UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1 to
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
Pursuant to Section 12(b) or (g) of the Securities Exchange Act of 1934
| COVENANT BANCSHARES, INC. |
(Exact name of registrant as specified in its charter)
| Illinois | 80-0092089 |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| | |
| 1111 S. Homan Avenue, Chicago, Illinois | 60624 |
| (Address of principal executive offices) | (Zip Code) |
| Registrant’s telephone number, including area code | (773) 533-5208 |
Securities to be registered pursuant to Section 12(b) of the Act:
Title of each class to be so registered | Name of each exchange on which each class is to be registered |
| None | Not Applicable |
Securities to be registered pursuant to Section 12(g) of the Act:
| Common stock, par value of $4.50 per share |
(Title of class)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ | Accelerated filer ¨ |
Non-accelerated filer ¨ (Do not check if a smaller reporting company) | Smaller reporting company ý |
| | Page |
| 1 |
| 15 |
| 20 |
| 41 |
| 42 |
| 42 |
| 44 |
| 45 |
| 46 |
| 46 |
| 46 |
| 47 |
| 47 |
| 48 |
| 48 |
| 48 |
The Company and the Bank
Covenant Bancshares, Inc. (the “Company”) is an Illinois corporation and is registered as a bank holding company with the Board of Governors of the Federal Reserve System (the “Federal Reserve”) pursuant to the Bank Holding Company Act of 1956, as amended. The Company began active operations when it acquired its sole subsidiary, Community Bank of Lawndale, now known as Covenant Bank (the “Bank”), on March 12, 2008. The Company’s primary purpose is to own and operate the Bank.
The Bank was established in 1977 and operates out of a single location in the west-side Chicago neighborhood of North Lawndale. The Bank also leases property at 4006 W. Roosevelt Road, Chicago, Illinois. As of September 30, 2010, the Bank had 30 full-time equivalent employees. The total assets of the Bank were approximately $75.1 million and $72.3 million as of September 30, 2010 and December 31, 2009, respectively.
The Company’s mission is to promote economic development and opportunity in the communities the Bank serves by offering high-quality financial products and services. The Company considers the greater Chicago, Illinois metropolitan area as its primary market area, and focuses its business on serving minority populations and those who have not traditionally had relationships with financial institutions. As minority-owned institutions, the Bank and the Company are designated by the U.S. Treasury as community development financial institutions and anticipate maintaining these designations. Because of its designation as a community development financial institution, the Bank may earn Bank Enterprise Awards for lending activity in economically distressed communities. The Company earned $430, 000 in awards during 2009, based on 2008 activity, and was awarded $600,000 in 2010 based on 2009 lending activity. The Bank has also applied to the U.S. Treasury for additional grants to increase lending to businesses and homeowners in these economically distressed communities.
Turnaround Plan
The Company’s goal is to operate the Bank in a safe and sound manner, to maximize stockholder value and to comply with applicable laws and regulations. To achieve this goal, the Company developed a five-point “turnaround” plan in 2007. The following is an explanation of the “turnaround” plan.
| · | Capital. The Company is working to increase the Bank’s capital level to stabilize the Bank and provide for future expansion. |
| · | Expansion. The Bank has expanded geographically and through its product lines by establishing a loan and deposit production office in Forest Park, Illinois and extending banking hours to provide better customer service. The Company intends to expand product lines to include online banking, cash management and various new loan products. |
| · | Management. The Company has built an experienced management team to lead the Company and the Bank. The Bank also hired a new Chief Financial Officer, Vice President of Mortgage Loans, Business Development Officer and Credit Administration Manager. |
| · | Credit Administration Process. The Company is aggressively addressing problem credits. The Company has implemented a risk management process to help the Bank establish and maintain a quality credit portfolio. Since the acquisition of the Bank on March 12, 2008, through sale and aggressive collection efforts, problem loans have been reduced by nearly $4 million. |
| · | Earnings. The Company is focused on achieving profitability. The Company’s plan to accomplish this includes increasing the net interest margin by increasing earning assets, primarily loans, funded with low cost deposits and wholesale funding as necessary. The Company will continue to contain costs and explore various sources of non-interest income. |
Business Strategy
The Company’s business strategy is to operate a well-capitalized and profitable community bank while promoting economic development and opportunity in the community. After the initial acquisition of the Community Bank of Lawndale, a management team was established to execute the Company’s long-term business strategy. To provide a stream of income, the Company purchased seasoned loans from other financial institutions, and funded the purchase of these loans with brokered deposits. The following are the key aspects of the Company’s business strategy:
| · | Increase Deposits. The Company, through its officers and staff, works to attract core deposits from local markets by offering competitive rate and fee structures and a high level of service and by marketing the Bank to consumers through multiple channels. Additionally, the Board of Directors is encouraged to engage with many community groups in volunteer leadership roles in order to build awareness of the Bank. |
| · | Expand Lending. The Company’s lending philosophy is to provide a full-service lending and deposit relationship to each customer. Part of the lending focus is on the small- to medium-sized, owner-operated businesses. After entering into a lending relationship, the Company seeks to expand the relationship through extensive cross-selling efforts to the business owners, their families, associates and employees, including special loan programs, direct payroll deposits, special deposit packages and customized service programs. |
| · | Maintain Competitive Technology. The Company offers products and services, such as internet banking with bill pay, service-charge-free checking, remote deposit capture, account analysis statements, electronic bank statements, and telephone banking, similar to those offered by larger financial institutions. |
| · | Emphasize Relationship Building and Superior Customer Service. The Company is geared toward building banking relationships with its customers, as opposed to processing individual transactions. The Company focuses on attracting and retaining customers to promote cross-selling activities and decrease acquisition costs. As a small community bank, the Company emphasizes its service level to create an environment in which the customer is the most important element of the business. The Company believes that a high degree of personal service is one of the important competitive advantages of smaller banks. |
| · | Emphasize Business Banking. The Bank works closely with small businesses, including small businesses owned by African Americans, Hispanics and women. The Bank offers complete banking services to these businesses, including start-up businesses. |
| · | Emphasize Community Banking. The Company intends to maintain a strong commitment to community banking. The Company has formed an advisory board, which is composed of members who are active in community development. The Bank has partnered with The Joseph Center, an affiliate of The Living Word Christian Center, which provides training for business owners and managers. The Company has also conducted classes concerning financial literacy, home ownership, business ownership and other subjects designed to promote economic development. |
| · | Emphasize Community Collaboration and Partnerships. Since the acquisition of the Bank in 2008, the Company’s New Business Development Officer and Residential Mortgage Representatives have focused marketing efforts in low- to moderate-income communities and developed partnerships with community organizations whose missions include community development. These partners include: Chicago Community Ventures; Chicago Urban League; Community Investment Corporation; Community Reinvestment Organizing Project; Englewood Black Chamber of Commerce; Greater North West Chicago Industrial League; Hull House-Parkway Community House; Lawndale Business Development Corporation; Lawndale Christian Development Corporation; Neighborhood Housing Services; Nobel Neighbors; North L awndale Chamber of Commerce; West Humboldt Park Family Community Development Corporation; and Quad City Developers. |
Market Area and Competition
The Company’s geographic market is the greater Chicago metropolitan area. The Bank is located in the North Lawndale neighborhood of Chicago, Illinois, approximately six miles from the center of the Chicago business district. The Company has recently established an office of the Bank in Forest Park, Illinois. Currently, the Forest Park office serves as a loan production and deposit production office. The Company is evaluating opening a branch at this site. The establishment of such a branch would be subject to applications to and approvals by both the Illinois Department of Financial and Professional Regulation (the “IDFPR”) and the Federal Deposit Insurance Corporation (the “FDIC”).
The Company does business in the highly competitive financial services industry and competes against large national banks, other commercial and community banks, savings institutions, credit unions, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market mutual funds and other financial institutions operating within the market. The Company’s non-bank competitors may not be subject to the same degree of regulation as that imposed on FDIC-insured banks and Illinois-chartered banks. As a result, such non-bank competitors may have advantages over the Bank in providing certain services.
The Company has addressed these competitive challenges through its business strategy and by maintaining an independent community bank presence with local decision-making. Additionally, the Company and the Bank will continue to compete for qualified personnel by offering competitive levels of compensation. The Company believes attracting and retaining high-quality employees is important in enabling the Bank to compete effectively for market share with both its large and small competitors.
Our Banking Services
Deposit Products and Lending Services
The Company offers the following deposit and lending services:
| · | Checking Accounts. The Company offers a range of checking account products (including low-cost checking accounts) designed and priced to meet specific target segments (e.g., age and industry groups) of local markets. |
| · | NOW/Money Market Accounts. The Company offers several types of premium-rate NOW (negotiable order of withdrawal) accounts and money market accounts with interest rates indexed to the prime rate or the 180-day U.S. Treasury bill rate. |
| · | Time Deposits. The Company offers a wide range of innovative time deposits and IRA accounts tailored to the market area at competitive rates. |
| · | Commercial Loans. The Company offers business-related loans to small- to medium-sized businesses. The Company is an approved Small Business Administration (SBA) 750 lender. When considering commercial loans, the Company reviews the strength and depth of the borrower, the business, the length of time in business, the industry, including its strengths and weaknesses and the risks associated with the industry. The Company also considers the business’s ability to service debt, the collateral values and the loan to value advances. |
| · | Commercial Real Estate Loans. The Company offers loans for real estate acquisition and refinancing. The Company also offers loans for the development and rehab of real estate properties. The Company considers the strength and creditworthiness of the borrower, as well as debt service and cash flow coverage and the value of the collateral. Industry trends and long-term viability are also considered. |
| · | Consumer Real Estate Loans. The Company offers residential real estate loans as well as loans to investors to rehab and rent out residential real estate properties. Creditworthiness, debt service ability and collateral values are all factors the Company considers when evaluating a consumer real estate loan. |
| · | Consumer Loans. The Company offers collateralized loans to individuals for various personal reasons, such as automobile financing and home improvements. Creditworthiness, debt service ability and collateral values are all factors that the Company considers when evaluating a consumer loan. |
Deposits composition. As of September 30, 2010, the Bank had total deposits of $67.1 million. Of these deposits, 32.5 percent were transaction accounts and savings deposits. The following table sets forth the composition of the total deposits for the Bank prior to the Company’s acquisition of the Bank on March 12, 2008, and for the Bank subsequent to the Company’s acquisition of the Bank.
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | (dollars in thousands) | |
| Non-interest bearing demand accounts | | $ | 6,315 | | | | 9.41 | % | | $ | 5,569 | | | | 8.37 | % | | $ | 4,443 | | | | 8.65 | % | | $ | 5,613 | | | | 18.91 | % |
| Money market and NOW demand accounts | | | 6,847 | | | | 10.20 | | | | 4,739 | | | | 7.12 | | | | 4,583 | | | | 8.92 | | | | 4,348 | | | | 14.65 | |
Savings accounts | | | 8,638 | | | | 12.87 | | | | 10,036 | | | | 15.08 | | | | 8,061 | | | | 15.69 | | | | 8,596 | | | | 28.96 | |
| Time deposits | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Certificates of deposit under $100,000 | | | 24,081 | | | | 35.87 | | | | 32,336 | | | | 48.58 | | | | 29,349 | | | | 57.12 | | | | 5,497 | | | | 18.52 | |
| Certificates of deposit over $100,000 | | | 21,248 | | | | 31.65 | | | | 13,881 | | | | 20.85 | | | | 4,947 | | | | 9.63 | | | | 5,630 | | | | 18.97 | |
| Total deposits | | $ | 67,129 | | | | 100.00 | % | | $ | 66,561 | | | | 100.00 | % | | $ | 51,383 | | | | 100.00 | % | | $ | 29,684 | | | | 100.00 | % |
_______________
| (1) | Certificates of deposit under $100,000 includes brokered deposits which totaled $17.2 million at September 30, 2010, $25.7 million at December 31, 2009 and $23.0 million at December 31, 2008. |
The following table summarizes the maturity distribution of certificates of deposit as of the dates indicated. These deposits were made by individuals, businesses and public and other not-for-profit entities, most of which are located within the Company’s market area.
| | | | | | | | | | |
| | | (in thousands) | |
Three months or less | | $ | 10,525 | | | $ | 5,417 | | | $ | 2,927 | |
| Over three months through twelve months | | | 8,892 | | | | 26,832 | | | | 24,949 | |
Over one year through three years | | | 22,671 | | | | 11,433 | | | | 6,417 | |
Over three years | | | 3,241 | | | | 2,535 | | | | 3 | |
| Total | | $ | 45,329 | | | $ | 46,217 | | | $ | 34,296 | |
Loans composition. The loan portfolio is comprised of commercial, real estate (which includes commercial real estate, construction, and residential real estate) and personal loans. Outstanding loans decreased by 0.18% to $56.7 million at September 30, 2010 after increasing 43.8% to $56.8 million at December 31, 2009, compared to $39.5 million at December 31, 2008. Residential real estate, including 1-4 family residences and multi-family real estate loans, continues to be the fastest growing segment of the loan portfolio and increased to $44.9 million, or 79.2% of total loans at September 30, 2010, from $43.1 million, or 75.9% of total loans at December 31, 2009 and $30.3 million, or 76.7% of total loans at December 31, 2008. Commercial real estate decreased to 15.5% of total loans, or $8.8 million, at September 30, 2010, after decreasing to 16.0% of total loans, or $9.1 million, at December 31, 2009 from 17.1% of total loans, or $6.8 million, at December 31, 2008. Construction loans, primarily for 1-4 family residences, decreased to 3.5% of total loans, or $2.0 million, after increasing to 5.5% of total loans, or $3.1 million, at December 31, 2009 from less than 0.01% of total loans, at December 31, 2008. Consistent with the Company’s emphasis on community banking, the majority of loans are made within the local community.
Lending activities are subject to a variety of lending limits imposed by state and federal law. Illinois law generally requires that loans to an individual may not exceed in the aggregate 25 percent of a bank’s capital and surplus. Federal law imposes a lower lending limit on loans to executive officers, directors, principal shareholders and the related interests of all such persons and also requires that such loans not be preferential.
The Company seeks to reduce credit risk through disciplined loan underwriting, combined with established loan portfolio sub-limits by loan type, collateral and industry to promote loan portfolio diversification and active credit administration. The Company has voluntarily chosen to establish an “in-house” lending limit that is less than its legal lending limit on loans to a single borrower. This policy is subject to exceptions and may be amended at any time. We do not engage in sub-prime residential lending and do not securitize our loans for sale.
Commercial Loans. The commercial loan portfolio is comprised of lines of credit to businesses for working capital needs, term loans for equipment and expansion, and owner-occupied commercial real estate loans. Commercial loans may contain risk factors unique to the business of each borrower. In order to mitigate these risks, we seek to gain an understanding of the business of each borrower, place appropriate value on collateral taken, and structure the loan properly to ensure that collateral values are maintained throughout the life of the loan. Appropriate documentation of commercial loans is also an important factor to protect the Company’s interests.
Lines of credit typically are limited to a percentage of the value of the assets securing the line, and priced by a floating rate formula. In general, lines of credit are reviewed annually and are supported by such items as accounts receivable, inventory and equipment. Depending on the risk profile of the borrower, the Company may require periodic aging of receivables, and inventory and equipment listings to verify the quality of the borrowing base prior to advancing funds. The Company’s term loans are also typically secured by the assets of borrowers’ businesses. Term loans typically have maturities of one to five years, with either floating or fixed rates of interest. Commercial borrowers are required to provide updated financial statements quarterly and personal fin ancial statements at least annually.
The Company’s commercial lending underwriting process includes an evaluation of the borrower’s financial statements and projections with an emphasis on operating results, cash flow, liquidity and balance sheet proportions as well as the collateral to determine the level of creditworthiness of the borrower. Generally, these loans are secured by a first priority security interest in all the assets of the borrower and a personal guarantee of one or more of the principals of the borrower.
While loan policies have guidelines for advances on various types of collateral, the Company establishes eligible asset values on a case-by-case basis for each borrower. As we continue to grow our commercial lending business, we will offer more traditional commercial loan products that will require higher monitoring of our borrowers’ collateralized assets.
Commercial Real Estate Loans. Our commercial real estate portfolio is comprised of loans secured by various types of collateral, including 1-4 family non-owner occupied housing units located primarily in the Company’s target market, other non-owner occupied multi-family real estate, office buildings, warehouses, retail space, and mixed-use buildings. Commercial real estate loan concentrations by collateral type are reviewed against established sub-limits as part of credit risk management and regulatory agency guidance.
Risks inherent in commercial real estate lending are related to the market value of the property taken as collateral, the underlying cash flows and loan transaction documentation. The Company believes it accurately assesses property values through careful review of appraisals. The Company mitigates these risks through review and analysis of the appraised value of the property, the ability of the cash flow generated from the collateral property to service debt, the significance of any outside income of the borrower or income from other properties owned by the borrowers, adhering to loan documentation policies and the strength of guarantors, as applicable. The Company’s real estate appraisal policy addresses selection of appraisers, appraisal standards, environmental issues and specific requirement s for different types of properties, and has been approved by the Company’s Credit Policy Committee.
Construction Loans. The Company’s construction loan portfolio consists of single-family residential properties, multi-family properties, and commercial projects, and includes both investment and owner-occupied properties. As construction lending has greater inherent risks than other types of loan transactions, the Company closely monitors the status of each construction loan throughout its term. Typically, the Company requires full investment of the borrower’s equity in construction projects prior to injecting funds. Generally, the Company does not allow borrowers to recoup equity from the sale proceeds of finished products (if applicable) until the Company has recovered all of its funds.
Due to higher risk and increased monitoring requirements involved with construction loans, construction loans are often the highest yielding loans in the portfolio. The Company seeks to manage the risks associated with construction loans by, among other things, ensuring that the collateral value of the property throughout the construction process does not fall below acceptable levels, requiring that funds disbursed are within parameters set by the original construction budget, and properly documenting each construction draw.
Residential Real Estate Loans. Much residential mortgage loan production is originated through the Company’s loan production office, with a majority of loans being for properties within the market. The Company does not generally originate long-term fixed rate loans for its own portfolio due to interest rate risk considerations.
Consumer Loans. The Company’s consumer loan portfolio consists largely of loans for asset acquisition and general liquidity purposes, including lines of credit. Due to the focus on real estate lending, the Company’s consumer loan portfolio accounts for less than 1% of the total loan portfolio. The Company has minimal automobile loans and no credit card loans.
The following table sets forth the composition of the Company’s loan portfolio:
| | | | | | | | | | |
| | | | | | (in thousands) | | | | |
| Commercial | | $ | 550 | | | $ | 981 | | | $ | 1,917 | |
| Construction | | | 1,989 | | | | 3,100 | | | | 2 | |
| Real estate | | | | | | | | | | | | |
| Residential | | | 44,882 | | | | 43,094 | | | | 30,300 | |
| Commercial | | | 8,822 | | | | 9,090 | | | | 6,766 | |
| Consumer | | | 458 | | | | 551 | | | | 523 | |
| Total loans | | $ | 56,701 | | | $ | 56,816 | | | $ | 39,508 | |
| Allowance for loan losses | | | 1,246 | | | | 915 | | | | 467 | |
| Net loans | | $ | 55,455 | | | $ | 55,901 | | | $ | 39,041 | |
The following table sets forth the dollar amount of all loans due after the dates indicated, which have fixed interest rates or floating or adjustable interest rates.
| | | | | | | |
| | | | | | Floating or Adjustable Rates | | | | | | | | | Floating or Adjustable Rates | | | | |
| | | | | | (in thousands) | | | | | | | | | (in thousands) | | | | |
| Commercial | | $ | — | | | $ | 331 | | | $ | 331 | | | $ | 857 | | | $ | 31 | | | $ | 888 | |
| Construction | | | 2,054 | | | | 250 | | | | 2,304 | | | | 2,422 | | | | 433 | | | | 2,855 | |
| Real estate | | | | | | | | | | | | | | | | | | | | | | | | |
| Residential | | | 39,085 | | | | 8,851 | | | | 47,936 | | | | 30,375 | | | | 12,394 | | | | 42,769 | |
| Commercial | | | 1,765 | | | | 1,812 | | | | 3,577 | | | | 8,781 | | | | 1,003 | | | | 9,784 | |
| Consumer | | | 955 | | | | 1,598 | | | | 2,553 | | | | 520 | | | | — | | | | 520 | |
| Total | | $ | 43,859 | | | $ | 12,842 | | | $ | 56,701 | | | $ | 42,955 | | | $ | 13,861 | | | $ | 56,816 | |
Maturity of loan portfolio. The following table presents certain information at September 30, 2010 and December 31, 2009, regarding the dollar amount of loans, before net items, maturing in the portfolio based on contractual terms to maturity or scheduled amortization, however, does not include potential prepayments. Scheduled contractual maturities of loans do not necessarily reflect the actual expected term of the loan portfolio. The average life of mortgage loans is substantially less than their average contractual terms because of prepayments. The average life of mortgage loans tends to increase when current mortgage loan rates are higher than rates on existing mortgage loans and, conversely, it tends to decrease when rates on current mortgage loans are lower than existing mortgage loan rates (due to prepayments as a result of the refinancing of adjustable-rate and fixed-rate loans at lower rates). Loan balances do not include undisbursed loan proceeds or the allowance for loan losses.
| | | | |
| | | | | | | | | | | | | |
| | | (in thousands) | |
| Commercial | | $ | — | | | $ | — | | | $ | 331 | | | $ | 331 | |
| Construction | | | 527 | | | | 1,431 | | | | 346 | | | | 2,304 | |
| Real Estate | | | | | | | | | | | | | | | | |
| Residential | | | 7,657 | | | | 22,090 | | | | 18,189 | | | | 47,936 | |
| Commercial | | | 211 | | | | 1,120 | | | | 2,246 | | | | 3,577 | |
| Consumer | | | 407 | | | | 160 | | | | 1,986 | | | | 2,553 | |
| Total | | $ | 8,802 | | | $ | 24,801 | | | $ | 23,098 | | | $ | 56,701 | |
| | | | |
| | | | | | | | | | | | | |
| | | (in thousands) | |
| Commercial | | $ | 881 | | | $ | 7 | | | $ | — | | | $ | 888 | |
| Construction | | | 188 | | | | 2,054 | | | | 613 | | | | 2,855 | |
| Real Estate | | | | | | | | | | | | | | | | |
| Residential | | | 6,395 | | | | 14,077 | | | | 22,297 | | | | 42,769 | |
| Commercial | | | 1,904 | | | | 6,316 | | | | 1,564 | | | | 9,784 | |
| Consumer | | | 259 | | | | 81 | | | | 180 | | | | 520 | |
| Total | | $ | 9,627 | | | $ | 22,535 | | | $ | 24,654 | | | $ | 56,816 | |
Correspondent Banking
The Company has maintained and intends to continue to maintain correspondent relationships with several large financial institutions. A correspondent bank is used to provide products and services a smaller bank will need in its daily operations, or to assist in delivering the desired services to its customers. Correspondent bank services needed in a community bank’s daily operation include check collections and clearing, purchase and sale of federal funds, investment services, wire transfer services, and coin and currency supplies. To assist in delivering its products and services to customers, it is necessary to have a correspondent bank to assist a bank with loans over its lending limit, purchase of fixed-rate residential mortgage loans and equipment leasing.
