XNAS:LSBK Lake Shore Bancorp Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
 
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                                                                                     
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission file number:   000-51821                                                                           
 
LAKE SHORE BANCORP, INC.
(Exact name of registrant as specified in its charter)
                                                                                                                                         
United States
 
20-4729288
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)
     
31 East Fourth Street, Dunkirk, New York
 
14048
(Address of principal executive offices)
 
(Zip code)
 
(716) 366-4070
(Registrant’s telephone number, including area code)
 
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, and (2) has been subject to such filing requirements for the past 90 days.
Yes x     No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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 o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition 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 file 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
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date:
 
Common stock ($0.01 par value) 5,939,132 shares outstanding as of May 1, 2012.
 
 
 

 
 
TABLE OF CONTENTS
 
ITEM
 
PAGE
       
1  
 
2
 
3
 
4
 
5
 
6
  7
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
32
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
45
CONTROLS AND PROCEDURES
45
     
       
RISK FACTORS
46
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
46
EXHIBITS
47
       
48
 
 
1

 
 
 
LAKE SHORE BANCORP, INC. and SUBSIDIARY
 
   
March 31,
2012
   
December 31,
2011
 
     (Unaudited)        
   
(Dollars in thousands, except per share data)
 
 
Assets
           
             
Cash and due from banks
  $ 7,226     $ 7,031  
Interest earning deposits
    7,019       5,402  
Federal funds sold
    15,418       11,271  
                 
Cash and Cash Equivalents
    29,663       23,704  
                 
Securities available for sale
    168,075       164,165  
Federal Home Loan Bank stock, at cost
    2,143       2,219  
Loans receivable, net of allowance for loan losses 2012 $1,325; 2011 $1,366
    270,373       275,068  
Premises and equipment, net
    8,550       8,530  
Accrued interest receivable
    1,989       1,919  
Bank owned life insurance
    11,435       11,376  
Other assets
    1,911       1,616  
                 
Total Assets
  $ 494,139     $ 488,597  
                 
Liabilities and Stockholders’ Equity
               
                 
Liabilities
               
Deposits:
               
Interest bearing
  $ 357,200     $ 352,369  
Non-interest bearing
    30,782       27,429  
                 
Total Deposits
    387,982       379,798  
                 
Short-term borrowings
    13,070       6,910  
Long-term debt
    19,370       27,230  
Advances from borrowers for taxes and insurance
    2,196       3,148  
Other liabilities
    7,183       7,564  
                 
Total Liabilities
    429,801       424,650  
                 
Commitments and Contingencies
    -       -  
                 
Stockholders’ Equity
               
Common stock, $0.01 par value per share, 25,000,000 shares authorized; 6,612,500 shares issued and 5,939,132 shares outstanding at March 31, 2012 and December 31, 2011
    66       66  
Additional paid-in capital
    27,982       27,987  
Treasury stock, at cost (673,368 shares at March 31, 2012 and December 31, 2011)
    (6,260 )     (6,260 )
Unearned shares held by ESOP
    (2,025 )     (2,046 )
Unearned shares held by RRP
    (593 )     (606 )
Retained earnings
    40,630       39,770  
Accumulated other comprehensive income
    4,538       5,036  
                 
Total Stockholders’ Equity
    64,338       63,947  
                 
Total Liabilities and Stockholders’ Equity
  $ 494,139     $ 488,597  
 
See notes to consolidated financial statements.
 
 
2

 
 
LAKE SHORE BANCORP, INC. and SUBSIDIARY
 
   
Three Months Ended March 31,
 
   
2012
   
2011
 
   
(Unaudited)
(Dollars in thousands except per
share data)
 
Interest Income
           
Loans, including fees
  $ 3,597     $ 3,505  
Investment securities, taxable
    1,010       1,144  
Investment securities, tax-exempt
    469       467  
Other
    4       14  
Total Interest Income
    5,080       5,130  
Interest Expense
               
Deposits
    1,081       1,212  
Short-term borrowings
    10       7  
Long-term debt
    147       256  
Other
    27       28  
Total Interest Expense
    1,265       1,503  
                 
Net Interest Income
    3,815       3,627  
                 
(Credit) Provision for loan losses
    (35 )     20  
                 
Net Interest Income after (Credit) Provision for Loan Losses
    3,850       3,607  
                 
Non-interest income
               
Service charges and fees
    419       421  
Earnings on bank owned life insurance
    59       63  
Recovery on previously impaired investment securities
    -       57  
Other
    43       39  
Total Non-Interest Income
    521       580  
                 
Non-interest expenses
               
                 
Salaries and employee benefits
    1,537       1,547  
Occupancy and equipment
    442       461  
Professional services
    316       273  
Advertising
    172       123  
Data processing
    152       139  
FDIC Insurance
    66       122  
Postage and Supplies
    61       75  
Other
    321       262  
Total Non-Interest Expenses
    3,067       3,002  
                 
Income before Income Taxes
    1,304       1,185  
                 
Income tax expense
    297       235  
                 
Net Income
  $ 1,007     $ 950  
                 
Basic and diluted earnings per common share
  $ 0.18     $ 0.17  
Dividends declared per share
  $ 0.07     $ 0.07  
 
See notes to consolidated financial statements.
 
 
3

 
 
LAKE SHORE BANCORP INC. AND SUBSIDIARY
 
   
Three Months Ended March 31,
 
   
2012
   
2011
 
   
(Unaudited)
 (Dollars in thousands)
 
             
Net Income
  $ 1,007     $ 950  
Other Comprehensive Income, net of tax:
               
Unrealized holding gains (losses) on securities available for sale
    (498 )     784  
Reclassification adjustment for recovery on previously impaired securities
    -       (35 )
                 
Total Other Comprehensive (Loss) Income
    (498 )     749  
                 
                 
Total Comprehensive Income
  $ 509     $ 1,699  
 
See notes to consolidated financial statements.
 
 
4

 
 
LAKE SHORE BANCORP, INC. and SUBSIDIARY
Three Months Ended March 31, 2012 and 2011 (unaudited)
 
   
Common Stock
   
Additional Paid-in Capital
   
Treasury Stock
   
Unearned Shares Held by ESOP
   
Unearned Shares Held by RRP
   
Retained Earnings
   
Accumulated Other Comprehensive Income (Loss)
   
Total
 
   
(Dollars in thousands, except share and per share data)
 
Balance – January 1, 2011
  $ 66     $ 27,920     $ (6,091 )   $ (2,132 )   $ (757 )   $ 36,737     $ (533 )   $ 55,210  
                                                                 
Net income
    -       -       -       -       -       950       -       950  
Other comprehensive income, net of tax
    -       -       -       -       -       -       749       749  
ESOP shares earned (1,984 shares)
    -       (1 )     -       22       -       -       -       21  
Stock based compensation
    -       36       -       -       -       -       -       36  
RRP shares earned (4,251 shares)
    -       (11 )     -       -       57       -       -       46  
Purchase of treasury stock, at cost (17,950 shares)
    -       -       (169 )     -       -       -       -       (169 )
Cash dividends declared ($0.07 per share)
    -       -       -       -       -       (148 )     -       (148 )
Balance – March 31, 2011
  $ 66     $ 27,944     $ (6,260 )   $ (2,110 )   $ (700 )   $ 37,539     $ 216     $ 56,695  
                                                                 
Balance – January 1, 2012
  $ 66     $ 27,987     $ (6,260 )   $ (2,046 )   $ (606 )   $ 39,770     $ 5,036     $ 63,947  
Net income
    -       -       -       -       -       1,007       -       1,007  
Other comprehensive loss, net of tax
    -       -       -       -       -       -       (498 )     (498 )
ESOP shares earned (1,984 shares)
    -       (2 )     -       21       -       -       -       19  
Stock based compensation
    -       2       -       -       -       -       -       2  
RRP shares earned (978 shares)
    -       (5 )     -       -       13       -       -       8  
Cash dividends declared ($0.07 per share)
    -       -       -       -       -       (147 )     -       (147 )
Balance – March 31, 2012
  $ 66     $ 27,982     $ (6,260 )   $ (2,025 )   $ (593 )   $ 40,630     $ 4,538     $ 64,338  
 
See notes to consolidated financial statements.
 
 
5

 
 
LAKE SHORE BANCORP, INC. and SUBSIDIARY
 
    Three Months Ended
March 31,
 
   
2012
   
2011
 
    (Unaudited)
(Dollars in thousands)
 
Cash Flows from Operating Activities
           
Net Income
  $ 1,007     $ 950  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Net amortization of investment securities
    71       17  
Amortization of deferred loan costs
    143       126  
(Credit) Provision for loan losses
    (35 )     20  
Recovery on previously impaired available for sale securities
    -       (57 )
Originations of loans held for sale
    (156 )     -  
Proceeds from sales of loans held for sale
    156       -  
Depreciation and amortization
    160       166  
Increase in bank owned life insurance, net
    (59 )     (63 )
ESOP shares committed to be released
    19       21  
Stock based compensation expense
    10       82  
Increase in accrued interest receivable
    (70 )     (314 )
Decrease in other assets
    100       954  
Decrease in other liabilities
    (67 )     (261 )
                 
Net Cash Provided by Operating Activities
    1,279       1,641  
                 
Cash Flows from Investing Activities
               
Activity in available for sale securities:
               
Maturities, prepayments and calls
    7,531       6,329  
Purchases
    (12,324 )     (10,490 )
Redemptions of Federal Home Loan Bank Stock
    76       4  
Loan origination and principal collections, net
    4,192       (3,298 )
Additions to premises and equipment
    (180 )     (88 )
                 
    Net Cash Used in Investing Activities
    (705 )     (7,543 )
                 
Cash Flows from Financing Activities
               
Net increase in deposits
    8,184       979  
Net decrease in advances from borrowers for taxes and insurance
    (952 )     (927 )
Net increase in short-term borrowings
    6,160       3,800  
Repayment of long-term debt
    (7,860 )     (3,890 )
Purchase of Treasury Stock
    -       (169 )
Cash dividends paid
    (147 )     (148 )
                 
Net Cash Provided by (Used In) Financing Activities
    5,385       (355 )
                 
Net Increase (Decrease) in Cash and Cash Equivalents
    5,959       (6,257 )
                 
Cash and Cash Equivalents – Beginning
    23,704       33,514  
                 
Cash and Cash Equivalents – Ending
  $ 29,663     $ 27,257  
Supplementary Cash Flows Information
               
Interest paid
  $ 1,297     $ 1,535  
Income taxes paid
  $ 238     $ -  
Supplementary Schedule of Noncash Investing and Financing Activities
               
Foreclosed real estate acquired in settlement of loans
  $ 413     $ -  
Securities purchased and not settled
  $ -     $ 3,681  
 
See notes to consolidated financial statements.
 
 
6

 
 
LAKE SHORE BANCORP, INC. and Subsidiary
 
NOTE 1 – NATURE OF OPERATIONS AND BASIS OF PRESENTATION
 
Lake Shore Bancorp, Inc. (the “Company”) was formed on April 3, 2006 to serve as the stock holding company for Lake Shore Savings Bank (“the Bank”) as part of the Bank’s conversion and reorganization from a New York-chartered mutual savings and loan association to the federal mutual holding form of organization.
 
The interim consolidated financial statements include the accounts of the Company and the Bank, its wholly owned subsidiary. All intercompany accounts and transactions of the consolidated subsidiary have been eliminated in consolidation.
 
The interim financial statements included herein as of March 31, 2012 and for the three months ended March 31, 2012 and 2011 have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission, and therefore, do not include all information or footnotes necessary for a complete presentation of the consolidated statements of financial condition, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The consolidated balance sheet at December 31, 2011 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by GAAP for complete consolidated financial statements. The consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair statement of such information and to make the financial statements not misleading. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the audited consolidated financial statements included in the Company’s Form 10-K for the year ended December 31, 2011. The consolidated results of operations for the three months ended March 31, 2012 are not necessarily indicative of the results for any subsequent period or the entire year ending December 31, 2012.
 
To prepare these consolidated financial statements in conformity with GAAP, management of the Company made a number of estimates and assumptions relating to the reporting of assets and liabilities and the reporting of revenue and expenses. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, securities valuation estimates, evaluation of impairment of securities and income taxes.
 
The Company has evaluated events and transactions occurring subsequent to the balance sheet as of March 31, 2012 for items that should potentially be recognized or disclosed in these consolidated financial statements. The evaluation was conducted through the date these consolidated financial statements were issued.
 
NOTE 2 – NEW ACCOUNTING STANDARDS
 
The Company adopted ASU 2011-04, Fair Value Measurement (“Subtopic 820”): Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs (ASU 2011-04) effective January 1, 2012. ASU 2011-04 creates common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs. ASU 2011-04 changes the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. For many of the requirements, the FASB does not intend for the amendments in ASU 2011-04 to result in a change to the application of the requirements in Subtopic 820. Some of the amendments clarify the application of existing fair value measurement requirements. Other amendments change a particular principal or requirement for measuring fair value or for disclosing information about fair value measurements. The adoption of ASU 2011-04 did not have a material impact on the Company’s consolidated financial condition or results of operations.
 
 
7

 
 
NOTE 2 – NEW ACCOUNTING STANDARDS (continued)
 
The Company adopted ASU 2011-05, “Comprehensive Income (“Subtopic 220”): Presentation of Comprehensive Income (ASU 2011-05) effective January 1, 2012. ASU 2011-05 provides 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. The Company has chosen to present the components of net income and the components of other comprehensive income in two separate but consecutive statements. The amendments in ASU 2011-05 do not change the items that must be reported; how they are reported in other comprehensive income; or when an item of other comprehensive income must be reclassified to net income. In December, 2011, the FASB issued ASU 2011-12, “Deferral of the Effective Date to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update 2011-05” (“ASU 2011-12”), in response to stakeholder concerns regarding the operational ramifications of the presentation of these reclassifications for current and previous years. The FASB has deferred the implementation date of the reclassification portion of the ASU 2011-05 provision to allow time for further consideration. The amendments do not affect how earnings per share is calculated or presented. The adoption of ASU 2011-05 did not have a material impact on the Company’s consolidated financial condition or results of operations.
 
 
 
8

 
 
NOTE 3 – INVESTMENT SECURITIES
 
The amortized cost and fair value of securities are as follows:
 
   
March 31, 2012
 
   
Amortized Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Fair Value
 
                         
   
(Dollars in thousands)
 
                         
Securities Available for Sale:
                       
                         
U.S. Treasury bonds
  $ 12,925     $ 1,702     $ -     $ 14,627  
Municipal bonds
    51,698       4,047       (37 )     55,708  
Mortgage-backed securities:
                               
                                 
Collateralized mortgage obligations - private label
    120       2       -       122  
Collateralized mortgage obligations - government sponsored entities
    59,714       1,076       (194 )     60,596  
Government National Mortgage Association
    3,035       202       -       3,237  
Federal National Mortgage Association
    20,672       927       (13 )     21,586  
Federal Home Loan Mortgage Corporation
    7,006       481       (21 )     7,466  
Asset-backed securities - private label
    5,315       401       (1,171 )     4,545  
Asset-backed securities - government sponsored entities
    166       15       -       181  
Equity securities
    22       -       (15 )     7  
                                 
    $ 160,673     $ 8,853     $ (1,451 )   $ 168,075  
 
 
9

 
 
NOTE 3 – INVESTMENT SECURITIES (continued)
 
   
December 31, 2011
 
   
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
                   
   
(Dollars in thousands)
 
Securities Available for Sale:
                     
                       
U.S. Treasury bonds
  $ 12,935     $ 2,143     $ -     $ 15,078  
Municipal bonds
    49,561       4,115       -       53,676  
Mortgage-backed securities:
                               
                                 
Collateralized mortgage obligations - private label
    133       -       (4 )     129  
Collateralized mortgage obligations - government sponsored entities
    59,669       1,127       (25 )     60,771  
Government National Mortgage Association
    3,141       208       -       3,349  
Federal National Mortgage Association
    19,612       958       -       20,570  
Federal Home Loan Mortgage Corporation
    5,246       520       -       5,766  
Asset-backed securities - private label
    5,459       378       (1,205 )     4,632  
Asset-backed securities - government sponsored entities
    173       16       -       189  
Equity securities
    22       -       (17 )     5  
                                 
    $ 155,951     $ 9,465     $ (1,251 )   $ 164,165  
 
All of our collateralized mortgage obligations are backed by residential mortgages.
 
At March 31, 2012 and December 31, 2011, equity securities consisted of 22,368 shares of Federal Home Loan Mortgage Corporation (“FHLMC”) common stock.
 
At March 31, 2012, thirty-two municipal bonds with a cost of $10.0 million and fair value of $11.1 million were pledged under a collateral agreement with the Federal Reserve Bank of New York for liquidity borrowing. In addition, at March 31, 2012, eleven municipal bonds with a cost of $4.1 million and a fair value of $4.5 million were pledged as collateral for customer deposits in excess of the Federal Deposit Insurance Corporation (“FDIC”) insurance limits. At December 31, 2011, thirty-two municipal bonds with a cost of $10.0 million and fair value of $11.2 million were pledged under a collateral agreement with the Federal Reserve Bank of New York for liquidity borrowing. In addition, at December 31, 2011, eleven municipal bonds with a cost of $4.1 million and a fair value of $4.6 million were pledged as collateral for customer deposits in excess of the FDIC insurance limits.
 
 
10

 
 
NOTE 3 – INVESTMENT SECURITIES (continued)
 
The following table sets forth the Company’s investment in securities available for sale with gross unrealized losses of less than twelve months and gross unrealized losses of twelve months or more and associated fair values as of the dates indicated:
 
   
Less than 12 Months
   
12 Months or More
   
Total
 
   
Fair
Value
   
Gross Unrealized Losses
   
Fair
Value
   
Gross Unrealized Losses
   
Fair
Value
   
Gross Unrealized Losses
 
   
(Dollars in thousands)
 
                                     
March 31, 2012
                                   
Municipal bonds
  $ 1,750     $ (37 )   $ -     $ -     $ 1,750     $ (37 )
Mortgage-backed securities
    10,269       (228 )     -       -       10,269       (228 )
Asset-backed securities – private label
    -       -       3,785       (1,171 )     3,785       (1,171 )
Equity securities
    -       -       7       (15 )     7       (15 )
    $ 12,019     $ (265 )   $ 3,792     $ (1,186 )   $ 15,811     $ (1,451 )
                                                 
December 31, 2011
                                               
                                                 
Mortgage-backed securities
  $ 6,982     $ (29 )   $ -     $ -     $ 6,982     $ (29 )
Asset-backed securities - private label
    -       -       3,846       (1,205 )     3,846       (1,205 )
Equity securities
    -       -       5       (17 )     5       (17 )
    $ 6,982     $ (29 )   $ 3,851     $ (1,222 )   $ 10,833     $ (1,251 )
 
The Company reviews investment securities on an ongoing basis for the presence of other-than-temporary impairment (“OTTI”) with formal reviews performed quarterly.
 
The Company determines whether the unrealized losses in accordance with FASB ASC Topic 320 “Investments - Debt and Equity Securities” are other-than-temporary, The evaluation is based upon factors such as the creditworthiness of the issuers/guarantors, the underlying collateral and the continuing performance of the securities.
 
Management also evaluates other facts and circumstances that may be indicative of an OTTI condition. This includes, but is not limited to, an evaluation of the type of security, length of time and extent to which fair value has been less than cost, and near-term prospects of the issuer. The Company uses the cash flow expected to be realized from the security, which includes assumptions about interest rates, timing and severity of defaults, estimates of potential recoveries, the cash flow distribution from the provisions in the applicable bond indenture and other factors, then applies a discounting rate equal to the effective yield of the security. If the present value of the expected cash flows is less than the amortized book value it is considered a credit loss. The fair value of the security is determined using the same expected cash flows; the discount rate is a rate the Company determines from open market and other sources as appropriate for the security. The difference between the fair value and the credit loss is recognized in other comprehensive income, net of taxes.
 
At March 31, 2012 the Company’s investment portfolio included eight mortgage-backed securities and eight municipal bonds in the unrealized losses less than twelve months category. The mortgage-backed securities and municipal bonds were not evaluated further for OTTI as the unrealized losses on the individual securities were less than 20% of book value, which management deemed to be immaterial, and the credit ratings remained strong. The Company expects these securities to be repaid in full, with no losses realized. Management does not intend to sell these securities and it is more likely than not that it will not be required to sell these securities.
 
 
11

 
 
NOTE 3 – INVESTMENT SECURITIES (continued)
 
At March 31, 2012, the Company had one equity security, and four private-label asset-backed securities in the unrealized loss of twelve months or more category. The Company’s investment in equity securities is a requirement of its membership with the FHLMC. The equity security was not evaluated further for OTTI, despite the percentage of unrealized losses, due to immateriality. One of the four private label securities in this category was not evaluated further for OTTI, as the unrealized loss was less than 20% of book value. The temporary impairment was due to declines in fair value resulting from changes in interest rates and/or increased credit liquidity spreads since the security was purchased. The Company expects this security to be repaid in full, with no losses realized. Management does not intend to sell this security and it is more likely than not that it will not be required to sell this security.
 
The remaining private label asset-backed securities in this category were subject to a formal OTTI review as the unrealized losses were greater than 20% of book value for the individual security, or the related credit ratings were below investment grade, or the Company’s analysis indicated a possible loss of principal. The following table provides additional information relating to these private-label asset-backed securities as of March 31, 2012 (dollars in thousands):
 
                     
Delinquent %
         
Security
 
Book
Value
 
Fair
Value
 
Unrealized
Gain/(Loss)
   
Lowest Rating
 
Over 60 days
 
Over 90 days
 
Foreclosure/OREO /
Bankruptcy %
  OREO %  
1   $ 2,000   $ 1,320   $ (680 )     C   41.50%   39.60%   15.20%   3.00%
2     1,288     971     (317 )  
CCC
  36.60%   34.60%   14.80%   3.40%
3     1,000     836     (164 )  
CCC
  22.90%   21.20%   13.10%   0.60%
Total
  $ 4,288   $ 3,127   $ (1,161 )                        
 
The three private-label asset-backed securities listed above were evaluated for OTTI under the guidance of FASB ASC Topic 320. The Company believes the unrealized losses on these three private-label asset-backed securities occurred due to the current challenging economic environment, high unemployment rates, a continued decline in housing values in many areas of the country, and increased delinquency trends. It is possible that principal losses may be incurred on the tranches we hold in these specific securities. Management’s evaluation of the estimated discounted cash flows in comparison to the amortized book value did not reflect the need to record initial OTTI charges against earnings as of March 31, 2012 as the calculations of the estimated discounted cash flows did not show additional principal losses for these securities under various prepayment and default rate scenarios. Management also concluded that it does not intend to sell the securities and that it is more likely than not it will not be required to sell the securities.
 
The unrealized losses shown in the above table, were recorded as a component of other comprehensive income, net of tax on the Company’s Consolidated Statements of Changes in Stockholders’ Equity.
 
 
12

 
 
NOTE 3 – INVESTMENT SECURITIES (continued)
 
The following table presents a summary of the credit related OTTI charges recognized as components of earnings:
 
   
For the Three
Months Ended
March 31,
2012
   
For the Year
Ended
December 31,
2011
 
   
(Dollars in thousands)
 
Beginning balance
  $ 1,084     $ 1,176  
                 
Reductions:
               
    Losses realized during the period on OTTI previously recognized
    (12 )     (35 )
Receipt of cash flows on previously recorded OTTI
    -       (57 )
Ending balance
  $ 1,072     $ 1,084  
 
Further deterioration in credit quality and/or a continuation of the current imbalances in liquidity that exist in the marketplace might adversely affect the fair values of the Company’s investment portfolio and may increase the potential that certain unrealized losses will be designated as other than temporary and that the Company may incur additional write-downs in future periods.
 
Scheduled contractual maturities of available for sale securities are as follows:
 
   
Amortized Cost
   
Fair Value
 
    (Dollars in thousands)  
             
March 31, 2012
           
After five years through ten years
  $ 17,402     $ 19,306  
After ten years
    47,221       51,029  
Mortgage-backed securities
    90,547       93,007  
Asset-backed securities
    5,481       4,726  
Equity securities
    22       7  
    $ 160,673     $ 168,075  
 
During the three months ended March 31, 2012 and 2011, the Company did not sell any available for sale securities.
 
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
 
Management segregates the loan portfolio into loan types and analyzes the risk level for each loan type when determining its allowance for loan losses. The loan types are as follows:
 
Real Estate Loans:
 
 
One-to Four-Family – are loans secured by first lien collateral on residential real estate primarily held in the Western New York region. These loans can be affected by economic conditions and the value of underlying properties. Western New York has not been impacted as severely as other parts of the country by fluctuating real estate prices. Furthermore, the Company has conservative underwriting standards and does not have any sub-prime loans in its loan portfolio.
 
 
13

 
 
NOTE 4 - ALLOWANCE FOR LOAN LOSSES (continued)
 
 
Home Equity - are loans or lines of credit secured by second lien collateral on owner-occupied residential real estate primarily held in the Western New York area. These loans can also be affected by economic conditions and the values of underlying properties.
 
Commercial Real Estate – are loans used to finance the purchase of real property, which generally consists of developed real estate that is held as first lien collateral for the loan. These loans are secured by real estate properties that are primarily held in the Western New York region. Commercial real estate lending involves additional risks compared with one-to four-family residential lending, because payments on loans secured by commercial real estate properties are often dependent on the successful operation or management of the properties, and/or the collateral value of the commercial real estate securing the loan, and repayment of such loans may be subject to adverse conditions in the real estate market or economic conditions to a greater extent than one-to four-family residential mortgage loans. Also, commercial real estate loans typically involve large loan balances to single borrowers or groups of related borrowers.
 
Construction– are loans to finance the construction of either one-to four-family owner occupied homes or commercial real estate. At the end of the construction period, the loan automatically converts to either a conventional or commercial mortgage, as applicable. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion compared to the estimated cost of construction.
 
Other Loans:
 
 
Commercial – includes business installment loans, lines of credit, and other commercial loans. Most of our commercial loans have variable interest rates tied to the prime rate, and are for terms generally not in excess of 10 years. Whenever possible, we collateralize these loans with a lien on business assets and equipment and require the personal guarantees from principals of the borrower. Commercial loans generally involve a higher degree of credit risk because the collateral underlying the loans may be in the form of intangible assets and/or inventory subject to market obsolescence. Commercial loans can also involve relatively large loan balances to a single borrower or groups of related borrowers, with the repayment of such loans typically dependent on the successful operation of the commercial businesses and the income stream of the borrower. Such risks can be significantly affected by economic conditions.
 
Consumer – consist of loans secured by collateral such as an automobile or a deposit account, unsecured loans and lines of credit. Consumer loans tend to have a higher credit risk due to the loans being either unsecured or secured by rapidly depreciable assets. Furthermore, consumer loan payments are dependent on the borrower’s continuing financial stability, and therefore are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.
 
The allowance for loan losses is a valuation account that reflects the Company’s evaluation of the losses inherent in its loan portfolio. In order to determine the adequacy of the allowance for loan losses, the Company estimates losses by loan type using historical loss factors, as well as other environmental factors, such as trends in loan volume and loan type, loan concentrations, changes in the experience, ability and depth of the lending management, and national and local economic conditions. The Company also reviews all loans on which the collectability of principal may not be reasonably assured, by reviewing payment status, financial conditions and estimated value of loan collateral. These loans are assigned an internal loan grade, and the Company assigns the amount of loss components to these classified loans based on loan grade.
 
 
14

 
 
NOTE 4 - ALLOWANCE FOR LOAN LOSSES (continued)
 
The following table summarizes the activity in the allowance for loan losses for the three months ended March 31, 2011 and 2012 and the distribution of the allowance for loan losses and loans receivable by loan portfolio class and impairment method as of March 31, 2012:
 
            Real Estate Loans            Other Loans              
   
One-to Four-Family
   
Home Equity
   
Commercial
   
Construction
   
Commercial
   
Consumer
   
Unallocated
   
Total
 
    (Dollars in thousands)  
                                                 
March 31, 2011
                                               
Allowance for Loan Losses:
                                               
Balance – January 1, 2011
  $ 407     $ 141     $ 278     $ 1     $ 104     $ 21     $ 1     $ 953  
Charge-offs
    -       (29 )     -       -       -       (5 )     -       (34 )
Recoveries
    4       -       -       -       -       1       -       5  
(Credit) Provision
    (105 )     (22 )     72       (1 )     73       4       (1 )     20  
Balance – March 31, 2011
  $ 306     $ 90     $ 350     $ -     $ 177     $ 21     $ -     $ 944  
                                                                 
March 31, 2012
                                                               
Allowance for Loan Losses:
                                                               
Balance – January 1, 2012
  $ 441     $ 125     $ 522     $ -     $ 265     $ 13     $ -     $ 1,366  
Charge-offs
    (6 )     -       -       -       (1 )     -       -       (7 )
Recoveries
    1       -       -       -       -       -       -       1  
(Credit) Provision
    (55 )     (59 )     197       -       (118 )     (3 )     3       (35 )
Balance – March 31, 2012
  $ 381     $ 66     $ 719     $ -     $ 146     $ 10     $ 3     $ 1,325  
                                                                 
Ending Balance: individually evaluated for impairment
  $ -     $ -     $ 8     $ -     $ -     $ -     $ -     $ 8  
Ending balance: collectively evaluated for impairment
  $ 381     $ 66     $ 711     $ -     $ 146     $ 10     $ 3     $ 1,317  
Gross Loans Receivable (1):
                                                               
Ending balance
  $ 176,238     $ 30,306     $ 48,188     $ 504     $ 12,029     $ 1,762     $ -     $ 269,027  
Ending balance: individually evaluated for impairment
  $ -     $ -     $ 228     $ -     $ 13     $ -     $ -     $ 241  
Ending balance: collectively evaluated for impairment
  $ 176,238     $ 30,306     $ 47,960     $ 504     $ 12,016     $ 1,762     $ -     $ 268,786  
 
 
(1)
Gross Loans Receivable does not include allowance for loan losses of $(1,325) or deferred loan costs of $2,671.
 
 
15

 
 
NOTE 4 - ALLOWANCE FOR LOAN LOSSES (continued)
 
The following table summarizes the activity in the allowance for loan losses for the year ended December 31, 2011 and the distribution of the allowance for loan losses and loans receivable by loan portfolio class and impairment method as of December 31, 2011:
 
          Real Estate Loans           Other Loans              
   
One-to Four-Family
   
Home Equity
   
Commercial
   
Construction
   
Commercial
   
Consumer
   
Unallocated
   
Total
 
    (Dollars in thousands)  
December 31, 2011
                                               
Allowance for Loan Losses:
                                               
Balance – December 31, 2011
  $ 441     $ 125     $ 522     $ -     $ 265     $ 13     $ -     $ 1,366  
                                                                 
Ending Balance: individually evaluated for impairment
  $ -     $ -     $ 8     $ -     $ -     $ -     $ -     $ 8  
Ending balance: collectively evaluated for impairment
  $ 441     $ 125     $ 514     $ -     $ 265     $ 13     $ -     $ 1,358  
                                                                 
Gross Loans Receivable (1):
                                                               
Ending balance
  $ 182,922     $ 30,671     $ 44,776     $ 519     $ 12,911     $ 1,948     $ -     $ 273,747  
Ending balance: individually evaluated for impairment
  $ -     $ -     $ 133     $ -     $ -     $ -     $ -     $ 133  
Ending balance: collectively evaluated for impairment
  $ 182,922     $ 30,671     $ 44,643     $ 519     $ 12,911     $ 1,948     $ -     $ 273,614  
 
 
(1)
Gross Loans Receivable does not include allowance for loan losses of $(1,366) or deferred loan costs of $2,687.
 
Although the allocations noted above are by loan type, the allowance for loan losses is general in nature and is available to offset losses from any loan in the Company’s portfolio.
 
 
16

 
 
NOTE 4 - ALLOWANCE FOR LOAN LOSSES (continued)
 
A loan is considered impaired when, based on current information and events, it is probable that the Company will not be able to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. Factors considered in determining impairment include payment status, collateral value and the probability of collecting scheduled payments when due. Impairment is measured on a loan-by-loan basis for commercial real estate loans and commercial loans. Larger groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer, home equity, or one-to four-family loans for impairment disclosure, unless they are subject to a troubled debt restructuring.
 
The following is a summary of information pertaining to impaired loans for the periods indicated:
 
         
Unpaid
          Average     Interest  
   
Recorded
   
Principal
   
Related
   
Recorded
   
Income
 
   
Investment
   
Balance
   
Allowance
   
Investment
   
Recognized
 
    (Dollars in thousands)  
   
At March 31, 2012
   
For the three months ended March 31, 2012
 
With no related allowance recorded:
                             
Commercial real estate
  $ 95     $ 95     $ -     $ 95     $ -  
Commercial loans
    13       13       -       13       -  
With an allowance recorded:
                                       
Commercial real estate
    133       133       8       133       3  
Total
  $ 241     $ 241     $ 8     $ 241     $ 3  
 
   
At December 31, 2011
   
For the year ended
December 31, 2011
 
With no related allowance recorded:
                             
Commercial real estate
  $ -     $ -     $ -     $ 131     $ 14  
With an allowance recorded:
                                       
Commercial real estate
    133       133       8       245       16  
Total
  $ 133     $ 133     $ 8     $ 376     $ 30  
 
 
17

 
 
NOTE 4 - ALLOWANCE FOR LOAN LOSSES (continued)
 
The following table provides an analysis of past due loans as of the dates indicated:
 
   
30-59 Days Past Due
   
60-89 Days Past Due
   
90 Days or More Past Due
   
Total Past Due
   
Current
   
Total Loans Receivable
 
    (Dollars in thousands)  
March 31, 2012:
                                   
Real Estate Loans:
                                   
Residential, one-to four-family
  $ 845     $ 296     $ 1,507     $ 2,648     $ 173,590     $ 176,238  
Home equity
    76       42       179       297       30,009       30,306  
Commercial
    -       -       228       228       47,960       48,188  
Construction
    -       -       -       -       504       504  
Other Loans:
                                               
Commercial
    55       14       13       82       11,947       12,029  
Consumer
    21