XNAS:CZWI Citizens Community Bancorp, Inc. Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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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 June 30, 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  x    No  ¨

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a 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   ¨  (do not check if a smaller reporting company)    Smaller reporting company      x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

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 August 13, 2012 there were 5,135,550 shares of the registrant’s common stock, par value $0.01 per share, outstanding.

 

 

 


CITIZENS COMMUNITY BANCORP, INC.

FORM 10-Q

June 30, 2012

INDEX

 

         Page  
         Number  

Part I – FINANCIAL INFORMATION

  

Item 1.

 

Financial Statements

  
 

Consolidated Balance Sheets as of June 30, 2012 (Unaudited) and September 30, 2011

     3   
 

Consolidated Statements of Operations (Unaudited) for the three and nine months ended June 30, 2012 and 2011

     4   
 

Consolidated Statement of Comprehensive Income (Unaudited) for the nine months ended June 30, 2012 and 2011

     5   
 

Consolidated Statement of Changes in Stockholders’ Equity (Unaudited) for the nine months ended June 30, 2012

     6   
 

Consolidated Statements of Cash Flows (Unaudited) for the nine months ended June 30, 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

     27   

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

     47   

Item 4.

 

Controls and Procedures

     49   

Part II – OTHER INFORMATION

     49   

Item 1.

 

Legal Proceedings

     49   

Item 1A.

 

Risk Factors

     50   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     50   

Item 3.

 

Defaults Upon Senior Securities

     50   

Item 4.

 

Mine Safety Disclosures

     50   

Item 5.

 

Other Information

     50   

Item 6.

 

Exhibits

     50   

SIGNATURES

     51   

 

2 | Page


PART 1 – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

CITIZENS COMMUNITY BANCORP, INC.

Consolidated Balance Sheets

June 30, 2012 (unaudited) and September 30, 2011

(derived from audited financial statements)

(in thousands, except share data)

 

     June 30, 2012     September 30, 2011  

Assets

    

Cash and cash equivalents

   $ 20,855      $ 31,763   

Other interest-bearing deposits

     —          9,543   

Securities available for sale (at fair value)

     67,436        44,338   

Federal Home Loan Bank stock

     4,426        5,787   

Loans receivable

     431,380        431,746   

Allowance for loan losses

     (5,702     (4,898
  

 

 

   

 

 

 

Loans receivable, net

     425,678        426,848   

Office properties and equipment, net

     5,699        6,696   

Accrued interest receivable

     1,543        1,508   

Intangible assets

     288        483   

Foreclosed and repossessed assets, net

     1,002        1,360   

Other assets

     6,439        8,231   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 533,366      $ 536,557   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Liabilities:

    

Deposits

   $ 426,697      $ 448,973   

Federal Home Loan Bank advances

     48,150        30,400   

Other liabilities

     4,423        4,296   
  

 

 

   

 

 

 

Total liabilities

     479,270        483,669   

Stockholders’ equity:

    

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

     51        51   

Additional paid-in capital

     53,949        53,934   

Retained earnings

     1,324        1,323   

Unearned deferred compensation

     (86     (102

Accumulated other comprehensive loss

     (1,142     (2,318
  

 

 

   

 

 

 

Total stockholders’ equity

     54,096        52,888   
  

 

 

   

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 533,366      $ 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 Nine Months Ended June 30, 2012 and 2011

(in thousands, except per share data)

 

     Three Months Ended     Nine Months Ended  
     June 30,     June 30,     June 30,     June 30,  
     2012     2011     2012     2011  

Interest and dividend income:

        

Interest and fees on loans

   $ 6,247      $ 6,773      $ 19,409      $ 21,038   

Interest on investments

     446        431        1,135        1,646   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest and dividend income

     6,693        7,204        20,544        22,684   

Interest expense:

        

Interest on deposits

     1,274        1,711        4,115        5,545   

Interest on borrowed funds

     324        433        982        1,494   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     1,598        2,144        5,097        7,039   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     5,095        5,060        15,447        15,645   

Provision for loan losses

     900        1,364        3,540        4,614   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

     4,195        3,696        11,907        11,031   
  

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest income:

        

Total fair value adjustments and other-than-temporary impairment

     107        126        (2,644     (1,288

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

     (107     (126     1,971        717   
        

Net gains on sale of available for sale securities

     11        281        91        516   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net gains (losses) on available for sale securities

     11        281        (582     (55

Service charges on deposit accounts

     400        386        1,127        1,095   

Insurance commissions

     35        25        49        73   

Loan fees and service charges

     133        70        354        349   

Other

     166        138        448        364   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

     745        900        1,396        1,826   
  

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest expense:

        

Salaries and related benefits

     2,237        2,128        6,600        6,238   

Occupancy

     617        606        1,838        1,915   

Office

     279        311        857        1,019   

Data processing

     389        250        1,120        605   

Amortization of core deposit intangible

     28        84        194        250   

Advertising, marketing and public relations

     47        26        147        94   

FDIC premium assessment

     124        279        518        822   

Professional services

     349        299        894        865   

Other

     284        310        1,115        990   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

     4,354        4,293        13,283        12,798   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before provision for income tax

     586        303        20        59   

Provision for income taxes

     237        127        19        42   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to common stockholders

   $ 349      $ 176      $ 1      $ 17   
  

 

 

   

 

 

   

 

 

   

 

 

 

Per share information:

        

Basic earnings

   $ 0.07      $ 0.03      $ —        $ —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings

   $ 0.07      $ 0.03      $ —        $ —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends paid

   $ —        $ —        $ —        $ —     
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying condensed notes to unaudited consolidated financial statements.

 

4 | Page


CITIZENS COMMUNITY BANCORP, INC.

Consolidated Statements of Other Comprehensive Income (unaudited)

Nine Months Ended June 30, 2012 and 2011

(in thousands, except per share data)

 

     Nine Months Ended  
     June 30,
2012
     June 30,
2011
 

Net income attributable to common stockholders

   $ 1       $ 17   
  

 

 

    

 

 

 

Other comprehensive income, net of tax:

     

Securities available for sale

     

Net unrealized gains arising during period

     715         2,391   

Reclassification adjustment for gains included in net income

     54         310   

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

     404         342   
  

 

 

    

 

 

 

Unrealized gains on securities

     1,173         3,043   
  

 

 

    

 

 

 

Defined benefit plans:

     

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

     3         —     
  

 

 

    

 

 

 

Total other comprehensive income, net of tax

     1,176         3,043   
  

 

 

    

 

 

 

Comprehensive income

   $ 1,177       $ 3,060   
  

 

 

    

 

 

 

See accompanying condensed notes to unaudited consolidated financial statements.

