XNAS:LSBI LSB Financial Corp Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 
   
SECURITIES EXCHANGE ACT OF 1934
 
       
   
For the quarterly period ended March 31, 2012
 
       
   
OR
 
       
 
o
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:  0-25070
 
LSB FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
 
Indiana
 
35-1934975
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
     
     
101 Main Street, Lafayette, Indiana
 
47901
(Address of principal executive offices)
 
(Zip Code)
 
(765) 742-1064
(Registrant’s telephone number, including area code)
 
 
None
(Former name, former address and former fiscal year, if changed since last report)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x        No o
 
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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x        No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):
 
Large Accelerated Filer o
Accelerated Filer o
Non-Accelerated Filer o
(Do not check if a smaller reporting company)
Smaller Reporting Company ý
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o        No x
 
The number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date is indicated below.

Class
 
Outstanding at May 10, 2012
Common Stock, $.01 par value per share
 
1,555,972 shares

 
 

 

LSB FINANCIAL CORP.

INDEX

 
PART I  FINANCIAL INFORMATION
1
     
Item 1.
Financial Statements
1
     
 
Consolidated Condensed Balance Sheets
1
     
 
Consolidated Condensed Statements of Income and Comprehensive Income
2
     
 
Consolidated Condensed Statements of Changes in Shareholders’ Equity
3
     
 
Consolidated Condensed Statements of Cash Flows
4
     
 
Notes to Consolidated Condensed Financial Statements
5
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
24
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
38
     
Item 4.
Controls and Procedures.
38
   
PART II. OTHER INFORMATION
39
     
Item 1.
Legal Proceedings
39
     
Item 1A.
Risk Factors
41
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
42
     
Item 3.
Defaults Upon Senior Securities
42
     
Item 4.
Mine Safety Disclosures
42
     
Item 5.
Other Information
42
     
Item 6.
Exhibits
42
   
SIGNATURES
43



 

 

PART I     FINANCIAL INFORMATION
 
Item 1.   Financial Statements
 
 

LSB FINANCIAL CORP.
Consolidated Condensed Balance Sheets
(Dollars in thousands, except per share data)

   
March 31, 2012
   
December 31, 2011
 
   
(unaudited)
       
Assets
           
Cash and due from banks
  $ 34,735     $ 18,552  
Interest bearing deposits
    2,669       3,156  
Cash and cash equivalents
    37,404       21,708  
Interest bearing time deposits
    745       ---  
Available-for-sale securities
    16,335       13,845  
Loans held for sale
    2,368       3,120  
Total loans
    298,432       307,841  
Less: Allowance for loan losses
    (5,305 )     (5,331 )
Net loans
    293,127       302,510  
Premises and equipment, net
    6,132       6,146  
Federal Home Loan Bank stock, at cost
    3,185       3,185  
Bank owned life insurance
    6,474       6,434  
Interest receivable and other assets
    5,785       7,342  
Total assets
  $ 371,555     $ 364,290  
                 
Liabilities and Shareholders’ Equity
               
Liabilities
               
Deposits
  $ 314,627     $ 308,433  
Federal Home Loan Bank advances
    18,000       18,000  
Interest payable and other liabilities
    2,148       1,683  
Total liabilities
    334,775       328,116  
                 
Commitments and Contingencies
               
                 
Shareholders’ Equity
               
Common stock, $.01 par value
               
Authorized - 7,000,000 shares
Issued and outstanding 2012 - 1,555,972 shares, 2011 - 1,555,222 shares
    15       15  
Additional paid-in-capital
    11,040       11,010  
Retained earnings
    25,508       24,913  
Accumulated other comprehensive income
    217       236  
Total shareholders’ equity
    36,780       36,174  
                 
Total liabilities and shareholders’ equity
  $ 371,555     $ 364,290  

See notes to consolidated condensed financial statements.


