XNAS:CZWI Citizens Community Bancorp Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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Table of Contents

 

 

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

OR

 

  ¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                                                           to                                                          

Commission file number 001-33003

CITIZENS COMMUNITY BANCORP, INC.

 

(Exact name of registrant as specified in its charter)

 

Maryland   20-5120010
(State or other jurisdiction of incorporation or organization)   (IRS Employer Identification Number)

            2174 EastRidge Center, Eau Claire, WI 54701            

(Address of principal executive offices)

                                 715-836-9994                                 

(Registrant’s 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):

 

Large accelerated filer  ¨   Accelerated filer  ¨   Non-Accelerated filer  ¨   Smaller reporting company  þ
  (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  þ

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date:

At May 15, 2012 there were 5,133,050 shares of the registrant’s common stock, par value $0.01 per share, outstanding.

 

 

 


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CITIZENS COMMUNITY BANCORP, INC.

FORM 10-Q

MARCH 31, 2012

INDEX

 

        Page Number  

Part I — FINANCIAL INFORMATION

 

    Item 1.

  Financial Statements  
  Consolidated Balance Sheets as of March 31, 2012 (Unaudited) and September 30, 2011     3   
  Consolidated Statements of Operations (Unaudited) for the three and six months ended March 31, 2012 and 2011     4   
  Consolidated Statement of Comprehensive Income (Unaudited) for the six months ended March 31, 2012 and 2011     5   
  Consolidated Statement of Changes in Stockholders’ Equity (Unaudited) for the six months ended March 31, 2012     6   
  Consolidated Statements of Cash Flows (Unaudited) for the six months ended March 31, 2012 and 2011     7   
  Condensed Notes to Consolidated Financial Statements (Unaudited)     8   

    Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations     26   

    Item 3.

  Quantitative and Qualitative Disclosures about Market Risk     46   

    Item 4.

  Controls and Procedures     48   

Part II — OTHER INFORMATION

    48   

    Item 1.

  Legal Proceedings     48   

    Item 1A.

  Risk Factors     49   

    Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds     49   

    Item 3.

  Defaults Upon Senior Securities     49   

    Item 4.

  Mine Safety Disclosures     49   

    Item 5.

  Other Information     49   

    Item 6.

  Exhibits     49   

SIGNATURES

    50   

 

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PART 1 – FINANCIAL INFORMATION

ITEM  1. FINANCIAL STATEMENTS

CITIZENS COMMUNITY BANCORP, INC.

Consolidated Balance Sheets

March 31, 2012 (unaudited) and September 30, 2011

(derived from audited financial statements)

(in thousands, except share data)

 

      March 31, 2012     September 30, 2011      
Assets       

Cash and cash equivalents

     $  18,395        $  31,763     

Other interest-bearing deposits

     2,739        9,543     

Securities available for sale (at fair value)

     65,156        44,338     

Federal Home Loan Bank stock

     5,014        5,787     

Loans receivable

     427,139        431,746     

Allowance for loan losses

     (5,668     (4,898    

Loans receivable — net

     421,471        426,848     

Office properties and equipment — net

     5,805        6,696     

Accrued interest receivable

     1,587        1,508     

Intangible assets

     316        483     

Foreclosed and repossessed assets

     1,126        1,360     

Other assets

     7,172        8,231       

TOTAL ASSETS

     $528,781        $536,557     
                      

Liabilities and Stockholders’ Equity

      

Liabilities:

      

Deposits

     $436,231        $448,973     

Federal Home Loan Bank advances

     35,100        30,400     

Other liabilities

     4,297        4,296       

Total liabilities

     475,628        483,669     

Stockholders’ equity:

      

Common stock — 5,133,050 and 5,133,570 shares, respectively

     51        51     

Additional paid-in capital

     53,944        53,934     

Retained earnings

     975        1,323     

Unearned deferred compensation

     (91     (102  

Accumulated other comprehensive loss

     (1,726     (2,318    

Total stockholders’ equity

     53,153        52,888       

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

     $528,781        $536,557     
                      

See accompanying condensed notes to unaudited consolidated financial statements.

 

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CITIZENS COMMUNITY BANCORP, INC.

Consolidated Statements of Operations (unaudited)

Three and Six Months Ended March 31, 2012 and 2011

(in thousands, except per share data)

 

     Three Months Ended     Six Months Ended
     March 31,     March 31,     March 31,     March 31,      
      2012     2011     2012     2011       

Interest and Dividend Income:

          

Interest and fees on loans

     $6,360        $6,996        $13,162        $14,265     

Interest on investments

     347        525        688        1,215       

Total interest and dividend income

     6,707        7,521        13,850        15,480     

Interest expense:

          

Interest on deposits

     1,346        1,845        2,841        3,834     

Interest on borrowed funds

     328        454        658        1,061       

Total interest expense

     1,674        2,299        3,499        4,895       

Net interest income

     5,033        5,222        10,351        10,585     

Provision for loan losses

     1,100        1,650        2,640        3,250       

Net interest income after provision for loan losses

     3,933        3,572        7,711        7,335       

Noninterest income:

          

Total fair value adjustments and other-than-temporary impairment

     251        566        (2,751     (1,414  

Portion of loss (gain) recognized in other comprehensive loss (income) (before tax)

     (251     (566     2,078        844     

Net gains (losses) on sale of available-for-sale securities

     (3     234        80        234       

Net gains (losses) on available for sale securities

     (3     234        (593     (336  

Service charges on deposit accounts

     340        335        727        709     

Insurance commissions

     14        24        14        48     

Loan fees and service charges

     101        68        221        279     

Other

     150        119        283        226       

Total noninterest income

     602        780        652        926       

Noninterest expense:

          