 

5 | Page


CITIZENS COMMUNITY BANCORP, INC.

Consolidated Statement of

Changes in Stockholders’ Equity (unaudited)

Nine Months Ended June 30, 2012

(in thousands, except Shares)

 

                                      Accumulated        
                  Additional             Unearned     Other     Total  
     Common Stock      Paid-in      Retained      Deferred     Comprehensive     Stockholders’  
     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 Income

             1             1   

Other comprehensive income

                  1,176        1,176   

Forfeiture of unvested shares - 520 shares

     (520               

Stock option expense

          15                15   

Amortization of restricted stock

                16          16   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance, June 30, 2012

     5,133,050      $  51       $  53,949       $  1,324       $ (86   $ (1,142   $  54,096   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

See accompanying condensed notes to unaudited consolidated financial statements.

 

6 | Page


CITIZENS COMMUNITY BANCORP, INC.

Consolidated Statements of Cash Flows (unaudited)

Nine Months Ended June 30, 2012 and 2011

(in thousands, except per share data)

 

     Nine Months Ended  
     June 30,     June 30,  
     2012     2011  

Cash flows from operating activities:

    

Net income attributable to common stockholders

   $ 1      $ 17   
  

 

 

   

 

 

 

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

    

Net accretion (amortization) of premium/discount on securities

     481        (20

Depreciation

     780        840   

Provision for loan losses

     3,540        4,614   

Net realized gain on sale of securities

     (91     (516

Other-than-temporary impairment on mortgage-backed securities

     673        620   

Amortization of core deposit intangible

     194        250   

Amortization of restricted stock

     16        2   

Stock based compensation expense

     15        1   

Loss on sale of office properties

     134        —     

Net gains from disposals of foreclosed properties

     (32     (35

Provision for valuation allowance on foreclosed properties

     144        135   

Decrease in accrued interest receivable and other assets

     1,044        1,424   

Increase in other liabilities

     130        378   
  

 

 

   

 

 

 

Total adjustments

     7,028        7,693   
  

 

 

   

 

 

 

Net cash from operating activities

     7,029        7,710   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchase of securities available for sale

     (47,521     (60,998

Net decrease (increase) in interest-bearing deposits

     9,543        (9,543

Proceeds from sale of securities available for sale

     18,200        45,041   

Principal payments on securities available for sale

     7,116        9,791   

Proceeds from sale of FHLB stock

     1,361        —     

Proceeds from sale of foreclosed properties

     1,421        763   

Net (increase) decrease in loans

     (3,616     18,959   

Net capital expenditures

     (380     (510

Net cash received from sale of office properties

     465        —     
  

 

 

   

 

 

 

Net cash from investing activities

     (13,411     3,503   
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Net increase (decrease) in Federal Home Loan Bank advances

     17,750        (28,900

Net decrease in deposits

     (22,276     (17,228
  

 

 

   

 

 

 

Net cash from financing activities

     (4,526     (46,128
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (10,908     (34,915

Cash and cash equivalents at beginning of period

     31,763        72,438   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 20,855      $ 37,523   
  

 

 

   

 

 

 

Supplemental cash flow information:

    

Cash paid during the year for:

    

Interest on deposits

   $ 4,103      $ 5,558   

Interest on borrowings

   $ 988      $ 1,581   

Income taxes

   $ 21      $ 8   

Supplemental noncash disclosure:

    

Transfers from loans receivable to foreclosed and repossessed assets

   $ 1,284      $
1,750
  

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 consolidated financial statements include the accounts of Citizens Community Bancorp, Inc. (the “Company”) and its wholly owned subsidiary, and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements. Citizens Community Bancorp 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 of the Company is principally derived from the income of the Company’s wholly owned subsidiary. 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 August 13, 2012, the date on which the financial statements were available to be issued. As of August 13, 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

 

8 | Page


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 (“OTTI”) 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 92 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. Impaired loans consist of all TDRs. All 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 TDR loan is deemed to be impaired, a specific ALL allocation is established so that the loan is reported, net, at either (a) the present value of estimated future cash flows using the loan’s existing rate; or (b) at the fair value of collateral less estimated disposal costs, if repayment is expected solely from the underlying collateral of the loan. For TDRs less than 91+ days past due,

 

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and certain TDRs that are less than 91+ days delinquent; the likelihood of the loan migrating to over 91 days past due is also factored in determining the specific ALL allocation. Large groups of smaller balance homogeneous loans, such as non-TDR consumer and residential real estate loans are collectively evaluated for impairment, and accordingly, are not separately identified for impairment disclosures.

Foreclosed and Repossessed Assets, net – 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 statements of operations. Foreclosed and repossessed asset balances were $1,002 and $1,360 at June 30, 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 did not 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

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 maturity, 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 other than temporary impairment existed during the three months ended June 30, 2012.

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

 

            Quoted Prices in      Significant         
            Active Markets      Other      Significant  
            for Identical      Observable      Unobservable  
     Fair      Instruments      Inputs      Inputs  
     Value      (Level 1)      (Level 2)      (Level 3)  

June 30, 2012:

           

Securities available for sale:

           

U.S. Agency mortgage-backed securities

   $ 14,656       $ —         $ 14,656       $ —     

U.S. Agency Floating Rate Bonds

     11,677         —           11,677         —     

Fannie Mae mortgage-backed securities

     11,845         —           11,845         —     

Freddie Mac mortgage-backed securities

     12,142         —           12,142         —     

Non-agency mortgage-backed securities

     7,416         —           —           7,416   

General Obligation Municipal Bonds

     7,361         —           7,361         —     

Revenue Municipal Bonds

     2,339         —           2,339         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 67,436       $ —         $ 60,020       $ 7,416   
  

 

 

    

 

 

    

 

 

    

 

 

 

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   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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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 nine month periods ended June 30, 2012 and 2011:

 

     Nine Months Ended  
     June 30,
2012
    June 30,
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

     1,379        5,417   

Sales

     —          (13,633

Payments, accretion and amortization

     (2,433     (5,780
  

 

 

   

 

 

 

Balance end of period

   $ 7,416      $ 10,383   
  

 

 

   

 

 

 

Assets Measured on a Nonrecurring Basis

The following tables present the financial instruments measured at fair value on a nonrecurring basis as of June 30, 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)
 

June 30, 2012:

           

Foreclosed and repossessed assets, net

   $ 1,002       $ —         $ —         $ 1,002   

Loans restructured in a troubled debt restructuring

     7,415         —           —           7,415   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 8,417       $ —         $ —         $ 8,417   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 and repossessed 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.

