|• FORM 10-Q • AMENDMENT TO ARTICLES OF INCORPORATION • RULE 13A-14(A) CERTIFICATION OF THE COMPANY'S CHIEF EXECUTIVE OFFICER • RULE 13A-14(A) CERTIFICATION OF THE COMPANY'S CHIEF FINANCIAL OFFICER • CERTIFICATION OF CEO AND CFO PURSUANT TO SECTION 1350 • XBRL INSTANCE DOCUMENT • XBRL TAXONOMY EXTENSION SCHEMA • XBRL TAXONOMY EXTENSION CALCULATION LINKBASE • XBRL TAXONOMY EXTENSION DEFINITION LINKBASE • XBRL TAXONOMY EXTENSION LABEL LINKBASE • XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE|
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
For the quarterly period ended March 31, 2012
For the transition period from to
Commission file number 001-33003
CITIZENS COMMUNITY BANCORP, INC.
(Exact name of registrant as specified in its charter)
2174 EastRidge Center, Eau Claire, WI 54701
(Address of principal executive offices)
(Registrants telephone number, including area code)
(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 and 15(d) of the Securities Exchange Act of 1934 during the past 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 þ 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 þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a small reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the registrants classes of common stock, as of the latest practicable date:
At May 15, 2012 there were 5,133,050 shares of the registrants common stock, par value $0.01 per share, outstanding.
MARCH 31, 2012
PART 1 FINANCIAL INFORMATION
Consolidated Balance Sheets
March 31, 2012 (unaudited) and September 30, 2011
(derived from audited financial statements)
(in thousands, except share data)
See accompanying condensed notes to unaudited consolidated financial statements.
Consolidated Statements of Operations (unaudited)
Three and Six Months Ended March 31, 2012 and 2011
(in thousands, except per share data)
See accompanying condensed notes to unaudited consolidated financial statements.
Consolidated Statements of Other Comprehensive Income (unaudited)
Six Months Ended March 31, 2012 and 2011
(in thousands, except per share data)
See accompanying condensed notes to unaudited consolidated financial statements.
Consolidated Statement of
Changes in Stockholders Equity (unaudited)
Six Months Ended March 31, 2012
(in thousands, except Shares)
See accompanying condensed notes to unaudited consolidated financial statements.
Consolidated Statements of Cash Flows (unaudited)
Six Months Ended March 31, 2012 and 2011
(in thousands, except per share data)
See accompanying condensed notes to unaudited consolidated financial statements.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements of Citizens Community Federal (the Bank) included herein have been included by its parent company, Citizens Community Bancorp, Inc. (the Company), pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Citizens Community Bancorp (CCB) was a successor to Citizens Community Federal as a result of a regulatory restructuring into the mutual holding company form, which was effective on March 29, 2004. Originally, Citizens Community Federal was a credit union. In December 2001, Citizens Community Federal converted to a federal mutual savings bank. In 2004, Citizens Community Federal reorganized into the mutual holding company form of organization. In 2006, Citizens Community Bancorp completed its second-step mutual to stock conversion.
The consolidated income (loss) of the Company is principally derived from the Banks income. The Bank originates residential and consumer loans and accepts deposits from customers, primarily in Wisconsin, Minnesota and Michigan. The Bank operates 26 full-service offices; eight stand-alone locations and 18 branches predominantly located inside Walmart Supercenters.
The Bank is subject to competition from other financial institutions and non-financial institutions providing financial products. Additionally, the Bank is subject to the regulations of certain regulatory agencies and undergoes periodic examination by those regulatory agencies.
In preparing these consolidated financial statements, we evaluated the events and transactions that occurred through May 15, 2012, the date on which the financial statements were available to be issued. As of May 15, 2012, there were no subsequent events which required recognition or disclosure.
The accompanying consolidated interim financial statements are unaudited. However, in the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Unless otherwise stated, all amounts are in thousands.
Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Citizens Community Federal. All significant inter-company accounts and transactions have been eliminated.
Use of Estimates Preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying disclosures. These estimates are based on managements best knowledge of current events and actions the Company may undertake in the future. Estimates are used in accounting for, among other items, fair value of financial instruments, the allowance for loan losses, valuation of acquired intangible assets, useful lives for depreciation and amortization, indefinite-lived intangible assets and long-lived assets, deferred tax assets, uncertain income tax positions and contingencies. Management does not anticipate any material changes to estimates made herein in the near term. Factors that may cause sensitivity to the aforementioned estimates include but are not limited to; external market factors such as market interest rates and employment rates, changes to operating policies and procedures, and changes in applicable banking regulations. Actual results may ultimately differ from estimates, although management does not generally believe such differences would materially affect the consolidated financial statements in any individual reporting period.
Securities Securities are classified as available for sale when they might be sold before maturity. Securities available for sale are carried at fair value, with unrealized holding gains and losses deemed other than
temporarily impaired due to non-credit issues being reported in other comprehensive income (loss), net of tax. Unrealized losses deemed other-than-temporary due to credit issues are reported in the Companys earnings in the period in which the losses arise. Interest income includes amortization of purchase premium or accretion of purchase discount. Amortization of premiums and accretion of discounts are recognized in interest income using the interest method over the estimated lives of the securities.
In estimating other-than-temporary impairment, management considers: (1) the length of time and extent that fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the Companys ability and intent to hold the security for a period sufficient to allow for any anticipated recovery in fair value. The difference between the present values of the cash flows expected to be collected and the amortized cost basis is the credit loss. The credit loss is the portion of the other-than-temporary impairment that is recognized in operations and is a reduction to the cost basis of the security. The portion of other-than-temporary impairment related to all other factors is included in other comprehensive income (loss), net of the related tax effect.
Loans Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of unearned interest, and deferred loan fees and costs. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the interest method without anticipating prepayments.
Interest income on mortgage and consumer loans is discontinued at the time the loan is over 91 days delinquent. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual status or charged off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not received for a loan placed on nonaccrual status is reversed against interest income. Interest received on such loans is accounted for on the cash basis or cost recovery method until qualifying for return to accrual status. Loans are returned to accrual status when payments are made that bring the loan account less than 92 days delinquent. Interest on impaired loans considered troubled debt restructurings (TDRs) that are not 91 days delinquent is recognized as income as it accrues based on the revised terms of the loan over an established period of continued payment.
