XNAS:FABK Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC  20549

FORM 10-Q

[X]         QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
 
OF THE SECURITIES EXCHANGE ACT OF 1934

 
For the quarterly period ended March 31, 2012

 
OR

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

 
For the transition period from _____________ to _____________

Commission File Number: 001-33682


FIRST ADVANTAGE BANCORP
(Exact name of registrant as specified in its charter)
 
 
Tennessee
(State or other jurisdiction of
incorporation or organization)
26-0401680
(I.R.S. Employer Identification No.)
1430 Madison Street, Clarksville, Tennessee
 (Address of principal executive offices)
37040
(Zip Code)

Registrant’s telephone number, including area code:  (931) 552-6176

Former name, former address and former fiscal year, if changed since last report.  N/A

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 Date 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 smaller reporting company.  See definitions of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

(Check one):        Large Accelerated Filer [    ]                                                             Accelerated Filer [    ]
Non-accelerated Filer [    ]                                                                Smaller Reporting Company [ X ]

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

The number of shares outstanding of the registrant’s common stock as of May 11, 2012 was 4,326,535.
 

 
 

 

 
FIRST ADVANTAGE BANCORP

Table of Contents

   
Page
 
Part I. Financial Information
 
     
Item 1.
Condensed Consolidated Balance Sheets as of March 31, 2012 (unaudited) and December 31, 2011
1
   Unaudited - Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2012 and 2011
2
   Unaudited - Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2012 and 2011
3
 
Unaudited - Condensed Consolidated Statements of Shareholders’ Equity for the Three Months Ended March 31, 2012 and 2011
4
 
Unaudited - Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2012 and 2011
5
 
Notes to Condensed Consolidated Financial Statements (unaudited)
6
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
28
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
36
Item 4.
Controls and Procedures                                                                                                     
36
 
Part II.  Other Information
 
Item 1.
Legal Proceedings                                                                                                     
36
Item 1A.
Risk Factors                                                                                                     
36
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
37
Item 3.
Defaults Upon Senior Securities                                                                                                     
37
Item 4.
Mine Safety Disclosures                                                                                                     
37
Item 5.
Other Information                                                                                                     
37
Item 6.
Exhibits                                                                                                     
38
     
 
SIGNATURES                                                                                                     
39
 

 
 

 

First Advantage Bancorp
           
Condensed Consolidated Balance Sheets
       
(Dollars in thousands, except share and per share amounts)
       
   
March 31,
   
December 31,
 
   
2012
   
2011
 
   
(Unaudited)
       
Assets
           
Cash and due from banks
  $ 3,924     $ 7,651  
Interest-bearing demand deposits with banks
    10,850       1,680  
Federal funds sold
    3,075       1,425  
Cash and cash equivalents
    17,849       10,756  
                 
Available-for-sale securities, at fair value
    70,165       70,279  
Loans held for sale
    1,672       5,509  
Loans, net of allowance for loan losses of $4,314 and $4,316 at
  March 31, 2012 and December 31, 2011, respectively
    257,167       259,534  
Premises and equipment, net
    7,407       7,504  
Other real estate owned and repossessed assets
    2,087       1,923  
Federal Home Loan Bank stock
    2,988       2,988  
Accrued interest receivable
    1,382       1,571  
Income taxes refundable
    1,965       2,789  
Deferred tax asset
    2,166       1,927  
Other assets
    1,652       1,369  
Total assets
  $ 366,500     $ 366,149  
                 
Liabilities and Shareholders' Equity
               
                 
Liabilities
               
Deposits
               
Demand
  $ 24,474     $ 28,062  
Savings, checking and money market
    134,412       134,360  
Time certificates
    83,727       70,162  
Total deposits
    242,613       232,584  
                 
Short-term borrowings
    7,949       14,676  
Federal Home Loan Bank advances
    13,000       13,000  
Long-term debt
    35,000       35,000  
Other liablilities
    1,982       4,414  
Total liabilities
    300,544       299,674  
Commitments and contingencies
    -       -  
                 
