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, 2005
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For transition period from to
Commission file number 0-51296
COMMUNITY FINANCIAL SHARES, INC.
(Exact name of Registrant as specified in its charter)
Delaware | 36-4387843 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
357 Roosevelt Road Glen Ellyn, Illinois | 60137 | |
(Address of principal executive offices) | (ZIP Code) |
(630) 545-0900
(Registrant’s telephone number, including area code)
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 is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act) Yes ¨ No x
Indicate the number of shares outstanding of each of the Registrant’s classes of common stock as of the latest practicable date: As of July 19, 2005, the Registrant had outstanding 683,839 shares of common stock, no par value per share.
Table of Contents
COMMUNITY FINANCIAL SHARES, INC.
Form 10-Q Quarterly Report
Table of Contents
PART I | ||||
Item 1. | Condensed Consolidated Financial Statements | 3 | ||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 10 | ||
Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 19 | ||
Item 4. | Controls and Procedures | 19 | ||
PART II | ||||
Item 1. | Legal Proceedings | 20 | ||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 20 | ||
Item 3. | Defaults Upon Senior Securities | 20 | ||
Item 4. | Submission of Matters to a Vote of Security Holders | 20 | ||
Item 5. | Other Information | 20 | ||
Item 6. | Exhibits | 20 | ||
Item 7. | Signatures | 21 |
2.
Table of Contents
COMMUNITY FINANCIAL SHARES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
June 30, 2005 | December 31, 2004 | |||||
(Unaudited) | ||||||
ASSETS | ||||||
Cash and due from banks | $ | 7,451 | $ | 5,354 | ||
Interest bearing deposits | 4,599 | 2,655 | ||||
Federal funds sold | 2,000 | 500 | ||||
Cash and cash equivalents | 14,050 | 8,509 | ||||
Securities available-for-sale | 39,248 | 40,710 | ||||
Loans, less allowance for loan losses of $1,138 and $1,367 | 177,867 | 165,056 | ||||
Federal Home Loan Bank stock | 10,512 | 10,232 | ||||
Premises and equipment, net | 9,641 | 8,232 | ||||
Cash value of life insurance | 5,121 | 5,006 | ||||
Interest receivable and other assets | 1,807 | 1,650 | ||||
Total assets | $ | 258,246 | $ | 239,395 | ||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||
Deposits | $ | 228,679 | $ | 211,373 | ||
Federal Home Loan Bank advances | 6,000 | 6,000 | ||||
Subordinated debentures | 3,609 | 3,609 | ||||
Interest payable and other liabilities | 2,298 | 1,690 | ||||
Total liabilities | 240,586 | 222,672 | ||||
Shareholders’ equity | ||||||
Common stock - no par value, 900,000 shares authorized; 683,839 and 683,069 issued and outstanding | — | — | ||||
Paid-in capital | 8,107 | 8,103 | ||||
Retained earnings | 9,426 | 8,507 | ||||
Accumulated other comprehensive income | 127 | 113 | ||||
Total shareholders’ equity | 17,660 | 16,723 | ||||
Total liabilities and shareholders’ equity | $ | 258,246 | $ | 239,395 | ||
See accompanying notes to condensed consolidated financial statements.
3.