 

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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.

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, net

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’s consolidated financial statements, 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:

 

     June 30,
2012
     September 30,
2011
 
     Carrying
Amount
     Estimated
Fair

Value
     Carrying
Amount
     Estimated
Fair

Value
 

Financial assets:

           

Cash and cash equivalents

   $ 20,855       $ 20,855       $ 31,763       $ 31,763   

Interest-bearing deposits

     —           —           9,543         9,543   

Securities available for sale

     67,436         67,436         44,338         44,338   

FHLB stock

     4,426         4,426         5,787         5,787   

Loans receivable, net

     425,678         453,809         426,848         453,112   

Accrued interest receivable

     1,543         1,543         1,508         1,508   

Financial liabilities:

           

Deposits

   $ 426,697       $ 432,255       $ 448,973       $ 454,933   

FHLB advances

     48,150         49,529         30,400         32,454   

Accrued interest payable

     120         120         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  

Nine Months then Ended June 30, 2012:

      

Allowance for Loan Losses:

      

Beginning balance, October 1, 2011

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

Charge-offs

     (1,424     (1,559     (2,983

Recoveries

     28        219        247   

Provision (1)

     1,747        1,793        3,540   
  

 

 

   

 

 

   

 

 

 

Ending balance, June 30, 2012

   $ 2,258      $ 3,444      $ 5,702   
  

 

 

   

 

 

   

 

 

 

Three Months then Ended June 30, 2012:

      

Allowance for Loan Losses:

      

Beginning balance, April 1, 2012

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

Charge-offs

     (601     (380     (981

Recoveries

     6        109        115   

Provision (1)

     618        282        900   
  

 

 

   

 

 

   

 

 

 

Ending balance, June 30, 2012

   $ 2,258      $ 3,444      $ 5,702   
  

 

 

   

 

 

   

 

 

 

Allowance for Loan Losses at June 30, 2012:

      

Amount of Allowance for Loan Losses arising from loans individually evaulated for impairment

   $ 413      $ 189      $ 602   
  

 

 

   

 

 

   

 

 

 

Amount of Allowance for Loan Losses arising from loans collectively evaulated for impairment

   $ 1,845      $ 3,255      $ 5,100   
  

 

 

   

 

 

   

 

 

 

Loans Receivable as of June 30, 2012:

      

Ending balance (2)

   $ 278,384      $ 152,996      $ 431,380   
  

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   $ 6,241      $ 1,174      $ 7,415   
  

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

   $ 272,143      $ 151,822      $ 423,965   
  

 

 

   

 

 

   

 

 

 

 

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     Real Estate     Consumer     Total  

Nine Months then Ended June 30, 2011:

      

Allowance for Loan Losses:

      

Beginning balance, October 1, 2011

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

Charge-offs

     (1,924     (2,359     (4,283

Recoveries

     33        146        179   

Provision (1)

     2,107        2,507        4,614   
  

 

 

   

 

 

   

 

 

 

Ending balance, June 30, 2011

   $ 1,778      $ 2,877      $ 4,655   
  

 

 

   

 

 

   

 

 

 

Three Months then Ended June 30, 2011:

      

Allowance for Loan Losses:

      

Beginning balance, April 1, 2011

   $ 1,687      $ 2,817      $ 4,504   

Charge-offs

     (729     (534     (1,263

Recoveries

     3        47        50   

Provision (1)

     817        547        1,364   
  

 

 

   

 

 

   

 

 

 

Ending balance, June 30, 2011

   $ 1,778      $ 2,877      $ 4,655   
  

 

 

   

 

 

   

 

 

 

Allowance for Loan Losses at June 30, 2011:

      

Amount of Allowance for Loan Losses arising from loans individually evaulated for impairment

   $ 409      $ 287      $ 696   
  

 

 

   

 

 

   

 

 

 

Amount of Allowance for Loan Losses arising from loans collectively evaulated for impairment

   $ 1,369      $ 2,590      $ 3,959   
  

 

 

   

 

 

   

 

 

 

Loans Receivable as of September 30, 2011:

      

Ending balance (2)

   $ 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.

The Bank has originated substantially all loans currently recorded on the Company’s consolidated balance sheet. The Bank has not acquired any loans since 2005.

 

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Loans receivable as of the end of the periods shown below were as follows:

 

     Real Estate Loans      Consumer Loans      Total Loans  
     June 30,
2012
     September 30,
2011
     June 30,
2012
     September 30,
2011
     June 30,
2012
     September 30,
2011
 

Performing loans

                 

Performing TDR loans

   $ 5,517       $ 3,191       $ 1,100       $ 914       $ 6,617       $ 4,105   

Performing loans other

     269,470         264,838         151,445         155,846         420,915         420,684   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total performing loans

     274,987         268,029         152,545         156,760         427,532         424,789   

Nonperforming loans (1)

                 

Nonperforming TDR loans

     724         2,238         74         319         798       $ 2,557   

Nonperforming loans other

     2,673         3,452         377         948         3,050         4,400   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total nonperforming loans

     3,397         5,690         451         1,267         3,848         6,957   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 278,384       $ 273,719       $ 152,996       $ 158,027       $ 431,380       $ 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 Company’s real estate and consumer loans as of June 30, 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 >

3  months and
Accruing
 

June 30, 2012:

                    

Real estate loans

   $ 2,393       $ 1,085       $ 3,062       $ 6,540       $ 271,854       $ 278,394       $ —     

Consumer loans

     2,124         433         376         2,933         150,053         152,986         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,517       $ 1,518       $ 3,438       $ 9,473       $ 421,907       $ 431,380       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Sepember 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       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At June 30, 2012, the Company has identified $7,415 of TDR loans as impaired, including $6,617 of performing TDRs. A loan is identified as impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. Performing TDRs consist of loans that have been modified and are performing in accordance with the modified terms for a sufficient length of time, generally six months, or loans that were modified on a proactive basis. A summary of the Company’s impaired loans as of June 30, 2012 and September 30, 2011 is as follows:

 

     With No Related Allowance Recorded      With An Allowance Recorded      Totals  
     Real Estate      Consumer      Total      Real Estate      Consumer      Total      Real Estate      Consumer      Total  

