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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2006
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 0-51296
COMMUNITY FINANCIAL SHARES, INC.
(Exact name of registrant as specified in its charter)
Delaware | 36-4387843 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
357 Roosevelt Road Glen Ellyn, Illinois | 60137 | |
(Address of principal executive offices) | (Zip Code) |
(630) 545-0900
(Registrant’s telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class | Outstanding at November 1, 2006 | |
Common Stock, no par value per share | 687,164 shares |
DOCUMENTS INCORPORATED BY REFERENCE
None.
Table of Contents
Table of Contents
PART I | ||||
Item 1. | 3 | |||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 9 | ||
Item 3. | 19 | |||
Item 4. | 20 | |||
PART II | ||||
Item 1. | 21 | |||
Item 1a. | 21 | |||
Item 2. | 21 | |||
Item 3. | 21 | |||
Item 4. | 21 | |||
Item 5. | 21 | |||
Item 6. | 21 | |||
Item 7. | 22 |
2.
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COMMUNITY FINANCIAL SHARES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
September 30, 2006 | December 31, 2005 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Cash and due from banks | $ | 7,312 | $ | 7,494 | ||||
Interest bearing deposits | 731 | 300 | ||||||
Cash and cash equivalents | 8,043 | 7,794 | ||||||
Securities available-for-sale | 30,139 | 37,888 | ||||||
Loans, less allowance for loan losses of $1,716 and $1,381 | 198,606 | 192,663 | ||||||
Federal Home Loan Bank stock | 7,073 | 10,742 | ||||||
Premises and equipment, net | 13,349 | 11,559 | ||||||
Cash value of life insurance | 5,406 | 5,240 | ||||||
Interest receivable and other assets | 2,153 | 1,643 | ||||||
Total assets | $ | 264,769 | $ | 267,529 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Deposits | $ | 228,704 | $ | 229,704 | ||||
Federal Home Loan Bank advances | 10,500 | 8,500 | ||||||
Federal funds purchased | — | 5,000 | ||||||
Subordinated debentures | 3,609 | 3,609 | ||||||
Interest payable and other liabilities | 1,960 | 2,247 | ||||||
Total liabilities | 244,773 | 249,060 | ||||||
Commitments and contingent liabilities | ||||||||
Shareholders’ equity | ||||||||
Common stock - no par value, 900,000 shares authorized; 687,164 and 685,539 issued and outstanding | — | — | ||||||
Paid-in capital | 8,189 | 8,148 | ||||||
Retained earnings | 11,838 | 10,402 | ||||||
Accumulated other comprehensive loss | (31 | ) | (81 | ) | ||||
Total shareholders’ equity | 19,996 | 18,469 | ||||||
Total liabilities and shareholders’ equity | $ | 264,769 | $ | 267,529 | ||||
See accompanying notes to condensed consolidated financial statements.
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COMMUNITY FINANCIAL SHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three and Nine Months ended September 30, 2006 and 2005
(In thousands, except share and per share data)
(Unaudited)
Three months Ended September 30, | Nine months Ended September 30, | |||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||
Interest income | ||||||||||||
Loans | $ | 3,708 | $ | 3,006 | $ | 10,757 | $ | 8,180 | ||||
Securities | ||||||||||||
Taxable | 167 | 213 | 545 | 718 | ||||||||
Exempt from federal income tax | 155 | 143 | 463 | 361 | ||||||||
Federal funds sold | — | 17 | — | 71 | ||||||||