Real estate loans and open ended consumer loans are charged off to estimated net realizable value less estimated selling costs at the earlier of when (a) the loan is deemed by management to be uncollectible, or (b) the loan becomes greater than 180 days past due. Closed end consumer loans are charged off to net realizable value at the earlier of when (a) the loan is deemed by management to be uncollectible, or (b) the loan becomes greater than 120 days past due.
Allowance for Loan Losses The allowance for loan losses (ALL) is a valuation allowance for probable and inherent credit losses in the portfolio. Loan losses are charged against the ALL when management believes that the collectability of a loan balance is unlikely. Subsequent recoveries, if any, are credited to the ALL. Management estimates the ALL balance required using past loan loss experience; the nature, volume and composition of the loan portfolio; known and inherent risks in the portfolio; information about specific borrowers ability to repay; estimated collateral values; current economic conditions; and other relevant factors. The ALL consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component covers non-impaired loans and is based on historical loss experience adjusted for certain qualitative factors. The entire ALL balance is available for any loan that, in managements judgment, should be charged off.
A loan is impaired when full payment under the loan terms is not expected. TDRs are individually evaluated for impairment. See Note 3 Loans, Allowance for Loan Losses and Impaired Loans for information on what we consider to be a TDR. If a loan is impaired, a specific allowance is established so that the loan is reported, net, at the present value of estimated future cash flows using the loans existing rate or at the fair value of collateral if repayment is expected solely from the underlying collateral of the loan. Large groups of smaller balance homogeneous loans, such as non-TDR consumer and residential real estate loans are collectively evaluated for impairment, and accordingly, are not separately identified for impairment disclosures.
Foreclosed and Repossessed Assets Assets acquired through, or instead of loan foreclosure, are initially recorded at fair value, less estimated costs to sell, which establishes a new cost basis. If the fair value declines subsequent to foreclosure or repossession, a valuation allowance is recorded through expense. Costs incurred after acquisition are expensed, and included in Non-interest Expense, Other on the consolidated statement of operations. Foreclosed and repossessed asset balances were $1,126 and $1,360 at March 31, 2012 and September 30, 2011, respectively.
Income Taxes The Company accounts for income taxes in accordance with the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 740, Income Taxes. Under this guidance, deferred taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates that will apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income or expense in the period that includes the enactment date. See Note 6 for details on the Companys income taxes.
The Company regularly reviews the carrying amount of its net deferred tax assets to determine if the establishment of a valuation allowance is necessary. If based on the available evidence, it is more likely than not that all or a portion of the Companys net deferred tax assets will not be realized in future periods, a deferred tax valuation allowance would be established. Consideration is given to various positive and negative factors that could affect the realization of the deferred tax assets. In evaluating this available evidence, management considers, among other things, historical performance, expectations of future earnings, the ability to carry back losses to recoup taxes previously paid, the length of statutory carry forward periods, any experience with utilization of operating loss and tax credit carry forwards not expiring, tax planning strategies and timing of reversals of temporary differences. Significant judgment is required in assessing future earnings trends and the timing of reversals of temporary differences. The Companys evaluation is based on current tax laws as well as managements expectations of future performance.
Earnings Per Share Basic earnings per common share is net income or loss divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share include the dilutive effect of additional potential common shares issuable during the period, consisting of stock options outstanding under the Companys stock incentive plan.
Reclassifications Certain items previously reported were reclassified for consistency with the current presentation.
Adoption of New Accounting Standards In June 2011, the FASB issued Accounting Standards Update (ASU) 2011-05, Presentation of Comprehensive Income. ASU 2011-05 requires the presentation of comprehensive income in either a single continuous financial statement or two separate, but consecutive financial statements. ASU 2011-05 also includes a provision requiring the presentation of reclassification adjustments from other comprehensive income to net income on the face of the financial statements. In December 2011, the FASB issued ASU 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 which deferred this requirement in order to allow the FASB more time to determine whether reclassification adjustments should be required to be presented on the face of the financial statements. For public entities, ASUs 2011-05 and 2011-12 are effective for fiscal years, and interim periods beginning after December 15, 2011, and are required to be applied retrospectively. Early adoption is permitted. The Company has adopted ASUs 2011-05 and 2011-12 effective October 31, 2011, electing to present a consolidated statement of comprehensive income or loss separate from, but consecutive to, its statement of operations. The adoption of ASUs 2011-05 and 2011-12 had no material effect on the Companys results of operations, financial position or cash flows.
In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. The amended guidance does not modify the requirements for when fair value measurements apply, rather it generally represents clarifications on how to measure and disclose fair value under Topic 820, Fair Value Measurement. Respective disclosure requirements are essentially the same. However, some of the specific amendments address the application of existing fair value measurement requirements. Other specific amendments change a particular principal or requirement for measuring fair value, or for disclosing information about fair value measurements. ASU 2011-04 is intended to improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRS. This guidance is effective prospectively for annual and interim periods beginning after December 15, 2011. The Company adopted this guidance effective January 1, 2012. The adoption of this guidance is not expected to have a material impact on the Companys consolidated financial statements.
In April 2011, the FASB issued ASU 2011-03, Transfers and Servicing (Topic 860); Reconsideration of Effective Control for Repurchase Agreements. Under the amended guidance, a transferor maintains effective control over transferred financial assets if there is an agreement between both entities which obligates the transferor to repurchase the financial assets before maturity. In addition, the following requirements must be met: (a) the financial asset to be repurchased or redeemed is the same or substantially the same as that transferred, (b) the agreement is to repurchase or redeem the transferred financial asset before maturity at a fixed or determinable price, and (c) the agreement is entered into contemporaneously with, or in contemplation of the transfer. This guidance is effective prospectively for transactions, or modifications of existing transactions, that occur on or after the first interim or annual period beginning on or after December 15, 2011. The Company adopted this guidance effective October 1, 2011. The adoption of this guidance did not have a material effect on the Companys consolidated financial statements.
NOTE 2 FAIR VALUE ACCOUNTING
ASC Topic 820-10, Fair Value Measurements and Disclosures establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The statement describes three levels of inputs that may be used to measure fair value:
Level 1- Quoted prices (unadjusted) for identical assets or liabilities in active markets that the Company has the ability to access as of the measurement date.
Level 2- Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3- Significant unobservable inputs that reflect the Companys assumptions about the assumptions that market participants would use in pricing an asset or liability.
A financial instruments categorization within the valuation hierarchy is based upon the lowest level of input within the valuation hierarchy that is significant to the fair value measurement.
