XOTC:AKPB Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
FORM 10-Q
(Mark One)

   X     
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2012

_____ 
Transition report pursuant to Section 13 or 15(d) of the Exchange Act of 1934
For the transition period from _____________  to ___________

Commission file number: 0-26003

ALASKA PACIFIC BANCSHARES, INC. 

(Exact name of registrant as specified in its charter)

                                           Alaska                                            
                  92-0167101                   
(State or other jurisdiction of incorporation or organization) 
  (I.R.S. Employer Identification No.)

 2094 Jordan Avenue, Juneau, Alaska  99801

(Address of Principal Executive Offices)
 
(907) 789-4844

(Registrant’s telephone number, including area code)

 
 NA       

(Former name, former address and former fiscal year,
if changed since last report)

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the 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  _____     Smaller reporting company  __X___
(do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes         No     X   
 
State the number of shares outstanding of each of the issuer's classes of common equity as of the latest practicable date:  654,486   shares outstanding on May 1, 2012

 
1

 

ALASKA PACIFIC BANCSHARES, INC.
Juneau, Alaska

INDEX

PART I.  FINANCIAL INFORMATION
 
   
   
Item 1.  Financial Statements
 
   
Condensed Consolidated Balance Sheets
3
Condensed Consolidated Statements of Income
4
Condensed Consolidated Statements of Comprehensive Income
5
Condensed Consolidated Statements of Cash Flows
6
Selected Notes to Condensed Consolidated Interim
Financial Statements
7
   
Item 2.  Management's Discussion and Analysis of
              Financial Condition and Results of Operations
34
   
Item 3.  Quantitative and Qualitative Disclosures About
              Market Risk
 
43
   
Item 4.  Controls and Procedures
43
   
   
PART II.  OTHER INFORMATION
 
   
Item 1. Legal Proceedings
44
   
Item 1A. Risk Factors
44
   
Item 2. Unregistered Sales of Equity Securities and Use
   of Proceeds
44
   
Item 3. Defaults Upon Senior Securities
44
   
Item 4.  Mine Safety Disclosures
44
   
Item 5. Other Information
44
   
Item 6. Exhibits
45
   
Signatures
47


 
2

 

 
PART I.  FINANCIAL INFORMATION
Item 1.  Financial Statements

Alaska Pacific Bancshares, Inc. and Subsidiary
Condensed Consolidated Balance Sheets

(dollars in thousands except share data)
 
March 31,
 2012
(Unaudited)
   
December 31,
2011
 
Assets
           
Cash and due from banks
  $ 3,471     $ 8,307  
Interest-earning deposits in financial institutions
    915       2,751  
Total cash and cash equivalents
    4,386       11,058  
Investment securities available for sale, at fair value  (amortized cost: March 31,
    2012 - $5,652; December 31, 2011 - $5,546)
    5,836       5,714  
Federal Home Loan Bank stock
    1,784       1,784  
Loans held for sale
    162       976  
Loans
    149,441       147,766  
Less allowance for loan losses
    (1,919 )     (1,865 )
Loans, net
    147,522       145,901  
Interest receivable
    573       585  
Premises and equipment, net
    3,177       2,451  
Real estate owned and repossessed assets, net
    754       880  
Mortgage servicing rights, at fair value
    1,085       1,098  
Other assets
    1,602       1,610  
Total Assets
  $ 166,881     $ 172,057  
Liabilities and Shareholders’ Equity
               
Deposits:
               
Noninterest-bearing demand
  $ 28,648     $ 31,748  
Interest-bearing demand
    32,147       33,033  
Money market
    26,727       27,843  
Savings
    20,832       20,987  
Certificates of deposit
    32,245       33,590  
Total deposits
    140,599       147,201  
Federal Home Loan Bank advances
    3,500       3,000  
Advances from borrowers for taxes and insurance
    1,199       691  
Accounts payable and accrued expenses
    454       331  
Interest payable
    150       131  
Other liabilities
    313       161  
Total liabilities
    146,215       151,515  
Shareholders’ Equity:
               
Preferred stock ($0.01 par value; 1,000,000 shares authorized; Series A –
    Liquidation preference $1,000 per share, 4,781 shares issued and outstanding
    at March 31, 2012 and at December 31, 2011)
    4,648       4,631  
Common stock ($0.01 par value; 20,000,000 shares authorized; 655,415 shares
    issued; 654,486 shares outstanding at March 31, 2012 and at December 31,
    2011)
    7       7  
Additional paid-in capital
    6,489       6,486  
Treasury stock
    (11 )     (11 )
Retained earnings
    9,387       9,290  
   Accumulated other comprehensive income
    146       139  
Total shareholders’ equity
    20,666       20,542  
Total Liabilities and Shareholders’ Equity
  $ 166,881     $ 172,057  
                 
See selected notes to condensed consolidated interim financial statements.
         