Salaries and related benefits

     2,212        2,093        4,363        4,110     

Occupancy — net

     616        666        1,222        1,309     

Office

     303        334        577        708     

Data processing

     380        191        731        355     

Amortization of core deposit

     83        83        166        166     

Advertising, marketing and public relations

     47        20        100        68     

FDIC premium assessment

     163        273        343        543     

Professional services

     284        279        596        566     

Other

     333        270        831        680       

Total noninterest expense

     4,421        4,209        8,929        8,505       

Income (loss) before provision for income tax

     114        143        (566     (244  

Provision (benefit) for income taxes

     48        63        (218     (85    

Net income (loss) attibutable to common stockholders

     $66        $80        $  (348     $  (159    

Per share information:

                                    

Basic earnings

     $0.01        $0.02        $ (0.07     $ (0.03    

Diluted earnings

     $0.01        $0.02        $ (0.07     $ (0.03    

Dividends paid

     $   —        $   —        $     —        $     —       

See accompanying condensed notes to unaudited consolidated financial statements.

 

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CITIZENS COMMUNITY BANCORP, INC.

Consolidated Statements of Other Comprehensive Income (unaudited)

Six Months Ended March 31, 2012 and 2011

(in thousands, except per share data)

 

     Six Months Ended
      March 31,
2012
    March 31,
2011
      

Net loss attributable to common stockholders

     $(348     $  (159    

Other comprehensive income, net of tax:

      

Securities available for sale

      

Net unrealized gains arising during period

     138        2,340     

Reclassification adjustment for gains included in net income

     48        140     

Change for realized losses on securities available for sale for Other-than-temporary impairment write-down

     404        342       

Unrealized gains on securities

     590        2,822       

Defined benefit plans:

      

Amortization of unrecognized prior service costs and net gains (losses)

     2        1       

Total other comprehensive income, net of tax

     592        2,823       

Comprehensive income

     $244        $2,664     
                      

See accompanying condensed notes to unaudited consolidated financial statements.

 

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CITIZENS COMMUNITY BANCORP, INC.

Consolidated Statement of

Changes in Stockholders’ Equity (unaudited)

Six Months Ended March 31, 2012

(in thousands, except Shares)

 

     Common Stock      Additional
Paid-in
     Retained     Unearned     Accumulated
Other
Comprehensive
    Total      
      Shares     Amount      Capital      Earnings     Compensation     Income (loss)     Equity       

Balance, October 1, 2011

     5,133,570        $51         $53,934         $1,323        $(102     $(2,318     $52,888     

Net loss

             (348         (348  

Other comprehensive income

                 592        592     

Forfeiture of unvested shares — 520 shares

     (520                

Stock option expense

          10               10     

Amortization of restricted stock

                                       11                11       

Balance, March 31, 2012

     5,133,050        $51         $53,944         $   975        $  (91     $(1,726     $53,153     
                                                                

See accompanying condensed notes to unaudited consolidated financial statements.

 

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CITIZENS COMMUNITY BANCORP, INC.

Consolidated Statements of Cash Flows (unaudited)

Six Months Ended March 31, 2012 and 2011

(in thousands, except per share data)

 

     Six Months Ended
      March 31,
2012
    March 31,
2011

Cash flows from operating activities:

      

Net loss attributable to common stockholders

     $    (348     $    (159    

Adjustments to reconcile net income to net cash provided by operating activities:

      

Net amortization of premium/discount on securities

     308        (97  

Depreciation

     518        666     

Provision for loan losses

     2,640        3,250     

Net realized gain on sale of securities

     (80     (234  

Other-than-temporary impairment on mortgage-backed securities

     673        620     

Amortization of core deposit intangible

     166        166     

Amortization of restricted stock

     11        1     

Stock based compensation expense

     10            

Loss on sale of office properties

     134            

Net gains from disposals of foreclosed properties

     (13     (41  

Provision for valuation allowance on foreclosed properties

     58        135     

Decrease in accrued interest receivable and other assets

     621        1,061     

Increase in other liabilities

     3        130       

Total adjustments

     5,049        5,657       

Net cash provided by operating activities

     4,701        5,498       

Cash flows from investing activities:

      

Purchase of securities available for sale

     (37,414     (49,577  

Net decrease (increase) in interest-bearing deposits

     6,804        (6,991  

Proceeds from sale of securities available-for-sale

     12,542        24,711     

Principal payments on securities available for sale

     4,137        7,363     

Proceeds from sale of FHLB stock

     773            

Proceeds from sale of foreclosed properties

     930        532     

Net decrease in loans

     1,961        12,850     

Net capital expenditures

     (224     (658  

Net cash received from sale of office properties

     464              

Net cash used in investing activities

     (10,027     (11,770    

Cash flows from financing activities:

      

Net increase (decrease) in Federal Home Loan Bank advances

     4,700        (21,400  

Net (decrease) increase in deposits

     (12,742     6,264       

Net cash used in financing activities

     (8,042     (15,136    

Net decrease in cash and cash equivalents

     (13,368     (21,408  

Cash and cash equivalents at beginning of period

     31,763        72,438       

Cash and cash equivalents at end of period

     $18,395        $51,030     
                      

Supplemental cash flow information:

      

Cash paid during the year for:

      

Interest on deposits

     $  2,829        $  3,846     

Interest on borrowings

     $     655        $     1,130     

Income taxes

     $         5        $         5     

Supplemental noncash disclosure:

      

Transfers from loans receivable to foreclosed and repossessed assets

     $     801        $     674     

See accompanying condensed notes to unaudited consolidated financial statements.

 

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CITIZENS COMMUNITY BANCORP, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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 Bank’s 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 management’s 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

 

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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 Company’s 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 Company’s 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 management’s 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 loan’s 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.