Recorded investment at June 30, 2012

   $ 2,735       $ 377       $ 3,112       $ 3,506       $ 797       $ 4,303       $ 6,241       $ 1,174       $ 7,415   

Unpaid balance at June 30, 2012

     2,735         377         3,112         3,506         797         4,303         6,241         1,174         7,415   

Recorded investment at September 30, 2011

     3,616         506         4,122         1,813         727         2,540         5,429         1,233         6,662   

Unpaid balance at September 30, 2011

     3,616         506         4,122         1,813         727         2,540         5,429         1,233         6,662   

Average recorded investment; three months ended June 30, 2012

     2,874         389         3,263         2,922         734         3,656         5,796         1,123         6,919   

Average recorded investment; three months ended June 30, 2011

     3,627         356         3,983         1,867         974         2,841         5,494         1,330         6,824   

Average recorded investment; nine months ended June 30, 2012

     3,176         442         3,618         2,660         762         3,422         5,836         1,204         7,040   

Average recorded investment; nine months ended June 30, 2011

     2,296         289         2,585         1,455         956         2,411         3,751         1,245         4,996   

Interest income received; three months ended June 30, 2012

     12         4         16         23         6         29         35         10         45   

Interest income received; three months ended June 30, 2011

     10         3         13         6         1         7         16         4         20   

Interest income received; nine months ended June 30, 2012

     34         14         48         58         14         72         92         28         120   

Interest income received; nine months ended June 30, 2011

   $ 61       $ 9       $ 70       $ 17       $ 16       $ 33       $ 78       $ 25       $ 103   

 

18 | Page


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. Concessions include extension of loan terms, renewals of existing balloon loans, reductions in interest rate and consolidation of existing Bank loans at modified terms. 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. There were 11 delinquent TDRs with a recorded investment of $764 at June 30, 2012, compared to 17 such loans with a recorded investment of $1,720 at September 30, 2011. A summary of loans modified in a troubled debt restructuring as of June 30, 2012 and during the three and nine months then ended is as follows:

 

     Real Estate     Consumer     Total  

June 30, 2012 and

      

Nine Months then Ended:

      

Accruing / Performing:

      

Beginning balance

   $ 3,506      $ 950      $ 4,456   

Principal payments

     (165     (116     (281

Charge-offs

     (79     (65     (144

Advances

     9        10        19   

New restructured (1)

     63        223        286   

Class transfers (2)

     1,318        (59     1,259   

Transfers between accrual/non-accrual

     865        157        1,022   
  

 

 

   

 

 

   

 

 

 

Ending balance

   $ 5,517      $ 1,100      $ 6,617   
  

 

 

   

 

 

   

 

 

 

Non-accrual / Non-performing:

      

Beginning balance

   $ 1,923      $ 283      $ 2,206   

Principal payments

     (31     (89     (120

Charge-offs

     (366     (144     (510

Advances

     7        1        8   

New restructured (1)

     56        106        162   

Class transfers (2)

     0        74        74   

Transfers between accrual/non-accrual

     (865     (157     (1,022
  

 

 

   

 

 

   

 

 

 

Ending balance

   $ 724      $ 74      $ 798   
  

 

 

   

 

 

   

 

 

 

Totals:

      

Beginning balance

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

Principal payments

     (196     (205     (401

Charge-offs

     (445     (209     (654

Advances

     16        11        27   

New restructured (1)

     119        329        448   

Class transfers (2)

     1,318        15        1,333   

Transfers between accrual/non-accrual

     0        0        0   
  

 

 

   

 

 

   

 

 

 

Ending balance

   $ 6,241      $ 1,174      $ 7,415   
  

 

 

   

 

 

   

 

 

 

 

(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.

 

19 | Page


     Real Estate     Consumer     Total  

June 30, 2012 and

      

Three Months then Ended:

      

Accruing / Performing:

      

Beginning balance

   $ 3,376      $ 767      $ 4,143   

Principal payments

     (48     (68     (116

Charge-offs

     0        0        0   

Advances

     8        0        8   

New restructured (1)

     56        157        213   

Class transfers (2)

     961        0        961   

Transfers between accrual/non-accrual

     1,164        244        1,408   
  

 

 

   

 

 

   

 

 

 

Ending balance

   $ 5,517      $ 1,100      $ 6,617   
  

 

 

   

 

 

   

 

 

 

Non-accrual / Non-performing:

      

Beginning balance

   $ 1,972      $ 304      $ 2,276   

Principal payments

     0        0        0   

Charge-offs

     (143     (51     (194

Advances

     3        0        3   

New restructured (1)

     56        74        130   

Class transfers (2)

     0        (9     (9

Transfers between accrual/non-accrual

     (1,164     (244     (1,408
  

 

 

   

 

 

   

 

 

 

Ending balance

   $ 724      $ 74      $ 798   
  

 

 

   

 

 

   

 

 

 

Totals:

      

Beginning balance

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

Principal payments

     (48     (68     (116

Charge-offs

     (143     (51     (194

Advances

     11        0        11   

New restructured (1)

     112        231        343   

Class transfers (2)

     961        (9     952   

Transfers between accrual/non-accrual

     0        0        0   
  

 

 

   

 

 

   

 

 

 

Ending balance

   $ 6,241      $ 1,174      $ 7,415   
  

 

 

   

 

 

   

 

 

 

 

(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.

 

20 | Page


     Real Estate     Consumer     Total  

June 30, 2011 and

      

Nine Months then Ended:

      

Accruing / Performing:

      

Beginning balance

   $ 1,402      $ 415      $ 1,817   

Principal payments

     (58     (104     (162

Charge-offs

     0        (8     (8

Advances

     27        7        34   

New restructured (1)

     962        369        1,331   

Class transfers (2)

     1,456        124        1,580   

Transfers between accrual/non-accrual

     (167     (4     (171
  

 

 

   

 

 

   

 

 

 

Ending balance

   $ 3,622      $ 799      $ 4,421   
  

 

 

   

 

 

   

 

 

 

Non-accrual / Non-performing:

      

Beginning balance

   $ 1,312      $ 144      $ 1,456   

Principal payments

     (27     (24     (51

Charge-offs

     0        (31     (31

Advances

     46        4        50   

New restructured (1)

     0        0        0   

Class transfers (2)

     0        0        0   

Transfers between accrual/non-accrual

     491        88        579   
  

 

 

   

 

 

   

 

 

 

Ending balance

   $ 1,822      $ 181      $ 2,003   
  

 

 

   

 

 

   

 

 

 

Totals:

      

Beginning balance

   $ 2,714      $ 559      $ 3,273   

Principal payments

     (85     (128     (213

Charge-offs

     0        (39     (39

Advances

     73        11        84   

New restructured (1)

     962        369        1,331   

Class transfers (2)

     1,456        124        1,580   

Transfers between accrual/non-accrual

     324        84        408   
  

 

 

   

 

 

   

 

 

 

Ending balance

   $ 5,444      $ 980      $ 6,424   
  

 

 

   

 

 

   

 

 

 

 

(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.

