XNAS:LSBI LSB Financial Corp Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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

FORM 10-Q

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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
     
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
 
(I.R.S. Employer
incorporation or organization)
 
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 [   ]
 
 
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 ýNo  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 [   ]       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 August 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  26
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
46
Item 4.
Controls and Procedures.
46
PART II.
OTHER INFORMATION
46
Item 1.
Legal Proceedings
47
Item 1A.
Risk Factors
49
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

 
 

 

PART I                FINANCIAL INFORMATION
 
Item 1.
Financial Statements
 

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

   
June 30,
2012
   
December 31,
2011
 
   
(unaudited)
       
Assets
           
Cash and due from banks
  $ 25,847     $ 18,552  
Interest bearing deposits
    3,866       3,156  
Cash and cash equivalents
    29,713       21,708  
    Interest bearing time deposits
    747       ---  
Available-for-sale securities
    23,785       13,845  
Loans held for sale
    2,302       3,120  
Total loans
    294,061       307,841  
Less: Allowance for loan losses
    (5,268 )     (5,331 )
Net loans
    288,793       302,510  
Premises and equipment, net
    6,082       6,146  
Federal Home Loan Bank stock, at cost
    3,185       3,185  
Bank owned life insurance
    6,514       6,434  
Interest receivable and other assets
    6,128       7,342  
Total assets
  $ 367,249     $ 364,290  
                 
Liabilities and Shareholders’ Equity
               
Liabilities
               
Deposits
  $ 309,997     $ 308,433  
Federal Home Loan Bank advances
    18,000       18,000  
Interest payable and other liabilities
    1,869       1,683  
Total liabilities
    329,866       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
    11,061       11,010  
Retained earnings
    26,017       24,913  
Accumulated other comprehensive income
    290       236  
Total shareholders’ equity
    37,383       36,174  
                 
Total liabilities and shareholders’ equity
  $ 367,249     $ 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
June 30,
   
Six months ended
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
Interest and Dividend Income
                       
     Loans
  $ 3,806     $ 4,245     $ 7,881     $ 8,604  
     Securities
                               
           Taxable
    90       66       157       134  
           Tax-exempt
    39       43       78       89  
      Other
    15       4       29       7  
                Total interest and dividend income
    3,950       4,358       8,145       8,834  
Interest Expense
                               
     Deposits
    747       943       1,558       1,933  
     Borrowings
    104       103       204       224  
                Total interest expense
    851       1,046       1,762       2,157  
Net Interest Income
    3,099       3,312       6,383       6,677  
Provision for Loan Losses
    500       675       1,100       1,851  
Net Interest Income After Provision for Loan Losses
    2,599       2,637       5,283       4,826  
                                 
Non-interest Income
                               
     Deposit account service charges and fees
    321       319       646       611  
     Net gains on loan sales
    425       226       832       390  
     Net realized gain on sale of available-for-sale securities
    0       2       0       2  
     Loss on other real estate owned
    (56 )     (311 )     (139 )     (336 )
     Other
    185       278       445       538  
             Total non-interest income
    875       514       1,784       1,205  
                                 
Non-Interest Expense
                               
     Salaries and employee benefits
    1,496       1,372       3,015       2,782  
     Net occupancy and equipment expense
    283       268       601       596  
     Computer service
    152       147       300       289  
     Advertising
    89       57       177       115  
     FDIC insurance premiums
    120       134       240       318  
     Other
    543       432       1,011       900  
            Total non-interest expense
    2,683       2,410       5,344       5,000  
                                 
Income  Before Income Taxes
    791       741       1,723       1,031  
Provision for Income Taxes
    282       264       619       350  
Net Income
    509       477       1,104       681  
Unrealized appreciation on available-for-sale securities net of taxes of $49 and $23 for the three months ended June 30, 2012 and 2011, and of $36 and $37, for the six months ended June 30, 2012 and 2011, respectively
    73       34       54       56  
Total comprehensive income
  $ 582     $ 511     $ 1,158     $ 737  
                                 
Basic Earnings Per Share
  $ 0.33     $ 0.31     $ 0.71     $ 0.44  
Diluted Earnings Per Share
  $ 0.33     $ 0.31     $ 0.71     $ 0.44  
                                 
Dividends Declared Per Share
  $ 0.00     $ 0.00     $ 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 Six Months Ended June 30, 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
                    681               681  
Change in unrealized appreciation on available-for-sale securities, net of taxes
                            56        56  
    Stock options exercised (750 shares)
            8                       8  
    Tax benefit related to stock options exercised
            2                       2  
Share-based compensation expense
   