 
1

 

LSB FINANCIAL CORP.
Consolidated Condensed Statements of Income and Comprehensive Income
(Dollars in thousands, except per share data)
(Unaudited)

   
Three months ended
March 31,
 
   
2012
   
2011
 
Interest and Dividend Income
           
Loans
  $ 4,075     $ 4,358  
Securities
               
Taxable
    66       68  
Tax-exempt
    39       45  
Other
    14       4  
Total interest and dividend income
    4,194       4,475  
Interest Expense
               
Deposits
    811       990  
Borrowings
    99       121  
Total interest expense
    910       1,111  
                 
Net Interest Income
    3,284       3,364  
Provision for Loan Losses
    600       1,176  
Net Interest Income After Provision for Loan Losses
    2,684       2,188  
                 
Non-interest Income
               
Deposit account service charges and fees
    325       292  
Net gains on loan sales
    406       164  
Loss on other real estate owned
    (83 )     (24 )
Other
    260       260  
Total non-interest income
    908       692  
                 
Non-Interest Expense
               
Salaries and employee benefits
    1,519       1,410  
Net occupancy and equipment expense
    318       329  
Computer service
    148       142  
Advertising
    88       58  
FDIC insurance premiums
    119       184  
Other
    468       466  
Total non-interest expense
    2,660       2,589  
                 
Income Before Income Taxes
    932       291  
Provision for Income Taxes
    337       86  
Net Income
    595       205  
Unrealized appreciation (depreciation) on available-for-sale securities net of taxes (credits) of $(13) and $15, for 2012 and 2011, respectively
    (19 )     22  
Comprehensive income
  $ 576     $ 227  
                 
Basic Earnings Per Share
  $ 0.38     $ 0.13  
Diluted Earnings Per Share
  $ 0.38     $ 0.13  
                 
Dividends Declared Per Share
  $ 0.00     $ 0.00  
 
See notes to consolidated condensed financial statements.
 
 
2

 

LSB FINANCIAL CORP.
Consolidated Condensed Statements of Changes in Shareholders’ Equity
For the Three Months Ended March 31, 2012 and 2011
 (Dollars in thousands, except per share data)
(Unaudited)

   
Common Stock
   
Additional
Paid-In
Capital
   
Retained Earnings
   
Accumulated Other Comprehensive Income
   
Total
 
                               
Balance, January 1, 2011
  $ 15     $ 10,987     $ 24,374     $ 201     $ 35,577  
Net income
                    205               205  
Change in unrealized appreciation on available-for-sale securities, net of taxes
                            22       22  
Share-based compensation expense
 
  
      1    
     
   
  
      1  
Balance, March 31, 2011
  $ 15     $ 10,988     $ 24,579     $ 223     $ 35,805  
                                         
                                         
                                         
Balance, January 1, 2012
  $ 15     $ 11,010     $ 24,913     $ 236     $ 36,174  
Net income
                    595               595  
Change in unrealized appreciation on available-for-sale securities, net of taxes
                            (19 )     (19 )
Stock options exercised (750 shares)
            7                       7  
Tax benefit related to stock options exercised
            2                       2  
Share-based compensation expense
 
  
      21    
  
   
  
      21  
Balance, March 31, 2012
  $ 15     $ 11,040     $ 25,508     $ 217     $ 36,780  

See notes to consolidated condensed financial statements.

 
3

 

LSB FINANCIAL CORP.
Consolidated Condensed Statements of Cash Flows
(Dollars in thousands)
(Unaudited)

   
Three months ended
March 31,
 
   
2012
   
2011
 
Operating Activities
           
Net income
  $ 595     $ 205  
Items not requiring (providing) cash
               
Depreciation
    113       98  
Provision for loan losses
    600       1,176  
Amortization of premiums and discounts on securities
    24       16  
Loss on sale of other real estate owned
    83       24  
Gain on sale of loans
    (406 )     (164 )
Loans originated for sale
    (13,201 )     (10,211 )
Proceeds on loans sold
    14,359       12,151  
Amortization of stock options
    21       1  
Changes in
               
Interest receivable and other assets
    371       184  
Interest payable and other liabilities
    478       217  
Net cash provided by operating activities
    3,037       3,697  
                 
Investing Activities
               
Purchases of available-for-sale securities
    (4,967 )     (1,038 )
Proceeds from maturities of available-for-sale securities
    1,675       870  
Net change in loans
    8,755       4,004  
Proceeds from sale of other real estate owned
    1,092       165  
Purchase of premises and equipment
    (99 )     (81 )
Net cash provided by investing activities
    6,456       3,920  
                 
Financing Activities
               
Net change in demand deposits, money market, NOW and savings accounts
    6,029       (960 )
Net change in certificates of deposit
    165       (5,569 )
Proceeds from Federal Home Loan Bank advances
    ---       4,000  
Repayment of Federal Home Loan Bank advances
    ---       (6,000 )
Proceeds from stock options exercised
    7       ---  
Tax benefits related to stock options exercised
    2       ---  
Net cash provided by (used in) financing activities
    6,203       (8,529 )
                 