 

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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 Company’s 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 Company’s 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 Company’s evaluation is based on current tax laws as well as management’s 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 Company’s 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 Company’s results of operations, financial position or cash flows.

 

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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 Company’s 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 Company’s 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 Company’s assumptions about the assumptions that market participants would use in pricing an asset or liability.

A financial instrument’s 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 Company’s estimates and judgments in determining fair value (Level 3 inputs).

 

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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:

 

      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:

           

Securities available for sale:

           

U.S. Agency mortgage-backed securities

     $15,092         $ —         $15,092         $   —   

U.S. Agency Floating Rate Bonds

     15,028                 15,028           

Fannie Mae mortgage-backed securities

     8,709                 8,709           

Freddie Mac mortgage-backed securities

     9,223            9,223      

Non-agency mortgage-backed securities

     7,963                         7,963   

General Obligation Municipal Bonds

     6,850            6,850      

Revenue Municipal Bonds

     2,291                  2,291            

Total

     $65,156         $ —         $57,193         $7,963   
                                     

September 30, 2011:

           

Securities available for sale:

           

U.S. Agency mortgage-backed securities

     $  9,983         $ —         $9,983         $   —   

U.S. Agency Floating Rate Bonds

     25,212                 25,212           

Non-agency mortgage-backed securities

     9,143                         9,143   

Total

     $44,338         $ —         $35,195         $9,143   
                                     

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. Management’s 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.

 

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The following tables present the financial instruments measured at fair value on a nonrecurring basis as of March 31, 2012 and September 30, 2011:

 

      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:

           

Foreclosed and repossessed assets

     $1,126         $ —         $ —         $1,126   

Loans restructured in a troubled debt restructuring

     6,419          —          —         6,419   

Total

     $7,545         $ —         $ —         $7,545   
                                     

September 30, 2011:

           

Foreclosed and repossessed assets

     $1,360         $ —         $ —         $1,360   

Loans restructured in a troubled debt restructuring

     6,018          —          —         6,018   

Total

     $7,378         $ —         $ —         $7,378   
                                     

The fair value of TDRs is determined by obtaining independent third party appraisals and/or internally developed collateral valuations to support the Company’s 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 Company’s 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:

 

     Six Months Ended  
      March 31,
2012
    March 31,
2011
 

Balance beginning of period

     $ 9,143        $ 24,999   

Total gains or losses (realized/unrealized):

    

Included in earnings

     (673     (620

Included in other comprehensive loss

     1,215        5,058   

Sales

            (13,633

Payments, accretion and amortization

     (1,722     (4,782

Balance end of period

     $ 7,963        $ 11,022   
                  

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.

 

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Interest-Bearing Deposits

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 Company’s consolidated financial statements included in the Company’s Form 10-K filed with the Securities and Exchange Commission on December 21, 2011 for additional information).

Loans Receivable

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 Bank’s 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.

Deposits

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 Bank’s current incremental borrowing rates for similar borrowing arrangements. The carrying value of short-term borrowed funds approximates its fair value.

Off-Balance-Sheet Instruments

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.

 

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The carrying amount and estimated fair value of financial instruments as of the dates indicated were as follows:

 

    

March 31,

2012

         

September 30,

2011

 
      Carrying
Amount
    

Estimated
Fair

Value

           Carrying
Amount
    

    Estimated        
Fair

Value

 

Financial assets:

              

Cash and cash equivalents

   $ 18,395       $ 18,395          $ 31,763       $ 31,763   

Interest-bearing deposits

     2,739         2,739            9,543         9,543   

Securities available for sale

     65,156         65,156            44,338         44,338   

FHLB stock

     5,014         5,014            5,787         5,787   

Loans receivable

     421,471         447,444            426,848         453,112   

Accrued interest receivable

     1,587         1,587            1,508         1,508   

Financial liabilities:

              

Deposits

   $ 436,231       $ 441,902          $ 448,973       $ 454,933   

FHLB advances

     35,100         37,018            30,400         32,454   

Accrued interest payable

     129         129            114         114   

NOTE 3 — LOANS, ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS

The ALL represents management’s estimate of probable and inherent credit losses in the Bank’s 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 Company’s 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 management’s judgment, should be charged-off or for which an actual loss is realized.

 

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Changes in the ALL for the periods presented below are as follows:

 

      Real Estate      Consumer      Total      

March 31, 2012 and Six Months then Ended:

        

Allowance for Loan Losses:

        

Beginning balance, October 1, 2011

     $ 1,907       $ 2,991       $ 4,898       

Charge-offs

     (823)         (1,179)         (2,002)      

Recoveries

     22         110         132       

Provision (1)

     1,129         1,511         2,640       
  

 

 

 

Ending balance, March 31, 2012

     $ 2,235       $ 3,433       $ 5,668       
  

 

 

 

Ending balance: individually evaluated for impairment

     $ 567       $ 275       $ 842       
  

 

 

 

Ending balance: collectively evaluated for impairment

     $ 1,668       $ 3,158       $ 4,826       
  

 

 

 

Loans Receivable:

        

Ending balance (2)

     $ 282,513       $ 144,809       $ 427,322       
  

 

 

 

Ending balance: individually evaluated for impairment

     $ 5,349       $ 1,070       $ 6,419       
  

 

 

 

Ending balance: collectively evaluated for impairment

     $ 277,164       $ 143,739       $ 420,903       
  

 

 

 

September 30, 2011 and Twelve Months then Ended:

        

Allowance for Loan Losses:

        

Beginning balance, October 1, 2010

     $ 1,562       $ 2,583       $ 4,145       

Charge-offs

     (2,476)         (2,882)         (5,358)      

Recoveries

     46         201         247       

Provision (1)

