Crowe Horwath LLP
				Independent Member Crowe Horwath International

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors

LaPorte Bancorp, Inc.

LaPorte, Indiana

We have audited the accompanying consolidated balance sheets of LaPorte Bancorp, Inc. as of December 31, 2010 and 2009 and the related consolidated statements of income, changes in shareholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that were appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of LaPorte Bancorp, Inc. as of December 31, 2010 and 2009, and the results of its operations and its cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.

 

South Bend, Indiana

March 22, 2011

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LAPORTE BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

December 31, 2010 and 2009

(Dollar amounts in thousands, except share and per share data)

 

 

 

		2010				2009
ASSETS
Cash and due from financial institutions		$	5,868			$	6,000
Securities available for sale			119,377				102,095
Federal Home Loan Bank (FHLB) stock, at cost (restricted)			4,038				4,206
Loans held for sale, at fair value			4,156				981
Loans, net of allowance for loan losses of $3,943 at December 31, 2010 and $2,776 at December 31, 2009			273,103				256,275
Mortgage servicing rights			414				424
Other real estate owned			1,516				554
Premises and equipment, net			10,332				11,150
Goodwill			8,431				8,431
Other intangible assets			675				939
Bank owned life insurance			10,479				9,618
Accrued interest receivable and other assets			5,881				5,154
Total assets		$	444,270			$	405,827
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Non-interest bearing		$	34,999			$	34,066
Interest bearing			282,339				239,342
Total deposits			317,338				273,408
Federal Home Loan Bank advances			61,675				52,773
Subordinated debentures			5,155				5,155
Federal Deposit Insurance Corporation guaranteed unsecured borrowings			4,916				4,852
Federal Reserve Bank discount window borrowings			—				16,675
Accrued interest payable and other liabilities			5,138				3,092
Total liabilities			394,222				355,955
Loan commitments and other related activities (Note 18)
Shareholders’ equity
Preferred stock, no par value; 1,000,000 shares authorized; none issued			—				—
Common stock, $0.01 par value; 19,000,000 shares authorized; 4,783,163 shares issued; and 4,586,363 and 4,607,963 shares outstanding at December 31, 2010 and December 31, 2009			48				48
Additional paid-in capital			21,160				21,188
Surplus			770				770
Retained earnings			31,211				28,620
Accumulated other comprehensive income (loss), net of tax (benefit) of $(283) and $936 at December 31, 2010 and 2009			(550	)			1,817
Treasury stock, at cost (2010 – 196,800 shares, 2009 – 175,200 shares)			(1,144	)			(1,033	)
Unearned Employee Stock Ownership Plan (ESOP) shares			(1,447	)			(1,538	)
Total shareholders’ equity			50,048				49,872
Total liabilities and shareholders’ equity		$	444,270			$	405,827

 

 

See accompanying notes to consolidated financial statements.

 

1.

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LAPORTE BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

Years ended December 31, 2010 and 2009

(Dollar amounts in thousands, except share and per share data)

 

 

 

		2010				2009
Interest and dividend income
Loans, including fees		$	16,371			$	14,431
Taxable securities			2,564				3,862
Tax exempt securities			1,155				582
FHLB stock			79				121
Other interest income			11				4
Total interest and dividend income			20,180				19,000
Interest expense
Deposits			4,679				4,972
Federal Home Loan Bank advances			2,096				2,833
Subordinated debentures			281				267
FDIC guaranteed unsecured borrowings			201				177
Federal funds purchased and other short-term borrowings			11				16
Total interest expense			7,268				8,265
Net interest income			12,912				10,735
Provision for loan losses			3,472				851
Net interest income after provision for loan losses			9,440				9,884
Noninterest income
Service charges on deposits			728				855
ATM and debit card fees			367				317
Brokerage fees, net			—				(4	)
Trust fees			6				170
Earnings on life insurance, net			381				351
Net gains on mortgage banking activities			814				942
Loan servicing fees, net			29				13
Net gains on securities			1,063				702
Warehouse loan fees			800				272
Losses on sales of other assets			(168	)			(130	)
Bank owned life insurance death benefit			5				441
Other income			480				282
Total noninterest income			4,505				4,211
Noninterest expense
Salaries and employee benefits			5,823				5,498
Occupancy and equipment			1,797				1,861
Data processing			461				458
Advertising			196				240
Bank examination fees			537				525
Amortization of intangibles			264				333
Collection and other real estate owned			133				131
FDIC insurance			437				575
FHLB advances prepayment penalty			—				427
Other expenses			1,161				1,110
Total noninterest expense			10,809				11,158
Income before income taxes			3,136				2,937
Income tax expense			545				425
Net income		$	2,591			$	2,512
Earnings per share:
Basic and diluted (Note 20)		$	0.58			$	0.56

 

 

See accompanying notes to consolidated financial statements.

 

2.

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LAPORTE BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Years ended December 31, 2010 and 2009

(Dollar amounts in thousands, except share and per share data)

 

 

 

		Common Stock				Additional Paid-In Capital				Surplus				Retained Earnings				Accumulated Other Comprehensive Income (Loss), Net of Tax				Treasury Stock				Unearned ESOP Shares				Total
Balance at January 1, 2009		$	48			$	21,235			$	770			$	26,108			$	383			$	(774	)		$	(1,628	)		$	46,142
Comprehensive income:
Net income			—				—				—				2,512				—				—				—				2,512
Other comprehensive income:
Net change in unrealized gain on securities available for sale, net of reclassification adjustments and tax effects			—				—				—				—				1,376				—				—				1,376
Net change in unrealized gain on derivative instruments, net of tax effects			—				—				—				—				58				—				—				58
Total comprehensive income																															3,946
Treasury shares purchased, 50,200 shares			—				—				—				—				—				(259	)			—				(259	)
ESOP shares earned, 9,044 shares			—				(47	)			—				—				—				—				90				43
Balance at December 31, 2009		$	48			$	21,188			$	770			$	28,620			$	1,817			$	(1,033	)		$	(1,538	)		$	49,872

 

 

(Continued)

3.

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LAPORTE BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Years ended December 31, 2010 and 2009

(Dollar amounts in thousands, except share and per share data)

 

 

 

		Common Stock				Additional Paid-In Capital				Surplus				Retained Earnings				Accumulated Other Comprehensive Income (Loss), Net of Tax				Treasury Stock				Unearned ESOP Shares				Total
Balance at January 1, 2010		$	48			$	21,188			$	770			$	28,620			$	1,817			$	(1,033	)		$	(1,538	)		$	49,872
Comprehensive income:
Net income			—				—				—				2,591				—				—				—				2,591
Other comprehensive income:
Net change in unrealized gain (loss) on securities available for sale, net of reclassification adjustments and tax effects			—				—				—				—				(1,319	)			—				—				(1,319	)
Net change in unrealized gain (loss) on derivative instruments, net of tax effects			—				—				—				—				(1,048	)			—				—				(1,048	)
Total comprehensive income																															224
Treasury shares purchased, 21,600 shares			—				—				—				—				—				(111	)			—				(111	)
ESOP shares earned, 9,044 shares			—				(28	)			—				—				—				—				91				63
Balance at December 31, 2010		$	48			$	21,160			$	770			$	31,211			$	(550	)		$	(1,144	)		$	(1,447	)		$	50,048

 

 

See accompanying notes to consolidated financial statements.