Federal Home Loan Bank dividends and other | 65 | 144 | 219 | 492 | ||||||||
Total interest income | 4,095 | 3,523 | 11,984 | 9,822 | ||||||||
Interest expense | ||||||||||||
Deposits | 1,399 | 1,022 | 3,980 | 2,563 | ||||||||
Federal Funds Purchased | 18 | — | 65 | 13 | ||||||||
Federal Home Loan Bank advances and other borrowed funds | 132 | 60 | 358 | 175 | ||||||||
Subordinated debentures | 82 | 63 | 231 | 181 | ||||||||
Total interest expense | 1,631 | 1,145 | 4,634 | 2,932 | ||||||||
Net interest income | 2,464 | 2,378 | 7,350 | 6,890 | ||||||||
Provision for loan losses | 45 | 150 | 315 | 170 | ||||||||
Net interest income after provision for loan losses | 2,419 | 2,228 | 7,035 | 6,720 | ||||||||
Non-interest income | ||||||||||||
Service charges on deposit accounts | 135 | 136 | 372 | 387 | ||||||||
Mortgage origination fees | 23 | 76 | 106 | 173 | ||||||||
Other non-interest income | 142 | 134 | 404 | 406 | ||||||||
Total non- interest income | 300 | 346 | 882 | 966 | ||||||||
Non-interest expense | ||||||||||||
Salaries and employee benefits | 1,101 | 1,063 | 3,231 | 3,108 | ||||||||
Net Occupancy and equipment expense | 230 | 219 | 707 | 613 | ||||||||
Data processing expense | 151 | 126 | 425 | 457 | ||||||||
Advertising and promotions | 101 | 103 | 267 | 272 | ||||||||
Professional fees | 65 | 83 | 242 | 250 | ||||||||
Other operating expenses | 258 | 284 | 833 | 813 | ||||||||
Total non interest expense | 1,906 | 1,878 | 5,705 | 5,513 | ||||||||
Income before income taxes | 813 | 696 | 2,212 | 2,173 | ||||||||
Provision for Income taxes | 241 | 174 | 631 | 664 | ||||||||
Net income | $ | 572 | $ | 522 | $ | 1,581 | $ | 1,509 | ||||
Earnings per Share | ||||||||||||
Basic | $ | 0.83 | $ | 0.76 | $ | 2.30 | $ | 2.21 | ||||
Diluted | 0.83 | 0.76 | 2.29 | 2.19 | ||||||||
Average shares outstanding | 687,164 | 683,902 | 686,375 | 681,921 | ||||||||
Dividends per share | $ | 0.07 | $ | 0.05 | $ | 0.21 | $ | 0.14 |
See accompanying notes to condensed consolidated financial statements.
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COMMUNITY FINANCIAL SHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Nine Months ended September 30, 2006 and 2005
(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, 2006 | 685,539 | $ | 8,148 | $ | 10,402 | $ | (81 | ) | $ | 18,469 | |||||||
Net income | — | — | 1,581 | — | 1,581 | ||||||||||||
Unrealized net gain on securities available-for-sale, net of reclassifications and tax effects | — | — | — | 50 | 50 | ||||||||||||
Total comprehensive income | 1,630 | ||||||||||||||||
Cash dividends | — | (143 | ) | — | (143 | ) | |||||||||||
Stock options exercised | 1,625 | 41 | — | — | 41 | ||||||||||||
Balance at September 30, 2006 | 687,164 | $ | 8,189 | $ | 11,838 | $ | (31 | ) | $ | 19,996 | |||||||
Balance at January 1, 2005 | 683,069 | $ | 8,103 | $ | 8,507 | $ | 113 | $ | 16,723 | ||||||||
Net income | — | — | 1,509 | — | 1,509 | ||||||||||||
Unrealized net loss on securities available-for-sale, net of reclassifications and tax effects | — | — | — | (45 | ) | (45 | ) | ||||||||||
Total comprehensive income | 1,464 | ||||||||||||||||
Cash dividends | (102 | ) | (102 | ) | |||||||||||||
Stock options exercised | 945 | 25 | — | — | 25 | ||||||||||||
Balance at September 30, 2005 | 684,014 | $ | 8,128 | $ | 9,914 | $ | 68 | $ | 18,110 | ||||||||
See accompanying notes to condensed consolidated financial statements.
5.