The fair value of securities available for sale is determined by obtaining market price quotes from independent third parties wherever such quotes are available (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities relationship to other benchmark quoted securities (Level 2 inputs). Where such quotes are not available, the Company utilizes independent third party valuation analyses to support the Companys estimates and judgments in determining fair value (Level 3 inputs).
Assets Measured on a Recurring Basis
The following tables present the financial instruments measured at fair value on a recurring basis as of March 31, 2012 and September 30, 2011:
Assets Measured on a Nonrecurring Basis
Level 3 assets measured on a recurring basis are certain investments for which little or no market activity exists or whose value of the underlying collateral is not market observable. Managements valuation uses both observable as well as unobservable inputs to assist in the Level 3 valuation of mortgage backed securities held by the Bank, employing a methodology that considers future cash flows along with risk-adjusted returns. The inputs in this methodology are as follows: ability and intent to hold to maturities, mortgage underwriting rates, market prices/conditions, loan type, loan-to-value, strength of borrower, loan age, delinquencies, prepayment/cash flows, liquidity, expected future cash flows, rating agency actions, and a discount rate, which is assumed to be approximately equal to the coupon rate for each security. The Company had an independent valuation of all Level 3 securities in the current quarter. Based on this valuation, no additional pre-tax other than temporary impairment existed during the three months ended March 31, 2012.
The following tables present the financial instruments measured at fair value on a nonrecurring basis as of March 31, 2012 and September 30, 2011:
The fair value of TDRs is determined by obtaining independent third party appraisals and/or internally developed collateral valuations to support the Companys estimates and judgments in determining the fair value of the underlying collateral supporting TDRs.
The fair value of foreclosed assets is determined by obtaining market price quotes from independent third parties wherever such quotes are available. Where such quotes are not available, the Company utilizes independent third party appraisals to support the Companys estimates and judgments in determining fair value.
The following table presents a reconciliation of non-agency mortgage-backed securities held by the Bank measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the six month periods ended March 31, 2012 and 2011:
Fair Values of Financial Instruments
ASC 825-10 and ASC 270-10, Interim Disclosures about Fair Value Financial Instruments, require disclosures about fair value financial instruments and significant assumptions used to estimate fair value. The estimated fair values of financial instruments not previously disclosed are as follows:
Cash and Cash Equivalents
Due to their short-term nature, the carrying amounts of cash and cash equivalents are considered to be a reasonable estimate of fair value.
Fair value of interest bearing deposits is estimated based on their carrying amounts.
Federal Home Loan Bank (FHLB) Stock
Federal Home Loan Bank Stock is carried at cost, which is its redeemable fair value since the market for the stock is restricted (See Note 8 to the Companys consolidated financial statements included in the Companys Form 10-K filed with the Securities and Exchange Commission on December 21, 2011 for additional information).
Fair value is estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as real estate and consumer. The fair value of loans is calculated by discounting scheduled cash flows through the estimated maturity date using market discount rates reflecting the credit and interest rate risk inherent in the loan. The estimate of maturity is based on the Banks repayment schedules for each loan classification.
Accrued Interest Receivable and Payable
Due to their short-term nature, the carrying amounts of accrued interest receivable and payable, respectively, are considered to be a reasonable estimate of fair value.
The fair value of deposits with no stated maturity, such as demand deposits, savings accounts, and money market accounts, is the amount payable on demand at the reporting date. The fair value of fixed rate certificate accounts is calculated by using discounted cash flows applying interest rates currently being offered on similar certificates.
Federal Home Loan Bank Advances
The fair value of long-term borrowed funds is estimated using discounted cash flows based on the Banks current incremental borrowing rates for similar borrowing arrangements. The carrying value of short-term borrowed funds approximates its fair value.
The fair value of off-balance sheet commitments would be estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements, the current interest rates, and the present creditworthiness of the customers. Since this amount is immaterial to the Company, no amounts for fair value are presented.
The carrying amount and estimated fair value of financial instruments as of the dates indicated were as follows:
NOTE 3 LOANS, ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS
The ALL represents managements estimate of probable and inherent credit losses in the Banks loan portfolio. Estimating the amount of the ALL requires the exercise of significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of other qualitative factors such as current economic trends and conditions, all of which may be susceptible to significant change.
There are many factors affecting the ALL; some are quantitative, while others require qualitative judgment. The process for determining the ALL (which management believes adequately considers potential factors which result in probable credit losses), includes subjective elements and, therefore, may be susceptible to significant change. To the extent actual outcomes differ from management estimates, additional provision for loan losses could be required that could adversely affect the Companys earnings or financial position in future periods. Allocations of the ALL may be made for specific loans but the entire ALL is available for any loan that, in managements judgment, should be charged-off or for which an actual loss is realized.
Changes in the ALL for the periods presented below are as follows:
The Bank has originated substantially all loans currently recorded on its consolidated balance sheet. The Bank has not acquired any loans since 2005.
Loans receivable as of the end of the periods shown below were as follows:
An aging analysis of the Banks real estate and consumer loans as of March 31, 2012 and September 30, 2011 is as follows:
A summary of the Banks impaired loans as of March 31, 2012 and September 30, 2011 is as follows:
Troubled Debt Restructuring A TDR includes a loan modification where a borrower is experiencing financial difficulty and the Company grants a concession to that borrower that the Company would not otherwise consider except for the borrowers financial difficulties. A TDR may be either on accrual or nonaccrual status based upon the performance of the borrower and managements assessment of collectability. If a TDR is placed on nonaccrual status, it remains there until a sufficient period of performance under the restructured terms has occurred at which time it is returned to accrual status. A summary of loans modified in a troubled debt restructuring as of March 31, 2012 and during the six months then ended is as follows:
As an integral part of their examination process, various regulatory agencies review the Banks ALL. Such agencies may require that changes in the ALL be recognized when such regulators credit evaluations differ from those of management based on information available to the regulators at the time of their examinations.
NOTE 4 INVESTMENT SECURITIES
The amortized cost, estimated fair value and related unrealized gains and losses on securities available for sale as of March 31, 2012 and September 30, 2011, respectively, were as follows:
The Company evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. As part of such monitoring, the credit quality of individual securities and their issuers are assessed. Significant inputs used to measure the amount related to credit loss include, but are not limited to; default and delinquency rates of underlying collateral, remaining credit support, and historical loss severities. Adjustments to market value that are considered temporary are recorded as separate components of equity, net of tax. If an impairment of a security is identified as other-than-temporary based on information available, such as the decline in the credit worthiness of the issuer, external market ratings, or the anticipated or realized elimination of associated dividends, such impairments are further analyzed to determine if credit loss exists. If there is a credit loss, it will be recorded in the consolidated statement of operations. Losses other than credit will continue to be recognized in other comprehensive income (loss), net of tax. Unrealized losses reflected in the preceding tables have not been included in results of operations because the unrealized loss was not deemed other-than-temporary. Management has determined that more likely than not, the Company neither intends to sell, nor will be required to sell the debt security before its anticipated recovery.
