

 

 

 

 

 

 

 

10,020

 

10,020

 

Balance, June 30, 2009

 

$

39,515

 

$

117,867

 

$

(711

)

$

(36,650

)

$

120,021

 

 

 

 

Common
Stock
and
Surplus

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
Income

 

Amount
Reclassified
on ESOP
Shares

 

Total
Shareholders’
Equity

 

Balance, January 1, 2010

 

$

38,865

 

$

115,544

 

$

3,584

 

$

(31,230

)

$

126,763

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

2,891

 

 

 

 

 

2,891

 

Change in unrealized gains on available for sale securities, net of reclassification and tax effects

 

 

 

 

 

351

 

 

 

351

 

Change in post-retirement obligation, net of tax effects

 

 

 

 

 

12

 

 

 

12

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

3,254

 

Reclassification due to change in fair value of common stock in ESOP subject to contingent repurchase obligation

 

 

 

 

 

 

 

(5,733

)

(5,733

)

Balance, June 30, 2010

 

$

38,865

 

$

118,435

 

$

3,947

 

$

(36,963

)

$

124,284

 

 

See accompanying notes to condensed consolidated financial statements.

 

7



Table of Contents

 

WEST SUBURBAN BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009

(Dollars in thousands)

(UNAUDITED)

 

 

 

2010

 

2009

 

Cash flows from operating activities

 

 

 

 

 

Net income

 

$

2,891

 

$

1,488

 

Adjustments to reconcile net income to net cash provided by continuing operating activities

 

 

 

 

 

Depreciation

 

1,566

 

1,660

 

Provision for loan losses

 

5,550

 

8,950

 

Deferred income tax provision (benefit)

 

864

 

(2,121

)

Net premium amortization and discount (accretion) of securities

 

1,100

 

(140

)

Net realized gains on securities transactions

 

 

(109

)

Impairment of pooled trust preferred securities

 

 

891

 

Increase in carrying value of bank-owned life insurance

 

(221

)

(672

)

Net gain on sales of loans held for sale

 

 

(381

)

Sales of loans held for sale

 

 

39,216

 

Origination of loans held for sale

 

 

(48,466

)

Net loss on sales of premises and equipment

 

4

 

 

Net gain on sales of other real estate

 

(237

)

(14

)

Write down of other real estate

 

516

 

 

Increase in accrued interest and other assets

 

(2,182

)

(715

)

Increase (decrease) in accrued interest and other liabilities

 

2,980

 

(1,451

)

Net cash provided by discontinued operating activities

 

 

842

 

Net cash provided by (used in) continuting operating activities

 

12,831

 

(1,022

)

Cash flows from investing activities

 

 

 

 

 

Securities available for sale

 

 

 

 

 

Sales

 

 

19,522

 

Maturities, calls and redemptions

 

49,573

 

40,047

 

Purchases

 

(197,567

)

(32,639

)

Securities held to maturity and FHLB stock

 

 

 

 

 

Maturities, calls and redemptions

 

48,372

 

27,197

 

Purchases

 

(38,324

)

(6,560

)

Net decrease in loans

 

32,647

 

8,148

 

Investment in bank-owned life insurance

 

(118

)

39

 

Purchases of premises and equipment

 

(460

)

(2,731

)

Sales of other real estate

 

5,885

 

1,699

 

Net cash provided by discontinued investing activities

 

 

371

 

Net cash (used in) provided by continuing investing activities

 

(99,992

)

55,093

 

Cash flows from financing activities

 

 

 

 

 

Net increase in deposits

 

27,029

 

63,531

 

Net decrease in federal funds purchased

 

 

(55,000

)

Repurchase and retirement of common stock

 

 

(2,008

)

Net increase in prepaid solutions cards

 

1,825

 

312

 

Dividends paid

 

 

(4,297

)

Net cash provided by financing activities

 

28,854

 

2,538

 

Net (decrease) increase in cash and cash equivalents

 

(58,307

)

56,609

 

Beginning cash and cash equivalents

 

148,610

 

55,474

 

Ending cash and cash equivalents

 

$

90,303

 

$

112,083

 

Supplemental disclosures

 

 

 

 

 

Cash paid for interest

 

$

10,448

 

$

12,751

 

Cash paid for income taxes

 

85

 

2,264

 

Other real estate acquired through loan foreclosures

 

2,170

 

14,284

 

 

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

 

WEST SUBURBAN BANCORP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(Dollars in thousands, except per share data)

 

Note 1 - Basis of Presentation

 

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

 

On December 4, 2009, the Company sold its prepaid solutions group. The Company anticipates transferring substantially all of the outstanding balances on prepaid solutions cards, which represent the total of prepaid solutions cards deposits and prepaid solutions cards liabilities to another financial institution during 2010.