     2,775         3,089         5,864       
  

 

 

 

Ending balance, September 30, 2011

     $ 1,907       $ 2,991       $ 4,898       
  

 

 

 

Ending balance: individually evaluated for impairment

     $ 381       $ 263       $ 644   
  

 

 

 

Ending balance: collectively evaluated for impairment

     $ 1,526       $ 2,728       $ 4,254   
  

 

 

 

Loans Receivable:

        

Ending balance

     $ 275,339       $ 157,425       $ 432,764       
  

 

 

 

Ending balance: individually evaluated for impairment

     $ 5,429       $ 1,233       $ 6,662       
  

 

 

 

Ending balance: collectively evaluated for impairment

     $ 269,910       $ 156,192       $ 426,102       
  

 

 

 

 

(1) The Bank does not have historical data disaggregating provision for loan losses between real estate and consumer loans. Therefore, the provision for loan losses has been allocated between real estate and consumer loans for each period presented based on the ratio of real estate and consumer net loan charge-offs for that period.
(2) Ending loan balances above do not include deferred loan origination fees net of costs.

 

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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:

 

     Real Estate Loans    Consumer Loans    Total Loans
      March 31,
2012
     September 30,
2011
           March 31,
2012
     September 30,
2011
           March 31,
2012
     September 30,
2011
       

Performing loans

                          

Performing TDR loans

   $ 3,376       $ 3,191          $ 767       $ 914          $ 4,143       $ 4,105      

Performing loans other

     272,044         264,838            144,443         155,846            416,487         420,684      
  

 

 

  

 

 

  

 

 

Total performing loans

     275,420         268,029            145,210         156,760            420,630         424,789      

Nonperforming loans (1)

                          

Nonperforming TDR loans

     1,972         2,238            304         319          $ 2,276       $ 2,557      

Nonperforming loans other

     3,527         3,452            706         948            4,233         4,400      
  

 

 

  

 

 

  

 

 

Total nonperforming loans

     5,499         5,690            1,010         1,267            6,509         6,957      
  

 

 

  

 

 

  

 

 

Total loans

   $ 280,919       $ 273,719          $ 146,220       $ 158,027          $ 427,139       $ 431,746      
  

 

 

  

 

 

  

 

 

 

 

(1) Nonperforming loans are defined as loans that (a) are 91+ days past due and nonaccruing, or (b) TDR loans restructured at a 0% interest rate that were 91+ days past due and nonaccruing at the time of restructuring.

An aging analysis of the Bank’s real estate and consumer loans as of March 31, 2012 and September 30, 2011 is as follows:

 

      1 Month
Past Due
     2 Months
Past Due
    

Greater
Than

3 Months

    

Total

Past Due

     Current      Total
Loans
     Recorded
Investment >
90 Days and
Accruing
       

March 31, 2012:

                       

Real estate loans

     $3,991         $611         $3,699         $8,301         $272,618         $280,919         $—      

Consumer loans

     1,845         582         761         3,188         143,033         146,220              
  

 

 

Total

     $5,836         $1,193         $4,460         $11,489         $415,651         $427,139         $—      
  

 

 

September 30, 2011:

                       

Real estate loans

     $3,867         $1,877         $3,452         $9,196         $264,523         $273,719         $—      

Consumer loans

     2,517         868         948         4,333         153,694         158,027              
  

 

 

Total

     $6,384         $2,745         $4,400         $13,529         $418,217         $431,746         $—      
  

 

 

A summary of the Bank’s impaired loans as of March 31, 2012 and September 30, 2011 is as follows:

 

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      Recorded
Investment
           Unpaid
Principal
Balance
           Related
Allowance
           Average
Recorded
Investment
           Interest
Income
Recognized
 

March 31, 2012 and Six Months then Ended:

                          

With no related allowance recorded:

                          

Real estate loans

     $3,012            $3,012            $—            $3,314            $36   

Consumer loans

     401            401                       454            10   

With an allowance recorded:

                          

Real estate loans

     2,337            2,337            567            2,075            24   

Consumer loans

     670            670            275            699            11   

Total:

                          

Real estate loans

     5,349            5,349            567            5,389            60   

Consumer loans

     1,071            1,071            275            1,153            21   

Sepember 30, 2011 and Twelve Months then Ended:

                          

With no related allowance recorded:

                          

Real estate loans

     $3,616            $3,616            $—            $2,262            $95   

Consumer loans

     506            506                       359            22   

With an allowance recorded:

                          

Real estate loans

     1,813            1,813            381            1,555            29   

Consumer loans

     727            727            263            843            16   

Total:

                          

Real estate loans

     5,429            5,429            381            3,817            124   

Consumer loans

     1,233            1,233            263            1,202            38   

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 borrower’s financial difficulties. A TDR may be either on accrual or nonaccrual status based upon the performance of the borrower and management’s 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:

 

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      Real Estate      Consumer      Total       

March 31, 2012 and Six Months then Ended:

          

Accruing / Performing:

          

Beginning balance

   $ 3,506       $ 950       $ 4,456     

Principal payments

     (117      (48      (165  

Charge-offs

     (79      (65      (144  

Advances

     1         10         11     

New restructured (1)

     7         66         73     

Class transfers (2)

     357         (59      298     

Transfers between accrual/non-accrual

     (299      (87      (386  
  

 

 

Ending balance

   $ 3,376       $ 767       $ 4,143     
  

 

 

Non-accrual / Non-performing:

          

Beginning balance

   $ 1,923       $ 283       $ 2,206     

Principal payments

     (31      (89      (120  

Charge-offs

     (223      (93      (316  

Advances

     4         1         5     

New restructured (1)

             32         32     

Class transfers (2)