A summary of the amount of other-than-temporary impairment related to credit losses on available-for-sale securities that have been recognized in earnings follows:
The Bank has pledged certain of its U.S. Agency securities as collateral against a borrowing line with the Federal Reserve Bank. However, as of March 31, 2012, there were no borrowings outstanding on the Federal Reserve line of credit.
NOTE 5 FEDERAL HOME LOAN BANK ADVANCES
A summary of Federal Home Loan Bank advances at March 31, 2012 and September 30, 2011 is as follows:
At March 31, 2012, the Banks available and unused portion of this borrowing agreement was approximately $185,700.
Maximum month-end amounts outstanding were $35,100 and $63,300 during the six month periods ended March 31, 2012 and 2011, respectively.
Each advance is payable at the maturity date, with a prepayment penalty for fixed rate advances. Federal Home Loan Bank advances are secured by $264,500 of real estate mortgage loans.
NOTE 6 INCOME TAXES
Income tax expense (benefit) for each of the periods shown below consisted of the following:
The provision for income taxes differs from the amount of income tax determined by applying statutory federal income tax rates to pretax income as result of the following differences:
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The following is a summary of the significant components of the Companys deferred tax assets and liabilities as of March 31, 2012 and September 30, 2011, respectively:
The Company regularly reviews the carrying amount of its deferred tax assets to determine if the establishment of a valuation allowance is necessary, as further discussed in Note 1 Nature of Business and Summary of Significant Accounting Policies above. At March 31, 2012 and September 30, 2011, respectively, management determined that no valuation allowance was necessary.
The Companys income tax returns are subject to review and examination by federal, state and local government authorities. As of March 31, 2012, years open to examination by the Internal Revenue Service include all taxable years after the taxable year ended September 30, 2008. The years open to examination by state and local government authorities varies by jurisdiction. The Internal Revenue Service is currently examining the income tax returns for the year ended September 30, 2010.
The tax effects from uncertain tax positions can be recognized in the financial statements, provided the position is more likely than not to be sustained on audit, based on the technical merits of the position. The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized, upon ultimate settlement with the relevant tax authority. The Bank applied the foregoing accounting standard to all of its tax positions for which the statute of limitations remains open as of the date of the accompanying financial statements.
The Companys policy is to recognize interest and penalties related to income tax issues as components of interest expense and miscellaneous expense, respectively. During the six month periods ended March 31, 2012 and 2011, the Company did not recognize any interest or penalties related to income tax issues in its statements of operations. The Company has no accrual for the payments of interest and penalties related to income tax issues as of March 31, 2012 or 2011.
NOTE 7 STOCK-BASED COMPENSATION
In February 2005, the Companys stockholders approved the Companys Recognition and Retention Plan. This plan provides for the grant of up to 113,910 shares of the Companys common stock to eligible participants under this plan. As of March 31, 2012, 90,927 restricted shares were issued and outstanding under this plan. During the year ended September 30, 2011, 20,312 shares were granted to an eligible participant under
this plan at a weighted average fair value of $5.24. No shares were granted during either of the three or six month periods ending March 31, 2012 or 2011, respectively. There were no previously awarded shares that were forfeited in either of the three or six month periods ending March 31, 2012 or 2011, respectively. Restricted shares previously granted were awarded at no cost to the employee and have a five-year vesting period. The fair value of these previously granted restricted shares on the date of award was $7.04 per share for 63,783 shares and $6.18 for 6,832 shares. Compensation expense related to these awards was $6, and $11 for the three and six month periods ended March 31, 2012, respectively.
In February 2005, the Companys stockholders also approved the Companys 2004 Stock Option and Incentive Plan. This plan provides for the grant of nonqualified and incentive stock options and stock appreciation rights to eligible participants under the plan. The plan provides for the grant of awards for up to 284,778 shares of the Companys common stock. At March 31, 2012, 248,635 options had been granted under this plan to eligible participants at a weighted-average exercise price of $6.70 per share. Options granted vest over a five-year period. Unexercised, nonqualified stock options expire within 15 years of the grant date and unexercised incentive stock options expire within 10 years of the grant date. Through March 31, 2012, since the plans inception, options for 93,980 shares of the Companys common stock were vested, options for 46,438 shares were unvested, options for 103,659 shares were forfeited and options for 4,558 shares were exercised. Of the 248,635 options granted, 140,418 remained outstanding as of March 31, 2012.
The Company accounts for stock-based employee compensation related to the Companys 2004 Stock Option and Incentive Plan using the fair-value-based method. Accordingly, management records compensation expense based on the value of the award as measured on the grant date and then the Company recognizes that cost over the vesting period for the award. The compensation cost recognized for stock-based employee compensation for the three and six month periods ended March 31, 2012 were $5, and $10, respectively.
In February 2008, the Companys stockholders approved the Companys 2008 Equity Incentive Plan. The aggregate number of shares of common stock reserved and available for issuance under the 2008 Equity Incentive Plan is 597,605 shares. Under the Plan, the Compensation Committee may grant stock options and stock appreciation rights that, upon exercise, result in the issuance of 426,860 shares of the Companys common stock. The Committee may grant restricted stock and restricted stock units for an aggregate of 170,745 shares of Company common stock under this plan. In October 2008, the Compensation Committee suspended consideration of distributions or awards under this plan, and as of March 31, 2012, no grants or awards have been made to eligible participants under the 2008 Equity Incentive Plan.