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COMMUNITY FINANCIAL SHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months ended September 30, 2006 and 2005
(In thousands)
(Unaudited)
2006 | 2005 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net income | $ | 1,581 | $ | 1,509 | ||||
Adjustments to reconcile net income to net cash from operating activities | ||||||||
Provision for loan losses | 315 | 170 | ||||||
Depreciation and amortization | 358 | 273 | ||||||
Premium amortization on securities, net | 100 | 157 | ||||||
Federal Home Loan Bank stock dividends | — | (410 | ) | |||||
Change in interest receivable and other assets | (708 | ) | (634 | ) | ||||
Change in interest payable and other liabilities | (288 | ) | 778 | |||||
Net cash from operating activities | 1,358 | 1,843 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Proceeds from maturities and calls of securities | 7,987 | 5,698 | ||||||
Purchases of securities available-for-sale | (257 | ) | (5,119 | ) | ||||
Proceeds from maturities of certificates of deposit | — | 495 | ||||||
Proceeds from Federal Home Loan Bank stock redemptions | 3,669 | — | ||||||
Net change in loans receivable | (6,258 | ) | (14,500 | ) | ||||
Property and equipment expenditures | (2,148 | ) | (2,439 | ) | ||||
Net cash from investing activities | 2,993 | (15,865 | ) | |||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Change in deposits | (1,000 | ) | 17,612 | |||||
Change in federal funds purchased | (5,000 | ) | — | |||||
Change in borrowings | 2,000 | — | ||||||
Exercise of stock options | 41 | 25 | ||||||
Dividends paid | (143 | ) | (101 | ) | ||||
Net cash from financing activities | (4,102 | ) | 17,536 | |||||
Change in cash and cash equivalents | 249 | 3,514 | ||||||
Cash and cash equivalents at beginning of period | 7,794 | 8,509 | ||||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 8,043 | $ | 12,023 | ||||
See accompanying notes to condensed consolidated financial statements.
6.
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COMMUNITY FINANCIAL SHARES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands)
September 30, 2006 and 2005
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 of Community Financial Shares, Inc. (the Company), for a fair statement of results for the interim periods presented. Results for the nine months ended September 30, 2006 are not necessarily indicative of the results that may be expected for the year ended December 31, 2006.
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 the Company’s annual report on Form 10-K for 2005 filed with the U.S. Securities and Exchange Commission. The condensed consolidated balance sheet of the Company as of December 31, 2005 has been derived from the audited consolidated balance sheet as of that date.
NOTE 2 – EARNINGS PER SHARE
The number of shares used to compute basic and diluted earnings per share were as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||
Net income (in thousands) | $ | 572 | $ | 522 | $ | 1,581 | $ | 1,509 | ||||
Weighted Average Shares outstanding | 687,164 | 683,902 | 686,375 | 683,389 | ||||||||
Effect of dilutive securities: | ||||||||||||
Stock options | 2,901 | 5,409 | 2,868 | 5,388 | ||||||||
Shares used to compute diluted earnings per share | 690,065 | 689,311 | 689,243 | 688,777 | ||||||||
Earnings per share: | ||||||||||||
Basic | $ | 0.83 | $ | 0.76 | $ | 2.30 | $ | 2.21 | ||||
Diluted | 0.83 | 0.76 | 2.29 | 2.19 |
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COMMUNITY FINANCIAL SHARES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands)
September 30, 2006 and 2005
NOTE 3 – CAPITAL RATIOS
At the dates indicated, the Company’s capital ratios were:
September 30, 2006 | December 31, 2005 | |||||||||||
Amount | Ratio | Amount | Ratio | |||||||||
Total capital (to risk-weighted assets) | $ | 25,346 | 12.1 | % | $ | 23,413 | 11.7 | % | ||||
Tier I capital (to risk-weighted assets) | 23,630 | 11.3 | % | 22,032 | 11.0 | % | ||||||
Tier I capital (to average assets) | 23,630 | 8.9 | % | 22,032 | 7.8 | % |
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.
NOTE 4 – COMMITMENTS
The Company purchased land for the construction of a new branch facility at the corner of Gary and Geneva Roads in Wheaton, Illinois on April 7, 2006 for $1,424,591. The new facility will be part of a development containing a bank building, a medical office and a strip mall. The Company will be sharing in the common area development costs of the project on a pro rata basis. Total shared costs are estimated to be approximately $450,000. The contract for building construction has not yet been negotiated.
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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 are located in Wheaton. The most recently opened facility in Wheaton was established on March 26, 2005. The Company also recently completed a remodeling and addition to its main facility in Glen Ellyn.