 

4.

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LAPORTE BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended December 31, 2010 and 2009

(Dollar amounts in thousands, except share and per share data)

 

 

 

		2010				2009
Cash flows from operating activities
Net income		$	2,591			$	2,512
Adjustments to reconcile net income to net cash from operating activities:
Depreciation			703				777
Provision for loan losses			3,472				851
Net gains on securities			(1,063	)			(702	)
Net gains on sales of loans			(691	)			(713	)
Originations of loans held for sale			(43,246	)			(53,398	)
Proceeds from sales of loans held for sale			40,762				53,254
Recognition of mortgage servicing rights			(123	)			(229	)
Amortization of mortgage servicing rights			91				126
Net change in mortgage servicing rights valuation allowance			42				8
Gain on sales of other real estate owned			(12	)			(23	)
Write down of other real estate owned			169				114
Earnings on life insurance, net			(366	)			(604	)
Amortization of intangible assets			264				333
ESOP compensation expense			63				43
Amortization of issuance costs of unsecured borrowing			64				55
Changes in assets and liabilities:
Accrued interest receivable and other assets			404				(700	)
Accrued interest payable and other liabilities			546				23
Net cash from operating activities			3,670				1,727
Cash flows from investing activities
Net change in loans			(21,881	)			(37,561	)
Proceeds from sales of other real estate owned			968				637
Proceeds from maturities, calls and principal repayments of securities available for sale			39,306				30,420
Proceeds from sales of securities available for sale			41,904				28,324
Proceeds from redemption of FHLB stock			168				—
Purchases of securities available for sale			(99,427	)			(56,602	)
Premises and equipment expenditures, net			(391	)			(216	)
Bank owned life insurance death benefits			5				441
Purchase of bank owned life insurance			(500	)			—
Net cash from investing activities			(39,848	)			(34,557	)

 

 

(Continued)

5.

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LAPORTE BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended December 31, 2010 and 2009

(Dollar amounts in thousands, except share and per share data)

 

 

 

		2010				2009
Cash flows from financing activities
Net change in deposits		$	43,930			$	38,594
Net change in FHLB advances			8,902				(25,955	)
Net change in Federal Reserve Bank discount window borrowings			(16,675	)			16,025
Proceeds from issuance of unsecured borrowing, net of issuance costs			—				4,797
Purchase of treasury stock			(111	)			(259	)
Net cash from financing activities			36,046				33,202
Net change in cash and cash equivalents			(132	)			372
Cash and cash equivalents at beginning of year			6,000				5,628
Cash and cash equivalents at end of year		$	5,868			$	6,000
Supplemental cash flow information:
Interest paid		$	7,257			$	8,281
Income taxes paid			746				45
Supplemental noncash disclosures:
Transfers from loans receivable to other real estate owned		$	1,581			$	361
Transfers from premises and equipment, net to other real estate owned			506				—

 

 

See accompanying notes to consolidated financial statements.

 

6.

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LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except share and per share data)

 

 

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations and Principles of Consolidation: The consolidated financial statements include the accounts of LaPorte Bancorp, Inc. (“the Bancorp”), its wholly owned subsidiary, The LaPorte Savings Bank (“the Bank”) and the Bank’s wholly owned subsidiary, LPSB Investments LTD., Cayman (“LPSB Ltd.”), together referred to as “the Company.” The Bancorp was formed on October 12, 2007 and acquired City Savings Financial Corporation and its subsidiary, City Savings Bank, which were merged into the Bancorp and the Bank. Intercompany transactions and balances are eliminated in consolidation. LaPorte Bancorp, Inc. is a majority owned (54.99%) subsidiary of LaPorte Savings Bank, MHC. These financial statements do not include the transactions and balances of LaPorte Savings Bank, MHC.

The Company provides financial services through its offices in LaPorte and Porter counties of Indiana. Its primary deposit products are checking, savings, and term certificate accounts, and its primary lending products are residential mortgage, commercial, and installment loans. Substantially all loans are secured by specific items of collateral including business assets, consumer assets, and commercial and residential real estate. Commercial loans are expected to be repaid from cash flow from operations of businesses. There are no significant concentrations of loans to any one industry or customer. However, the customers’ ability to repay their loans is dependent on the real estate and general economic conditions in the area. LPSB Ltd. began operations in 2002 when the Bank received approval from the Federal Deposit Insurance Corporation to form the subsidiary in the Cayman Islands. LPSB Ltd. held and managed a portion of the Bank’s investment portfolio until July 30, 2008 when the securities were transferred to the Bank as LPSB Ltd. was in the process of being dissolved. LPSB Ltd. was deemed to be dissolved on March 17, 2009.

Use of Estimates: To prepare financial statements in conformity with United States generally accepted accounting principles management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ. The allowance for loan losses, consideration of other than temporary declines in fair values of securities, the fair values of securities and other financial instruments, consideration of impairment of goodwill and other intangible assets, and the need for a deferred tax asset valuation allowance are particularly subject to change.

Cash Flows: Cash and cash equivalents includes cash, deposits with other financial institutions with original maturities under 90 days, and federal funds sold. Net cash flows are reported for customer loan and deposit transactions, interest bearing deposits in other financial institutions, federal funds purchased, Federal Home Loan Bank advances and Federal Reserve Bank discount window borrowings.

Securities: Securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity. Securities are classified as available for sale when they might be sold before maturity. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income, net of tax, as a separate component of shareholders’ equity. Trading securities are carried at fair value, with changes in unrealized holding gains and losses included in income.

 

 

(Continued)

7.

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LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except share and per share data)

 

 

 

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments, except for mortgage backed securities and collateralized mortgage obligations where prepayments are anticipated. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.

Management evaluates securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the income statement and 2) OTTI related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. For equity securities, the entire amount of impairment is recognized through earnings.

Loans Held for Sale: Mortgage loans originated and intended for sale in the secondary market are carried at fair value, as determined by outstanding commitments from investors.

The carrying value of mortgage loans sold with servicing rights retained is reduced by the amount allocated to the servicing right. Gains and losses on sales of mortgage loans are based on the difference between the selling price and the carrying value of the related loan sold.

Loans: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of purchase premiums and discounts, deferred loan fees and costs, and an allowance for loan losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipating prepayments.

Interest income on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in process of collection. Consumer loans are typically charged off no later than 120 days past due. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. A loan is moved to non-accrual status in accordance with the Company’s policy, typically after 90 days of non-payment.

 

 

(Continued)

8.

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LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except share and per share data)

 

 

 

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

The recorded investment in loans is the loan balance plus unamortized net deferred loan costs less unamortized net deferred loan fees. The total amount of accrued interest on loans as of December 31, 2010 was $595.

Concentration of Credit Risk: Most of the Company’s business activity is with customers located within La Porte County. Therefore, the Company’s exposure to credit risk is significantly affected by changes in the economy in the La Porte County area.