NOTE 8 OTHER COMPREHENSIVE INCOME (LOSS)
On October 1, 2011, the Company adopted ASU 2011-05, Presentation of Comprehensive Income. In addition to presenting the Consolidated Statements of Comprehensive Income herein, the following table shows the tax effects allocated to each component of other comprehensive income for the six months ended March 31, 2012:
The changes in the accumulated balances for each component of other comprehensive income for the six months ended March 31, 2012 were follows:
Certain statements contained in this report are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may be identified by the use of forward-looking words or phrases such as anticipate, believe, could, expect, intend, may, planned, potential, should, will, and would. Such forward-looking statements in this report are inherently subject to many uncertainties in the Companys operations and business environment. These uncertainties include general economic conditions, in particular, relating to consumer demand for the Banks products and services; the Banks ability to maintain current deposit and loan levels at current interest rates; competitive and technological developments; deteriorating credit quality, including changes in the interest rate environment reducing interest margins; prepayment speeds, loan origination and sale volumes, charge-offs and loan loss provisions; the Banks ability to maintain required capital levels and adequate sources of funding and liquidity; maintaining capital requirements may limit the Banks operations and potential growth; changes and trends in capital markets; competitive pressures among depository institutions; effects of critical accounting policies and judgments; changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board (FASB) or other regulatory agencies; further write-downs in the Banks mortgage-
backed securities portfolio; the Banks ability to implement its cost-savings and revenue enhancement initiatives; legislative or regulatory changes or actions, or significant litigation, adversely affecting the Bank; fluctuation of the Companys stock price; ability to attract and retain key personnel; ability to secure confidential information through the use of computer systems and telecommunications networks; and the impact of reputational risk created by these developments on such matters as business generation and retention, funding and liquidity. Shareholders, potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. Such uncertainties and other risks that may affect the Companys performance are discussed further in Part I, Item 1A, Risk Factors, in the Companys Form 10-K, for the year ended September 30, 2011 filed with the Securities and Exchange Commission on December 21, 2011. The Company undertakes no obligation to make any revisions to the forward-looking statements contained in this report or to update them to reflect events or circumstances occurring after the date of this report.
The following discussion sets forth managements discussion and analysis of our consolidated financial condition as of March 31, 2012, and the consolidated results of operations for the three and six months ended March 31, 2012, compared to the same periods in the fiscal year ended September 30, 2011. This discussion should be read in conjunction with the interim consolidated financial statements and the condensed notes thereto included with this report and with Managements Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and notes related thereto included in the Companys annual report on Form 10-K filed with the Securities and Exchange Commission on December 21, 2011.
The following table sets forth our results of operations and related summary information for the three and six month periods ended March 31, 2012 and 2011:
SUMMARY RESULTS OF OPERATIONS
(Dollar amounts in thousands, except for per share data)
The following is a brief summary of some of the factors that affected our operating results in the three and six month periods ended March 31, 2012. See the remainder of this section for a more thorough discussion. Unless otherwise stated, all monetary amounts in this Managements Discussion and Analysis of Financial Condition and Results of Operations, other than share and per share amounts, are stated in thousands.
We reported net income of $66 for the three months ended March 31, 2012, compared to net income of $80 for the three months ended March 31, 2011. We reported net loss of ($348) and a net loss of ($159) for the six months ended March 31, 2012 and 2011, respectively. Both basic and diluted earnings per share were $0.01 for the three months ended March 31, 2012 and $0.02 for the three months ended March 31, 2011. Both basic and diluted loss per share were ($0.07) and ($0.03) for the six months ended March 31, 2012 and 2011, respectively.
The return on average assets for the three months ended March 31, 2012 and 2011 was 0.05% and 0.06%, respectively. The return on average assets for the six months ended March 31, 2012 and 2011 was (0.13%) and (0.05%), respectively.
The return on average equity for the three months ended March 31, 2012 and 2011 was 0.50% and 0.62%, respectively. The return on average equity for the six months ended March 31, 2012 and 2011 was (1.31%) and (0.62%), respectively.
No cash dividends were declared or paid in either of the three month periods ended March 31, 2012 and 2011, respectively.
Key factors behind these results were:
CRITICAL ACCOUNTING POLICIES
We have established certain accounting policies, which require use of estimates and judgment. In addition to the policies included in Note 1, Nature of Business and Summary of Significant Accounting Policies, to the Consolidated Financial Statements included as an exhibit to our Form 10-K annual report for the fiscal year ending September 30, 2011, our critical accounting policies are as follows:
Allowance for Loan Losses.
We maintain an allowance for loan losses to absorb probable incurred losses in our loan portfolio. The allowance is based on ongoing, quarterly assessments of the estimated probable incurred losses in the loan portfolio. In evaluating the level of the allowance for loan loss, we consider the types of loans and the amount of loans in the loan portfolio, historical loss experience, adverse situations that may affect the borrowers ability to repay, the estimated value of any underlying collateral and prevailing economic conditions. We follow all applicable regulatory guidance, including the Interagency Policy Statement on the Allowance for Loan and Lease Losses, issued by the Federal Financial Institutions Examination Council (FFIEC). The Banks Allowance for Loan Losses Policy conforms to all applicable regulatory expectations. However, based on periodic examinations by regulators, the amount of the allowance for loan losses recorded during a particular period may be adjusted.
Our determination of the allowance for loan losses is based on (1) specific allowances for specifically identified and evaluated impaired loans and their corresponding estimated loss based on likelihood of default, payment history, and net realizable value of underlying collateral; and (2) a general allowance on loans not specifically identified in (1) above, based on historical loss ratios which are adjusted for qualitative and general economic factors. We continue to refine our allowance for loan losses methodology, with an increased emphasis on historical performance adjusted for applicable economic and qualitative factors.
Assessing the allowance for loan losses is inherently subjective as it requires making material estimates, including the amount and timing of future cash flows expected to be received on impaired loans, any of which estimates may be susceptible to significant change. In our opinion, the allowance, when taken as a whole, reflects estimated probable loan losses in our loan portfolio.
Available for Sale Securities.
Securities are classified as available for sale and are carried at fair value, with unrealized gains and losses reported in other comprehensive income (loss). Amortization of premiums and accretion of discounts are recognized in interest income using the interest method over the estimated lives of the securities.
We evaluate all investment securities on a quarterly basis, and more frequently when economic conditions warrant determining if other-than-temporary impairment exists. A debt security is considered impaired if the fair value is less than its amortized cost at the report date. If impaired, we then assess whether the impairment is other-than-temporary.
Current authoritative guidance provides that some portion of unrealized losses may be other-than-temporary and a credit loss is deemed to exist if the present value of the expected future cash flows is less than the
amortized cost basis of the debt security. The credit loss component is recorded in earnings as a component of other-than-temporary impairment in the consolidated statements of operations, while the loss component related to other market factors is recognized in other comprehensive income (loss), provided the Bank does not intend to sell the underlying debt security and it is more likely than not that the Bank will not have to sell the debt security prior to recovery of the unrealized loss.
