XASE:TSH Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 
For the quarterly period ended
June 30, 2012
 

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

For the transition period from _________________________ to _________________________

Commission file number 1-13712

TECHE HOLDING COMPANY
(Exact name of registrant as specified in its charter)

Louisiana
 
72-128746
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)

1120 Jefferson Terrace Boulevard New Iberia, Louisiana
   
70560
 
(Address of principal executive offices)
   
(Zip Code)
 

Registrant’s telephone number, including area code    (337) 365-0366

N/A
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 (Section 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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o
Accelerated filer  o
Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o   No x
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: August 1, 2012.

Class
    2,028,152
$.01 par value common stock
 
Outstanding Shares
 
 
 

 
TECHE HOLDING COMPANY

QUARTERLY REPORT ON FORM 10-Q

INDEX


     
Page
 
PART I.
FINANCIAL INFORMATION
     
       
Item 1.
Financial Statements
 
3
 
       
Consolidated Balance Sheets as of June 30, 2012 (unaudited)  and September 30, 2011
 
3
 
Unaudited Consolidated Statements of Income for the three and nine months ended June 30, 2012 and 2011
 
4
 
Unaudited Consolidated Statements of Comprehensive Income for the three and nine months ended June 30, 2012 and 2011
 
5
 
Unaudited Consolidated Statements of Cash Flows for the nine months ended June 30, 2012 and 2011
 
6
 
Notes to Unaudited Consolidated Financial Statements
 
7
 
         
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
32
 
         
Item 3.
Quantitative and Qualitative Disclosure About Market Risk
 
36
 
         
Item 4
Controls and Procedures
 
36
 
         
PART II.
OTHER INFORMATION
 
37
 
         
Item 1.
Legal Proceedings
 
37
 
         
Item 1A.
Risk Factors
 
37
 
         
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
 




 
2

 

TECHE HOLDING COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)


     
June 30,
2012
 
September 30,
2011*
 
ASSETS
     
(unaudited)
       
                 
Cash and due from banks
   
$
15,610
 
$
13,541
 
Interest-bearing deposits
     
19,295
   
15,614
 
Securities available-for-sale at fair value
     
21,984
   
25,148
 
Securities held-to-maturity—at amortized cost (estimated fair
value of $75,079 and $82,859)
     
72,861
   
80,598
 
Loans receivable—net of allowance for loan losses of $8,411 and $8,331
     
652,124
   
600,271
 
Accrued interest receivable
     
2,439
   
2,320
 
Investment in Federal Home Loan Bank stock, at cost
     
6,520
   
5,318
 
Real estate owned, net
     
625
   
1,405
 
Prepaid expenses and other assets
     
4,620
   
5,021
 
Goodwill
     
3,647
   
3,647
 
Life insurance contracts
     
14,360
   
13,905
 
Premises and equipment, net
     
29,683
   
26,415
 
                 
TOTAL ASSETS
   
$
843,768
 
$
793,203
 
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
                 
Deposits
   
$
615,464
 
$
598,582
 
Advances from Federal Home Loan Bank
     
139,955
   
108,183
 
Advance payments by borrowers for taxes and insurance
     
2,651
   
2,436
 
Accrued interest payable
     
358
   
319
 
Accounts payable and other liabilities
     
3,660
   
3,696
 
                 
TOTAL LIABILITIES
     
762,088
   
713,216
 
                 
COMMITMENTS AND CONTINGENCIES
               
                 
STOCKHOLDERS’ EQUITY:
               
Preferred stock, 5,000,000 shares authorized, none issued
     
-
   
-
 
Common stock, $.01 par value, 10,000,000 shares authorized; 4,722,114 and
4,688,697 shares issued, 2,025,715 and 2,062,040 outstanding
     
47
   
47
 
Additional paid-in capital
     
54,445
   
53,372
 
Retained earnings
     
81,171
   
78,203
 
Unearned compensation
     
-
   
(65
)
Treasury stock, 2,696,399 and 2,626,657 shares - at cost
     
(54,618
 
(52,058
)
Accumulated other comprehensive loss on held-to-maturity securities
     
(291
 
(353
)
Accumulated other comprehensive income on available for sale securities
     
926
   
841
 
                 
TOTAL STOCKHOLDERS’ EQUITY
     
81,680
   
79,987
 
                 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
   
$
843,768
 
$
793,203
 

See Notes to Unaudited Consolidated Financial Statements.