 

Note 2 - Securities

 

At June 30, 2010 and December 31, 2009, the amortized cost, unrealized gains and losses and fair value of securities available for sale were as follows:

 

 

 

June 30, 2010

 

 

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

U.S. Treasuries

 

$

19,980

 

$

549

 

$

 

$

20,529

 

U.S. government sponsored enterprises

 

44,706

 

749

 

(1

)

45,454

 

Mortgage-backed: residential

 

270,474

 

5,872

 

(458

)

275,888

 

States and political subdivisions

 

11,181

 

366

 

(24

)

11,523

 

Total debt securities

 

$

346,341

 

$

7,536

 

$

(483

)

$

353,394

 

 

 

 

December 31, 2009

 

 

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

U.S. government sponsored enterprises

 

$

49,621

 

$

909

 

$

(46

)

$

50,484

 

Mortgage-backed: residential

 

139,151

 

5,313

 

(13

)

144,451

 

States and political subdivisions

 

10,367

 

314

 

(6

)

10,675

 

Total debt securities

 

$

199,139

 

$

6,536

 

$

(65

)

$

205,610

 

 

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Table of Contents

 

At June 30, 2010 and December 31, 2009, the amortized cost, unrealized gains and losses and fair value of securities held to maturity were as follows:

 

 

 

June 30, 2010

 

 

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

U.S. Treasuries

 

$

9,952

 

$

343

 

$

 

$

10,295

 

U.S. government sponsored enterprises

 

34,391

 

677

 

 

35,068

 

Mortgage-backed: residential

 

162,722

 

9,279

 

(19

)

171,982

 

States and political subdivisions

 

48,487

 

516

 

(333

)

48,670

 

Total

 

$

255,552

 

$

10,815

 

$

(352

)

$

266,015

 

 

 

 

December 31, 2009

 

 

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

U.S. government sponsored enterprises

 

$

41,199

 

$

392

 

$

(48

)

$

41,543

 

Mortgage-backed: residential

 

178,129

 

7,029

 

(160

)

184,998

 

States and political subdivisions

 

46,580

 

429

 

(234

)

46,775

 

Total

 

$

265,908

 

$

7,850

 

$

(442

)

$

273,316

 

 

At June 30, 2010, the amortized cost and fair value of debt securities available for sale and held to maturity by contractual maturity were as follows:

 

 

 

Available for Sale

 

Held to Maturity

 

 

 

Amortized
Cost

 

Fair Value

 

Amortized
Cost

 

Fair Value

 

Due in 1 year or less

 

$

7,134

 

$

7,180

 

$

31,881

 

$

31,846

 

Due after 1 year through 5 years

 

56,089

 

57,331

 

39,260

 

40,278

 

Due after 5 years through 10 years

 

6,332

 

6,414

 

12,663

 

12,810

 

Due after 10 years

 

6,312

 

6,581

 

9,026

 

9,099

 

Mortgage-backed: residential

 

270,474

 

275,888

 

162,722

 

171,982

 

Total

 

$

346,341

 

$

353,394

 

$

255,552

 

$

266,015

 

 

Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

There were no sales of securities during the six months ended June 30, 2010. There were $19,522 in sales for the six months ended June 30, 2009.

 

Securities with a carrying value of $102,149 and $114,177 at June 30, 2010 and December 31, 2009, respectively, were pledged to secure public deposits, fiduciary activities and for other purposes required or permitted by law.

 

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Table of Contents

 

Securities with unrealized losses at June 30, 2010 and December 31, 2009 are presented below by the length of time the securities have been in a continuous unrealized loss position:

 

 

 

June 30, 2010

 

 

 

Less than 12 Months

 

12 Months or More

 

Total

 

 

 

Fair
Value

 

Unrealized
Loss

 

Fair
Value

 

Unrealized
Loss

 

Fair
Value

 

Unrealized
Loss

 

U.S. government sponsored enterprises

 

$

1,404

 

$

(1

)

$

 

$

 

$

1,404

 

$

(1

)

Mortgage-backed: residential

 

37,512

 

(471

)

605

 

(6

)

38,117

 

(477

)

States and political subdivisions

 

32,394

 

(156

)

2,626

 

(201

)

35,020

 

(357

)

Total temporarily impaired

 

$

71,310

 

$

(628

)

$

3,231

 

$

(207

)

$

74,541

 

$

(835

)

 

 

 

December 31, 2009

 

 

 

Less than 12 Months

 

12 Months or More

 

Total

 

 

 

Fair
Value

 

Unrealized
Loss

 

Fair
Value

 

Unrealized
Loss

 

Fair
Value

 

Unrealized
Loss

 

U.S. government sponsored enterprises

 

$

25,637

 

$

(94

)

$

 

$

 

$

25,637

 

$

(94

)

Mortgage-backed: residential

 

21,072

 

(136

)

751

 

(37

)

21,823

 

(173

)

States and political subdivisions

 

2,964

 

(97

)

1,001

 

(143

)

3,965

 

(240

)

Total temporarily impaired

 

$

49,673

 

$

(327

)

$

1,752

 

$

(180

)

$

51,425

 

$

(507

)

 

Mortgage-backed: residential securities consist of residential mortgage-backed securities issued by U.S. government sponsored enterprises and agencies, primarily Fannie Mae, Freddie Mac and Ginnie Mae, institutions which the government has affirmed its commitment to support.