We consider the following factors in determining whether a credit loss exists and the period over which the debt security is expected to recover:
Interest income on securities for which other-than-temporary impairment has been recognized in earnings is recognized at a rate commensurate with the expected future cash flows and amortized cost basis of the securities after the impairment.
Gains and losses on the sale of securities are recorded on the trade date and determined using the specific-identification method.
To determine if other-than-temporary impairment exists on a debt security, the Bank first determines if (1) it intends to sell the security or (2) it is more likely than not that it will be required to sell the security before its anticipated recovery. If either of the conditions is met, the Bank will recognize other-than-temporary impairment in earnings equal to the difference between the securitys fair value and its adjusted cost basis. If neither of the conditions is met, the Bank determines (a) the amount of the impairment related to credit loss and (b) the amount of the impairment due to all other factors. The difference between the present values of the cash flows expected to be collected and the amortized cost basis is the credit loss. The credit loss is the amount of the other-than-temporary impairment that is recognized in earnings and is a reduction to the cost basis of the security. The amount of the total impairment related to all other factors (excluding credit loss) is included in other comprehensive income (loss).
We monitor our portfolio investments on an on-going basis and we obtain an independent valuation of our non-agency residential mortgage-backed securities. This analysis is utilized to ascertain whether any decline in market value is other-than-temporary. In determining whether an impairment is other-than-temporary, we consider the length of time and the extent to which the market value has been below cost, recent events specific to the issuer including investment downgrades by rating agencies and economic conditions within the issuers industry, whether it is more likely than not that we will be required to sell the security before there would be a recovery in value, and credit performance of the underlying collateral backing the securities, including delinquency rates, cumulative losses to date, and prepayment speed.
The independent valuation process included:
For non-agency residential mortgage-backed securities that are considered other-than-temporarily impaired and for which we have the ability and intent to hold these securities until the recovery of our amortized cost basis, we recognize other-than-temporary impairment in accordance with accounting principles generally accepted in the United States. Under these principles, we separate the amount of the other-than-temporary impairment into the amount that is credit related and the amount due to all other factors. The credit loss component is recognized in earnings and is the difference between the securitys amortized cost basis and the present value of expected future cash flows. The amount due to other factors is recognized in other comprehensive income (loss).
The assessment of tax assets and liabilities involves the use of estimates, assumptions, interpretations, and judgments concerning certain accounting pronouncements and federal and state tax codes. There can be no assurance that future events, such as court decisions or positions of federal and state taxing authorities, will not differ from managements current assessment, the impact of which could be material to our consolidated results of our operations and reported earnings. We believe that the tax assets and liabilities are adequate and properly recorded in the accompanying consolidated financial statements. As of March 31, 2012, management does not believe a valuation allowance is necessary.
STATEMENT OF OPERATIONS ANALYSIS
Net Interest Income. Net interest income represents the difference between the dollar amount of interest earned on interest-bearing assets and the dollar amount of interest paid on interest-bearing liabilities. The interest income and expense of financial institutions are significantly affected by general economic conditions, competition, policies of regulatory authorities and other factors.
Interest rate spread and net interest margin are used to measure and explain changes in net interest income. Interest rate spread is the difference between the yield on interest earning assets and the rate paid for interest-bearing liabilities that fund those assets. Net interest margin is expressed as the percentage of net interest income to average earning assets. Net interest margin exceeds interest rate spread because non-interest bearing sources of funds (net free funds), principally demand deposits and stockholders equity, also support interest income earning assets. The narrative below discusses net interest income, interest rate spread, and net interest margin for the three and six month periods ended March 31, 2012 and 2011, respectively.
Net interest income was $5,033 for the three months ended March 31, 2012, compared to $5,222 for the three months ended March 31, 2011. Net interest income was $10,351 for the six months ended March 31, 2012, compared to $10,585 for the six months ended March 31, 2011. The net interest margin for the three months ended March 31, 2012 was 3.91% compared to 3.75% for the three months ended March 31, 2011. The net interest margin for the six months ended March 31, 2012 was 3.99% compared to 3.74% for the six months ended March 31, 2011. The increases in net interest margin were primarily attributable to corresponding
increases in interest rate spread over the prior year periods. A factor contributing to the increase in interest rate spread between the periods was a decrease in the average balance of outstanding higher rate FHLB borrowings. $13,200 of FHLB borrowings have matured since December 31, 2010. As the FHLB borrowings continue to mature, we anticipate that they will be replaced, as needed with lower rate borrowings as a source of funding, as demonstrated by an increase in FHLB borrowings of $5,500 during the quarter ended March 31, 2012 at lower weighted average rates.
As shown in the rate/volume analysis in the following pages, volume changes resulted in decreases of ($189) and ($234) in net interest income for the three and six month periods ended March 31, 2012, respectively, compared to the comparable prior year periods. The decrease and changes in the composition of interest earning assets resulted in $147 and $367 decreases in interest income for the three and six months ended March 31, 2012, respectively, compared to the comparable prior year periods. Rate changes on interest earning assets decreased interest income by $667 and $1,263 for the three and six month periods ended March 31, 2012, respectively. These decreases were partially offset by rate changes on interest-bearing liabilities that decreased interest expense by $307 and $641 over the same periods in the prior year, resulting in a net decrease of $360 and $622 in net interest income due to changes in interest rates during the three and six month periods ended March 31, 2012. The decreases in our balances of certificates of deposit and FHLB Advances, are the primary factors affecting volume changes during these same periods. Rate decreases on all asset and deposit categories are reflective of the current overall lower market interest rate environment versus the same period last year.
We have remained liability sensitive in the short term during the most recent two fiscal years, in which interest rates have declined to historically low levels. Continued low interest rates will enable us to experience a favorable interest rate margin.
Average Balances, Net Interest Income, Yields Earned and Rates Paid. The following Net Interest Income Analysis table presents interest income from average interest earning assets, expressed in dollars and yields, and interest expense on average interest-bearing liabilities, expressed in dollars and rates. Also presented is the weighted average yield on interest-earning assets, rates paid on interest-bearing liabilities and the resultant spread at March 31, 2012 for each of the three-month periods shown below. No tax equivalent adjustments were made. Non-accruing loans have been included in the table as loans carrying a zero yield.