Mortgage Warehouse Loans: During the month of May 2009, a mortgage warehouse lending division was established at the Bank. This division has approved specific mortgage companies through which individual mortgage loans are originated by the mortgage company and funded by the Bank, as a secured borrowing with the pledge of collateral under the Bank’s agreement with the mortgage company. The individual mortgage loans are held between the time of origination and subsequent repurchase by the mortgage company for sale of the loan into the secondary market. Each individual mortgage is assigned to the Bank until the loan is repurchased and sold to the secondary market by the mortgage company. Also, the Bank takes possession of each original note and forwards such note to the end investor once the mortgage company has sold the loan. The individual loans are typically sold by the mortgage company within 30 days of origination and are seldom held more than 90 days. Interest income is accrued by the Bank during this period and fee income for each loan sold is collected when the sale has been completed.

Purchased Loans: The Company purchased a group of loans through the acquisition of City Savings Financial Corporation on October 12, 2007. Purchased loans that showed evidence of credit deterioration since their origination are recorded at an allocated fair value, such that there is no carryover of the seller’s allowance for loan losses. After acquisition, incurred losses are recognized by an increase in the allowance for loan losses.

Purchased loans are accounted for individually or aggregated into pools of loans based on common risk characteristics (e.g., credit score, loan type, and date of origination). The Company estimates the amount and timing of expected cash flows for each purchased loan or pool, and the expected cash flows in excess of amount paid is recorded as interest income over the remaining life of the loan or pool (accretable yield). The excess of the loan’s or pool’s contractual principal and interest over expected cash flows is not recorded (nonaccretable difference).

Over the life of the loan or pool, expected cash flows continue to be estimated. If the present value of expected cash flows is less than the carrying amount, a loss is recorded. If the present value of expected cash flows is greater than the carrying amount, it is recognized as part of future interest income.

 

 

(Continued)

9.

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LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except share and per share data)

 

 

 

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off.

The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired.

A loan is impaired when based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired.

Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. 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 shortfall in relation to the principal and interest owed.

All individually classified commercial and commercial real estate loans are evaluated for impairment. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures. Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For troubled debt restructurings that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.

 

 

(Continued)

10.

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LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except share and per share data)

 

 

 

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

The general component covers non-impaired loans and is based on historical loss experience adjusted for current factors. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the last three years. This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment. These economic factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other change in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations.

The following portfolio segments have been identified: Commercial, Mortgage, Mortgage Warehouse, Residential Construction, Indirect Auto, Home Equity and Consumer and Other. The risk characteristics of each of the identified portfolio segments are as follows:

Commercial – Subject to decreases in demand for certain products or services; increasing production costs; increases in interest rates on adjustable rate loans may impact borrowers’ ability to continue payments; adverse market conditions which may cause a decrease in the value of underlying collateral.

Mortgage – Subject to adverse market conditions which may cause a decrease in the value of underlying collateral; adverse employment conditions in the local economy which may lead to an increase in default rates; incremental rate increases on adjustable rate mortgages may impact borrowers’ ability to continue payments.

Mortgage Warehouse – Subject to higher fraud risk than our other lending areas; decreased market values in real estate throughout the country.

Residential Construction – Subject to adverse market conditions which may cause a decrease in the value of underlying collateral; adverse employment conditions in the local economy which may lead to an increase in default rates.

Indirect Auto – Subject to higher fraud risk than our other lending areas; adverse employment conditions in the local economy which may lead to an increase in default rates; decreased value of the underlying collateral.

Home Equity – Subject to adverse employment conditions in the local economy which may lead to an increase in default rates; decreased market values due to adverse real estate market conditions.

Consumer and Other – Subject to adverse employment conditions in the local economy which may lead to an increase in default rates; decreased value of the underlying collateral.

 

 

(Continued)

11.

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LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except share and per share data)

 

 

 

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

The Bank is subject to periodic examinations by its federal and state regulatory examiners, and may be required by such regulators to recognize additions to the allowance for loan losses based on their assessment of credit information available to them at the time of their examinations. The process of assessing the allowance for loan losses is necessarily subjective. Further, and particularly in times of economic downturns, it is reasonably possible that future credit losses may exceed historical loss levels and may also exceed management’s current estimates of incurred credit losses inherent within the loan portfolio. As such, there can be no assurance that future charge-offs will not exceed management’s current estimate of what constitutes a reasonable allowance for loan losses.

Mortgage Servicing Rights: When mortgage loans are sold with servicing retained, servicing rights are initially recorded at fair value with the income statement effect recorded in net gains on mortgage banking activities. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. The Company compares the valuation model inputs and results to published industry data in order to validate the model results and assumptions. All classes of servicing assets are subsequently measured using the amortization method which requires servicing rights to be amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans.

Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to carrying amount. Impairment is determined by stratifying rights into groupings based on predominant risk characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance for an individual grouping, to the extent that fair value is less than the carrying amount. If the Company later determines that all or a portion of the impairment no longer exists for a particular grouping, a reduction of the allowance may be recorded as an increase to income. Changes in valuation allowances are reported with loan servicing fees, net on the consolidated statements of income. The fair values of servicing rights are subject to significant fluctuations as a result of changes in estimated and actual prepayment speeds and default rates and losses.

Servicing fee income, which is reported on the consolidated statements of income as loan servicing fees, net, is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal; or a fixed amount per loan and are recorded as income when earned. The amortization of mortgage servicing rights is netted against loan servicing fee income. Loan servicing fees, net totaled $29 and $13 for the years ended December 2010 and 2009. Late fees and ancillary fees related to loan servicing are not material.

Transfers of Financial Assets: Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

 

 

(Continued)

12.

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LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except share and per share data)

 

 

 

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Foreclosed Assets: Assets acquired through or instead of loan foreclosure are initially recorded at fair value, less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Operating costs after acquisition are expensed.

Premises and Equipment: Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Buildings and related components are depreciated using the straight line method with useful lives ranging from 5 to 30 years. Furniture, fixtures and equipment are depreciated on an accelerated or straight line method with useful lives ranging from 3 to 10 years.

Federal Home Loan Bank (FHLB) Stock: The Bank is a member of the FHLB system. Members are required to own a certain amount of FHLB stock based on the level of FHLB borrowings and other factors, and may invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Cash dividends are reported as income.

Bank Owned Life Insurance: The Bank has purchased life insurance policies on certain key executives. Bank owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.

Goodwill and Other Intangible Assets: All goodwill on the Company’s balance sheet resulted from business combinations prior to January 1, 2009 and represents the excess of the purchase price over the fair value of the net assets of businesses acquired. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually. The Company has selected September 30^th as the date to perform the annual impairment test. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Goodwill is the only intangible asset with an indefinite life on our balance sheet.

Other intangible assets consist of core deposit and acquired customer relationship intangible assets arising from a whole bank acquisition. They are initially measured at fair value and then are amortized on an accelerated method over their estimated useful lives, which range from 4 to 15 years.

Loan Commitments and Related Financial Instruments: Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.

 

 

(Continued)

13.