             83         83     

Transfers between accrual/non-accrual

     299         87         386     
  

 

 

Ending balance

   $ 1,972       $ 304       $ 2,276     
  

 

 

Totals:

          

Beginning balance

   $ 5,429       $ 1,233       $ 6,662     

Principal payments

     (148      (137      (285  

Charge-offs

     (302      (158      (460  

Advances

     5         11         16     

New restructured (1)

     7         98         105     

Class transfers (2)

     357         24         381     

Transfers between accrual/non-accrual

                         
  

 

 

Ending balance

   $ 5,348       $ 1,071       $ 6,419     
  

 

 

 

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September 30, 2011 and Twelve Months then Ended:

          

Accruing / Performing:

          

Beginning balance

     $1,402         $415         $1,817     

Principal payments

     (80      (140      (220  

Charge-offs

                         

Advances

     35         8         43     

New restructured (1)

     1,085         422         1,507     

Class transfers (2)

     1,275         229         1,504     

Transfers between accrual/non-accrual

     (211      16         (195  
  

 

 

Ending balance

     $3,506         $950         $4,456     
  

 

 

Non-accrual / Non-performing:

          

Beginning balance

     $1,312         $144         $1,456     

Principal payments

     (42      (34      (76  

Charge-offs

             (31      (31  

Advances

     52         5         57     

New restructured (1)

                         

Class transfers (2)

     390         215         605     

Transfers between accrual/non-accrual

     211         (16      195     
  

 

 

Ending balance

     $1,923         $283         $2,206     
  

 

 

Totals:

          

Beginning balance

     $2,714         $559         $3,273     

Principal payments

     (122      (174      (296  

Charge-offs

             (31      (31  

Advances

     87         13         100     

New restructured (1)

     1,085         422         1,507     

Class transfers (2)

     1,665         444         2,109     

Transfers between accrual/non-accrual

                         
  

 

 

Ending balance

     $5,429         $1,233         $6,662     
  

 

 

 

(1) “New restructured” represent loans restructured during the current period that meet TDR criteria in accordance with the Bank’s policy at the time of the restructuring.
(2) “Class transfers” represent previously restructured loans that met TDR criteria per the Bank’s policy for the first time during the current period.

As an integral part of their examination process, various regulatory agencies review the Bank’s 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:

 

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Description of Securities    Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Fair Value
 

March 31, 2012

           

U.S. Agency mortgage-backed securities

     $14,953         $153         $     14         $15,092   

U.S. Agency Floating Rate Bonds

     14,974         65         11         15,028   

Fannie Mae mortgage-backed securities

     8,646         63                 8,709   

Freddie Mac mortgage-backed securities

     9,294                 71         9,223   

Non-agency mortgage-backed securities

     10,523                 2,560         7,963   

General Obligation Municipal Bonds

     6,993         27         170         6,850   

Revenue Municipal Bonds

     2,303         3         15         2,291   

Total investment securities

     $67,686         $311         $2,841         $65,156   
                                     

September 30, 2011

           

U.S. Agency mortgage-backed securities

     $  9,719         $264         $     —         $9,983   

U.S. Agency Floating Rate Bonds

     25,215         24         27         25,212   

Non-agency mortgage-backed securities

     12,918                 3,775         9,143   

Total investment securities

     $47,852         $288         $3,802         $44,338   
                                     

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:

 

      Six Months
Ended
March 31,
2012
     Twelve Months
Ended
September 30,
2011
 

Beginning balance of the amount of OTTI related to credit losses

     $2,408         $  9,497   

Credit portion of OTTI on securities for which OTTI was not previously recognized

     673         620   

Cash payments received on a security in excess of the security’s book value adjusted for previously recognized credit portion of OTTI

             (50

Credit portion of OTTI on securities in default for which OTTI was previously recognized

             (2,798

Credit portion of OTTI previously recognized on securities sold during the period

             (4,861

Ending balance of the amount of OTTI related to credit losses

     $3,081         $  2,408   
                   

 

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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:

 

Maturing during the fiscal year Ended September 30,                As of
March 31,
2012
     Weighted
Average
Rate
     As of
September 30,
2011
     Weighted
Average
Rate
 

2012

     $  15,200         4.45%         $  16,000         4.46%   

2013

     6,750         3.99%         6,750         3.99%   

2014

     8,650         3.31%         6,150         4.45%   

2015

     4,500         1.83%         1,500         4.05%   

After 2015

             NA                    NA      

Total fixed maturity

     $  35,100            $  30,400      

Advances with amortizing principal

                                 

Total

     $  35,100            $  30,400      
                                     

At March 31, 2012, the Bank’s 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.

 

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NOTE 6 — INCOME TAXES

Income tax expense (benefit) for each of the periods shown below consisted of the following:

 

      Six Months
Ended
March 31,
2012
    Six Months
Ended
March 31,
2011
 

Current tax provision / (benefit)

    

Federal

   $ 686      $ (18

State

     83        (11
     769        (29

Deferred tax (benefit)

    

Federal

     (874     (57

State

     (113     1   
       (987     (56

Total

   $ (218   $ (85
                  

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:

 

     

Six Months

Ended

March 31,

2012

   

Six Months
Ended
March 31,

2011

 

Tax expense at statutory rate

   $ (193     34.0%      $ (83     34.0%   

State income taxes net of exception

     (30     5.4%        (13     5.4%   

Other permanent differences

     5        (0.98%     5        (0.9%

Other

            0.%        6        (3.5%

Total

   $ (218     38.4%      $ (85     35.0%   
                                  

 

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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 Company’s deferred tax assets and liabilities as of March 31, 2012 and September 30, 2011, respectively:

 

      March 31,
2012
    September 30,
2011
 

Deferred tax assets:

    