*  derived from audited financial statements

 
3

 

TECHE HOLDING COMPANY
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)

    
Three Months Ended
   
Nine Months Ended
 
   
June 30,
   
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
       
INTEREST INCOME
                       
Interest and fees on loans
  $ 9,124     $ 9,083     $ 27,381     $ 27,550  
Interest and dividends on investments
    454       532       1,464       1,503  
Other interest income
    147       143       453       444  
TOTAL INTEREST INCOME
    9,725       9,758       29,298       29,497  
                                 
INTEREST EXPENSE:
                               
Deposits
    981       1,265       3,209       4,122  
Advances from Federal Home Loan Bank
    1,012       920       2,976       2,968  
TOTAL INTEREST EXPENSE
    1,993       2,185       6,185       7,090  
NET INTEREST INCOME
    7,732       7,573       23,113       22,407  
                                 
PROVISION FOR LOAN LOSSES
    510       1,000       1,410       3,150  
                                 
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES
    7,222       6,573       21,703       19,257  
                                 
NON INTEREST INCOME:
                               
Total other-than temporary impairment losses
    (35 )     (87 )     (35 )     (87 )
Portion of impairment losses recognized in or
reclassified from other comprehensive loss
    (93 )     28       (93 )     28  
Net impairment losses recognized in earnings
    (128 )     (59 )     (128 )     (59 )
Service charges and other
    3,509       3,749       10,725       11,013  
Gain on sale of premises and equipment
    -       -       -       103  
Gain on equity securities
    -       6       -       15  
Gain on sale of loans
    71       4       71       22  
Other income
    199       189       633       627  
TOTAL NON INTEREST INCOME
    3,651       3,889       11,301       11,721  
                                 
NON INTEREST EXPENSE:
                               
Compensation and employee benefits
    4,576       4,325       13,475       12,518  
Occupancy expense
    1,660       1,555       4,826       4,473  
Marketing and professional
    740       664       2,397       2,198  
FDIC premiums and assessment
    145       225       424       674  
Other operating expenses
    1,166       1,007       4,057       3,414  
TOTAL NON INTEREST EXPENSE
    8,287       7,776       25,179       23,277  
                                 
INCOME BEFORE INCOME TAXES
    2,586       2,686       7,825       7,701  
INCOME TAXES
    854       896       2,613       2,574  
NET INCOME
  $ 1,732     $ 1,790     $ 5,212     $ 5,127  
BASIC EARNINGS PER COMMON SHARE
  $ 0.84     $ 0.86     $ 2.53     $ 2.48  
DILUTED EARNINGS PER COMMON SHARE
  $ 0.83     $ 0.85     $ 2.50     $ 2.45  
See Notes to Unaudited Consolidated Financial Statements.


 
4

 


TECHE HOLDING COMPANY
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)


   
Three Months
   
Nine Months
 
   
Ended June 30,
   
Ended June 30,
 
   
2012
   
2011
   
2012
   
2011
 
                                 
Net income
 
$
1,732
   
$
1,790
   
$
5,212
   
$
5,127
 
Reclassification of realized losses (gains), net of  tax
   
-
     
(4
   
-
     
(10
                                 
Noncredit portion of OTTI losses on held-to-maturity securities, net of tax
   
-
     
(18
   
-
     
(18
                                 
Previously recorded non-credit OTTI loss reclassed and recognized as
a loss in the statement of income
   
62
     
-
     
62
     
-
 
                                 
Unrealized gains (losses), net of tax
   
100
     
150
     
85
     
177
 
                                 
Comprehensive income
 
$
1,894
   
$
1,918
   
$
5,359
   
$
5,276
 


See Notes to Unaudited Consolidated Financial Statements.


 
5

 
TECHE HOLDING COMPANY
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
   
For the Nine Months
Ended June 30,
 
   
2012
   
2011
 
CASH FLOWS FROM OPERATING ACTIVITIES
               
  Net income
 
$
5,212
   
$
5,127
 
  Adjustments to reconcile net income to net cash provided by operating activities:
               
   Accretion of discount on investments and mortgage-backed securities, net
   
(81)
     
(308
)
   Impairment of debt securities
   
128
     
59
 
   Provision for loan losses
   
1,410
     
3,150
 
   Provision for real estate owned
   
412
     
2
 
   Gain on sale of land
   
-
     
(103
)
   (Gain) Loss on sale of OREO
   
82
     
(62
)
   Gain on securities
   
-
     
(15
)
   Gain on sale of loans
   
(71
   
(22
)
   Depreciation
   
1,177
     
1,077
 
   Excess tax benefits from share-based payment arrangements
   
(29
   
(29
)
   Stock-based compensation
   
468
     
408
 
   Change in accounts payable and other liabilities
   
(36
   
(410
)
   Change in life insurance contracts
   
(455
   
(444
)
   Change in prepaid expenses and other assets
   
401
     
(182
)
   Change in accrued interest payable
   
39
     
(104
)
   Other– net
   
8
     
262
 
Net cash provided by operating activities
   
8,665
     
8,406
 
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
  Purchase of available for sale securities
   
(482
   
(13,876
)
  Purchase of securities held to maturity
   
(6,819
   
(19,729
)
  Proceeds from sale of equity securities
   
-
     
71
 
  Principal repayments and proceeds from sale of mortgage-backed securities available for sale
   
3,649
     
2,839
 
  Principal repayments of securities held to maturity
   
14,505
     
4,663
 
  Net loan (originations) repayments
   
(56,580
   
3,840
 
  Purchase of loans
   
(1,380
   
-
 
  Proceeds from sale of loan participations
   
3,913
     
1,969
 
  (Purchase) redemption of FHLB stock
   
(1,202
   
1,511
 
  Proceeds from sale of land
   
-
     
499
 
  Proceeds from sale of OREO
   
1,141
     
990
 
  Purchase of premises and equipment
   
(4,445
   
(964
)
  Net cash used in investing activities
   
(47,700
   
(18,187
)
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
  Repayment of  ESOP loan
   