Increase (decrease) in Cash and Cash Equivalents
    15,696       (912 )
Cash and Cash Equivalents, Beginning of Period
    21,708       13,573  
Cash and Cash Equivalents, End of Period
  $ 37,404     $ 12,661  
                 
Supplemental Cash Flows Information
               
Interest paid
  $ 901     $ 1,109  
Income taxes paid
    ---       400  
                 
Supplemental Non-Cash Disclosures
               
Capitalization of mortgage servicing rights
    49       15  
Loans transferred to other real estate owned
    28       ---  

See notes to consolidated condensed financial statements.

 
4

 

LSB FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements
March 31, 2012
 
Note 1 – General
 
The financial statements were prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all of the disclosures necessary for a complete presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America.  These interim financial statements have been prepared on a basis consistent with the annual financial statements and include, in the opinion of management, all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the results of operations and financial position for and at the end of such interim periods.  The consolidated condensed balance sheet of LSB Financial Corp. as of December 31, 2011 has been derived from the audited consolidated balance sheet of LSB Financial Corp. as of that date.

Certain information and note disclosures normally included in the Company’s annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted.  These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 10-K annual report for the fiscal year ended December 31, 2011 filed with the Securities and Exchange Commission.  The results of operations for the periods are not necessarily indicative of the results to be expected for the full year.

 
Note 2 – Principles of Consolidation
 
The accompanying financial statements include the accounts of LSB Financial Corp., its wholly owned subsidiary Lafayette Savings Bank, FSB (“Lafayette Savings”), and Lafayette Savings’ wholly owned subsidiaries, LSB Service Corporation and Lafayette Insurance and Investments, Inc.  All significant intercompany transactions have been eliminated upon consolidation.

 
5

 

Note 3 – Earnings per share
 
Earnings per share are based upon the weighted average number of shares outstanding during the period.  Diluted earnings per share further assume the issuance of any potentially dilutive shares. For the three month period ended March 31, 2011, 15,327 shares related to stock options outstanding were dilutive and 21,458 were antidilutive.  For the three month period ended March 31, 2012, 6,000 shares related to stock options outstanding were dilutive and 51,433 were antidilutive.  The following table presents information about the number of shares used to compute earnings per share and the results of the computations:

     
Three months ended
March 31,
 
     
2012
   
2011
 
               
 
Weighted average shares outstanding
    1,555,337       1,553,525  
 
Stock options
    664       2,715  
 
Shares used to compute diluted earnings per share
    1,556,001       1,556,240  
 
Basic earnings per share
  $ 0.38     $ 0.13  
 
Diluted earnings per share
  $ 0.38     $ 0.13  

 
Note 4 – Securities

The amortized cost and approximate fair values, together with gross unrealized gains and losses, of securities are as follows:

     
Amortized Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Approximate Fair Value
 
           
(in Thousands)
       
 
Available-for-sale Securities:
                       
 
March 31, 2012:
                       
 
U.S. Government sponsored agencies
  $ 4,653     $ 2     $ (34 )   $ 4,621  
 
Mortgage-backed securities – government sponsored entities
    5,208       170       (1 )     5,377  
 
State and political subdivisions
    6,114       224       (1 )     6,337  
      $ 15,975     $ 396     $ (36 )   $ 16,335  
                                   
 
December 31, 2011:
                               
 
U.S. Government sponsored agencies
  $ 3,172     $ 7     $ (2 )   $ 3,177  
 
Mortgage-backed securities – government sponsored entities
    3,570       149       ---       3,719  
 
State and political subdivisions
    6,710       242       (3 )     6,949  
      $ 13,452     $ 398     $ (5 )   $ 13,845  

 

 
6

 

The amortized cost and fair value of available-for-sale securities at March 31, 2012, by contractual maturity, are shown below.  Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

     
Available for Sale
 
     
Amortized Cost
   
Fair Value
 
     
March 31, 2012
 
     
(in thousands)
 
               
 
Within one year
  $ 1,095     $ 1,097  
 
One to five years
    5,661       5,722  
 
Five to ten years
    4,011       4,139  
 
After ten years
    ---       ----  
        10,767       10,958  
                   
 
Mortgage-backed securities
    5,208       5,377  
                   
 
Totals
  $ 15,975     $ 16,335  

 
The carrying value of securities pledged as collateral, to secure public deposits and for other purposes, was $2.2 million at March 31, 2012 and $2.3 million at December 31, 2011.