Allowance for loan losses

   $ 2,232      $ 1,928   

Deferred loan costs/fees

     403        366   

Director/officer compensation plans

     1,326        1,360   

Net unrealized loss on securities available for sale

     1,518        1,406   

Impairment loss

     574        72   

Other

     193        229   

Deferred tax assets

   $ 6,246      $ 5,361   

Deferred tax liabilities:

    

Office properties and equipment

     (807     (902

Federal Home Loan Bank stock

     (64     (64

Core deposit intangible, net

     14        (42

481a adjustment

     (41     (82

Other

     (86     (108

Deferred tax liabilities

     (984     (1,198

Net deferred tax assets

   $ 5,262      $ 4,163   
                  

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 Company’s 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 Company’s 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 Company’s stockholders approved the Company’s Recognition and Retention Plan. This plan provides for the grant of up to 113,910 shares of the Company’s 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

 

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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 Company’s stockholders also approved the Company’s 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 Company’s 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 plan’s inception, options for 93,980 shares of the Company’s 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 Company’s 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 Company’s stockholders approved the Company’s 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 Company’s 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.

 

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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:

 

      Before-Tax
Amount
     Tax
Expense
    Net-of-Tax
Amount
 

Unrealized gains (losses) on securities:

       

Unrealized holding losses arising during period

     $230         (92     $138   

Less: reclassification adjustment for gains included in net income

     80         (32     48   

Changes for realized losses on securities available for sale for OTTI write-down

     673         (269     404   

Defined benefit plans:

       

Amortization of unrecognized prior service costs and net gains (losses)

     3         (1     2   

Other comprehensive income

     $986         $(394     $592   
                           

The changes in the accumulated balances for each component of other comprehensive income for the six months ended March 31, 2012 were follows:

 

      Unrealized
Gains
(Losses) on
Securities
    Defined
Benefit
Plans
    Other
Comprehensive
Income (Loss)
 

Balance, October 1, 2011

   $     (2,109   $     (209   $ (2,318

Current period other comprehensive income, net of tax

     590        2        592   

Ending balance, March 31, 2012

   $ (1,519   $ (207   $ (1,726
                          

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

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 Company’s operations and business environment. These uncertainties include general economic conditions, in particular, relating to consumer demand for the Bank’s products and services; the Bank’s 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 Bank’s ability to maintain required capital levels and adequate sources of funding and liquidity; maintaining capital requirements may limit the Bank’s 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 Bank’s mortgage-

 

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backed securities portfolio; the Bank’s 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 Company’s 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 Company’s performance are discussed further in Part I, Item 1A, “Risk Factors,” in the Company’s 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.

GENERAL

The following discussion sets forth management’s 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 Management’s Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and notes related thereto included in the Company’s annual report on Form 10-K filed with the Securities and Exchange Commission on December 21, 2011.

PERFORMANCE SUMMARY

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)

 

     Three Months Ended     Sixth Months Ended  
     March 31,     March 31,  
     2012     2011     2012     2011  

Net income (loss), as reported

   $ 66      $ 80      $ (348   $ (159

EPS—basic, as reported

   $ 0.01      $ 0.02      $ (0.07   $ (0.03

EBS—diluted, as reported

   $ 0.01      $ 0.02      $ (0.07   $ (0.03

Cash dividends paid

   $ —        $ —        $ —        $ —     

Return on average assets (annualized)

     0.05     0.06     (0.13 %)      (0.05 %) 

Reteurn on average equity (annualized)

     0.50     0.62     (1.31 %)      (0.62 %) 

Efficiency ratio, as reported (1)

     78.46     70.13     76.47     70.40

 

(1) Non-interest expense divided by the sum of net interest income plus non-interest income, excluding net impairment losses recognized in earnings. A lower ratio indicates greater efficiency.

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 Management’s Discussion and Analysis of Financial Condition and Results of Operations, other than share and per share amounts, are stated in thousands.

 

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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:

 

   

Net interest income decreased for both the current three and six month periods compared to the comparable prior year periods. However, net interest margin increased for both the current three and six month periods compared to the comparable prior year periods.

 

   

We continue to see both rate and volume related decreases in both interest income on loans and interest expense on deposits. Reductions in Federal Home Loan Bank (“FHLB”) borrowings led to decreases in interest expense on borrowed funds of ($126) and ($403) for the three and six month period ended March 31, 2012, respectively, over the comparable prior year periods.

 

   

Net interest income was $5,033 for the three month period ended March 31, 2012, a decrease of ($189) or (3.62%) from the three month period ended March 31, 2011. Net interest income was $10,351 for the six month period ended March 31, 2012, a decrease of ($234) or (2.21%) from the six month period ended March 31, 2011.

 

   

The net interest margin of 3.91% for the three months ended March 31, 2012 represents a 16 bp increase from a net interest margin of 3.75% for the three months ended March 31, 2011. The net interest margin of 3.99% for the six months ended March 31, 2012 represents a 25 bp increase from a net interest margin of 3.74% for the six months ended March 31, 2011.

 

   

Total loans were $427,139 at March 31, 2012, a decrease of $4,607, or (2.07%) from September 30, 2011. Total deposits were $436,231 at March 31, 2012, a decrease of $12,742 or (2.84%) from September 30, 2011.

 

   

Net loan charge-offs decreased from $1,558 for the three months ended March 31, 2011 to $968 for the three months ended March 31, 2012. Net loan charge-offs decreased from $2,891 for the six months ended March 31, 2011 to $1,870 for the six months ended March 31, 2012. Continued lower levels of net loan charge-offs and non-performing loans led to a decreased provision for loan losses of $1,100 for the three month period ended March 31, 2012, compared to $1,650 for the three months ended March 31, 2011. Annualized net loan charge-offs as a percentage of average loans were 0.87% for the six months ended March 31, 2012, compared to 1.29% for the six months ended March 31, 2011. Net loan charge-offs increased during the current year quarter over the prior year quarter, but remain at levels lower than the next five previous quarters.