Investments
The Company makes investments from time to time, subject to the investment limitations of state and federal laws and safe and sound banking practices. The Company’s objective is to maintain a sound investment portfolio which provides earnings and liquidity, while also providing for reinvestment in the community.
Asset and Liability Management
The primary functions of asset and liability management are to ensure adequate liquidity and the maintenance of an appropriate balance between interest-sensitive earning assets and interest-bearing liabilities. Liquidity management involves the ability to meet cash flow requirements of depositors wishing to withdraw funds, and borrowers needing assurance that sufficient funds will be available to meet their credit needs. Interest rate sensitivity management seeks to avoid fluctuating net interest margins and to enhance consistent growth of net interest income through periods of changing interest rates. The Company’s objective is to manage its assets and liabilities to provide optimum and stable net interest margin while avoiding any undue interest rate risk. The Company’s fu nds management strategy is to provide adequate returns, as well as sufficient liquidity.
Supervision and Regulation
General
Banks and bank holding companies are extensively regulated under both federal and state law. To the extent the following information describes statutory and regulatory provisions, it is qualified in its entirety by reference to the particular statutes and regulations. Any significant change in applicable law or regulation may have an effect on the business and prospects of the Company and the Bank. The supervision, regulation and examination of banks and bank holding companies by bank regulatory agencies are intended primarily for the protection of customers, rather than stockholders of banks and bank holding companies.
The Company is registered as a bank holding company under the Bank Holding Company Act of 1956 (the “Bank Holding Company Act”), as amended, and is regulated by the Federal Reserve. Under the Bank Holding Company Act, the Company is required to file periodic reports and such additional information as the Federal Reserve may require and is subject to examination by the Federal Reserve.
The Bank is an Illinois-chartered, non-Federal-Reserve-member bank. Deposits of the Bank are insured by the FDIC under the provisions of the Federal Deposit Insurance Act. The Bank is subject to regulation and supervision by the FDIC and the IDFPR, and both agencies conduct periodic examinations of the Bank. The federal and state laws and regulations generally applicable to the Bank regulate, among other things, the scope of the Bank’s business, its investments, its reserves against deposits, the nature and amount of and collateral for its loans, and the location of its banking offices and types of activities that it may perform at such offices.
Permitted Bank Holding Company Investments and Acquisitions
The Bank Holding Company Act requires every bank holding company to obtain the prior approval of the Federal Reserve before merging or consolidating with another bank holding company, acquiring substantially all the assets of any bank or acquiring directly or indirectly any control of more than 5 percent of the voting shares or substantially all of the assets of any bank.
The Bank Holding Company Act also prohibits a bank holding company, with certain exceptions, from acquiring direct or indirect ownership or control of more than 5 percent of the voting shares of any company that is not a bank and from engaging in any business other than that of banking, managing and controlling banks, or furnishing services to banks and their subsidiaries. The Company, however, may engage in certain businesses determined by the Federal Reserve to be so closely related to banking or managing and controlling banks as to be a proper incident thereto, such as owning and operating an escrow company or trust company, acting as an investment or financial adviser, providing management consulting services to depository institutions, or providing investment management services. Each of these permitted activities is subject to certain constraints specified by regulation, order, or policy of the Federal Reserve. A bank holding company that meets certain criteria related to capital, management and performance under the Community Reinvestment Act may certify its performance to the Federal Reserve and elect to become a financial holding company. A financial holding company is permitted to engage in a broader range of activities than is otherwise permitted for bank holding companies, including insurance activities, securities underwriting and merchant banking. The Company has not elected to become a financial holding company.
Capital Requirements; Prompt Corrective Action
The Federal Reserve has adopted risk-based capital requirements for assessing the capital adequacy of bank holding companies. Bank holding companies with consolidated assets of more than $500 million are required to comply with the Federal Reserve’s capital guidelines on risk-based capital. Bank holding companies that are below this threshold and otherwise qualify as “small bank holding companies” under applicable regulations need not comply with the Federal Reserve’s risk-based capital guidelines on a consolidated basis. The Company's assets as of September 30, 2010 were below $500 million and the Company otherwise qualified as a small bank holding company. Accordingly, the Company is not required to comply with the Federal Reserve Board's risk-based capital requirem ents. Instead, the Company must comply with the Federal Reserve Board’s Small Bank Holding Company Policy Statement, which requires the Company to maintain a certain debt-to-equity ratio and to maintain appropriate capital levels at insured depository subsidiaries of the Company.
Bank regulatory agencies have adopted risk-based capital requirements applicable to FDIC-insured banks, which establish certain capital ratios banks are required to maintain. Capital is divided into two components: Tier 1 capital, which includes common stock, additional paid-in capital, retained earnings and certain types of perpetual preferred stock, less certain items, such as certain intangible assets, servicing rights and certain credit-enhancing interest-only strips; and Tier 2 capital, which includes, among other things, perpetual preferred stock, subordinated debt, limited amounts of unrealized gains on marketable equity securities, and the allowance for loan losses. These components of capital are calculated as ratios to average assets as reported on the balance sheet and assets that have been adjusted to compensate for associated risk to the organization.
Under the FDIC’s capital requirements for insured banks, a bank is considered well capitalized for regulatory purposes if it has a total risk-based capital of 10 percent or greater; has Tier 1 risk-based capital of 6 percent or greater; has a leverage ratio of 5 percent or greater; and is not subject to any written agreement, order, capital directive or prompt corrective action directive.
The Federal Deposit Insurance Corporation Improvements Act of 1991 (“FDICIA”) requires the federal banking regulators, including the FDIC, to take prompt corrective action with respect to depository institutions that fall below certain capital standards and prohibits any depository institution from making any capital distribution that would cause it to be undercapitalized. Institutions that are not adequately capitalized may be subject to a variety of supervisory actions, including, but not limited to, restrictions on growth, investment activities, capital distributions and affiliate transactions, and will be required to submit a capital restoration plan which, to be accepted by the regulators, must be guaranteed in part by any company having control of the institution (such as the Company). In other respects, the FDICIA provides for enhanced supervisory authority, including greater authority for the appointment of a conservator or receiver for undercapitalized institutions. The capital-based prompt corrective action provisions of the FDICIA and their implementing regulations apply to FDIC-insured depository institutions. However, federal banking agencies have indicated that, in regulating bank holding companies, the agencies may take appropriate action at the holding company level based on their assessment of the effectiveness of supervisory actions imposed upon subsidiary insured depository institutions pursuant to the prompt corrective action provisions of the FDICIA.
Interstate Banking and Branching Legislation
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “Interstate Banking Act”), bank holding companies that are adequately capitalized and managed are allowed to acquire banks across state lines subject to certain limitations. States may prohibit interstate acquisitions of banks that have not been in existence for at least five years. The Federal Reserve is prohibited from approving an application for acquisition if the applicant controls more than 10 percent of the total amount of deposits of insured depository institutions nationwide. In addition, interstate acquisitions may also be subject to statewide concentration limits.
Furthermore, under the Interstate Banking Act, banks are permitted, under some circumstances, to merge with one another across state lines and thereby create a main bank with branches in separate states. Approval of interstate bank mergers is subject to certain conditions, including: adequate capitalization, adequate management, CRA compliance, deposit concentration limits, compliance with federal and state antitrust laws and compliance with applicable state consumer protection laws. After establishing branches in a state through an interstate merger transaction, a bank may establish and acquire additional branches at any location in the state where any bank involved in the interstate merger could have established or acquired branches under applicable federal and state law.
Dividends
Bank holding companies operating under the Federal Reserve’s Small Bank Holding Company Policy Statement may not pay dividends unless (i) the bank holding company’s debt-to-equity ratio is at or below 1.0:1, (ii) the dividends are reasonable in amount, (iii) the dividends do not adversely affect the ability of the bank holding company to service its debt in an orderly manner, (iv) the dividends do not adversely affect the ability of the holding company’s subsidiary banks to be well capitalized, (v) the bank holding company is considered to be “well managed” by the Federal Reserve, and (vi) during a specified time period, there have been no supervisory actions taken or pending against the bank holding company or any subsidiary bank.
In addition, Federal Reserve policy provides that, as a general matter, a bank holding company should eliminate, defer or severely limit the payment of dividends if (i) the bank holding company’s net income over the prior four quarters is not sufficient to fully fund the dividends, (ii) the bank holding company’s prospective rate of earnings retention is not consistent with the bank holding company’s capital needs and overall current and prospective financial condition, and (iii) the bank holding company will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios. The Federal Reserve may find that the bank holding company is operating in an unsafe and unsound manner if the bank holding company does not comply with the Federal Reserve dividend policy and may use its enforcement powers to limit or prohibit the payment of dividends by bank holding companies.
Banking regulations restrict the amount of dividends that a bank may pay to its shareholders. Under the Illinois Banking Act, an Illinois-chartered bank may not pay dividends of an amount greater than its current net profits after deducting losses and bad debt. The payment of dividends by any financial institution or its holding company is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and a financial institution generally is prohibited from paying any dividends if, following payment thereof, the institution would be undercapitalized. Notwithstanding compliance with applicable capital requirements and the availability of funds for dividends, however, the applicable banking regulators may prohibit the payment of any dividends if it is determined that such payment would constitute an unsafe or unsound practice.
Stock Repurchases
The Federal Reserve requires a bank holding company to give prior written notice to the Federal Reserve before repurchasing its equity securities if the gross consideration for the purchase or redemption, when aggregated with the net consideration paid for all such purchases or redemptions during the preceding twelve-month period is equal to 10 percent or more of the bank holding company’s consolidated net worth. The Federal Reserve may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe or unsound practice or would violate any law, regulation, Federal Reserve order, or any condition imposed by written agreement with the Federal Reserve. This prior notice requirement does not apply to any bank holding company that meets certain well-capitalized and wel l-managed standards and is not subject to any unresolved supervisory issues.
Deposit Insurance
As an FDIC-insured institution, the Bank is required to pay deposit insurance premiums based on the risk it poses to the Deposit Insurance Fund (“DIF”). The FDIC has authority to raise or lower assessment rates on insured deposits in order to achieve required revenue ratios in the insurance fund and to impose special additional assessments. To determine an institution’s assessment rate, each insured bank is placed into one of four risk categories using a two-step process based on capital and supervisory information. First, each insured bank is assigned to one of the following three capital groups: “well capitalized,” “adequately capitalized” or “undercapitalized.” Each institution is then assigned one of three supervisory ratin gs: “A” (institutions with minor weaknesses), “B” (institutions that demonstrate weaknesses which, if not corrected, could result in significant deterioration of the institution) or “C” (institutions that pose a substantial probability of loss to the Deposit Insurance Fund unless effective corrective action is taken). Banks classified as strongest by the FDIC are subject to the lowest insurance assessment rate; banks classified as weakest by the FDIC are subject to the highest insurance assessment rate. In addition to its insurance assessment, each insured bank is subject to quarterly debt service assessments in connection with bonds issued by a government corporation that financed the federal savings and loan bailout. Deposit insurance may be terminated by the FDIC upon a finding that an institution has engaged in an unsafe or unsound practice, is in an unsafe or unsound condition to continue operations or has violated any appli cable law, regulation, rule, order, or condition imposed by the FDIC. The management of the Bank does not know of any practice, condition or violation that might lead to termination of deposit insurance of the Bank.
In October 2008, the FDIC published a restoration plan to reestablish the DIF to the statutory required minimum percentage of deposits, and has amended the restoration plan from time to time thereafter. As part of the restoration plan, the FDIC increased risk-based assessment rates and may continue to do so. In November 2009, the FDIC approved a final rule that required insured institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. The prepaid assessments were recorded as a prepaid expense against which future quarterly assessments will be applied.
During 2009, the Bank paid deposit insurance premiums in the aggregate amount of $829,000, which included $760,000 in deposit insurance prepayments through 2012 and special assessments in the amount of $31,000, which were applicable to all insured institutions.
Transactions with Affiliates
Federal and state statutes place certain restrictions and limitations on transactions between banks and their affiliates, which includes holding companies. Among other provisions, these laws place restrictions upon: (i) extensions of credit to affiliates; (ii) the purchase of assets from affiliates; (iii) the issuance of guarantees, acceptances or letters of credit on behalf of affiliates; and (iv) investments in stock or other securities issued by affiliates or the acceptance thereof as collateral for an extension of credit.
Standards for Safety and Soundness
The Federal Deposit Insurance Act (“FDIA”), as amended by the FDICIA and the Riegle Community Development and Regulatory Improvement Act of 1994, requires the FDIC, together with the other federal bank regulatory agencies, to prescribe standards of safety and soundness, by regulations or guidelines, relating generally to operations and management, asset growth, asset quality, earnings, stock valuation, and compensation. The FDIC and the other federal bank regulatory agencies have adopted a set of guidelines prescribing safety and soundness standards pursuant to the FDIA, as amended. The guidelines establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, and compensation, fee s and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal stockholder. In addition, the federal bank regulatory agencies adopted regulations that authorize, but do not require, the agencies to order an institution that has been given notice that it is not satisfying the safety and soundness guidelines to submit a compliance plan. If, after being so notified, an institution fails to submit an acceptable compliance plan or fails in any material respect to implement an accepted compliance plan, the agency must issue an order directing action to correct the deficiency and may issue an order
directing other actions of the types to which an undercapitalized institution is subject under the “prompt corrective action” provisions of FDICIA. If an institution fails to comply with such an order, the agency may seek to enforce its order in judicial proceedings and to impose civil money penalties. The federal bank regulatory agencies have also adopted guidelines for asset quality and earning standards.
Community Reinvestment
Under the Community Reinvestment Act (“CRA”), a financial institution has a continuing and affirmative obligation, consistent with the safe and sound operation of such institution, to help meet the credit needs of its entire community, including low- and moderate-income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions, nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires each federal banking agency, in connection with its examination of a financial institution, to assess and assign one of four ratings to the institution’s record of meeting the credit needs of its community and to take suc h record into account in its evaluation of certain applications by the institution, including applications for charters, branches and other deposit facilities, relocations, mergers, consolidations, acquisitions of assets or assumptions of liabilities, and savings and loan holding company acquisitions. The CRA also requires that all institutions make public disclosure of their CRA ratings.
Regulatory Approvals and Enforcement Actions
Federal and state laws require banks to seek approval by the appropriate federal or state banking agency (or agencies) for any merger and/or consolidation by or with another depository institution, as well as for the establishment or relocation of any bank or branch office and, in some cases to engage in new activities or form subsidiaries.
Federal and state statutes and regulations provide financial institution regulatory agencies with great flexibility to undertake an enforcement action against an institution that fails to comply with regulatory requirements, particularly capital requirements. Possible enforcement actions include the imposition of a capital plan and capital directive, receivership, conservatorship or the termination of deposit insurance.
Monetary Policy
The earnings of commercial banks and bank holding companies are affected not only by general economic conditions, but also by the policies of various governmental regulatory authorities. In particular, the Federal Reserve Board influences conditions in the money and capital markets, which affect interest rates and growth in bank credit and deposits. Federal Reserve Board monetary policies have had a significant effect on the operating results of commercial banks in the past, and this is expected to continue in the future. The general effect, if any, of such policies on future business and earnings of the Company and the Bank cannot be predicted.
Anti-Money Laundering and the Bank Secrecy Act
Under the Bank Secrecy Act (“BSA”), a financial institution is required to have systems in place to detect certain transactions, based on the size and nature of the transaction. Financial institutions are generally required to report cash transactions involving more than $10,000 to the United States Treasury. In addition, financial institutions are required to file suspicious activity reports for transactions that involve more than $5,000 and that the financial institution knows, suspects, or has reason to suspect involve illegal funds, are designed to evade the requirements of the BSA, or have no lawful purpose. The USA PATRIOT Act of 2001 (the “PATRIOT Act”), which amended the BSA, contains anti-money laundering and financial-transparency laws, as well as enhanced information collection tools and enforcement mechanisms for the U.S. government. PATRIOT Act provisions include the following: standards for verifying customer identification when opening accounts; rules to promote cooperation among financial institutions, regulators, and law enforcement; and due diligence requirements for financial institutions that administer, maintain or manage certain bank accounts. The Bank is subject to BSA and PATRIOT Act requirements. Bank regulators carefully review an institution’s compliance with these requirements when examining an institution and consider the institution’s compliance when evaluating an application submitted by an institution. Bank regulators may require an institution to take various actions to ensure that it is meeting the requirements of these acts.
Brokered Deposits
Well-capitalized institutions are not subject to limitations on brokered deposits. An adequately capitalized institution is able to accept, renew or roll over brokered deposits only with a waiver from the FDIC and subject to certain restrictions on the yield paid on such deposits. Undercapitalized institutions are not permitted to accept, renew or rollover brokered deposits.
Acquisition and Ownership of Common Stock May Be Restricted by Bank Regulators
Any person or group who purchases 10 percent or more of the Company’s common stock, or hereafter acquires additional securities such that its interest in the Company exceeds 10 percent, may be required to obtain approval of the Federal Reserve pursuant to the Change in Bank Control Act and the FDIA as well as the approval of the IDFPR. Further, any corporation, partnership, trust or organized group that acquires a controlling interest in the Company may have to obtain approval of the Federal Reserve to become a bank holding company and thereafter be subject to regulation as such.
Consumer Laws
In addition to the CRA, other federal and state laws regulate various lending and consumer aspects of the banking business. These laws include the Equal Credit Opportunity Act, the Fair Housing Act, Truth in Lending Act, the Truth in Savings Act, the Real Estate Settlement Procedures Act and the Electronic Funds Transfer Act.
2008 Emergency Economic Stabilization Act
On October 3, 2008, the U.S. Congress enacted the Emergency Economic Stabilization Act (“EESA”) in response to the financial turmoil in the banking industry. EESA authorized the Secretary of the U.S. Department of the Treasury to purchase up to $700 billion in troubled assets from qualifying financial institutions pursuant to the Troubled Asset Relief Program (“TARP”). On October 14, 2008, the U.S. Department of the Treasury (“U.S. Treasury”), pursuant to its authority under EESA, announced the Capital Purchase Program (“CPP”). Pursuant to the CPP, qualifying small bank financial institutions, with assets less than $500 million, were permitted to issue senior preferred stock to the U.S. Treasury in an amount not less than 1 percent of the i nstitution’s risk-weighted assets and not more than 5 percent of the institution’s risk-weighted assets. Financial institutions participating in the CPP must agree and comply with certain restrictions, including restrictions on dividends, stock redemptions, stock repurchases and executive compensation. Pursuant to the CPP, the U.S. Treasury may unilaterally amend any provision of the CPP to comply with changes in applicable federal statutes. Neither the Company nor the Bank is participating in the CPP.