65
     
196
 
  Net increase in deposits
   
16,882
     
45,968
 
  Net (decrease) increase in FHLB advances
   
31,772
     
(20,484
)
  Net (decrease) increase in advance payments by borrowers for taxes and insurance
   
215
     
(559
)
  Proceeds from exercise of stock options
   
626
     
77
 
  Dividends paid
   
(2,244
   
(2,226
)
  Excess tax benefits from share-based payment arrangements
   
29
     
29
 
  Purchase of common stock for treasury
   
(2,560
   
(673
)
  Net cash provided by financing activities
   
44,785
     
22,328
 
                 
NET INCREASE  IN CASH AND CASH EQUIVALENTS
   
5,750
     
12,547
 
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
   
29,155
     
40,655
 
CASH AND CASH EQUIVALENTS, END OF PERIOD
 
$
34,905
   
$
53,202
 
                 
Supplemental schedule of noncash investing activities:
               
  Transfer from loans to real estate owned
   
1,262
     
2,713
 
  Loans originated to finance sale of real estate owned
   
407
     
268
 

See Notes to Unaudited Consolidated Financial Statements.
 
6

 

TECHE HOLDING COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - PRINCIPLES OF CONSOLIDATION

The consolidated financial statements as of June 30, 2012 and September 30, 2011 and for the three and nine months ended June 30, 2012 and 2011, include the accounts of Teche Holding Company (the “Company”) and its subsidiary, Teche Federal Bank (the “Bank”). The Company’s business is conducted principally through the Bank. All significant inter-company accounts and transactions have been eliminated in consolidation.

NOTE 2 - BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include all information necessary for a complete presentation of consolidated financial condition, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America. However, all adjustments, consisting of normal recurring accruals, which, in the opinion of management, are necessary for a fair presentation of the consolidated financial statements, have been included. The results of operations for the three and nine months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the entire fiscal year or any other period. These financial statements should be read in conjunction with the audited consolidated financial statements and the accompanying notes thereto included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2011.  Certain items related to the financial statements dated September 30, 2011 were reclassified to conform to the June 30, 2012 financial statements.  The reclassification had no impact on net income or shareholders’ equity.

NOTE 3 - INCOME PER SHARE

Basic and diluted net income per share is computed based on the weighted average number of shares outstanding during each period. Diluted net income per share reflects the potential dilution that could occur if stock options were exercised, resulting in the issuance of common stock that then shared in the net income of the Company.

Following is a summary of the information used in the computation of basic and diluted income per common share for the three and nine months ended June 30, 2012 and 2011 (in thousands).


  
Three Months Ended
 
Nine Months Ended
 
June 30,
 
June 30,
 
2012
 
2011
 
2012
 
2011
Weighted average number of common shares outstanding -
used in computation of basic income per common share
 
2,055
   
2,073
   
2,060
   
2,071
Effect of dilutive securities:
                     
Common stock equivalents
 
23
   
23
   
21
   
23
Weighted average number of common shares outstanding
plus effect of dilutive securities - used in computation
of diluted net income per common share
 
2,078
   
2,096
   
2,081
   
2,094


 
7

 

For the three and nine months ended June 30, 2012 and 2011, net income for determining diluted earnings per share was equivalent to net income. Options to purchase shares that have been excluded from the determination of diluted earnings per share because they are antidilutive (the exercise price is higher than the current market price) amounted to approximately 47,200 and 149,000 for the three and nine months ended June 30, 2012 and 2011, respectively.

NOTE 4 - NEW ACCOUNTING PRONOUNCEMENTS
 
ASU –Accounting Standards Update (2011-04),  Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.  ASU 2011-04, amends Topic 820, Fair Value Measurement and Disclosures, to converge the fair value measurement guidance in U.S. generally accepted accounting principles and International Financial Reporting Standards.  ASU 2011-04 clarified the application of existing fair value measurement requirements, changed certain principles in Topic 820 and requires additional fair value disclosures. ASU 2011-04 was effective for annual and interim periods beginning after December 15, 2011. The adoption of this ASU did not have a significant impact to the Company’s financial statements and the updated disclosures are included in this Form 10-Q.

ASU-Accounting Standards Update (2011-05), Comprehensive Income (Topic 220): Presentation of Comprehensive Income. The amendments in this Update allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This Update eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. The amendments in this Update do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendments in this Update should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. For nonpublic entities, the amendments are effective for fiscal years ending after December 15, 2012, and interim and annual periods thereafter.  The amendments do not require any transition disclosures.  The adoption of this standard did not require additional disclosure.

ASU –Accounting Standards Update (2011-12), Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassification of Items Out of Accumulated Other Comprehensive in Accounting Standards Update No. 2011-05.  This amendment effectively defers only those changes that related to the presentation of reclassification adjustments out of accumulated other comprehensive income and will be temporary to allow the Board time to re-deliberate the presentation requirements for reclassifications out of accumulated other comprehensive income for annual and interim financial statements for public, private, and non-profit entities.


 
8

 

NOTE 5 – FAIR VALUE MEASUREMENTS
 
The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Available for sale securities are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets or liabilities on a nonrecurring basis, such as securities held-to-maturity, loans held for sale, loans held for investment and certain other assets. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting, other than temporary impairment accounting or impairments of individual assets.
 
This is a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value as follows:
 
Level 1   - Observable inputs such as quoted prices in active markets;
 
Level 2   - Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
 
Level 3   - Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
 
The Company evaluates fair value measurement inputs on an ongoing basis in order to determine if there is a change of sufficient significance to warrant a transfer between levels.  For example, changes in market activity or the addition of new unobservable inputs could, in the Company’s judgment, cause a transfer to either a higher or lower level.  For the three and nine months ended June 30, 2012, there were no transfers between levels.
 
Following is a description of valuation methodologies used for assets recorded at fair value.
 
Investment Securities
 
Securities available for sale are valued at quoted market prices where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable securities. These are inputs used by a third-party pricing service used by the Company.  Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities. Securities classified as Level 3 include asset-backed securities in less liquid markets.  Securities held to maturity are valued using discounted cash flow models that use assumptions about prepayment speeds, coupon default rates, discount rates and timing and other assumptions that may affect the amounts of cash flows.  The Company periodically updates its understanding of the inputs used and compares valuations to an additional third party source.
 
Loans
 
The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with ASC 310, “Accounting by Creditors for Impairment of a Loan.” The fair value of impaired loans is estimated using one of several methods, including collateral value if the impaired loan is collateral-dependent, which is typically derived from appraisals that take into consideration prices in observed transactions involving similar assets and similar locations.  Each appraisal is updated on an annual basis, either through a new appraisal or through an internal review process.  Other methods used to determine fair value are enterprise value, liquidation value and discounted cash flows.  The fair value of impaired loans that are not collateral dependent would require a measure using a discounted cash flow analysis considered to be a Level 3 input.  Fair value is re-assessed at least quarterly, or more frequently when circumstances occur that indicate a change in fair value.  Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At June 30, 2012, substantially all of the impaired loans were evaluated based on the fair value of the collateral less estimated costs to sell.  Impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy.  When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.
 
 
9

 
Fair value is also used on a nonrecurring basis for nonfinancial assets and liabilities such as foreclosed assets, and other real estate owned measured at fair value for purposes of assessing impairment.  A description of the valuation methodologies used for nonfinancial assets measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.
 
Other Real Estate Owned
 
Other Real Estate Owned (“OREO”), consisting of properties obtained through foreclosure or in satisfaction of loans, is reported at the lower of cost or fair value, determined on the basis of current appraisal, comparable sales, and other estimates of value obtained principally from independent sources, adjusted for estimated selling costs (Level 3).   The fair value of OREO is based on a property’s appraised value adjusted at management’s discretion to reflect a further decline in the fair value of properties since the time the appraisal analysis was performed.  The Company has experienced that appraisals quickly become outdated due to the volatile real-estate environment.  The inputs used to determine the fair value of OREO fall within Level 3.  At the time of foreclosure, any excess of the loan balance over the fair value of the real estate held as collateral is treated as a charge against the allowance for loan losses. Gains or losses on sale and generally any subsequent adjustments to the value are recorded as a component of OREO expense.
 

 
10

 
 
The following tables present the fair value measurements of financial assets measured at fair value on a recurring and nonrecurring basis as of June 30, 2012 and September 30, 2011, respectively, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value.
 
          
Fair Value Measurements using:
 
   
Fair Value
At
June 30, 2012
   
Quoted prices in active markets for identical assets (Level 1)
   
Significant other observable inputs
(Level 2)
   
Significant unobservable inputs (Level 3)
 
(In thousands)
                       
Assets valued on a recurring basis:
                       
Mortgage-backed securities:
                       
  Government National Mortgage Assoc.
  $ 1,729     $ -     $ 1,729     $ -  
  Federal Home Loan Mortgage Corp.
    2,427       -       2,427       -  
  Federal National Mortgage Assoc.
    14,839       -       14,839       -  
Total  mortgage-backed securities
  $ 18,995     $ -     $ 18,995     $ -  
                                 
CMOs:
                               
 Government National Mortgage Assoc.
  $ 1,881     $ -     $ 1,881     $ -  
Other equity securities
    1,108       1,108       -       -  
Total recurring
  $ 21,984     $ 1,108     $ 20,876     $ -  
                                 
Assets valued on a non-recurring basis:
                               
CMOs:  Private label
  $ 356     $ -     $ 356     $ -  
Impaired loans
    4,388       -       -       4,388  
Other real estate owned
    625       -       -       625  
Total non-recurring
  $ 5,369     $ -     $ 356     $ 5,013  
                                 
                                 

 
11

 


          
Fair Value Measurements using:
 
   
Fair Value
At
September 30, 2011
   
Quoted prices in active markets for identical assets (Level 1)
   
Significant other observable inputs
(Level 2)
   
Significant unobservable inputs (Level 3)
 
(In thousands)
                       
Assets valued on a recurring basis:
                       
Mortgage-backed securities:
                       
  Government National Mortgage Assoc.
  $ 1,833     $ -     $ 1,833     $ -  
  Federal Home Loan Mortgage Corp.
    3,434       -       3,434       -  
  Federal National Mortgage Assoc.
    17,179       -       17,179       -  
Total  mortgage-backed securities
  $ 22,446     $ -     $ 22,446     $ -  
                                 
CMOs:
                               
  Government National Mortgage Assoc.
  $ 2,183     $ -     $ 2,183     $ -  
  Other equity securities
    519       519       -       -  
Total recurring
  $ 25,148     $ 519     $ 24,629     $ -  
 
Assets valued on a non-recurring basis:
                               
CMOs:  Private Label
  $ 96     $ -     $ 96     $ -  
Mortgage-backed securities:  Private Label
    796       -       796       -  
Impaired loans
    6,821       -       -       6,821  
Other real estate owned
    1,405       -       -       1,405  
Total non-recurring
  $ 9,118     $ -     $ 892     $ 8,226  

 

    
Quantitative Information about Level 3 Fair Value
Measurements
   
Fair Value
 
Valuation
 
Unobservable
 
Range (Weighted
   
Estimate
 
Techniques
 
Input
 
Average)
(In thousands)
               
June 30, 2012:
               
                 
Impaired Loans
  $ 4,388    Property appraisals   Management discount for property type and recent market volatility     5%-30% discount
                   
Other real estate owned
  $ 625  
Property appraisals
 
Management discount for property type and recent market volatility
 
10%-68% discount


 
12

 

The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation.  Fair value is best determined based upon quoted market prices.  However, in many instances, there are no quoted market prices for the Company’s various financial instruments.  In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques.  Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows.  Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.  ASC 825 excludes certain financial instruments and all non-financial instruments from its disclosure requirements.  Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments:

Cash - For those short-term instruments, the carrying amount is a reasonable estimate of fair value.

Investment Securities – See the discussion in the beginning of Note 5 on the valuation of the fair value of investment securities.  Investment securities’ fair value equals quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.

Loans - See the discussion in the beginning of Note 5 on the valuation of fair value of impaired loans.  The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers for the same remaining maturities.  No adjustment has been made for illiquidity in the market for loans as there is no active market for many of the Company’s loans on which to reasonably base this estimate.

Federal Home Loan Bank Stock - Federal Home Loan Bank (FHLB) stock is recorded at cost and is periodically reviewed for impairment. No ready market exists for the FHLB stock.  It has no quoted market value and is carried at cost.  Cost approximates fair market value based upon the redemption requirements of the FHLB, and this investment is not considered impaired at June 30, 2012.  The FHLB of Dallas is still redeeming stock.

Bank Owned Life Insurance- The carrying amounts of bank owned life insurance contracts approximate fair value.

Accrued Interest - The carrying amounts of accrued interest receivable and payable approximate fair value.

Deposits - The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturities certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities.

Advances from Federal Home Loan Bank - The fair value of advances is estimated using rates currently available for advances of similar remaining maturities.

Commitments - The fair value of commitments to extend credit was not significant.

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Company has utilized Level 3 inputs to determine fair value:


 
13

 

    The estimated fair values of the Company’s financial instruments are as follows at June 30, 2012 and September 30, 2011:
 
 

   
June 30, 2012
       
(In thousands)
 
 
   
 
   
Fair Value Measurements at June 30, 2012
 
 
 
   
 
 
     Carrying     Estimated    
Quoted Prices in Active Markets for Identical Assets
   
Significant Other Observable Inputs
   
Significant Unobservable Inputs
 
Financial assets:
   Amount     Fair Value    
(Level 1)
   
(Level 2)
   
(Level 3)
 
  Cash and cash equivalents
  $ 34,905     $ 34,905     $ 34,905     $ -     $ -  
  Investment securities
    94,845       97,063       1,108       95,955       -  
  FHLB stock
    6,520       6,520       -       6,520       -  
  Accrued interest receivable
    2,439       2,439       -       2,439       -  
  Life Insurance contracts
    14,360       14,360       -       14,360       -  
  Loans receivable, net
    652,124       651,593       -       -       651,593  
                                         
Financial liabilities:
                                       
  Deposits
    615,564       619,281       93,896       525,385       -  
  Advance from Federal Home Loan Bank
    139,955       149,963       -       149,963       -  
  Accrued interest payable
    358       358       -       358       -  
                                         

 

   
September 30, 2011
 
   
Carrying
   
Estimated
 
   
Amount
   
Fair Value
 
(In thousands)
           
Financial assets:
           
  Cash and cash equivalents
  $ 29,155     $ 29,155  
  Investment securities
    105,746       108,007  
  FHLB stock
    5,318       5,318  
  Accrued interest receivable
    2,320       2,320  
  Life Insurance contracts
    13,905       13,905  
  Loans receivable, net
    600,271       629,541  
                 
Financial liabilities:
               
  Deposits
  $ 598,582     $ 603,251  
  Advance from Federal Home Loan Bank
    108,183       116,879  
  Accrued interest payable
    319       319  


 
14

 

NOTE 6 – SECURITIES

The amortized cost and estimated fair values of securities available-for-sale are as follows:

   
June 30, 2012
 
         
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Estimated
Fair
Value
 
   
Amortized
Cost
 
(In thousands)
                       
Mortgage-backed securities:
                       
  Government National Mortgage Assoc.
  $ 1,675     $ 54     $ -     $ 1,729  
  Federal Home Loan Mortgage Corp.
    2,340       87       -       2,427  
  Federal National Mortgage Assoc.
    13,976       863       -       14,839  
      17,991       1,004       -       18,995  
                                 
CMOs:
                               
  Government National Mortgage Assoc.
    1,701       180       -       1,881  
Other equity securities
    868       244       (4 )     1,108  
Total
  $ 20,560     $ 1,428     $ (4 )   $ 21,984  


    
September 30, 2011
 
         
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Estimated
Fair
Value
 
   
Amortized
Cost
 
(In thousands)
                       
Mortgage-backed securities:
                       
  Government National Mortgage Assoc.
  $ 1,772     $ 61     $ -     $ 1,833  
  Federal Home Loan Mortgage Corp.
    3,343       91       -       3,434  
  Federal National Mortgage Assoc.
    16,367       812       -       17,179  
      21,482       964       -       22,446  
                                 
CMOs:
                               
  Government National Mortgage Assoc.
    1,987       196       -       2,183  
Other equity securities
    386       136       (3 )     519  
Total
  $ 23,855     $ 1,296     $ (3 )   $ 25,148  



 
15

 


The amortized cost and estimated fair values of securities held-to-maturity are as follows:

   
June 30, 2012
 
         
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Estimated
Fair
Value
 
   
Amortized
Cost
 
(In thousands)
                       
Investment securities:
                       
  Time deposits other banks
  $ 46,933     $ -     $ -     $ 46,933  
Mortgage-backed securities:
                               
  Federal National Mortgage Assoc.
    19,288       1,130       (1 )     20,417  
  Federal Home Loan Mortgage Corp.
    4,248       338       -       4,586  
  Private Label
    1,173       380       (58 )     1,495  
CMOs:
                               
  Federal Home Loan Mortgage Corp.
    82       2       -       84  
  Federal National Mortgage Assoc.
    905       71       -       976  
  Private Label
    232       356       -       588  
Total
  $ 72,861     $ 2,277     $ (59 )   $ 75,079  


   
September 30, 2011
 
         
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Estimated
Fair
Value
 
   
Amortized
Cost
 
(In thousands)
                       
Investment securities:
                       
  Time deposits other banks
  $ 47,975     $ -     $ -     $ 47,975  
Mortgage-backed securities:
                               
  Federal National Mortgage Assoc.
    24,200       1,194       (1 )     25,393  
  Federal Home Loan Mortgage Corp.
    5,530       451       -       5,981  
  Private Label
    1,377       367       (102 )     1,642  
CMOs:
                               
  Federal Home Loan Mortgage Corp.
    129       1       -       130  
  Federal National Mortgage Assoc.
    1,067       52       -       1,119  
  Private Label
    320       300       (1 )     619  
    $ 80,598     $ 2,365     $ (104 )   $ 82,859  
 
 
Details concerning available-for-sale securities with unrealized losses as of June 30, 2012 are as follows:

 
Securities with losses
 
Securities with losses
         
 
under 12 months
 
over 12 months
 
Total
 
(In thousands)
Fair
value
 
Unrealized
 
Fair 
value
 
Unrealized
 
Fair 
value
 
Unrealized
 
Available-for-sale
                                   
Marketable equity securities
  $ 83     $ (2 )   $ 5     $ (2 )   $ 88     $ (4 )
Total
  $ 83     $ (2 )   $ 5     $ (2 )   $ 88     $ (4 )
                                                 


 
16

 
Details concerning held-to-maturity securities with unrealized losses as of June 30, 2012 are as follows:

    
Securities with losses
   
Securities with losses
             
   
under 12 months
   
over 12 months
   
Total
 
(In thousands)
 
Fair
value
   
Unrealized
   
Fair
value
   
Unrealized
   
Fair
value
   
Unrealized
 
Held-to-maturity
                                   
Investment  securities:
                                   
Mortgage-backed securities:
                                   
  Private Label
  $ 100     $ (4 )   $ 293     $ (54 )   $ 393     $ (58 )
  Federal National Mortgage Association
    117       (1 )     -       -       117       (1 )
Total
  $ 217     $ (5 )   $ 293     $ (54 )   $ 510     $ (59 )

Details concerning available-for-sale securities with unrealized losses as of September 30, 2011 are as follows:

 
Securities with losses
 
Securities with losses
         
 
under 12 months
 
Over 12 months
 
Total
 
     
Gross
     
Gross
     
Gross
 
 
Fair
 
unrealized
 
Fair
 
unrealized
 
Fair
 
unrealized
 
(In thousands)
value
 
Losses
 
value
 
losses
 
value
 
losses
 
Available-for-Sale
                                   
Marketable equity securities
  $ 7     $ (3 )   $ -     $ -     $ 7     $ (3 )
    $ 7     $ (3 )   $ -     $ -     $ 7     $ (3 )


Details concerning held-to-maturity securities with unrealized losses as of September 30, 2011 are as follows:

  
Securities with losses
 
Securities with losses
         
 
under 12 months
 
Over 12 months
 
Total
 
     
Gross
     
Gross
     
Gross
 
 
Fair
 
unrealized
 
Fair
 
unrealized
 
Fair
 
unrealized
 
(In thousands)
value
 
losses
 
value
 
losses
 
value
 
losses
 
Held-to-Maturity
                                   
Mortgage backed securities
                                   
Private Label
  $ 231     $ (13 )   $ 499     $ (89 )   $ 730     $ (102 )
Federal National Mortgage Association
    199       (1 )     -       -       199       (1 )
CMOs:
                                               
Private label
    48       (1 )     -       -       48       (1 )
    $ 478     $ (15 )   $ 499     $ (89 )   $ 977     $ (104 )

The Bank had a total of 20 securities classified as held-to-maturity in an unrealized loss position; with total gross unrealized losses of $ 59,000 as of June 30, 2012.

Management of the Company has asserted that they have no intent to sell impaired securities and it is more likely than not that impaired securities will not be required to be sold. These unrealized losses generally result from changes in market interest rates and as a result of the disruption in the existing mortgage securities market due to illiquidity in certain sectors of that market.  The unrealized losses associated with investment securities issued by government sponsored enterprises (GSEs) are caused by changes in interest rates and are not considered credit related since the contractual cash flows of these investments are guaranteed by these agencies.  GSEs have access to additional capital and liquidity resources from the U.S. Treasury, which indicates that they will be able to honor their guarantees, related to the contractual cash flows of the MBS that they have issued.  In the case of securities issued by the Government National Mortgage Association, the securities are fully guaranteed by an agency of  the U.S. Government.

 
17

 
The private label mortgage backed securities and CMOs are not backed by the full faith and credit of the U.S. Government.  For each private label security, the duration of the impairment, credit support and cash flows were assessed to determine whether the security was temporarily or other than temporarily impaired.  Management evaluates the actual mortgage delinquencies, foreclosures, and real estate owned for each security, as well as future expected losses in the underlying mortgage collateral to determine if there is a high probability for expected losses and contractual shortfalls of interest or principal, which could warrant further recognition of impairment.  Based upon such evaluation, it was determined that some securities have been other-than-temporarily impaired and a corresponding charge to earnings for credit related impairment was recognized with the non-credit related impairment recognized in other comprehensive income.  There was $128,000 of realized credit losses in the private label securities portfolio for the three and  nine months ended June 30, 2012.  In the performance of cash flow analysis on private label securities, management determined impaired securities with non-credit losses previously recognized in other comprehensive income had additional credit losses.  Accordingly, management reclassified previous non-credit losses in the amount of $93,000 from other comprehensive income into earnings for the three and nine months ended June 30, 2012.  All private label securities with no other than temporary impairment have been determined to have sufficient credit support and cash flows to recover the amortized cost of the related securities.

The amortized cost and estimated fair value of available-for-sale securities by contractual maturity at June 30, 2012, are shown below.  Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

(In thousands)
 
Amortized
Cost
   
Fair
Value
 
Due within one year
  $ -     $ -  
Due after one year but within five years
    -       -  
Due after five years but within ten years
    -       -  
Due after ten years
    -       -  
Total
    -       -  
                 
Mortgage-backed securities
    19,692       20,876  
Equity securities
    868       1,108  
Total
  $ 20,560     $ 21,984  
 
The amortized cost and estimated fair value of held-to-maturity securities by contractual maturity at June 30, 2012, are shown below.  Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

(In thousands)
 
Amortized
Cost
   
Fair
Value
 
Due within one year
  $ 35,286     $ 35,286  
Due after one year but within five years
    11,647       11,647  
Due after five years  but within ten years
    -       -  
Due after ten years
    -       -  
Total
    46,933       46,933  
                 
Mortgage-backed securities
    25,928       28,146  
Total
  $ 72,861     $ 75,079  

There were no impairment losses in the equity securities portfolio for the nine months ended June 30, 2012. Management will continue to monitor the equity securities and make an impairment adjustment if deemed necessary based upon the prospects for recovery and the duration and severity of the unrealized losses.
 
18

 


The following table presents a roll-forward of the amount of credit losses on the Bank’s investment securities recognized in earnings for the nine months ended June 30, 2012 (in thousands).

Beginning balance of credit losses
 
$
1,563
 
Amount related to credit losses for securities for which an other-than-temporary
impairment was not previously recognized in earnings
   
118
 
Amount related to credit losses for securities for which an other-than-temporary
impairment was recognized in earnings
   
10
 
Reduction for realized losses
   
(134
)
Ending balance of cumulative credit losses recognized in earnings
 
$
1,557
 

The assumptions used to estimate credit related losses are based on estimates obtained from third parties and cash flow projections.  The assumptions used to determine the cash flows were based on estimates of loss severity, credit default, and prepayment speeds developed from third party servicers’ reports.


NOTE 7-LOANS

Loans Receivable

Loans receivable are summarized as follows:

   
Jun 30,‘12
   
%Total
   
Sept 30, ‘11
   
%Total
 
(in 000’s)
                       
Commercial real estate loans
  $ 120,988       18.2 %   $ 111,558       18.2 %
Commercial non-real estate loans
    31,564       4.8 %     27,403       4.5 %
Commercial-construction loans
    11,732       1.8 %     9,473       1.6 %
Commercial-land
    13,374       2.0 %     15,721       2.6 %
Residential-construction loans
    8,288       1.3 %     10,604       1.7 %
Residential-real estate loans
    398,475       60.1 %     356,950       58.5 %
Consumer-Mobile home loans
    36,910       5.6 %     38,285       6.3 %
Consumer-other
    41,144       6.2 %     40,227       6.6 %
Total Loans
    662,475       100.0 %     610,221       100.0 %
Less:
                               
   Allowance for loan losses
    8,411               8,331          
   Deferred loan fees
    1,940               1,619          
Total Net Loans
  $ 652,124             $ 600,271          

Residential real estate loans increased $41.5 million mainly due to originations of 15 year term conforming one-to-four family mortgage loans.  Commercial real estate loans increased $9.4 million mainly due to four new large commercial real estate loans that total $8.9 million at June 30, 2012.  At June 30, 2012 approximately $289.3 million of loans receivable were pledged as collateral securing advances from the FHLB.

At June 30, 2012 the Company was in an asset sensitive position.  Generally, an asset sensitive position will result in enhanced earnings in a rising interest rate environment and declining earnings in a falling interest rate environment because larger volumes of assets than liabilities will reprice.  Conversely, a liability sensitive position will be detrimental to earnings in a rising interest rate environment and will enhance earnings in a falling interest rate environment. In the current operating environment, the Company is biased toward rising market interest rates and the timing of such increases, if any, is unknown. With the increase in the Company’s portfolio of conforming one-to-four family fixed interest rate loans at historically low market interest rates, the future sale of a portion of this portfolio could be a possibility and in keeping with one of the methods used by the Company to manage interest rate risk in the past.  There is no present intent to sell these loans, however.


 
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CREDIT QUALITY OF LOANS AND ALLOWANCE FOR LOAN LOSSES

Changes in the allowance for loan losses were as follows:

   
Three Months
Ended June 30,
   
Nine Months
Ended June 30,
 
(in 000’s)
 
2012
   
2011
   
2012
   
2011
 
Beginning ALLL
  $ 8,450     $ 10,452     $ 8,331     $ 9,256  
Provision for Loan Losses
    510       1,000       1,410       3,150  
Net Charge-offs
    (549 )     (3,329 )     (1,330 )     (4,283 )
Ending ALLL
  $  8,411     $ 8,123     $ 8,411     $ 8,123  

Non-accrual loans at both June 30, 2012 and September 30, 2011 was approximately $10.1 million. The Company had total impaired loans of approximately $9.3 million and $8.7 million at June 30, 2012 and September 30, 2011, respectively.  Specific reserves allocated to impaired loans totaled zero and $548 thousand as of June 30, 2012 and September 30, 2011, respectively.  Impaired loans totaling approximately $9.3 million and $2.6 million had no specific reserves allocated as of June 30, 2012 and September 30, 2011, respectively.

Allowance for Loan Losses and Recorded Investment in Loans as of June 30, 2012 and September 30, 2011 and for the three and nine months ended June 30, 2012 and June 30, 2011.

The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents management’s best estimate of probable losses that have been incurred within the existing portfolio of loans.  The allowance is the amount, in the judgment of management, necessary to reserve for estimated loan losses and risks inherent in the loan portfolio.  The methodology is based on the Bank’s historical loss experience by type of credit and internal risk grade, specific homogeneous risk pools and specific loss allocations, with adjustments for current events and conditions.  The Company’s process for determining the appropriate level of the allowance for loan losses is designed to account for credit deterioration as it occurs.  The provision for loan losses reflects loan quality trends, potential problem loans, and criticized loans and net charge-offs, among other factors.  The provision for loan losses also reflects the totality of actions taken on all loans for a particular period.  In other words, the amount of the provision reflects not only the necessary increases in the allowance for loan losses related to newly identified criticized loans, but it also reflects actions taken related to other loans including, among other things, any necessary increases or decreases in required allowances for specific loans or loan class.


 
20

 


The table below provides an allocation of the allowance for possible loan losses by loan type; however, allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories:

    
Quarter Ended June 30, 2012
 
   
Real Estate
                         
(In thousands)
 
Commercial-
real estate
   
Commercial-construction
   
Commercial-
Land
   
Residential-construction
   
Residential-
real estate
   
Commercial-
non real
estate
   
Consumer-
Mobile
Homes
   
Consumer-
Other