 
3

 

Alaska Pacific Bancshares, Inc. and Subsidiary
Condensed Consolidated Statements of Income
(Unaudited)
   
Three Months Ended
March 31,
(in thousands, except per share data)
   
2012
2011
Interest Income
       
Loans
   
$2,053
$2,103
Investment securities
   
34
30
Interest-earning deposits with financial institutions
   
3
9
Total interest income
   
2,090
2,142
Interest Expense
       
Deposits
   
119
150
Federal Home Loan Bank advances
   
28
51
Total interest expense
   
147
201
Net Interest Income
   
1,943
1,941
Provision for loan losses
   
90
60
Net interest income after provision for loan losses
   
1,853
1,881
Noninterest Income
       
Mortgage servicing income
   
80
86
Service charges on deposit accounts
   
158
145
Other service charges and fees
   
65
61
Gain on sale of loans
   
110
50
Total noninterest income
   
413
342
Noninterest Expense
       
Compensation and benefits
   
1,090
1,123
Occupancy and equipment
   
345
351
Data processing
   
68
71
Professional and consulting fees
   
115
125
Marketing and public relations
   
40
46
Real estate owned and repossessed assets, net
   
70
3
FDIC assessment
   
27
134
Other
   
224
225
Total noninterest expense
   
1,979
2,078
Income before provision for income taxes
   
287
145
Provision for income taxes
   
113
-
Net income
   
$  174
$  145
Preferred stock dividend and discount accretion
       
Preferred stock dividends
   
60
62
Preferred stock discount accretion
   
17
16
Net income available to common shareholders
   
$  97
$  67
Income per common share:
       
Basic
   
$0.15
$0.10
Diluted
   
$0.13
$0.09
         
See selected notes to condensed consolidated interim financial statements.
 


 
4

 

Alaska Pacific Bancshares, Inc. and Subsidiary
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
   
Three Months Ended
March 31,
(in thousands, except per share data)
   
2012
2011
Net income available to common shareholders
   
$97
$67
Other comprehensive income (loss)
       
   Net unrealized income (loss) on investment securities, net of tax
   
7
(23)
Comprehensive income
   
$104
$44

 
5

 

Alaska Pacific Bancshares, Inc. and Subsidiary
Condensed Consolidated Statements of Cash Flows
(Unaudited)
   
Three Months Ended
March 31,
 
(in thousands)
 
2012
   
2011
 
Operating Activities
           
Net income
  $ 174     $ 145  
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
               
Provision for loan losses
    90       60  
Gain on sale of loans
    (110 )     (50 )
Fair value valuation adjustment mortgage servicing rights
    13       7  
Depreciation and amortization
    69       69  
Amortization of fees, discounts, and premiums, net
    (14 )     (57 )
Stock compensation expense
    3       4  
Loss on sale and impairment of real estate owned and repossessed assets
    40       1  
Loans originated for sale
    (6,849 )     (7,554 )
Proceeds from sale of loans originated for sale
    7,773       3,150  
Cash provided by (used in) changes in operating assets and liabilities:
               
Interest receivable
    12       5  
Other assets
    2       512  
Advances from borrowers for taxes and insurance
    508       507  
Interest payable
    19       (2 )
Accounts payable and accrued expenses
    123       (170 )
Other liabilities
    152       78  
Net cash provided by (used in) operating activities
    2,005       (3,295 )
Investing Activities
               
Purchase of investment securities available for sale
    (261 )     (3,004 )
Maturities and principal repayments of investment securities available for sale, net
    145       141  
Loan originations, net of principal repayments
    (1,690 )     (1,814 )
Proceeds from sale of real estate owned and repossessed assets
    86       601  
Purchase of premises and equipment
    (795 )     (33 )
Net cash (used in) investing activities
    (2,515 )     (4,109 )
Financing Activities
               
Repayments on Federal Home Loan Bank advances
    -       (1,500 )
Proceeds from Federal Home Loan Bank advances
    500       -  
Net decrease in demand and savings deposits
    (5,257 )     (3,373 )
Net decrease in certificates of deposit
    (1,345 )     (2,293 )
Cash dividends paid
    (60 )     (181 )
Net cash (used in) financing activities
    (6,162 )     (7,347 )
Decrease in cash and cash equivalents
    (6,672 )     (14,751 )
Cash and cash equivalents at beginning of period
    11,058       21,023  
Cash and cash equivalents at end of period
  $ 4,386     $ 6,272  
Supplemental information:
               
Cash paid for interest
  $ 128     $ 203  
Net cash paid for (received from) income taxes
    50       (116 )
Net change in fair value of securities available for sale, net of tax
    7       (23 )
Accrued dividends on Series A preferred stock issued to United States Department of Treasury
               
   in Troubled Asset Relief Program Capital Purchase Plan
    31       31  


 
6

 
Alaska Pacific Bancshares, Inc. and Subsidiary
Selected Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)

Note 1 Basis of Presentation
 
The accompanying unaudited condensed consolidated financial statements include the accounts of Alaska Pacific Bancshares, Inc. (the “Company”) and its wholly owned subsidiary, Alaska Pacific Bank (the “Bank”), and have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and to general practices within the financial institutions industry, where applicable.  All significant intercompany balances have been eliminated in the consolidation.  Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.  They should be read in conjunction with the audited consolidated financial statements included in the Form 10-K for the year ended December 31, 2011.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included pursuant to the requirements of the Securities and Exchange Commission (“SEC”) for interim reporting.  The results of operations for the interim periods ended March 31, 2012 and 2011, are not necessarily indicative of the results which may be expected for an entire year or any other period.
 