 

Other-Than-Temporary Impairment Evaluation

 

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. The investment securities portfolio is evaluated for OTTI by segregating the portfolio into two general segments and applying the appropriate OTTI model. Investment securities classified as available for sale or held to maturity are generally evaluated for OTTI under Financial Accounting Standards Board (“FASB”) guidance “Investments in Debt and Equity Securities.” However, certain purchased beneficial interests, including non-agency mortgage-backed securities and collateralized debt obligations that had credit ratings at the time of purchase of below AA are evaluated using the model outlined in FASB guidance “Beneficial Interests in Securitized Financial Assets.”

 

In determining OTTI on debt securities, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost; (2) the financial condition and near-term prospects of the issuer; (3) whether the market decline was affected by macroeconomic conditions; and (4) whether the Company has the intent to sell the debt security or whether it is more likely than not the Company will be required to sell the debt security before its anticipated recovery. The assessment of whether OTTI exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

 

In determining OTTI on purchased beneficial interests, the Company evaluates the present value of future cash flows to determine if there has been an adverse change in the remaining expected future cash flows.

 

When management determines that OTTI exists under either model, the amount of the OTTI recognized in earnings depends on whether the Company intends to sell the security or whether it is more likely than not the Company will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss. If the Company intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss, the OTTI is recognized in earnings in an amount equal to the entire difference between the investment’s 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

 

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Table of Contents

 

the amount representing the credit loss and the amount related to all other factors. The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the portion of the OTTI recognized in earnings becomes the new amortized cost basis of the investment.

 

In accordance with FASB guidance, unrealized losses on the Company’s debt securities are not recognized because management does not have the intent to sell the securities and it is not more likely than not that the Company would be required to sell the securities prior to the anticipated recovery. The Company has concluded that as of June 30, 2010, its debt securities were not other-than-temporarily impaired.

 

As of June 30, 2009, the Company held three pooled trust preferred securities that had total OTTI of $5,110, of which $891 represented the credit component and was charged to expense and $4,219 (before taxes) was recorded in other comprehensive income.

 

The table below presents a roll-forward of the credit losses recognized in earnings for the six month period ended June 30, 2010:

 

Beginning Balance, January 1, 2010

 

$

891

 

Additions

 

 

Ending Balance, June 30, 2010

 

$

891

 

 

Note 3 - Loans

 

Major classifications of loans were as follows:

 

 

 

June 30,
2010

 

December 31,
2009

 

Commercial

 

$

246,936

 

$

267,432

 

Consumer

 

2,717

 

3,031

 

Indirect automobile

 

1,644

 

2,395

 

Real estate

 

 

 

 

 

Residential

 

220,625

 

219,551

 

Commercial

 

285,484

 

280,442

 

Home equity

 

222,854

 

232,607

 

Construction

 

164,844

 

175,186

 

Credit card

 

9,424

 

9,874

 

Other

 

1,500

 

3,079

 

Total

 

1,156,028

 

1,193,597

 

Allowance for loan losses

 

(28,721

)

(25,922

)

Loans, net

 

$

1,127,307

 

$

1,167,675

 

 

The Company makes commercial, consumer and residential real estate loans primarily to customers throughout the western suburbs of Chicago. Construction loans are primarily made to customers engaged in the development and construction of residential real estate projects within the Company’s market area. From time to time the Company will make loans outside of its market area.

 

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Table of Contents

 

Changes in the allowance for loan losses were as follows:

 

 

 

June 30,
2010

 

December 31,
2009

 

Balance, beginning of year

 

$

25,922

 

$

15,578

 

Provision for loan losses

 

5,550

 

24,925

 

Loans charged-off

 

(2,852

)

(14,952

)

Recoveries

 

101

 

371

 

Balance, end of year

 

$

28,721

 

$

25,922

 

 

Impaired loans are summarized as follows:

 

 

 

June 30,
2010

 

December 31,
2009

 

Period-end loans with no allocated allowance for loan losses

 

$

27,373

 

$

30,754

 

Period-end loans with allocated allowance for loan losses

 

34,084

 

14,636

 

Total

 

$

61,457

 

$

45,390

 

 

 

 

 

 

 

Amount of the allowance for loan losses allocated to impaired loans at year-end

 

$

5,697

 

$

1,527

 

 

Nonperforming loans were as follows:

 

 

 

June 30,
2010

 

December 31,
2009

 

Loans past due 90 days or more still on accrual

 

$

464

 

$

790

 

Nonaccrual loans

 

51,135

 

38,038

 

Total nonperforming loans

 

$

51,599

 

$

38,828

 

 

At June 30, 2010, the Company had $15.6 million of loans considered troubled debt restructurings, which are considered impaired loans compared to $8.6 million as of December 31, 2009. Modifications for loans classified as troubled debt restructurings primarily changed the timing of cash flows for a short period of time and the Bank has not allocated any specific reserves to customers whose loan terms have been modified in troubled debt restructurings. The Company has not committed to lend additional amounts to customers with outstanding loans that are classified as troubled debt restructurings.