The Company has entered into a contract to purchase land to build a fourth full-service banking facility at the corner of Gary and Geneva Avenues in the Northwest portion of Wheaton, Illinois. Construction of the new facility began in September with a projected opening date in the third quarter of 2007. The new facility will help to solidify the Company’s market presence in Wheaton as well as provide access to the Carol Stream and Winfield markets.
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.
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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, 2005. 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.
CHANGE IN ACCOUNTING PRINCIPLE
The Company has a stock-based employee compensation plan, which is described in Notes of Financial Statements included in the December 31, 2005 Annual Report to shareholders.
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COMMUNITY FINANCIAL SHARES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123(R), Share–Based Payment (SFAS 123(R)). SFAS 123(R) addresses all forms of share–based payment awards, including shares under employee stock purchase plans, stock options, restricted stock and stock appreciation rights. SFAS 123(R) requires all share-based payments to be recognized as expense, based upon their fair values, in the financial statements over the vesting period of the awards. The Company has elected the modified prospective application and, as a result, has recorded compensation expense related to vested stock options less estimated forfeitures in 2006. Certain disclosures required by 123(R) have been omitted due to their immaterial nature.
Prior to the adoption of SFAS 123(R), the Company accounted for this plan under the recognition and measurement principles of APB Opinion No. 25,Accounting for Stock Issued to Employees, and related interpretations. No stock-based employee compensation cost was reflected in net income, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the grant date.
NEW ACCOUNTING ISSUES
Emerging Issues Task Force Issue 06-4.In September 2006, the Emerging Issues Task Force (EITF) reached a consensus regarding the accounting for entities with split-dollar life insurance arrangements that provide an employee with a specified benefit that is not limited to an employee’s active service period. In reaching its consensus, the EITF determined that an employer should recognize as a liability the future benefits to be provided to employees beyond the employees active service period. In the case of split-dollar plan that provides a death benefit to the employees designated beneficiary and the benefit is provided to the employee beyond their active service period, an entity should accrue a liability during the employee’s active service period for the cost of maintaining the life insurance policy during the employee’s retirement period. EITF 06-4 is effective for fiscal years beginning after December 15, 2007 with earlier application permitted. Entities should recognize the effects of applying EITF 06-4 either as a change in accounting principle through a cumulative-effect adjustment to retained earnings or other components of equity as of the beginning of the year of adoption or as a change in accounting principle through retrospective application to all prior periods.
Statement of Financial Accounting Standards (SFAS) No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plan – an amendment of SFAS No. 87, 88, 106 and 132(r).
In September, 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 158. This statement requires an entity that sponsors one or more single-employer defined benefit plans to recognize the funded status of a benefit plan (measured as the difference between the fair value of plan assets and the benefit obligation) in its statement of financial position. For a pension plan, the benefit obligation is the projected benefit obligation and for any other plan the benefit obligation is the accumulated postretirement benefit obligation. Additionally, all items previously deferred when applying SFAS No. 87 or SFAS No. 106 will now be recognized as a component of accumulated other comprehensive income, net of applicable taxes. SFAS No. 158 will not change the components of net periodic benefit cost. SFAS No. 158 will require plan asset and benefit obligations to be measured primarily as of the balance sheet date. The effective date for the recognition of the funded status on the balance sheet is for fiscal years ending after December 15, 2006 while the effective date for the requirement that the measurement date of plan assets and the benefit obligation be the same as the balance sheet date is for fiscal years ending after December 15, 2008.
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COMMUNITY FINANCIAL SHARES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
In March 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 156. This Statement amends SFAS 140,Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, with respect to the accounting for separately recognized servicing assets and servicing liabilities.
SFAS No. 156 requires an entity to initially recognize a servicing asset or servicing liability at fair value each time it undertakes an obligation to service a financial asset by entering into a servicing contract in other specific situations.