The following table shows our investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities had been in a continuous unrealized loss position at March 31, 2012 and December 31, 2011

     
Less Than 12 Months
 
12 Months or More
 
Total
 
Description of Securities
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
     
(In thousands)
 
March 31, 2012
                       
 
U.S. Government sponsored agencies
  $ 4,115   $ 34   $ ---   $ ---   $ 4,115   $ 34
 
Mortgage-backed securities
    1,306   $ 1   $ ---   $ ---   $ 1,306   $ 1
 
State and political subdivisions
    223     1     ---     ---     223     1
 
Total temporarily impaired securities
  $ 5,644   $ 36   $ ---   $ ---   $ 5,644   $ 36
                                       
 
December 31, 2011
                                   
 
U.S. Government sponsored agencies
  $ 368   $ 2   $ ---   $ ---   $ 368   $ 2
 
State and political subdivisions
    570     3     ---     ---     570     3
 
Total temporarily impaired securities
  $ 938   $ 5   $ ---   $ ---   $ 938   $ 5

 

 
7

 

Note 5 - Loans and Allowance for Loan Losses
 
The allowance for loan losses represents management’s estimate of probable losses inherent in Lafayette Savings’ loan portfolios. In determining the appropriate amount of the allowance for loan losses, management makes numerous assumptions, estimates and assessments.
 
The strategy also emphasizes diversification on an industry and customer level, regular credit quality reviews and quarterly management reviews of large credit exposures and loans experiencing deterioration of credit quality.
 
Lafayette Savings’ allowance consists of three components: probable losses estimated from individual reviews of specific loans, probable losses estimated from historical loss rates, and probable losses resulting from economic or other deterioration above and beyond what is reflected in the first two components of the allowance.
 
All loans that are rated substandard and impaired, or are troubled debt restructures are subject to individual review. Where appropriate, reserves are allocated to individual loans based on management’s estimate of the borrower’s ability to repay the loan given the availability of collateral, other sources of cash flow and legal options available to the Bank. Included in the review of individual loans are those that are impaired as provided in Financial Accounting Standards Board (“FASB”) ASC 310-10 (formerly FAS 114, Accounting by Creditors for Impairment of a Loan). Any allowances for impaired loans are determined by the fair value of the underlying collateral based on the discounted appraised value.  Allowances for loans that are not collateral dependent are determined by the present value of expected future cash flows discounted at the loan’s effective interest rate.  Historical loss rates are applied to all loans not included in the ASC 310-10 calculation.
 
Historical loss rates for commercial and consumer loans may be adjusted for significant qualitative factors that, in management’s judgment, reflect the impact of any current conditions on loss recognition.  Factors which management considers in the analysis include the effects of the national and local economies, trends in the nature and volume of loans (delinquencies, charge-offs and nonaccrual loans), changes in mix, asset quality trends, risk management and loan administration, changes in the internal lending policies and credit standards, collection practices, examination results from bank regulatory agencies and Lafayette Savings’ internal loan review.
 
Allowances on individual loans and historical loss rates are reviewed quarterly and adjusted as necessary based on changing borrower and/or collateral conditions and actual collection and charge-off experience.
 
Lafayette Savings’ primary market area for lending is Tippecanoe County, Indiana and to a lesser extent the eight surrounding counties. When evaluating the adequacy of the allowance, consideration is given to this regional geographic concentration and the closely associated effect of changing economic conditions on Lafayette Savings’ customers.

 
8

 

Categories of loans include:
 
     
March 31, 2012
   
December 31, 2011
 
     
(In thousands)
 
  Real Estate            
 
One-to-four family residential
  $ 108,192     $ 108,867  
 
Multi-family residential
    60,527       60,612  
 
Commercial real estate
    87,415       90,879  
 
Construction and land development
    13,680       18,364  
 
Commercial
    12,504       14,366  
 
Consumer and other
    1,185       1,161  
 
Home equity lines of credit
    17,653       17,330  
 
Total loans
    301,156       311,579  
 
Less
               
 
Net deferred loan fees, premiums and discounts
    (490 )     (496 )
 
Undisbursed portion of loans
    (2,234 )     (3,242 )
 
Allowance for loan losses
    (5,305 )     (5,331 )
 
Net loans
  $ 293,127     $ 302,510  
 
 
The risk characteristics of each loan portfolio segment are as follows:
 
Commercial
 
Commercial loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.
 