Certain amounts in prior-period consolidated financial statements have been reclassified to conform to the current-period presentation.  These reclassifications had no effect on net income or shareholders’ equity.
 
The Company has evaluated events and transactions for potential recognition and disclosure through the day the financial statements were issued.

Note 2 – Mortgage Loan Servicing

The Company generally retains the right to service mortgage loans sold to others.  Loans serviced for others at March 31, 2012 and December 31, 2011 was $139.1 million and $138.5 million, respectively.  The Company accounts for mortgage servicing rights (“MSR”) in accordance with Accounting Standards Codification (“ASC”) 860-50, Servicing Assets and Liabilities, which provides an election to record changes in fair value to be reported in earnings in the period in which the change occurs.  The Company uses a model derived valuation methodology to estimate the fair value of MSR obtained from an independent financial advisor on an annual basis.  The annual valuation is reviewed on a quarterly basis for significant changes in assumptions and current market rates.  The model pools loans into tranches of homogeneous characteristics and performs a present value analysis of the expected future cash flows.  The tranches are created by individual loan characteristics such as note rate, product type, and the remittance schedule.  Current market rates are utilized for discounting the future cash flows.  Significant assumptions used in the valuation of the MSR include discount rates, projected repayment speeds, escrow calculations, ancillary income, delinquencies and option adjusted spreads.  
 
 
 
7

 
Key assumptions used in measuring the fair value of the MSR as of March 31, 2012 and 2011 were as follows:
 
(in thousands)
 
March 31,
 
   
2012
   
2011
 
Constant prepayment rate
    18.56 %     16.83 %
Discount rate
    8.08 %     7.94 %
Weighted average life (years)
    23.6       23.9  

 
The change in the balance of mortgage servicing assets is included in the following table:
 
   
Three Months
Ended
March 31,
 
(in thousands)
 
2012
   
2011
 
             
Balance beginning of period
  $ 1,098     $ 1,242  
   Additions to servicing assets
    70       31  
   Disposals of servicing assets
    (70 )     (31 )
   Fair value adjustment
    (13 )     (7 )
Balance end of period
  $ 1,085     $ 1,235  

Note 3 – Fair Value Measurements

We have elected to record certain assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The GAAP standard (ASC 820, Fair Value Measurements and Disclosures) establishes a consistent framework for measuring fair value and disclosure requirements about fair value measurements.  The standard requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions.  These two types of inputs create the following fair value hierarchy:

Level 1 - Unadjusted quoted prices for identical instruments in active markets;

Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable; and

Level 3 - Instruments whose significant value drivers are unobservable.

An asset or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

 
8

 
The following table sets forth the Company’s assets and liabilities by level within the fair value hierarchy that were measured at fair value on a recurring and non-recurring basis at March 31, 2012 and December 31, 2011.

 (in thousands)
 
Fair Value
   
Quoted
Prices in
Active
Markets for Identical Instruments
 (Level 1)
   
Significant
Other
Observable
Inputs
(Level 2)
   
Significant Unobservable
Inputs
 (Level 3)
 
March 31, 2012:
                       
Recurring:
                       
Available for sale securities:
                       
   Mortgage-backed securities
  $ 2,292     $ -     $ 2,292     $ -  
   Municipal securities
    1,959       -       1,959       -  
   U.S. government agencies
    1,585       -       1,585       -  
Mortgage servicing rights
    1,085       -       -       1,085  
                                 
Non-recurring:
                               
Impaired loans
    2,035       -       -       2,035  
Real estate owned and repossessed assets
    754       -       -       754  
                                 
December 31, 2011:
                               
Recurring:
                               
Available for sale securities:
                               
   Mortgage-backed securities
  $ 2,421     $ -     $ 2,421     $ -  
   Municipal securities
    1,706       -       1,706       -  
   U.S. government agencies
    1,587       -       1,587       -  
Mortgage servicing rights
    1,098       -       -       1,098  
                                 
Non-recurring:
                               
Impaired loans
    2,045       -       -       2,045  
Real estate owned and repossessed assets
    880       -       -       880  

For three months ended March 31, 2012, the changes in Level 3 assets and liabilities measured at fair value on a recurring and non-recurring basis were as follows:

(in thousands)
 
Mortgage
Servicing
Rights
   
Impaired
Loans
   
Real Estate
Owned and Repossessed
Assets
   
For the Year
Ended March
31,
 
Balance as of January 1, 2012
  $ 1,098     $ 2,035     $ 880     $ 4,013  
    Net change in principal                      (86      (86
Realized and Unrealized Net Gains (Losses) included in income
    (13 )     -       (40 )     (53 )
Balance as of March 31, 2012
  $ 1,085     $ 2,035     $ 754     $ 3,874  

 
 
9

 
 