Shareholders' Equity
               
Preferred stock, $0.01 par value, 10,000,000 shares authorized
   no shares outstanding at March 31, 2012 or December 31, 2011
    -       -  
Common stock, $0.01 par value 50,000,000 shares authorized,
  4,360,335 shares issued and 3,939,460 outstanding at
  March 31, 2012 and 4,459,135 shares issued and
   4,038,260 outstanding at December 31, 2011
    44       45  
Additional paid-in-capital
    43,470       44,579  
Common stock held by:
               
Nonqualified Deferred Compensation Plan
    (1,847 )     (1,845 )
Employee Stock Ownership Plan
    (2,860 )     (2,860 )
2008 Equity Incentive Plan
    (1,107 )     (1,107 )
Retained earnings
    25,603       24,900  
Accumulated other comprehensive income
    2,653       2,763  
Total shareholders' equity
    65,956       66,475  
Total liabilities and shareholders' equity
  $ 366,500     $ 366,149  
                 
See accompanying notes to unaudited condensed consolidated financial statements.
 

 
 
1

 

 
First Advantage Bancorp
           
Unaudited - Condensed Consolidated Statements of Income
 
(Dollars in thousands, except share and per share data)
       
   
Three Months Ended
 
   
March 31,
 
   
2012
   
2011
 
Interest and dividend income
           
Loans
  $ 3,829     $ 3,527  
Investment securities
    662       777  
Other
    65       66  
Total interest and dividend income
    4,556       4,370  
Interest expense
               
Deposits
    457       591  
Borrowings
    432       438  
Total interest expense
    889       1,029  
Net interest income
    3,667       3,341  
Provision for loan losses
    227       255  
Net interest income after provision for loan losses
    3,440       3,086  
Non-interest income
               
Service charges on deposit accounts and other fees
    298       282  
Loan servicing and other fees
    38       17  
Net gains on sales of mortgage loans held for sale
    205       207  
Net realized gain on sales of available-for-sale securities
    474       -  
Insurance and brokerage commissions
    23       26  
Other
    6       47  
Total non-interest income
    1,044       579  
Non-interest expense
               
Salaries and employee benefits
    1,542       1,732  
Net occupancy expense
    159       166  
Equipment expense
    162       187  
Data processing fees
    261       223  
Professional fees
    165       184  
Marketing expense
    80       76  
Supplies and communication
    92       72  
Loan collection and repossession expense
    15       -  
Other
    480       477  
Total non-interest expense
    2,956       3,117  
Income before income taxes
    1,528       548  
Provision for income taxes
    603       190  
Net income
  $ 925     $ 358  
Per common share:
               
Basic net income per common share
  $ 0.23     $ 0.09  
Diluted net income per common share
  $ 0.22     $ 0.08  
Dividends declared per common share
  $ 0.05     $ 0.05  
Basic weighted average common shares outstanding
    3,998,329       4,107,813  
Diluted weighted average common shares outstanding
    4,236,410       4,260,723  
                 
See accompanying notes to unaudited condensed consolidated financial statements.
 
 

 
2

 

First Advantage Bancorp
           
Unaudited -  Condensed Consolidated Statements of Other Comprehensive Income
(Dollars in thousands)
           
             
   
Three months ended
 
   
March 31,
 
   
2012
   
2011
 
             
Net income
  $ 925     $ 358  
                 
Unrealized gains on available-for-sale securities
    (653)       105  
Less reclassification adjustment for realized gains included in income
    (474)       -  
Other comprehensive gains, before tax effect
    (179)       105  
Tax (benefit) expense
    (69)       40  
Other comprehensive (loss) income
    (110)       65  
Comprehensive income
  $ 815     $ 423  
 See accompanying notes to unaudited condensed consolidated financial statements.    