Table of Contents
COMMUNITY FINANCIAL SHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Six Months ended June 30, 2005 and 2004
(In thousands, except share and per share data)
(Unaudited)
Three months Ended June 30, | Six months Ended June 30, | |||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||
Interest income | ||||||||||||
Loans | $ | 2,694 | $ | 2,257 | $ | 5,174 | $ | 4,459 | ||||
Securities | ||||||||||||
Taxable | 239 | 253 | 505 | 534 | ||||||||
Exempt from federal income tax | 113 | 112 | 218 | 227 | ||||||||
Federal funds sold | 43 | 8 | 54 | 10 | ||||||||
Federal Home Loan Bank dividends and other | 190 | 158 | 348 | 322 | ||||||||
Total interest income | 3,279 | 2,788 | 6,299 | 5,552 | ||||||||
Interest expense | ||||||||||||
Deposits | 888 | 581 | 1,541 | 1,162 | ||||||||
Federal Funds Purchased | — | — | 13 | — | ||||||||
Federal Home Loan Bank advances and other borrowed funds | 58 | 18 | 115 | 43 | ||||||||
Subordinated debentures | 64 | 42 | 118 | 84 | ||||||||
Total interest expense | 1,010 | 641 | 1,787 | 1,289 | ||||||||
Net interest income | 2,269 | 2,147 | 4,512 | 4,263 | ||||||||
Provision for loan losses | 20 | — | 20 | — | ||||||||
Net interest income after provision for loan losses | 2,249 | 2,147 | 4,492 | 4,263 | ||||||||
Non-interest income | ||||||||||||
Service charges on deposit accounts | 130 | 141 | 251 | 284 | ||||||||
Mortgage origination fees | 61 | 64 | 97 | 155 | ||||||||
Securities gains | — | — | — | 44 | ||||||||
Other non-interest income | 111 | 68 | 272 | 118 | ||||||||
Total non- interest income | 302 | 273 | 620 | 601 | ||||||||
Non-interest expense | ||||||||||||
Salaries and employee benefits | 1,040 | 915 | 2,045 | 1,823 | ||||||||
Net Occupancy and equipment expense | 213 | 169 | 394 | 332 | ||||||||
Data processing expense | 170 | 135 | 331 | 261 | ||||||||
Advertising and promotions | 109 | 72 | 169 | 128 | ||||||||
Professional fees | 86 | 53 | 167 | 130 | ||||||||
Other operating expenses | 300 | 276 | 529 | 562 | ||||||||
Total non interest expense | 1,918 | 1,620 | 3,635 | 3,236 | ||||||||
Income before income taxes | 633 | 800 | 1,477 | 1,628 | ||||||||
Provision for Income taxes | 221 | 234 | 490 | 495 | ||||||||
Net income | $ | 412 | $ | 566 | $ | 987 | $ | 1,133 | ||||
Earnings per Share | ||||||||||||
Basic | 0.60 | 0.83 | 1.44 | 1.66 | ||||||||
Diluted | $ | 0.60 | $ | 0.82 | $ | 1.43 | $ | 1.65 | ||||
Average shares outstanding | 683,188 | 681,845 | 683,069 | 681,907 | ||||||||
Dividends per share | $ | 0.05 | $ | 0.05 | $ | 0.10 | $ | 0.09 |
See accompanying notes to condensed consolidated financial statements.
4.
Table of Contents
COMMUNITY FINANCIAL SHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Six Months ended June 30, 2005 and 2004
(In thousands, except per share data)
(Unaudited)
Number of Common Shares | Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total Shareholders’ Equity | |||||||||||||||
Balance at January 1, 2005 | 683,069 | $ | 8,103 | $ | 8,507 | $ | 113 | $ | 16,723 | ||||||||||
Net income | — | — | 987 | — | 987 | ||||||||||||||
Unrealized net gain on securities available-for-sale, net of reclassifications and tax effects | — | — | — | 14 | 14 | ||||||||||||||
Total comprehensive income | 1,001 | ||||||||||||||||||
Cash Dividends | — | (68 | ) | — | (68 | ) | |||||||||||||
Stock options exercised | 770 | 4 | — | — | 4 | ||||||||||||||
Balance at June 30, 2005 | 683,839 | $ | 8,107 | $ | 9,426 | $ | 127 | $ | 17,660 | ||||||||||
Balance at January 1, 2004 | 682,804 | $ | 8,131 | $ | 6,346 | $ | 278 | $ | 14,755 | ||||||||||
Net income | — | — | 1,133 | — | 1,133 | ||||||||||||||
Unrealized net loss on securities available-for-sale, net of reclassifications and tax effects | — | — | — | (417 | ) | (417 | ) | ||||||||||||
Total Comprehensive income | 716 | ||||||||||||||||||
Cash Dividends | — | — | (62 | ) | — | (62 | ) | ||||||||||||
Purchase of stock | (1,230 | ) | (48 | ) | (48 | ) | |||||||||||||
Stock options exercised | 250 | 4 | — | — | 4 | ||||||||||||||
Balance at June 30, 2004 | 681,824 | $ | 8,087 | $ | 7,417 | $ | (139 | ) | $ | 15,365 | |||||||||
See accompanying notes to condensed consolidated financial statements.
5.