 

     June 30,
2012
     June 30,
2011
 
     Number of
Modifications
     Recorded
Investment
     Number of
Modifications
     Recorded
Investment
 

Troubled debt restructurings:

           

Real estate

     43       $ 6,241         33       $ 5,429   

Consumer

     64         1,174         64         1,233   
  

 

 

    

 

 

    

 

 

    

 

 

 
     107       $ 7,415         97       $ 6,662   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

21 | Page


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 June 30, 2012 and September 30, 2011, respectively, were as follows:

 

Description of Securities

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Fair Value
 

June 30, 2012

           

U.S. Agency mortgage-backed securities

   $ 14,271       $ 385       $ —         $ 14,656   

U.S. Agency Floating Rate Bonds

     11,485         192         —           11,677   

Fannie Mae mortgage-backed securities

     11,709         136         —           11,845   

Freddie Mac mortgage-backed securities

     12,058         84         —           12,142   

Non-agency mortgage-backed securities

     9,813         —           2,397         7,416   

General Obligation Municipal Bonds

     7,361         91         91         7,361   

Revenue Municipal Bonds

     2,297         42         —           2,339   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities

   $ 68,994       $ 930       $ 2,488       $ 67,436   
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

22 | Page


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:

 

     Nine Months      Nine Months  
     Ended      Ended  
     June 30,      June 30,  
     2012      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   
  

 

 

    

 

 

 

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 June 30, 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 June 30, 2012 and September 30, 2011 is as follows:

 

     As of      Weighted     As of      Weighted  
Maturing during the fiscal year    June 30,      Average     September 30,      Average  

Ended September 30,

   2012      Rate     2011      Rate  

2012

   $ 17,250         2.49   $ 16,000         4.46

2013

     6,750         3.99     6,750         3.99

2014

     8,650         3.31     6,150         4.45

2015

     11,500         1.18     1,500         4.05

After 2015

     4,000         1.00     —           NA   
  

 

 

      

 

 

    

Total fixed maturity

   $ 48,150         $ 30,400      

Advances with amortizing principal

     —             —        
  

 

 

      

 

 

    

Total

   $ 48,150         $ 30,400      
  

 

 

      

 

 

    

At June 30, 2012, the Bank’s available and unused portion of this borrowing agreement was approximately $142,300.

Maximum month-end amounts outstanding were $48,150 and $63,300 during the nine month periods ended June 30, 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.

 

23 | Page


NOTE 6 – INCOME TAXES

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

 

     Nine Months     Nine Months  
     Ended     Ended  
     June 30,     June 30,  
     2012     2011  

Current tax provision (benefit)

    

Federal

   $ 710      $ 170   

State

     155        16   
  

 

 

   

 

 

 
     865        186   

Deferred tax provision (benefit)

    

Federal

     (744     (145

State

     (102     1   
  

 

 

   

 

 

 
     (846     (144
  

 

 

   

 

 

 

Total

   $ 19      $ 42   
  

 

 

   

 

 

 

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:

 

     Nine Months     Nine Months  
     Ended     Ended  
     June 30,     June 30,  
     2012     2011  

Tax expense at statutory rate

   $ 7         34.0   $ 20         34.0

State income taxes net of exception

     1         5.4     3         5.4

Other permanent differences

     11         55.5     3         4.5

Other

     —           1.3     16         27.3
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 19         96.2   $ 42         71.2
  

 

 

    

 

 

   

 

 

    

 

 

 

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 June 30, 2012 and September 30, 2011, respectively:

 

24 | Page


 

     June 30,
2012
    September 30,
2011
 

Deferred tax assets:

    

Allowance for loan losses

   $ 2,245      $ 1,928   

Deferred loan costs/fees

     387        366   

Director/officer compensation plans

     1,330        1,360   

Net unrealized loss on securities available for sale

     623        1,406   

Impairment loss

     574        72   

Other

     180        229   
  

 

 

   

 

 

 

Deferred tax assets

     5,339      $ 5,361   
  

 

 

   

 

 

 

Deferred tax liabilities:

    

Office properties and equipment

     (781     (902

Federal Home Loan Bank stock

     (64     (64

Core deposit intangible, net

     21        (42

481a adjustment

     (21     (82

Other

     (69     (108
  

 

 

   

 

 

 

Deferred tax liabilities

     (914     (1,198
  

 

 

   

 

 

 

Net deferred tax assets

   $ 4,425      $ 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 June 30, 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 June 30, 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 Company 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 consolidated 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 nine month periods ended June 30, 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 June 30, 2012 or September 30, 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 June 30, 2012, 90,927 restricted shares were issued and outstanding under this plan. Restricted shares previously granted were awarded at no cost to the employee and have a five-year vesting

 

25 | Page


period from the grant date. 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. During the year ended September 30, 2011, 20,312 shares were granted to an eligible participant under this plan at a weighted average fair value of $5.24. Compensation expense related to these awards was $5 and $16 for the three and nine month periods ended June 30, 2012, respectively.

Of the 20,312 shares granted, 10,156 shares were granted during the quarter ended June 30, 2011. No shares were granted during either of the three or nine month periods ending June 30, 2012. There were no previously awarded shares that were forfeited in either of the three or nine month periods ending June 30, 2012 or 2011, 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 June 30, 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 from the grant date. 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 June 30, 2012, since the plan’s inception, options for 72,995 shares of the Company’s common stock were vested, options for 41,794 shares were unvested, options for 129,288 shares were forfeited and options for 4,558 shares were exercised. Of the 248,635 options granted, 114,789 remained outstanding as of June 30, 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 nine month periods ended June 30, 2012 were $5 and $15, 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 June 30, 2012, no grants or awards have been made to eligible participants under the 2008 Equity Incentive Plan.