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LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except share and per share data)

 

 

 

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Derivatives: At the inception of a derivative contract, the Company designates the derivative as one of three types based on the Company’s intentions and belief as to likely effectiveness as a hedge. These three types are (1) a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (“fair value hedge”), (2) a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”), or (3) an instrument with no hedging designation (“stand-alone derivative”). As of December 31, 2010, the Company had entered into four cash flow hedge transactions and one fair value hedge transaction. For a fair value hedge, the gain or loss on the derivative, as well as the offsetting loss or gain on the hedged item, are recognized in current earnings as fair values change. For a cash flow hedge, the gain or loss on the derivative is reported in other comprehensive income and is reclassified into earnings in the same periods during which the hedged transaction affects earnings. For both types of hedges, changes in the fair value of derivatives that are not highly effective in hedging the changes in fair value or expected cash flows of the hedged item are recognized immediately in current earnings. Changes in the fair value of derivatives that do not qualify for hedge accounting are reported currently in earnings, as noninterest income.

Net cash settlements on derivatives that qualify for hedge accounting are recorded in interest income or interest expense, based on the item being hedged. Net cash settlements on derivatives that do not qualify for hedge accounting are reported in noninterest income. Cash flows on hedges are classified in the cash flow statement the same as the cash flows of the items being hedged.

The Company formally documents the relationship between derivatives and hedged items, as well as the risk-management objective and the strategy for undertaking hedge transactions at the inception of the hedging relationship. This documentation includes linking fair value or cash flow hedges to specific assets and liabilities on the balance sheet. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivative instruments that are used are highly effective in offsetting changes in fair values or cash flows of the hedged items. The Company discontinues hedge accounting when it determines that the derivative is no longer effective in offsetting changes in the fair value or cash flows of the hedged item, the derivative is settled or terminates, a hedged forecasted transaction is no longer probable, a hedged firm commitment is no longer firm, or treatment of the derivative as a hedge is no longer appropriate or intended.

When hedge accounting is discontinued, subsequent changes in fair value of the derivative are recorded as noninterest income. When a fair value hedge is discontinued, the hedged asset or liability is no longer adjusted for changes in fair value and the existing basis adjustment is amortized or accreted over the remaining life of the asset or liability. When a cash flow hedge is discontinued but the hedged cash flows or forecasted transactions are still expected to occur, gains or losses that were accumulated in other comprehensive income (loss) are amortized into earnings over the same periods which the hedged transactions will affect earnings.

 

 

(Continued)

14.

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LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except share and per share data)

 

 

 

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Mortgage Banking Derivatives: Commitments to fund mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of these mortgage loans are accounted for as free standing derivatives. Fair values of these mortgage derivatives are estimated based on changes in mortgage interest rates from the date the interest rate on the loan is locked. The Company enters into forward commitments for the future delivery of mortgage loans when interest rate locks are entered into, in order to hedge the change in interest rates resulting from its commitments to fund the loans. Changes in the fair values of these derivatives are included in net gains on mortgage banking activities on the consolidated statements of income.

Income Taxes: Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.

A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.

The Company recognizes interest and/or penalties related to income tax matters in income tax expense.

Retirement Plans: Employee 401(k) and profit sharing plan expense is the amount of matching contributions. Split-dollar life insurance plan expense and supplemental retirement plan expense allocates the benefits over years of service.

Employee Stock Ownership Plan: The cost of shares issued to the ESOP, but not yet allocated to participants, is shown as a reduction of shareholders’ equity. Compensation expense is based on the market price of shares as they are committed to be released to participant accounts. Dividends, when paid, on allocated ESOP shares reduce retained earnings; dividends, when paid, on unearned ESOP shares reduce debt and accrued interest.

Earnings Per Common Share: Basic earnings per common share is net income divided by the weighted average number of common shares outstanding during the period. ESOP shares are considered outstanding for this calculation unless unearned. There were no potentially dilutive shares for any periods presented. Diluted earnings per common share is equal to basic earnings per common share for the years ended December 31, 2010 and 2009, as there were no outstanding equity plans which would have a dilutive effect.

Surplus: Surplus has been established in reference to Indiana State Banking Statute 28-6-1-28. This statute required State Savings Banks to reserve and set aside from the gross amount of gains and profits of the institution not less than one quarter of one percent (1/4%) per annum on the deposits, to be held and invested as a surplus fund to meet any contingency in its business, until the surplus fund shall equal up to ten percent (10%) upon the amount of deposits, however, a surplus fund up to twenty-five percent (25%) upon the amount of deposits was allowed. This statute has since been repealed, however, the fund will remain as a part of the Company’s total equity.

 

 

(Continued)

15.

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LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except share and per share data)

 

 

 

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Comprehensive Income: Comprehensive income, net of tax, consists of net income and other comprehensive income (loss), net of tax. Other comprehensive income (loss), net of tax, includes net changes in net unrealized gains and losses on securities available for sale, net of tax, reclassification adjustments and unrealized gains and losses on cash flow hedges, which are also recognized as a separate component of shareholders’ equity.

Loss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there now are such matters that will have a material effect on the consolidated financial statements.

Restrictions on Cash: Cash on hand or on deposit with the Federal Reserve Bank was required to meet regulatory reserve and clearing requirements.

Dividend Restriction: Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Bank to the Bancorp or by the Bancorp to shareholders.

Fair Value of Financial Instruments: Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.

Operating Segments: While the chief decision-makers monitor the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Company-wide basis. Operating segments are aggregated into one as operating results for all segments are similar. Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable operating segment.

Reclassifications: Some items in the prior year financial statements were reclassified to conform to the current presentation. Reclassifications had no effect on prior year net income or shareholders’ equity.

Adoption of New Accounting Standards:

FASB ASC 860

In June 2009, the FASB issued new guidance impacting FASB ASC 860, Transfers and servicing (Statement No. 166 – Accounting for Transfers of Financial Assets – an amendment of FASB Statement No. 140). The new guidance removes the concept of a qualifying special-purpose entity and limits the circumstances in which a financial asset, or portion of a financial asset, should be derecognized when the transferor has not transferred the entire financial asset to an entity that is not consolidated with the transferor in the financial statements being presented and/or when the transferor has continuing involvement with the transferred financial asset. The new standard became effective for the Company on January 1, 2010 and did not have a material impact on the Company’s consolidated financial condition or results of operations.

 

 

(Continued)

16.

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LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except share and per share data)

 

 

 

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

FASB ASC 810-10

In June 2009, the FASB issued new guidance impacting FASB ASC 810-10, which amended guidance for consolidation of variable interest entities by replacing the quantitative-based risks and rewards calculation for determining which enterprise, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. This new guidance became effective for the Company on January 1, 2010 and did not have a material impact on the Company’s consolidated financial condition or results of operations.

FASB ASC 310

In April 2009, the FASB issued an update (ASU No. 2010-18, Effect of a Loan Modification When the Loan Is Part of a Pool That is Accounted for as a Single Asset) impacting FASB ASC 310-30, Receivables – Loans and Debt Securities Acquired with Deteriorated Credit Quality. Under the amendments, modifications of loans that are accounted for within a pool do not result in the removal of those loans from the pool even if the modification of those loans would otherwise be considered a troubled debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change. This update was effective for the Company for the interim reporting period beginning after June 15, 2010. The adoption of this updated did not have a material impact on the Company’s consolidated financial condition or results of operations.