Commercial real estate
 
These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s commercial real estate portfolio are diverse in terms of type and geographic location. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. As a general rule, the Company avoids financing single purpose projects unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans.

 
9

 
 
Construction
 
Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analysis of the developers and property owners. Construction loans are generally based on estimates of costs and value associated with the complete project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.
 
Residential and Consumer
 
With respect to residential loans that are secured by one- to four-family residences and are generally owner occupied, the Company generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Home equity loans are typically secured by a subordinate interest in one- to four-family residences, and consumer loans are secured by consumer assets such as automobiles or recreational vehicles. Some consumer loans are unsecured such as small installment loans and certain lines of credit. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

Additional information on the allocation of loan loss reserves by loan category, which does not include loans held for sale, for the three month periods ending March 31, 2012 and March 31, 2011 and for the year ended December 31, 2011 is provided below.

 
10

 
 
Allowance for Loan Losses and Recorded Investment in Loans for the Three Months Ended March 31, 2012
 
Three Months Ended March 31, 2012
 
Commercial
 
Owner
Occupied
1-4
 
Non-owner
Occupied
1-4
 
Multi-
family
 
Commercial
Real Estate
 
Construction
 
Land
 
Consumer
and
Home
Equity
 
Total
 
   
In thousands
 
Allowance for losses
                                     
Beginning balance
  $ 667   $ 436   $ 1,330   $ 646   $ 1,788   $ 64   $ 264   $ 136   $ 5,331  
Provision charged to expense
    362     (19 )   (87 )   276     212     (51 )   (121 )   28     600  
Losses charged off
    (313 )   (6 )   (25 )   (259 )   ---     ---     (17 )   (11 )   (631 )
Recoveries
    ---     ---     3     1     ---     ---     1     ---     5  
Ending balance
    716     411     1,221     664     2,000     13     127     153     5,305  
ALL individually evaluated
    ---     7     62     46     939     ---     ---     ---     1,054  
ALL collectively evaluated
    716     404     1,159     618     1,061     13     127     153     4,251  
Total ALL
    716     411     1,221     664     2,000     13     127     153     5,305  
Loans individually evaluated
    460     1,520     6,748     3,520     11,913     ---     1,899     158     26,218  
Loans collectively evaluated
    12,044     50,228     49,696     57,007     75,443     6,995     4,786     18,680     274,938  
Total loans evaluated
    12,504     51,748     56,444     60,527     87,415     6,995     6,685     18,838     301,156  
   
 
 
Allowance for Loan Losses for the Three Months Ended March 31, 2011
 
 
Three Months Ended March 31, 2011
 
Commercial
 
Owner
Occupied
1-4
 
Non-owner
Occupied
1-4
 
Multi-
family
 
Commercial
Real Estate
 
Construction
 
Land
 
Consumer
and
Home
Equity
 
Total
 
   
In thousands
 
Allowance for losses
                                                       
Beginning balance
  $ 565   $ 242   $ 773   $ 1,138   $ 2,061   $ ---   $ 480   $ 84   $ 5,343  
Provision charged to expense
    162     231     690     17     33     78     (37 )   2     1,176  
Losses charged off
    ---     ---     ---     ---     ---     ---     ---     (9 )   (9 )
Recoveries
    ---     22     8     ---     ---     ---     7     ---     37  
Ending balance
    727     495     1,471     1,155     2,094     78     450     77     6,547  
                                                         
 
 
Allowance for Loan Losses and Recorded Investment in Loans at December 31, 2011
 
 
ALL individually evaluated
    129     13     84     ---     413     ---     ---     ---     639  
ALL collectively evaluated
    538     423     1,246     646     1,375     64     264     136     4,692  
Total ALL
    667     436     1,330     646     1,788     64     264     136     5,331  
Loans individually evaluated
    2,451     2,094     8,315     4,558     11,764     ---     2,140     143     31,465  
Loans collectively evaluated
    11,915     48,248     50,209     56,054     79,115     8,060     8,164     18,349     280,114  
Total loans evaluated
    14,366     50,342     58,524     60,612     90,879     8,060     10,304     18,491     311,579  
 
 
 
11

 
 
Management’s general practice is to charge down collateral dependent loans individually evaluated for impairment to the fair value of the underlying collateral.