FDIC Temporary Liquidity Guarantee Program
In October 2008, the FDIC announced the Temporary Liquidity Guarantee Program (“TLGP”) to strengthen confidence and encourage liquidity in the banking system. The program consists of two components: the Transaction Account Guarantee Program (“TAGP”) and the Debt Guarantee Program (“DGP”).
Transaction Account Guarantee Program. Pursuant to the TAGP, the FDIC will fully insure, without limit, qualifying transaction accounts held at qualifying depository institutions through December 31, 2010 (extended from December 31, 2009 provided the institution did not previously opt out of the TAGP). Qualifying transaction accounts include non-interest-bearing transaction accounts, Interest on Lawyers Trust Accounts (IOLTAs) and NOW accounts with interest rates less than 0.5 percent. The FDIC assessed a fee equal to 10 basis points on transaction account deposit balances in excess of the $250,000 insured limit. During the six-month extension period in 2010, the fee assessment increased to 15 basis points, 20 basis poin ts or 25 basis points, based on an institution’s risk category. On April 13, 2010, the board of directors of the FDIC approved an interim rule that would extend the TAGP until December 31, 2010, with further extensions until December 31, 2011 possible without further rulemaking. The interim rule, if approved, would also alter the reporting requirements required under the TAGP and alter the requirements for the inclusion of NOW accounts in the TAGP. The Bank is currently participating in the TAGP.
Debt Guarantee Program. Pursuant to the DGP, eligible entities were permitted to issue FDIC-guaranteed senior unsecured debt up to 125 percent of the entity’s senior unsecured debt outstanding as of September 30, 2008. The Company did not issue any guaranteed debt under the DGP.
Future Regulatory Uncertainty
Because federal regulation of financial institutions changes regularly and is the subject of constant legislative debate regarding issues such as the evolving structure of financial institutions and the evolving competitive relationship among financial institutions and other, similar service providers such as securities firms and insurance companies, we cannot forecast how federal regulation of financial institutions may change in the future. Due to the recent financial and real estate market turmoil, the U.S. Government has implemented numerous programs designed to stabilize the financial markets and economy. Although we cannot predict what new policies or programs will impact the Company or the Bank, we fully expect that the financial institution industry will remain heavily regulated and that additional laws o r regulations will likely be adopted that will impact the operations of the Company and the Bank.
The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law on July 21, 2010. This legislation may have an adverse impact on the Company’s financial results upon full implementation. Among other impacts, this legislation establishes a Consumer Financial Protection Bureau, changes the base for deposit insurance assessments, introduces regulatory rate-setting for interchange fees charged to merchants for debit card transactions, and excludes certain instruments currently included in determining the Tier 1 regulatory capital ratio. The capital instrument exclusion will be phased-in over a three-year period beginning in 2013. Most of the legislation’s other provisions require rulemaking by various regulatory agencies. The Company cannot currently quantify the future impact of this legislation and the related future rulemaking on its business, financial condition or results of operations.
Cautionary Statement Regarding Forward-Looking Statements
Included in this Form 10 registration statement are statements which may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. These statements are not historical facts but instead represent only management’s beliefs regarding future events, many of which, by their nature, are inherently uncertain and outside our control. Although the Company believes the expectations reflected in any forward-looking statements are reasonable, it is possible that actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in such statements. In some cases, these statements can be identified by forward-looking words such as “may,” “might, ” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” and the negative of these terms and other comparable terminology. These forward-looking statements include statements relating to projected growth, anticipated future financial performance and management’s long-term performance goals. Forward-looking statements also include statements that anticipate the effects on the Company’s financial condition and results of operations from expected developments or events, such as the implementation of internal and external business and growth plans and strategies.
These forward-looking statements are subject to significant risks, assumptions and uncertainties, and they could be affected by many factors. Factors that could have a material adverse effect on financial condition, results of operations and future prospects include, but are not limited to:
| · | the success of the “turnaround” plan and business strategy; |
| · | changes in economic conditions, including interest rates; |
| · | the sufficiency of the allowance for loan losses; |
| · | the failure to obtain on terms acceptable to the Company, or at all, the capital necessary to fund growth and to maintain the Company’s regulatory capital ratios, or those of the Bank, above the “well-capitalized” threshold; |
| · | management’s ability to manage interest rate and credit risks; |
| · | continuing deterioration of U.S. economic conditions; |
| · | legislative or regulatory changes, particularly changes in the regulation of financial services companies and/or products and services offered by financial service companies; and |
| · | risks and other factors set forth in Item 1A of this registration statement on Form 10, including the section entitled “Risk Factors” as well as subsequent periodic and current reports filed with the SEC. |
Because of these and other uncertainties, actual future results, performance or achievements, or industry results, may be materially different from the results indicated by these forward-looking statements. In addition, past results of operations do not necessarily indicate future results.
The reader should not place undue reliance on any forward-looking statements, which speak only as of the dates on which they were made. The Company is not undertaking an obligation to update these forward-looking statements, even though its situation may change in the future, except as required under federal securities law. The Company qualifies all forward-looking statements by these cautionary statements.
The Company’s financial condition and results of operations could be negatively affected if the Company fails to execute its “turnaround” plan.
The Company has, since its acquisition of the Bank, embarked on a “turnaround” plan to cause the Bank and the Company to move to profitability. The success of the “turnaround” plan depends on effectively executing management’s business strategy, which includes plans to continue to grow total assets, the level of deposits, and the scale of operations. Achieving growth targets requires the Company, in part, to attract customers who currently bank with other financial institutions in the Company’s markets, thereby increasing the Company’s share in these markets. The Company’s ability to successfully execute its “turnaround” plan will depend on a variety of factors, including the ability to attract and retain experienced bankers, the continued ava ilability of desirable business opportunities, the competitive response from other financial institutions in the market and the Company’s ability to manage growth effectively. There can be no assurance that these opportunities will be available or that the Company will successfully execute the “turnaround” plan or business strategy. If the Company does not successfully execute the “turnaround” plan or business strategy, its business and prospects could be harmed. Executing the “turnaround” plan includes risks such as:
| · | failure to attract additional capital to support expansion; |
| · | inability to achieve a level of growth that is translated into profitable operations; |
| · | failure to adequately address problem credits; and |
| · | failure to achieve economies of scale and anticipated cost savings. |
The holding company was recently formed and has less than three years of operating history.
The Company became a bank holding company after the purchase of the Bank on March 12, 2008. Prior to becoming a bank holding company, the Company had limited operations. Since acquiring the Bank, the Company has increased the Bank’s assets by over 100 percent and the Bank’s loan portfolio by over 250 percent. Given the limited operating history as a bank holding company, there is no assurance the Company will be able to continue to grow the Bank or to successfully manage growth.
The Bank has been experiencing performance issues which may be irreversible.
The Bank has incurred net losses in each of the last ten calendar years. There are multiple reasons for these losses, which include losses on loans and high operating expenses. The correction of these problems is a difficult task. Although the Company has established a new management team, developed a “turnaround” plan and
implemented a new business strategy and risk management process, there is no assurance that the Bank and the Company will ever be able to operate profitably.
The Company is dependent upon the management team.
The successful operation of the Company will be greatly influenced by the ability to retain the services of existing senior management and, as the Company expands, to attract and retain additional qualified senior and middle management. The unexpected loss of the services of any key management personnel, or the inability to recruit and retain qualified personnel in the future, could have an adverse effect on the Company’s business and financial results. On December 16, 2010, John Sorensen, the Company's President and CEO tendered his resignation. Effective upon his resignation, the board of directors appointed William S. Winston as CEO. No key-man life insurance policy is maintained on any of our directors, officers or employees. See “MANAGEMENT.”
Commercial and residential real estate markets continue to experience extraordinary challenges following the downturn in recent years. Because of the Company’s substantial reliance on real estate lending, these challenges increase the risk that the Company’s loans may not be repaid.
The commercial and residential real estate markets continue to experience extraordinary challenges following the downturn in recent years. At September 30, 2010, approximately 15.5 percent of the Bank’s loans are commercial real estate loans, and 94.9 percent of total loans are real estate loans. Economic factors have and may continue to cause deterioration to the value of real estate the Company uses to secure its loans. The continued weakness of the economy and the deterioration of our real estate portfolio could result in additional increases in the provision for loan losses, higher delinquencies and additional charge-offs in future periods that may materially affect the Company’s financial condition and results of operations.
Although the Company makes various types of loans, including commercial, consumer, residential mortgage and construction loans, a significant percentage of the Company’s loans will be commercial loans. Commercial lending is more risky than residential lending because loan balances are greater and the borrower’s ability to repay is dependent on the success of the borrower’s business. The Company will try to limit its exposure to default risk by carefully monitoring the amount of loans it makes within specific industries and through prudent lending practices, but we cannot assure you that this will reduce these lending risks.
Weak economic conditions could continue to have a material effect on financial condition and results of operations.
Sustained weakness in the real estate market, reduced business activity, high unemployment, instability in the financial markets, less available credit and lack of confidence in the financial sector, among other factors, have adversely affected the Company and the financial services industry in general over the last three years. A sustained deterioration in the national or local business or economic condition could result in, among other things, a deterioration of credit quality or a reduced demand for credit, including a resultant effect on our loan portfolio and allowance for loan losses. These factors could result in higher delinquencies and greater charge-offs in future periods, which would materially adversely affect financial condition and results of operations. Continued, sustained weakness in b usiness and economic conditions generally or in the Company’s markets specifically could have one or more of the following adverse impacts on the business:
| · | a decrease in the demand for loans and other products and services offered by us; |
| · | a decrease in the value of loans held for sale or other assets secured by consumer or commercial real estate; and |
| · | an increase in the number of customers and counterparties who become delinquent, file for protection under bankruptcy laws, or default on their loans or other obligations. |
An increase in the number of delinquencies, bankruptcies or defaults could result in a higher level of nonperforming assets, net charge-offs, provision for loan losses, and valuation adjustments on loans held for sale, which would materially adversely affect financial condition and results of operations.
The Company’s profitability may suffer if it is unable to successfully manage interest rate risk.
The profitability of the Company depends, in substantial part, upon the spread between the interest rates earned on investments and loans and the interest rates paid on deposits and other interest-bearing liabilities. Changes in interest rates affect the Company’s operating performance and financial condition in diverse ways. There are no assurances that the Company’s efforts to mitigate such risks will be successful.
The Company’s net interest spread depends on many factors which are partly or entirely outside of its control, including competition, federal economic, monetary and fiscal policies, and economic conditions generally. The Federal Reserve regulates the supply of money and credit in the United States. Its policies determine in large part the cost of funds for lending and investing and the return earned on those loans and investments, both of which affect our net interest margin.
The Company faces strong competition.
The Company faces strong competition for deposits, loans and other financial services from numerous banks, thrifts, credit unions and other financial institutions, as well as other entities that provide financial services. The banking business is highly competitive. Some of the financial institutions and financial services organizations with which the Company competes are not subject to the same degree of regulation as the Company. Most of these competitors have been in business for many years, have established customer bases, are substantially larger, have greater financial and personnel resources, have substantially higher lending limits than the Company and are able to offer certain services, including extensive branch networks, trust services and international banking services, that the Company eit her does not expect to provide or will not provide for some time, or can offer only through correspondents, if at all. Moreover, most of these entities have greater capital resources than we have, which, among other things, may allow them to price their services at levels more favorable to the customer and to provide larger credit facilities than the Company. See “BUSINESS—Market Area and Competition” and “SUPERVISION AND REGULATION.”
The Company is significantly smaller than most of its competitors.
The Company is one of the smaller financial institutions in the metropolitan Chicago area. As such, the Company has a smaller lending limit than other institutions in the market area. As of September 30, 2010, the Company’s legal lending limit was approximately $1.1 million. The Company’s inability to lend larger sums of money may impact its ability to attract larger businesses. We intend to accommodate loans in excess of the Company’s lending limit through the sale of participations in those loans to other banks. However, other banks may not be willing to purchase loan participations from the Company, thereby limiting our ability to service customers whose credit needs exceed the lending limit of the Company.
Many of the Company’s competitors have substantially greater resources to invest in technological improvements.
The banking industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services. In addition to providing for better customer service, the effective use of technology increases efficiency and enables financial institutions to reduce costs. The Company’s success depends in part on its ability to address the needs of its customers by using technology to provide products and services which will satisfy customer demands for convenience, as well as to create additional efficiencies in its operations. Many of the Company’s competitors have substantially greater resources to invest in technological improvements.
The Company may have to pay above-market interest rates to attract depositors and charge below-market interest rates to attract borrowers compared to our competitors in our primary service area.
Thus far, the Company has been able to pay market interest rates to attract depositors, and has been able to charge market interest rates to attract borrowers in its primary service area. However, the banking business is highly competitive, and profitability depends on the ability of the Company to attract depositors and borrowers. The Company competes with numerous other lenders and deposit-takers in the area, including other commercial banks, savings and loan associations and credit unions. Compared to competitors in the primary service area, the Company
may have to pay above-market interest rates to attract depositors and charge below market interest rates to attract borrowers in the future, which may have a material effect on financial condition and results of operations.
The creditworthiness of other financial institutions could adversely affect the Company.
The Company’s ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial institutions are interrelated as a result of lending, clearing, counterparty and other relationships. As a result, defaults by, or even rumors or questions about, one or more banks, or the banking industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by the Company or by other institutions. Many of the transactions engaged in by the Company in the ordinary course of business expose the Company to credit risk in the event of default of our counterparty or customer. In such instances, the collateral held by the Company may be insufficient to mitigate losses, as the Compa ny may be unable to realize upon or liquidate at prices sufficient to recover the full amount of its exposure. Such losses could have a material and adverse effect on results of operations.
The Company is highly regulated and may be adversely affected by changes in banking laws, regulations and regulatory practices, including the extraordinary actions being taken by the U.S. government in response to the recent financial crises.
The Company is subject to extensive state and federal legislation, regulation and supervision, including regulation by state and federal banking regulators. As a bank holding company, the Company is also subject to regulation by the IDFPR and the Federal Reserve. Changes in legislation and regulations may continue to have a significant impact on the banking industry. Although some legislative and regulatory changes may benefit the Company, others may increase the costs of doing business and assist competitors which are not subject to similar regulation. See “SUPERVISION AND REGULATION.”
Changes in laws, regulations and regulatory practices affecting the financial services industry, and the effects of such changes, including the federal government’s response or lack of response to the ongoing financial crises affecting the banking system and financial markets, are difficult to predict and may have unintended consequences. New regulations or changes in the regulatory environment could subject the Company to additional costs, limit the types of financial services and products the Company may offer and/or increase the ability of non-banks to offer competing financial services and products, among other things. These changes also can adversely affect borrowers, potentially increasing the risk that they may fail to repay their loans. Any failure on the Company’s part to comply wi th or adapt to changes in the regulatory environment could have a material adverse effect on its business, financial condition and results of operations.
The banking regulators’ supervisory framework could materially impact the conduct, growth and profitability of operations.
The Company’s primary regulatory agencies have broad discretion to impose restrictions and limitations on the Company’s operations if they determine, among other things, operations are unsafe or unsound, fail to comply with applicable law or are otherwise inconsistent with laws and regulations or with the supervisory policies of these agencies. This supervisory framework could materially impact the conduct, growth and profitability of the Company’s operations. Any failure on the Company’s part to comply with current laws, regulations, other regulatory requirements or safe and sound banking practices or concerns about our financial condition, or any related regulatory sanctions or adverse actions against us, could increase costs or restrict the Company’s ability to operate the busines s and result in damage to the Company’s reputation.
The Company cannot predict the impact of recently enacted legislation, in particular the Emergency Economic Stabilization Act of 2008 and the Dodd-Frank Wall Street Reform and Consumer Protection Act and their implementing regulations, and actions by the FDIC.
The programs established or to be established under the Emergency Economic Stabilization Act of 2008 may have adverse effects upon the Company, including increased regulation of the industry. Compliance with such regulation may increase costs and limit the Company’s ability to pursue business opportunities. Also, participation in specific programs will likely subject the Company to additional restrictions.
The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law on July 21, 2010. This legislation may have an adverse impact on the Company’s financial results upon full implementation. Among other impacts, this legislation establishes a Consumer Financial Protection Bureau, changes the base for deposit insurance assessments, introduces regulatory rate-setting for interchange fees charged to merchants for debit card transactions, and excludes certain instruments currently included in determining the Tier 1 regulatory capital ratio. The capital instrument exclusion will be phased-in over a three-year period beginning in 2013. Most of the legislation’s other provisions require rulemaking by various regulatory agencies. The Company cannot currently quantify the future impact of this legislation and the related future rulemaking on the Company’s business, financial condition and results of operations.
Similarly, programs established by the FDIC under the systemic-risk exception to the Federal Deposit Insurance Act may have an adverse effect on the Company, including the payment of additional deposit insurance premiums to the FDIC. Due to the recent depletion of the Deposit Insurance Fund, the FDIC has increased rates on deposit insurance premiums and has required banks to prepay deposit insurance premiums for three years. The FDIC may continue to increase deposit insurance premiums in the future, which may have a material effect on financial condition and results of operations.
Continued tightening of credit markets and instability in financial markets could adversely affect our industry, business and results of operations.
Reflecting concern about the stability of the financial markets generally and the strength of counterparties, many lenders and institutional investors have reduced, and in some cases ceased, their provision of funding to borrowers including other financial institutions. This has resulted in less available credit, a lack of confidence in the financial sector, increased volatility in the financial markets and reduced business activity. A sustained period of such conditions could materially and adversely affect business, financial condition and results of operations.
The Company’s growth may require the raising of additional capital in the future, which may not be available.
The Company is required by federal and state regulatory authorities to maintain adequate levels of capital to support operations. The Company may need to raise additional capital to support the execution of the “turnaround” plan. If the Company raises capital through the issuance of additional shares of common stock or other securities, it will dilute the ownership interests of existing shareholders and may dilute the per-share book value of common stock. If the Company chooses to raise capital through the issuance of a preferred class of stock, new investors may also have rights, preferences and privileges senior to the Company’s current shareholders which may adversely impact current shareholders.
The Company’s ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside the Company’s control, and on financial performance. Accordingly, the Company cannot guarantee the Company’s ability to raise additional capital, if needed, on terms acceptable to it. If the Company cannot raise additional capital when needed, the ability to further expand operations through internal growth and acquisitions could be materially impaired.
No active trading market for the Company’s common stock exists.
There is no public market for the Company’s common stock, nor is one likely to develop or exist in the immediate future. The Company has no present plan to list or qualify its common stock on any securities exchange. Therefore, shares of the Company’s common stock may not be readily marketable in the case of financial emergency or otherwise.
The Company’s profitability may suffer because of indemnification of directors and officers.
The Company’s Articles of Incorporation require the indemnification of our officers and directors to the fullest extent permitted by law. These provisions could result in expenses that would reduce earnings. See “Item 12. Indemnification of Directors and Officers.”
The Company’s organizers and directors own a significant number of shares of common stock, which will allow them to control management.
The Company’s directors and executive officers own 95,640 shares of common stock, which equals approximately 12.59 percent of shares outstanding. To the extent the organizers, directors and executive officers vote together, they will have the ability to exert significant influence over the election of the Board of Directors, as well as over policies and business affairs.
A majority of the Company’s shareholders are members of The Living Word Christian Center. Together, these members of The Living Word Christian Center could become a significant shareholder voting group.
The Company has not tracked the number of shareholders who are also members of The Living Word Christian Center. However, the Company believes that in excess of 50 percent of outstanding shares of common stock are owned by members of The Living Word Christian Center. The Living Word Christian Center is not now a shareholder, and the Company is not aware of any plans on the part of The Living Word Christian Center to become a shareholder.
The Company has never paid dividends and may not do so in the future.
The payment of dividends is at the discretion of the Company’s Board of Directors. No dividends have been paid since the Company’s inception. As the Bank is the only source of revenue to the Company at this time, it is not expected that dividends will be paid in the foreseeable future.
Item 2. Financial Information.
The following discussion and analysis is intended as a review of significant factors affecting the financial condition and results of operations of the Company. The Company acquired the Bank on March 12, 2008. Prior to the Company’s acquisition of the Bank, the Bank was owned by another bank, which had foreclosed upon a loan that the other bank had extended to the former owners of the Bank. Prior to March 12, 2008, the Company had no role in the management or operations of the Bank or in the preparation of the financial data regarding the Bank. For any period prior to March 12, 2008, the Company has no knowledge as to how the financial data of the Bank was compiled, or whether this data was accurate.