FASB ASU 2010-06

In January 2010, the FASB issued FASB Accounting Standards Update No. 2010-06, Fair Value Measurements and Disclosures (ASC 820). This Update amended existing guidance for fair value measurements and disclosures which requires disclosures for transfers in and out of Levels 1 and 2 fair value measurements and activity in Level 3 fair value measurements. The amendments in the guidance also clarify existing disclosures for level of disaggregation and disclosures about inputs and valuation techniques. The amendments in the guidance also include conforming amendments to the guidance on employers’ disclosures about postretirement benefit plan assets. The guidance was effective for interim and annual report periods beginning after December 15, 2009, except for the disclosures about 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 effect of adopting this new guidance did not have any material effect on the Company’s consolidated financial condition or results of operations.

 

 

(Continued)

17.

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LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except share and per share data)

 

 

 

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

FASB ASC 820-10

In July 2010, the FASB issued an update (ASU No. 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses). The objective of the update is for an entity to provide disclosures that facilitate financial statement users’ evaluation of the nature of credit risk inherent in the entity’s portfolio of financing receivables, how that risk is analyzed and assessed in arriving at the allowance for credit losses and the changes and reasons for those changes in the allowance for credit losses. This update provides a list of amendments to existing disclosures about financing receivables on a disaggregated basis with two levels – portfolio segment and class of financing receivable, as well as a list of additional disclosures about financing receivables. 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. In January 2011, the FASB temporarily delayed the effective date of the disclosures about troubled debt restructurings. Those disclosures are anticipated to be effective for interim and annual reporting periods ending after June 15, 2011. The Company is currently evaluating the impact of adopting this standard on the consolidated financial statements, however, it does not expect to have a material effect on the Company’s consolidated financial condition or results of operations.

Newly Issued Not Yet Effective Standards:

No new accounting standards have been issued that are not yet effective that are expected to have a significant impact on the Company’s consolidated financial condition or results of operations.

NOTE 2 – SECURITIES

The following table summarizes the amortized cost and fair value of the available-for-sale securities portfolio at December 31, 2010 and 2009 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss):

 

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
2010
U.S. federal agency		$	20,950			$	311			$	(181	)		$	21,080
State and municipal			39,779				503				(454	)			39,828
Mortgage-backed securities - residential			25,009				643				(222	)			25,430
Government agency sponsored collateralized mortgage obligations			32,943				503				(437	)			33,009
Privately held collateralized mortgage obligations			29				1				—				30
Total		$	118,710			$	1,961			$	(1,294	)		$	119,377

 

 

(Continued)

18.

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LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except share and per share data)

 

 

 

NOTE 2 – SECURITIES (Continued)

 

		Amortized Costs				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
2009
U.S. federal agency		$	13,112			$	19			$	(159	)		$	12,972
State and municipal			24,761				597				(94	)			25,264
Mortgage-backed securities - residential			29,732				1,350				—				31,082
Government agency sponsored collateralized mortgage obligations			25,755				845				(26	)			26,574
Privately held collateralized mortgage obligations			1,077				9				(18	)			1,068
Corporate debt securities			4,993				165				(23	)			5,135
Total		$	99,430			$	2,985			$	(320	)		$	102,095

At December 31, 2010 and 2009, mortgage backed securities available-for-sale consisted solely of Federal Home Loan Mortgage Corporation, Federal National Mortgage Association and Government National Mortgage Association issues.

The proceeds from sales of securities available-for-sale were as follows:

 

		2010				2009
Proceeds		$	41,904			$	28,324
Gross gains			1,110				728
Gross losses			(28	)			(24	)

Proceeds from calls of securities available for sale during the years ended December 31, 2010 and 2009 were $22,601 and $9,071 with gross gains of $12 and $2 and gross losses of $(31) and $(4).

The amortized cost and fair value of the investment securities portfolio are shown by expected maturity. Securities not due at a single maturity date, primarily mortgage-backed securities and CMOs, are shown separately.

 

		December 31, 2010
		Amortized Cost				Fair Value
Due in one year or less		$	—			$	—
Due from one to five years			19,035				19,267
Due from five to ten years			7,128				7,147
Due after ten years			34,566				34,494
Subtotal			60,729				60,908
Mortgage-backed securities and CMOs			57,981				58,469
Total		$	118,710			$	119,377

 

 

(Continued)

19.

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LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except share and per share data)

 

 

 

NOTE 2 – SECURITIES (Continued)

 

Securities pledged at year-end 2010 and 2009 had a carrying amount of approximately $36,195 and $70,561 and were pledged to secure public deposits, FHLB advances, short-term borrowings through the Federal Reserve Bank discount window and cash flow hedges.

At year-end 2010 and 2009, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of shareholders’ equity.

Securities with unrealized losses at year-end 2010 and 2009, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows:

 

December 31, 2010		Continuing Unrealized Loss For Less Than 12 Months								Continuing Unrealized Loss For 12 Months or More								Total
Description of Securities		Fair Value				Unrealized Loss				Fair Value				Unrealized Loss				Fair Value				Unrealized Loss
U.S. federal agency		$	9,935			$	(181	)		$	—			$	—			$	9,935			$	(181	)
State and municipal			16,766				(454	)			—				—				16,766				(454	)
Mortgage-backed securities – residential			11,718				(222	)			—				—				11,718				(222	)
Government agency sponsored collateralized mortgage obligations			13,615				(437	)			—				—				13,615				(437	)
Total temporarily impaired		$	52,034			$	(1,294	)		$	—			$	—			$	52,034			$	(1,294	)
December 31, 2009		Continuing Unrealized Loss For Less Than 12 Months								Continuing Unrealized Loss For 12 Months or More								Total
Description of Securities		Fair Value				Unrealized Loss				Fair Value				Unrealized Loss				Fair Value				Unrealized Loss
U.S. federal agency		$	10,582			$	(159	)		$	—			$	—			$	10,582			$	(159	)
State and municipal			5,496				(67	)			678				(27	)			6,174				(94	)
Government agency sponsored collateralized mortgage obligations			3,599				(26	)			—				—				3,599				(26	)
Privately held collateralized mortgage obligations			257				(1	)			286				(17	)			543				(18	)
Corporate debt securities			—				—				962				(23	)			962				(23	)
Total temporarily impaired		$	19,934			$	(253	)		$	1,926			$	(67	)		$	21,860			$	(320	)

 

 

(Continued)

20.

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LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except share and per share data)

 

 

 

NOTE 2 – SECURITIES (Continued)

 

At December 31, 2010, the Company held 64 investments in debt securities which were in an unrealized loss position of which all were in an unrealized loss position for less than twelve months. Management periodically evaluates each investment security for potential other than temporary impairment, relying primarily on industry analyst reports and observation of market conditions and interest rate fluctuations. Management believes it will be able to collect all amounts due according to the contractual terms of the underlying investment securities and that the noted declines in fair value are considered temporary and due only to normal market interest rate fluctuations. The Company does not intend to sell the securities and it is not more likely than not to be required to sell the debt security before its anticipated recovery.