 
      2                       2  
Balance, June 30, 2011
  $ 15     $ 10,999     $ 25,055     $ 257     $ 36,326  
                                         
                                         
                                         
Balance, January 1, 2012
  $ 15     $ 11,010     $ 24,913     $ 236     $ 36,174  
Net income
                    1,104               1,104  
Change in unrealized appreciation on available-for-sale securities, net of taxes
                             54        54  
    Stock options exercised (750 shares)
            7                       7  
    Tax benefit related to stock options exercised
            2                       2  
Share-based compensation expense
 
 
      42                   42  
Balance, June 30, 2012
  $ 15     $ 11,061     $ 26,017     $ 290     $ 37,383  

See notes to consolidated condensed financial statements.

 
3

 

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

   
Six months ended
June 30,
 
   
2012
   
2011
 
Operating Activities
           
Net income
  $ 1,104     $ 681  
Items not requiring (providing) cash
               
Depreciation
    228       197  
Provision for loan losses
    1,100       1,851  
Amortization of premiums and discounts on securities
    (140 )     39  
Loss on sale of other real estate owned
    139       336  
Gain on sale of loans
    (832 )     (390 )
Loans originated for sale
    (28,281 )     (21,323 )
Proceeds on loans sold
    29,931       22,636  
    Share-based compensation expense
    42       2  
    Tax benefit related to stock options exercised
    2       2  
Changes in
               
Interest receivable and other assets
    176       481  
Interest payable and other liabilities
    151       (594 )
Net cash provided by operating activities
    3,620       3,918  
                 
Investing Activities
               
Purchases of available-for-sale securities
    (12,827 )     (1,336 )
Proceeds from maturities of available-for-sale securities
    2,368       951  
Proceeds from sale of available-for-sale securities
    ---       220  
Net change in loans
    11,877       7,207  
Proceeds from sale of other real estate owned
    1,560       856  
Purchase of premises and equipment
    (164 )     (272 )
Redemption of Federal Home Loan Bank stock
    ---       398  
Net cash provided by investing activities
    2,814       8,024  
                 
Financing Activities
               
Net change in demand deposits, money market, NOW and savings accounts
    (1,299 )     (1,056 )
Net change in certificates of deposit
    2,863       (6,623 )
Proceeds from Federal Home Loan Bank advances
    ---       8,000  
Repayment of Federal Home Loan Bank advances
    ---       (12,500 )
Proceeds from stock options exercised
    7       8  
Net cash provided by (used in) financing activities
    1,571       (12,171 )
                 
Increase (decrease) in Cash and Cash Equivalents
    8,005       (229 )
Cash and Cash Equivalents, Beginning of Period
    21,708       13,573  
Cash and Cash Equivalents, End of Period
  $ 29,713     $ 13,344  
                 
Supplemental Cash Flows Information
               
Interest paid
  $ 1,762     $ 2,154  
Income taxes paid
    125       675  
                 
Supplemental Non-Cash Disclosures
               
     Capitalization of mortgage servicing rights
    103       36  
     Loans transferred to other real estate owned
    654       207  
                 

See notes to consolidated condensed financial statements.

 
4

 


LSB FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements
June 30, 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 June 30, 2012, 40,317 shares related to stock options outstanding were dilutive and 17,116 were antidilutive and for the six month period ended June 30, 2012, 6,000 shares related to stock options outstanding were dilutive and 51,433 were antidilutive.  For the three and six month periods ended June 30, 2011, 14,577 shares related to stock options outstanding were dilutive and 25,208 were antidilutive.  The following table presents information about the number of shares used to compute earnings per share and the results of the computations:

   
(Unaudited)
 
   
Three months ended
June 30,
   
Six months ended
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
Weighted average shares outstanding
    1,555,972       1,553,764       1,555,646       1,553,645  
    Stock options
    724       2,382       ---       2,463  
Shares used to compute diluted
 earnings per share
    1,556,696       1,556,146       1,555,646       1,556,108  
Basic earnings per share
  $ 0.33     $ 0.31     $ 0.71     $ 0.44  
Diluted earnings per share
  $ 0.33     $ 0.31     $ 0.71     $ 0.44  

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:
                       
June 30, 2012: (Unaudited)
                       
U.S. Government sponsored agencies
  $ 7,413     $ 42     $ ---     $ 7,455  
Mortgage-backed securities – government sponsored entities
    7,610       171       (1 )     7,780  
State and political subdivisions
     8,282        270        (2 )      8,550  
    $ 23,305     $ 483     $ (3 )   $ 23,785  
                                 
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 June 30, 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
 
   
June 30, 2012
 
   
Unaudited (in thousands)
 
             
Within one year
  $ 1,093     $ 1,096  
One to five years
    7,374       7,489  
Five to ten years
    7,228       7,420  
After ten years
    ---       ---  
      15,695       16,005  
                 
                 Mortgage-backed securities
     7,610       7,780  
                 
Totals
  $ 23,305     $ 23,785  
 
 
The carrying value of securities pledged as collateral, to secure public deposits and for other purposes, was $2.2 million at June 30, 2012 (unaudited) 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 June 30, 2012 and December 31, 2011, respectively.