For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of March 31, 2012, the significant unobservable inputs used in the fair value measurements were as follows:
 
   
Fair Value at
March 31, 2012
(in thousands)
 
Valuation
Technique
Significant Unobservable
Inputs
 
Significant Unobservable
Input
 
Mortgage servicing rights
  $ 1,085  
Discounted Cash Flow
Weighted Average
Constant Prepayment Rate
    18.56 %
           
Weighted Average
Discount Rate
    8.08 %
                     
Impaired loans
    2,035  
Appraised value
less cost to sell,
net of discount
Discount Rate Range
    10% - 30 %
Real estate owned and repossessed assets
    754  
Appraised value
less cost to sell,
net of discount
Discount Rate Range
    10% - 30 %

 
The following table sets forth the estimated fair values of the Company’s financial instruments at March 31, 2012 and December 31, 2011:
 
(in thousands
       
Fair Value Measurements at March 31, 2012
 
   
Carrying
Amount
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Financial Assets
                             
Cash and cash equivalents
  $ 4,386     $ 4,386     $ -     $ -     $ 4,386  
Investment securities available for sale
    5,836       -       5,836       -       5,836  
Federal Home Loan Bank stock
    1,784       -       1,784       -       1,784  
Loans, including held for sale, net
    147,684       -       -       130,693       130,693  
Accrued interest receivable
    573       -       573       -       573  
Mortgage servicing rights
    1,085       -       -       1,085       1,085  
                                         
Financial Liabilities
                                       
Demand and savings deposits
    108,354       -       108,354       -       108,354  
Certificates of deposit
    32,245       -       -       33,052       33,052  
Federal Home Loan Bank Advances
    3,500       -       -       3,611       3,611  
Accrued interest payable
    150       -       150       -       150  
                                         
 
 
 
 
10

 

 
(in thousands
       
Fair Value Measurements at December 31, 2011
 
   
Carrying
Amount
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Financial Assets
                             
Cash and cash equivalents
  $ 11,058     $ 11,058     $ -     $ -     $ 11,058  
Investment securities available for sale
    5,714       -       5,714       -       5,714  
Federal Home Loan Bank stock
    1,784       -       1,784       -       1,784  
Loans, including held for sale, net
    148,742       -       -       129,941       129,941  
Accrued interest receivable
    585       -       585       -       585  
Mortgage servicing rights
    1,098       -       -       1,098       1,098  
                                         
Financial Liabilities
                                       
Demand and savings deposits
    113,611       -       113,611       -       113,611  
Certificates of deposit
    33,590       -       -       33,888       33,888  
Federal Home Loan Bank Advances
    3,000       -       -       3,111       3,111  
Accrued interest payable
    131       -       131       -       131  
                                         


The following methods and assumptions were used to estimate the fair value of each class of financial instrument:

Cash, cash equivalents, and accrued interest:  The fair value of cash and cash equivalents and accrued interest is estimated to be equal to the carrying value, due to their short-term nature.
 
Investment Securities:   Securities available-for-sale are recorded at fair value on a recurring basis.  Fair values are based on quoted market prices, where available.  If quoted market prices are not available, fair values are estimated based on quoted market prices of comparable instruments with similar characteristics.  Changes in fair market value are recorded in other comprehensive income.

Mortgage servicing rights:  MSR are measured at fair value on a recurring basis.  These assets are classified as Level 3 as quoted prices are not available and the Company uses a model derived valuation methodology to estimate the fair value of MSR obtained from an independent financial advisor on an annual basis.   The annual valuation is reviewed on a quarterly basis for significant changes in assumptions and current market rates.  The model pools loans into tranches of homogeneous characteristics and performs a present value analysis of the expected future cash flows.  The tranches are created by individual loan characteristics such as note rate, product type, and the remittance schedule.  Current market rate assumptions are utilized for discounting the future cash flows.

Impaired loans:  Impaired loans are measured at fair value on a non-recurring basis and included in the table are impaired loans with a current specific valuation allowance.  These assets are classified as Level 3 where significant value drivers are unobservable.  The fair value of impaired
 
 
 
11

 
 
loans are determined using a discounted cash flow basis or the fair value of each loan’s collateral for collateral-dependent loans as determined by an appraisal of the property, less estimated costs related to liquidation of the collateral.  The appraisal amount may also be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and the client’s business.  Impaired loans with a specific valuation allowance were $2.5 million at March 31, 2012 and December 31, 2011, respectively, with estimated reserves for impairment of $473,000 on both dates.

Real estate owned and repossessed assets:  The $754,000 in real estate owned and repossessed assets at March 31, 2012, represents impaired real estate and repossessed assets that have been adjusted to fair value. Real estate owned and repossessed assets primarily represents real estate and other assets which the Bank has taken control of in partial or full satisfaction of loans. At the time of foreclosure, real estate owned and repossessed assets are recorded at the lower of the carrying amount of the loan or fair value less costs to sell, which becomes the property’s new basis. Any write-downs based on the asset’s fair value at the date of acquisition are charged to the allowance for loan losses. After foreclosure, real estate is carried at the lower of its new cost basis or fair value, net of estimated costs to sell.  The fair value of real estate owned is determined by appraisal of the property, less estimated costs related to liquidation of the asset.  The appraisal amount may also be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the asset.  Fair value adjustments on real estate owned and repossessed assets are recognized in noninterest expense.