 
3

 

First Advantage Bancorp
                                         
Unaudited - Condensed Consolidated Statements of Shareholders' Equity
 
Three Months Ended March 31, 2012 and 2011
 
(Dollars in thousands, except share and per share amounts)
 
                           
Common
   
Accumulated
       
               
Additional
         
Stock
   
Other
   
Total
 
   
Common Stock
 
Paid-in
   
Retained
   
Acquired by
   
Comprehensive
   
Stockholders'
 
   
Shares
   
Amount
   
Capital
   
Earnings
   
Benefit Plans
   
Income
   
Equity
 
Balance at January 1, 2011
    4,632,494     $ 46     $ 46,626     $ 23,923     $ (6,442)     $ 2,574     $ 66,727  
Comprehensive income, net of tax:
                                                       
  Net income
                    -       358       -       -       358  
Change in unrealized appreciation of
 available-for-sale securities, net of tax
      -               -       -       65       65  
Dividends paid ($0.05 per common share)
            -               (234)       -       -       (234)  
Purchase of shares by employee benefit plans
                    29       -       (29)       -       -  
Stock-based compensation
                    298       -       -       -       298  
Balance at March 31, 2011
    4,632,494     $ 46     $ 46,953     $ 24,047     $ (6,471)     $ 2,639     $ 67,214  
                                                         
Balance at January 1, 2012
    4,459,135     $ 45     $ 44,579     $ 24,900     $ (5,812 )   $ 2,763     $ 66,475  
Comprehensive income, net of tax:
                                                       
  Net income
            -       -       925       -       -       925  
Change in unrealized appreciation of
 available-for-sale securities, net of tax
                      (110)       (110)  
Treasury stock purchase/retire
    (98,800)       (1)       (1,273)       -                       (1,274)  
Dividends paid ($0.05 per common share)
            -       -       (222)       -       -       (222)  
Purchase of shares by employee benefit plans
                    2       -       (2)       -       -  
Stock-based compensation
            -       162       -       -       -       162  
Balance at March 31, 2012
    4,360,335     $ 44     $ 43,470     $ 25,603     $ (5,814)     $ 2,653     $ 65,956  
                                                         
See accompanying notes to unaudited condensed financial statements.
                                         


 
4

 
 

First Advantage Bancorp
           
Unaudited - Condensed Consolidated Statements of Cash Flows
           
(Dollars in thousands)
           
   
Three Months Ended
 
   
March 31,
 
   
2012
   
2011
 
Operating activities
           
Net income
  $ 925     $ 358  
Adjustments to reconcile net income to net cash
  provided by (used in) operating activities
               
Provision for loan losses
    227       255  
Depreciation, amortization and accretion
    235       201  
Deferred income taxes
    (170 )     -  
Funding of mortgage loans held for sale
    (8,055 )     (8,699 )
Proceeds from sales of mortgage loans held for sale
    12,097       10,822  
Net gains on sales of mortgage loans held for sale
    (205 )     (207 )
Net gains on sale of available-for-sale securities
    (474 )     -  
Stock-based compensation
    162       298  
Decrease in other assets
    (23 )     (3,171 )
Decrease in other liabilities
    (1,608 )     (36 )
Net cash provided by (used in) operating activities
    3,111       (179 )
                 
Investing activities
               
Proceeds from maturities of other investments
    -       1,494  
Purchases of securities available for sale
    (7,481 )     -  
Proceeds from call/maturities and repayments of securities available-for-sale
    7,093       5,271  
Proceeds from sales of securities available-for-sale
    474       -  
Net decrease (increase) in loans
    2,140       (997 )
Purchases of premises and equipment
    (50 )     (141 )
Proceeds from sale of other real estate owned and repossessed assets
    -       13  
Net cash provided by investing activities
    2,176       5,640  
                 
Financing activities
               
Net (decrease) increase in demand deposits, savings, checking and
  money market accounts
    (3,536 )     4,188  
Net increase (decrease) in time deposits
    13,565       (4,693 )
Net decrease in short-term borrowings
    (6,727 )     (790 )
Cash paid for dividends
    (222 )     (234 )
Stock repurchased/retired  - repurchase program
    (1,274 )     -  
Net cash provided by (used in) financing activities
    1,806       (1,529 )
Increase in cash and cash equivalents
    7,093       3,932  
Cash and cash equivalents, beginning of period
    10,756       7,788  
Cash and cash equivalents, end of period
  $ 17,849     $ 11,720  
Supplemental cash flow information:
               
Other real estate owned acquired through foreclosure of real estate loans
    138       -  
See accompanying notes to unaudited condensed consolidated financial statements.
               