 

Note 4 - Financial Instruments with Off-Balance Sheet Risk

 

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

 

 

 

June 30, 2010

 

December 31, 2009

 

 

 

Fixed
Rate

 

Variable
Rate

 

Total

 

Fixed
Rate

 

Variable
Rate

 

Total

 

Commercial loans and lines of credit

 

$

1,239

 

$

136,875

 

$

138,114

 

$

1,434

 

$

169,158

 

$

170,592

 

Check credit lines of credit

 

945

 

 

945

 

1,027

 

 

1,027

 

Mortgage loans

 

8,509

 

 

8,509

 

8,419

 

 

8,419

 

Home equity lines of credit

 

2,573

 

144,787

 

147,360

 

2,508

 

152,281

 

154,789

 

Letters of credit

 

 

15,990

 

15,990

 

 

14,650

 

14,650

 

Credit card lines of credit

 

 

38,385

 

38,385

 

 

38,771

 

38,771

 

Total

 

$

13,266

 

$

336,037

 

$

349,303

 

$

13,388

 

$

374,860

 

$

388,248

 

 

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Table of Contents

 

Fixed rate commercial loan commitments and lines of credit at June 30, 2010 had interest rates ranging from 3.8% to 7.3% with terms ranging from 1 month to 5 years. Fixed rate mortgage loan commitments at June 30, 2010 had interest rates ranging from 4.4% to 5.3% with terms ranging from 10 to 30 years. Fixed rate home equity lines of credit at June 30, 2010 had interest rates ranging from 6.5% to 7.0% with terms ranging from 1 to 3 years. Fixed rate check credit lines of credit at June 30, 2010 had interest rates of 18.0%.

 

Note 5 - Common Stock in ESOP Subject to Contingent Repurchase Obligation

 

At June 30, 2010 and December 31, 2009, the Employee Stock Ownership Plan (the “ESOP”) held 91,267 and 91,317 shares of West Suburban common stock, respectively. Upon termination of their employment, participants who elect to receive their benefit distributions in the form of West Suburban common stock may require the Company to purchase the common stock distributed at fair value during two 60-day periods. The first purchase period begins on the date the benefit is distributed and the second purchase period begins on the first anniversary of the distribution date. This contingent repurchase obligation is reflected in the Company’s financial statements as “Common stock in ESOP subject to contingent repurchase obligation” and reduces shareholders’ equity by an amount that represents the independently appraised fair value of all West Suburban common stock held by the ESOP and allocated to participants, without regard to whether it is likely that the shares would be distributed or that the recipients of the shares would be likely to exercise their right to require the Company to purchase the shares.

 

Note 6 - New Accounting Pronouncements

 

Adoption of New Accounting Standards

In June 2009, the FASB amended previous guidance relating to transfers of financial assets and eliminated the concept of a qualifying special purpose entity.  This guidance must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. This guidance must be applied to transfers occurring on or after the effective date. Additionally, on and after the effective date, the concept of a qualifying special purpose entity is no longer relevant for accounting purposes. Therefore, formerly qualifying special-purpose entities should be evaluated for consolidation by reporting entities on and after the effective date in accordance with the applicable consolidation guidance. The disclosure provisions were also amended and apply to transfers that occurred both before and after the effective date of this guidance.  The adoption did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

 

In June 2009, the FASB amended guidance for consolidation of variable interest entity guidance by replacing the quantitative-based risks and rewards calculation for determining which enterprise, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. Additional disclosures about an enterprise’s involvement in variable interest entities are also required. This guidance was effective as of the beginning of each reporting entity’s first annual reporting period that began after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Early adoption was prohibited. The adoption did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

 

Note 7 - Retirement Benefits

 

The Bank maintains the West Suburban Bank 401(k) Profit Sharing Plan (the “401(k) Plan”), which serves as the Company’s 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 ESOP’s 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 employer’s contributions and any income, expenses, gains and losses and forfeitures allocated to the participant’s account.

 

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Table of Contents

 

The Company also maintains a noncontributory postretirement benefit plan covering certain senior executives. The plan provides postretirement medical, dental and long term care coverage for certain executives and their surviving spouses.

 

The eligible retirement age under the plan is age 62 and the plan is unfunded. Net postretirement benefit costs are summarized in the following table:

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2010

 

2009

 

Service cost

 

$

17

 

$

20

 

Interest cost

 

29

 

30

 

Amortization of prior service cost

 

11

 

10

 

Recognized net actuarial gain

 

10

 

14

 

Net periodic benefit cost

 

$

67

 

$

74

 

 

 

 

Three Months Ended

 

 

 

June 30,

 

 

 

2010

 

2009

 

Service cost

 

$

9

 

$

10

 

Interest cost

 

14

 

15

 

Amortization of prior service cost

 

5

 

5

 

Recognized net actuarial gain

 

5

 

7

 

Net periodic benefit cost

 

$

33

 

$

37

 

 

Note 8 - Income Taxes

 

The Company files income tax returns in the U.S. federal jurisdiction and in Illinois. The Company is no longer subject to examination by the U.S. federal tax authorities or by Illinois tax authorities for years prior to 2006.