In addition, SFAS No. 156 permits an entity to choose either of the following subsequent measurement methods for each class of separately recognized servicing assets and servicing liabilities:
• | Amortization method – Amortize servicing assets or servicing liabilities in proportion to and over the period of estimated net servicing income or net servicing loss and assess servicing assets or servicing liabilities for impairment or increased obligation based on fair value at each reporting date. |
• | Fair value measurement method – Measure servicing assets or servicing liabilities at fair value at each reporting date and report changes in fair value in earnings in the period in which the changes occur. |
SFAS No. 156 is effective at the beginning of an entity’s first fiscal year that begins after September 15, 2006 and should be applied prospectively for recognition and initial measurement of servicing assets and servicing liabilities. Earlier adoption is permitted as of the beginning of an entity’s fiscal year, provided the entity has not yet issued financial statements, including interim financial statements, for any period of that fiscal year.
The Company has not elected early adoption of SFAS No. 156. The Company is currently evaluating the effect of adoption of this Statement on the Company’s financial condition or results of operations.
CONSOLIDATED FINANCIAL CONDITION
Total assets at September 30, 2006 were $264.8 million contrasted to $267.5 million at December 31, 2005, a decrease of $2.7 million, or 1.0%. While third quarter results show a decline in total assets as compared with year-end 2005, total loans at September 30, 2006 were $198.6 million reflecting an increase of $5.9 million, or 3.1%, from December 31, 2005. While total loans reflect an increase over year-end volume the results for the third quarter show a slight decline from June 30, 2005. The growth in loans was partially funded by a reduction in securities available-for-sale which at $30.1 million reflects a decline of $7.7 million, or 20.5%, from December 31. The decrease in securities available for sale came about through scheduled maturities as well as call options exercised during the first three quarters. Cash and due from bank balances of $8.0 million reflects an increase of $0.2 million, or 3.2%, from December 31. This change is primarily due to an increase of $0.4 million, or 143.7%, in interest bearing deposits. A partial redemption of the company’s holdings of Federal Home Loan Bank stock in June resulted in a decrease of $3.7 million, or 34.2%, of total holdings which now stand at $7.0 million. The purchase of land for the company’s new branch facility contributed to an increase of $1.8 million, or 15.5%, in premises and equipment. Total other assets have increased by $0.5 million, or 31.0%, over December 31, 2005 primarily due to higher levels of interest receivable from both investment securities and loans.
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COMMUNITY FINANCIAL SHARES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Total liabilities at September 30, 2006 were $244.8 million compared to $249.1 million at December 31, 2005, a decrease of $4.3 million, or 1.7%. While deposits grew by $1.5 million during the first six months of 2006, deposits have begun to decline ending at $228.7 million a drop of $1.0 million, or 0.4%, from December 31, 2005. The difficulty in growing deposits is the result of the continued pressure of competition from other financial institutions as well as more attractive market investments for consumers. The opening of the County Farm facility in March 2005 provided a significant upsurge in new deposits. Having been open for over one year now the rate of deposit growth has moderated as anticipated with total deposits of $17.3 million as of quarter end. With deposit growth lagging behind the growth in loans, additional borrowings from the Federal Home Loan Bank (FHLB) were needed to satisfy the funding need. Total FHLB borrowings as of September 30 were $10.5 million, an increase of $2.0 million, or 23.5%, from December 31. In addition, the proceeds from the FHLB stock redemption and maturing investments and softness in the demand for loans has provided enough liquidity to reduce outstanding federal fund purchases to $0 from $5.0 million at December 31.
Total shareholders’ equity was $20.0 million at September 30, 2006 compared to $18.5 million at December 31, 2005 an increase of $1.5 million, or 8.3%. The increase in shareholders’ equity was primarily the result of $1.4 million of additional retained earnings from net income for the period ended September 30, 2006 less dividends of $143,000 and a decrease of $50,000 in accumulated other comprehensive loss, net of tax, caused by an increase in the valuation of the Company’s investment portfolio.
CONSOLIDATED RESULTS OF OPERATIONS
Net income for the first three quarters of 2006 was $1,581 thousand, or $2.30 per share, an increase of $72 thousand, or 4.8%, over the same period in 2005. Third quarter earnings of $572 thousand, or $0.83 per share, reflect an increase of $50 thousand, or $0.07 per share over third quarter 2005 results. The increase in net income for the quarter was primarily the result of improved net interest income. This improvement was partially offset by an increase in the provision for loan loss which at $315 thousand represents an increase of $145 thousand, or 85.3%, over the same period last year.