 

   

Non-interest income decreased from $780 for the three months ended March 31, 2011 to $602 for the three months ended March 31, 2012. Non-interest income decreased from $926 for the six months ended March 31, 2011 to $652 for the six months ended March 31, 2012. The primary contributor in this decrease was $234 of gains on sale of available-for-sale securities during the three months ended March 31, 2011.

 

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Non-interest expense increased 5.04%, from $4,209 to $4,421 for the three month period ending March 31, 2011 compared to the three month period ending March 31, 2012. Non-interest expense increased 4.99%, from $8,505 to $8,929 for the six month period ending March 31, 2011 compared to the six month period ending March 31, 2012. These increases were primarily due to increased compensation and data processing costs, partially offset by a decrease in our FDIC insurance premium assessment costs.

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 borrower’s 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 Bank’s 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

 

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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:

 

   

The length of time, and extent to which, the fair value has been less than the amortized cost.

 

   

Adverse conditions specifically related to the security, industry or geographic area.

 

   

The historical and implied volatility of the fair value of the security.

 

   

The payment structure of the debt security and the likelihood of the issuer or underlying borrowers being able to make payments that may increase in the future.

 

   

The failure of the issuer of the security or the underlying borrowers to make scheduled interest or principal payments.

 

   

Any changes to the rating of the security by a rating agency.

 

   

Recoveries or additional declines in fair value subsequent to the balance sheet date.

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 security’s 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 issuer’s 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.

 

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The independent valuation process included:

 

 

Obtaining individual loan level data directly from servicers and trustees, and making assumptions regarding the frequency of foreclosure, loss severity and conditional prepayment rate (both the entire pool and the loan group pertaining to the bond we hold).

 

 

Projecting cash flows based on these assumptions and stressing the cash flows under different time periods and requirements based on the class structure and credit enhancement features of the bond we hold.

 

 

Identifying various price/yield scenarios based on the Bank’s book value and valuations based on both hold-to-maturity and current free market trade scenarios. Discount rates were determined based on the volatility and complexity of the security and the yields demanded by buyers in the market at the time of the valuation.

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 security’s 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).

Income Taxes.

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 management’s 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

 

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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.

 

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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:

 

     Three months ended March 31,
2012
     Three months ended March 31,
2011
 
            Interest      Average             Interest      Average  
     Average      Income/      Yield/      Average      Income/      Yield/  
     Balance      Expense      Rate      Balance      Expense      Rate  

Average interest-earning assets:

                 

Cash and cash equivalents

   $ 18,586       $ 5         0.11%       $ 64,369       $ 31         0.20%   

Loans

     428,147         6,360         5.97%         445,785         6,996         6.36%   

Interest-bearing deposits

     5,136         9         0.70%         4,498         9         0.81%   

Securities available for sale

     58,601         332         2.28%         43,730         484         4.49%   

FHLB stock

     5,401         1         0.07%         5,787         1         0.07%   
  

 

 

    

 

 

 

Total interest earning assets

   $ 515,871       $ 6,707         5.23%       $ 564,169       $ 7,521         5.41%   
  

 

 

    

 

 

 

Average interest-bearing liabilities:

                 

Savings accounts

   $ 24,042       $ 5         0.08%       $ 24,965       $ 8         0.13%   

Demand deposits

     23,893         1         0.02%         22,896         2         0.04%   

Money market

     150,732         209         0.56%         160,888         426         1.07%   

CD’s

     210,932         1,024         1.95%         247,914         1,288         2.11%   

IRA’s

     24,357         107         1.77%         24,409         121         2.01%   
  

 

 

    

 

 

 

Total deposits

     433,956         1,346         1.25%         481,072         1,845         1.53%   

FHLB advances

     32,225         328         4.09%         42,800         454         4.30%   
  

 

 

    

 

 

 

Total interest bearing liabilities

   $ 466,181       $ 1,674         1.44%       $ 523,872       $ 2,299         1.78%   
  

 

 

    

 

 

 

Net interest income

      $ 5,033             $ 5,222      
     

 

 

          

 

 

    

Interest rate spread

           3.78%               3.63%   
        

 

 

          

 

 

 

Net interest margin

           3.91%               3.75%   
        

 

 

          

 

 

 

Average interest-earning assets to average interest-bearing liabilities

           1.11                  1.08      
        

 

 

          

 

 

 

 

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Six months ended March 31, 2012 compared to the six months ended March 31, 2011:

 

     Six months ended March 31, 2012      Six months ended March 31, 2011  
            Interest      Average             Interest      Average  
     Average      Income/      Yield/      Average      Income/      Yield/  
     Balance      Expense      Rate      Balance      Expense      Rate  

Average interest-earning assets:

                 

Cash and cash equivalents

   $ 22,886       $ 18         0.16%       $ 68,135       $ 72         0.21%   

Loans

   $ 430,110       $ 13,162         6.12%       $ 449,253       $ 14,265         6.35%   

Interest-bearing deposits

   $ 7,025       $ 27         0.77%       $ 2,570       $ 9         0.70%   

Securities available for sale

   $ 53,336       $ 640         2.40%       $ 42,375       $ 1,133         5.35%   

FHLB stock

   $ 5,566       $ 3         0.11%       $ 5,787       $ 1         0.03%   
  

 

 

    

 

 

 

Total interest earning assets

     518,923         13,850         5.34%         568,120         15,480         5.46%   
  

 

 

    

 

 

 

Average interest-bearing liabilities:

                 

Savings accounts

     24,232         10         0.08%       $ 25,564       $ 24         0.19%   

Demand deposits

     23,667         2         0.02%       $ 22,353       $ 6         0.05%   

Money market

     151,796         487         0.64%       $ 158,258       $ 859         1.09%   

CD’s

     215,893         2,124         1.97%       $ 250,316       $ 2,705         2.16%   

IRA’s

     24,492         218         1.78%       $ 24,240       $ 240         1.98%   
  

 

 

    

 

 

 

Total deposits

     440,080         2,841         1.29%         480,731         3,834         1.60%   
        

 

 

          

 

 

 

FHLB advances

     31,214         658         4.22%       $ 48,786       $ 1,061         4.35%   
  

 

 

    

 

 

 

Total interest bearing liabilities

     471,294         3,499         1.48%         529,517         4,895         1.85%   
  

 

 

    

 

 

 

Net interest income

      $ 10,351             $ 10,585      
     

 

 

          

 

 

    

Interest rate spread

           3.85%               3.61%   
        

 

 

          

 

 

 

Net interest margin

           3.99%               3.74%   
        

 

 

          

 

 

 

Average interest-earning assets to average interest-bearing liabilities

           1.10                 1.07      
        

 

 

          

 

 

 

 

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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:

 

     Increase (decrease) due to  
         Volume             Rate             Net      

Interest income:

      

Cash and cash equivalents

   $ (14   $ (12   $ (26

Loans

     (272     (364     (636

Interest-bearing deposits

     1        (1       

Securities available for sale

     138        (290     (152

FHLB stock

                     
  

 

 

 

Total interest earning assets

     (147     (667     (814
  

 

 

 

Interest expense:

      

Savings accounts

            (3     (3

Demand deposits

            (1     (1

Money market

     (26     (191     (217

CD’s

     (184     (80     (264

IRA’s

            (14     (14
  

 

 

 

Total deposits

     (210     (289     (499

FHLB advances

     (108     (18     (126
  

 

 

 

Total interest bearing liabilities

     (318     (307     (625

Net interest income

   $ 171      $ (360   $ (189
  

 

 

 

 

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Six months ended March 31, 2012 compared to the six months ended March 31, 2011:

 

    

Increase (decrease) due to

 
         Volume                 Rate                     Net          

Interest income:

      

Cash and cash equivalents

   $ (37   $ (17   $ (54

Loans

     (596     (507     (1,103

Interest-bearing deposits

     17        1        18   

Securities available for sale

     249        (742     (493

FHLB stock

            2        2   
  

 

 

 

Total interest earning assets

     (367     (1,263     (1,630
  

 

 

 

Interest expense:

      

Savings accounts

     (1     (13     (14

Demand deposits

            (4     (4

Money market

     (34     (338     (372

CD’s

     (351     (230     (581

IRA’s

     2        (24     (22
  

 

 

 

Total deposits

     (384     (609     (993

FHLB advances

     (371     (32     (403
  

 

 

 

Total interest bearing liabilities

     (755     (641     (1,396

Net interest income

   $ 388      $ (622   $ (234
  

 

 

 

 

 

(1) the change in interest due to both rate and volume has been allocated in proportion to the relationship to the dollar amounts of the change in each.

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

 

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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.

 

     Three months ended
March 31,
     %     Six months ended
March 31,
    %  
      2012     2011      Change     2012     2011     Change  

Noninterest Income (Loss):

             

Net gains/(losses) on available for sale securities

   $ (3   $ 234         (101.28%   $ (593   $ (336     76.49%   

Service charges on deposit accounts

     340        335         1.49%        727        709        2.54%   

Insurance commissions

     14        24         (41.67%     14        48        (70.83%

Loan fees and service charges

     101        68         48.53%        221        279        (20.79%

Other

     150        119         26.05%        283        226        25.22%   

 

 

Total noninterest income

   $ 602      $ 780         (22.82%   $ 652      $ 926        (29.59%
                                                   

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.

 

     Three months ended
March 31,
     %     Six months ended
March 31,
     %  
      2012      2011      Change     2012      2011      Change  

Noninterest Expense:

                

Salaries and related benefits

   $ 2,212       $ 2,093         5.69%      $ 4,363       $ 4,110         6.16%   

Occupancy — net

     616         666         (7.51%     1,222         1,309         (6.65%

Office

     303         334         (9.28%     577         708         (18.50%

Data processing

     380         191         98.95%        731         355         105.92%   

Amortization of core deposit

     83         83         0.00%        166         166         0.00%   

Advertising, marketing and public relations

     47         20         135.00%        100         68         47.06%   

FDIC premium assessment

     163         273         (40.29%     343         543         (36.83%

Professional services

     284         279         1.79%        596         566         5.30%   

Other

     333         270         23.33%        831         680         22.21%   

Total noninterest expense

   $ 4,421       $ 4,209         5.04%      $ 8,929       $ 8,505         4.99%   
                                                      

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,

 

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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 Bank’s 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 loan’s 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.

 

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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 management’s 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.

 

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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:

 

     

March 31,
2012

and Six

Months

Then Ended

   

September 30,

2011

and Twelve

Months

Then Ended

 

Nonperforming assets:

    

Nonaccrual loans

   $ 4,893      $ 4,400   

Accruing loans past due 90 days or more

              

Total nonperforming loans (“NPLs”)

     4,893        4,400   

Other real estate owned

     980        1,153   

Other collateral owned

     146        207   

Total nonperforming assets (“NPAs”)

   $ 6,019      $ 5,760   
                  

Troubled Debt Restructurings (“TDRs”)

   $ 6,419      $ 6,662   

Performing nonaccrual TDRs

   $ 1,616      $ 1,855