Selected Consolidated Financial Data
The following table sets forth summarized historical consolidated financial information for each of the periods indicated. The historical information indicated as of and for the years ended December 31, 2005 through 2009 has been derived from the Company's audited consolidated financial statements for the period ended December 31, 2005 through 2009, and the historical information for the nine months ended September 30, 2010 and 2009 has been derived from unaudited internal financial statements for the nine months ended September 30, 2010 and 2009. Historical results set forth below and elsewhere in this prospectus are not necessarily indicative of future performance.
| | | As of and for the nine months ended September 30, | | | As of and for the year ended December 31, | | | As of and for the period from inception
March 12, 2008 to December 31, | | | As of and for the year ended December 31,(1) | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | (dollars in thousands) | |
| Statement of Income: | | | | | | | | | | | | | | | | | | | | | |
| Total interest income | | $ | 2,936 | | | $ | 2,470 | | | $ | 3,424 | | | $ | 1,646 | | | $ | 1,905 | | | $ | 1,900 | | | $ | 2,041 | |
| Total interest expense | | | 801 | | | | 965 | | | | 1,294 | | | | 430 | | | | 645 | | | | 510 | | | | 349 | |
| Net interest income | | | 2,135 | | | | 1,505 | | | | 2,130 | | | | 1,216 | | | | 1,260 | | | | 1,390 | | | | 1,692 | |
| Provision (recovery) for loan losses | | | 486 | | | | 125 | | | | 497 | | | | 347 | | | | — | | | | (18 | ) | | | (233 | ) |
| Net interest income after provision for loan losses | | | 1,649 | | | | 1,380 | | | | 1,633 | | | | 869 | | | | 1,260 | | | | 1,408 | | | | 1,925 | |
| Noninterest income | | | 924 | | | | 696 | | | | 779 | | | | 273 | | | | 851 | | | | 874 | | | | 946 | |
| Noninterest expense | | | 2,911 | | | | 2,299 | | | | 4,261 | | | | 2,303 | | | | 2,833 | | | | 2,628 | | | | 2,940 | |
| Income (loss) before income taxes | | | (338 | ) | | | (223 | ) | | | (1,849 | ) | | | (1,161 | ) | | | (722 | ) | | | (346 | ) | | | (69 | ) |
| Income tax expense | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Net income (loss) | | $ | (338 | ) | | $ | (223 | ) | | $ | (1,849 | ) | | $ | (1,161 | ) | | $ | (722 | ) | | $ | (346 | ) | | $ | (69 | ) |
| Balance Sheet Data: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total assets | | $ | 75,111 | | | $ | 72,259 | | | $ | 71,574 | | | $ | 57,229 | | | $ | 34,237 | | | $ | 38,227 | | | $ | 38,843 | |
| Cash and due from banks and interest-bearing deposits in banks | | | 6,717 | | | | 4,916 | | | | 3,703 | | | | 2,511 | | | | 2,477 | | | | 3,655 | | | | 4,477 | |
| Federal funds sold | | | 1,522 | | | | 2,655 | | | | 2,708 | | | | 4,319 | | | | 1,702 | | | | 1,002 | | | | 500 | |
| Securities | | | 5,771 | | | | 4,481 | | | | 4,340 | | | | 6,168 | | | | 9,546 | | | | 9,652 | | | | 10,417 | |
| Federal Home Loan Bank Stock | | | 439 | | | | 320 | | | | 320 | | | | 120 | | | | 120 | | | | 120 | | | | 120 | |
| Loans, net of unearned income | | | 56,701 | | | | 55,431 | | | | 56,816 | | | | 39,508 | | | | 15,836 | | | | 21,606 | | | | 20,862 | |
| Allowance for loan losses | | | (1,246 | ) | | | (708 | ) | | | (915 | ) | | | (467 | ) | | | (485 | ) | | | (457 | ) | | | (508 | ) |
| Premises and equipment, net | | | 2,736 | | | | 2,974 | | | | 2,907 | | | | 3,079 | | | | 3,796 | | | | 2,007 | | | | 2,209 | |
| Other real estate owned | | | 178 | | | | — | | | | — | | | | — | | | | 800 | | | | — | | | | — | |
| Goodwill and intangible assets, net | | | 293 | | | | 1,546 | | | | 343 | | | | 1,595 | | | | — | | | | — | | | | — | |
| Other assets | | | 2,000 | | | | 644 | | | | 1,353 | | | | 396 | | | | 445 | | | | 642 | | | | 766 | |
| Total liabilities | | | 70,942 | | | | 66,756 | | | | 67,696 | | | | 51,890 | | | | 31,820 | | | | 35,088 | | | | 35,358 | |
| Total deposits | | | 67,129 | | | | 65,796 | | | | 66,561 | | | | 51,383 | | | | 29,684 | | | | 33,993 | | | | 35,231 | |
| Interest-bearing deposits | | | 60,814 | | | | 60,001 | | | | 60,992 | | | | 46,940 | | | | 24,071 | | | | 25,624 | | | | 21,561 | |
| Borrowed funds | | | 3,000 | | | | — | | | | — | | | | — | | | | 2,000 | | | | 1,000 | | | | — | |
| Other liabilities | | | 813 | | | | 960 | | | | 1,135 | | | | 507 | | | | 136 | | | | 95 | | | | 127 | |
| Total capital | | | 4,169 | | | | 5,503 | | | | 3,878 | | | | 5,339 | | | | 2,417 | | | | 3,139 | | | | 3,485 | |
(1) Information presented for the Bank only.
| | | As of and for the nine months ended September 30, | | | As of and for the year ended December 31, | | | As of and for the period from inception
March 12, 2008 to December 31, | | | As of and for the year ended December 31,(1) | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | (dollars in thousands) | |
| Share and Per Share Data: | | | | | | | | | | | | | | | | | | | | | |
| Earnings (losses) per share - basic | | $ | (0.48 | ) | | $ | (0.33 | ) | | $ | (2.70 | ) | | $ | (1.78 | ) | | $ | (721.92 | ) | | $ | (345.95 | ) | | $ | (69.22 | ) |
| Weighted average shares outstanding - basic | | | 712,480 | | | | 683,053 | | | | 684,740 | | | | 650,853 | | | | 1,000 | | | | 1,000 | | | | 1,000 | |
| Earnings (losses) per share - diluted | | | (0.48 | ) | | | (0.33 | ) | | | (2.70 | ) | | | (1.78 | ) | | | (721.92 | ) | | | (345.95 | ) | | | (69.22 | ) |
| Weighted average shares outstanding - diluted | | | 712,480 | | | | 683,053 | | | | 684,740 | | | | 650,853 | | | | 1,000 | | | | 1,000 | | | | 1,000 | |
| Book value per common share | | | 5.49 | | | | 7.33 | | | | 5.62 | | | | 8.20 | | | | 2,417.34 | | | | 3,139.15 | | | | 3,485.10 | |
| Tangible book value per common share | | | 5.10 | | | | 5.09 | | | | 5.13 | | | | 5.75 | | | | 2,417.34 | | | | 3,139.15 | | | | 3,485.10 | |
| Performance Ratios: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Return (loss) on average assets | | | -0.60 | % | | | -0.45 | % | | | -2.74 | % | | | -3.75 | % | | | -2.03 | % | | | -0.92 | % | | | -0.18 | % |
| Return (loss) on average equity | | | -9.55 | % | | | -5.26 | % | | | -31.92 | % | | | -23.29 | % | | | -13.46 | % | | | -5.22 | % | | | -0.97 | % |
| Net interest margin | | | 4.30 | % | | | 3.54 | % | | | 3.57 | % | | | 3.42 | % | | | 4.16 | % | | | 4.51 | % | | | 5.42 | % |
| Asset Quality Ratios: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nonperforming assets to total loans | | | 8.26 | % | | | 3.05 | % | | | 3.37 | % | | | 1.74 | % | | | 16.69 | % | | | 13.21 | % | | | 8.29 | % |
| Allowance for loan losses to nonperforming loans | | | 27.66 | % | | | 41.83 | % | | | 47.76 | % | | | 67.78 | % | | | 26.32 | % | | | 16.01 | % | | | 29.36 | % |
| Allowance for loan losses to total loans | | | 2.20 | % | | | 1.28 | % | | | 1.61 | % | | | 1.18 | % | | | 3.06 | % | | | 2.12 | % | | | 2.44 | % |
| Net (charge-offs) recoveries to average loans | | | -0.35 | % | | | -0.04 | % | | | -0.10 | % | | | -0.04 | % | | | 0.14 | % | | | -0.08 | % | | | 1.02 | % |
| Capital Ratios: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Tier 1 leverage ratio | | | 5.65 | % | | | 6.28 | % | | | 6.83 | % | | | 9.11 | % | | | 6.92 | % | | | 8.61 | % | | | 9.03 | % |
| Tier 1 risk-based capital ratio | | | 8.10 | % | | | 11.07 | % | | | 12.01 | % | | | 9.39 | % | | | 11.22 | % | | | 12.59 | % | | | 15.59 | % |
| Total risk-based capital ratio | | | 9.37 | % | | | 12.01 | % | | | 13.27 | % | | | 10.35 | % | | | 12.48 | % | | | 13.85 | % | | | 16.85 | % |
| Equity to assets ratio | | | 5.55 | % | | | 7.62 | % | | | 5.42 | % | | | 9.33 | % | | | 7.06 | % | | | 8.21 | % | | | 8.97 | % |
(1) Information presented for the Bank only.
Average Balances, Net Interest Income and Rates
The following table sets forth the average balances, net interest income, and expenses and average yields for interest-earning assets and interest-bearing liabilities for the indicated periods. No tax equivalent adjustments were made because the Company does not receive tax-exempt income. All average balances are daily average balances. Non-accruing loans have been included in the table as loans carrying a zero yield. Included in loan interest income are loan fees of $73,000 and $22,000 for the periods ended September 30, 2010 and 2009, respectively, as well as $32,000 and $1,000 for the periods ended December 31, 2009 and 2008, respectively.
| | | As of and for the nine months ended September 30, | | | As of and for the nine months ended September 30, | | | As of and for the year ended December 31, | | | As of and for the period from inception March 12, 2008 to December 31, | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest-earning Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Federal funds sold | | $ | 1,437 | | | $ | 2 | | | | 0.19 | % | | $ | 2,876 | | | $ | 3 | | | | 0.08 | % | | $ | 2,635 | | | $ | 4 | | | | 0.15 | % | | $ | 4,619 | | | $ | 71 | | | | 1.54 | % |
| Interest-bearing deposits with other institutions | | | 458 | | | | 15 | | | | 4.37 | % | | | 492 | | | | 13 | | | | 3.48 | % | | | 496 | | | | 18 | | | | 3.63 | % | | | 20,815 | | | | 542 | | | | 2.60 | % |
| Securities - taxable | | | 5,959 | | | | 119 | | | | 2.66 | % | | | 5,121 | | | | 164 | | | | 4.27 | % | | | 5,073 | | | | 210 | | | | 4.14 | % | | | 5,593 | | | | 207 | | | | 3.70 | % |
| Loans | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Construction | | | 2,854 | | | | 144 | | | | 6.73 | % | | | 2,232 | | | | 75 | | | | 4.48 | % | | | 3,404 | | | | 132 | | | | 3.88 | % | | | 4 | | | | — | | | | 0.00 | % |
| Commercial | | | 823 | | | | 47 | | | | 7.61 | % | | | 1,368 | | | | 65 | | | | 6.34 | % | | | 1,281 | | | | 79 | | | | 6.17 | % | | | 2,942 | | | | 215 | | | | 7.31 | % |
| Real estate | | | 54,206 | | | | 2,595 | | | | 6.38 | % | | | 44,265 | | | | 2,126 | | | | 6.40 | % | | | 46,149 | | | | 2,952 | | | | 6.40 | % | | | 9,939 | | | | 591 | | | | 5.95 | % |
| Consumer | | | 463 | | | | 14 | | | | 4.03 | % | | | 544 | | | | 24 | | | | 5.88 | % | | | 546 | | | | 29 | | | | 5.31 | % | | | 293 | | | | 20 | | | | 6.83 | % |
| Total loans | | | 58,346 | | | | 2,800 | | | | 6.40 | % | | | 48,409 | | | | 2,290 | | | | 6.31 | % | | | 51,380 | | | | 3,192 | | | | 6.21 | % | | | 13,178 | | | | 826 | | | | 6.27 | % |
| Total interest-earning assets | | $ | 66,200 | | | $ | 2,936 | | | | 5.91 | % | | $ | 56,689 | | | $ | 2,470 | | | | 5.81 | % | | $ | 59,584 | | | $ | 3,424 | | | | 5.75 | % | | $ | 44,205 | | | $ | 1,646 | | | | 3.72 | % |
| Interest-Bearing Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Deposits | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| NOW & money market | | $ | 5,951 | | | $ | 7 | | | | 0.16 | % | | $ | 5,429 | | | $ | 6 | | | | 0.15 | % | | $ | 5,345 | | | $ | 27 | | | | 0.51 | % | | $ | 3,816 | | | $ | 33 | | | | 0.86 | % |
| Savings | | | 9,513 | | | | 58 | | | | 0.81 | % | | | 8,530 | | | | 57 | | | | 0.89 | % | | | 8,623 | | | | 55 | | | | 0.64 | % | | | 7,266 | | | | 74 | | | | 1.02 | % |
| Time deposits of less than $100,000 | | | 25,515 | | | | 436 | | | | 2.28 | % | | | 28,116 | | | | 763 | | | | 3.62 | % | | | 6,479 | | | | 114 | | | | 1.76 | % | | | 4,492 | | | | 193 | | | | 4.30 | % |
| Time deposits of $100,000 or more | | | 21,139 | | | | 261 | | | | 1.65 | % | | | 12,050 | | | | 141 | | | | 1.56 | % | | | 35,343 | | | | 1,087 | | | | 3.08 | % | | | 3,875 | | | | 101 | | | | 2.61 | % |
| Total deposits | | | 62,118 | | | | 762 | | | | 1.64 | % | | | 54,124 | | | | 967 | | | | 2.38 | % | | | 55,790 | | | | 1,283 | | | | 2.30 | % | | | 19,449 | | | | 401 | | | | 2.06 | % |
| Borrowings | | | 618 | | | | 39 | | | | 8.41 | % | | | 622 | | | | (2 | ) | | | -0.43 | % | | | 324 | | | | 11 | | | | 3.40 | % | | | 2,053 | | | | 29 | | | | 1.41 | % |
| Total interest-bearing liabilities | | $ | 62,736 | | | $ | 801 | | | | 1.70 | % | | $ | 54,747 | | | $ | 965 | | | | 2.35 | % | | $ | 56,114 | | | $ | 1,294 | | | | 2.31 | % | | $ | 21,502 | | | $ | 430 | | | | 2.00 | % |
(1) For the nine months ended September 30, 2010.
(2) Yields/rates are annualized.
Rate/Volume Analysis
The following table describes the extent to which changes in interest rates and changes in volume of interest-related assets and liabilities have affected the Bank’s interest income and interest expense during the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in volume (change in volume multiplied by prior year rate), (2) changes in rate (change in rate multiplied by prior year volume), and (3) total change in rate and volume. The combined effect of changes in both rate and volume has been allocated proportionately to the change due to rate and the change due to volume. The period ended December 31, 2008 is for the period from inception, March 12, 2008, to December 31, 2008, and not a full twelve month period and the results for the period have been annualized.
| | | As of and for the nine months ended September 30, | | | As of and for the period ended December 31, | |
| | | | | | | |
| | | Increase (Decrease) Due To: | | | Increase (Decrease) Due To: | |
| | | | | | | | | Total Increase (Decrease)(1) | | | | | | | | | | |
| Interest-Earning Assets: | | | | | | | | | | | | | | | | | | |
| Federal funds sold | | $ | 1,040 | | | $ | (2,040 | ) | | $ | (1,000 | ) | | $ | (45 | ) | | $ | (22 | ) | | $ | (67 | ) |
| Interest-bearing deposits with other institutions | | | 2,922 | | | | (922 | ) | | | 2,000 | | | | 317 | | | | (841 | ) | | | (524 | ) |
| Securities - taxable | | | (79,606 | ) | | | 34,606 | | | | (45,000 | ) | | | 15 | | | | (12 | ) | | | 3 | |
Loans(2)(3) | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial | | | 18,497 | | | | (36,497 | ) | | | (18,000 | ) | | | (30 | ) | | | (106 | ) | | | (136 | ) |
| Real estate | | | 31,167 | | | | 506,833 | | | | 538,000 | | | | 37 | | | | 2,451 | | | | 2,493 | |
| Consumer | | | (6,662 | ) | | | (3,338 | ) | | | (10,000 | ) | | | (1 | ) | | | 10 | | | | 9 | |
| Total loans | | | 43,002 | | | | 466,998 | | | | 510,000 | | | | 6 | | | | 2,355 | | | | 2,366 | |
| Total interest-earning assets | | $ | (32,642 | ) | | $ | 498,646 | | | $ | 466,000 | | | $ | 293 | | | $ | 1,480 | | | $ | 1,778 | |
| Interest-Bearing Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Deposits | | | | | | | | | | | | | | | | | | | | | | | | |
| Money market & NOW | | $ | 401 | | | $ | 599 | | | $ | 1,000 | | | $ | — | | | $ | (6 | ) | | $ | (6 | ) |
| Savings | | | (3,169 | ) | | | 4,169 | | | | 1,000 | | | | (37 | ) | | | 18 | | | | (19 | ) |
| Time deposits of less than $100,000 | | | (261,640 | ) | | | (65,360 | ) | | | (327,000 | ) | | | 128 | | | | (207 | ) | | | (79 | ) |
| Time deposits of $100,000 or more | | | (8,179 | ) | | | 111,821 | | | | 120,000 | | | | (26 | ) | | | 1,012 | | | | 986 | |
| Total deposits | | | (256,229 | ) | | | 51,229 | | | | (205,000 | ) | | | 65 | | | | 817 | | | | 882 | |
| Borrowings | | | 40,987 | | | | 13 | | | | 41,000 | | | | (45 | ) | | | 27 | | | | (18 | ) |
| Total interest-bearing liabilities | | $ | (215,642 | ) | | $ | 51,242 | | | $ | (164,000 | ) | | $ | 20 | | | $ | 844 | | | $ | 864 | |
| Change in Net Interest Income | | $ | 182,600 | | | $ | 447,400 | | | $ | 630,000 | | | $ | 273 | | | $ | 636 | | | $ | 914 | |
| (1) | 2010 inputs have been annualized to prepare this analysis. |
| (2) | Nonaccrual loans are included in average loans |
| (3) | Interest income includes amortization of deferred loan fees of $72,336, $21,459, and $31,983 for the nine months ended September 30, 2010 and 2009, and the year ended December 31, 2009, respectively. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following is a discussion and analysis of the Company’s financial position and results of operations and should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this registration statement on Form 10. The Company is an Illinois corporation and is registered as a bank holding company with the Board of Governors of the Federal Reserve. The Company began active operations when it acquired the Bank, its sole subsidiary, on March 12, 2008. The Company’s primary purpose is to own and operate the Bank.
The Bank provides community banking services, and its primary market is the greater Chicago, Illinois metropolitan area.
The Company and the Bank are subject to regulation by numerous agencies including the Federal Reserve, the Federal Deposit Insurance Corporation and the Illinois Department of Financial and Professional Regulation. Among other things, these agencies limit the activities in which the Company and the Bank may engage, limit the investments and loans that the Bank may fund, and set the amount of reserves against deposits that the Bank must maintain.
Critical Accounting Policies
Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and are consistent with predominant practices in the financial services industry. Critical accounting policies are those policies that management believes are the most important to our financial position and results of operations. Application of critical accounting policies requires management to make estimates, assumptions, and judgments based on information available at the date of the financial statements that affect the amounts reported in the financial statements and accompanying notes. Future changes in information may affect these estimates, assumptions, and judgments, which, in turn, may affect amounts reported in the consolidated financial statements.
These policies, along with the disclosures presented in the consolidated financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the consolidated financial statements and how those values are determined.
Certain critical accounting policies involve estimates and assumptions by management. To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has determined that our accounting policies with respect to the allowance for loan losses, goodwill and intangible assets, and income taxes are the accounting areas requiring subjective or complex judgments that are most important to our financial position and results of operations, and, as such, are considered to be critical accounting policies, as discussed below.
Allowance for loan losses. The allowance for loan losses is charged to earnings as an estimate of probable losses. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management periodically evaluates the loan portfolio in order to establish the adequacy of the allowance for loan losses to absorb estimated losses that are probable. This evaluation includes specific loss estimates on certain individually reviewed loans where it is probable that the Company will be unable to collect all the amounts due (principal and interest) according to the contractual terms of the loan agreement. Also included are the loss estimates that reflect the current credit environment and that are not otherwise captured in the historical loss rates. These include the quality and concentration characteristics of the various loan portfolios, adverse situations that may affect a borrower’s ability to repay, and current economic and industry conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses and may require the Company to recognize adjustments to its allowance based on their judgments of information available to them at the time of their examinations.