 

Income tax expense increased $.9 million for the first six months of 2010 compared to the first six months of 2009. The effective tax rates for the first six months of 2010 and 2009 were 24.7% and 8.8%, respectively. The increase was due to the increase in taxable income.

 

Note 9 - Fair Value

 

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  There are three levels of inputs that may be used to measure fair values:

 

Level 1 — Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2 — Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3 — Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

 

The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:

 

Securities:  The fair value of securities is determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair value is calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair value is calculated using discounted cash flows or other market indicators (Level 3). Discounted cash flows are calculated using spread to swap and LIBOR curves that are updated to incorporate loss severities, volatility, credit spread and optionality.

 

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Table of Contents

 

During times when trading is more liquid, broker quotes are used (if available) to validate the model. Rating agency and industry research reports, as well as defaults and deferrals on individual securities are reviewed and incorporated into the calculations.

 

Impaired Loans:  The fair value of impaired loans secured by real estate with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches, including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

 

Other Real Estate:  Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate are measured at the lower of carrying amount or fair value, less costs to sell. Fair values are generally based on third party appraisals of the property, resulting in a Level 3 classification. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.

 

Assets and liabilities measured at fair value on a recurring basis and a non-recurring basis are as follows:

 

 

 

Carrying
Value

 

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

June 30, 2010 Recurring basis

 

 

 

 

 

 

 

 

 

U.S. Treasuries

 

$

20,529

 

$

20,529

 

$

 

$

 

U.S. government sponsored enterprises

 

45,454

 

 

45,454

 

 

Mortgage-backed: residential

 

275,888

 

 

275,888

 

 

State and political subdivisions

 

11,523

 

 

11,523

 

 

Total securities available for sale

 

$

353,394

 

$

20,529

 

$

332,865

 

$

 

 

 

 

 

 

 

 

 

 

 

June 30, 2010 Non-recurring basis

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

28,387

 

$

 

$

 

$

28,387

 

Other real estate

 

624

 

 

 

624

 

 

 

 

 

 

 

 

 

 

 

December 31, 2009 Recurring basis

 

 

 

 

 

 

 

 

 

U.S. government sponsored enterprises

 

$

50,484

 

$

 

$

50,484

 

$

 

Mortgage-backed: residential

 

144,451

 

 

144,451

 

 

State and political subdivisions

 

10,675

 

 

10,675

 

 

Total securities available for sale

 

$

205,610

 

$

 

$

205,610

 

$

 

 

 

 

 

 

 

 

 

 

 

December 31, 2009 Non-recurring basis

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

13,109

 

$

 

$

 

$

13,109

 

Other real estate

 

25,994

 

 

 

25,994

 

 

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $34,084 with a valuation allowance of $5,697 at June 30, 2010, resulting in an additional provision for loan losses of $4,253 during the first six months of 2010. The majority of the additional provision was due to further deterioration in the collateral value of loans that had been classified as impaired at December 31, 2009. At December 31, 2009, impaired loans had a carrying amount of $14,636, with a valuation allowance of $1,527.

 

At June 30, 2010, other real estate which is measured at fair value less costs to sell, had a net carrying amount of $624, which was made up of the outstanding balance of $846, net of a valuation

 

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allowance of $222, resulting in expense of $471 for the first six months of 2010. At December 31, 2009, other real estate, had a net carrying amount of $25,994, which was made up of the outstanding balance of $26,390, net of a valuation allowance of $396, resulting in expense of $449 for 2009.

 

Carrying values and estimated fair values of the Company’s financial instruments as of June 30, 2010 and December 31, 2009 are set forth in the table below:

 

 

 

2010

 

2009

 

 

 

Carrying
Value

 

Estimated
Fair Value

 

Carrying
Value

 

Estimated
Fair Value

 

Financial assets

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

90,303

 

$

90,303

 

$

148,610

 

$

148,610

 

Securities

 

 

 

 

 

 

 

 

 

Available for sale

 

353,394

 

353,394

 

205,610

 

205,610

 

Held to maturity

 

255,552

 

266,015

 

265,908

 

273,316

 

Federal Home Loan Bank stock

 

7,599

 

N/A

 

7,599

 

N/A

 

Loans, less allowance for loan losses

 

1,127,307

 

1,132,722

 

1,167,675

 

1,166,369

 

Accrued interest receivable

 

6,484

 

6,484

 

6,048

 

6,048

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities

 

 

 

 

 

 

 

 

 

Deposits

 

1,784,016

 

1,798,868

 

1,756,987

 

1,774,132

 

Accrued interest payable

 

4,842

 

4,842

 

4,994

 

4,994

 

 

Estimated fair value for cash and cash equivalents, accrued interest receivable and payable, demand deposits and variable rate loans or deposits that reprice frequently and fully are each based on carrying value. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to estimated life and credit. Fair value of debt is based on current rates for similar financing. It was not practical to determine the fair value of FHLB stock due to the restrictions placed on its transferability. The fair value of off-balance-sheet items is not considered material.