NOTE 3 – LOANS

Loans at year end were as follows:

 

				2010				2009
Commercial				$	124,714			$	115,520
Mortgage					57,144				70,127
Mortgage warehouse					69,600				43,765
Residential construction					2,283				2,023
Indirect auto					3,390				4,812
Home equity					14,187				15,704
Consumer and other					5,595				6,978
		Subtotal			276,913				258,929
Less:		Net deferred loan (fees) costs			133				122
		Allowance for loan losses			(3,943	)			(2,776	)
Loans, net				$	273,103			$	256,275

As of December 31, 2010 and 2009, the Bank had repurchase agreements with nine and ten mortgage companies, respectively. For the year ended December 31, 2010, the mortgage companies originated $2,636,203 in mortgage loans and sold $2,605,039 in mortgage loans. The Bank recorded interest income of $3,877, mortgage warehouse loan fees of $800 and wire transfer fees of $268 for the year ended December 31, 2010. For the year ended December 31, 2009, the mortgage companies originated $604,755 in mortgage loans and sold $560,991 in mortgage loans. The Bank recorded interest income of $1,456, mortgage warehouse loan fees of $272 and wire transfer fees of $71 for the year ended December 31, 2009.

Activity in the allowance for loan losses was as follows:

 

		2010				2009
Beginning balance		$	2,776			$	2,512
Provision for loan losses			3,472				851
Loans charged-off			(2,333	)			(640	)
Recoveries			28				53
Ending balance		$	3,943			$	2,776

 

 

(Continued)

21.

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LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except share and per share data)

 

 

 

NOTE 3 – LOANS (Continued)

 

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2010:

 

		Commercial				Mortgage				Mortgage Warehouse				Residential Construction				Indirect Auto				Home Equity				Consumer and Other				Unallocated				Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment		$	813			$	60			$	—			$	—			$	—			$	15			$	—			$	—			$	888
Collectively evaluated for impairment			2,334				329				139				17				28				127				81				—				3,055
Acquired with deteriorated credit quality			—				—				—				—				—				—				—				—				—
Total ending allowance		$	3,147			$	389			$	139			$	17			$	28			$	142			$	81			$	—			$	3,943
Loans:
Loans individually evaluated for impairment		$	5,408			$	1,224			$	—			$	87			$	—			$	377			$	—			$	—			$	7,096
Loans collectively evaluated for impairment			118,779				55,751				69,600				2,187				3,390				13,858				5,600				—				269,165
Loans acquired with deteriorated credit quality			622				162				—				—				—				—				1				—				785
Total ending loan balance		$	124,809			$	57,137			$	69,600			$	2,274			$	3,390			$	14,235			$	5,601			$	—			$	277,046

The recorded investment in loans does not include accrued interest.

 

 

(Continued)

22.

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LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except share and per share data)

 

 

 

NOTE 3 – LOANS (Continued)

 

Individually impaired loans were as follows:

 

		2009
Year-end loans with no allocated allowance for loan losses		$	3,067
Year-end loans with allocated allowance for loan losses			4,397
Total		$	7,464
Amount of the allowance for loan losses allocated to impaired loans		$	614

 

		2010				2009
Average of individually impaired loans during year		$	6,076			$	6,622
Interest income recognized during impairment			71				21
Cash-basis interest income recognized			—				—

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2010:

 

		Unpaid Principal Balance				Recorded Investment				Allowance for Loan Losses Allocated
With no related allowance recorded:
Commercial:
Real Estate		$	1,185			$	1,184			$	—
Land			2,323				2,323				—
Mortgage			732				732				—
Residential construction:
Land			87				88				—
Subtotal			4,327				4,327				—
With an allowance recorded:
Commercial:
Real Estate			1,843				1,843				812
Land			57				57				1
Mortgage			492				492				60
Home equity			377				377				15
Subtotal			2,769				2,769				888
Total		$	7,096			$	7,096			$	888

The recorded investment in loans does not include accrued interest.

 

 

(Continued)

23.

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LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except share and per share data)

 

 

 

NOTE 3 – LOANS (Continued)

 

Nonaccrual loans and loans past due 90 days still on accrual were as follows:

 

		2010				2009
Loans past due over 90 days still on accrual		$	—			$	—
Nonaccrual loans			6,892				7,716

Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

The following table presents the recorded investment in nonaccrual loans and loans past due over 90 days still on accrual by class of loans as of December 31, 2010:

 

		Nonaccrual				Loans Past Due Over 90 Days Still Accruing
Commercial:
Real estate		$	2,819			$	—
Land			2,381				—
Mortgage			1,224				—
Residential construction:
Land			87				—
Indirect auto			4				—
Home equity			377				—
Total		$	6,892			$	—

The recorded investment in loans does not include accrued interest.

 

 

(Continued)

24.

---

LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except share and per share data)

 

 

 

NOTE 3 – LOANS (Continued)

 

The following table presents the aging of the recorded investment in past due loans as of December 31, 2010 by class of loans:

 

		30-59 Days Past Due				60-89 Days Past Due				Greater than 90 Days Past Due				Total Past Due				Loans Not Past Due				Total
Commercial:
Commercial and other		$	—			$	35			$	—			$	35			$	17,994			$	18,029
Real estate			1,328				—				1,580				2,908				76,948				79,856
Five or more family			48				—				—				48				11,530				11,578
Construction			—				—				—				—				4,943				4,943
Land			—				—				133				133				10,270				10,403
Mortgage			1,200				—				1,021				2,221				54,916				57,137
Mortgage warehouse			—				—				—				—				69,600				69,600
Residential construction:
Construction			—				—				—				—				1,876				1,876
Land			44				—				87				131				267				398
Indirect auto			31				—				4				35				3,355				3,390
Home equity			—				377				—				377				13,858				14,235
Consumer and other			153				—				—				153				5,448				5,601
Total		$	2,804			$	412			$	2,825			$	6,041			$	271,005			$	277,046

The recorded investment in loans does not include accrued interest.

Credit Quality Indicators

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. The analysis includes loans with risk ratings of Special Mention, Substandard and Doubtful. This analysis is performed on a quarterly basis. The Company uses the following definitions for risk ratings:

Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

 

 

(Continued)

25.

---

LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except share and per share data)

 

 

 

NOTE 3 – LOANS (Continued)

 

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. Loans listed as not rated are included in groups of homogeneous loans. The credit quality indicator on loans not rated is based on their individual payment performance. As of December 31, 2010, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

 

		Not Rated				Pass				Special Mention				Substandard				Doubtful
Commercial:
Commercial and other		$	213			$	17,736			$	29			$	51			$	—
Real estate			419				69,094				4,820				4,743				780
Five or more family			216				11,187				175				—				—
Construction			—				4,690				253				—				—
Land			—				6,427				684				3,292				—
Mortgage			47,086				7,525				520				1,951				55
Mortgage warehouse			69,600				—				—				—				—
Residential construction:
Construction			1,876				—				—				—				—
Land			311				—				—				87				—
Indirect auto			3,353				37				—				—				—
Home equity			13,458				141				109				150				377
Consumer and other			4,294				1,307				—				—				—
Total		$	140,826			$	118,144			$	6,590			$	10,274			$	1,212

The recorded investment in loans does not include accrued interest.