 
 
5

 

 
Notes to Condensed Consolidated Financial Statements (unaudited)

NOTE 1 – BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated interim financial statements include the accounts of First Advantage Bancorp (the “Company”), First Advantage Bank (the “Bank”) and the Bank’s subsidiaries.  First Advantage Bank is a Tennessee chartered commercial bank, formerly known as First Federal Savings Bank, originally founded in 1953 and is headquartered in Clarksville, Tennessee.  The Company uses the premises, equipment and other property of the Bank with the payment of appropriate rental fees, as required by applicable laws and regulations, under the terms of an expense allocation agreement.   Accordingly, the information set forth in this interim report, including the condensed consolidated financial statements and related financial data contained herein relates primarily to the Bank.  These financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q.  Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.  In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation of the financial position, results of operations and cash flows for reporting the interim periods have been included.    The results of operations for the three months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the full fiscal year or any other interim period.  The condensed consolidated financial statements and notes thereto included in this report should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 filed with the United States Securities and Exchange Commission (the “SEC”) on March 9, 2012.

Certain reclassifications considered to be immaterial have been made to prior period consolidated financial statements to conform to the current period consolidated financial statements.

In preparing financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and income and expenses during the reporting period.  Actual results could differ significantly from those estimates.

NOTE 2 – RECENT ACCOUNTING UPDATES

ASU 2011-11, “Balance Sheet (Topic 210) - “Disclosures about Offsetting Assets and Liabilities.” ASU 2011-11 amends Topic 210, “Balance Sheet,” to require an entity to disclose both gross and net information about financial instruments, such as sales and repurchase agreements and reverse sale and repurchase agreements and securities borrowing/lending arrangements, and derivative instruments that are eligible for offset in the statement of financial position and/or subject to a master netting arrangement or similar agreement. ASU 2011-11 is effective for annual and interim periods beginning on January 1, 2013, and is not expected to have a significant impact on the Company’s consolidated financial position, results of operation, cash flows, or disclosures.
 
ASU 2011-12 “Comprehensive Income (Topic 220) - 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.” ASU 2011-12 defers changes in ASU No. 2011-05 that relate to the presentation of reclassification adjustments to allow the FASB time to redeliberate whether to require presentation of such adjustments on the face of the financial statements to show the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income. ASU 2011-12 allows entities to continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU No. 2011-05. All other requirements in ASU No. 2011-05 are not affected by ASU No. 2011-12. ASU 2011-12 is effective for annual and interim periods beginning after December 15, 2011.  In connection with the adoption of ASU No. 2011-12, in the first quarter of 2012, the company presented condensed consolidated statements of other comprehensive income in the accompanying financial statements.
 
 
6

 

NOTE 3 – EARNINGS PER COMMON SHARE

Basic earnings per share (“EPS”) is calculated by dividing net income available to common stockholders by the weighted-average number of shares of common stock outstanding during the period. Diluted EPS is computed in a manner similar to that of basic EPS except that the weighted-average number of common shares outstanding is increased to include the number of incremental common shares (computed using the treasury stock method) that would have been outstanding if all potentially dilutive common stock equivalents (such as stock options and unvested restricted stock) were vested during the period.  The weighted average  common shares outstanding equals the gross number of common shares issued less unallocated shares held by the First Advantage Bank Employee Stock Ownership Plan (“ESOP”), nonvested restricted stock awards under the Company’s 2007 Deferred Compensation Plan and nonvested restricted stock awards under the Company’s 2008 Equity Incentive Plan.  Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued.  Potential common shares to be issued include any restricted shares authorized under the Company’s 2007 Deferred Compensation Plan and the 2008 Equity Incentive Plan.  Unallocated common shares held by the ESOP are shown as a reduction in stockholders’ equity and are included in the weighted-average number of common shares outstanding for diluted EPS calculations as they are committed to be released.