   
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)
 
June 30, 2012 (Unaudited)
                                   
Mortgage-backed securities
    1,734     $ 1     $ ---     $ ---     $ 1,734     $ 1  
State and political subdivisions
    1,110       2       ---       ---       1,110       2  
Total temporarily impaired securities
  $ 2,844     $ 3     $ ---     $ ---     $ 2,844     $ 3  

 

 
7

 
 

 

 
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  

 
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,
 
 
8

 
 
consideration is given to this regional geographic concentration and the closely associated effect of changing economic conditions on Lafayette Savings’ customers.
 

 


 
Categories of loans include:
 
   
(Unaudited)
June 30,
2012
   
December 31,
2011
 
Real Estate
 
(In thousands)
 
One-to-four family residential
  $ 105,352     $ 108,867  
Multi-family residential
    62,311       60,612  
Commercial real estate
    86,748       90,879  
Construction and land development
    14,998       18,364  
Commercial
    11,159       14,366  
Consumer and other
    998       1,161  
Home equity lines of credit
    17,428       17,330  
Total loans
    298,994       311,579  
Less
               
Net deferred loan fees, premiums and discounts
    (488 )     (496 )
Undisbursed portion of loans
    (4,445 )     (3,242 )
Allowance for loan losses
    (5,268 )     (5,331 )
Net loans
  $ 288,793     $ 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
 
 
9

 
 
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.
 
Construction and Development
 
Construction and land development 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. Multi-family property 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.  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 and six month periods ending June 30, 2012 and for the year ended December 31, 2011 is provided below.
 
   
Allowance for Loan Losses and Recorded Investment in Loans for the Three Months Ended June 30, 2012 (Unaudited)
 
Three Months Ended      
June 30, 2012
 
Commercial
   
Owner
Occupied
1-4
   
Non-owner
Occupied
1-4
   
Multi-
family
   
Commercial
Real Estate
   
Construction
   
Land
   
Consumer
and Home
Equity
   
Total
 
Allowance for losses
                     
  (In thousands)
 
                     
Beginning balance
  $ 716     $ 411     $ 1,221     $ 664     $ 2,000     $ 13     $ 127     $ 153     $ 5,305  
Provision charged to expense
    99       31       (108 )     224       276       (5 )     (23 )     6       500  
Losses charged off
    (148 )     (10 )     (12 )     ---       (417 )     ---       ---       ---       (587 )
Recoveries
    17       ---       17       ---       ---       ---       16       ---       50  
Ending balance
  684     432     1,118     888     1,859     8     120     159     5,268  
 
 
10

 
 
   
Allowance for Loan Losses and Recorded Investment in Loans for the Six Months Ended June 30, 2012 (Unaudited)
 
Six Months Ended      June  30, 2012
 
Commercial
   
Owner
Occupied
1-4
   
Non-owner
Occupied
1-4
   
Multi-
family
   
Commercial
Real Estate
   
Construction
   
Land
   
Consumer
and
Home
Equity
   
Total
 
Allowance for losses
                     
  (In thousands)
 
                     
Beginning balance
  $ 667     $ 436     $ 1,330     $ 646     $ 1,788     $ 64     $ 264     $ 136     $ 5,331  
Provision charged to expense
    462       12       (195 )     500       488       (56 )     (145 )     34       1,100  
Losses charged off
    (462 )     (16 )     (37 )     (259 )     (417 )     ---       (15 )     (11 )     (1,217 )
Recoveries
    17       ---       20       1       ---       ---       16       ---       54  
Ending balance
    684       432       1,118       888       1,859       8       120       159       5,268  
ALL individually evaluated
    2       11       60       208       617       ---       ---       ---       898  
ALL collectively evaluated
    682       421       1,058       680       1,242       8       120       159       4,368  
Total ALLL
    684       432       1,118       888       1,859       8       120       159       5,268  
Loans individually evaluated
    298       1,475       6,552       2,143       10,169       ---       1,661       158       22,456  
Loans collectively evaluated
    10,861       51,099       46,226       60,168       76,579       9,144       4,193       18,268       276,538  
Total loans evaluated
  11,159     52,574     52,778     62,311     86,748     9,144     5,854     18,426     298,994  
 