Goodwill and Intangible Assets. Goodwill represents the excess of cost over fair value of net assets acquired that arose in the acquisition of Community Bank of Lawndale during March 2008. Other intangible assets represent purchased assets from the acquisition of Community Bank of Lawndale during March 2008 that lack physical substance, but can be distinguished from goodwill because of contractual or other legal rights, or because the asset is capable of being sold or exchanged either on its own or in combination with a related contract, asset, or liability.
Goodwill is not amortized, but is subject to impairment tests on at least an annual basis or more frequently if an event occurs or circumstances change that reduce the fair value of a reporting unit below its carrying amount. In the event that we conclude that all or a portion of our goodwill may be impaired, a noncash charge for the amount of such impairment would be recorded in earnings.
The impairment testing process is conducted by assigning net assets and goodwill to each reporting unit. The fair value of each reporting unit is compared to the recorded book value, “step one.” If the fair value of the reporting unit exceeds its carrying value, goodwill is not considered impaired and “step two” is not considered necessary. If the carrying value of a reporting unit exceeds its fair value, the impairment test continues (“step two”) by comparing the carrying value of the reporting unit’s goodwill to the implied fair value of goodwill. The implied fair value is computed by adjusting all assets and liabilities of the reporting unit to current fair value with the offset adjustment to goodwill. The adjusted goodwill balance is t he implied fair value of the goodwill. An impairment charge is recognized if the carrying fair value of goodwill exceeds the implied fair value of goodwill.
At December 31, 2009, the Company tested goodwill for impairment and found it to be fully impaired, which resulted in a charge of $1,186,000. The Company considered projected discounted cash flows and price-to-tangible-book-value multiples in its analysis, as well as qualitative circumstances within the industry. The Company attributes the impairment to continued weakened economic conditions and the resulting impact of market valuations of financial institutions.
Goodwill impairment testing is considered a “critical accounting estimate” as estimates and assumptions are made about future performance and cash flows, as well as other prevailing market factors. Management provides certain information and assumptions that are utilized in the implied fair value calculation. Assumptions critical to the process include discount rates, asset and liability growth rates, and other income and expense estimates. We use the best information currently available to estimate future performance; however, future adjustments to these projections may be necessary if conditions differ substantially from the assumptions utilized in making these assumptions.
Income Tax Accounting. ASC Topic 740 provides guidance on accounting for income taxes by prescribing the minimum recognition threshold that a tax position must meet to be recognized in the financial statements. ASC Topic 740 also provides guidance on measurement, recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. As of December 31, 2009, the Company had no uncertain tax positions. The application of income tax law is inherently complex. Laws and regulations in this area are voluminous and are often ambiguous. As such, we are required to make many subjective assumptions and judgments regarding our income tax exposures. Interpretations of, a nd guidance surrounding, income tax laws and regulations change over time. As such, changes in our subjective assumptions and judgments can materially affect amounts recognized in the consolidated balance sheets and statements of income.
Recent Accounting Pronouncements
FIN 48 “Accounting for Uncertainty in Income Taxes.” In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with SFAS 109, Accounting for Income Taxes. FIN 48 prescribes a comprehensive model for recognizing, measuring, presenting and disclosing in the financial statements tax positions taken or expected to be taken on a tax return. If there are changes in net assets as a result of application of FIN 48, these will be accounted for as an adjustment to the opening balance of accumulated defici t. Additional disclosures about the amounts of such liabilities will also be required. In December 2008, the FASB delayed the effective date of FIN 48 for certain nonpublic enterprises to annual financial statements for fiscal years beginning after December 15, 2008. The Company adopted FIN 48 in its 2009 annual consolidated financial statements. The adoption of this statement did
not have a material impact on its consolidated financial position, results of operations or cash flows. FIN 48 has been incorporated into ASC Topic 740 “Income Taxes.”
ASC Topic 820, “Fair Value Measurements and Disclosures.” ASC Topic 820, “Fair Value Measurements and Disclosures,” defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. The provisions of ASC Topic 820 became effective for the Company on January 1, 2008 for financial assets and financial liabilities and on January 1, 2009 for non-financial assets and non-financial liabilities.
Additional new authoritative accounting guidance under ASC Topic 820 affirms that the objective of fair value when the market for an asset is not active is the price that would be received to sell the asset in an orderly transaction, and clarifies and includes additional factors for determining whether there has been a significant decrease in market activity for an asset when the market for that asset is not active. ASC Topic 820 requires an entity to base its conclusion about whether a transaction was not orderly on the weight of the evidence. The new accounting guidance amended prior guidance to expand certain disclosure requirements. The Company adopted the new authoritative accounting guidance under ASC Topic 820 during the first quarter of 2009. Adoption of the new guidance did n ot significantly impact the Company’s financial statements.
Further new authoritative accounting guidance (Accounting Standards Update No. 2009-5) under ASC Topic 820 provides guidance for measuring the fair value of a liability in circumstances in which a quoted price in an active market for the identical liability is not available. In such instances, a reporting entity is required to measure fair value utilizing a valuation technique that uses (i) the quoted price of the identical liability when traded as an asset, (ii) quoted prices for similar liabilities or similar liabilities when traded as assets, or (iii) another valuation technique that is consistent with the existing principles of ASC Topic 820, such as an income approach or market approach. The new authoritative accounting guidance also clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. The forgoing new authoritative accounting guidance under ASC Topic 820 became effective for the Company’s financial statements for periods ending after October 1, 2009 and did not have a significant impact on the Company’s financial statements.
ASC Topic 860, “Transfers and Servicing.” New authoritative accounting guidance under ASC Topic 860, “Transfers and Servicing,” amends prior accounting guidance to enhance reporting about transfers of financial assets, including securitizations, and where companies have continuing exposure to the risks related to transferred financial assets. The new authoritative accounting guidance eliminates the concept of a “qualifying special-purpose entity” and changes the requirements for derecognizing financial assets. The new authoritative accounting guidance also requires additional disclosures about all continuing involvements with transferred financial assets including information about gains and losses resulting from transfers during the period. The new authoritative accounting guidance under ASC Topic 860 was effective January 1, 2010, and did not have a significant impact on the Company’s financial statements.
In January 2010, the FASB issued an accounting standard providing additional guidance relating to fair value measurement disclosures. Specifically, companies will be required to separately disclose significant transfers into and out of Level 1 and Level 2 measurements in the fair value hierarchy and the reasons for those transfers. Significance should generally be based on earnings and total assets or liabilities, or when changes are recognized in other comprehensive income, based on total equity. Companies may take different approaches in determining when to recognize such transfers, including using the actual date of the event or change in circumstances causing the transfer, or using the beginning or ending of a reporting period. For Level 3 fair value measurements, the new guidance requ ires presentation of separate information about purchases, sales, issuances and settlements. Additionally, the FASB also clarified existing fair value measurement disclosure requirements relating to the level of disaggregation, inputs, and valuation techniques. This accounting standard will be effective for the Company beginning January 1, 2010, except for the detailed Level 3 disclosures, which will be effective beginning January 1, 2011. The adoption of the applicable provisions of the standard on January 1, 2010 did not have a material impact on the Company’s consolidated financial statements as it addresses financial statement disclosures only.
In July 2010, new authoritative guidance under Receivables amended prior guidance to provide a greater level of disaggregated information about the credit quality of loans and the allowance for loan losses. The new
authoritative guidance also requires additional disclosures related to credit quality indicators, past due information, and information related to loans modified in a troubled debt restructuring. The provisions of this guidance will be effective in the year ending December 31, 2011.
Overview
The profitability of the Bank’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 Bank receives on its loan and investment 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 Bank’s loan portfolio. Other income consists of service charges on deposit accounts, securities gains, Bank Enterprise Award grants and fees and commissions. Other expenses includes salaries and employee benefits, as well as occupancy and equipment expenses and other non-interest expenses.
Net interest income is dependent on the amounts and yields of interest-earning assets as compared to amounts of and rates on interest-bearing liabilities. Net interest income is sensitive to changes in market rates of interest and the Bank’s asset/liability management procedures in coping with such changes. The provision for loan losses is dependent on increases in the loan portfolio and management’s assessment of the collectability of the loan portfolio under current economic conditions. Other expenses are heavily influenced by the growth of operations and the cost of employees. Growth in the number of account relationships directly affects such expenses as data processing costs, supplies, postage and other miscellaneous expenses.
Comparison of Financial Condition at September 30, 2010 and December 31, 2009
Total assets increased $3.5 million, or 4.9 percent, to $75.1 million as of September 30, 2010 from $71.6 million as of December 31, 2009. The increase in total assets was primarily due to cash and due from banks balances increasing to $6.7 million at September 30, 2010, compared to $3.7 million at December 31, 2009, an increase of 81.1 percent. Cash and due from banks balances increased in anticipation of paying off short term borrowings during the fourth quarter of 2010. The investment portfolio increased $1.5 million, or 34.9%, to $5.8 million at September 30, 2010 from $4.3 million at December 31, 2009. The increase in securities is the result of the Bank’s decision to move historically low yielding federal funds sold into higher yielding government securities, inc reasing the yield on the funds by over 150 basis points.
Total deposits increased $500,000, or 0.75 percent, to $67.1 million as of September 30, 2010 from $66.6 million as of December 31, 2009. The increase in total deposits was primarily due to transaction and savings deposits increasing to $21.8 million at September 30, 2010, compared to $20.3 million at December 31, 2009, an increase of 7.4 percent. During the period, the Bank redeemed $8.6 million in brokered deposits through the issuance of $7.1 million of certificates of deposit over $100,000. The redemption of $8.6 million in maturing brokered CDs allowed the bank to extend the maturities of its time deposits and lowered the cost to the Bank by over 245 basis points.
Comparison of Results of Operations for the Nine Months Ended September 30, 2010 and September 30, 2009
General. The Company’s net loss for the nine months ended September 30, 2010 was $338,000, compared to a net loss of $223,000 for the nine months ended September 30, 2009. The increase in net loss was primarily the result of a $612,000 increase in noninterest expense and a $361,000 increase the provision for loan losses, partially offset by a $630,000 increase in the net interest margin.
Return on average assets was negative 0.60 percent for the nine months ended September 30, 2010 as compared to negative 0.45 percent for the nine months ended September 30, 2009. Return on average shareholders’ equity was negative 9.55 percent and negative 5.26 percent for the nine months ended September 30, 2010 and the nine months ended September 30, 2009, respectively. The ratio of shareholders’ equity to total assets at September 30, 2010 and 2009 was 5.55 percent and 7.62 percent, respectively.
Interest Income. Interest income increased by $630,000, or 42.0 percent, to $2.1 million for the nine months ended September 30, 2010 from $1.5 million for the nine months ended September 30, 2009. The increase in interest income resulted primarily from an increase in average total interest earning assets of $9.0 million, or 15.7 percent, to $66.2 million at September 30, 2010 from $57.2 million at September 30, 2009, as well as a 15 basis point increase in the average yield. The average yield on interest earning assets was 5.91 percent and 5.76 percent for 2010 and 2009, respectively.
Interest income on the loan portfolio was $2.8 million for the nine months ended September 30, 2010, compared to $2.3 million for the nine months ended September 30, 2009, an increase of $510,000. The increase was primarily due to a $9.9 million increase in average balances, as well as a 9 basis point increase in the yield on the portfolio.
Interest income on the investment portfolio decreased $45,000 due to a 142 basis point decrease in the yield on the portfolio as maturing securities were re-invested at market rates that have declined over the past 12 months, partially offset by a $600,000 increase in average balances. Interest income on federal funds sold decreased $1,000 for the nine months ended September 30, 2010 compared to the nine month period ended September 30, 2009 due mainly to a $1.5 million decrease in average balances, partially offset by an 11 basis point increase in yield.
Interest Expense. Interest expense decreased $164,000, or 17.0 percent, to $801,000 for the nine months ended September 30, 2010 from $965,000 for the nine months ended September 30, 2009. The decrease was due primarily to a 74 basis point, or 31.1 percent, decrease in the average rates paid on time deposits from 2.38 percent for the nine months ended September 30, 2009 to 1.64 percent for the nine months ended September 30, 2010, partially offset by an $8.2 million increase in average time deposit balances. During the nine-month period ended September 30, 2010, total average interest-bearing deposits increased $8.0 million to $63.9 million, an increase of 14.8 percent, from $54.1 million at September 30, 2009. The $8.2 million increas e in time deposit balances was the result of the bank looking to lock in historically low deposit rates.
In September 2009, the Company issued $652,000 in convertible debentures. A majority of the funds received from the debentures was infused into the Bank to increase the Bank’s capital position and allow the Bank to continue expanding its lending and work on its turnaround plan. Interest expense on borrowings increased $41,000, to $39,000 for the nine months ended September 30, 2010 from a negative $2,000 for the nine months ended September 30, 2009 which was the result of an adjustment of an over-accrual of interest in prior years.
Net Interest Income. Net interest income increased $630,000, or 42.3 percent, to $2.1 million for the nine months ended September 30, 2010 from $1.5 million for the nine months ended September 30, 2009.
The increase in net interest income resulted primarily from an increase in net interest margin to 4.30 percent for the nine months ended September 30, 2010 compared to 3.54 percent for the nine months ended September 30, 2009. The $9.0 million increase in total average interest earning assets, primarily loans, was funded by a $10.3 million increase in average interest-bearing liabilities, including an $8.2 million in average time deposit balances.
Provision for Loan Losses. The provision for loan losses is charged to earnings to bring the total allowance for loan losses to a level considered adequate by management to cover probable credit losses in the loan portfolio. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses and may require us to recognize additional provisions based on their judgment of information available to them at the time of their examination.
For the nine months ended September 30, 2010 and the nine months ended September 30, 2009, the provision for losses on loans totaled $486,000 and $125,000, respectively, based on management’s estimate of probable losses.
As of September 30, 2010, the Company’s total nonperforming loans were $4.5 million compared to $1.9 million total nonperforming loans as of December 31, 2009.
The allowance for loan losses was $1.2 million, or 2.2 percent of total loans and 27.7 percent of nonperforming loans, respectively, at September 30, 2010, as compared to $915,000, or 1.61 percent of total loans
and 47.8 percent of nonperforming loans, respectively, at December 31, 2009. The Bank believes, as of September 30, 2010, its allowance for loan losses was adequate to cover probable losses.
Other Income. Other income increased $228,000, or 32.6 percent, to $924,000 for the nine months ended September 30, 2010 from $696,000 for the nine months ended September 30, 2009. The increase was due mainly to a $170,000 increase in the Department of the Treasury’s BEA grant and a $56,000 increase in gains on sale of securities, partially offset by a $14,000 decrease in miscellaneous income and a $12,000 decrease in loan fee income.
Other Expense. Other expense increased $612,000, or 26.6 percent, to $2.9 million for the nine months ended September 30, 2010 from $2.3 million for the nine months ended September 30, 2009. The increase was due mainly to a $324,000 increase in other expenses, including cancellation costs of a data processing contract and consulting expenses for preparation of regulatory filings, a $145,000 increase in personnel costs which included additional personnel for the growing loan portfolio and increased health care costs, as well as a $132,000 increase in FDIC insurance expenses as a result of the increase in deposit accounts.
Income Taxes Expense (Benefits). Because the Bank and the Company have incurred losses, and remain in a loss position, the Bank and the Company have established a valuation allowance for the entire net deferred tax asset balance.
Comparison of Financial Condition at December 31, 2009 and December 31, 2008
Total assets increased $14.4 million, or 25.2 percent, to $71.6 million as of December 31, 2009 from $57.2 million as of December 31, 2008. The increase in total assets was primarily due to total loans increasing to $56.8 million at December 31, 2009, compared to $39.5 million at December 31, 2008, an increase of 43.8 percent. Loans increased mainly due to the hiring of additional loan officers who have utilized their network of contacts to build the Company’s loan portfolio. To increase the Company’s portfolio, the Company also purchased a $1.5 million portfolio of loans from a local financial institution, which met the Bank’s underwriting guidelines.
Total deposits increased $15.2 million, or 29.6 percent, to $66.6 million as of December 31, 2009 from $51.4 million as of December 31, 2008. The increase in total deposits was primarily due to interest-bearing deposits increasing to $61.0 million at December 31, 2009, compared to $46.9 million at December 31, 2008, an increase of 30.1 percent. During the year, the Bank issued $2.7 million in brokered deposits, increased certificates of deposit of over $100,000 by $8.9 million, and increased savings account balances by $2.0 million to fund the growth of the loan portfolio. The Bank also refinanced $17.2 million in maturing brokered CDs, extending the maturities and lowering the cost to the Bank by over 150 basis points.
Due to the lack of taxable income over the past ten years, the Company has a net operating loss carryforward in excess of $10.2 million. The Company has a valuation allowance of $4.0 million against its deferred tax asset, resulting in no deferred tax asset at the present time.
Comparison of Results of Operations for the Year Ended December 31, 2009 and the Period from Inception (March 12, 2008) to December 31, 2008 (the period ended)
General. The Company’s net loss for the year ended December 31, 2009 was $1.8 million compared to a net loss of $1.2 million for the period from inception, March 12, 2008, to December 31, 2008. The increase in net loss was primarily the result of the writedown of $1.2 million of impaired goodwill, partially offset by a $900,000 increase in the net interest margin. The Company considered projected discount cash flows and price-to-tangible-book-value multiples in its goodwill analysis, as well as quantitative circumstances within the industry. The Company attributes the impairment to continued weakened economic conditions and the resulting impact of market valuations on financial institutions.
Return on average assets was negative 2.74 percent for the year ended December 31, 2009 as compared to negative 3.75 percent for the period from inception, March 12, 2008, to December 31, 2008. Return on average shareholders’ equity was negative 31.92 percent and negative 23.29 percent for the year ended December 31, 2009 and the period from inception, March 12, 2008, to December 31, 2008, respectively. The ratio of shareholders’ equity to total assets at December 31, 2009 and 2008 was 5.42 percent and 9.33 percent, respectively.
Interest Income. Interest income increased by $1.8 million, or 112.5 percent, to $3.4 million for the year ended December 31, 2009 from $1.6 million for the period from inception, March 12, 2008, to December 31, 2008. The increase in interest income resulted primarily from an increase in average total interest earning assets of $15.4 million, or 34.8 percent, to $59.6 million at December 31, 2009 from $44.2 million at December 31, 2008, as well as a 113 basis point increase in the average yield. The average yield on interest earning assets was 5.75 percent and 4.62 percent for 2009 and 2008, respectively.
Interest income on the loan portfolio was $3.2 million for the year ended December 31, 2009, compared to $826,000 for the period from inception, March 12, 2008, to December 31, 2008, an increase of $2.4 million. The increase was primarily due to a $38.2 million increase in average balances, partially offset by a 6 basis point decrease in the yield on the portfolio. The increase in interest income was due in part to a shorter reporting period, beginning with the purchase of the Bank on March 12, 2008. On an annualized basis, the Bank’s interest income for the year ended December 31, 2008 would have been approximately $1.0 million.
Interest income on the investment portfolio increased $3,000 due to a 44 basis point increase in the yield on the portfolio, partially offset by a $520,000 decrease in average balances. Interest income on federal funds sold declined $67,000 due to a $2.0 million decrease in average balances as well as a 139 basis point drop in yield as the federal funds target rate dropped to 0.25% for most of the year. Interest on deposits in other financial institutions decreased $524,000 primarily due to the decrease in stock subscription escrow balances upon the issuance of stock used in the acquisition of the Bank.
Interest Expense. Interest expense on deposits increased $882,000, or 220.0 percent, to $1.3 million for the year ended December 31, 2009 from $401,000 for the period from inception, March 12, 2008, to December 31, 2008. The increase was due to a $36.4 million increase in average total interest-bearing deposits from $19.4 million at December 31, 2008 to $55.8 million at December 31, 2009, an increase of 187.6 percent. In addition, there was a 24 basis point, or 11.7 percent, increase in the average rates paid on deposits from 2.06 percent for the period from inception, March 12, 2008, to December 31, 2008 compared to 2.30 percent for the year ended December 31, 2009. The increase in interest inco me was due in part to a shorter reporting period, beginning with the purchase of the Bank on March 12, 2008. On an annualized basis, the Company’s interest expense would have been approximately $507,000 for the year ended December 31, 2008.
Net Interest Income. Net interest income increased $900,000, or 75.0 percent, to $2.1 million for the year ended December 31, 2009 from $1.2 million for the period from inception, March 12, 2008, to December 31, 2008.
The increase in net interest income resulted primarily from an increase in net interest margin to 3.57 percent for the year ended December 31, 2009 compared to 3.42 percent for the period from inception, March 12, 2008, to December 31, 2008. The increase in net interest income was due in part to a shorter reporting period, beginning with the purchase of the Bank on March 12, 2008. On an annualized basis, the Company’s net interest income would have been approximately $1.5 million for the year ended December 31, 2008.
Provision for Loan Losses. The provision for loan losses is charged to earnings to bring the total allowance for loan losses to a level considered adequate by management to cover probable credit losses in the loan portfolio. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses and may require us to recognize additional provisions based on their judgment of information available to them at the time of their examination.