Basic and diluted earnings per share are computed as follows:
 

 (Dollars in thousands, except share and per share amounts)    Three Months Ended March 31,
   
2012
   
2011
 
Net income
  $ 925     $ 358  
                 
                 
Weighted-average shares - Basic EPS
    3,998,329       4,107,813  
Weighted-average restricted shares -
               
2007 Deferred Compensation Plan
    -       12,007  
2008 Equity Incentive Plan
    124,115       43,327  
Weighted-average shares -
               
ESOP committed to be released - diluted EPS
    113,966       97,576  
Weighted-average shares - Diluted EPS
    4,236,410       4,260,723  
Basic earnings per common share
  $ 0.23     $ 0.09  
Diluted earnings per common share
  $ 0.22     $ 0.08  
                 
 
 
 
7

 
 
 
NOTE 4 –LOANS AND ALLOWANCE FOR CREDIT LOSSES

Loans

The Company’s primary lending activity is the origination of loans secured by real estate.  The Company originates one-to-four family mortgage loans, multi-family loans, nonresidential real estate loans, commercial business loans and construction loans.  To a lesser extent, we also originate land loans and consumer loans.

The following table summarizes the composition of our total net loans receivable at March 31, 2012 and December 31, 2011:
 

                         
   
March 31, 2012
   
December 31, 2011
 
 
 
Amount
   
Percent
   
Amount
   
Percent
 
   
(Dollars in thousands)
 
Real estate loans:
                       
Permanent loans:
                       
One-to-four family
  $ 45,532       17.4 %   $ 44,813       17.0 %
Multi-family
    17,218       6.6       16,695       6.3  
Nonresidential
    98,543       37.7       98,278       37.3  
Construction loans:
                               
One-to-four family
    18,875       7.2       18,618       7.1  
Multi-family
    2,977       1.2       2,357       0.9  
Nonresidential
    7,095       2.7       6,753       2.5  
Land loans
    24,888       9.5       25,409       9.6  
Total real estate loans
    215,128       82.3       212,923       80.7  
                                 
Consumer:
                               
Home equity loans and lines of credit
    18,595       7.1       19,722       7.5  
Auto loans
    468       0.2       429       0.2  
Deposit loans
    371       0.2       321       0.1  
Overdrafts
    31       -       77       -  
Other
    2,359       0.9       1,828       0.7  
Total consumer loans
    21,824       8.4       22,377       8.5  
                                 
Commercial loans
    24,408       9.3       28,462       10.8  
                                 
Total loans
    261,360       100.0 %     263,762       100.0 %
Allowance for loan losses
    (4,314 )             (4,316 )        
Net deferred loan costs
    121               88          
Loans receivable, net
  $ 257,167             $ 259,534          
                                 
 
 
8

 

The following table sets forth certain information at March 31, 2012 and December 31, 2011 regarding the dollar amount of loan principal repayments becoming due during the periods indicated.  The table does not include any estimate of prepayments which may significantly shorten the average life of loans and may cause our actual repayment experience to differ from that shown below.  Demand loans having no stated schedule of repayments and no stated maturity are reported as due in one year or less.
 

       
At March 31, 2012
 
                                               
         One- to      Multi-family and Nonresidential                              Total  
       
Four-Family
   
Real Estate
   
Construction
   
Land
   
Consumer
   
Commercial
   
Loans
 
        (Dollars in thousands)  
                                               
Amounts due in:
                                           
One year or less
    $ 11,154     $ 19,260     $ 26,915     $ 7,945     $ 12,295     $ 12,588     $ 90,157  
More than one year to three years
      9,261       50,910       2,032       13,216       1,536       5,680       82,635  
More than three years to five years
      11,357       41,551       -       3,252       806       3,309       60,275  
More than five years to fifteen years
      7,793       4,040       -       475       7,187       2,831       22,326  
More than fifteen years
      5,967       -       -       -       -       -       5,967  
Total
    $ 45,532     $ 115,761     $ 28,947     $ 24,888     $ 21,824     $ 24,408     $ 261,360  
                                                             
                                                             
       
At December 31, 2011
                                                             
         One- to      Multi-family and Nonresidential                              Total  
       
Four-Family
   
Real Estate
   
Construction
   
Land
   
Consumer
   
Commercial
   
Loans
 
       
(Dollars in thousands)
                                                             
Amounts due in:
                                                         