NOTE 8 – OTHER COMPREHENSIVE INCOME (LOSS)

On October 1, 2011, the Company adopted ASU 2011-05, “Presentation of Comprehensive Income”. In addition to presenting the Consolidated Statements of Comprehensive Income herein, the following table shows the tax effects allocated to each component of other comprehensive income for the nine months ended June 30, 2012:

 

26 | Page


 

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

Unrealized gains (losses) on securities:

       

Unrealized holding losses arising during period

   $ 1,192         (477   $ 715   

Less: reclassification adjustment for gains included in net income

     91         (37     54   

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)

     5         (2     3   
  

 

 

    

 

 

   

 

 

 

Other comprehensive income (loss)

   $ 1,961       $ (785   $ 1,176   
  

 

 

    

 

 

   

 

 

 

The changes in the accumulated balances for each component of other comprehensive income (loss) for the nine months ended June 30, 2012 were as 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

     1,173        3        1,176   
  

 

 

   

 

 

   

 

 

 

Ending balance, June 30, 2012

   $ (936   $ (206   $ (1,142
  

 

 

   

 

 

   

 

 

 

 

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-

 

27 | Page


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 June 30, 2012, and the consolidated results of operations for the three and nine months ended June 30, 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 nine month periods ended June 30, 2012 and 2011:

 

     Three Months Ended     Nine Months Ended  
     June 30,     June 30,  
     2012     2011     2012     2011  

Net income as reported

   $ 349      $ 176      $ 1      $ 17   

EPS - basic, as reported

   $ 0.07      $ 0.03      $ —        $ —     

EBS - diluted, as reported

   $ 0.07      $ 0.03      $ —        $ —     

Cash dividends paid

   $ —        $ —        $ —        $ —     

Return on average assets (annualized)

     0.26     0.12     0.00     0.00

Return on average equity (annualized)

     2.62     1.34     0.00     0.04

Efficiency ratio, as reported (1)

     74.55     71.39     75.83     70.35

 

(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 nine month periods ended June 30, 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.

 

28 | Page


We reported net income of $349 for the three months ended June 30, 2012, compared to net income of $176 for the three months ended June 30, 2011. We reported net income of $1 and $17 for the nine months ended June 30, 2012 and 2011, respectively. Both basic and diluted earnings per share were $0.07 for the three months ended June 30, 2012 and $0.03 for the three months ended June 30, 2011. Both basic and diluted earnings per share were $0.00 and $0.00 for the nine months ended June 30, 2012 and 2011, respectively.

The return on average assets for the three months ended June 30, 2012 and 2011 was 0.26% and 0.12%, respectively. The return on average assets for the nine months ended June 30, 2012 and 2011 was 0.00% and 0.00%, respectively.

The return on average equity for the three months ended June 30, 2012 and 2011 was 2.62% and 1.34%, respectively. The return on average equity for the nine months ended June 30, 2012 and 2011 was 0.00% and 0.04%, respectively.

No cash dividends were declared or paid in either of the three or nine month periods ended June 30, 2012 and 2011, respectively.

Key factors behind these results were:

 

   

Net interest income increased for the current three month period and decreased for the current nine month period compared to the comparable prior year periods. However, net interest margin increased for both the current three and nine 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. However, the net impact of volume decreases on net interest income is an increase of $59 and $401 for the three and nine month periods ended June 30, 2012, respectively. The net impact of the rate decreases was a reduction in net interest income of $24 and $599 for the three and nine month periods ended June 30, 2012, respectively. Reductions in fiscal year-to-date average Federal Home Loan Bank (“FHLB”) borrowings led to decreases in interest expense on borrowed funds of ($109) and ($512) for the three and nine month period ended June 30, 2012, respectively, over the comparable prior year periods.

 

   

Net interest income was $5,095 for the three month period ended June 30, 2012, an increase of $35 or 0.7% from the three month period ended June 30, 2011. Net interest income was $15,447 for the nine month period ended June 30, 2012, a decrease of ($198) or (1.3%) from the nine month period ended June 30, 2011.

 

   

The net interest margin of 3.92% for the three months ended June 30, 2012 represents a 26 bp increase from a net interest margin of 3.66% for the three months ended June 30, 2011. The net interest margin of 3.97% for the nine months ended June 30, 2012 represents a 25 bp increase from a net interest margin of 3.72% for the nine months ended June 30, 2011.

 

   

Total loans were $431,380 at June 30, 2012, a decrease of ($366), or (0.08%) from September 30, 2011. Total deposits were $426,697 at June 30, 2012, a decrease of ($22,276) or (4.96%) from September 30, 2011.

 

   

Net loan charge-offs decreased from $1,214 for the three months ended June 30, 2011 to $866 for the three months ended June 30, 2012. Net loan charge-offs decreased from $4,104 for the nine months ended June 30, 2011 to $2,736 for the nine months ended June 30, 2012. Continued lower levels of net loan charge-offs and non-performing loans led to a decreased provision for loan losses of $900 for the three month period ended June 30, 2012, compared to $1,364 for the three months ended June 30, 2011. Annualized net loan charge-offs as a percentage of average loans were 0.85% for the nine months ended June 30, 2012, compared to 1.24% for the nine months ended June 30, 2011. Net loan charge-offs decreased during the current year quarter over the prior year quarter, and were at levels lower than the seven previous quarters.

 

   

Non-interest income decreased from $900 for the three months ended June 30, 2011 to $745 for the three months ended June 30, 2012. Non-interest income decreased from $1,826 for the nine months ended June 30, 2011 to $1,396 for the nine months ended June 30, 2012. The primary contributor in this decrease was $281 of gains on the sale of available for sale securities during the three months ended

 

29 | Page


 

June 30, 2011 compared to the $11 gains during the three months ended June 30, 2012 and $55 in losses on the sale of available-for sale securities for the nine months ended June 30, 2011 compared to $582 in loss for the nine months ended June 30, 2012, respectively.

 

   

Non-interest expense increased 1.42%, from $4,293 to $4,354 for the three month period ending June 30, 2012 compared to the three month period ending June 30, 2011. Non-interest expense increased 3.79%, from $12,798 to $13,283 for the nine month period ending June 30, 2012 compared to the nine month period ending June 30, 2011. These increases were primarily due to increased compensation costs necessary to meet increasing regulatory demands and higher levels of outsourced data processing costs necessary for improved data security and product expansions.

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 requirements. 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, to determine 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.