Purchased Loans:

The Company purchased loans during 2007, for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The carrying amount of those loans is as follows at year end:

 

		2010				2009
Commercial		$	66			$	93
Commercial real estate			962				1,000
Consumer			9				16
Residential real estate			163				170
Outstanding balance		$	1,200			$	1,279
Carrying amount, net of allowance of $0		$	1,035			$	797

 

 

(Continued)

26.

---

LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except share and per share data)

 

 

 

NOTE 3 – LOANS (Continued)

 

Accretable yield, or income expected to be collected, is as follows:

 

		2010				2009
Beginning balance		$	29			$	78
New loans purchased			—				—
Reclassification from nonaccretable yield			316				97
Accretion of income			(95	)			(146	)
Disposals			—				—
Ending balance		$	250			$	29

For those purchased loans disclosed above, the Company did not increase the allowance for loan losses during 2010 or 2009. No allowances for loan losses were reversed during 2010 or 2009.

There were no such loans purchased during 2010 or 2009.

Income is not recognized on certain purchased loans if the Company cannot reasonably estimate cash flows expected to be collected. The carrying amounts of such loans were $50 and $51 at December 31, 2010 and 2009.

NOTE 4 – FAIR VALUE

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3 – Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The Company used the following methods and significant assumptions to estimate the fair value of each type of financial asset:

Investment Securities: The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2).

 

 

(Continued)

27.

---

LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except share and per share data)

 

 

 

NOTE 4 – FAIR VALUE (Continued)

 

Loans Held for Sale and Loan Commitment Derivatives: The fair value of loans held for sale and residential mortgage loan commitments are determined by obtaining quoted prices for similar loans and commitments with similar interest rates and maturities from major secondary markets (Level 2).

Derivatives-Interest Rate Swaps: The fair values of derivatives are based on valuation models using observable market data as of the measurement date (Level 2).

Impaired Loans: The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

Other Real Estate Owned: Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate owned (OREO) are measured at the lower of carrying amount or fair value, less costs to sell. Fair values are generally based on third party appraisals of the property, resulting in a Level 3 classification. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.

Mortgage Servicing Rights: The fair value of mortgage servicing rights is based on a valuation model that calculates the present value of estimated net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income (Level 2).

 

 

(Continued)

28.

---

LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except share and per share data)

 

 

 

NOTE 4 – FAIR VALUE (Continued)

 

Assets and liabilities measured at fair value on a recurring basis, including financial assets and liabilities for which the Company has elected the fair value option, are summarized below:

 

						Fair Value Measurements at December 31, 2010 using:
		Carrying Value				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Financial Assets
Investment securities available-for-sale
U.S. federal agency		$	21,080			$	—			$	21,080			$	—
State and municipal			39,828				—				39,828				—
Mortgage-backed securities – residential			25,430				—				25,430				—
Government agency sponsored collateralized mortgage obligations			26,113				—				26,113				—
Privately held collateralized mortgage obligations			6,926				—				6,926				—
Total investment securities available-for-sale		$	119,377			$	—			$	119,377			$	—
Loans held for sale		$	4,156			$	—			$	4,156			$	—
Derivatives - residential mortgage loan commitments			53				—				53				—
Financial Liabilities
Derivatives – interest rate swaps			(1,828	)			—				(1,828	)			—

 

 

(Continued)

29.

---

LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except share and per share data)

 

 

 

NOTE 4 – FAIR VALUE (Continued)

 

						Fair Value Measurements at December 31, 2009 using:
		Carrying Value				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Financial Assets
Investment securities available-for-sale
U.S. treasury and federal agency		$	12,972			$	—			$	12,972			$	—
State and municipal			25,264				—				25,264				—
Mortgage-backed securities – residential			31,082				—				31,082				—
Government agency sponsored collateralized mortgage obligations			18,148				—				18,148				—
Privately held collateralized mortgage obligations			9,494				—				9,494				—
Corporate debt securities			5,135				—				5,135				—
Total investment securities available-for-sale		$	102,095			$	—			$	102,095			$	—
Loans held for sale		$	981			$	—			$	981			$	—
Derivatives - residential mortgage loan commitments			31				—				31				—
Derivatives – interest rate swaps			88				—				88				—

Loans held for sale were carried at the fair value of $4,156 which is made up of the outstanding balance of $4,110, net of a valuation of $46 at December 31, 2010, resulting in income of $32 for the year ending December 31, 2010. At December 31, 2009, loans held for sale were carried at the fair value of $981, which is made up of the outstanding balance of $967, net of a valuation of $14 at December 31, 2009, resulting in income of $14 for the year ending December 31, 2009.

 

 

(Continued)

30.

---

LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except share and per share data)

 

 

 

NOTE 4 – FAIR VALUE (Continued)

 

Assets measured at fair value on a non-recurring basis are summarized below:

 

						Fair Value Measurements at December 31, 2010 using:
		Carrying Value				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Impaired loans
Commercial:
Real estate		$	1,031			$	—			$	—			$	1,031
Land			56				—				—				56
Mortgage			432				—				—				432
Home equity			362				—				—				362
Other real estate owned, net
Commercial:
Real estate			148				—				—				148
Land			390				—				—				390
Mortgage			13				—				—				13
Mortgage servicing rights			277				—				277				—
						Fair Value Measurements at December 31, 2009 using:
		Carrying Value				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Impaired loans		$	3,783			$	—			$	—			$	3,783
Other real estate owned, net			230				—				—				230
Mortgage servicing rights			318				—				318				—

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $2,769, with a valuation allowance of $888 at December 31, 2010, resulting in an additional provision for loan losses of $2,515 for the year ending December 31, 2010. At December 31, 2009, impaired loans had a carrying amount of $4,397, with a valuation allowance of $614, resulting in an additional provision for loan losses of $323 for the year ending December 31, 2009.

 

 

(Continued)

31.

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LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except share and per share data)

 

 

 

NOTE 4 – FAIR VALUE (Continued)

 

Other real estate owned, which is measured at the lower of carrying or fair value less costs to sell, had a net carrying amount of $551, which is made up of the outstanding balance of $682, net of a valuation allowance of $131 at December 31, 2010, resulting in a write-down of $131 for the year ending December 31, 2010. At December 31, 2009, other real estate owned had a net carrying amount of $230, which is made up of the outstanding balance of $308, net of a valuation allowance of $78 at December 31, 2009, resulting in a write-down of $78 for the year ending December 31, 2009.

Mortgage servicing rights, which are carried at lower of cost or fair value, were carried at their fair value of $277, which is made up of the outstanding balance of $369, net of a valuation allowance of $92 at December 31, 2010, resulting in a charge of $42 for the year ending December 31, 2010. At December 31, 2009, mortgage servicing rights were carried at their fair value of $318, which is made up of the outstanding balance of $368, net of a valuation allowance of $50, resulting in a charge of $8 for the year ended December 31, 2009.