Table of Contents
COMMUNITY FINANCIAL SHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months ended June 30, 2005 and 2004
(In thousands)
(Unaudited)
2005 | 2004 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net income | $ | 987 | $ | 1,133 | ||||
Adjustments to reconcile net income to net cash from operating activities | ||||||||
Provision for loan losses | 20 | — | ||||||
Depreciation and amortization | 169 | 148 | ||||||
Premium amortization on securities, net | 106 | 177 | ||||||
Gain on sales of securities | — | (33 | ) | |||||
Federal Home Loan Bank stock dividends | (280 | ) | (301 | ) | ||||
Change in interest receivable and other assets | (299 | ) | 218 | |||||
Change in interest payable and other liabilities | 608 | 49 | ||||||
Net cash from operating activities | 1,311 | 1,391 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Proceeds from sales of securities available-for-sale | — | 5,527 | ||||||
Proceeds from maturities and calls of securities | 4,146 | 9,259 | ||||||
Purchases of securities available-for-sale | (3,262 | ) | (5,538 | ) | ||||
Proceeds from maturities of certificates of deposit | 495 | — | ||||||
Net change in loans receivable | (12,814 | ) | (9,736 | ) | ||||
Property and equipment expenditures | (1,578 | ) | (285 | ) | ||||
Net cash from investing activities | (13,013 | ) | (773 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Change in deposits | 17,306 | (931 | ) | |||||
Change in securities sold under agreements to repurchase | — | (125 | ) | |||||
Change in borrowings | — | (2,000 | ) | |||||
Exercise of stock options | 4 | 4 | ||||||
Purchases of common shares | — | (48 | ) | |||||
Dividends paid | (67 | ) | (61 | ) | ||||
Net cash from financing activities | 17,243 | (3,161 | ) | |||||
Change in cash and cash equivalents | 5,541 | (2,543 | ) | |||||
Cash and cash equivalents at beginning of period | 8,509 | 11,851 | ||||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 14,050 | $ | 9,308 | ||||
See accompanying notes to condensed consolidated financial statements.
6.
Table of Contents
COMMUNITY FINANCIAL SHARES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands)
June 30, 2005 and 2004
NOTE 1 – BASIS OF PRESENTATION
The accounting policies followed in the preparation of the interim condensed consolidated financial statements 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, for a fair statement of results for the interim periods presented. Results for the six months ended June 30, 2005 are not necessarily indicative of the results that may be expected for the year ended December 31, 2005.
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 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 consolidated financial statements and notes included in Community Financial Shares, Inc.’s (the Company) annual report on Form 10-K for 2004 filed with the U.S. Securities and Exchange Commission. The condensed consolidated balance sheet of the Company as of December 31, 2004 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 June 30, | Six Months Ended June 30, | |||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||
Net income (in thousands) | $ | 412 | $ | 566 | $ | 987 | $ | 1,133 | ||||
Weighted Average Shares outstanding | 683,188 | 681,845 | 683,129 | 681,876 | ||||||||
Effect of dilutive securities: | ||||||||||||
Stock options | 5,453 | 3,818 | 5,453 | 3,818 | ||||||||
Shares used to compute diluted earnings per share | 688,641 | 685,663 | 688,582 | 685,694 | ||||||||
7.
Table of Contents
COMMUNITY FINANCIAL SHARES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands)
June 30, 2005 and 2004
NOTE 2 – EARNINGS PER SHARE (Continued)
Earnings per share:
Basic | $ | 0.60 | $ | 0.83 | $ | 1.44 | $ | 1.66 | ||||
Diluted | 0.60 | 0.82 | 1.43 | 1.65 |
NOTE 3 – CAPITAL RATIOS
At the dates indicated, the Company’s capital ratios were:
June 30, 2005 | December 31, 2004 | |||||||||||
Amount | Ratio | Amount | Ratio | |||||||||
Total capital (to risk-weighted assets) | $ | 22,171 | 11.8 | % | $ | 21,477 | 12.3 | % | ||||
Tier I capital (to risk-weighted assets) | 21,033 | 11.2 | % | 20,110 | 11.5 | % | ||||||
Tier I capital (to average assets) | 21,033 | 8.2 | % | 20,110 | 7.9 | % |
At the dates indicated, the Company and the Bank were categorized as well capitalized and management is not aware of any conditions or events since the most recent notification that would change the Company’s or Bank’s categories.
8.
Table of Contents
COMMUNITY FINANCIAL SHARES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is intended as a review of significant factors affecting the financial condition and results of operations of the Company for the periods indicated. The discussion should be read in conjunction with the Condensed Consolidated Financial Statements and Notes. In addition to historical information, the following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. The Company’s actual results could differ significantly from those anticipated in these forward-looking statements as a result of certain factors discussed elsewhere in this report.