 

30 | Page


Current authoritative guidance provides that some portion of unrealized losses may be other-than-temporary and a credit loss is deemed to exist if the present value of the expected future cash flows is less than the amortized cost basis of the debt security. The credit loss component is recorded in earnings as a component of other-than-temporary impairment in the consolidated statements of operations, while the loss component related to other market factors is recognized in other comprehensive income (loss), provided the Bank does not intend to sell the underlying debt security and it is “more likely than not” that the Bank will not have to sell the debt security prior to recovery of the unrealized loss.

We consider the following factors in determining whether a credit loss exists and the period over which the debt security is expected to recover:

 

   

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.

 

31 | Page


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 June 30, 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 nine month periods ended June 30, 2012 and 2011, respectively.

Net interest income was $5,095 for the three months ended June 30, 2012, compared to $5,060 for the three months ended June 30, 2011. Net interest income was $15,447 for the nine months ended June 30, 2012, compared to $15,645 for the nine months ended June 30, 2011. The net interest margin for the three months ended June 30, 2012 was 3.92% compared to 3.66% for the three months ended June 30, 2011. The net interest

 

32 | Page


margin for the nine months ended June 30, 2012 was 3.97% compared to 3.72% for the nine months ended June 30, 2011. The increases in net interest margin were primarily attributable to corresponding increases in interest rate spread over the prior year periods. The primary 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. $20,500 of FHLB borrowings have matured since December 31, 2010. As the outstanding FHLB borrowings continue to mature, we anticipate that they will be replaced, as needed, with lower FHLB rate borrowings as a source of funding, as demonstrated by an increase in FHLB borrowings of $13,050 during the quarter ended June 30, 2012 at lower weighted average rates.

As shown in the rate/volume analysis in the following pages, volume changes resulted in increases of $59 and $401 in net interest income for the three and nine month periods ended June 30, 2012, respectively, compared to the comparable prior year periods. The decrease and changes in the composition of interest earning assets resulted in $71 and $434 decreases in interest income for the three and nine months ended June 30, 2012, respectively, compared to the comparable prior year periods. Rate changes on interest earning assets decreased interest income by $440 and $1,706 for the three and nine month periods ended June 30, 2012, respectively. These decreases were partially offset by rate changes on interest-bearing liabilities that decreased interest expense by $416 and $1,107 over the same periods in the prior year, resulting in a net decrease of $24 and $599 in net interest income due to changes in interest rates during the three and nine month periods ended June 30, 2012, respectively. The decrease in our balance of certificates of deposit is the primary factor 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 June 30, 2012 for each of the three and nine-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 $522,371 and $520,351 for the three and nine month periods ended June 30, 2012, respectively, compared to $553,904 and $562,588 for the comparable prior year periods. Interest income on interest earning assets was $6,693 and $20,544 for the three and nine month periods ended June 30, 2012, respectively, compared to $7,204 and $22,684 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 $6,247 and $19,409 for the three and nine month periods ended June 30, 2012, respectively, compared to $6,773 and $21,038, respectively, for the comparable prior year periods. Interest income on available for sale securities was $434 and $1,075 for the three and nine month periods ended June 30, 2012, respectively, compared to $386 and $1,519 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 during 2011.

Average interest bearing liabilities were $474,420 and $473,962 for the three and nine month periods ended June 30, 2012, respectively, compared to $511,534 and $522,739 for the comparable prior year periods. Interest expense on interest bearing liabilities was $1,598 and $5,097 for the three and nine month periods ended June 30, 2012, respectively, compared to $2,144 and $7,039 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.

 

33 | Page


For the three months ended June 30, 2012, interest expense on interest-bearing deposits decreased $169 from the volume and mix changes and decreased $268 from the impact of the rate environment, resulting in an aggregate decrease of $437 in interest expense on interest-bearing deposits. For the nine months ended June 30, 2012, interest expense on interest-bearing deposits decreased $539 from the volume and mix changes and decreased $891 from the impact of the rate environment, resulting in an aggregate decrease of $1,430 in interest expense on interest-bearing deposits. Average FHLB advances increased $3,762 and $10,025 for the three and nine month periods ended June 30, 2012, respectively, compared to the comparable prior year periods. Interest expense on FHLB advances was $324 and $982 for the three and nine month periods ended June 30, 2012, respectively, compared to $433 and $1,494 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 June 30, 2012 compared to the three months ended June 30, 2011

 

     Three months ended June 30, 2012     Three months ended June 30, 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

   $ 20,208       $ 7         0.14   $ 44,068       $ 27         0.25

Loans

     428,674         6,247         5.86     434,586         6,773         6.25

Interest-bearing deposits

     1,245         2         0.65     8,438         17         0.81

Securities available for sale

     67,524         434         2.59     61,025         386         2.54

FHLB stock

     4,720         3         0.26     5,787         1         0.07
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total interest earning assets

   $ 522,371       $ 6,693         5.15   $ 553,904       $ 7,204         5.22
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Average interest-bearing liabilities:

                

Savings accounts

   $ 24,783       $ 5         0.08   $ 25,194       $ 7         0.10

Demand deposits

     30,266         1         0.01     23,488         1         0.02

Money market

     145,782         183         0.50     167,929         406         0.97

CD’s

     206,630         984         1.92     231,849         1,184         2.05

IRA’s

     24,034         101         1.69     23,911         113         1.90
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total deposits

     431,495         1,274         1.19     472,371         1,711         1.45

FHLB Advances

     42,925         324         3.04     39,163         433         4.43
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total interest bearing liabilities

   $ 474,420       $ 1,598         1.35   $ 511,534       $ 2,144         1.68
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Net interest income

      $ 5,095            $ 5,060      
     

 

 

         

 

 

    

Interest rate spread

           3.80           3.54
        

 

 

         

 

 

 

Net interest margin

           3.92           3.66
        

 

 

         

 

 

 

Average interest-earning assets to average interest-bearing liabilities

           1.10              1.08   
        

 

 

         

 

 

 

 

34 | Page


NET INTEREST INCOME ANALYSIS

(Dollar amounts in thousands)

Nine months ended June 30, 2012 compared to the nine months ended June 30, 2011

 

     Nine months ended June 30, 2012     Nine months ended June 30, 2011  
     Average
Balance
     Interest
Income/
Expense
     Average
Yield/
Rate
    Average
Balance
     Interest
Income/
Expense
     Average
Yield/
Rate
 

Average interest-earning assets:

                