 

ITEM 2.

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

 

Executive Overview

 

At the end of 2007, the United States economy experienced a downturn that continued throughout 2009 and into 2010. During this period, the United States economy experienced rising unemployment, declining home values, extremely low liquidity in the debt markets and declining values and high volatility in the equity markets.  As a result of these conditions, consumer confidence and spending decreased substantially and asset values declined.  Like many other financial institutions, the Company’s financial results in recent reporting periods, including the first six months of 2010, were impacted by the continuing economic downturn.

 

The economic downturn has impacted the entire state of Illinois, including the Company’s primary market area, located in the western suburbs of Chicago, Illinois.  The unemployment rate in the state of Illinois currently exceeds 11%, and during 2009 and the first part of 2010, job cuts were prevalent in the Company’s market area.  Rising unemployment has adversely impacted the ability of certain of the Company’s borrowers to meet their ongoing debt obligations.  In addition, real estate demand in the Company’s market area remains weak, resulting in declines in the values of the real estate serving as collateral for certain of the Company’s loans.  Although management believes that single family residential property values are beginning to stabilize, many other types of properties, including commercial real estate and raw land, remain at extremely weak levels.

 

As a result of the continuing economic downturn in the national and local economies and declining real estate values, management has focused its attention primarily on improving the performance of the Bank’s loan portfolio.  During the first six months of 2010, the Bank’s nonaccrual loans increased, which adversely impacted its interest income.  The deterioration in the Bank’s loan portfolio has forced the Bank to increase its allowance for loan losses

 

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to absorb additional losses in the loan portfolio.  The Bank’s board of directors reviews the level of its allowance for loan losses on a monthly basis, and the Bank consults with its registered public accountant on a quarterly basis.  The board responds as promptly as practicable to new developments in the Bank’s loan portfolio, but it often takes time to implement appropriate changes to the Bank’s allowance.  Although management has aggressively increased the Bank’s allowance for loan losses in response to increasing levels of nonaccrual loans, management cannot be certain that it has established the allowance at the correct level, and loan losses in excess of the allowance for loan losses would adversely affect the Bank’s financial condition and results of operations.  In addition, as a result of increasing levels of foreclosures, the Bank’s other real estate owned portfolio increased dramatically in 2009 and remained at a historically high level in the first six months of 2010, further decreasing the Bank’s interest income. Management has had to focus additional time and effort on selling these properties, and the Bank has incurred significant costs in connection with maintaining the properties, including real estate taxes, management fees and insurance costs.  Management continues to aggressively pursue sales of the foreclosed assets in the Bank’s portfolio, but due to weak real estate demand in the Bank’s market area, management is not able to dispose of these properties as promptly as desired.

 

In response to issues regarding credit quality in the Bank’s loan portfolio, the Bank has limited the amount of credit that has been extended, particularly in areas of higher loan concentration, such as real estate construction loans. The Bank continues to see low levels of quality demand for credit but will continue to evaluate credit requests using the Bank’s traditional, prudent lending standards.

 

In response to the economic downturn, the Federal Reserve has maintained interest rates at historical low levels and has used various forms of monetary policy in an attempt to drive down long-term interest rates.  The presence of these historically low interest rates has created net interest challenges for the banking industry in general and the Bank in particular.  This interest rate environment has resulted in low-yielding investment opportunities, adding to the downward pressure on the Bank’s interest income.  Because management believes that interest rates will increase over the next few years, management has been focused on investments for the Bank’s securities portfolio that are expected to retain their value in a rising rate environment.  Specifically, the Bank has invested in mortgage-backed securities issued by United States government sponsored enterprises with average maturities of less than five years.  In addition, movements in general market interest rates are a key element in changes in the Bank’s interest rate margin, and the Bank’s interest rate margin has declined in this environment.  Management expects the interest rate environment to remain at historically low levels throughout most, if not all, of 2010, which will likely cause these trends to continue in the short-term.

 

During the first six months of 2010, management remained focused on resolving the issues raised by the Bank’s regulators in two Cease and Desist Orders.  On December 3, 2008, the Bank entered into an Order to Cease and Desist with the FDIC and the DFPR, which is based on FDIC and DFPR findings that the Bank’s Secrecy Act/Anti-Money Laundering Program was inadequate and that the Bank had violated various laws and regulations related to the Bank Secrecy Act.  On April 23, 2009, the Bank entered into a second Order to Cease and Desist with the FDIC based on FDIC findings that the Bank’s program to implement consumer protection related laws and regulations was inadequate and that the Bank had violated certain consumer protection related laws and regulations.  Both of the orders require the Bank to take certain corrective actions aimed at resolving any outstanding violations of laws or regulations and to implement revised programs intended to address future compliance.  Neither of the orders relates to the Bank’s asset quality, capital position or its financial operations.  The Bank’s regulators recently completed an examination of the Bank’s compliance with the Bank Secrecy Act and other laws and regulations, and in connection with this examination, the Bank expects that the FDIC and DFPR will evaluate whether the orders should be terminated.