 
 
 
 
   
Allowance for Loan Losses and Recorded Investment in Loans for the Quarter Ended June 30, 2011 (Unaudited)
 
Three Months Ended      
June 30, 2011
 
Commercial
   
Owner
Occupied
1-4
   
Non-owner
Occupied
1-4
   
Multi-
family
   
Commercial
Real Estate
   
Construction
   
Land
   
Consumer
and
Home
Equity
   
Total
 
Allowance for losses
                                                     
Beginning balance
  $ 727     $ 495     $ 1,471     $ 1,155     $ 2,094     $ 78     $ 450     877     6,547  
Provision charged to expense
    (148 )     61       157       139       404       (44 )     59       46       675  
Losses charged off
    (15 )     (80 )     (61 )     ---       (39 )     ---       ---       ---       (195 )
Recoveries
    ---       ---       1       ---       ---       ---       7       ---       1  
Ending balance
  564     476     1,568     1,294     2,460     34     509     123     7,028  
 
 
 
 

 
   
Allowance for Loan Losses and Recorded Investment in Loans for the Six Months Ended June 30, 2011 (Unaudited)
 
Six Months Ended      
June  30, 2011
 
Commercial
   
Owner
Occupied
1-4
   
Non-owner
Occupied
1-4
   
Multi-
family
   
Commercial
Real Estate
   
Construction
   
Land
   
Consumer
and
Home
Equity
   
Total
 
Allowance for losses
                     
  (In thousands)
 
 
                     
Beginning balance
  $ 565     $ 242     $ 773     $ 1,138     $ 2,061     $ ---     $ 480     84     5,343  
Provision charged to expense
    14       292       847       156       438       34       22       48       1,851  
Losses charged off
    (15 )     (80 )     (61 )     ---       (39 )     ---       ---       (9 )     (204 )
Recoveries
    ---       22       9       ---       ---       ---       7       ---       38  
Ending balance
  564     476     1,568     1,294     2,460     34     509     123     7,028  
                                                                         
 
 
11

 
 
 
   
 
 
 
 
 
 
 
 
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 ALLL
    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  
   
 
 
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.
 
 
12

 

 
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.
 
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
 
 
13

 
 
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.


 
14

 

The following table provides an analysis of loan quality using the above designations, based on property type at June 30, 2012. (Unaudited)

 
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
  $ 33     $ 4,218     $ 254     $ ---     $ 105     $ 282     $ 196     $ 1,575     $ 6,663  
2 - Good
    2,880       21,161       5,224       8,135       10,874       882       198       11,758       61,112  
3 - Pass Low risk
    6,262       18,732       12,897       30,363       33,196       5,662       219       3,795       111,126  
4 - Pass
    1,641       6,264       24,269       18,316       23,337       2,318       1,646       1,226       79,017  
4W - Watch
    29       683       5,908       4,447       7,466       ---       1,934       ---       20,467  
5 - Special mention
    ---       84       762       ---       831       ---       ---       ---       1,677  
6 - Substandard
    314       1,432       3,464       1,050       10,939       ---       1,661       72       18,932  
7 - Doubtful
    ---       ---       ---       ---       ---       ---       ---       ---       ---  
8 - Loss
    ---       ---       ---       ---       ---       ---       ---       ---       ---  
 Total
  $ 11,159     $ 52,574     $ 52,778     $ 62,311     $ 86,748     $ 9,144     $ 5,854     $ 18,426     $ 298,994  
 
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     $ 58,525     $ 60,612     $ 90,879     $ 8,060     $ 10,304     $ 18,491     $ 311,579  

 

 
15

 


 
Analyses of past due loans segregated by loan type as of June 30, 2012 and December 31, 2011 are provided below.

   
Loan Portfolio Aging Analysis as of June 30, 2012 (Unaudited)
 
       
   
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
  $ ---     $ ---     $ 63     $ 63     $ 11,096     $ 11,159     $ ---     $ ---  
Owner occupied 1-4
    ---       ---       425       425       52,149       52,574       853       ---  
Non owner occupied 1-4
    ---       1,459       987       2,444       50,333       52,778       939       ---  
Multi-family
    ---       84       ---       84       62,227       62,311       483       ---  
Commercial Real Estate
    ---       93       2,372       2,465       84,283       86,748       2,462       ---