For the year ended December 31, 2009 and the period from inception, March 12, 2008, to December 31, 2008, the provision for losses on loans totaled $497,000 and $347,000, respectively, based on management’s estimate of probable losses.
As of December 31, 2009, the Company’s total nonperforming loans were $1.92 million compared to $689,000 total nonperforming loans as of December 31, 2008.
The allowance for loan losses was $915,000, or 1.61 percent of total loans and 47.8 percent of nonperforming loans, respectively, at December 31, 2009, as compared to $467,000, or 1.18 percent of total loans and 67.8 percent of nonperforming loans, respectively, at December 31, 2008. The Bank believes, as of December 31, 2009, its allowance for loan losses was adequate to cover probable losses.
Other Income. Other income increased $506,000, or 185.3 percent, to $779,000 for the year ended December 31, 2009 from $273,000 for the period from inception, March 12, 2008, to December 31, 2008. The increase was due mainly to a $412,000 increase in CDFI grants obtained.
Other Expense. Other expense increased $2.0 million, or 87.0 percent, to $4.3 million for the year ended December 31, 2009 from $2.3 million for the period from inception, March 12, 2008, to December 31, 2008. On an annualized basis, the results for the period ended December 31, 2008 would have been $2.9 million. The increase was due mainly to a $1.2 million writedown of impaired goodwill and a $396,000 increase in personnel costs as the Company’s turnaround plan required the hiring of multiple executives to execute the plan as well as a $252,000 increase in other expenses, including a $45,000 increase in FDIC premiums with the increase in deposit accounts and a $52,000 increase in consultant fees used in outsourcing non - -core business processes.
Income Taxes Expense (Benefits). Because the Bank and the Company have incurred losses, and remain in a loss position, the Bank and the Company have established a valuation allowance for the entire net deferred tax asset balance.
Comparison of Financial Condition at December 31, 2008 and December 31, 2007
Total assets increased $23.0 million, or 67.3 percent, to $57.2 million as of December 31, 2008 from $34.2 million as of December 31, 2007. The increase in total assets was primarily due to total loans increasing to $39.0 million at December 31, 2008, compared to $15.4 million at December 31, 2007, an increase of over 153.2 percent. The loan portfolio increase was primarily the result of the purchase of $24.3 million in loans from various local financial institutions. All loan purchases were reviewed, and approved, under the Bank’s underwriting guidelines prior to purchase.
Total deposits increased $21.7 million, or 73.1 percent, to $51.4 million as of December 31, 2008 from $29.7 million as of December 31, 2007. The increase in total deposits was primarily due to a $22.8 million increase in interest bearing deposits to $46.9 million at December 31, 2008, compared to $24.1 million at December 31, 2007, an increase of 94.6 percent. During the year, the Bank issued $23.0 million in brokered CDs to fund the purchases and growth of the loan portfolio. The Bank also repaid $2.0 million in maturing FHLB advances during the year.
Comparison of Results of Operations for the Period from Inception (March 12, 2008) to December 31, 2008 and the year ended December 31, 2007
General. The net loss for the period from inception, March 12, 2008, to December 31, 2008 was $1.2 million, compared to a net loss of $722,000 for the year ended December 31, 2007. The increase in net loss resulted from a provision for loan losses of $347,000 for the period from inception, March 12, 2008, to December 31, 2008, compared to no provision for loan losses for the year ended December 31, 2007.
Return on average assets was negative 3.75 percent for the period from inception, March 12, 2008, to December 31, 2008 as compared to negative 2.03 percent for the year ended December 31, 2007.
Interest Income. Interest income decreased by $259,000, or 13.6 percent, to $1.6 million for the period from inception, March 12, 2008, to December 31, 2008 from $1.9 million for the year ended December 31, 2007. The decrease in interest income resulted primarily from the 2008 time period being over two months shorter, beginning with the purchase of the Bank on March 12, 2008. On an annualized basis, the Company’s interest income would have been approximately $2.1 million for the year ended December 31, 2008. During the 2008 period, the yield on average interest-earning assets declined 234 basis points from 6.06 percent for the year ended December 31, 2007 to 3.72 percent for the period from in ception, March 12, 2008, to December 31, 2008. Average total interest earning assets increased $12.7 million, or 40.3 percent, from $31.5 million at December 31, 2007 to $44.2 million at December 31, 2008.
Interest Expense. Interest expense decreased $215,000, or 33.3 percent, to $430,000 for the period from inception, March 12, 2008, to December 31, 2008 from $645,000 for the year ended December 31, 2007. The decrease was due to a decrease in average rates paid on deposits of 17 basis points to 1.65 percent for the period from inception, March 12, 2008, to December 31, 2008 compared to 1.82 percent for the year ended December 31,
2007, and a decrease in average balances of $7.3 million, or 23.2 percent, to $24.2 million for the period from inception, March 12, 2008, to December 31, 2008 compared to $31.5 million in total interest-bearing deposits for the period ended December 31, 2007. On an annualized basis in 2008, the Company’s interest expense would have been approximately $507,000.
Net Interest Income. Net interest income decreased by $44,000, or 3.38 percent, to $1.22 million for the period from inception, March 12, 2008, to December 31, 2008 from $1.26 million for the year ended December 31, 2007.
The decrease in net interest income resulted primarily from the 2008 time period being over two months shorter, beginning with the purchase of the Bank on March 12, 2008. On an annualized basis, the Company’s net interest income would have been approximately $1.5 million for the year ended December 31, 2008. Also contributing to the decline in net interest income was a 126 basis point decline in the net interest margin as faster than expected loan prepayments were reinvested in lower yielding investments until they could fund additional loans.
Provision for Loan Losses. The provision for loan losses is charged to earnings to bring the total allowance for loan losses to a level considered adequate by management to cover probable incurred credit losses in the loan portfolio. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses and may require us to recognize additional provisions based on their judgment of information available to them at the time of their examination.
For the period from inception, March 12, 2008, to December 31, 2008, the provision for losses on loans totaled $347,000 based on management’s estimate of probable incurred losses. There was no provision for loan losses for the year ended December 31, 2007.
As of December 31, 2008, the Company’s total nonperforming loans were $689,000 compared to $1.8 million total nonperforming loans as of December 31, 2007.
The allowance for loan losses was $467,000, or 1.18 percent of total loans and 67.8 percent of nonperforming loans, respectively, at December 31, 2008, as compared to $485,000, or 3.06 percent of total loans and 26.3 percent of nonperforming loans, respectively, at December 31, 2007.
Other Income. Other income decreased $578,000, or 67.9 percent, to $273,000 for the period from inception, March 12, 2008, to December 31, 2008 from $851,000 for the year ended December 31, 2007. On an annualized basis, the other income for the period from inception, March 12, 2008, to December 31, 2008 would have been $345,000. The decrease was due mainly to a $482,000 decrease in CDFI grants obtained. Service fee income decreased as the Bank re-priced some of its products to increase deposits.
Other Expense. Other expense decreased $530,000, or 18.7 percent, to $2.3 million for the period from inception, March 12, 2008, to December 31, 2008 from $2.8 million for the year ended December 31, 2007. On an annualized basis, the results for the period from inception, March 12, 2008, to December 31, 2008 would have been $2.9 million. Salaries and employee benefits increased $139,000 during the period as the Company installed a management team to enact the Company’s turnaround plan. Occupancy expense increased $128,000 as the Company installed a new technology system to support the business.
Income Taxes Expense (Benefits). Because the Bank and the Company have incurred losses and remain in a loss position, the Bank and the Company have established a valuation allowance for the entire net deferred tax asset balance.
Credit Quality Management and Allowance for Loan Losses
Loan quality is monitored by management and reviewed by the Board of Directors. We have established policies, procedures, and practices designed to mitigate credit risk. Chief among these is the management Loan Committee review process, which presents selected credits based on amount and risk before a group of seasoned credit professionals who vet the loan at approval and then at appropriate intervals. Also in place to monitor and manage loan quality are standard lending and credit policies, underwriting criteria, and collateral monitoring. We
monitor and implement our formal credit policies and procedures and regularly evaluate trends, collectability, and collateral protection within the loan portfolio. Our policies and procedures are regularly reviewed and modified in order to manage risk as conditions change and new credit products are offered.
Our credit administration policies include a comprehensive loan rating system. This system allows for common reference across loan types and facilitates the identification of emerging problems in loan transactions. Our internal credit review function performs regular reviews of the lending groups to assess the accuracy of loan ratings and the adherence to credit policies. Exam results are communicated to senior lending and risk management executives as well as specified Board of Directors committees. Lending officers have the primary responsibility for monitoring their client relationships and effecting timely changes to loan ratings as events warrant.
In addition, the Bank’s senior lenders actively review those loans that call for more extensive monitoring and may warrant some degree of remediation. These loans are reviewed at least quarterly by a committee of senior lending and risk management officers, including the Chief Executive Officer, which assesses and directs action plans to minimize the risk of these loans. More troubled loans are reviewed on a monthly basis for heightened oversight with such reviews including the participation of the Chief Executive Officer.
We also maintain an allowance for loan losses to absorb probable losses inherent in the loan portfolio. The allowance for loan losses represents our estimate of probable losses in the portfolio at each balance sheet date and is supported by available and relevant information. The allowance contains provisions for probable losses that have been identified relating to specific borrowing relationships, as well as probable losses inherent in the loan portfolio and credit undertakings that are not specifically identified. We evaluate the sufficiency of the allowance for loan losses based on the combined total of the general and specific reserve components. Our application of the methodology for determining the allowance for loan losses resulted in an allowance for loan losses of $1.2 million at S eptember 30, 2010, providing 2.2% coverage of total loans compared with $915,000 at December 31, 2009 providing 1.61% coverage of total loans and $467,000 providing 1.18% coverage of total loans at December 31, 2008. The changes in the allowance for loan losses from December 31, 2008 reflect management’s judgment concerning the credit risk inherent in the portfolio. During 2010, the Company has enhanced its analysis of its loan loss allowance to include historical losses, trends in past due balances and nonaccruals, changes in volume among loan types as well as economic and industry trends. In addition, the Company individually analyzes impaired loans in detail and reserves accordingly for each impaired loan. We believe that the allowance for loan losses is adequate to provide for probable and reasonably estimable credit losses inherent in our loan portfolio as of September 30, 2010.
Non-Performing Loans and Potential Problem Loans
Generally, loans are placed on non-accrual status if principal or interest payments become ninety days or more past due and management deems the collectability of the principal and interest to be in question. Loans to customers whose financial condition has deteriorated are considered for non-accrual status whether or not the loan is 90 days or more past due.
Once interest accruals are discontinued, accrued but uncollected interest is charged to current year operations. Subsequent receipts on non-accrual loans are recorded as a reduction of principal, and interest income is recorded only after principal recovery is reasonably assured. Classification of a loan as non-accrual does not preclude the ultimate collection of loan principal or interest.
We continue to accrue interest on certain loans ninety days or more past due when such loans are well secured and collection of principal and interest is expected within a reasonable period.
Potential Problem Loans. Potential problem loans consist of loans that are performing in accordance with contractual terms but for which management has concerns about the ability of an obligor to continue to comply with repayment terms because of the obligor’s potential operating or financial difficulties. Management monitors these loans closely and reviews their performance on a regular basis.
Non-Performing Loans. A loan is non-performing when it is more than 90 days past due. Specific allocations are made for loans that are determined to be non-performing. Loans past due less than 90 days may
also be classified as non-performing when management does not expect to collect all amounts due according to the contractual terms of the loan agreement. Specific allocations are measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses as compared to the loan carrying value.
| | | | |
| | | | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | (dollars in thousands) | |
| Commercial | | | — | | | $ | — | | | | 0 | % | | | 3 | | | $ | 200 | | | | 36 | % | | | 3 | | | $ | 200 | | | | 36 | % |
| Construction | | | — | | | | — | | | | 0 | % | | | — | | | | — | | | | 0 | % | | | — | | | | — | | | | 0 | % |
| Real estate: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Residential | | | — | | | | — | | | | 0 | % | | | 16 | | | | 2,958 | | | | 7 | % | | | 16 | | | | 2,958 | | | | 7 | % |
| Commercial | | | 1 | | | | 213 | | | | 2 | % | | | 6 | | | | 1,345 | | | | 15 | % | | | 7 | | | | 1,558 | | | | 18 | % |
| Consumer loans | | | 1 | | | | 2 | | | | 1 | % | | | 1 | | | | 1 | | | | 1 | % | | | 2 | | | | 3 | | | | 1 | % |
| Total loans | | | 2 | | | | 215 | | | | 1 | % | | | 26 | | | | 4,504 | | | | 8 | % | | | 28 | | | | 4,719 | | | | 8 | % |
| | | | |
| | | | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | (dollars in thousands) | |
| Commercial | | | — | | | $ | — | | | | 0 | % | | | 1 | | | $ | 31 | | | | 3 | % | | | 1 | | | $ | 31 | | | | 3 | % |
| Construction | | | — | | | | — | | | | 0 | % | | | 1 | | | | 79 | | | | 3 | % | | | 1 | | | | 79 | | | | 3 | % |
| Real estate: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Residential | | | 1 | | | | 30 | | | | 1 | % | | | 3 | | | | 1,327 | | | | 3 | % | | | 4 | | | | 1,357 | | | | 4 | % |
| Commercial | | | 2 | | | | 155 | | | | 2 | % | | | 7 | | | | 477 | | | | 5 | % | | | 9 | | | | 632 | | | | 7 | % |
| Consumer loans | | | — | | | | — | | | | 0 | % | | | 1 | | | | 2 | | | | 0 | % | | | 1 | | | | 2 | | | | 0 | % |
| Total loans | | | 3 | | | | 185 | | | | 1 | % | | | 13 | | | | 1,916 | | | | 3 | % | | | 16 | | | | 2,101 | | | | 4 | % |
| | | | |
| | | | | | | |
| | | | | | | | | | |
| | | (dollars in thousands) | |
| Commercial | | $ | 200 | | | $ | 31 | | | $ | — | |
| Construction | | | — | | | | 79 | | | | — | |
| Real estate: | | | | | | | | | | | | |
| Residential | | | 2,958 | | | | 1,327 | | | | 290 | |
| Commercial | | | 1,345 | | | | 477 | | | | 399 | |
| Consumer loans | | | 1 | | | | 2 | | | | — | |
| Total | | $ | 4,504 | | | $ | 1,916 | | | $ | 689 | |
| Total as a percentage of total assets | | | 6.00 | % | | | 2.68 | % | | | 1.20 | % |
| Non-performing loans as percentage of gross loans | | | 7.94 | % | | | 3.37 | % | | | 1.74 | % |
All of the loans in the above Non-performing Loans table are on non-accrual. There are no loans delinquent more than 90 days that are still accruing interest. The table does not include restructured loans in the amount of $211,000 at December 31, 2009 and September 30, 2010. The loan loss allowance as a percentage of nonperforming loans was 27.7% at September 30, 2010 compared to 47.8% at December 31, 2009 and 67.8% at December 31, 2008.
Analysis of Allowance for Loan Losses
The Company has established an allowance for loan losses to provide for those loans that may not be repaid in their entirety. The allowance for loan losses is currently maintained at a level considered by management to be adequate to provide for probable loan losses. The allowance is increased by provisions charged to earnings and is reduced by charge-offs, net of recoveries. The provision for loan losses is based on management’s evaluation of the loan portfolio under current economic conditions. Loans are charged to the allowance for loan losses when, and to the extent, they are deemed by management to be uncollectible. The allowance for loan losses is composed of allocations for specific loans and a general reserve for all other loans.
The following table sets forth loans charged off and recovered and an analysis of the allowance for loan losses for the period since inception (March 12, 2008) to December 31, 2008, the year ended December 31, 2009 and the nine month period ended September 30, 2010.
| | | As of and for the nine months ended September 30, 2010 | | | As of and for the year ended December 31, 2009 | | | As of and for the period from inception (March 31, 2008) to December 31, 2008 | |
| | | (dollars in thousands) | |
| Average total loans | | $ | 58,346 | | | $ | 51,380 | | | $ | 13,178 | |
| Total loans at end of period | | | 56,701 | | | | 56,816 | | | | 39,508 | |
| Total nonperforming loans | | | 4,504 | | | | 1,916 | | | | 689 | |
| Allowance at beginning of period | | $ | 915 | | | $ | 467 | | | $ | 125 | |
| Loans charged-off: | | | | | | | | | | | | |
| Commercial | | | — | | | | (4 | ) | | | — | |
| Construction | | | — | | | | — | | | | — | |
| Real estate | | | | | | | | | | | | |
| Residential | | | (148 | ) | | | (39 | ) | | | — | |
| Commercial | | | — | | | | (3 | ) | | | — | |
| Consumer | | | (8 | ) | | | (7 | ) | | | (6 | ) |
| Total | | | (156 | ) | | | (53 | ) | | | (6 | ) |
| Recoveries: | | | | | | | | | | | | |
| Commercial | | | — | | | | — | | | | — | |
| Construction | | | — | | | | — | | | | — | |
| Real estate | | | | | | | | | | | | |
| Residential | | | — | | | | — | | | | — | |
| Commercial | | | — | | | | — | | | | — | |
| Consumer | | | 1 | | | | 4 | | | | 1 | |
| Total | | | 1 | | | | 4 | | | | 1 | |
| Net recoveries (charge offs) | | | (155 | ) | | | (49 | ) | | | (5 | ) |
| Provision for loan losses | | | 486 | | | | 497 | | | | 347 | |
| Allowance at end of period | | $ | 1,246 | | | $ | 915 | | | $ | 467 | |
| Net recoveries (charge offs) to average total loans | | | (0.35 | %) | | | (0.10 | %) | | | (0.04 | %) |
| Allowance to total loans | | | 2.20 | % | | | 1.61 | % | | | 1.18 | % |
| Allowance to nonperforming loans | | | 27.66 | % | | | 47.76 | % | | | 67.78 | % |
_______________
(1) Nonperforming loans include those loans past due 90 or more days and loans that are on a non-accrual status.
The Bank relies, among other things, on its experienced senior management in determining the appropriate allowance for loan losses on the loan portfolio. In general, management reviews delinquency trends, impaired loans, loan to value ratios and types of collateral. Based on these factors, we determined that the allocation of the allowance for loan losses for these types of loans was appropriate at September 30, 2010.
While management believes that it determines the amount of the allowance based on the best information available at the time, the allowance will need to be adjusted as circumstances change and assumptions are updated. Additions to the allowance for loan losses, which are charged to earnings through the provision for loan losses, are determined based on a variety of factors, including specific reserves, current loan risk ratings, delinquent loans, historical loss experience and economic conditions in our market area. In addition, federal regulatory authorities, as part of the examination process, periodically review our allowance for loan losses. The regulators may require us to record adjustments to the allowance level based upon their assessment of the information available to them at the time of exam ination. Although management believes the allowance for loan losses is sufficient to cover probable
losses inherent in the loan portfolio, there can be no assurance that the allowance will prove sufficient to cover actual loan losses.
Our allowance increased to $1.2 million at September 30, 2010 after increasing to $915,000 as of December 31, 2009 and up from $467,000 as of December 31, 2008. The ratio of the reserve for loan losses to loans was 2.2% as of September 30, 2010 compared to 1.61% as of December 31, 2009, and 1.18% as of December 31, 2008. The provision for loan losses was $486,000 for the period ended September 30, 2010, versus $497,000 for the year ended December 31, 2009, and $347,000 in the period from inception, March 12, 2008, to December 31, 2008. The key factors in determining the level of provision is the composition of our loan portfolio, loan growth, risk rating distribution within each major loan category, historical loss experience and internal and external factors. Weakne ss in the general economy and, in particular, higher vacancy rates in commercial real estate, sponsor bankruptcies, declining real estate values, limited sales activity and little financing activity severely impacted our portfolio.
During the nine month period ended September 30, 2010, net charge-offs totaled $156,000 compared to $49,000 for the year ended December 31, 2009 and $5,000 in the period from inception, March 12, 2008, to December 31, 2008. The increase in charge-offs reflects real estate collateral values, particularly land values, which have remained low. The provision for loan losses at September 30, 2010 totaled $486,000 and exceeded net charge-offs of $333,000.