Federal Home Loan Bank (“FHLB”) stock:  The fair value of FHLB stock is considered to be equal to its carrying value, since it may be redeemed at that value.
 
Loans including held for sale, net:  The fair value of loans net of allowance for loan losses is estimated using present value methods which discount the estimated cash flows, including prepayments as well as contractual principal and interest, using current interest rates appropriate for the type and maturity of the loans.
 
Deposits and other liabilities:  For demand, money market and savings deposits and accrued interest payable, fair value is considered to be carrying value.

Certificates of deposit:  The fair value disclosed for demand deposits, savings, and money market accounts are, by definition, equal to the amount payable on demand at the reporting date.  The fair values of fixed-rate certificates of deposit are estimated using present value methods and current offering rates for such deposits.

FHLB advances:  The estimated fair value approximates carrying value for short-term borrowings. The fair value of long-term fixed-rate borrowings is estimated by discounting future cash flows using current interest rates for similar financial instruments.
 
 
 
12

 
Note 4 – Investment Securities Available for Sale
 
Amortized cost and fair values of investment securities available for sale, including mortgage-backed securities, are summarized as follows:
 
(in thousands)
 
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
 
Fair
Value
March 31, 2012:
       
Mortgage-backed securities:
$2,160
$132
$-
$2,292
Municipal securities:
1,921
39
(1)
1,959
U.S. government agencies
1,571
14
-
1,585
Total
$5,652
$185
($1)
$5,836
         
December 31, 2011:
       
Mortgage-backed securities:
$2,303
$118
$-
$2,421
Municipal securities:
1,668
38
-
1,706
U.S. government agencies
1,575
13
(1)
1,587
Total
$5,546
$169
($1)
$5,714

Available for sale securities at March 31, 2012 that have been in a continuous unrealized loss position are as follows:
 
 
Impaired less than
12 months
Impaired 12 months
or more
Total
(in thousands)
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Municipal
   securities
$257
$ (1)
$ -
$ -
$257
$(1)

 
Available for sale securities at December 31, 2011 that have been in a continuous unrealized loss position are as follows:
 
 
Impaired less than
12 months
Impaired 12 months
or more
Total
(in thousands)
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
U.S.
government
Agencies
$499
$ (1)
$ -
$ -
$499
$(1)
 
There was one security with unrealized losses at March 31, 2012 and December 31, 2011 respectively, which was a municipal security; collectability of principal and interest is considered to be reasonably assured.  The fair values of individual securities fluctuate significantly with interest rates and with market demand for securities with specific structures and characteristics.  

 
 
13

 
Management does not consider these unrealized losses to be other than temporary because the Company does not intend to sell and the Company will likely not be required to sell.
 
No securities were designated as trading or held to maturity at March 31, 2012 or December 31, 2011.
 
The fair value and amortized cost of investment securities at March 31, 2012 is presented below by contractual maturity.  Actual maturities may vary as borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
 
in
thousands
Fair
Value
Mortgage
Backed
Securities
Amortized
Cost
Mortgage
Back
Securities
Fair
Value
Municipal
Securities
Amortized
Cost
Municipal
Securities
Fair Value
U.S
Government
Agencies
Amortized
Cost U.S
Government
Agencies
Maturing
within 1 to 5 years
$7
$7
-
-
$500
$500
Maturing
between 5 and 10 years
189
180
1,959
1,921
1,085
1,071
Maturing
beyond 10 years
2,096
1,973
-
-
-
-
Total
$2,292
$2,160
$1,959
$1,921
$1,585
$1,571

The amortized cost and market value of investment securities pledged to secure public funds deposited with the Bank at March 31, 2012 was $5.7 million and $5.8 million, respectively.  The amortized cost and market value of investment securities pledged to secure public funds deposited with the Bank at December 31, 2011 were $5.5 million and $5.7 million, respectively.
 
There were no sales of securities during the three months ended March 31, 2012 or 2011.
 
At March 31, 2012 the Bank owned $1.8 million of stock of the FHLB of Seattle. As a condition of membership in the FHLB, the Bank is required to purchase and hold a certain amount of FHLB stock, which is based, in part, upon the outstanding principal balance of advances from the FHLB and is calculated in accordance with the Capital Plan of the FHLB.  FHLB stock has a par value of $100 per share, is carried at cost, and is subject to impairment testing per ASC 320-10-35. The FHLB announced that it had a risk-based capital deficiency under the regulations of the Federal Housing Finance Agency (“FHFA”), its primary regulator, and that it would suspend future dividends and the repurchase and redemption of outstanding capital stock. In October 2010, the FHLB entered into a Stipulation and Consent to the Issuance of a Consent Order with
 
 
 
 
14

 
 
the FHFA. The Stipulation and Consent provides that the FHLB of Seattle agrees to a Consent Order issued by the Finance Agency, which requires the bank to take certain specified actions related to its business and operations. The FHLB has communicated that it believes the calculation of risk-based capital under the current rules of the FHFA significantly overstates the market risk of the FHLB’s private label mortgage-backed securities in the current market environment and that it has enough capital to cover the risks reflected in the FHLB’s balance sheet. As a result, an “other than temporary impairment” has not been recorded for the Bank’s investment in FHLB stock. However, continued deterioration in the FHLB’s financial position may result in impairment in the value of those securities. Management will continue to monitor the financial condition of the FHLB as it relates to, among other things, the recoverability of the Bank’s investment.
 