Overview
Community Financial Shares, Inc. is the holding company for Community Bank Wheaton/ Glen Ellyn. The Company is headquartered in Glen Ellyn, Illinois and operates three offices in its market. One location is in Glen Ellyn and two, including a recently completed facility, are located in Wheaton. The new Wheaton location was opened on March 26, 2005.
The Company is in the construction phase of remodeling and expanding its main headquarters located in Glen Ellyn. The Company continues to explore expansion opportunities within its designated market area as opportunities arise.
The Company’s principal business is conducted by the Bank and consists of a full range of community-based financial services, including commercial and retail banking. The profitability of the Company’s operations depends primarily on its net interest income, provision for loan losses, other income, and other expenses. Net interest income is the difference between the income the Company receives on its loan and securities portfolios and its cost of funds, which consists of interest paid on deposits and borrowings. The provision for loan losses reflects the cost of credit risk in the Company’s loan portfolio. Other income consists of service charges on deposit accounts, mortgage origination fees, securities gains (losses), and other income. Other expenses include salaries and employee benefits, as well as occupancy and equipment expenses and other noninterest expenses.
Net interest income is dependent on the amounts and yields of interest-earning assets as compared to the amounts of and rates on interest-bearing liabilities. Net interest income is sensitive to changes in market rates of interest and the Company’s asset/liability management procedures in coping with such changes. The provision for loan losses is dependent upon management’s assessment of the collectibility of the loan portfolio under current economic conditions.
The Company’s net income for the six months ended June 30, 2005, was $987,000, or $1.44 per basic common share, compared to net income of $1,133,000, or $1.66 per basic common share for the six months ended June 30, 2004.
9.
Table of Contents
COMMUNITY FINANCIAL SHARES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States and conform to general practices within the banking industry. The Company’s significant accounting policies are described in detail in the notes to the Company’s consolidated financial statements for the year ended December 31, 2004. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. The financial position and results of operations can be affected by these estimates and assumptions and are integral to the understanding of reported results. Critical accounting policies are those policies that management believes are the most important to the portrayal of the Company’s financial condition and results, and they require management to make estimates that are difficult, subjective, or complex.
Allowance for Credit Losses-The allowance for credit losses provides coverage for probable losses inherent in the Company’s loan portfolio. Management evaluates the adequacy of the allowance for credit losses each quarter based on changes, if any, in underwriting activities, the loan portfolio composition (including product mix and geographic, industry or customer-specific concentrations), trends in loan performance, regulatory guidance and economic factors. This evaluation is inherently subjective, as it requires the use of significant management estimates. Many factors can affect management’s estimates of specific and expected losses, including volatility of default probabilities, rating migrations, loss severity and economic and political conditions. The allowance is increased through provisions charged to operating earnings and reduced by net charge-offs.
The Company determines the amount of the allowance based on relative risk characteristics of the loan portfolio. The allowance recorded for commercial loans is based on reviews of individual credit relationships and an analysis of the migration of commercial loans and actual loss experience. The allowance recorded for homogeneous consumer loans is based on an analysis of loan mix, risk characteristics of the portfolio, fraud loss and bankruptcy experiences, and historical losses, adjusted for current trends, for each homogeneous category or group of loans. The allowance for credit losses relating to impaired loans is based on the loan’s observable market price, the collateral for certain collateral-dependent loans, or the discounted cash flows using the loan’s effective interest rate.
Regardless of the extent of the Company’s analysis of customer performance, portfolio trends or risk management processes, certain inherent but undetected losses are probable within the loan portfolio. This is due to several factors including inherent delays in obtaining information regarding a customer’s financial condition or changes in their unique business conditions, the judgmental nature of individual loan evaluations, collateral assessments and the interpretation of economic trends. Volatility of economic or customer-specific conditions affecting the identification and estimation of losses for larger non-homogeneous credits and the sensitivity of assumptions utilized to establish allowances for homogenous groups of loans are among other factors. The Company estimates a range of inherent losses related to the existence of these exposures. The estimates are based upon the Company’s evaluation of imprecision risk associated with the commercial and consumer allowance levels and the estimated impact of the current economic environment.
10.