Consistent with regulatory guidance, charge-offs on all loan segments are taken when specific loans, or portions thereof, are considered uncollectible. The Company’s policy is to promptly charge these loans off in the period the uncollectible loss is reasonably determined.

For all loan portfolio segments except one- to four-family residential properties and consumer, the Company promptly charges-off loans, or portions thereof, when available information confirms that specific loans are uncollectible based on information that includes, but is not limited to, (1) the deteriorating financial condition of the borrower, (2) declining collateral values, and/or (3) legal action, including bankruptcy, that impairs the borrower’s ability to adequately meet its obligations. For impaired loans that are considered to be solely collateral dependent, a partial charge-off is recorded when a loss has been confirmed by an updated appraisal or other appropriate valuation of the collateral.
 
The Company charges-off one- to four-family residential and consumer loans, or portions thereof, when the Company reasonably determines the amount of the loss. The Company adheres to timeframes established by applicable regulatory guidance which provides for the charge-down of one- to four-family first and junior lien mortgages to the net realizable value less costs to sell when the loan is 120 days past due, charge-off of unsecured open-end loans when the loan is 120 days past due, and charge-down to the net realizable value when other secured loans are 120 days past due. Loans at these respective delinquency thresholds for which the Company can clearly document that the loan is both well-secured and in the process of collection, such that collection will occur regardless of delinquency status, need not be charged off.   Charge-offs may be taken sooner than the above-referenced timeframes if circumstances warrant.

The entire balance of a loan is considered delinquent if the minimum payment contractually required to be made is not received by the specified due date.

The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the prior four years.  Management believes the four year historical loss experience methodology is appropriate in the current economic environment, as it captures loss rates that are comparable to the current period being analyzed.
 
We rate all loans by credit quality using the following designations:
 
GRADE 1 - Pass, superior credit quality
 
Loans of the highest quality.  Financial strength of the borrower (exhibited by extremely low debt-to-income ratios/high debt-service coverage, low loan-to-value ratio, and clean credit history) is such that no loss is anticipated.  Probability of serious or rapid deterioration is extremely small.
 
GRADE 2 - Pass, good credit quality
 
Loans of good quality.  Overall above average credit, with strong capacity to repay (exhibited by higher debt-to-income ratios/lower debt-service coverage than Grade 1, but still better than average levels), sound credit history and employment.  Loan-to-value is not as strong as Grade 1, but is greater than Grade 3.  Minor loss exposure with the probability of serious financial deterioration unlikely.
 
GRADE 3 - Pass, low risk
 
Loans of satisfactory quality.  Average quality due to average capacity to repay (exhibited by higher debt-to-income ratios/lower debt-service coverage than Grade 2 but better than levels requiring Loan Committee approval), employment, credit history, loan-to-value ratio, or paying habits.  Deterioration possible if adverse factors occur.
 
GRADE 4 - Pass, acceptable risk
 
Loans of marginal, but acceptable quality due to below average capacity to repay (exhibited by high debt-to-income ratios/low debt-service coverage), high loan-to-value, or poor paying habits. Deterioration likely if adverse factors occur.
 

 
12

 

GRADE W-4 - Pass, watch list credit
 
These loans have the same characteristics as standard Grade 4 loans, with an added significant weakness such as the global debt-service coverage of the borrower being below 1.00. Such loans should have no delinquencies within the previous 12 months.
 
GRADE 5- Special Mention
 
Loans in this classification are in a state of change that could adversely affect paying ability, collateral value or which require monthly monitoring to protect the asset value.
 
GRADE 6- Substandard
 
A substandard asset with a defined weakness.  Heavy debt condition, deterioration of collateral, poor paying habits, or conditions present that unless deficiencies are corrected will result in some loss. Loans 90 or more days past due should be automatically included in this grade.
 
GRADE 7- Doubtful
 
Poor quality.  Loans in this group are characterized by less than adequate collateral and all of the characteristics of a loan classified as substandard.  The possibility of a loss is extremely high, but factors may be underway to minimize the loss or maximize the recovery.
 
GRADE 8 - Loss
 
Loans classified loss are considered uncollectible and of such little value that their continuance as an asset is not warranted.
 

Interest income on loans individually classified as impaired is recognized on a cash basis after all past due and current principal payments have been made.