One year or less
    $ 9,942     $ 12,231     $ 25,977     $ 14,289     $ 11,637     $ 17,041     $ 91,117  
More than one year to three years
      10,457       56,586       1,751       7,610       1,645       7,651       85,700  
More than three years to five years
      11,244       40,319       -       3,032       1,011       3,448       59,054  
More than five years to fifteen years
      6,675       5,837       -       478       8,084       322       21,396  
More than fifteen years
      6,495       -       -       -       -       -       6,495  
Total
    $ 44,813     $ 114,973     $ 27,728     $ 25,409     $ 22,377     $ 28,462     $ 263,762  

 
9

 
 
The following tables set forth the dollar amount of all loans at March 31, 2012 that are due after March 31, 2013, and at December 31, 2011 that are due after December 31, 2012, and have either fixed interest rates or floating or adjustable interest rates:

 
As of March 31, 2012
       
Floating or
       
 
 
Fixed Rates
   
Adjustable Rates
   
Total
 
   
(Dollars in thousands)
           
One-to-four family
  $ 33,456     $ 922     $ 34,378  
Multi-family and nonresidential
    87,838       8,663       96,501  
Construction
    214       1,818       2,032  
Land
    3,003       13,940       16,943  
Consumer
    2,938       6,591       9,529  
Commercial
    10,344       1,476       11,820  
Total
  $ 137,793     $ 33,410     $ 171,203  
                         
                         
 As of December 31, 2011
         
Floating or
         
 
 
Fixed Rates
   
Adjustable Rates
   
Total
 
   
(Dollars in thousands)
               
One-to-four family
  $ 33,873     $ 998     $ 34,871  
Multi-family and nonresidential
    93,484       9,258       102,742  
Construction
    213       1,538       1,751  
Land
    3,045       8,076       11,121  
Consumer
    3,293       7,446       10,739  
Commercial
    10,061       1,360       11,421  
Total
  $ 143,969     $ 28,676     $ 172,645  
 
Our adjustable-rate mortgage loans do not adjust downward below the initial discounted contract rate.  When market rates rise the interest rates on these loans may increase based on the contract rate (the index plus the margin) exceeding the initial interest rate floor.
 
Nonperforming Assets

We consider repossessed assets and loans that are 90 days or more past due to be nonperforming assets.  Loans are placed on non-accrual status when, in management’s opinion, the borrower is unable to meet payment obligations, which typically occurs when principal and interest payments are 90 days delinquent at which time the accrual of interest ceases and the allowance for any uncollectible accrued interest is established and charged against interest income.  Typically, payments received on a non-accrual loan are first applied to the outstanding principal balance.  At March 31, 2012 and December 31, 2011, non-accruing loans were $2.6 million and $2.8 million, respectively.  Had non-accrual loans performed in accordance with their original contractual terms, the Company would have recognized additional interest income, net of tax, of approximately $77,000 for the first three months of 2012.  No interest income was recognized on non-accrual loans on a cash basis during the first three months of 2012 or during 2011.

Other real estate owned and repossessed assets which are acquired through, or in lieu, of foreclosure are held for sale and initially recorded at fair value, less estimated selling cost, when acquired, establishing a new cost basis.  Costs incurred after acquisition are generally expensed.  Any changes in fair value below the new cost basis of the asset are recorded through a valuation allowance and charged to expense.  The valuations of other real estate owned and repossessed asset are subjective in nature and may be adjusted in the future because of changes in market conditions.
 
 
10

 
 
The following table provides information with respect to our nonperforming assets at the dates indicated.
 

Nonperforming Assets
 
At March 31,
   
At December 31,
 
   
2012
   
2011
 
   
(Dollars in thousands)
 
             
Non-accrual loans:
           
   One- to four-family
  $ 1,580     $ 2,135  
   Multi-family and nonresidential
    -       -  
   Construction
    292       -  
   Land
    -       -  
   Consumer
    209       254  
   Commercial
    561       399  
      Total
    2,642       2,788  
                 
Accruing loans past due 90 days or more:
 
   One- to four-family
    -       -  
   Multi-family and nonresidential
    -       -  
   Construction
    -       -  
   Land
    -       -  
   Consumer
    -       -  
   Commercial
    -       -  
      Total
    -       -  
           Total of non-accrual and 90 days or     2,642        2,788   
              more past due loans          
            