Table of Contents
COMMUNITY FINANCIAL SHARES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Stock Compensation- Employee compensation expense under stock options is reported using the intrinsic value method. No stock-based compensation cost is reflected in net income, as all options granted had an exercise price equal to or greater than the market price of the underlying common stock at date of grant. The effect on net income and earnings per share if expense was measured using the fair value recognition provisions of the Financial Accounting Standards Board (FASB) Statement No. 123,Accounting for Stock-Based Compensation, was not material in 2004, 2003 or 2002.
In December 2004, the Financial Accounting Standards Board (FASB) issued an amendment to SFAS 123 (SFAS 123R) which eliminates the ability to account for share-based compensation transactions using Accounting Principles Board Opinion No. 25 and generally requires that such transactions be accounted for using a fair value-based method. SFAS 123R will be effective for the Company beginning January 1, 2006. SFAS 123R applies to all awards granted after the required effective date and to awards modified, repurchased, or cancelled after that date. The cumulative effect of initially applying this Statement, if any, is recognized as of the required effective date.
As of the required effective date, the Company will apply SFAS 123R using either the modified version of prospective application or the modified version of retrospective application. Under the prospective transition method, compensation cost is recognized on or after the required effective date for the portion of outstanding awards for which the requisite service has not yet been rendered, based on the grant-date fair value of those awards calculated under SFAS 123 for either recognition or pro forma disclosures. For periods before the required effective date, a company may elect to apply a modified version of retrospective application under which financial statements for prior periods are adjusted on a basis consistent with the pro forma disclosures required for those periods by SFAS 123.
The Company is currently evaluating the effect of the recognition and measurement provisions of SFAS 123R but believes the adoption of SFAS 123R will not result in a material impact on the Company’s results of operations or financial condition.
NEW ACCOUNTING ISSUES
In June, 2005 the FASB Board decided not to provide additional guidance on the meaning of other-than-temporary impairment, but directed the FASB staff to issue a staff position (FSP) which will be retitled FSP 115-1 “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”. The final FSP will supersede EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” and EITF Topic No. D-44, “Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value.” FSP FAS 115-1 will replace guidance in EITF Issue 03-1 on loss recognition with references to existing other-than-temporary impairment guidance, such as FASB Statement No. 115, “Accounting for Certain Investments in Debt and Equity Securities”. FSP FAS 115-1 will clarify that an investor should recognize an impairment loss no later than when the impairment is deemed other than temporary, even if a decision to sell has not been made.
11.
Table of Contents
COMMUNITY FINANCIAL SHARES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FSP FAS 115-1 will be effective for other-than-temporary impairment analysis conducted in periods beginning after September 15, 2005. The Company has consistently followed the loss recognition guidance in SFAS No. 115, so the adoption of FSP FAS 115-1 will not have any significant impact on the Company’s financial condition or results of operation.
CONSOLIDATED FINANCIAL CONDITION
Total assets at June 30, 2005 were $258.2 million contrasted to $239.4 million at December 31, 2004, an increase of $18.8 million, or 7.9%. This increase in total assets is reflected in the growth of total loans which grew by $12.9 million, or 7.8%, ending at $177.9 million. Interest bearing deposits and federal funds sold grew by $1.9 million and $1.5 million respectively. Securities available-for-sale reflected a small decline of $1.5 million over December 31 ending at $39.2 million. This decline was due to maturities and call options being exercised during the period.
Total liabilities at June 30, 2005 were $240.1 million compared to $222.7 million at December 31, 2004, an increase of $17.4 million, or 7.8%. This increase in total liabilities was a result of increases in deposits of $17.4 million primarily due to a premium rate certificate of deposit promotion and the opening of the County Farm Road facility. While the pace of deposit growth is expected to moderate over the second half of 2005, it is anticipated that this growth will be sufficient to meet loan demand.
Total equity was $17.7 million at June 30, 2005 compared to $16.7 million at December 31, 2004. This increase in equity was the result of $987,000 of additional retained earnings from net income for the period ended June 30, 2005. Changes in unrealized gains on available-for-sale securities and cash dividends of $68,000 had minimal impact on total equity for the period.