NET INTEREST INCOME
Net interest income was $7.4 million for the nine months ended September 30, 2006 as compared to $6.9 million for the same period in 2005, an increase of $0.5 million, or 6.8%. Total interest income increased to $12.0 million for the nine months ended September 30, 2006 from $9.8 million in 2005, an increase of $2.2 million, or 22.0%. This increase was primarily the result of increased loan demand as well as rising interest rates although the rate of growth in loans has begun to subside over the last few months. However, interest income from loans of $10.8 million in the first three quarters represents an increase of $2.6 million, or 31.5%, over the same period in 2005.
Total interest expense was also impacted by the rising rate environment as well as an increased emphasis on acquiring certificate of deposit accounts increasing to $4.6 million for the nine months ended September 30, 2006 up $1.7 million, or 58.0%, from $2.9 million in 2005. The major portion of interest expense is comprised of interest expense on deposits which at $4.0 million represents an increase of $1.4 million, or 55.3%, over the same period last year. In addition to rising rates, interest rate expense has been impacted by increased competition as well as a general migration from lower cost deposits to higher cost certificates of deposits. As the need for additional funding to support loan growth became necessary, the associated expense of Federal Home Loan Bank advances and other borrowed funds increased by $0.2 million, or 104.6%, over the same period last year.
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COMMUNITY FINANCIAL SHARES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Due to the significant increase in interest expense, the Company’s net interest margin fell to 4.09% for the nine months ended September 30, 2006 as compared to 4.13% a year earlier. The yield on average earning assets increased to 6.46% for the nine months ended September 30, 2006 from 5.73% for the period ended September 30, 2005, a 73 basis point increase. This increase in yield on earning assets was due to an increase in higher yielding loans. The increase in yield on earning assets was partially offset by an increase in the cost of funds during the quarter which at 2.30% is up 75 basis points from 1.55% for the corresponding period in 2005.
PROVISION FOR LOAN LOSSES
There was a provision for loan losses in the first three quarters of 2006 of $315,000 as compared to a $170,000 provision in 2005. As of September 30, 2006, the allowance for loan losses totaled $1.7 million, or 0.86% of total loans, which is up from 0.71% as of December 31, 2005. The increase in provision is a result of changing economic conditions. While no specific issues have been identified, the recent rapid rise in interest rates combined with a slowing economy could have a negative impact on credit quality. As of the end of the third quarter nonaccrual loans decreased from $200,000 at December 31, 2005 to $107,000 at September 30, 2006 and remain a very small percentage of total loans at 0.05%.
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. Management shares a concern for the possibility of a weakened economy for the remainder of 2006. Even though there have been various signs of continued strength in the economy, it is not certain that this strength will be sustainable. Should the economic climate begin to 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, 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 September 30, 2006. However, there can be no assurance that the allowance for loan losses will be adequate to cover all losses.
NONINTEREST INCOME
The Company’s noninterest income totaled $882,000 for the nine months ended September 30, 2006 compared to $966,000 for the same period in 2005, a decrease of $84,000 or 8.7%. The decrease in non-interest income was primarily due to a general decline in fees from multiple sources including service charges on deposits, debit card income and income from the bank owned life insurance among others. Income generated through mortgage origination fees of $106,000 through September 30, 2006 is down $67,000, or 38.7%, from the same period last year reflecting the slow down in the market due to the rise in interest rates. Service charges on deposit accounts of $372,000 are down $15,000 or 3.9% from last year reflecting the continued competitive pressure to reduce fees to the consumer.
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COMMUNITY FINANCIAL SHARES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
NONINTEREST EXPENSE
The Company’s noninterest expense was $5.7 and $5.5 million for the nine months ended September 30, 2006 and 2005. The $0.2 million increase in expenses was primarily due to the increased expenses associated with the operations of the County Farm facility which opened late in the first quarter of 2005. Salaries and benefits, the largest component of non interest expense, increased $0.1 million, or 4.0%, to $3.2 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. The increases in occupancy and equipment expense of $94 thousand is partially due to expenses associated with the expansion of the Glen Ellyn facility as well as the timing issue of the County Farm facility opening. Data processing costs ended the third quarter at $425,000 a decrease of $32,000, or 7.0%, over last year due to savings gained from the renegotiation of the Company’s core processing contract.