Note 5 – Loans

Loans are summarized as follows:
 
(in thousands)
 
March 31,
 2012
 
December 31,
2011
 
Real estate:
           
Permanent:
           
One- to four-family
  $ 24,005     $ 24,554  
Multifamily
    2,913       2,951  
Commercial nonresidential
    70,964       70,926  
   Land
    8,386       8,435  
Construction:
               
One- to four-family
    914       1,103  
Commercial nonresidential
    3,826       2,042  
   
Commercial business
    20,899       19,197  
Consumer:
               
Home equity
    11,117       11,532  
Boat
    4,613       5,011  
Automobile
    866       913  
Other
    938       1,102  
Total loans
  $ 149,441     $ 147,766  

 
Impaired Loans.  Loans are deemed to be impaired when management determines that it is probable that all amounts due under the contractual terms of the loan agreements will not be collectible in accordance with the original loan agreement. All problem-graded loans are evaluated for impairment.  Impairment is measured by comparing the fair value of the collateral or discounted cash flows to the recorded investment in the loan.  Impaired loans include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties.  These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.
 

 
 
15

 

Impaired loans are set forth in the following table as of March 31, 2012.
 

 
 (in thousands)
 
Unpaid
Contractual
Principal
Balance
   
Recorded
Investment
With No
Allowance
   
Recorded
Investment
With
Allowance
   
Total
Recorded
Investment
   
Related
Allowance
 
Real estate:
                             
Permanent:
                             
One- to four-family
  $ -     $ -     $ -     $ -     $ -  
Multifamily
    655       655       -       655       -  
Commercial nonresidential
    7,462       4,869       2,508       7,377       473  
Land
    2,236       2,223       -       2,223       -  
Construction:
                                       
One- to four-family
    -       -       -       -       -  
Commercial nonresidential
    -       -       -       -       -  
Commercial business
    1,643       1,643       -       1,643       -  
Consumer:
                                       
Home equity
    40       40       -       40       -  
Boat
    -       -       -       -       -  
Automobile
    -       -       -       -       -  
Other
    -       -       -       -       -  
Total
  $ 12,036     $ 9,430     $ 2,508     $ 11,938     $ 473  

Impaired loans are set forth in the following table as of December 31, 2011.
 

 
 (in thousands)
 
Unpaid
Contractual
Principal
Balance
   
Recorded
 Investment
With No
Allowance
   
Recorded
Investment
With
Allowance
   
Total
Recorded
Investment
   
Related
Allowance
 
Real estate:
                             
Permanent:
                             
One- to four-family
  $ -     $ -     $ -     $ -     $ -  
Multifamily
    659       659       -       659       -  
Commercial nonresidential
    7,479       4,877       2,518       7,395       473  
   Land
    2,237       2,224       -       2,224       -  
Construction:
                                       
One- to four-family
    -       -       -       -       -  
Commercial nonresidential
    -       -       -       -       -  
Commercial business
    1,626       1,626       -       1,626       -  
Consumer:
                                       
Home equity
    123       76       -       76       -  
Boat
    -       -       -       -       -  
Automobile
    -       -       -       -       -  
Other
    -       -       -       -       -  
Total
  $ 12,124     $ 9,462     $ 2,518     $ 11,980     $ 473  

 

 
16

 

The following table presents interest income recognized and average recorded investment of impaired loans for the period ended:
 
   
Three Months Ended March 31, 2012
   
Three Months Ended March 31, 2011
 
 (in thousands)
 
Interest
Income
Recognized
   
Average
Recorded
 Investment
   
Interest Income Recognized
   
Average Recorded Investment
 
Real estate:
                       
Permanent:
                       
One- to four-family
  $ -     $ -     $ -     $ -  
Multifamily
    5       657       -       -  
Commercial nonresidential
    73       7,386       113       8,545  
   Land
    19       2,224       25       2,021  
Construction:
                               
One- to four-family
    -       -       -       -  
Commercial nonresidential
    -       -       -       -  
Commercial business
    8       1,635       5       682  
Consumer:
                               
Home equity
    1       58       -       -  
Boat
    -       -       -       -  
Automobile
    -       -       -       -  
Other
    -       -       1       42  
Total
  $ 106     $ 11,960     $ 144     $ 11,289  

 
Nonaccrual loans at March 31, 2012 and December 31, 2011, were as follows:
 
   
March 31,
   
December 31,
 
(in thousands)
 