Subsequent payments on non-accrual loans are recorded as a reduction of principal, and interest income is recorded only after principal recovery is reasonably assured.  Nonaccrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal. The Company requires a period of satisfactory performance of not less than six months before returning a nonaccrual loan to accrual status.


 
13

 

The following table provides an analysis of loan quality using the above designations, based on property type at March 31, 2012.
 
 
Credit Rating
 
Commercial
 
Owner
Occupied
1-4
 
Non-owner
Occupied
1-4
 
Multi-
Family
 
Commercial
Real Estate
 
Construction
 
Land
 
Consumer
and
Home
Equity
 
Total
 
                 
(In thousands)
                 
                                                           
 
1- Superior
  $ 254   $ 4,217   $ 258   $ ---   $ 106   $ ---   $ 198   $ 1,576   $ 6,609  
 
2 - Good
    3,593     19,668     5,078     8,156     9,580     1,207     384     11,675     59,341  
 
3 - Pass Low risk
    6,519     18,979     13,658     25,261     32,512     4,366     283     4,285     105,863  
 
4 - Pass
    1,479     6,629     28,702     20,170     23,958     1,422     1,804     1,137     83,301  
 
4W - Watch
    125     699     6,831     4,479     7,353     ---     2,117     90     21,694  
 
5 - Special mention
    ---     84     159     697     849     ---     ---     ---     1,789  
 
6 - Substandard
    534     1,472     3,758     1,764     13,057     ---     1,899     75     22,559  
 
7 - Doubtful
    ---     ---     ---     ---     ---     ---     ---     ---     ---  
 
8 - Loss
    ---     ---     ---     ---     ---     ---     ---     ---     ---  
 
Total
  $ 12,504   $ 51,748   $ 56,444   $ 60,527   $ 87,415   $ 6,995   $ 6,685   $ 18,838   $ 301,156  
 
 
 
The following table provides an analysis of loan quality using the above designations, based on property type at December 31, 2011.
 
 
Credit Rating
 
Commercial
 
Owner
Occupied
1-4
 
Non-owner
Occupied
1-4
 
Multi-
Family
 
Commercial
Real Estate
 
Construction
 
Land
 
Consumer
and
Home
Equity
 
Total
 
                 
(In thousands)
                 
                                                           
 
1- Superior
  $ 257   $ 2,911   $ 115   $ ---   $ 107   $ ---   $ 200   $ 1,743   $ 5,333  
 
2 - Good
    2,719     18,638     5,167     8,176     10,761     1,094     763     11,336     58,654  
 
3 - Pass Low risk
    6,408     19,801     13,665     24,884     33,730     4,170     354     4,376     107,388  
 
4 - Pass
    2,229     6,403     28,118     20,475     25,302     2,796     1,312     803     87,438  
 
4W - Watch
    303     748     6,398     4,342     9,772     ---     2,077     90     23,730  
 
5 - Special mention
    1,550     475     188     704     232     ---     3,501     99     6,749  
 
6 - Substandard
    900     1,366     4,874     2,031     10,975     ---     2,097     44     22,287  
 
7 - Doubtful
    ---     ---     ---     ---     ---     ---     ---     ---     ---  
 
8 - Loss
    ---     ---     ---     ---     ---     ---     ---     ---     ---  
 
Total
  $ 14,366   $ 50,342   $ 58,524   $ 60,612   $ 90,879   $ 8,060   $ 10,304   $ 18,491   $ 311,579  

 
14

 

Analyses of past due loans segregated by loan type as of March 31, 2012 and December 31, 2011 are provided below.

   
Loan Portfolio Aging Analysis as of March 31, 2012
 
       
   
30-59 Days
   
60-89 Days
   
Over 90 Days
   
Total Past Due
   
Current
   
Total Loans
   
Under 90 Days
and Not Accruing
   
Total 90 Days
and Accruing
 
                     
(In thousands)
                   
                                                                 
Commercial
  $ 128     $ 62     $ 208     $ 398     $ 12,106     $ 12,504     $ 128     $ ---  
Owner occupied 1-4
    173       287       596       1,056       50,692       51,748       725       ---  
Non owner occupied 1-4
    462       180       1,030       1,672       54,772       56,444       1,025       ---  
Multi-family
    88       642       542       1,272       59,255       60,527       496       ---  
Commercial Real Estate
    18       ---       2,859       2,877       84,538       87,415       2,611       ---  
Construction
    ---       ---       ---       ---       6,996       6,995       ---       ---  
Land
    ---       ---       1,079       1,079       5,606       6,685       819       ---  
Consumer and home equity
    1       7       68       76       18,761       18,838       7       ---  
Total
  $ 870     $ 1,178     $ 6,382     $ 8,430     $ 292,726     $ 301,156     $ 5,811     $ ---  