CONSOLIDATED RESULTS OF OPERATIONS
Net income for the first half of 2005 was $987,000, or $1.44 per basic share, a 12.9% decrease compared to $1,133,000, or $1.66 per basic share, in the first half of 2004. The primary reason for the decline in net income was the increase in operating expenses associated with the opening of the County Farm facility. Total County Farm expenses through June 30, 2005 totaled approximately $214,000. Total net income for the quarter ended June 30, 2005 was $412,000 down $154,000, or 27.2% from the same period last year. As was the case with the year to date results, the variation can be attributed to the expense of opening the new facility which occurred during the second quarter.
The annualized return on average assets was .77% in the first half of 2005 compared to .97% in the first half of 2004. The annualized return on average equity decreased to 11.4% in the first half of 2005 from 14.9% in the first half of 2004.
12.
Table of Contents
COMMUNITY FINANCIAL SHARES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income was $4.5 million for the six months ended June 30, 2005 and $4.3 million for the same period in 2004. Despite the decline in net income for the period, the $4.5 million in current net interest income represents an increase of $200,000, or 4.7%, over 2004. Total interest income increased to $6.3 million for the six months ended June 30, 2005 from $5.6 million in 2004. This increase was primarily the result of increased loan demand as well as rising interest rates. Net interest income for the second quarter of $2,2 million represents an increase of $102,000 or 4.8% over the same period in 2004 while interest income rose $491,000 or 17.6% during this time.
Total interest expense was also impacted by the rising rate environment increasing to $1.8 million for the six months ended June 30, 2005 from $1.3 million in 2004. The interest expense associated with the premium rate certificates of deposit also impacted the results. The results for the second quarter show interest expense rising $369,000 or 57.6% from second quarter 2004. Again this change can be attributed to rising rates and the deposit promotion which ran throughout the second quarter of 2005.
The Company’s net interest margin was 4.14% for the six months ended June 30, 2005 and 3.92% a year earlier. The yield on average earning assets increased to 5.47% for the six months ended June 30, 2005 from 5.02% for the same period ended June 30, 2004, a 45 basis point increase. This increase was partially offset by an increase in the cost of funds to 1.55% from 1.14% paid for the same period ended June 30, 2004, a 41 basis point increase.
PROVISION FOR LOAN LOSSES
There was a provision for loan losses of $20,000 in the first half of 2005 as compared to no provision in 2004. As of June 30, 2005, the allowance for loan losses totaled $1.1 million, or .64% of total loans, this is down from .82% as of December 31, 2004. Non-accrual loans decreased from $21,000 at December 31, 2004 to $0 at June 30, 2005. The drop in allowance for loan losses as a percentage of loans is primarily due to a recent charge-off of $200,000 (all of which was specifically reserved) as well as the growth in total loans. It is anticipated that additional provisions will be made at current levels throughout the remainder of 2005 as loans continue to grow.
The amounts of the provision and allowance for loan losses are influenced by a number of factors, including current economic conditions, actual loss experience, industry trends and other factors, including real estate values in the Company’s market area and management’s assessment of current collection risks within the loan portfolio. Along with other financial institutions, management shares a concern for the continued uncertainty surrounding the economy for the remainder of 2005. Even though there have been various signs of emerging strength in the economy, it is still not certain that this strength will be sustainable. Should the economic climate deteriorate, borrowers may experience difficulty, and the level of non-performing loans, charge-offs, and delinquencies could rise and require increases in the provision. The allowance for loan losses represents management’s estimate of probable incurred losses based on information available as of the date of the financial statements. The allowance for loan losses is based on management’s evaluation of the collectibility of the loan portfolio,
13.
Table of Contents
COMMUNITY FINANCIAL SHARES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 has concluded that the allowance for loan losses is adequate at June 30, 2005.However, there can be no assurance that the allowance for loan losses will be adequate to cover all losses.
NON-INTEREST INCOME
The Company’s non-interest income totaled $620,000 for the six months ended June 30, 2005 compared to $601,000 for the same period in 2004, an increase of $19,000 or 3.2%. The increase in non-interest income resulted primarily from income generated by the bank owned life insurance investment made in December 2004. Mortgage origination fees of $97,000 represent a decline of $58,000, or 37.4%, from the same period in 2004. The decline in mortgage origination is mostly a reflection of the changes in the market due to rising interest rates. Service charges on deposit accounts of $251,000 are down $33,000 or 11.6% from last year.