The following table sets forth information concerning the allocation of the allowance for loan losses by loan category at the dates indicated.
| | | | | | | |
| | | | | | | | | | |
| | | | | | Percentage of Loans to Total Loans | | | | | | Percentage of Loans to Total Loans | | | | | | Percentage of Loans to Total Loans | |
| | | (dollars in thousands) | |
| Commercial | | $ | 2 | | | | 0.97 | % | | $ | 55 | | | | 1.73 | % | | $ | 19 | | | | 4.85 | % |
| Construction | | | 30 | | | | 3.51 | % | | | 38 | | | | 5.46 | % | | | — | | | | 0.01 | % |
| Real estate | | | | | | | | | | | | | | | | | | | | | | | | |
| Residential | | | 797 | | | | 79.16 | % | | | 461 | | | | 75.85 | % | | | 313 | | | | 76.69 | % |
| Commercial | | | 412 | | | | 15.56 | % | | | 352 | | | | 16.00 | % | | | 113 | | | | 17.13 | % |
| Consumer | | | 5 | | | | 0.81 | % | | | 10 | | | | 0.97 | % | | | 5 | | | | 1.32 | % |
| Total allocated reserves | | | 1,246 | | | | 100.00 | % | | | 916 | | | | 100.00 | % | | | 450 | | | | 100.00 | % |
| Unallocated (unfunded) reserve | | | — | | | | | | | | (1 | ) | | | | | | | 17 | | | | | |
| Total allowance for loan losses | | $ | 1,246 | | | | 100.00 | % | | $ | 915 | | | | 100.00 | % | | $ | 467 | | | | 100.00 | % |
Securities
The Bank’s securities portfolio increased $1.4 million from $4.3 million at December 31, 2009 to $5.7 million at September 30, 2010. The following table sets forth the composition of the securities portfolio at the dates indicated.
| | | | | | | |
| | | | | | | | | | | | | |
| | | (dollars in thousands) | |
| Securities held to maturity (at amortized cost) | | | | | | | | | | | | |
| Government sponsored agencies | | $ | — | | | $ | — | | | $ | 3,186 | | | $ | 3,227 | |
| Residential mortgage-backed securities | | | — | | | | — | | | | 752 | | | | 757 | |
| Securities available for sale (at fair value) | | | | | | | | | | | | | | | | |
| U.S. treasury securities | | | 2,028 | | | | 2,083 | | | | | | | | | |
| Government sponsored agencies | | | 3,657 | | | | 3,688 | | | | 401 | | | | 402 | |
| Total securities | | $ | 5,685 | | | $ | 5,771 | | | $ | 4,339 | | | $ | 4,386 | |
The maturity distribution of the securities portfolio as of the dates indicated is shown below:
| | | | | | | |
| | | | | | | | | | | | | |
| | | (dollars in thousands) | |
| Due in one year or less | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Due after one year through five years | | | 4,685 | | | | 4,767 | | | | 601 | | | | 603 | |
| Due after five years through ten years | | | 1,000 | | | | 1,004 | | | | 1,003 | | | | 1,043 | |
| Due after ten years | | | — | | | | — | | | | 1,983 | | | | 1,983 | |
| Mortgage backed and related securities | | | — | | | | — | | | | 752 | | | | 757 | |
| Total | | $ | 5,685 | | | $ | 5,771 | | | $ | 4,339 | | | $ | 4,386 | |
Securities are classified as held to maturity when a company has the positive intent and ability to hold those securities to maturity. These securities are carried at cost, adjusted for amortization of premiums and accretion of discounts. Securities are classified as available for sale if a company decides to sell those securities before maturity. These securities are carried at fair value, adjusted for amortization of premiums and accretion of discounts. Unrealized gains and losses on securities available for sale are recognized in a valuation allowance that is included as a separate component of stockholders’ equity, net of taxes.
At September 30, 2010 and December 31, 2009, all investment securities were either issued by the U.S. Treasury or a government sponsored agency.
Liquidity and Capital Resources
Our primary sources of liquidity are deposits, advances from the Federal Home Loan Bank, amortization and prepayment of loans, maturities of investment securities and other short-term investments, and earnings and funds provided from operations. Bank management believes it has the liquidity necessary to meet unexpected deposit withdrawal requirements or increases in loan demand.
Off-Balance-Sheet Arrangements
Commitments. As a financial services provider, we routinely enter into commitments to extend credit, including loan commitments, standby and commercial letters of credit. While these contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans made by us.
Contractual Obligations. In the ordinary course of operations, we enter into certain contractual obligations. Such obligations include the funding of operations through debt issuances, operating leases for premises and equipment, as well as capital expenditures for new premises and equipment.
The following table summarizes our significant contractual obligations and other potential funding needs at September 30, 2010 and December 31, 2009:
| | | | |
| | | | | | | | | | | | | | | | |
| | | (in thousands) | |
| Operating leases | | $ | 66 | | | $ | 87 | | | $ | — | | | $ | — | | | $ | 153 | |
| Commitments to extend credit | | | 1,556 | | | | — | | | | — | | | | — | | | | 1,556 | |
| Unfunded commitments under lines of credit | | | 453 | | | | — | | | | — | | | | 69 | | | | 522 | |
| Letters of credit | | | — | | | | — | | | | — | | | | — | | | | — | |
| Notes issues | | | 370 | | | | — | | | | — | | | | — | | | | 370 | |
| Total | | $ | 2,445 | �� | | $ | 87 | | | $ | — | | | $ | 69 | | | $ | 2,601 | |
| | | | |
| | | | | | | | | | | | | | | | |
| | | (in thousands) | |
| Operating leases | | $ | 65 | | | $ | 136 | | | $ | — | | | $ | — | | | $ | 201 | |
| Commitments to extend credit | | | 1,809 | | | | — | | | | — | | | | — | | | | 1,809 | |
| Unfunded commitments under lines of credit | | | 474 | | | | — | | | | — | | | | 135 | | | | 609 | |
| Letters of credit | | | — | | | | — | | | | — | | | | — | | | | — | |
| Notes issues | | | 792 | | | | — | | | | — | | | | — | | | | 792 | |
| Total | | $ | 3,140 | | | $ | 136 | | | $ | — | | | $ | 135 | | | $ | 3,411 | |
Impact of Inflation and Changing Prices
The financial statements and related financial data presented in this registration statement regarding the Company have been prepared in accordance with accounting principles generally accepted in the United States of America, which generally require the measurement of financial position and operating results in terms of historical dollars, without considering changes in relative purchasing power over time due to inflation. Unlike most industrial companies, virtually all the Company’s assets and liabilities are monetary in nature. As a result, changes in market interest rates have a greater impact on performance than the effects of inflation.
Quantitative and Qualitative Disclosures about Market Risk
The Company’s primary market risk exposure is interest rate risk. Interest rate risk is the exposure of a banking organization’s financial condition to adverse movements in interest rates.
The Company analyzes its interest rate sensitivity. Interest rate sensitivity is a measure of the difference between amounts of interest-earning assets and interest-bearing liabilities that either reprice or mature within a given
period of time. The difference, or the interest rate repricing “gap,” provides an indication of how our interest rate spread will be affected by changes in interest rates.
A gap is considered positive when the amount of interest-rate-sensitive assets exceeds the amount of interest-rate-sensitive liabilities, and a gap is considered negative when the amount of interest-rate-sensitive liabilities exceeds the amount of interest-rate-sensitive assets.
Generally, during a period of rising interest rates, a negative gap within shorter maturities would adversely affect net interest income, while a positive gap within shorter maturities would result in an increase in net interest income, and during a period of falling interest rates, a negative gap within shorter maturities would result in an increase in net interest income while a positive gap within shorter maturities would have the opposite effect.
Although interest rate sensitivity gap is a useful measurement and contributes toward effective asset and liability management, it is difficult to predict the effect of changing interest rates based solely on that measure. As a result, at least on a quarterly basis, management reviews interest rate risk by means of a rate shock analysis, forecasting the impact of alternative interest rate environments on net interest income and evaluating such impacts against the maximum potential changes in net interest income. The following table shows the estimated impact of an immediate change in interest rates as of the dates indicated.
| | | | |
| | | | -300 | | | | -200 | | | | -100 | | | | -50 | | | | +50 | | | | +100 | | | | +200 | | | | +300 | |
| | | (dollars in thousands) | |
| Dollar Change | | $ | (743 | ) | | $ | (417 | ) | | $ | (116 | ) | | $ | (15 | ) | | $ | 22 | | | $ | 30 | | | $ | 14 | | | $ | (18 | ) |
| Percentage Change | | | (22.3 | %) | | | (12.5 | %) | | | (3.5 | %) | | | (0.5 | %) | | | 0.7 | % | | | 0.4 | % | | | 0.4 | % | | | (0.6 | %) |
| | | | |
| | | | -300 | | | | -200 | | | | -100 | | | | -50 | | | | +50 | | | | +100 | | | | +200 | | | | +300 | |
| | | (dollars in thousands) | |
| Dollar Change | | $ | (978 | ) | | $ | (472 | ) | | $ | (136 | ) | | $ | (60 | ) | | $ | 7 | | | $ | 8 | | | $ | 17 | | | $ | 28 | |
| Percentage Change | | | (26.5 | %) | | | (12.8 | %) | | | (3.7 | %) | | | (1.6 | %) | | | 0.2 | % | | | 0.2 | % | | | 0.5 | % | | | 0.8 | % |
The estimated impact to our net interest income over a one-year period is reflected in dollar terms and percentage change. As an example, this table illustrates that if there had been an instantaneous parallel shift in the yield curve of +100 basis points on December 31, 2009, net interest income would increase by $8,000, or 0.2 percent, over a one-year period.
The Company is located and conducts its business at the Bank’s single branch location at 1111 S. Homan Avenue, Chicago, Illinois 60624. The Bank also leases property at 4006 W. Roosevelt Road, Chicago, Illinois and leases an office at 7610 Roosevelt Road, Forest Park, Illinois. The Company believes that the current facilities are adequate to meet its present and immediately foreseeable needs.
Item 4. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth information as to the Company’s common stock beneficially owned as of September 30, 2010 by (1) each director and named executive officer, (2) all directors and executive officers of the Company and the Bank as a group, and (3) each person known to the Company to be the beneficial owner of five percent or more of the Company’s common stock.
| | | | |
| | Number of Shares Beneficially Owned(1) | | | Percentage Ownership of Common Stock Outstanding | |
Directors and named Executive Officers:(2) | | | | | | |
| William S. Winston | | | 72,140 | | | | 9.50 | % |
| Addie D. Husbands | | | 2,500 | | | | 0.33 | % |
| Herman L. Davis | | | 20,800 | | | | 2.74 | % |
| Belinda Whitfield | | | 200 | | | | 0.03 | % |
| Directors and Officers as a group | | | 95,640 | | | | 12.59 | % |
| Five Percent or Greater Shareholders: | | | | | | | | |
| William S. Winston | | | 72,140 | | | | 9.50 | % |
_______________
| (1) | Beneficial ownership is determined in accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as amended. |
| (2) | The address for each director and executive officer is 1111 S. Homan Avenue, Chicago, Illinois 60624. |
| (3) | Directors not named above beneficially own no shares of the Company's common stock. |
Item 5. Directors and Executive Officers.
Set forth below is information concerning the members of our Board of Directors and executive officers.
| | | Covenant Bancshares, Inc. | Covenant Bank |
| | | |
| William S. Winston | 66 | Chief Executive Officer and Chairman of the Board | Chief Executive Officer and Chairman of the Board |
| | | | |
| Herman L. Davis | 58 | Senior Vice President, Chief Financial Officer, Secretary, Treasurer and Director | President, Chief Operating Officer and Director |
Management of the Company and the Bank are each led by a Board of Directors. The Board of Directors of the Company and the Bank is currently composed of the following individuals: William S. Winston, Herman L. Davis, David Ramseur, Belinda Whitfield, Addie Husbands and Jay Plourde.
The following sets forth the background and experience of the Company’s senior management team and Board of Directors.
William (Bill) S. Winston (66) is the Chairman of the Board of Directors and Chief Executive Officer of the Company and the Bank. In 1989, Bill Winston founded The Living Word Christian Center, a 17,000-member church located in Forest Park, Illinois, and he continues to serve as its Pastor. The Living Word Christian Center has a broad range of entities including a Bible Training Center, a School of Ministry and Missions, the Joseph School of Business, the Forest Park Plaza shopping mall, and the Living Word Christian Academy, among others. Mr. Winston also hosts the Believer’s Walk of Faith television and radio broadcast, which reaches more than
80 million households nationwide and overseas. Prior to joining the ministry, Mr. Winston worked for IBM Corporation, where he rose from a marketing representative to regional marketing manager in IBM’s Midwest region. In that position, he was responsible for more than $35 million in sales revenues per year. Prior to joining IBM, Mr. Winston served as a fighter pilot in the United States Air Force, where he received numerous awards and medals in recognition of his superior skills and accomplishments.
Herman L. Davis (58) is the Senior Vice President, Chief Financial Officer, Secretary, Treasurer and a director of the Company and the President, the Chief Operating Officer, and a director of the Bank. Mr. Davis has 35 years of commercial banking experience, all of which has been for financial institutions in the State of Illinois. Prior to joining the Company, he served as senior vice president and cashier of Advance Bancorp, Inc. (now a part of Charter One Bank) from 1997 to 2003. Previously, he served as Senior Vice President of Lending and Senior Vice President of Operations for Independence Bank of Chicago and Drexel National Bank of Chicago (both now part of Shore Bank of Chicago) from 1987 to 1997. As Senior Vice President of Advance Bancorp, Inc., Mr. Davis’s responsibilities included branch operations, regulatory supervision, data processing, consumer lending, credit administration, security, budgeting and data processing. Prior to joining Advance Bancorp, Inc., Mr. Davis served as Vice President of Corporate Services for Shore Bank of Chicago, from 1996 to 1997, where he was responsible for growing the asset base of the bank through middle-market services. He joined Independence Bank and Drexel National Bank as Senior Vice President and supervised the growth of the bank’s loan portfolio with community lending and specialized services. He also served as a non-voting member of the Board of Directors of Independence Bank from 1987 to 1996. Since 2003, Mr. Davis has been involved with the Company and its efforts to organize or acquire a bank.
Addie D. Husbands (59) is a director of the Company and of the Bank and a retired transportation official. From 1988 to 2009, Ms. Husbands served in various capacities in a regional and national railroad company through the superintendent level. During this time, Ms. Husbands mentored numerous subordinates and oversaw various departments. Prior to entering the transportation industry, Ms. Husbands was employed by American National Bank and Trust Company. With more than 30 years of experience in the transportation industry, Ms. Husbands has a strong background in management and operations.
Jay C. Plourde (57) is a director of the Company and of the Bank and an Executive Director and Head of Equities at CLSA Asia Pacific Markets, Ltd. in New York, New York. Before CLSA Asia Pacific Markets, Inc., Mr. Plourde founded and was Chief Executive Officer of SCIUS Capital. Prior to founding SCIUS Capital in 2000, Mr. Plourde held several executive positions with Credit Suisse First Boston, Credit Lyonnais and CBS Publishing Group. In 1987, he helped establish and develop a research and publishing start-up, 13D Research Inc., and co-founded the 21st Century Digital Industries Fund, L.P. in 1992. He currently serves on board of EAI Corporation. Previously he served on the boards of Atlantic Stem Cell Technologies, HydroFuel systems Inc., Cold Spring Harbor Research Laboratory and Filter Control Technologies. Through his prior work in the investment banking industry and current investment firm position, Mr. Plourde brings to the Board a diverse array of business experiences and extensive knowledge of corporate governance matters.
David Ramseur (50) is a director of the Company and of the Bank and has served as the Dean of the Joseph Business School since August 2008. Prior to the Joseph Business School, Mr. Ramseur spent almost 15 years in technology sales, most recently as an area Sales Manager for Synquest, Inc. from 1997 to 2008. From 1993 to 1997, Mr. Ramseur was a senior marketing representative at the Oracle Corporation, winning the President’s Council award in 1995. While at Computer Associates from 1989 to 1993, David won numerous sales awards in their business application division as well as the 100% Club and Golden Circle awards at IBM until leaving in 1989. Mr. Ramseur brings to the Board a diverse array of business experiences and extensive knowledge of marketing and sales.
Belinda Whitfield (49) is a director of the Company and of the Bank, a principal of Whitfield and Associates LLC and Treasurer of the Living Word Christian Center. Before Whitfield and Associates, Mrs. Whitfield rose through the ranks at Heitman Properties Ltd., leaving in 1996 at the manager level. She currently provides a range of accounting and consulting services to multiple clients, concentrating on faith-based organizations. Through her prior work in the real estate industry and current accounting firm position, Mrs. Whitfield brings to the Board a diverse array of business experiences and extensive knowledge of accounting and auditing matters and is a particularly valuable resource to the Company’s financial management.
On December 14, 2010, John Sorensen, the Company’s President and CEO, tendered his resignation. Effective upon his resignation, the board of directors appointed William S. Winston as Chief Executive Officer.
Item 6. Executive Compensation.
Summary Compensation Table
The following table summarizes the compensation earned during the nine months ended September 30, 2010 and years ended December 31, 2009 and 2008 by the persons at the Company who held the positions of “Principal Executive Officer” and “Principal Financial Officer” during 2010. No other executive officer of the Company or the Bank earned and/or received total compensation in excess of $100,000 in 2009 or 2010.
Name and Principal Position | | | | | | | | | | | | | | | Non-Equity Incentive Plan Compensation | | | Non-Qualified Deferred Compensation Earnings | | | | | | | |
| John L. Sorensen, Jr., Former President and CEO | 2010 | | $ | 157,750 | | | | — | | | | — | | | | — | | | | — | | | | — | | | $ | 9,900 | (1) | | $ | 167,650 | |
| | 2009 | | | 157,750 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 6,000 | (2) | | | 163,750 | |
| | 2008 | | | 118,315 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 5,000 | (3) | | | 123,315 | |
| Herman L. Davis, Chief Financial Officer, Secretary and Treasurer | 2010 | | | 120,000 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 9,900 | (4) | | | 129,900 | |
| | 2009 | | | 120,000 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 6,000 | (5) | | | 126,000 | |
| | 2008 | | | 90,000 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 5,000 | (6) | | | 95,000 | |
William S. Winston, CEO | 2010 | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 4,500 | (7) | | | 4,500 | |
| (1) | Consists of $4,500 in director fees and $5,400 automobile allowance. |
| (2) | Consists of $1,000 in director fees and $5,000 automobile allowance. |
| (3) | Consists of $1,200 in director fees and $3,800 automobile allowance. |
| (4) | Consists of $4,500 in director fees and $5,400 automobile allowance. |
| (5) | Consists of $1,000 in director fees and $5,000 automobile allowance. |
| (6) | Consists of $1,200 in director fees and $3,800 automobile allowance. |
| (7) | Consists of $4,500 in director fees. |
Mr. Davis is also eligible for the 401(k) match of up to 3 percent of his base salary. There are no bonus plans or stock options of any kind available to the named executive officers.
Compensation Discussion and Analysis
Introduction
The compensation of the Company’s named executive officers was determined by the Board of Directors. The Company plans to form a compensation committee consisting of the following members of the Board of Directors: William Winston, Belinda Whitfield and David Ramseur, which will be primarily responsible for reviewing the compensation of the Company’s Chief Executive Officer and President on an annual basis as well as setting the compensation and benefit policies and programs for the Company’s other executive officers.
Executive Compensation Policies and Objectives
The Company’s compensation policies are designed to align the interests of the Company’s executives with those of the Company’s shareholders. Through its policies, the Company seeks to improve profitability and long-term shareholder value by rewarding its executives based on criteria set for individual and corporate performance. The compensation program and policies also are designed to aid in the attraction, motivation and retention of key personnel. The compensation committee will consider all elements of compensation when determining individual components of pay. The Company strives to pay its executive officers a salary that is competitive with market levels. In defining the competitive market, the compensation committee will include companies in the financia l institutions industry with an average size and location comparable to the Company.
At present, we do not have employment agreements with any of our named executive officers.
The Company has not established any equity or non-equity incentive plans for its named executive officers, although we may do so in the future.
The Company has not established any plans that provide for payments or other benefits at, following, or in connection with retirement of our named executive officers.
At the present time, the only element of compensation is the base salary, an automobile allowance, director fees and a 3 percent 401(k) match. In considering annual base salary increases, the compensation committee, in conjunction with the chief executive officer, will review the performance of each of its senior executives individually. In general, competitive trends in the industry and in the Company’s peer group will be followed.
Director Compensation
Company and Bank directors each receive $100 per meeting for attendance at each Board of Directors meeting. The Company intends to form committees of the Board of Directors, and additional fees may be established for service on such committees. The following table sets forth the compensation paid by the Company and the Bank to each of the Company’s directors in 2009 and 2010.
| | | Nine Months Ended September 30, 2010 | | |
| | | | | | | | | | | Non-Equity Incentive Plan Compensation | | | Changes in Pension Value and Non- qualified Deferred Compensation Earnings | | | | | | |
| William S. Winston | | $ | 4,500 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 4,500 | |
| John L. Sorensen, Jr. | | | 4,500 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 4,500 | |
| Herman L. Davis | | | 4,500 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 4,500 | |
| (1) | Directors not named above received no compensation for the period. |
| | | Year Ended December 31, 2009 | | |
| | | | | | | | | | | Non-Equity Incentive Plan Compensation | | | Changes in Pension Value and Non- qualified Deferred Compensation Earnings | | | | | | |
| William S. Winston | | $ | 1,200 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,200 | |
| John L. Sorensen, Jr. | | | 1,200 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,200 | |
| Herman L. Davis | | | 1,200 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,200 | |
| (1) | Directors not named above received no compensation for the period. |
Compensation Committee Interlocks and Insider Participation
As of the date hereof, the Company has not established a compensation committee of the Board of Directors. The functions that would be performed by such committee are performed by our Board of Directors.