2012
   
2011
 
Commercial business
  $ 1,448     $ 1,449  
Real Estate:
               
Commercial nonresidential
    957       957  
Land
    202       202  
Consumer:
               
Home equity
    -       37  
   Total
  $ 2,607     $ 2,645  

Troubled Debt Restructurings.  Troubled debt restructured loans are loans for which the Company, for economic or legal reasons related to the borrower’s financial condition, has granted a significant concession to the borrower that it would otherwise not consider.  The Company accounts for troubled debt restructurings in accordance with ASU No. 2011-02.  Troubled debt restructurings of certain receivables identified are deemed impaired under the guidance of Section 310-10-35 of ASU No. 2011-02.  As of March 31, 2012 and December 31,
 
 
 
17

 
2011, the recorded investment in receivables that have been modified in a troubled debt restructuring and that are impaired was $9.6 million, respectively.  Included in these amounts, the Company had $9.0 million and $9.6 million of troubled debt restructurings as of March 31, 2012 and December 31, 2011, respectively, which were performing in accordance with their modified loan terms.  The Company has not committed any additional amounts to lend to borrowers with loans considered to be troubled debt restructurings.
 
Modification Categories:  The Bank considers a variety of modifications to borrowers.  The types of modifications considered can generally be described in the following categories:
 
·  
Rate Modification: A modification in which the interest rate is changed.
 
·  
Term Modification:  A modification in which the maturity date, timing of payments, or frequency of payments is changed.
 
·  
Interest Only Modification:  A modification in which the loan is converted to interest only payments for a period of time.
 
·  
Payment Modification:  A modification in which the dollar amount of the payment is changed, other than an interest only modification described above.
 
·  
Combination Modification:  Any other type of modification, including the use of multiple categories above.
 
The following tables present troubled debt restructurings by concession (terms modified) as of March 31, 2012:
 
                         
(dollars in thousands)
 
Number of
Contracts
   
Accrual
Status
   
Non-
Accrual
Status
   
Total
Modifications
 
Real Estate:
                       
Commercial nonresidential
    11     $ 6,420     $ 957     $ 7,377  
Land
    3       400       202       602  
Commercial business
    4       175       1,427       1,602  
Consumer:
                               
Home equity
    1       40       -       40  
   Total
    19     $ 7,035     $ 2,586     $ 9,621  

The following tables present newly restructured loans that occurred during the three months ended March 31, 2012:
 
     
(in thousands)
Number of Contracts
Payment Modification
Real Estate:
   
Commercial nonresidential
1
  $ 537

 
 
18

 
There was one commercial business loan for $1.4 million and one commercial non-residential loan for $630,000 modified as a troubled debt restructuring within the previous 12 months for which there was a payment default.
 
The Bank’s policy is that loans placed in nonaccrual may be restored to accrual status when delinquent principal and interest payments are brought current and future monthly principal and interest payments are expected to be collected.  In general, the Bank’s policy refers to six months of payment performance as sufficient to warrant a return to accrual status.
 
An age analysis of past due loans, segregated by class of loans, as of March 31, 2012 were as follows:
 
(in thousands)
 
Loans
30-89
Days Past
Due
   
Loans 90
or More
Days
Past Due
   
Total
Past Due
Loans
   
Current
Loans
   
Total
Loans
   
Accruing
Loans 90
or More
Days
Past Due
 
Real estate:
                                   
  Permanent:
                                   
One- to four-family
  $ -     $ -     $ -     $ 24,005     $ 24,005     $ -  
Multifamily
    -       -       -       2,913       2,913       -  
Commercial nonresidential
    1,971       630       2,601       68,363       70,964       -  
   Land
    36       -       36       8,350       8,386       -  
Construction:
                                               
One- to four-family
    -       -       -       914       914       -  
Commercial nonresidential
    -       -       -       3,826       3,826       -  
Commercial business
    20       -       20       20,879       20,899       -  
Consumer:
                                               
Home equity
    -       -       -       11,117       11,117       -  
Boat
    -       -       -       4,613       4,613       -  
Automobile
    10       -       10       856       866       -  
Other
    -       -       -       938       938       -  
Total
  $ 2,037     $ 630     $ 2,667     $ 146,774     $ 149,441       -  

 

 
19

 

An age analysis of past due loans, segregated by class of loans, as of December 31, 2011 were as follows:
 
(in thousands)
 
Loans
30-89 Days
Past Due
   
Loans
90 or More
Days
Past Due
   
Total
Past Due
 Loans
   
Current
 Loans
   
Total
 Loans
   
Accruing
Loans 90
or More
Days
Past Due
 
Real estate:
                                   
   Permanent:
                                   
One- to four-family
  $ -     $ -     $ -     $ 24,554     $ 24,554     $ -  
Multifamily
    -       -       -       2,951       2,951       -  
Commercial nonresidential
    229       -       229       70,697       70,926       -  
    Land
    -       -       -       8,435       8,435       -  
Construction:
                                               
One- to four-family
    -       -       -       1,103       1,103       -  
Commercial nonresidential
    -       -       -       2,042       2,042       -  
Commercial business
    -       -       -       19,197       19,197       -  
Consumer:
                                               