LIQUIDITY AND CAPITAL RESOURCES
The Company’s primary sources of funds are deposits, FHLB advances, and proceeds from principal and interest payments on loans and securities. While maturities and scheduled amortization of loans and securities and calls of securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions, and competition. The Company generally manages the pricing of its deposits to be competitive and to increase core deposit relationships.
Liquidity management is both a daily and long-term responsibility of management. The Company adjusts its investments in liquid assets based upon management’s assessment of (i) expected loan demand, (ii) expected deposit flows, (iii) yields available on interest-earning deposits and securities, and (iv) the objectives of its asset/liability management program. Excess liquid assets are invested generally in interest-earning overnight deposits and short- and intermediate-term U.S. government and agency obligations.
The Company’s most liquid assets are cash and short-term investments. The levels of these assets are dependent on the Company’s operating, financing, lending, and investing activities during any given year. The Company has other sources of liquidity if a need for additional funds arises, including securities maturing within one year and the repayment of loans. The Company may also utilize the sale of securities available-for-sale, federal funds lines of credit from correspondent banks, and borrowings from the Federal Home Loan Bank of Chicago and Bank One.
The following table discloses contractual obligations of the Company as of September 30, 2006:
(Dollars in Thousands) | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 and after | Total | ||||||||||||||
Federal Home Loan Bank Advances | — | $ | 4,000 | $ | 2,500 | $ | 2,000 | — | $ | 2,000 | $ | 10,500 | |||||||||
Subordinated debentures | 3,609 | 3,609 | |||||||||||||||||||
Data Processing1,2 | $ | 244 | 504 | 523 | 541 | 561 | 1,183 | 3,556 | |||||||||||||
Total | $ | 244 | $ | 2,504 | $ | 3,023 | $ | 2,541 | $ | 561 | $ | 6,792 | $ | 17,665 | |||||||
(1) | Estimated contract amount based on transaction volume. Actual expense was $500,000 and $484,000 in 2005 and 2004 respectively. |
(2) | Contract expires September 31, 2012. |
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COMMUNITY FINANCIAL SHARES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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.
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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. |
• | 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. |
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COMMUNITY FINANCIAL SHARES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SAFE HARBOR STATEMENT(Continued)
• | 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.
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COMMUNITY FINANCIAL SHARES, INC. AND SUBSIDIARIES
QUANTITATIVE 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 September 30, 2006:
100 Basis Point Rate Shift Up | 200 Basis Point Rate Shift Up | 300 Basis Point Rate Shift Up | |||||||
Net interest income | +3.7 | % | +7.3 | % | +10.9 | % | |||
Market value of securities | -4.1 | % | -7.8 | % | -11.3 | % |
Based on the Company’s current simulation model, the following schedule indicates the estimated effects of an immediate downward rate shift of 100, 200, 300 basis points as of September 30, 2006:
100 Basis Point Rate Shift Down | 200 Basis Point Rate Shift Down | 300 Basis Point Rate Shift Down | |||||||
Net interest income | -0.3 | % | -2.3 | % | -5.3 | % | |||
Market value of securities | +4.2 | % | +8.7 | % | +13.5 | % |
All measures of interest rate risk are within policy guidelines.
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COMMUNITY FINANCIAL SHARES, INC. AND SUBSIDIARIES
QUANTITATIVE 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 September 30, 2006. 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.
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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.
There are no material changes to the risk factors disclosed in the Company’s Form 10-K for the year ended December 31, 2005.
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. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
COMMUNITY FINANCIAL SHARES, INC. |
(Registrant) |
/s/ Donald H. Fischer |
Donald H. Fischer Dated: November 14, 2006 |
President and Chief Executive Officer |
(Principal Executive Officer) |
/s/ Scott W. Hamer |
Scott W. Hamer Dated: November 14, 2006 |
Chief Financial Officer |
(Principal Financial Officer) |
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