               
                 
Real estate owned
    1,555       1,391  
Other nonperforming assets
    -       -  
         Total nonperforming assets
  $ 4,197     $ 4,179  
                 
Total nonperforming loans to total loans
    1.01 %     1.06 %
 Total nonperforming loans to total assets     0.72   %     0.76   %
 Total nonperforming assets to total assets     1.15   %     1.14   %
 
Allowance for Loan Losses

The allowance for loan losses is a valuation allowance for probable credit losses in the loan portfolio and represents management’s best estimate of known and inherent losses in the loan portfolio, based upon management’s evaluation of the portfolio’s collectibility. We evaluate the need to establish allowances against losses on loans on a quarterly basis. When additional allowances are necessary, a provision for loan losses is charged to earnings. The recommendations for increases or decreases to the allowance are approved by the Asset Quality Review Committee and presented to the Board of Directors.

Our methodology for assessing the appropriateness of the allowance for loan losses consists of: (1) a specific allowance on identified problem loans; and (2) a general valuation allowance on the remainder of the loan portfolio. Management estimates a range of losses and then makes its best estimate of potential credit losses within that range. Although we determine the amount of each element of the allowance separately, the entire allowance for loan losses is available for the entire portfolio.
 
 
11

 

Specific Allowance Required for Identified Problem Loans. We establish an allowance on certain identified problem loans based on such factors as: (1) the strength of the customer’s personal or business cash flows; (2) the availability of other sources of repayment; (3) the amount due or past due; (4) the type and value of collateral; (5) the strength of our collateral position; and (6) the borrower’s effort to cure the delinquency.

We also identify loans that may need to be charged-off as a loss by reviewing all delinquent loans, classified loans and other loans for which management may have concerns about collectibility. For individually reviewed loans, the borrower’s inability to make payments under the terms of the loan or a shortfall in collateral value would result in our allocating a portion of the allowance to the loan that was impaired.

General Valuation Allowance on the Remainder of the Loan Portfolio. We establish a general allowance for loans that are not currently classified in order to recognize the inherent losses associated with lending activities. This general valuation allowance is determined through two steps. First, we estimate potential losses on the portfolio by analyzing historical losses for each loan category. Second, we look at additional significant factors that, in management’s judgment, affect the collectibility of the portfolio as of the evaluation date. These significant factors may include changes in lending policies and procedures; international, national, regional and local economic conditions; changes in the nature and volume of the portfolio; changes in the experience, ability and depth of lending management; changes in the volume of past dues, non-accruals and classified assets; changes in the quality of the loan review system; changes in the value of underlying collateral for collateral dependent loans; concentrations of credit, and other factors.

At March 31, 2012, our allowance for loan losses represented 1.7% of total gross loans and 163.3% of nonperforming loans.  At December 31, 2011, our allowance for loan losses represented 1.6% of total gross loans and 154.8% of nonperforming loans.  The allowance for loan losses decreased $2,000 at March 31, 2012, as compared to December 31, 2011, due to $238,000 in charge offs during the first quarter of 2012 which were partially offset by $227,000 in allowance provision and $9,000 in recoveries from charged off loans during the first quarter of 2012.

The following table sets forth the breakdown of the allowance for loan losses by loan category at the dates indicated.
 

   
At March 31,
   
At December 31,
 
 
 
2012
   
2011
 
               
% of
               
% of
 
         
% of
   
Loans in
         
% of
   
Loans in
 
         
Allowance
   
Category
         
Allowance
   
Category
 
         
to Total
   
to Total
         
to Total
   
to Total
 
   
Amount
   
Allowance
   
Loans
   
Amount
   
Allowance
   
Loans
 
   
(Dollars in thousands)
   
(Dollars in thousands)
One-to-four family
  $ 404       9.4 %     17.4 %   $ 476       11.0 %     17.0 %
Multi-family and nonresidential
    1,111       25.7       44.3       1,063       24.6       43.6  
Construction
    400       9.3       11.1       400       9.3       10.5  
Land
    641       14.9       9.5       614       14.2       9.6  
Consumer
    252       5.8       8.4       296       6.9       8.5  
Commercial
    1,506       34.9       9.3       1,467       34.0       10.8  
Total allowance for loan losses
  $ 4,314       100.0 %     100.0 %   $ 4,316       100.0 %     100.0 %
 