Home equity
    38       37       75       11,457       11,532       -  
Boat
    17       -       17       4,994       5,011       -  
Automobile
    8       -       8       905       913       -  
Other
    -       -       -       1,102       1,102       -  
Total
  $ 292     $ 37     $ 329     $ 147,437     $ 147,766       -  

Credit Quality / Risk Rating System:  The Bank utilizes a risk rating system to segment the risk profile of its loan portfolio. As part of this on-going monitoring system of the credit quality of the Bank’s loan portfolio, management tracks certain credit quality indicators including trends in past due and nonaccrual loans, gross and net charge-offs, and movement in loan balances within the risk classifications.  The Bank’s risk rating system is comprised of nine ranges (1-9) based upon industry best practice and regulator definitions. A brief summary of the general characteristics of the nine risk classes is as follows:

·  
Ratings 1-2: Include loans with the highest credit quality based upon financial performance, high net worth borrowers, an industry category with very positive trends, collateral of readily marketable government securities, time certificates or cash value of life insurance, and other strong financial performance ratios.
 
·  
Ratings 3-4: Include loans with satisfactory financial performance, adequate liquidity and compare favorably to industry performance measurements.  Loans in these categories are typically secured by real estate, inventory, accounts receivable or other collateral that may not be as easily converted to cash.  Loans graded a 4 might, for example, be loans where the borrower’s business is tied to a cyclical or seasonal industry such as tourism or fishing.
 
·  
Rating 5:  This is a “Pass/Watch” category requiring additional management attention.  These are performing loans where there is still no perception of unwarranted or undue credit risk, but because of external events in the marketplace, management change, a shift in financial
 
 
 
 
20

 
 
  
performance or other conditions, which if not addressed could cause further problems.  This is typically a temporary classification.
 
·  
Rating 6:  These are “Special Mention” loans which are currently performing as agreed but have developed a financial weakness, which if not corrected, pose unwarranted risk to the institution. This classification is used when the degree of risk initially evaluated has increased beyond conditions that would have prevented the loan from being originated initially. Prompt corrective action is needed.
 
·  
Rating 7:  These are “Substandard” loans which are no longer protected by adequate cash flow, net work, or collateral.  There is a well-defined weakness that jeopardizes the repayment of the debt and subjects the institution to the possibility of loss.  Loans in this category may or may not have specific valuation allowance assigned to the loan depending on conditions.
 
·  
Ratings 8:  These are loans classified as “Doubtful” which, based upon a variety of negative conditions, will more than likely result in a loss if a set of events do not occur.  These loans have specific valuation allowance to the extent of the calculated impairment.
 
·  
Ratings 9:  These are loans classified as “Loss”.  They are to be charged-off or charged-down because that repayment is uncertain or when the timing or value of payments cannot be determined.  This classification does not imply that the loan will never be paid, nor does it imply that there has been a forgiveness of debt, but does indicate that the value will not be carried on the books of the institution as an earning asset.
 
The loan portfolio, segmented by risk range at March 31, 2012, is shown below:
 
   
Weighted Average Risk Grade
 
(in thousands)
    1 - 4       5 - 6       7 - 9    
Total Loans
 
Real estate:
                             
  Permanent:
                             
One- to four-family
  $ 23,958     $ 47     $ -     $ 24,005  
Multifamily
    2,259       654       -       2,913  
Commercial nonresidential
    62,608       4,337       4,019       70,964  
   Land
    5,834       333       2,219       8,386  
Construction:
                               
One- to four-family
    914       -       -       914  
Commercial nonresidential
    3,826       -       -       3,826  
Commercial business
    18,276       1,078       1,545       20,899  
Consumer:
                               
Home equity
    11,117       -       -       11,117  
Boat
    4,613       -       -       4,613  
Automobile
    866       -       -       866  
Other
    938       -       -       938  
Total
  $ 135,209     $ 6,449     $ 7,783     $ 149,441  

 
 
21

 
 
The loan portfolio, segmented by risk range at December 31, 2011, is shown below:
 
   
Weighted Average Risk Grade
 
(in thousands)
    1 - 4       5 - 6       7 - 9    
Total Loans
 
Real estate:
                             
  Permanent:
                             
One- to four-family
  $ 24,506     $ 48     $ -     $ 24,554  
Multifamily
    2,292       659       -       2,951  
Commercial nonresidential
    62,206       4,689       4,031       70,926  
   Land
    5,879       333       2,223       8,435  
Construction:
                               
One- to four-family
    1,103       -       -       1,103  
Commercial nonresidential
    2,042       -       -       2,042  
Commercial business
    16,524       1,118       1,555       19,197  
Consumer:
                               
Home equity
    11,495       -       37       11,532  
Boat
    5,011       -       -       5,011  
Automobile
    913       -       -       913  
Other
    1,102       -       -       1,102  
Total
  $ 133,073     $ 6,847     $ 7,846     $ 147,766  

The Bank’s Asset Classification Policy requires an ongoing quarterly assessment of the probable estimated losses in the portfolios.  Th