Average interest earning assets were $515,871 and $518,923 for the three and six month periods ended March 31, 2012, respectively, compared to $564,169 and $568,120 for the comparable prior year periods. Interest income on interest earning assets was $6,707 and $13,850 for the three and six month periods ended March 31, 2012, respectively, compared to $7,521 and $15,480 for the comparable prior year periods. Interest income is comprised primarily of interest income on loans and interest income on available for sale securities. Interest income on loans was $6,360 and $13,162 for the three and six month periods ended March 31, 2012, respectively, compared to $6,996 and $14,265, respectively, for the comparable prior year periods. Interest income on available for sale securities was $332 and $640 for the three and six month periods ended March 31, 2012, respectively, compared to $484 and $1,133 for the comparable prior year periods. The decrease in loan interest income was primarily due to decreased loan volumes and a continued lower interest rate environment. Decreases in interest income on available for sale securities were primarily due to two factors. First, we apply any interest payments we receive to principal on specific securities on which we had previously recorded other-than-temporary impairment. Also, we sold several higher risk non-agency mortgage backed securities and reinvested the proceeds in lower risk and lower yielding agency bonds.
Average interest bearing liabilities were $466,181 and $471,294 for the three and six month periods ended March 31, 2012, respectively, compared to $523,872 and $529,517 for the comparable prior year periods. Interest expense on interest bearing liabilities was $1,674 and $3,499 for the three and six month periods ended March 31, 2012, respectively, compared to $2,299 and $4,895 for the comparable prior year periods. Interest expense is comprised primarily of interest expense on money market accounts, certificates of deposit and FHLB advances. Decreases in interest expense in the current year periods were primarily due to maturities of higher rate FHLB advances which carry higher interest rates than deposits, increases in lower rate new FHLB advances, and lower balances and interest rates paid on money market accounts and certificates of deposit.
For the three months ended March 31, 2012, interest expense on interest-bearing deposits decreased $210 from the volume and mix changes and decreased $289 from the impact of the rate environment, resulting in an aggregate decrease of $499 in interest expense on interest-bearing deposits. For the six months ended March 31, 2012, interest expense on interest-bearing deposits decreased $384 from the volume and mix changes and decreased $609 from the impact of the rate environment, resulting in an aggregate decrease of $993 in interest expense on interest-bearing deposits. Average FHLB advances decreased $10,575 and $17,572 for the three and six month periods ended March 31, 2012, respectively, compared to the comparable prior year periods. Interest expense on FHLB advances was $328 and $658 for the three and six month periods ended March 31, 2012, respectively, compared to $454 and $1,061 for the comparable prior year periods. The decreases were due to scheduled maturities on certain higher rate FHLB advances since 2011, partially offset by newer FHLB borrowings at lower interest rates.
NET INTEREST INCOME ANALYSIS
(Dollar amounts in thousands)
Three months ended March 31, 2012 compared to the three months ended March 31, 2011:
Six months ended March 31, 2012 compared to the six months ended March 31, 2011:
Rate/Volume Analysis. The following table presents the dollar amount of changes in interest income and interest expense for the components of interest-earning assets and interest-bearing liabilities that are presented in the preceding table. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to: (1) changes in volume, which are changes in the average outstanding balances multiplied by the prior period rate (i.e. holding the initial rate constant); and (2) changes in rate, which are changes in average interest rates multiplied by the prior period volume (i.e. holding the initial balance constant). Changes due to both rate and volume which cannot be segregated have been allocated in proportion to the relationship of the dollar amounts of the change in each.
RATE / VOLUME ANALYSIS (1)
(Dollar amounts in thousands)
Three months ended March 31, 2012 compared to the three months ended March 31, 2011:
Six months ended March 31, 2012 compared to the six months ended March 31, 2011:
Provision for Loan Losses. We determine our provision for loan losses (provision, or PLL), based on our desire to provide an adequate allowance for loan losses (ALL) to reflect probable incurred credit losses in our loan portfolio. Based on increased historical charge off ratios and the negative influence of certain qualitative and general economic factors discussed above under Critical Accounting Policies Allowance for Loan Losses, the provision necessary to ensure an adequate ALL continues to remain at elevated levels. Specifically, our customers ability to repay loans continues to be adversely affected by higher unemployment rates, and depressed housing prices are causing increases in collateral deficiencies on real estate loans. With both local and national unemployment rates improving slightly in recent quarters, we anticipate our actual charge-off experience to continue to remain stable throughout the remainder of the fiscal year ending September 30, 2012.
Net loan charge-offs for the three and six month periods ended March 31, 2012 were $968 and $1,870, compared to $1,558 and $2,891 for the comparable prior year periods. Annualized net charge-offs to average loans were 0.87% for the six months ended March 31, 2012 compared to 1.15% for the twelve months ended September 30, 2011. Non-accrual loans were $4,460 at March 31, 2012 compared to $4,400 at September 30, 2011. Non-accrual loans plus non-performing TDRs totaled $6,509 at March 31, 2012 compared to $6,255 at September 30, 2011. These changes are primarily due to the inclusion of $1,300 of loans in bankruptcy that are not 91+ days delinquent that are now included in classified non-accrual loans. Also, several large real estate loans were moved to non-accrual status during the quarter ended March 31, 2012 despite not yet being 91+ days delinquent. Refer to the Allowance for Loan Losses and Nonperforming Loans, Potential Problem Loans and Foreclosed Properties sections below for more information related to non-performing loans.
We recorded provision for loan losses of $1,100 and $2,640 for the three and six month periods ended March 31, 2012 and 2011, respectively, compared to $1,650 and $3,250 for the comparable prior year periods. Management believes that the provision taken for these three and six month periods is adequate in view of the present condition of the loan portfolio and the sufficiency of collateral supporting non-performing loans. We continually monitor non-performing loan relationships and will make provisions, as necessary, if changes facts and circumstances require a change in the ALL. In addition, a decline in the quality of our loan portfolio as a
result of general economic conditions, factors affecting particular borrowers or our market areas, or otherwise, could affect the adequacy of our ALL. If there are significant charge-offs against the ALL, or we otherwise determine that the ALL is inadequate, we will need to record an additional PLL in the future. See the section below captioned Allowance for Loan Losses in this discussion for further analysis of the provision for loan losses.
Noninterest Income (Loss). The following table reflects the various components of non-interest income (loss) for the six months ended March 31, 2012 and 2011, respectively.
Noninterest income was $602 and $652 for the three and six month periods ended March 31, 2012 and 2011, respectively, compared to $780 and $926 for the comparable prior year periods. The decrease of ($178) during the three month periods resulted from a $234 gain on sale of available for sale securities in the three months ended March 31, 2011, partially offset by increases in loan fees and service charges of $33 during the current year quarter. The decrease of ($274) for the six month periods was primarily due to an increase in securities related losses of ($257).