 

Recent Regulatory Developments

 

On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”), which is perhaps the most significant financial reform since the Great Depression.  Among other things, the law:

 

·                  Creates a Financial Services Oversight Council to identify emerging systemic risks and improve interagency cooperation;

 

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·                  Creates a Consumer Financial Protection Agency authorized to promulgate and enforce consumer protection regulations relating to financial products, which would affect both banks and non-bank finance companies;

·                  Establishes strengthened capital standards for banks and bank holding companies, and disallows trust preferred securities from being included in the Tier 1 capital determination for certain financial institutions;

·                  Enhances regulation of financial markets, including derivatives and securitization markets;

·                  Contains a series of provisions covering mortgage loan original standards affecting, among other things, originator compensation, minimum repayment standards and pre-payments;

·                  Grants the Board of Governors of the Federal Reserve System the power to regulate debit card interchange fees;

·                  Prohibits certain trading activities by banks;

·                  Permanently increases the maximum standard FDIC deposit insurance amount to $250,000; and

·                  Creates an Office of National Insurance with the U.S. Department of Treasury.

 

While the provisions of the Act receiving the most public attention have generally been those more likely to affect larger institutions, the Act also contains many provisions which will affect smaller institutions such as the Company in substantial and unpredictable ways.  Consequently, compliance with the Act’s provisions may curtail the Company’s revenue opportunities, increase its operating costs, require it to hold higher levels of regulatory capital and/or liquidity or otherwise adversely affect the Company’s business or financial results in the future.  The Company’s management is actively reviewing the provisions of the Act and assessing its probable impact on the Company’s business, financial condition, and result of operations.  However, because many aspects of the Act are subject to future rulemaking, it is difficult to precisely anticipate its overall financial impact on the Company and the Bank at this time.

 

Critical Accounting Policies

 

The Company’s 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 Company’s 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 Suburban’s Board of Directors. This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction the Company’s Condensed Consolidated Financial Statements and Notes to the Condensed Consolidated Financial Statements included in this quarterly report.

 

In management’s 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 Company’s federal and state tax obligations, the determination of the fair value of certain of the Company’s investment securities and the determination of the carrying value of the Company’s other real estate.

 

Allowance for Loan Losses. The Company maintains an allowance for loan losses at a level management believes is sufficient to absorb probable incurred credit losses in the loan portfolio. The allowance for loan losses represents the Company’s 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.

 

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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 borrower’s current economic status, including liquidity and future business viability. Other factors used in the allocation of the allowance include levels and trends of past dues and charge-offs along with concentrations of credit within the commercial and commercial real estate loan portfolios. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available or as future developments occur. Along with the allocation of the allowance on a category-by-category basis and the specific allocations for individual borrowing relationships, the allowance includes a relatively small portion that remains unallocated. Management adjusts the allowance for loan losses by an amount sufficient to maintain the allowance at the level determined appropriate. A loan is fully or partially charged-off when all or a portion of the loan is deemed to be uncollectible by management. The Company believes that the allowance for loan losses is adequate to provide for estimated probable incurred credit losses in the loan portfolio.

 

Income Taxes. The Company is subject to income tax laws of the U.S. and the State of Illinois. These laws are complex and subject to different interpretations by the taxpayer and the various taxing authorities. Management makes certain judgments and estimates about the application of these inherently complex laws when determining the provision for income taxes. Federal and state taxing authorities have recently become increasingly aggressive in challenging tax positions taken by financial institutions, including positions that may be taken by the Company. During the preparation of the Company’s 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 management’s ongoing assessment of facts and evolving case law.

 

On a quarterly basis, management evaluates the reasonableness of its effective tax rate based upon its current best estimate of net income and applicable taxes expected for the full year. Deferred tax assets and liabilities are evaluated on a quarterly basis, or more frequently if necessary.

 

Temporary Decline in Fair Value of Securities. The Company evaluates its debt and equity securities for other-than-temporary impairment under FASB guidance “Investments in Debt and Equity Securities.” The guidance applies to debt securities, as well as equity securities not accounted for under the equity method (i.e., cost method investments), unless the investments are subject to other accounting guidance, such as FASB guidance “Beneficial Interest in Securitized Financial Assets.” Investments in securitized structures such as collateralized mortgage obligations and collateralized debt obligations that are not high quality investment grade securities upon acquisition are subject to this guidance. High quality investment grade securities are defined as securities with an investment grade of “AA” or higher.