Cash and cash equivalents

   $ 22,264       $ 25         0.15   $ 60,219       $ 99         0.22

Loans

   $ 429,833       $ 19,409         6.03   $ 444,327       $ 21,038         6.33

Interest-bearing deposits

   $ 5,141       $ 29         0.75   $ 4,475       $ 25         0.75

Securities available for sale

   $ 57,830       $ 1,075         2.48   $ 47,780       $ 1,519         4.25

FHLB stock

   $ 5,283       $ 6         0.15   $ 5,787       $ 3         0.07
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total interest earning assets

     520,351         20,544         5.27     562,588         22,684         5.39
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Average interest-bearing liabilities:

                

Savings accounts

     24,384         15         0.08   $ 25,462       $ 31         0.16

Demand deposits

     26,757         3         0.01   $ 22,701       $ 7         0.04

Money market

     149,623         670         0.60   $ 161,259       $ 1,265         1.05

CD’s

     213,346         3,108         1.95   $ 243,707       $ 3,889         2.13

IRA’s

     24,342         319         1.75   $ 24,075       $ 353         1.96
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total deposits

     438,452         4,115         1.25     477,204         5,545         1.55
        

 

 

         

 

 

 

FHLB Advances

     35,510         982         3.69   $ 45,535       $ 1,494         4.39
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total interest bearing liabilities

     473,962         5,097         1.44     522,739         7,039         1.80
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Net interest income

      $ 15,447            $ 15,645      
     

 

 

         

 

 

    

Interest rate spread

           3.84           3.59
        

 

 

         

 

 

 

Net interest margin

           3.97           3.72
        

 

 

         

 

 

 

Average interest-earning assets to average interest-bearing liabilities

           1.10              1.08   
        

 

 

         

 

 

 

 

35 | Page


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 June 30, 2012 compared to the three months ended June 30, 2011:

 

     Increase (decrease) due to  
     Volume     Rate     Net  

Interest income:

      

Cash and cash equivalents

   $ (10   $ (10   $ (20

Loans

     (91     (435     (526

Interest-bearing deposits

     (12     (3     (15

Securities available for sale

     42        6        48   

FHLB stock

     —          2        2   
  

 

 

   

 

 

   

 

 

 

Total interest earning assets

     (71     (440     (511
  

 

 

   

 

 

   

 

 

 

Interest expense:

      

Savings accounts

     —          (2     (2

Demand deposits

     —          —          —     

Money market

     (47     (176     (223

CD’s

     (123     (77     (200

IRA’s

     1        (13     (12
  

 

 

   

 

 

   

 

 

 

Total deposits

     (169     (268     (437

FHLB Advances

     39        (148     (109
  

 

 

   

 

 

   

 

 

 

Total interest bearing liabilities

     (130     (416     (546

Net interest income

   $ 59      $ (24   $ 35   
  

 

 

   

 

 

   

 

 

 

 

36 | Page


Nine months ended June 30, 2012 compared to the nine months ended June 30, 2011:

 

     Increase (decrease) due to  
     Volume     Rate     Net  

Interest income:

      

Cash and cash equivalents

   $ (46   $ (28   $ (74

Loans

     (673     (956     (1,629

Interest-bearing deposits

     4        —          4   

Securities available for sale

     281        (725     (444

FHLB stock

     —          3        3   
  

 

 

   

 

 

   

 

 

 

Total interest earning assets

     (434     (1,706     (2,140
  

 

 

   

 

 

   

 

 

 

Interest expense:

      

Savings accounts

     (1     (15     (16

Demand deposits

     1        (5     (4

Money market

     (85     (510     (595

CD’s

     (458     (323     (781

IRA’s

     4        (38     (34
  

 

 

   

 

 

   

 

 

 

Total deposits

     (539     (891     (1,430

FHLB Advances

     (296     (216     (512
  

 

 

   

 

 

   

 

 

 

Total interest bearing liabilities

     (835     (1,107     (1,942

Net interest income

   $ 401      $ (599   $ (198
  

 

 

   

 

 

   

 

 

 

 

(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 PoliciesAllowance 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 nine month periods ended June 30, 2012 were $866 and $2,736, compared to $1,214 and $4,104 for the comparable prior year periods. Annualized net charge-offs to average loans were 0.85% for the nine months ended June 30, 2012 compared to 1.23% for the nine months ended June 30, 2011. Non-accrual loans were $3,848 at June 30, 2012 compared to $4,400 at September 30, 2011. The decrease is due to overall improvements in credit portfolio quality. 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 $900 and $3,540 for the three and nine month periods ended June 30, 2012, respectively, compared to $1,364 and $4,614 for the comparable prior year periods. Management believes that the provision taken for these three and nine 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 changing facts and circumstances require a change in the ALL. In addition, a decline in the quality of our loan portfolio as a result of

 

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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 three and nine-month periods ended June 30, 2012 and 2011, respectively.

 

     Three months ended
June 30,
     %     Nine months ended
June 30,
    %  
     2012      2011      Change     2012     2011     Change  

Noninterest Income (Loss):

              

Net gains/(losses) on available for sale securities

   $ 11       $ 281         (96.09 %)    $ (582   $ (55     958.18

Service charges on deposit accounts

     400         386         3.63     1,127        1,095        2.92

Insurance commissions

     35         25         40.00     49        73        (32.88 %) 

Loan fees and service charges

     133         70         90.00     354        349        1.43

Other

     166         138         20.29     448        364        23.08
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

   $ 745       $ 900         (17.22 %)    $ 1,396      $ 1,826        (23.55 %) 
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest income was $745 and $1,396 for the three and nine month periods ended June 30, 2012, respectively, compared to $900 and $1,826 for the comparable prior year periods. The decrease of ($155) during the three month periods resulted from a $281 gain on sale of available for sale securities in the three months ended June 30, 2011, partially offset by increases in loan fees and service charges of $63 during the current year quarter. The decrease of ($430) for the nine month periods was primarily due to an increase in securities related losses of ($527).

Noninterest Expense. The following table reflects the various components of noninterest expense for the three and nine month periods ended June 30, 2012 and 2011, respectively.

 

     Three months ended
June 30,
     %     Nine months ended
June 30,
     %  
     2012      2011      Change     2012      2011      Change  

Noninterest Expense:

                

Salaries and related benefits

   $ 2,237       $ 2,128         5.12   $ 6,600       $ 6,238         5.80

Occupancy - net

     617         606         1.82     1,838         1,915         (4.02 %) 

Office

     279         311         (10.29 %)      857         1,019         (15.90 %) 

Data processing

     389         250    <