Noninterest Expense. The following table reflects the various components of noninterest expense for the three and six month periods ended March 31, 2012 and 2011, respectively.
Noninterest expense increased $212 (5.04%) and $424 (4.99%) for the three and six month periods ended March 31, 2012, respectively, compared to the comparable prior year periods. The noninterest expense (annualized) to average assets ratios were 3.34% and 3.35% for the three and six month periods ended March 31, 2012,
respectively, compared to 2.90% and 2.89% for the comparable prior year periods. The increases in noninterest expense and the noninterest expense (annualized) to average assets ratios in the current year periods were primarily attributable to; (a) increased data processing costs and (b) increases in compensation costs. The increased data processing costs are a result of the 2011 migration to a service bureau data processing model and enhancements to the Banks business continuity plan. Compensation costs were higher for both time frames as a result of an increase in the Full Time Equivalent employees.
Income Taxes. Income tax expense was $114 and $143 for the three and six months ended March 31, 2012, respectively, compared to income tax (benefit) of ($218) and ($85), respectively, for the comparable prior year periods. The changes resulted from the changes in pre-tax income and loss items discussed above.
BALANCE SHEET ANALYSIS
Loans. Loans decreased by $4,607, or (1.07%), to $427,139 as of March 31, 2012 from $431,746 at September 30, 2011. At March 31, 2012, the loan portfolio was comprised of $280,919 of loans secured by real estate, or 65.8% of total loans, and $146,220 of consumer loans, or 34.2% of total loans. At September 30, 2011, the loan portfolio mix included real estate loans of $273,719, or 63.4% of total loans, and consumer loans of $158,027, or 36.6% of total loans. The continued trend in loan balance mix shifting toward higher real estate loan levels was the result of our recently updated and more conservative underwriting standards, primarily on indirect paper consumer loans. We also continue to experience reduced loan demand in our markets, consistent with decreased loan demand throughout the United States.
Allowance for Loan Losses. The loan portfolio is our primary asset subject to credit risk. To address this credit risk, we maintain an ALL for probable and inherent credit losses through periodic charges to our earnings. These charges are shown in our consolidated statements of operations as PLL. See Provision for Loan Losses earlier in this Report. We attempt to control, monitor and minimize credit risk through the use of prudent lending standards, a thorough review of potential borrowers prior to lending and ongoing and timely review of payment performance. Asset quality administration, including early identification of loans performing in a substandard manner, as well as timely and active resolution of problems, further enhances management of credit risk and minimization of loan losses. Any losses that occur and that are charged off against the ALL are periodically reviewed with specific efforts focused on achieving maximum recovery of both principal and interest.
At least quarterly, we review the adequacy of the ALL. Based on an estimate computed pursuant to the requirements of ASC 450-10, Accounting for Contingencies and ASC 310-10, Accounting by Creditors for Impairment of a Loan, the analysis of the ALL consists of three components: (i) specific credit allocation established for expected losses relating to specific individual loans for which the recorded investment in the loan exceeds its fair value; (ii) general portfolio allocation based on historical loan loss experience for significant loan categories; and (iii) general portfolio allocation based on qualitative factors such as economic conditions and other factors specific to the markets in which we operate. We continue to refine our ALL methodology by introducing a greater level of granularity to the portfolio. For example, bifurcating consumer loans between indirect paper and other consumer loans; and segmenting real estate loans without an event of delinquency. The additional segmentation of the portfolio is intended to provide a more effective basis for the determination of qualitative factors. In addition, management evaluates its ALL methodology from time to time to assess whether modifications are appropriate in light of underwriting practices, market conditions, identifiable trends, regulatory pronouncements or other factors. Management is continually reviewing its ALL methodology and may make modifications to it as necessary. We believe that any modifications or changes to the ALL methodology would be to enhance the ALL. However, any such modifications could result in materially different allowance levels in future periods.
The specific credit allocation for the ALL is based on a regular analysis of all loans that are considered TDRs. In compliance with ASC 310-10, the fair value of the loan is determined based on either the present value of expected cash flows discounted at the loans effective interest rate, the market price of the loan, or, if the loan is collateral dependent, the fair value of the underlying collateral less the cost of sale. We currently have 96 such loans, all secured by real estate or personal property. Their aggregate book value is $6,419 as of March 31, 2012. The total for the 48 such individual loans where estimated fair value was less than their book value (i.e. we deemed impairment to exist) was $3,007 for which $842 in specific ALL was recorded as of March 31, 2012.
At March 31, 2012, the ALL was $5,668 or 1.33% of the total loan portfolio, compared to ALL of $4,898, or 1.14% of the total loan portfolio at September 30, 2011. This level was based on our analysis of the loan portfolio risk at March 31, 2012, taking into account the factors discussed above.
All of the factors we take into account in determining the ALL in general categories are subject to change; thus the allocations are managements estimate of the loan loss categories in which the probable and inherent loss has occurred. Currently, management especially focuses on local and national unemployment rates and home prices, as management believes these factors currently have the most impact on our customers ability to repay loans and our ability to recover potential losses through collateral sales. As loan balances and estimated losses in a particular loan type decrease or increase and as the factors and resulting allocations are monitored by management, changes in the risk profile of the various parts of the loan portfolio may be reflected in the allowance allocated. The general component covers non-impaired loans and is based on historical loss experience adjusted for qualitative factors. In addition, management continues to refine the ALL estimation process as new information becomes available. These refinements could also cause increases or decreases in ALL. The unallocated portion of the ALL is intended to account for imprecision in the estimation process or relevant current information that may not have been considered in the process.
Nonperforming Loans, Potential Problem Loans and Foreclosed Properties. We practice early identification of non-accrual and problem loans in order to minimize the risk of loss. Non-performing loans are defined as non-accrual loans and restructured loans that were more than 91 days past due at the time of their restructure, or when management determines that such classification is warranted. The accrual of interest income is discontinued when a loan becomes more than 91 days past due as to principal and interest. When interest accruals are discontinued, interest credited to income is reversed. If collection is in doubt, cash receipts on non-accrual loans are used to reduce principal rather than become recorded as interest income. Restructuring a loan typically involves the granting of some concession to the borrower involving a loan modification, such as payment schedule or interest rate changes. Restructured loans may involve loans that have had a charge-off taken against the loan to reduce the carrying amount of the loan to fair market value as determined pursuant to ASC 310-10.
The following table identifies the various components of non-performing assets and other balance sheet information as of the dates indicated below and changes in the ALL for the periods then ended: