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Fidelity Bancorp 10-Q 2011

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32
  5.  
Form 10-Q
Table of Contents

 

 

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, 2011.

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 No. 0-22288

 

 

Fidelity Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Pennsylvania   25-1705405

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

1009 Perry Highway, Pittsburgh, Pennsylvania 15237

(Address of principal executive offices)

412-367-3300

(Registrant’s telephone number, including area code)

Not Applicable

(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 (§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   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨  (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    x  No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 3,062,549 shares, par value $0.01, at July 29, 2011.

 

 

 


Table of Contents

FIDELITY BANCORP, INC. AND SUBSIDIARIES

Index

 

            Page  
Part I - Financial Information   
Item 1.    Financial Statements (Unaudited)      3   
   Consolidated Statements of Financial Condition as of June 30, 2011 and September 30, 2010      3   
   Consolidated Statements of Income (Loss) for the Three and Nine Months Ended June 30, 2011 and 2010      4-5   
   Consolidated Statement of Changes in Stockholders’ Equity for the Nine Months Ended June 30, 2011      6   
   Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2011 and 2010      7-8   
   Notes to Consolidated Financial Statements      9   
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      35-46   
Item 3.    Quantitative and Qualitative Disclosures About Market Risk      46   
Item 4.    Controls and Procedures      47   
Part II - Other Information   
Item 1.    Legal Proceedings      47   
Item 1A.    Risk Factors      47   
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds      47   
Item 3.    Defaults Upon Senior Securities      47   
Item 4.    [Removed & Reserved]      47   
Item 5.    Other Information      47   
Item 6.    Exhibits      47-49   
Signatures      50   

 

2


Table of Contents

Part I - Financial Information

Item 1. Financial Statements

FIDELITY BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Financial Condition (Unaudited)

(in thousands, except share data)

 

     June 30,
2011
    September 30,
2010
 

Assets

    

Cash and due from banks

   $ 5,700      $ 8,414   

Interest-bearing demand deposits with other institutions

     15,570        20,923   
  

 

 

   

 

 

 

Cash and Cash Equivalents

     21,270        29,337   

Securities available-for-sale (amortized cost of $181,230 and $176,949)

     178,688        174,700   

Securities held-to-maturity (fair value of $82,409 and $76,033)

     81,453        74,827   

Loans held for sale

     480        1,970   

Loans receivable, net of allowance of $5,670 and $5,821

     342,796        373,072   

Foreclosed real estate, net

     2,879        398   

Federal Home Loan Bank stock, at cost

     8,603        10,034   

Office premises and equipment, net

     9,670        9,315   

Accrued interest receivable

     2,408        2,655   

Bank owned life insurance

     5,765        5,592   

Goodwill

     2,653        2,653   

Deferred tax assets

     7,202        6,853   

Other assets

     3,618        5,264   
  

 

 

   

 

 

 

Total Assets

   $ 667,485      $ 696,670   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Liabilities:

    

Deposits:

    

Non-interest bearing

   $ 54,306      $ 51,963   

Interest bearing

     391,314        392,485   
  

 

 

   

 

 

 

Total Deposits

     445,620        444,448   

Securities sold under agreement to repurchase

     75,175        108,342   

Short-term borrowings

     165        130   

Long-term debt

     80,000        80,401   

Subordinated debt

     7,732        7,732   

Advance payments by borrowers for taxes and insurance

     2,855        1,223   

Other liabilities

     5,457        4,808   
  

 

 

   

 

 

 

Total Liabilities

     617,004        647,084   
  

 

 

   

 

 

 

Stockholders’ equity:

    

Preferred stock, $0.01 par value per share, liquidation preference $1,000; 5,000,000 shares authorized; 7,000 shares issued

     6,848        6,803   

Common stock, $0.01 par value per share, 10,000,000 shares authorized; 3,673,062 and 3,668,436 shares issued, respectively

     37        37   

Paid-in-capital

     46,613        46,473   

Retained earnings

     9,155        8,708   

Accumulated other comprehensive loss, net of tax

     (1,940     (2,053

Treasury stock, at cost - 610,513 shares and 619,129 shares, respectively

     (10,232     (10,382
  

 

 

   

 

 

 

Total Stockholders’ Equity

     50,481        49,586   
  

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 667,485      $ 696,670   
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

3


Table of Contents

FIDELITY BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Income (Loss) (Unaudited)

(in thousands, except per share data)

 

     Three Months Ended
June 30,
    Nine Months Ended
June 30,
 
     2011     2010     2011     2010  

Interest income:

        

Loans

   $ 4,624      $ 5,340      $ 14,652      $ 16,600   

Mortgage-backed securities

     902        783        2,437        2,302   

Investment securities-taxable

     622        758        1,934        2,290   

Investment securities-tax-exempt

     349        429        1,127        1,318   

Other

     25        13        67        38   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     6,522        7,323        20,217        22,548   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense:

        

Deposits

     1,083        1,301        3,353        4,281   

Securities sold under agreement to repurchase

     1,007        1,263        3,461        3,789   

Short-term borrowings

     1        2        5        5   

Long-term debt

     675        847        2,025        3,204   

Subordinated debt

     102        102        305        305   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     2,868        3,515        9,149        11,584   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     3,654        3,808        11,068        10,964   

Provision for loan losses

     300        500        900        1,100   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

     3,354        3,308        10,168        9,864   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest income:

        

Other-than-temporary impairment losses

     (55     (3,065     (2,450     (9,078

Non-credit related losses recognized in other comprehensive income

     —          2,153        1,039        6,635   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net impairment losses recognized in earnings

     (55     (912     (1,411     (2,443

Loan service charges and fees

     133        170        491        448   

Realized (loss) gain on sales of securities, net

     —          (3     586        1,034   

Gain on sales of loans

     21        83        249        304   

(Loss) gain on loan interest rate swaps

     (2     (11     12        (6

Deposit service charges and fees

     309        351        909        1,070   

ATM fees

     258        238        733        695   

Non-insured investment products

     46        45        152        128   

Earnings on cash surrender value of life insurance

     63        56        191        175   

Other

     49        40        193        141   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest income

     822        57        2,105        1,546   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest expense:

        

Compensation and benefits

     2,130        2,046        6,492        6,125   

Office occupancy and equipment expense

     258        251        786        779   

Depreciation and amortization

     142        131        429        399   

Advertising

     100        100        300        281   

Professional fees

     102        113        336        383   

Service bureau expense

     147        120        444        428   

Federal deposit insurance premiums

     225        292        820        923   

Other

     634        579        1,737        1,772   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest expense

     3,738        3,632        11,344        11,090   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

4


Table of Contents

FIDELITY BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Income (Loss) (Unaudited) (Cont’d.)

(in thousands, except per share data)

 

     Three Months Ended
June 30,
    Nine Months Ended
June 30,
 
     2011     2010     2011     2010  

Income (loss) before provision for (benefit of) income taxes

   $ 438      $ (267   $ 929      $ 320   

Provision for (benefit of) income taxes

     25        (215     (9     (339
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     413        (52     938        659   

Preferred stock dividend

     (88     (88     (263     (263

Accretion of preferred stock discount

     (15     (15     (45     (45
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) available to common stockholders

   $ 310      $ (155   $ 630      $ 351   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per Share:

        

Basic earnings per common share

   $ 0.10      $ (0.05   $ 0.21      $ 0.12   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per common share

   $ 0.10      $ (0.05   $ 0.21      $ 0.12   
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends per common share

   $ 0.02      $ 0.02      $ 0.06      $ 0.06   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

5


Table of Contents

FIDELITY BANCORP, INC. AND SUBSIDIARIES

Consolidated Statement of Changes in Stockholders’ Equity (Unaudited)

(in thousands, except share data)

 

     Number
of Common
Shares
Issued
     Preferred
Stock
     Common
Stock
     Paid-in
Capital
     Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss)
    Treasury
Stock
    Total  

Balance at September 30, 2010

     3,668,436       $ 6,803       $ 37       $ 46,473       $ 8,708      $ (2,053   $ (10,382   $ 49,586   

Comprehensive income (loss):

                    

Net income

                 938            938   

Comprehensive gain on cash flow hedges net of tax of $57

                   112          112   

Comprehensive gain on investment securities, net of tax of $73

                   142          142   

Reclassification adjustment on investment securities, net of tax of ($170)

                   (329       (329

Comprehensive loss on securities for which other-than-temporary impairment has been recognized in earnings, net of tax of ($353)

                   (686       (686

Reclassification adjustment for other-than-temporary impairment losses on debt securities, net of tax of $450

                   874          874   
                    

 

 

 

Total comprehensive income

                       1,051   

Accretion of preferred stock discount

        45               (45         —     

Cumulative dividends on preferred stock

                 (263         (263

Stock-based compensation expense

              28               28   

Restricted stock issued

     2,969                     

Cash dividends declared

                 (183         (183

Shares issued through Dividend Reinvestment Plan

     1,657               12               12   

Contribution of stock to Employee Stock Ownership Plan (ESOP) (8,616 shares)

              100             150        250   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2011

     3,673,062       $ 6,848       $ 37       $ 46,613       $ 9,155      $ (1,940   $ (10,232   $ 50,481   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

6


Table of Contents

FIDELITY BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

 

     Nine Months Ended June 30,  
     2011     2010  

Operating Activities:

    

Net income

   $ 938      $ 659   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Provision for loan losses

     900        1,100   

Provision for depreciation and amortization

     429        399   

Deferred loan fee amortization

     (111     (18

Amortization of investment and mortgage-backed securities (discounts) premiums, net

     699        712   

Realized gains on sales of securities, net

     (586     (1,034

Impairment losses on securities

     1,411        2,443   

Loans originated for sale

     (11,015     (20,394

Sales of loans held for sale

     12,754        19,595   

Net gains on sales of loans

     (249     (304

Earnings on cash surrender value of life insurance policies

     (191     (175

Decrease in interest receivable

     247        196   

Decrease in interest payable

     (204     (173

(Increase) decrease in prepaid taxes

     (197     1,141   

Non-cash compensation expense related to stock benefit plans

     28        48   

Changes in other assets

     1,381        (4,011

Changes in other liabilities

     1,270        9   
  

 

 

   

 

 

 

Net cash provided by operating activities

     7,504        193   
  

 

 

   

 

 

 

Investing Activities:

    

Proceeds from sales of securities available-for-sale

     22,382        16,316   

Proceeds from maturities and principal repayments of securities available-for-sale

     23,459        44,980   

Purchases of securities available-for-sale

     (51,254     (67,550

Proceeds from maturities and principal repayments of securities held-to-maturity

     35,273        32,154   

Purchases of securities held-to-maturity

     (41,867     (44,602

Net decrease in loans

     26,665        25,905   

Proceeds from sales of foreclosed real estate

     297        265   

Purchases of office premises and equipment

     (794     (983

Redemptions of Federal Home Loan Bank (FHLB) stock

     1,431        —     
  

 

 

   

 

 

 

Net cash provided by investing activities

     15,592        6,485   
  

 

 

   

 

 

 

 

7


Table of Contents

FIDELITY BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited) (Cont’d.)

(in thousands)

 

     Nine Months Ended June 30,  
     2011     2010  

Financing Activities:

    

Net increase in deposits

   $ 1,172      $ 2,422   

Net decrease in retail securities sold under agreement to repurchase

     (3,167     (387

Net decrease in wholesale securities sold under agreement to repurchase

     (30,000     —     

Net increase (decrease) in short-term borrowings

     35        (3

Increase in advance payments by borrowers for taxes and insurance

     1,632        1,798   

Repayments of long-term debt

     (401     (26,828

Cash dividends paid

     (446     (446

Stock options exercised

     —          7   

Proceeds from sale of stock through Dividend Reinvestment Plan

     12        11   
  

 

 

   

 

 

 

Net cash used in financing activities

     (31,163     (23,426
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (8,067     (16,748

Cash and cash equivalents at beginning of period

     29,337        42,480   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 21,270      $ 25,732   
  

 

 

   

 

 

 

Supplemental Disclosure of Cash Flow Information

    

Cash paid during the period for:

    

Interest paid on deposits and other borrowings

   $ 9,353      $ 11,757   
  

 

 

   

 

 

 

Income taxes paid

   $ 595      $ 25   
  

 

 

   

 

 

 

Supplemental Schedule of Noncash Investing and Financing Activities

    

Transfer of loans to foreclosed real estate

   $ 2,822      $ 402   
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

8


Table of Contents

FIDELITY BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements - (Unaudited)

June 30, 2011

(1) Consolidation

The consolidated financial statements contained herein for Fidelity Bancorp, Inc. (the “Company”) include the accounts of Fidelity Bancorp, Inc. and its wholly-owned subsidiary, Fidelity Bank, PaSB (the “Bank”). All inter-company balances and transactions have been eliminated.

(2) Basis of Presentation

The accompanying consolidated financial statements were prepared in accordance with instructions to Form 10-Q, and therefore, do not include information or footnotes necessary for a complete presentation of financial position, results of operations, and cash flows in conformity with generally accepted accounting principles in the United States. However, all adjustments (consisting of normal recurring adjustments), which, in the opinion of management, are necessary for a fair presentation of the financial statements, have been included. These financial statements should be read in conjunction with the audited financial statements and the accompanying notes thereto included in the Company’s Annual Report for the fiscal year ended September 30, 2010. The results for the three and nine month periods ended June 30, 2011 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2011 or any future interim period.

Certain amounts in the fiscal year 2010 financial statements have been reclassified to conform with the fiscal year 2011 presentation format. These reclassifications had no effect on stockholders’ equity or net income.

(3) New Accounting Standards

In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. ASU 2010-06 amends Subtopic 820-10 to clarify existing disclosures, require new disclosures, and includes conforming amendments to guidance on employers’ disclosures about postretirement benefit plan assets. ASU 2010-06 is effective for interim and annual periods beginning after December 15, 2009, except for disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The adoption of this guidance is not expected to have a significant impact on the Company’s financial statements.

In July 2010, FASB issued ASU No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. ASU 2010-20 is intended to provide additional information to assist financial statement users in assessing an entity’s credit risk exposures and evaluating the adequacy of its allowance for credit losses. The disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. The amendments in ASU 2010-20 encourage, but do not require, comparative disclosures for earlier reporting periods that ended before initial adoption. However, an entity should provide comparative disclosures for those reporting periods ending after initial adoption. The adoption of this ASU did not have a material effect on the Company’s results of operations or financial position. The Company has presented the necessary disclosures in Note (7) herein.

In October, 2010, the FASB issued ASU 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. This ASU addresses the diversity in practice regarding the interpretation of which costs relating to the acquisition of new or renewal insurance contracts qualify for deferral. The amendments are effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2011 and are not expected to have a significant impact on the Company’s financial statements.

 

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Table of Contents

In December, 2010, the FASB issued ASU 2010-28, When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. This ASU modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating an impairment may exist. The qualitative factors are consistent with the existing guidance, which requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. For public entities, the amendments in this Update are effective for fiscal year, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. This ASU is not expected to have a significant impact on the Company’s financial statements.

In April 2011, the FASB issued ASU 2011-02, Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. The amendments in this Update provide additional guidance or clarification to help creditors in determining whether a creditor has granted a concession and whether a debtor is experiencing financial difficulties for purposes of determining whether a restructuring constitutes a troubled debt restructuring. The amendments in this Update are effective for the first interim or annual reporting period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning annual period of adoption. As a result of applying these amendments, an entity may identify receivables that are newly considered impaired. For purposes of measuring impairment of those receivables, an entity should apply the amendments prospectively for the first interim or annual period beginning on or after June 15, 2011. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In April 2011, the FASB issued ASU 2011-03, Reconsideration of Effective Control for Repurchase Agreements. The main objective in developing this Update is to improve the accounting for repurchase agreements (repos) and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The amendments in this Update remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion. The amendments in this Update apply to all entities, both public and nonpublic. The amendments affect all entities that enter into agreements to transfer financial assets that both entitle and obligate the transferor to repurchase or redeem the financial assets before their maturity. The guidance in this Update is effective for the first interim or annual period beginning on or after December 15, 2011 and should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. This ASU is not expected to have a significant impact on the Company’s financial statements.

In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards. The amendments in this Update result in common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs. Consequently, the amendments change 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. The amendments in this Update are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. For nonpublic entities, the amendments are effective for annual periods beginning after December 15, 2011. Early application by public entities is not permitted. This ASU is not expected to have a significant impact on the Company’s financial statements.

In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income. The amendments in this Update improve the comparability, clarity, consistency, and transparency of financial reporting and increase the prominence of items reported in other comprehensive income. To increase the prominence of items reported in other comprehensive income and to facilitate convergence of U.S. GAAP and IFRS, the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity was eliminated. The amendments require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements.

 

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In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income. All entities that report items of comprehensive income, in any period presented, will be affected by the changes in this Update. 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 in this Update should be applied retrospectively, and early adoption is permitted. This ASU is not expected to have a significant impact on the Company’s financial statements.

(4) Stock Based Compensation

On June 30, 2011, the Company had five share-based compensation plans, for which stock options and restricted stock were outstanding as of June 30, 2011. However, the plan described below is the only plan for which stock options and restricted stock are available for grant. The compensation cost that has been charged against income for those plans was $28,000 and $48,000 for the nine-month periods ended June 30, 2011 and 2010, respectively.

The Company’s 2005 Stock-Based Incentive Plan (the Plan), which was shareholder-approved, permits the grant of stock options and restricted stock to its employees and non-employee directors for up to 165,000 shares of common stock, of which a maximum of 55,000 may be restricted stock. Option awards are granted with an exercise price equal to the market value of the common stock on the date of the grant, the options vest over a three-year period, and have a contractual term of seven years, although the Plan permits contractual terms of up to ten years. Option awards provide for accelerated vesting if there is a change in control, as defined in the Plan. Additionally, at December 21, 2010, the Company awarded 2,969 shares of restricted stock from the unallocated shares under the Plan having a market value of approximately $17,550. Compensation expense on the restricted stock awards equals the market value of the Company’s stock on the grant date and will be amortized ratably over the three-year vesting period. As of June 30, 2011, 10,381 share awards were available for grant under this program.

As of June 30, 2011 there was approximately $26,000 of unrecognized compensation costs related to unvested share-based compensation awards granted.

Stock option transactions for the nine months ended June 30, 2011 were as follows:

 

     Options     Weighted-
Average
Exercise
Price Per Share
 

Outstanding at the beginning of the year

     353,196      $ 15.18   

Granted

     —          —     

Exercised

     —          —     

Forfeited

     (22,177     9.80   
  

 

 

   

 

 

 

Outstanding as of June 30, 2011

     331,019      $ 15.54   
  

 

 

   

 

 

 

Exercisable as of June 30, 2011

     316,119      $ 15.98   
  

 

 

   

 

 

 

The options outstanding and exercisable as of June 30, 2011 have a weighted average remaining term of 1.9 years and 1.8 years, respectively.

No options were granted for the nine-month period ended June 30, 2011 or 2010.

Compensation cost related to restricted stock is recognized based on the market price of the stock at the grant date over the vesting period. Compensation expense related to restricted stock was $20,000 and $27,000 for the nine months ended June 30, 2011 and 2010, respectively. For the nine months ended June 30, 2011, there were 2,969 shares of restricted stock awarded. The market price of stock on the date of grant was $5.91. There were no shares issued for the nine months ended June 30, 2010.

 

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(5) Earnings Per Share

Basic earnings per share (EPS) excludes dilution and is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. The following table sets forth the computation of basic and diluted earnings per share (amounts in thousands, except per share data):

 

     Three Months Ended
June 30,
    Nine Months Ended
June 30,
 
     2011      2010     2011      2010  

Numerator:

          

Net income (loss) available to common stockholders

   $ 310       $ (155   $ 630       $ 351   

Denominator:

          

Denominator for basic earnings per share - weighted average shares outstanding

     3,057         3,042        3,053         3,041   

Effect of dilutive securities:

          

Common stock equivalents

     137         —          9         —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Denominator for diluted earnings per share - weighted average shares and assumed conversions

     3,194         3,042        3,062         3,041   
  

 

 

    

 

 

   

 

 

    

 

 

 

Basic earnings per common share

   $ 0.10       $ (0.05   $ 0.21       $ 0.12   
  

 

 

    

 

 

   

 

 

    

 

 

 

Diluted earnings per common share

   $ 0.10       $ (0.05   $ 0.21       $ 0.12   
  

 

 

    

 

 

   

 

 

    

 

 

 

Options to purchase 286,319 shares of common stock at prices ranging from $11.06 to $22.91 per share were outstanding during the three months ended June 30, 2011, but were not included in the computation of diluted EPS because to do so would have been anti-dilutive. Similarly, options to purchase 353,196 shares of common stock at prices ranging from $6.23 to $22.91 per share, 5,962 shares of restricted stock at prices ranging from $7.00 to $13.06 per share, and warrants to acquire 121,387 shares of common stock at a price of $8.65 per share were outstanding during the three months ended June 30, 2010, but were not included in the computation of diluted EPS because to do so would have been anti-dilutive.

Options to purchase 286,319 shares of common stock at prices ranging from $11.06 to $22.91 per share and warrants to acquire 121,387 shares of common stock at a price of $8.65 per share were outstanding during the nine months ended June 30, 2011, but were not included in the computation of diluted EPS because to do so would have been anti-dilutive. Similarly, options to purchase 353,196 shares of common stock at prices ranging from $6.23 to $22.91 per share, 5,962 shares of restricted stock at prices ranging from $7.00 to $13.06 per share, and warrants to acquire 121,387 shares of common stock at a price of $8.65 per share were outstanding during the nine months ended June 30, 2010, but were not included in the computation of diluted EPS because to do so would have been anti-dilutive.

 

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Table of Contents

(6) Securities

The amortized cost and fair value of securities are as follows:

 

     Amortized
Cost
     Unrealized
Gains
     Unrealized
Losses
     Fair
Value
 
(Dollar amounts in thousands)                            

Available-for-sale:

           

As of June 30, 2011:

           

U.S. government and agency obligations

   $ 44,191       $ 485       $ 103       $ 44,573   

Municipal obligations

     30,099         939         21         31,017   

Corporate obligations

     5,982         93         575         5,500   

Equity securities in financial institutions

     2,468         97         873         1,692   

Other equity securities

     1,000         —           27         973   

Mutual funds

     2,671         17         16         2,672   

Trust preferred securities

     14,488         38         4,526         10,000   

Mortgage-backed securities:

           

Agency

     68,130         1,827         —           69,957   

Collateralized mortgage obligations:

           

Agency

     9,558         210         —           9,768   

Private-label

     2,643         28         135         2,536   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 181,230       $ 3,734       $ 6,276       $ 178,688   
  

 

 

    

 

 

    

 

 

    

 

 

 

Held-to-maturity:

           

As of June 30, 2011:

           

U.S. government and agency obligations

   $ 23,542       $ 76       $ 77       $ 23,541   

Municipal obligations

     10,898         241         50         11,089   

Mortgage-backed securities:

           

Agency

     7,080         303         40         7,343   

Collateralized mortgage obligations:

           

Agency

     37,610         564         25         38,149   

Private-label

     2,323         16         52         2,287   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 81,453       $ 1,200       $ 244       $ 82,409   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     Amortized
Cost
     Unrealized
Gains
     Unrealized
Losses
     Fair
Value
 
(Dollar amounts in thousands)                            

Available-for-sale:

           

As of September 30, 2010:

           

U.S. government and agency obligations

   $ 49,442       $ 836       $ —         $ 50,278   

Municipal obligations

     27,838         1,742         30         29,550   

Corporate obligations

     7,980         193         567         7,606   

Equity securities in financial institutions

     2,685         5         912         1,778   

Other equity securities

     1,000         —           68         932   

Mutual funds

     8,716         501         3         9,214   

Trust preferred securities

     16,695         29         5,784         10,940   

Mortgage-backed securities:

           

Agency

     43,778         1,602         3         45,377   

Collateralized mortgage obligations:

           

Agency

     15,332         329         6         15,655   

Private-label

     3,483         17         130         3,370   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 176,949       $ 5,254       $ 7,503       $ 174,700   
  

 

 

    

 

 

    

 

 

    

 

 

 

Held-to-maturity:

           

As of September 30, 2010:

           

U.S. government and agency obligations

   $ 20,064       $ 161       $ 5       $ 20,220   

Municipal obligations

     16,514         554         13         17,055   

Mortgage-backed securities:

           

Agency

     6,931         353         —           7,284   

Collateralized mortgage obligations:

           

Agency

     27,861         410         21         28,250   

Private-label

     3,457         36         269         3,224   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 74,827       $ 1,514       $ 308       $ 76,033   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents the amortized cost and fair value of debt securities by contractual maturity dates as of June 30, 2011:

 

     Securities Available-for-Sale      Securities Held-to-Maturity  
     Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
 
     (In Thousands)  

As of June 30, 2011:

           

Due in one year or less

   $ 7,949       $ 7,971       $ —         $ —     

Due after one year through five years

     30,529         31,203         12,388         12,472   

Due after five years through ten years

     32,932         33,625         17,050         17,230   

Due after ten years

     103,681         100,552         52,015         52,707   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 175,091       $ 173,351       $ 81,453       $ 82,409   
  

 

 

    

 

 

    

 

 

    

 

 

 

The proceeds from the sale of securities for the three months ended June 30, 2011 and 2010 were $0 and $32,000, respectively. There were no gross gains realized on sales of securities during the three months ended June 30, 2011 and 2010. Gross losses of $0 and $3,000 were realized on sales of securities during the three months ended June 30, 2011 and 2010, respectively. The proceeds from the sale of securities for the nine months ended June 30, 2011 and 2010 were $22.4 million and $16.3 million, respectively. Gross gains of $586,000 and $1.1 million were realized on sales of securities during the nine months ended June 30, 2011 and 2010, respectively. Gross losses of $0 and $23,000 were realized on sales of securities during the nine months ended June 30, 2011 and 2010, respectively.

 

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Table of Contents

The Company recognized other-than-temporary impairment losses on securities of $55,000 and $912,000 for the three-month periods ended June 30, 2011 and 2010, respectively. The impairment charges for the three-month period ended June 30, 2011 relate to the Company’s holding of a private label mortgage-backed security. The impairment charges for the three-month period ended June 30, 2010 relate to the Company’s holdings of three pooled trust preferred securities and one private label mortgage-backed security. The Company recognized other-than-temporary impairment losses on securities of $1.4 million and $2.4 million for the nine-month periods ended June 30, 2011 and 2010, respectively. The impairment charges for the nine-month period ended June 30, 2011 relate to the Company’s holdings of five pooled trust preferred securities, a single issue trust preferred security, a private label mortgage-backed security, and common stock of a local financial institution. The impairment charges for the nine-month period ended June 30, 2010 relate to six pooled trust preferred securities and one private label mortgage-backed security.

At June 30, 2011, the unrealized losses on the securities portfolio were primarily attributable to wider credit spreads, reflecting market illiquidity. The Company does not intend to sell these securities and it is not more-likely than-not that the Company will have to sell these securities.

 

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Table of Contents

The following tables show the aggregate related fair value of investments with a continuous unrealized loss position for less than twelve months and those that have been in a continuous unrealized loss position for twelve months or more.

 

    Less than 12 Months     12 Months or More     Total  
    # of
Securities
    Fair
Value
    Unrealized
Losses
    # of
Securities
    Fair
Value
    Unrealized
Losses
    # of
Securities
    Fair
Value
    Unrealized
Losses
 
As of June 30, 2011:                                                      

(Dollar amounts in thousands)

                                                     

Available-for-sale:

                 

U.S. government and agency obligations

    5      $ 9,895      $ 103        —        $ —        $ —          5      $ 9,895      $ 103   

Municipal obligations

    5        3,364        21        —          —          —          5        3,364        21   

Corporate obligations

    —          —          —          2        1,420        575        2        1,420        575   

Equity securities in financial institutions

    —          —          —          5        1,274        873        5        1,274        873   

Other equity securities

    —          —          —          1        973        27        1        973        27   

Mutual Funds

    1        1,366        16        —          —          —          1        1,366        16   

Trust preferred securities

    2        411        19        11        9,036        4,507        13        9,447        4,526   

Mortgage-backed securities:

                 

Agency

    —          —          —          —          —          —          —          —          —     

Collateralized mortgage obligations:

                 

Agency

    —          —          —          —          —          —          —          —          —     

Private-label

    —          —          —          2        1,456        135        2        1,456        135   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total temporarily impaired available-for-sale securities

    13        15,036        159        21        14,159        6,117        34        29,195        6,276   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Held-to-maturity:

                 

U.S. government and agency obligations

    3        7,923        77        —          —          —          3        7,923        77   

Municipal obligations

    3        2,463        50        —          —          —          3        2,463        50   

Mortgage-backed securities:

                 

Agency

    2        2,074        40        —          —          —          2        2,074        40   

Collateralized mortgage obligations:

                 

Agency

    3        4,386        18        1        835        7        4        5,221        25   

Private-label

    —          —          —          3        1,334        52        3        1,334        52   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total temporarily impaired held-to-maturity securities

    11        16,846        185        4        2,169        59        15        19,015        244   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total temporarily impaired securities

    24      $ 31,882      $ 344        25      $ 16,328      $ 6,176        49      $ 48,210      $ 6,520   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
    Less than 12 Months     12 Months or More     Total  
    # of
Securities
    Fair
Value
    Unrealized
Losses
    # of
Securities
    Fair
Value
    Unrealized
Losses
    # of
Securities
    Fair
Value
    Unrealized
Losses
 
As of September 30, 2010:                                                      

(Dollar amounts in thousands)

                                                     

Available-for-sale:

                 

Municipal obligations

    1      $ 998      $ 7        1      $ 478      $ 23        2      $ 1,476      $ 30   

Corporate obligations

    —          —          —          2        1,428        567        2        1,428        567   

Equity securities in financial institutions

    —          —          —          6        1,367        912        6        1,367        912   

Other equity securities

    —          —          —          1        933        68        1        933        68   

Mutual funds

    1        1,332        3        —          —          —          1        1,332        3   

Trust preferred securities

    —          —          —          15        9,321        5,784        15        9,321        5,784   

Mortgage-backed securities:

                 

Agency

    1        161        3        —          —          —          1        161        3   

Collateralized mortgage obligations:

                 

Agency

    —          —          —          1        647        6        1        647        6   

Private-label

    —          —          —          3        2,663        130        3        2,663        130   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total temporarily impaired available-for-sale securities

    3        2,491        13        29        16,837        7,490        32        19,328        7,503   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Held-to-maturity:

                 

U.S. government and agency obligations

    1      $ 2,995      $ 5        —        $ —        $ —          1      $ 2,995      $ 5   

Municipal obligations

    —          —          —          1        607        13        1        607        13   

Collateralized mortgage obligations:

                 

Agency

    1        1,653        1        1        1,295        20        2        2,948        21   

Private-label

    —          —          —          4        1,773        269        4        1,773        269   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total temporarily impaired held-to-maturity securities

    2        4,648        6        6        3,675        302        8        8,323        308   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total temporarily impaired securities

    5      $ 7,139      $ 19        35      $ 20,512      $ 7,792        40      $ 27,651      $ 7,811   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The Company conducts periodic reviews to identify and evaluate each investment that has an unrealized loss, in accordance with U.S. generally accepted accounting principles. An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis. Unrealized losses that are determined to be temporary in nature are recorded, net of tax, in Accumulated Other Comprehensive Income (AOCI) for available-for-sale securities, while such losses related to held-to-maturity securities are not recorded, as these investments are carried at their amortized cost.

Regardless of the classification of the securities as available-for-sale or held-to-maturity, the Company has assessed each position for other than temporary impairment.

 

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Factors considered in determining whether a loss is temporary include:

 

   

the length of time and the extent to which fair value has been below cost;

 

   

the severity of the impairment;

 

   

the cause of the impairment and the financial condition and near-term prospects of the issuer;

 

   

activity in the market of the issuer which may indicate adverse credit conditions;

 

   

if the Company intends to sell the investment;

 

   

if it’s more-likely-than-not the Company will be required to sell the investment before recovering its amortized cost basis; and

 

   

if the Company does not expect to recover the investment’s entire amortized cost basis (even if the Company does not intend to sell the security).

The Company’s review for impairment generally entails:

 

   

identification and evaluation of investments that have indications of possible impairment;

 

   

analysis of individual investments that have fair values less than amortized cost, including consideration of the length of time the investment has been in an unrealized loss position and the expected recovery period;

 

   

discussion of evidential matter, including an evaluation of factors or triggers that could cause individual investments to qualify as having other-than-temporary impairment and those that would not support other-than-temporary impairment; and

 

   

documentation of the results of these analyses, as required under business policies.

For debt securities that are not deemed to be credit impaired, management performs additional analysis to assess whether it intends to sell or would more-likely-than-not be required to sell the investment before the expected recovery of the amortized cost basis. Management has asserted that it has no intent to sell and that it believes it is more-likely-than-not that it will not be required to sell the investment before recovery of its amortized cost basis.

Similarly, for equity securities, management considers the various factors described above, including its intent and ability to hold the equity security for a period of time sufficient for recovery to amortized cost. Where management lacks that intent or ability, the security’s decline in fair value is deemed to be other-than-temporary and is recorded in earnings.

For debt securities, a critical component of the evaluation for other-than-temporary impairment is the identification of credit impaired securities, where management does not receive cash flows sufficient to recover the entire amortized cost basis of the security. The extent of the Company’s analysis regarding credit quality and the stress on assumptions used in the analysis had been refined for securities where the current fair value or other characteristics of the security warrant. The paragraphs below describe the Company’s process for identifying credit impairment in security types with the most significant unrealized losses as of June 30, 2011.

Trust Preferred Debt Securities

Included in debt securities in an unrealized loss position at June 30, 2011 were thirteen different trust preferred offerings with an aggregate fair value of $9.4 million, which had floating rates based on LIBOR. The unrealized losses on these debt securities amounted to $4.5 million at June 30, 2011. Due to dislocations in the credit markets broadly, and the lack of trading and new issuances in trust preferred securities, market price indications generally reflect the lack of liquidity in the market. Prices on pooled trust preferred securities were calculated by a third party valuation company. The valuation methodology is based on the premise that the fair value of the security’s collateral should approximate the fair value of its liabilities. In general, the spreads for trust preferred collateral have widened by over 500 basis points since 2007. To determine the decline in the collateral’s value associated with this increase in credit spreads, the third party projected collateral cash flows for each pool using Intex, the commonly used modeling software for securities of this type. Once generated, the cash flows for each pool were discounted at the applicable rate to arrive at the fair value of the collateral. Any declines in the resulting fair value of the collateral below the par value represents the component of loss attributed to credit risk.

 

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The credit quality of each collateral pool was then analyzed for the purpose of projecting defaults and recoveries. Prepayment assumptions were also estimated. With these additional assumptions, cash flow projections for both the collateral and the debt obligation were modeled and valued. The fair value of each bond was then determined by discounting the projected cash flows by an adjusted discount rate (adjusted to capture the default risk). During the three months ended June 30, 2011, the Company did not incur any impairment charges to earnings on trust preferred debt securities. During the three months ended June 30, 2010, the Company recognized in earnings impairment charges of $886,000 on three investments in pooled trust preferred securities resulting from several factors, including a downgrade on their credit ratings, failure to pass their principal coverage tests, and the decline in the net present value of their projected cash flows. During the nine months ended June 30, 2011, the Company recognized impairment charges of $1.0 million on five investments in pooled trust preferred securities and $135,000 on a single issuer trust preferred security. The impairment charges on the pooled trust preferred securities resulted from several factors, including a downgrade on their credit ratings, failure to pass their principal coverage tests, indications of a break in yield, and the decline in the net present value of their projected cash flows. The impairment charges on the single issuer trust preferred security resulted from the financial institution being put on regulatory order after several quarters of losses and it started deferring interest payments on both its trust preferred and its TARP preferred shares outstanding. During the nine months ended June 30, 2010, the Company recognized in earnings impairment charges of $2.4 million on six investments in pooled trust preferred securities resulting from several factors, including a downgrade on their credit ratings, failure to pass their principal coverage tests, indications of a break in yield, and the decline in the net present value of their projected cash flows. Based on cash flow forecasts for the remaining securities, management expects to recover the remaining amortized cost of these securities. Furthermore, the Company does not intend to sell these securities and it is not more-likely-than-not that the Company will be required to sell these securities before recovery of their cost basis, which may be at maturity.

Equity Securities in Financial Institutions

At June 30, 2011 the Company had $873,000 of unrealized losses on equity securities in financial institutions. These securities represent investments in common equity offerings of five financial institutions with an aggregate fair value of $1.3 million. In addition to the general factors mentioned above for determining whether the decline in market value is other than temporary, the analysis of each of these securities includes a review of the profitability of each issuer and its capital adequacy, and all data available to determine the credit quality of each issuer. During the nine months ended June 30, 2011, the Company recognized in earnings impairment charges of $87,000 on one investment in common stock of a local financial institution resulting from the duration and extent to which the market value has been less than the cost and the performance of the financial institution over the past two years. There were no impairment charges taken on these securities for the three months ended June 30, 2011, three months ended June 30, 2010, and the nine months ended June 30, 2010. Based on the Company’s detailed analysis, and because the Company has the ability and intent to hold the investments until a recovery of its amortized cost basis, except for the investment mentioned above, the Company does not consider these remaining assets to be other-than-temporarily impaired at June 30, 2011. However, continued price declines could result in a write down of one or more of these equity investments.

Corporate Obligations

Included in corporate obligations in an unrealized loss position at June 30, 2011 were two different securities with an aggregate fair value of $1.4 million. The unrealized loss on these securities amounted to $575,000 at June 30, 2011. These two securities represent investments in corporate obligations issued by financial institutions and have floating rates which reset monthly based on LIBOR. In addition to the general factors mentioned above for determining whether the decline in market value is other-than-temporary, the analysis of each of these securities included a review of the profitability of each issuer and its capital adequacy, and all data available to determine the credit quality of each issuer. Both issuers are well capitalized as of June 30, 2011 and the securities have an investment grade rating as rated by at least one nationally recognized credit rating agency. Both institutions had participated in the Treasury’s TARP Capital Purchase Program and have subsequently repaid the TARP proceeds. Based on the Company’s detailed analysis and because the Company has the ability and intent to hold these investments until a recovery of its amortized cost basis, the Company does not consider these securities to be other-than-temporarily impaired at June 30, 2011. There were no impairment charges on corporate obligations for the three and nine months ended June 30, 2011 and 2010.

 

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Table of Contents

Private-Label Collateralized Mortgage Obligations

Included in private-label collateralized mortgage obligations in an unrealized loss position at June 30, 2011 were five different securities with an aggregate fair value of $2.8 million. The unrealized loss on these securities amounted to $187,000 at June 30, 2011. A significant amount of the unrealized losses at June 30, 2011 represents one private label mortgage-backed security. For the three months ended June 30, 2011 the Company recognized $55,000 of credit impairment losses relating to this security. For the nine months ended June 30, 2011 the Company recognized $142,000 of credit impairment losses relating to this security. The impairment losses were a result of a downgrade in its credit rating, as well as independent third-party analysis of the underlying collateral for the bond. For the three and nine months ended June 30, 2010 the Company recognized $26,000 of credit impairment losses relating to this security. Based on management’s analysis of the remaining securities, management determined that the price declines are strictly market and spread related and management expects to recover the remaining amortized cost of these securities. Furthermore, the Company does not intend to sell these securities and it is not more-likely-than-not that the Company will be required to sell these securities before recovery of their cost basis, which may be at maturity.

The following is a roll forward for the nine months ended June 30, 2011 of the amounts recognized in earnings related to credit losses on securities which the Company has recorded other-than-temporary impairment charges through earnings and other comprehensive income:

 

     (In Thousands)  

Credit component of OTTI as of October 1, 2010

   $ 3,586   

Additions for credit-related OTTI charges on previously unimpaired securities

     135   

Additions for credit-related OTTI charges on previously impaired securities

     1,189   
  

 

 

 

Credit component of OTTI as of June 30, 2011

   $ 4,910   
  

 

 

 

(7) Loans Receivable and Related Allowance for Loan Losses

The following table summarizes the primary segments of the loan portfolio as of June 30, 2011 and September 30, 2010 (in thousands):

 

     Individually
Evaluated for
Impairment
     Collectively
Evaluated for
Impairment
     Total  

June 30, 2011

        

Residential loans

   $ 1,671       $ 119,326       $ 120,997   

Commercial real estate loans

        

Non owner-occupied

     9,825         50,752         60,577   

All other commercial real estate

     7,223         15,274         22,497   

Construction loans

        

Residential construction loans

     —           4,781         4,781   

Commercial construction loans

     1,641         13,650         15,291   

Home equity loans

     117         67,005         67,122   

Consumer loans

     —           2,763         2,763   

Commercial business and lease loans

     1,885         52,553         54,438   
  

 

 

    

 

 

    

 

 

 

Total

   $ 22,362       $ 326,104       $ 348,466   
  

 

 

    

 

 

    

 

 

 

 

20


Table of Contents
     Individually
Evaluated for
Impairment
     Collectively
Evaluated for
Impairment
     Total  

September 30, 2010

        

Residential loans

   $ 93       $ 127,182       $ 127,275   

Commercial real estate loans

        

Non owner-occupied

     7,069         61,867         68,936   

All other commercial real estate

     9,924         16,732         26,656   

Construction loans

        

Residential construction loans

     —           1,762         1,762   

Commercial construction loans

     —           18,260         18,260   

Home equity loans

     —           72,008         72,008   

Consumer loans

     —           3,786         3,786   

Commercial business and lease loans

     1,060         59,150         60,210   
  

 

 

    

 

 

    

 

 

 

Total

   $ 18,146       $ 360,747       $ 378,893   
  

 

 

    

 

 

    

 

 

 

The segments of the Bank’s loan portfolio are disaggregated to a level that allows management to monitor risk and performance. The residential mortgage loan segment is made up of fixed rate and adjustable rate single-family amortizing term loans, which are primarily first liens. The commercial real estate (“CRE”) loan segment is further disaggregated into two classes. Non-owner occupied CRE loans, which include loans secured by non-owner occupied nonfarm nonresidential properties, generally have a greater risk profile than all other CRE loans, which include multifamily structures and owner-occupied commercial structures. The construction loan segment is further disaggregated into two classes. One to four family residential construction loans are generally made to individuals for the acquisition of and/or construction on a lot or lots on which a residential dwelling is to be built. Commercial construction loans are generally made to developers or investors for the purpose of acquiring, developing and constructing residential or commercial structures. Construction lending is generally considered to involve a higher degree of credit risk than long-term permanent financing. If the estimate of construction cost proves to be inaccurate, the Bank may be compelled to advance additional funds to complete the construction with repayment dependent, in part, on the success of the ultimate project rather than the ability of a borrower or guarantor to repay the loan. If the Bank is forced to foreclose on a project prior to completion, there is no assurance that it will be able to recover all of the unpaid portion of the loan. In addition, the Bank may be required to fund additional amounts to complete a project and may have to hold the property for an indeterminate period of time. The commercial business and lease loan segment consists of loans made for the purpose of financing the activities of commercial customers. The home equity loan segment consists primarily of home equity loans, which are generally second liens. The consumer loans consist of motor vehicle loans, savings account loans, personal lines of credit, overdraft loans, other types of secured consumer loans, and unsecured personal loans.

Management evaluates individual loans in all of the commercial segments for possible impairment if the loan is greater than $50,000 and if the loan either is in nonaccrual status, or is risk rated Substandard. Loans are considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in evaluating impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. The Company does not separately evaluate individual consumer and residential mortgage loans for impairment, unless such loans are part of a larger relationship that is impaired, or are classified as a troubled debt restructuring agreement.

 

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Table of Contents

Once the determination has been made that a loan is impaired, the determination of whether a specific allocation of the allowance is necessary is measured by comparing the recorded investment in the loan to the fair value of the loan using one of three methods: (a) the present value of expected future cash flows discounted at the loan’s effective interest rate; (b) the loan’s observable market price; or (c) the fair value of the collateral less selling costs. The method is selected on a loan-by-loan basis, with management primarily utilizing the fair value of collateral method, which is required for loans that are collateral dependent. The evaluation of the need and amount of a specific allocation of the allowance and whether a loan can be removed from impairment status is made on a monthly basis. The Company’s policy for recognizing interest income on impaired loans does not differ from its overall policy for interest recognition.

The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary as of June 30, 2011 and September 30, 2010 (in thousands):

 

     Impaired Loans with
Specific Allowance
     Impaired
Loans with
No Specific
Allowance
     Total Impaired Loans  
     Recorded
Investment
     Related
Allowance
     Recorded
Investment
     Recorded
Investment
     Unpaid
Principal
Balance
 

June 30, 2011

              

Residential loans

   $ —         $ —         $ 1,671       $ 1,671       $ 1,671   

Commercial real estate loans

              

Non owner-occupied

     5,579         1,127         4,246         9,825         10,443   

All other commercial real estate

     2,756         138         4,467         7,223         7,339   

Commercial construction loans

     —           —           1,641         1,641         1,641   

Home equity loans

     —           —           117         117         117   

Commercial business and lease loans

     1,479         340         406         1,885         1,885   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 9,814       $ 1,605       $ 12,548       $ 22,362       $ 23,096   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

September 30, 2010

              

Residential loans

   $ —         $ —         $ 93       $ 93       $ 93   

Commercial real estate loans

              

Non owner-occupied

     3,017         542         4,052         7,069         7,351   

All other commercial real estate

     5,741         812         4,183         9,924         10,253   

Commercial business and lease loans

     723         188         337         1,060         1,060   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 9,481       $ 1,542       $ 8,665       $ 18,146       $ 18,757   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

There are certain impaired loans whose payments are being applied to reduce the principal balance of the loan because the recovery of interest is not determinable. The unpaid principal balance reflects the balance as if the payments were applied in accordance with the terms of the original contractual agreement whereas the recorded investment reflects the outstanding principal balance for financial reporting purposes.

 

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Table of Contents

The following table presents the average recorded investment in impaired loans and related interest income recognized for the periods indicated (in thousands):

 

     Nine Months Ended June 30, 2011      Nine Months Ended June 30, 2010  
     Average
Investment in
Impaired
Loans
     Interest
Income
Recognized
on an
Accrual Basis
     Interest
Income
Recognized
on a Cash
Basis
     Average
Investment in
Impaired
Loans
     Interest
Income
Recognized
on an
Accrual Basis
     Interest
Income
Recognized
on a Cash
Basis
 

Residential loans

   $ 464       $ 73       $ —         $ 35       $ —         $ —     

Commercial real estate loans

                 

Non owner-occupied

     7,675         141         153         7,278         —           213   

All other commercial real estate

     8,855         12         364         7,770         65         27   

Commercial construction loans

     410         49         —           42         —           —     

Home equity loans

     29         5         —           —           —           —     

Commercial business and lease loans

     1,336         31         53         1,947         15         63   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 18,769       $ 311       $ 570       $ 17,072       $ 80       $ 303   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Management uses an eight point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first four categories are considered not criticized, and are aggregated as “Pass” rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The Special Mention category includes assets that are currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a Substandard classification. Loans in the Substandard category have well-defined weaknesses that jeopardize the orderly liquidation of the debt, and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. All loans greater than 90 days past due are considered Substandard. Loans in the Doubtful category have all the weaknesses found in substandard loans, with the added provision that the weaknesses make collection of debt in full highly questionable and improbable. Any portion of a loan that has been charged off is placed in the Loss category.

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Bank has a structured loan rating process with several layers of internal and external oversight. The Bank’s Commercial Loan Officers are responsible for the timely and accurate risk rating of the loans in their portfolios at origination and on an ongoing basis. The Credit Analysis Department confirms the appropriate risk grade at origination and monitors all subsequent changes to risk ratings. The Bank’s Classified Asset Committee approves all risk rating changes, except those made within the pass risk ratings. The Bank engages an external consultant to conduct loan reviews on a quarterly basis. Generally, the external consultant reviews commercial relationships that equal or exceed $1,000,000, 10% of the number of loans under $1,000,000, and adversely classified commercial credits in excess of $50,000. Detailed reviews, including plans for resolution, are performed on loans classified as substandard on a monthly basis. Loans in the Special Mention and Substandard categories that are collectively evaluated for impairment are given separate consideration in the determination of the allowance.

 

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Table of Contents

The following table presents the classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard, and Doubtful within the internal risk rating system as of June 30, 2011 (in thousands):

 

     Pass      Special
Mention
     Substandard      Doubtful      Total  

June 30, 2011

              

Commercial real estate loans

              

Non owner-occupied

   $ 47,734       $ 6,316       $ 6,527       $ —         $ 60,577   

All other commercial real estate

     14,405         —           8,092         —           22,497   

Construction loans

              

Residential construction loans

     4,781         —           —           —           4,781   

Commercial construction loans

     13,650         —           1,641         —           15,291   

Commercial business and lease loans

     52,094         459         1,868         17         54,438   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 132,664       $ 6,775       $ 18,128       $ 17       $ 157,584   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents (in thousands) the classes of the loan portfolio for which loan performance is the primary credit quality indicator.

 

     Residential
Loans
     Home
Equity
Loans
     Consumer
Loans
     Total  

June 30, 2011

           

Performing loans

   $ 119,723       $ 66,623       $ 2,755       $ 189,101   

Non-performing loans

     1,274         499         8         1,781   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 120,997       $ 67,122       $ 2,763       $ 190,882   
  

 

 

    

 

 

    

 

 

    

 

 

 

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans as of June 30, 2011 (in thousands):

 

     Current      30 - 59
Days Past
Due
     60 - 89
Days Past
Due
     90 Days+
Past Due
     Total Past
Due
     Non-Accrual      Total
Loans
 

Residential loans

   $ 115,985       $ 2,400       $ 1,338       $ —         $ 3,738       $ 1,274       $ 120,997   

Commercial real estate loans

                    

Non owner-occupied

     52,169         1,017         545         2,313         3,875         4,533         60,577   

All other commercial real estate

     19,429         2,412         576         —           2,988         80         22,497   

Construction loans

                    

Residential construction loans

     4,781         —           —           —           —           —           4,781   

Commercial construction loans

     15,291         —           —           —           —           —           15,291   

Home equity loans

     65,232         432         528         431         1,391         499         67,122   

Consumer loans

     2,694         34         27         —           61         8         2,763   

Commercial business and lease loans

     51,729         344         215         1,095         1,654         1,055         54,438   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 327,310       $ 6,639       $ 3,229       $ 3,839       $ 13,707       $ 7,449       $ 348,466   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

An allowance for loan and lease losses (“ALLL”) is maintained to absorb losses from the loan portfolio. The ALLL is based on management’s continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience, and the amount of non-performing loans.

 

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Table of Contents

The classes described above, provide the starting point for the ALLL analysis. Management tracks the historical net charge-off activity by loan class. A historical charge-off factor is calculated and applied to each class. Loans that are collectively evaluated for impairment are analyzed with general allowances being made as appropriate. For general allowances, historical loss trends are used in the estimation of losses in the current portfolio. Other qualitative factors are also considered.

“Pass” rated credits are segregated from “Criticized” credits for the application of qualitative factors. Management has identified a number of qualitative factors which it uses to supplement the historical charge-off factor because these factors are likely to cause estimated credit losses associated with the existing loan pools to differ from historical loss experience. The qualitative factors are evaluated quarterly and updated using information obtained from internal, regulatory, and governmental sources. The Bank’s qualitative factors consist of: national and local economic trends and conditions; levels of and trends in delinquency rates and non-accrual loans; levels of and trends in the Bank’s borrowers in bankruptcy; trends in volumes and terms of loans; effects of changes in lending policies and strategies; and concentrations of credit from a loan type, industry and/or geographic standpoint.

Management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process in order to make appropriate and timely adjustments to the ALLL. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALLL.

The following table summarizes the primary segments of the ALLL, segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of June 30, 2011. Activity in the allowance is presented for the nine months ended June 30, 2011 (in thousands):

 

     Residential
Loans
    Commercial
Real Estate
Loans
    Installment
Loans
    Commercial
Business and
Lease Loans
    Unallocated      Total  

ALLL balance at September 30, 2010

   $ 236      $ 3,300      $ 371      $ 1,914      $ —         $ 5,821   

Charge-offs

     (13     (192     (77     (814     —           (1,096

Recoveries

     —          —          12        33        —           45   

Provision

     208        (226     142        696        80         900   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

ALLL balance at June 30, 2011

   $ 431      $ 2,882      $ 448      $ 1,829      $ 80       $ 5,670   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Individually evaluated for impairment

   $ —        $ 1,265      $ —        $ 340      $ —         $ 1,605   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Collectively evaluated for impairment

   $ 431      $ 1,617      $ 448      $ 1,489      $ 80       $ 4,065   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

The allowance for loan losses is based on estimates, and actual losses will vary from current estimates. Management believes that the granularity of the homogeneous pools and the related historical loss ratios and other qualitative factors, as well as the consistency in the application of assumptions, result in an ALLL that is representative of the risk found in the components of the portfolio at any given date.

(8) Derivative Instruments

The Company accounts for its derivative instruments as either assets or liabilities on the balance sheet at fair value through adjustments to either the hedged items, accumulated other comprehensive income (loss), or current earnings, as appropriate. As part of its overall interest rate risk management activities, the Company utilizes derivative instruments to manage its exposure to various types of interest rate risk. These derivative instruments consist of interest rate swaps. There were two interest rate swap contracts outstanding as of June 30, 2011.

Entering into interest rate derivatives potentially exposes the Company to the risk of counterparties’ failure to fulfill their legal obligations including, but not limited to, potential amounts due or payable under each derivative contract. Notional principal amounts are often used to express the volume of these transactions, but the amounts potentially subject to credit risk are much smaller.

 

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During the second quarter of fiscal 2008, the Company entered into an interest rate swap contract involving the exchange of the Company’s floating rate interest rate payment on its $7.5 million in floating rate preferred securities for a fixed rate interest payment without the exchange of the underlying principal amount. This hedge relationship fails to qualify for the assumption of no ineffectiveness (short cut method) as defined by U.S. generally accepted accounting principles. Therefore, the Company accounts for this hedge relationship as a cash flow hedge. The cumulative change in fair value of the hedging derivative, to the extent that it is expected to be offset by the cumulative change in anticipated interest cash flows from the hedged exposure, will be deferred and reported as a component of accumulated other comprehensive income (AOCI). Any hedge ineffectiveness will be charged to current earnings. Consistent with the risk management objective and the hedge accounting designation, management measured the degree of hedge effectiveness by comparing the cumulative change in anticipated interest cash flows from the hedged exposure over the hedging period to the cumulative change in anticipated cash flows from the hedging derivative. Management utilizes the “Hypothetical Derivative Method” to compute the cumulative change in anticipated interest cash flows from the hedged exposure. To the extent that the cumulative change in anticipated cash flows from the hedging derivative offsets from 80% to 125% of the cumulative change in anticipated interest cash flows from the hedged exposure, the hedge will be deemed effective. The Company will use the Hypothetical Derivative Method to measure ineffectiveness. Under this method, the calculation of ineffectiveness will be done by using the change in fair value of the hypothetical derivative. That is, the swap will be recorded at fair value on the balance sheet and other comprehensive income will be adjusted to an amount that reflects the lesser of either the cumulative change in fair value of the swap or the cumulative change in the fair value of the hypothetical derivative instrument. Management will determine the ineffectiveness of the hedging relationship by comparing the cumulative change in anticipated interest cash flows from the hedged exposure over the hedging period to the cumulative change in anticipated cash flows from the hedging derivative. Any difference between these two measures will be deemed hedge ineffectiveness and recorded in current earnings. As of June 30, 2011, the hedge instrument was deemed to be effective, therefore, no amounts were charged to current earnings. The Company does not expect to reclassify any hedge-related amounts from accumulated other comprehensive income (loss) to earnings over the next twelve months.

The pay fixed interest rate swap contract outstanding at June 30, 2011 is being utilized to hedge $7.5 million in floating rate-preferred securities. Below is a summary of the interest rate swap contract and the terms at June 30, 2011:

 

     Notional
Amount
     Pay
Rate
    Receive
Rate(*)
    Maturity
Date
     Unrealized  

(Dollars in thousands)

             Gain      Loss  

Cash flow hedge

   $ 7,500         5.32     1.61     12/15/2012       $ —         $ 398   

 

(*) Variable receive rate based upon contract rates in effect at June 30, 2011.

During the first quarter of fiscal 2009, the Bank originated a $1.0 million fixed rate loan for one of its commercial mortgage loan customers and simultaneously entered into an offsetting fixed interest rate swap contract with PNC Bank, National Association (“PNC”). The Bank pays PNC interest at the same fixed rate on the same notional amount as the customer pays to the Bank on the commercial mortgage loan, and receives interest from PNC at a floating rate on the same notional amount. This interest rate hedging program helps the Bank limit its interest rate risk while at the same time helps the Bank meet the financing needs and interest rate risk management needs of its commercial customers. The Company accounts for this hedge relationship as a fair value hedge. This interest rate swap contract was recorded at fair value with any resulting gain or loss recorded in current period earnings. For the three and nine months ended June 30, 2011 the Company recorded a loss of $2,000 and a gain of $12,000, respectively, relating to this contract. For the three and nine months ended June 30, 2010 the Company recorded losses of $11,000 and $6,000, respectively, relating to this contract. As of June 30, 2011, the notional amount of the customer-related interest rate derivative financial instrument was $954,000, compared to $972,000 at June 30, 2010.

 

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(9) Comprehensive Income

The Company has developed the following table, which includes the tax effects of the components of other comprehensive income (loss). Other comprehensive income (loss) consists of net unrealized gains (losses) on securities available-for-sale, non-credit impairment charges on securities, and derivatives that qualify as cash flow hedges. Other comprehensive income (loss) and related tax effects for the indicated periods, consists of:

 

(Dollars in thousands)

   Three Months
Ended
June 30, 2011
    Three Months
Ended
June 30, 2010
 

Net income (loss)

   $ 413      $ (52

Comprehensive gain (loss) on cash flow hedges net of tax of $8 in 2011 and ($17) in 2010

     15        (32

Comprehensive gain on investment securities, net of tax of $133 in 2011 and $572 in 2010

     258        1,038   

Reclassification adjustment on investment securities, net of tax of $0 in 2011 and ($8) in 2010

     —          (16

Comprehensive loss on securities for which other-than-temporary impairment has been recognized in earnings, net of tax of $0 in 2011 and ($732) in 2010

     —          (1,421

Reclassification adjustment for other-than-temporary impairment losses on debt securities, net of tax of $19 in 2011 and $310 in 2010

     36        602   
  

 

 

   

 

 

 

Total comprehensive income

   $ 722      $ 119   
  

 

 

   

 

 

 

(Dollars in thousands)

   Nine Months
Ended
June 30, 2011
    Nine Months
Ended
June 30, 2010
 

Net income

   $ 938      $ 659   

Comprehensive gain (loss) on cash flow hedges net of tax of $57 in 2011 and ($16) in 2010

     112        (30

Comprehensive gain on investment securities, net of tax of $73 in 2011 and $2,309 in 2010

     142        4,410   

Reclassification adjustment on investment securities, net of tax of ($170) in 2011 and ($361) in 2010

     (329     (700

Comprehensive loss on securities for which other-than-temporary impairment has been recognized in earnings, net of tax of ($353) in 2011 and ($2,256) in 2010

     (686     (4,379

Reclassification adjustment for other-than-temporary impairment losses on debt securities, net of tax of $450 in 2011 and $831 in 2010

     874        1,612   
  

 

 

   

 

 

 

Total comprehensive income

   $ 1,051      $ 1,572   
  

 

 

   

 

 

 

 

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Table of Contents

(10) Disclosures About Fair Value Measurements

The following disclosures show the hierarchal disclosure framework associated with the level of pricing observations utilized in measuring assets and liabilities at fair value. The three broad levels defined by U.S. generally accepted accounting principles are as follows:

 

Level I -    Quoted prices are available in the active markets for identical assets or liabilities as of the reported date.
Level II -    Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities include items for which quoted prices are available but traded less frequently, and items that are fair valued using other financial instruments, the parameters of which can be directly observed.
Level III -    Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

This hierarchy requires the use of observable market data when available.

The following tables present the assets and liabilities reported on the consolidated statements of financial condition at their fair value as of June 30, 2011 and September 30, 2010 by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

 

     Level I      Level II      Level III      Total  
     (In Thousands)  

As of June 30, 2011

  

Assets:

           

Available-for-sale securities:

           

U.S. government and agency obligations

   $ —         $ 44,573       $ —         $ 44,573   

Municipal obligations

     —           31,017         —           31,017   

Corporate obligations

     —           5,500         —           5,500   

Equity securities in financial institutions

     1,692         —           —           1,692   

Other equity securities

     973         —           —           973   

Mutual funds

     2,672         —           —           2,672   

Trust preferred securities

     —           —           10,000         10,000   

Mortgage-backed securities:

           

Agency

     —           69,957         —           69,957   

Collateralized mortgage obligations:

           

Agency

     —           9,768         —           9,768   

Private-label

     —           2,536         —           2,536   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 5,337       $ 163,351       $ 10,000       $ 178,688   
  

 

 

    

 

 

    

 

 

    

 

 

 

Residential loans held for sale

   $ —         $ 480       $ —         $ 480   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Derivative instruments

   $ —         $ 497       $ —         $ 497   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     Level I      Level II      Level III      Total  
     (In Thousands)  

As of September 30, 2010

           

Assets:

           

Available-for-sale securities:

           

U.S. government and agency obligations

   $ —         $ 50,278       $ —         $ 50,278   

Municipal obligations

     —           29,550         —           29,550   

Corporate obligations

     —           7,606         —           7,606   

Equity securities in financial institutions

     1,778         —           —           1,778   

Other equity securities

     932         —           —           932   

Mutual funds

     9,214         —           —           9,214   

Trust preferred securities

     —           —           10,940         10,940   

Mortgage-backed securities:

           

Agency

     —           45,377         —           45,377   

Collateralized mortgage obligations:

           

Agency

     —           15,655         —           15,655   

Private-label

     —           3,370         —           3,370   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 11,924       $ 151,836       $ 10,940       $ 174,700   
  

 

 

    

 

 

    

 

 

    

 

 

 

Residential loans held for sale

   $ —         $ 1,970       $ —         $ 1,970   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Derivative instruments

   $ —         $ 736       $ —         $ 736   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company’s Level III investments at June 30, 2011, represent 19 different trust preferred offerings with an aggregate fair value of $10.0 million, which had floating rates based on LIBOR at June 30, 2011. Due to dislocations in the credit markets broadly, and the lack of trading and new issuance in trust preferred securities, market price indications generally reflect the lack of liquidity in the market. For further information relating to the Company’s Level III trust preferred securities, reference footnote 6, “Securities”, on pages 13 through 20.

The following table presents the changes in the Level III fair value category for the nine months ended June 30, 2011. The Company classifies financial instruments in Level III of the fair value hierarchy when there is reliance on at least one significant unobservable input to the valuation model. In addition to the unobservable inputs, the valuation models for Level III financial instruments typically also rely on a number of inputs that are readily observable either directly or indirectly.

Securities Available-For-Sale (In Thousands)

 

Beginning balance October 1, 2010

   $ 10,940   

Impairment charge on securities

     (1,182

Net change in unrealized loss on securities available-for-sale

     1,267   

Purchases, issuances, calls, and settlements

     (500

Paydowns on securities

     (532

Amortization

     7   

Transfers in and/or out of Level III

     —     
  

 

 

 

Ending balance June 30, 2011

   $ 10,000   
  

 

 

 

 

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Table of Contents

The following tables present the assets measured on a nonrecurring basis on the consolidated statements of financial condition at their fair value as of June 30, 2011 and September 30, 2010 by level within the fair value hierarchy. Impaired loans that are collateral dependent are written down to fair value through the establishment of specific reserves. Techniques used to value the collateral that secure the impaired loan include: quoted market prices for identical assets classified as Level I inputs; observable inputs, employed by certified appraisers, for similar assets classified as Level II inputs. In cases where valuation techniques included inputs that are unobservable and are based on estimates and assumptions developed by management based on the best information available under each circumstance, the asset valuation is classified as Level III inputs.

 

     Level I      Level II      Level III      Total  
     (In Thousands)  

As of June 30, 2011

  

Assets Measured on a Nonrecurring Basis:

           

Impaired loans

   $ —         $ 7,460       $ 13,297       $ 20,757   

Foreclosed real estate, net

     —           2,879         —           2,879   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ —         $ 10,339       $ 13,297       $ 23,636   
  

 

 

    

 

 

    

 

 

    

 

 

 
     Level I      Level II      Level III      Total  
     (In Thousands)  

As of September 30, 2010

  

Assets Measured on a Nonrecurring Basis:

           

Impaired loans

   $ —         $ 10,318       $ 6,286       $ 16,604   

Foreclosed real estate, net

     —           398         —           398   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ —         $ 10,716       $ 6,286       $ 17,002   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

(11) Disclosures About Fair Value of Financial Instruments

Management uses its best judgment in estimating the fair value of the Company’s financial instruments, however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective periods, and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each period.

The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities.

Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful. The Company, in estimating its fair value disclosures for financial instruments, used the following methods and assumptions:

Cash and Due From Banks

The carrying amounts reported approximate those assets’ fair value.

Interest Bearing Demand Deposits with Other Institutions

The carrying amounts reported approximate those assets’ fair value.

Securities

Fair values of securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable securities. Prices on pooled trust preferred securities were calculated by a third party using a discounted projected cash-flow technique. Cash flows were estimated based on credit quality and prepayment assumptions. The present value of the projected cash flows was calculated using an adjusted discount rate which reflects higher credit spreads due to economic stresses in the marketplace and lower credit ratings.

Loans Receivable

The net loan portfolio has been valued using a present value discounted cash flow. The discount rate used in these calculations is based upon the treasury yield curve adjusted for non-interest operating costs, credit loss, current market prices and assumed prepayment risk.

Federal Home Loan Bank Stock

The carrying amounts reported approximate those assets’ fair value.

Accrued Interest Receivable and Payable

The carrying amounts of accrued interest receivable and payable approximate their fair value.

Deposits

Deposits with stated maturities have been valued using a present value discounted cash flow with a discount rate approximating current market for similar assets and liabilities. Deposits with no stated maturities have an estimated fair value equal to both the amount payable on demand and the recorded book balance.

 

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Table of Contents

Securities Sold Under Agreements to Repurchase

The fair values for securities sold under agreement to repurchase were estimated using the interest rate currently available from the party that holds the existing debt.

Short-Term Borrowings

The carrying amounts for short-term borrowings approximate the estimated fair value of such liabilities.

Long-Term Debt

The fair values for long-term debt were estimated using the interest rate currently available from the party that holds the existing debt.

Subordinated Debt

Fair values for subordinated debt are estimated using a discounted cash flow calculation similar to that used in valuing fixed rate certificate of deposit liabilities.

Advance Payments by Borrowers for Taxes and Insurance

The fair value of the advance payments by borrowers for taxes and insurance approximates the carrying value of those commitments at those dates.

Interest Rate Swap Contracts

Estimated fair values of interest rate swap contracts are based on quoted market prices.

Off-Balance Sheet Instruments

Fair values for the Company’s off-balance sheet instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing.

 

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The carrying amounts and fair values of the Company’s financial instruments are presented in the following table:

 

     June 30,
2011
     September 30,
2010
 
     Carrying
Amount
     Fair
Value
     Carrying
Amount
     Fair
Value
 
     (In Thousands)  

Financial assets:

           

Cash and due from banks

   $ 5,700       $ 5,700       $ 8,414       $ 8,414   

Interest bearing demand deposits with other institutions

     15,570         15,570         20,923         20,923   

Securities available-for-sale

     178,688         178,688         174,700         174,700   

Securities held-to-maturity

     81,453         82,409         74,827         76,033   

Loans receivable, net (including loans held for sale)

     343,276         343,075         375,042         379,906   

Federal Home Loan Bank stock

     8,603         8,603         10,034         10,034   

Accrued interest receivable

     2,408         2,408         2,655         2,655   

Financial liabilities:

           

Deposits

     445,620         449,240         444,448         449,467   

Securities sold under agreements to repurchase

     75,175         81,696         108,342         117,307