 
 
12

 
 
Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary and our results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Furthermore, while we believe we have established our allowance for loan losses in conformity with accepted accounting principles, there can be no assurance that our regulators, in reviewing our loan portfolio, will not require us to increase our allowance for loan losses. Our regulators may require us to increase our allowance for loan losses based on judgments different from ours. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases will not be necessary should the quality of any loans deteriorate as a result of the factors discussed above. Any material increase in the allowance for loan losses may adversely affect our financial condition and results of operations.

Analysis of Loan Loss Experience

The following table details allowance for loan losses and recorded investment in loans by portfolio segment for the three months ended March 31, 2012 and 2011:
 

Allowance for Loan Losses and Recorded Investment in Loans
                   
For the Three Months Ended March 31, 2012
                                     
(Dollars in thousands)
                                           
                                             
 
 
One-to-Four
   
Multi-family/
               
Consumer
                   
   
Family
   
Nonresidential
   
Construction
   
Land
   
and Other
   
Commercial
   
Unallocated
   
Total
 
                                                 
Allowance for loan losses:
                                           
                                                 
Beginning balance
  $ 476     $ 1,063     $ 400     $ 614     $ 296     $ 1,467     $ -     $ 4,316  
Charge offs
    (212 )     -       -       -       (11 )     (15 )     -     $ (238 )
Recoveries
    -       6       -       -       1       2       -     $ 9  
Provision (Credit)
    140       42       -       27       (34 )     52       -     $ 227  
Ending balance
  $ 404     $ 1,111     $ 400     $ 641     $ 252     $ 1,506     $ -     $ 4,314  
                                                                 
Ending balance individually
  evaluated for impairment
  $ 50     $ -     $ -     $ -     $ -     $ 379     $ -     $ 429  
                                                                 
Ending balance collectively
  evaluated for impairment
  $ 354     $ 1,111     $ 400     $ 641     $ 252     $ 1,127     $ -     $ 3,885  
                                                                 
Loans:
                                                               
                                                                 
Ending balance
  $ 45,532     $ 115,761     $ 28,947     $ 24,888     $ 21,824     $ 24,408     $ -     $ 261,360  
                                                                 
Ending balance individually
  evaluated for impairment
  $ 907     $ 234     $ -     $ -     $ 160     $ 800     $ -     $ 2,101  
                                                                 
Ending balance collectively
  evaluated for impairment
  $ 44,625     $ 115,527     $ 28,947     $ 24,888     $ 21,664     $ 23,608     $ -     $ 259,259  
 
 
 
13

 
 
Allowance for Loan Losses and Recorded Investment in Loans
                   
For the Three Months Ended March 31, 2011
                                     
(Dollars in thousands)
                                           
                                             
 
 
One-to-Four
   
Multi-family/
               
Consumer
                   
   
Family
   
Nonresidential
   
Construction
   
Land
   
and Other
   
Commercial
   
Unallocated
   
Total
 
                                                 
Allowance for loan losses:
                                           
                                                 
Beginning balance
  $ 545     $ 1,061     $ 325     $ 730     $ 250     $ 738     $ -     $ 3,649  
Charge offs
    -       -       -       -       (5 )     -       -       (5 )
Recoveries
    -       -       -       -       3       9       -       12  
Provision (Credit)
    21       (71 )     -       (49 )     2       352       -       255  
Ending balance
  $ 566     $ 990     $ 325     $ 681     $ 250     $ 1,099     $ -     $ 3,911  
                                                                 
Ending balance individually
  evaluated for impairment
  $ 216     $ -     $ -     $ 71     $ -     $ 238     $ -     $ 525  
                                                                 
Ending balance collectively
  evaluated for impairment
  $ 350     $ 990     $ 325     $ 610     $ 250     $ 861     $ -     $ 3,386  
                                                                 
Loans:
                                                               
                                                                 
Ending balance
  $ 44,248     $ 94,357     $ 29,411     $ 25,998     $ 22,080     $ 26,810     $ -     $ 242,904