NON-INTEREST EXPENSE
The Company’s non-interest expense was $3.6 and $3.2 million for the six months ended June 30, 2005 and 2004. Salaries and benefits, the largest component of non interest expense, increased $222,000, or 12.2%, to $2.0 million. The increased expense was a result of additions to staff for the new facility as well as increased costs associated with group health insurance. Increases in occupancy and equipment expense of $63,000, data processing expense of $70,000, and advertising expense of $41,000, were partially offset by decreases in other expenses of $33,000. Equipment, data processing and advertising expenses continue to increase as a result of the Company’s commitment to staying on top of new technology as well as expenses related to the County Farm facility. The reduction in other expenses is mostly due to a decline in expenses related to resolving problem loan issues which originated during prior years.
LIQUIDITY AND CAPITAL RESOURCES
The Company’s primary sources of funds are deposits, repurchase agreements, 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 management’s assessment of (i) expected loan demand, (ii) expected deposit flows, (iii) yields available on interest-earning deposits and securities, and (iv) the objectives of its asset/liability management program. Excess liquid assets are invested generally in interest-earning overnight deposits and short- and intermediate-term U.S. government and agency obligations.
14.
Table of Contents
COMMUNITY FINANCIAL SHARES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company’s most liquid assets are cash and short-term investments. The levels of these assets are dependent on the Company’s operating, financing, lending, and investing activitiesduring any given year. At June 30, 2005, cash and short-term investments totaled $14.1 million. 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.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary impact of inflation on the operations of the Company is reflected in increased operating costs. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates, generally, have a more significant impact on a financial institution’s performance than does inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
15.
Table of Contents
COMMUNITY FINANCIAL SHARES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SAFE HARBOR STATEMENT
This document (including information incorporated 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 term in the Private Securities Litigation Reform Act of 1995, with respect to the financial condition, results of operations, plans, objectives, future performance and business of the Company. Forward-looking statements, which may be based upon beliefs, expectations and assumptions of the Company’s management and on information currently available to management, are generally identifiable by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “intend,” “estimate,” “may,” “will,” “would,” “could,” “should” or other similar expressions. Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no obligation to update any statement in light of new information or future events.
The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries include, but are not limited to, the following:
• | The strength of the United States economy in general and the strength of the local economies in which the Company conducts its operations which may be less favorable than expected and may result in, among other things, a deterioration in the credit quality and value of the Company’s assets. |
• | 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 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 inability of the Company to obtain new customers and to retain existing customers. |
16.
Table of Contents
COMMUNITY FINANCIAL SHARES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SAFE HARBOR STATEMENT (Continued)
• | 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 Company’s 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 Company’s financial results, is included in the Company’s filings with the Securities and Exchange Commission.
17.
Table of Contents
COMMUNITY FINANCIAL SHARES, INC. AND SUBSIDIARIES
QUANITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The Company monitors and manages risks associated with changes in interest rates and mismatched asset and deposit maturities. Significant changes in rates can adversely affect net interest income, market value of securities, and the economic value of equity. Based on the Company’s current simulation model, the following schedule indicates the estimated effects of an immediate upward rate shift of 100, 200 and 300 basis points as of June 30, 2005:
100 Basis Point Rate Shift Up | 200 Basis Point Rate Shift Up | 300 Basis Point Rate Shift Up | |||||||
Net interest income | +4.5 | % | +9.1 | % | +13.59 | % | |||
Market value of securities | -2.9 | % | -5.7 | % | -8.2 | % |
Based on the Company’s current simulation model, the following schedule indicates the estimated effects of an immediate downward rate shift of 75, 100, 200 basis points as of June 30, 2005:
75 Basis Point Rate Shift Down | 100 Basis Point Rate Shift Down | 200 Basis Point Rate Shift Down | |||||||
Net interest income | -0.7 | % | -1.3 | % | -4.8 | % | |||
Market value of securities | +1.7 | % | +2.3 | % | +4.6 | % |
All measures of interest rate risk are within policy guidelines.
18.
Table of Contents
COMMUNITY FINANCIAL SHARES, INC. AND SUBSIDIARIES
QUANITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 4: CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of June 30, 2005. Based on that evaluation, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls.
19.
Table of Contents
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 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
None
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. |
20.
Table of Contents
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/ Donald H. Fischer |
Donald H. Fischer |
President and Chief Executive Officer |
(Principal Executive Officer) |
/s/ Scott W. Hamer |
Scott W. Hamer |
Chief Financial Officer |
(Principal Financial Officer) |
21.