 
 
   
Loan Portfolio Aging Analysis as of December 31, 2011
 
       
   
30-59 Days
   
60-89 Days
   
Over 90 Days
   
Total Past Due
   
Current
   
Total Loans
   
Under 90 Days
and Not Accruing
   
Total 90 Days
and Accruing
 
                     
(In thousands)
                   
                                                                 
Commercial
  $ 1,387     $ 572     $ 148     $ 2,107     $ 12,259     $ 14,366     $ 568     $ ---  
Owner occupied 1-4
    336       211       714       1,261       49,081       50,342       433       ---  
Non owner occupied 1-4
    435       25       1,918       2,378       56,147       58,524       1,184       ---  
Multi-family
    ---       116       801       917       59,695       60,612       501       ---  
Commercial Real Estate
    19       74       1,974       2,067       88,812       90,879       1,677       ---  
Construction
    ---       ---       ---       ---       8,060       8,060       ---       ---  
Land
    ---       ---       1,173       1,173       9,131       10,304       924       ---  
Consumer and home equity
    86       8       36       130       18,361       18,491       8       ---  
Total
  $ 2,263     $ 1,006     $ 6,764     $ 10,033     $ 301,546     $ 311,579     $ 5,295     $ ---  


 
15

 

Impaired loans are those for which we believe it is probable that we will not collect all principal and interest due in accordance with the original terms of the loan agreement.  The following table presents impaired loans and interest recognized on them for the quarter ended March 31, 2012 and impaired loans for the year ended December 31, 2011 and interest recognized for the quarter ended March 31, 2011.

     
Impaired Loans as of and for the Quarter Ended March 31, 2012
 
     
Recorded
Balance
   
Unpaid
Principal
Balance
   
Specific
Allowance
   
Average
Impaired
Loans
   
Interest
Income
Recognized
 
                 
In thousands
             
 
Loans without a specific valuation allowance
                             
 
Commercial
  $ 460     $ 773     $ ---     $ 1,455     $ 5  
 
Owner occupied 1-4
    1,423       1,439       ---       2,022       27  
 
Non-owner occupied 1-4
    6,052       6,309       ---       6,410       83  
 
Multi-family
    3,347       5,095       ---       3,866       44  
 
Commercial real estate
    7,236       8,087       ---       8,045       76  
 
Construction
    ---       ---       ---       ---       ---  
 
Land
    1,899       1,937       ---       2,019       1  
 
Consumer and home equity
    158       174       ---       196       3  
 
Total loans without a specific valuation allowance
    20,575       23,815       ---       24,013       239  
                                           
 
Loans with a specific valuation allowance
                                       
 
Commercial
    ---       ---       ---       ---       ---  
 
Owner occupied 1-4
    97       97       7       94       2  
 
Non-owner occupied 1-4
    696       696       62       701       5  
 
Multi-family
    172       172       46       173       3  
 
Commercial real estate
    4,677       4,677       939       3,794       31  
 
Construction
    ---       ---       ---       ---       ---  
 
Land
    ---       ---       ---       ---       ---  
 
Consumer and home equity
    ---       ---       ---       ---       ---  
 
Total loans with a specific valuation allowance
    5,642       5,642       1,054       4,762       41  
                                           
 
Total
                                       
 
Commercial
    460       773       ---       1,455       5  
 
Owner occupied 1-4
    1,520       1,535       7       2,116       29  
 
Non-owner occupied 1-4
    6,748       7,005       62       7,111       88  
 
Multi-family
    3,520       5,267       46       4,039       47  
 
Commercial real estate
    11,913       12,764       939       11,839       107  
 
Construction
    ---       ---       ---       ---       ---  
 
Land
    1,899       1,937       ---       2,019       1  
 
Consumer and home equity
    158       174       ---       196       3  
 
Total impaired loans
  $ 26,218     $ 29,457     $ 1,054     $ 28,775     $ 280  
                                           




 
16

 
 
     
Impaired Loans as of December 31, 2011
   
Impaired Loans for the Quarter
Ended March 31, 2011
 
     
Recorded
Balance
   
Unpaid