 

In accordance with FASB guidance “Investments in Debt and Equity Securities,” declines in the fair value of securities below their cost that are other-than-temporary are reflected as realized losses. In determining OTTI on debt securities, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost; (2) the financial condition and near-term prospects of the issuer; (3) whether the market decline was affected by macroeconomic conditions; and (4) whether the Company has the intent to sell the debt security or whether it is more likely than not the Company will be required to sell the debt security before its anticipated recovery. The assessment of whether OTTI exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

 

Other Real Estate. Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis.  If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense.  Operating costs after acquisition are expensed as incurred.

 

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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 Company’s significant fixed and determinable contractual obligations and significant commitments by payment date as of June 30, 2010 (dollars in thousands). The payment amounts represent those amounts contractually due to the recipient and do not include any carrying value adjustments.

 

 

 

One Year
or Less

 

Over One
Year to
Three Years

 

Over Three
Years to
Five Years

 

Over
Five Years

 

Total

 

Deposits without a stated maturity

 

$

1,221,844

 

$

 

$

 

$

 

$

1,221,844

 

Time deposits

 

360,602

 

121,439

 

51,963

 

171

 

534,175

 

Prepaid solutions cards deposits

 

27,997

 

 

 

 

27,997

 

Operating leases

 

488

 

669

 

457

 

248

 

1,862

 

Prepaid solutions cards liabilities

 

8,140

 

 

 

 

8,140

 

Commitments to extend credit

 

 

 

 

 

 

 

 

 

 

 

Fixed rate

 

 

 

 

 

 

 

 

 

13,266

 

Variable rate

 

 

 

 

 

 

 

 

 

336,037

 

Deferred compensation

 

 

 

 

 

 

 

 

 

7,153

 

Postretirement benefit plan

 

 

 

 

 

 

 

 

 

1,039

 

 

At June 30, 2010 and December 31, 2009, the ESOP held 91,267 and 91,317 shares of West Suburban common stock, respectively. Upon termination of their employment, participants who elect to receive their benefit distributions in the form of West Suburban common stock may require the Company to purchase the common stock distributed at fair value. A more detailed discussion concerning this obligation is presented in Note 5 to the Company’s Condensed Consolidated Financial Statements included in this report. At June 30, 2010 and December 31, 2009, this contingent repurchase obligation reduced shareholders’ equity by $37.0 million and $31.2 million, respectively.

 

Balance Sheet Analysis

 

Total Assets. Total consolidated assets at June 30, 2010 increased 1.8% from December 31, 2009. This increase was primarily due to an increase in the securities portfolio, offset by decreases in federal funds sold and the loan portfolio.

 

Cash and Cash Equivalents. Cash and cash equivalents at June 30, 2010 decreased 39.2% from December 31, 2009, primarily due to a decrease in federal funds sold partially offset by an increase in cash and due from banks. As rates on federal funds sold remained at historically low levels, the Company increased its available for sale securities portfolio. This was done in order to earn a higher rate of return compared to the rate paid on federal funds sold while maintaining a high level of liquidity in response to the uncertain economy.

 

Securities. The Company’s securities portfolio increased 28.7% during the first six months of 2010. This increase was primarily due to investments in U.S. government sponsored enterprise issued mortgage-backed securities and U.S. Treasury securities. The Company manages its securities portfolio to maximize the return on invested funds within acceptable risk guidelines, to meet pledging and liquidity requirements, and to adjust balance sheet interest rate sensitivity in an effort to insulate net interest income against the impact of interest rate changes. The Company will continue to monitor its level of available for sale and held to maturity securities and will classify new securities purchased in the appropriate category at the time of purchase. At June 30, 2010, the Company’s accumulated

 

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comprehensive income due to unrealized gains and losses on securities available for sale was $4.2 million compared to $3.9 million at December 31, 2009.

 

Securities available for sale are carried at fair value, securities held to maturity are carried at amortized cost and Federal Home Loan Bank stock is carried at historical cost. The carrying values of the Company’s major categories of securities are summarized in the following table (dollars in thousands):

 

 

 

June 30,
2010

 

December 31,
2009

 

Dollar
Change

 

Percent
Change

 

Securities available for sale

 

 

 

 

 

 

 

 

 

U.S. Treasuries

 

$

20,529

 

$

 

$

20,529

 

N/A

 

U.S. government sponsored enterprises

 

45,454

 

50,484

 

(5,030

)

(10.0

)%

Mortgage-backed: residential

 

275,888

 

144,451

 

131,437

 

91.0

%

States and political subdivisions

 

11,523

 

10,675

 

848

 

7.9

%

Total securities available for sale

 

353,394

 

205,610

 

147,784

 

71.9

%

 

 

 

 

 

 

 

 

 

 

Securities held to maturity

 

 

 

 

 

 

 

 

 

U.S. Treasuries

 

9,952

 

 

9,952

 

N/A

 

U.S. government sponsored enterprises

 

34,391

 

41,199

 

(6,808

)

(16.5

)%

Mortgage-backed: residential

 

162,722

 

178,129

 

(15,407

)

(8.6

)%

States and political subdivisions

 

48,487

 

46,580

 

1,907

 

4.1

%

Total securities held to maturity

 

255,552