Mr. Davis participated in deliberations of the Company’s Board of Directors concerning executive officer compensation.
None of our executive officers has served as a director or as a member of the compensation committee of a company that employs any of our directors.
Item 7. Certain Relationships and Related Transactions, and Director Independence.
Certain Relationships and Related Transactions
The Company and the Bank have conducted, and expect to continue the practice of conducting, banking transactions in the ordinary course of business with their directors, executive officers, employees, and affiliates or
family members of such persons, on substantially the same terms (including pricing, collateral requirements, interest rates and term length) as those then existing at the time and offered to unrelated parties. Any loans made to this group of persons or entities comply with Regulation O as promulgated by the Federal Reserve Board, which includes limiting the aggregate amount that can be loaned to the Banks’ directors and officers.
Independence of Members of the Board of Directors
The Company has not previously registered shares under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended. Furthermore, the Company’s shares are not currently listed on any national securities exchange or other automated quotation system, nor is the Company applying for the initial listing of its securities on any such exchange or system in connection with the filing of this registration statement. The Company, therefore, is not presently governed by specific corporate governance guidelines or rules imposing independence requirements on the composition of the Board of Directors and its committees.
The Company’s Board of Directors currently intends to evaluate the independence of its members according to the definition of “independence” as set forth in The Nasdaq Stock Market Marketplace Rules.
Item 8. Legal Proceedings.
From time to time, we may be party to various legal actions arising in the normal course of business. The Company believes that there is no proceeding threatened or pending against us or the Bank which, if determined adversely, would have a material adverse effect on the financial condition or results of our operations or those of the Bank.
Item 9. Market Price of and Dividends on the Registrant’s Common Equity and Related Stockholder Matters.
(a) Market Information. The Company’s common stock is not registered under the Securities Act of 1933, as amended (the “Securities Act”), or the Securities Exchange Act of 1934, as amended. There is no established public trading market for the Company’s common stock. No shares of common stock are subject to outstanding options or warrants, and there are no outstanding securities convertible into common stock of the Company. As of September 30, 2010, a total of 751,667 shares of our common stock were eligible for resale under Rule 144 promulgated under the Securities Act, to the Company’s knowledge.
(b) Holders. As of September 30, 2010, the Company had 2,863 holders of record of its common stock.
(c) Dividends. The Company has not paid any dividends to date. We have no plans at present to issue dividends to public holders of our common stock.
(d) Securities Authorized for Issuance under Equity Compensation Plans. Presently, the Company has no equity compensation plan in place for its employees.
Item 10. Recent Sales of Unregistered Securities.
The Company offered and sold an aggregate of 689,149 shares of common stock pursuant to an exemption from the registration requirements of the Securities Act, for intrastate offerings as provided in Section 3(a)(11) of the Securities Act and Rule 147 thereunder (the “Intrastate Exemption”), and accordingly such shares of common stock were presented to the Secretary of State of Illinois pursuant to the Illinois Securities Law of 1953, as amended. Section 3(a)(11) provides, in pertinent part, that in order for an offering to qualify for this exemption, each investor must be a resident of the State of Illinois, and accordingly, only residents of the State of Illinois are eligible to participate in such offerings.
None of the offerings in reliance on the Intrastate Exemption involved underwriters or broker-dealers. Therefore, no underwriting discounts or commissions were paid, and the Company received the full gross proceeds of the offering.
| | | | | | | | | | |
March 2004 through March 2008 | Directors and executive management – 41,000 shares; Illinois residents – 650,253 shares | | $ | 10.00 | | | | 650,253 | | | $ | 6,498,000 | |
August 2008 through February 2009 | Directors and executive management – 10,000 shares; Illinois residents – 38,896 shares | | | 10.00 | | | | 38,896 | | | | 389,000 | |
[Q. How many shares were issued upon conversion of the promissory note? When? At what conversion price?]
Item 11. Description of Registrant’s Securities to be Registered.
The Company is authorized to issue 11,000,000 shares of common stock having a par value of $4.50 per share. As of September 30, 2010, there were 751,667 shares of common stock issued and outstanding. As of September 30, 2010, the Company had 2,863 holders of record of its common stock.
Distributions. We can pay dividends if, as and when declared by our Board of Directors, subject to compliance with limitations which are imposed by law. The holders of our common stock will be entitled to receive and share equally in such dividends as may be declared by the Board of Directors out of funds legally available therefor. We have no plans at present to issue dividends to public holders of our common stock.
Voting Rights. Holders of our common stock possess exclusive voting rights in us. Each holder of common stock will be entitled to one vote per share and will not have any right to cumulate votes in the election of directors.
Liquidation. In the event of any liquidation, dissolution or winding up of the Bank, the Company, as holder of the Bank’s capital stock, would be entitled to receive, after payment or provision for payment of all debts and liabilities of the Bank, including all deposit accounts and accrued interest thereon, all assets of the Bank available for distribution. In the event of liquidation, dissolution or winding up of the Company, the holders of its common stock would be entitled to receive, after payment or provision for payment of all its debts and liabilities, all the assets of the Company available for distribution.
Preemptive Rights; Redemption. Holders of our common stock are not entitled to preemptive rights with respect to any shares. The common stock is not subject to redemption.
Item 12. Indemnification of Directors and Officers.
Our certificate of incorporation, as amended, provides for indemnification of the Company’s directors and officers up to the fullest extent authorized by applicable law.
Section 8.75 of the Illinois Business Corporation Act empowers Illinois corporations to indemnify any person who was or is a party, or is threatened to be made a party, to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that the person is or was a director, officer, employee or agent of the Company, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding, so long as such person acted in good faith and in a manner such per son reasonably believed to be in or not opposed to the best interests of the Company and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful.
For actions or suits by or in the right of the Company, no indemnification is permitted in respect of any claim, issue or matter as to which such person is adjudged to be liable to the Company, unless and only to the extent that the court in which the applicable action or suit was brought determines upon application that, despite the
adjudication of liability, but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the court deems proper.
Any indemnification (unless ordered by a court) will be made by the Company only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because the person has met the applicable standard of conduct described above. To the extent that a director, officer, employee or agent of the Company has been successful, on the merits or otherwise, in the defense of any action, suit or proceeding described above or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys’ fees) actually and reasonably incurred by such person in connection therewith. Such indemnification is not exclusive of any other rights to which those indemnified may be entitled under any byla ws, agreement, vote of shareholders or otherwise. Section 8.75 also authorizes the Company to buy and maintain insurance on behalf of any director, officer, employee or agent of the Company, or a person who is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against any liability asserted against such person and incurred by such person in any such capacity, or arising out of the person’s status as such, whether or not the Company has the power to indemnify the person against such liability.
Item 13. Financial Statements and Supplementary Data.
The financial statements required to be included in this registration statement appear at the end of the registration statement beginning on page F-1.
Item 14. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 15. Financial Statements and Exhibits.
(a) The financial statements required to be included in this registration statement appear at the end of the registration statement beginning on page F-1.
(b) See the Exhibit Index below.
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: January 18, 2011 | COVENANT BANCSHARES, INC. By: /s/William S. Winston William S. Winston Chief Executive Officer |
| | By: /s/Herman L. Davis Herman L. Davis Chief Financial Officer |
EXHIBIT INDEX
| |
| 3.1 | Articles of Incorporation of Covenant Bancshares, Inc. |
| 3.2 | Bylaws of Covenant Bancshares, Inc. |
| 11.1 | Statement re Computation of Per Share Earnings |
| 21.1 | Subsidiaries of the Company |
* All exhibits have been previously filed.
INDEX TO FINANCIAL STATEMENTS
| Covenant Bancshares, Inc. and Subsidiary | |
| AUDITED CONSOLIDATED FINANCIAL STATEMENTS - DECEMBER 31, 2009 AND 2008 | |
| Report of Independent Registered Public Accounting Firm | F-2 |
| Consolidated Balance Sheet as of December 31, 2009 and 2008 | F-3 |
Consolidated Statement of Operations for the year ended December 31, 2009 and the period from inception (March 12, 2008) to December 31, 2008 | F-4 |
Consolidated Statement of Changes in Stockholders’ Equity for the year ended December 31, 2009 and the period from inception (March 12, 2008) to December 31, 2008 | F-5 |
Consolidated Statement of Cash Flows for the year ended December 31, 2009 and the period from inception (March 12, 2008) to December 31, 2008 | F-6 |
| Acquisition of Community Bank of Lawndale | F-7 |
| Notes to Consolidated Financial Statements | F-8 |
| UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - SEPTEMBER 30, 2009 AND 2008 | |
| Consolidated Balance Sheet as of September 30, 2010 and December 31, 2009 | F-21 |
| Consolidated Statement of Operations for the three months and nine months ended September 30, 2010 and 2009 | F-22 |
| Consolidated Statement of Cash Flows for the nine months ended September 30, 2010 and 2009 | F-23 |
| Consolidated Statement of Stockholder's Equity for the nine months ended September 30, 2009 | F-24 |
| Consolidated Statement of Stockholder's Equity for the nine months ended September 30, 2010 | F-25 |
McGladrey & Pullen
Certified Public Accountants
We have audited the accompanying consolidated balance sheets of Covenant Bancshares, Inc. and Subsidiary as of December 31, 2009 and 2008, and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for the year ended December 31, 2009 and for the period from inception (March 12, 2008) to December 31, 2008. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Covenant Bancshares, Inc. and Subsidiary as of December 31, 2009 and 2008, and the results of their operations and their cash flows for the year ended December 31, 2009 and for the period from inception (March 12, 2008) to December 31, 2008, in conformity with accounting principles generally accepted in the United States of America.
Schaumburg, Illinois
October 14, 2010
Covenant Bancshares, Inc. and Subsidiary
Consolidated Balance Sheets
December 31, 2009 and 2008
| | | | | | | |
| | | (in thousands) | |
| Assets | | | | | | |
| Cash and due from banks | | $ | 3,244 | | | $ | 1,708 | |
| Federal funds sold | | | 2,708 | | | | 4,319 | |
| Interest-bearing deposits in banks | | | 459 | | | | 803 | |
| Securities available for sale | | | 402 | | | | — | |
Securities held to maturity (fair value approximates $3,984 in 2009 and $6,263 in 2008) | | | 3,938 | | | | 6,168 | |
| Federal Home Loan Bank Stock, at cost | | | 320 | | | | 120 | |
| Loans, net of allowance for loan losses of $915 in 2009; $467 in 2008 | | | 55,901 | | | | 39,041 | |
| Premises and equipment, net | | | 2,907 | | | | 3,079 | |
| Goodwill | | | — | | | | 1,186 | |
| Other intangibles, net | | | 343 | | | | 409 | |
| Prepaid FDIC insurance assessment | | | 760 | | | | — | |
| Accrued interest receivable and other assets | | | 593 | | | | 396 | |
| Total assets | | $ | 71,575 | | | $ | 57,229 | |
Liabilities and Stockholders’ Equity | | | | | | | | |
| Liabilities | | | | | | | | |
| Deposits | | | | | | | | |
| Noninterest-bearing | | $ | 5,569 | | | $ | 4,443 | |
| Interest-bearing | | | 60,992 | | | | 46,940 | |
| Total deposits �� | | | 66,561 | | | | 51,383 | |
| Notes payable | | | 792 | | | | | |
| Accrued interest payable and other liabilities | | | 343 | | | | 507 | |
| Total liabilities | | | 67,696 | | | | 51,890 | |
Commitments, Contigencies and Credit Risk (See Note 13) | | | | | | | | |
| Stockholders’ equity | | | | | | | | |
Common stock, $4.50 par value; 1,000,000 shares authorized; 2009 - 689,749 shares issued and outstanding; 2008 - 650,853 shares issued and outstanding | | | 3,104 | | | | 2,929 | |
| Additional paid-in capital | | | 3,783 | | | | 3,571 | |
| Accumulated deficit | | | (3,009 | ) | | | (1,161 | ) |
| Accumulated other comprehensive income | | | 1 | | | | — | |
| Total stockholders’ equity | | | 3,879 | | | | 5,339 | |
Total liabilities and stockholders’ equity | | $ | 71,575 | | | $ | 57,229 | |
See Notes to Consolidated Financial Statements.
Covenant Bancshares, Inc. and Subsidiary
Consolidated Statements of Operations
Year Ended December 31, 2009 and Period from
Inception (March 12, 2008) to December 31, 2008
| | | Year Ended December 31, 2009 | | | Period from Inception (March 12, 2008) to December 31, 2008 | |
| | | (in thousands) | |
| Interest and dividend income: | | | | | | |
| Loans, including fees | | $ | 3,192 | | | $ | 826 | |
| Securities | | | 210 | | | | 207 | |
| Federal funds sold and other | | | 22 | | | | 613 | |
| Total interest and dividend income | | | 3,424 | | | | 1,646 | |
| Interest expense: | | | | | | | | |
| Deposits | | | 1,283 | | | | 401 | |
| Borrowings | | | 11 | | | | 29 | |
| Total interest expense | | | 1,294 | | | | 430 | |
| Net interest income | | | 2,130 | | | | 1,216 | |
| Provision for loan losses | | | 497 | | | | 347 | |
| Net interest income after provision for loan losses | | | 1,633 | | | | 869 | |
| Noninterest income: | | | | | | | | |
| Service charges on deposit accounts | | | 194 | | | | 190 | |
| Bank Enterprise Award grant | | | 430 | | | | 18 | |
| Other | | | 155 | | | | 65 | |
| | | | 779 | | | | 273 | |
| Noninterest expenses: | | | | | | | | |
| Salaries and employee benefits | | | 1,400 | | | | 1,004 | |
| Occupancy and equipment expense | | | 668 | | | | 534 | |
| Data processing | | | 218 | | | | 267 | |
| Professional fees | | | 137 | | | | 112 | |
| Other intangibles amortization | | | 66 | | | | 53 | |
| FDIC insurance expense | | | 72 | | | | 27 | |
| Goodwill impairment | | | 1,186 | | | | — | |
| Other | | | 513 | | | | 306 | |
| | | | 4,260 | | | | 2,303 | |
| Net loss before income taxes | | | (1,848 | ) | | | (1,161 | ) |
| Income tax expense | | | — | | | | — | |
| Net loss | | $ | (1,848 | ) | | $ | (1,161 | ) |
See Notes to Consolidated Financial Statements.
Covenant Bancshares, Inc. and Subsidiary
Consolidated Statements of Changes in Stockholders’ Equity
Year Ended December 31, 2009 and Period from
Inception (March 12, 2008) to December 31, 2008
| | | | | | | | | | | | | | | Accumulated Other Comprehensive Income | | | | |
| | | | | | (in thousands except share data) | |
| Issuance of 650,853 shares of common stock, net of issuance cost of $8 | | | 650,853 | | | $ | 2,929 | | | $ | 3,571 | | | $ | — | | | $ | — | | | $ | 6,500 | |
| Net loss (comprehensive loss) | | | — | | | | — | | | | — | | | | (1,161 | ) | | | — | | | | (1,161 | ) |
| Balance, December 31, 2008 | | | 650,853 | | | | 2,929 | | | | 3,571 | | | | (1,161 | ) | | | — | | | | 5,339 | |
| Issuance of 38,896 shares of common stock, net of issuance cost of $2 | | | 38,896 | | | | 175 | | | | 212 | | | | — | | | | — | | | | 387 | |
| Comprehensive loss: | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss | | | — | | | | — | | | | — | | | | (1,848 | ) | | | — | | | | (1,848 | ) |
| Unrealized gain on securities available for sale | | | — | | | | — | | | | — | | | | — | | | | 1 | | | | 1 | |
| Total comprehensive loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | (1,847 | ) |
| Balance, December 31, 2009 | | | 689,749 | | | $ | 3,104 | | | $ | 3,783 | | | $ | (3,009 | ) | | $ | 1 | | | $ | 3,879 | |
See Notes to Consolidated Financial Statements.
Covenant Bancshares, Inc. and Subsidiary
Consolidated Statements of Cash Flows
Year Ended December 31, 2009 and Period from
Inception (March 12, 2008) to December 31, 2008
| | | Year Ended December 31, 2009 | | | Period from Inception (March 12, 2008) to December 31, 2008 | |
| | | (in thousands) | |
| Cash Flows From Operating Activities | | | | | | |
| Net loss | | $ | (1,848 | ) | | $ | (1,161 | ) |
| Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | | | | | | | | |
| Net accretion (amortization) of securities | | | 3 | | | | (10 | ) |
| Provision for loan losses | | | 497 | | | | 347 | |
| Amortization of other intangibles | | | 66 | | | | 53 | |
| Depreciation and amortization of premises and equipment | | | 337 | | | | 255 | |
| Goodwill impairment | | | 1,186 | | | | — | |
| (Increase) decrease in accrued interest receivable and other assets | | | (197 | ) | | | 778 | |
| (Increase) in prepaid FDIC insurance assessment | | | (760 | ) | | | — | |
| (Decrease) increase in accrued interest payable and other liabilities | | | (164 | ) | | | 347 | |
| Net cash (used in) provided by operating activities | | | (880 | ) | | | 609 | |
Cash Flows From Investing Activities | | | | | | | | |
| Net decrease in federal funds sold | | | 1,611 | | | | 937 | |
| Net decrease in interest-bearing deposits in banks | | | 344 | | | | 496 | |
| Purchases of securities held to maturity | | | (200 | ) | | | (8,129 | ) |
| Proceeds from maturities, prepayments and calls of securities held to maturity | | | 2,431 | | | | 8,204 | |
| Purchases of securities available for sale | | | (605 | ) | | | — | |
| Proceeds from maturities, prepayments and calls of securities available for sale | | | 200 | | | | — | |
| Purchase of Federal Home Loan Bank Stock | | | (200 | ) | | | (120 | ) |
| Net increase in loans | | | (17,357 | ) | | | (25,297 | ) |
| Purchase of premises and equipment | | | (165 | ) | | | (352 | ) |
| Net cash paid for bank acquisition | | | — | | | | (1,335 | ) |
| Net cash (used in) investing activities | | | (13,941 | ) | | | (25,596 | ) |
Cash Flows From Financing Activities | | | | | | | | |
| Net increase in deposits | | | 15,178 | | | | 22,195 | |
| Repayment of other borrowings | | | — | | | | (2,000 | ) |
| Proceeds from issuance of notes payable | | | 792 | | | | — | |
| Proceeds from issuance of common stock | | | 387 | | | | 6,500 | |
| Net cash provided by financing activities | | | 16,357 | | | | 26,695 | |
Net change in cash and due from banks | | | 1,536 | | | | 1,708 | |
Cash and due from banks: | | | | | | | | |
| Beginning �� | | | 1,708 | | | | — | |
Ending | | $ | 3,244 | | | $ | 1,708 | |
Covenant Bancshares, Inc. and Subsidiary
| | | Year Ended December 31, 2009 | | | Period from Inception (March 12, 2008) to December 31, 2008 | |
| | | (in thousands) | |
| Acquisition of Community Bank of Lawndale | | | | | | |
| Assets purchased: | | | | | | |
Cash and due from banks | | $ | — | | | $ | 1,556 | |
Federal funds sold | | | — | | | | 5,256 | |
Interest-bearing deposits in banks | | | — | | | | 1,299 | |
Securities held to maturity | | | — | | | | 6,233 | |
Loans, net of allowance for loan losses of $125 | | | — | | | | 14,091 | |
Premises and equipment, net | | | — | | | | 2,982 | |
Accrued interest receivable and other assets | | | — | | | | 1,174 | |
Total assets acquired | | $ | — | | | $ | 32,591 | |
| Liabilities assumed: | | | | | | | | |
Deposits | | $ | — | | | $ | 29,188 | |
Borrowings | | | — | | | | 2,000 | |
Accrued interest payable and other liabilities | | | — | | | | 159 | |
Total liabilities assumed | | $ | — | | | $ | 31,347 | |
Net asset acquired | | $ | — | | | $ | 1,244 | |
Cash paid for bank acquisition | | $ | — | | | $ | 2,892 | |
| Supplemental Disclosures of Cash Flow Information | | | | | | | | |
| Cash payments for | | | | | | | | |
Interest | | $ | 1,291 | | | $ | 352 | |
Income taxes | | | — | | | | — | |
See Notes to Consolidated Financial Statements.
principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method.
have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
There were no securities available for sale at December 31, 2008.
mortgage-backed securities because the mortgage’s underlying securities may be called or repaid without any penalties.
value per share. In June 2010, certain notes were converted upon maturity to 62,610 shares of common stock. Other notes were renewed at similar terms.
consistent with the market approach, the income approach and/or the cost approach in the determination of fair value. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, the Standard establishes a fair value hierarchy for valuation inputs that giv es the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