The carrying amounts and estimated fair values of financial instruments, at December 31, 2010 and December 31, 2009 are as follows:

 

December 31, 2010		Carrying Amount				Fair Value
Financial assets
Cash and due from financial institutions		$	5,868			$	5,868
Securities available-for-sale			119,377				119,377
Federal Home Loan Bank stock			4,038				N/A
Loans held for sale			4,156				4,156
Loans, net			273,103				277,030
Accrued interest receivable			1,451				1,451
Financial liabilities
Deposits		$	(317,338	)		$	(310,419	)
Federal Home Loan Bank advances			(61,675	)			(64,100	)
Subordinated debentures			(5,155	)			(4,933	)
FDIC guaranteed unsecured borrowings			(4,916	)			(5,162	)
Accrued interest payable			(407	)			(407	)
Derivatives – interest rate swaps			(1,828	)			(1,828	)

 

 

(Continued)

32.

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LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except share and per share data)

 

 

 

NOTE 4 – FAIR VALUE (Continued)

 

December 31, 2009		Carrying Amount				Fair Value
Financial assets
Cash and due from financial institutions		$	6,000			$	6,000
Securities available-for-sale			102,095				102,095
Federal Home Loan Bank stock			4,206				N/A
Loans held for sale			981				981
Loans, net			256,275				260,311
Accrued interest receivable			1,650				1,650
Derivatives – interest rate swaps			88				88
Financial liabilities
Deposits		$	(273,408	)		$	(263,933	)
Federal Home Loan Bank advances			(52,773	)			(54,547	)
Subordinated debentures			(5,155	)			(4,360	)
FDIC guaranteed unsecured borrowings			(4,852	)			(5,152	)
Federal Reserve Bank discount window borrowings			(16,675	)			(16,675	)
Accrued interest payable			(396	)			(396	)

The methods and assumptions, not previously presented, used to estimate fair value are described as follows:

Carrying amount is the estimated fair value for cash and due from financial institutions, accrued interest receivable and payable, demand deposits, other secured borrowings, and variable rate loans or deposits that reprice frequently and fully. The methods for determining the fair values for securities, loans held for sale, and interest rate swap derivatives were described previously. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. Fair value of debt is based on current rates for similar financing. It was not practicable to determine the fair value of FHLB stock due to restrictions placed on its transferability. The fair value of off-balance sheet items is not considered material.

 

 

(Continued)

33.

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LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except share and per share data)

 

 

 

NOTE 5 – LOAN SERVICING

Mortgage loans serviced for others are not reported as assets. The principal balances of these loans at year end are as follows:

 

		2010				2009
Mortgage loan portfolios serviced for:
FHLMC		$	65,595			$	64,016
FHLB			406				504
Total		$	66,001			$	64,520

Custodial escrow balances maintained in connection with serviced loans were $255 and $220 at year-end 2010 and 2009.

Activity for capitalized mortgage servicing rights was as follows:

 

		2010				2009
Servicing rights:
Beginning of year		$	424			$	329
Additions			123				229
Amortized to expense			(91	)			(126	)
Change in valuation allowance			(42	)			(8	)
End of year		$	414			$	424
		2010				2009
Valuation allowance:
Beginning of year		$	50			$	42
Additions expensed			68				15
Reductions credited to expense			(26	)			(7	)
Direct write-downs			—				—
End of year		$	92			$	50

The fair value of mortgage servicing rights was $456 and $473 at year-end 2010 and 2009. At year-end 2010, $137 of the mortgage servicing rights were carried at book value and $277 of the mortgage servicing rights were carried at their fair value, which is made up of the outstanding balance of $506, net of a valuation allowance of $92. Fair value at year-end 2010 was determined using a discount rate of 9.0%, prepayment speeds ranging from 8.2% to 22.6%, depending on the stratification of the specific right, and a weighted average default rate of approximately 0.5%. At year-end 2009, $106 of the mortgage servicing rights were carried at book value and $318 of the mortgage servicing rights were carried at their fair value, which was made up of the outstanding balance of $368, net of a valuation allowance of $50. Fair value at year-end 2009 was determined using a discount rate of 9.0%, prepayment speeds ranging from 11.1% to 22.7%, depending on stratification of the specific right, and a weighted average default rate of approximately 0.5%.

The weighted average amortization period is 3.66 years.

 

 

(Continued)

34.

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LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except share and per share data)

 

 

 

NOTE 6 – PREMISES AND EQUIPMENT

Year-end premises and equipment were as follows:

 

		2010				2009
Land		$	2,772			$	3,268
Buildings			9,872				9,856
Furniture, fixtures and equipment			5,701				5,728
Construction in progress			2				3
			18,347				18,855
Less: Accumulated depreciation			(8,015	)			(7,705	)
		$	10,332			$	11,150

Depreciation expense was $703 and $777 for 2010 and 2009.

NOTE 7 – GOODWILL AND INTANGIBLE ASSETS

Goodwill: The change in goodwill during the year is as follows:

 

		2010				2009
Beginning of year		$	8,431			$	8,431
Acquired goodwill			—				—
Impairment			—				—
End of year		$	8,431			$	8,431

 

 

(Continued)

35.

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LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except share and per share data)

 

 

 

NOTE 7 – GOODWILL AND INTANGIBLE ASSETS (Continued)

 

Impairment exists when a reporting unit’s carrying value of goodwill exceeds its fair value, which is determined through a two-step impairment test. Step 1 includes the determination of the carrying value of our single reporting unit, including the existing goodwill and intangible assets, and estimating the fair value of the reporting unit. We determined the fair value of our reporting unit and compared it to its carrying amount. If the carrying amount of a reporting unit exceeds its fair value, we are required to perform a second step to the impairment test.

Our annual impairment analysis as of September 30, 2010, indicated that the Step 2 analysis was not necessary. The estimate of the fair value of the reporting unit was higher than the carrying value of our reporting unit, including the existing goodwill and intangible assets, as of September 30, 2010. The Company did not record an impairment charge during 2010 or 2009.

 

 

(Continued)

36.

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LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except share and per share data)

 

 

 

NOTE 7 – GOODWILL AND INTANGIBLE ASSETS (Continued)

 

Acquired Intangible Assets

Acquired intangible assets were as follows at year end:

 

		2010
		Gross Carrying Amount				Gross Accumulated Amortization				Net Carrying Value
Amortized intangible assets:
Core deposit intangibles		$	1,534			$	916			$	618
Customer relationship intangibles			304				247				57
Total		$	1,838			$	1,163			$	675
		2009
		Gross Carrying Amount				Gross Accumulated Amortization				Net Carrying Value
Amortized intangible assets:
Core deposit intangibles		$	1,534			$	728			$	806
Customer relationship intangibles			304				171				133
Total		$	1,838			$	899			$	939

Aggregate amortization expense for 2010 and 2009 was $264 and $333, respectively.

Estimated amortization expense for each of the next five years is as follows:

 

2011		$	202
2012			109
2013			85
2014			66
2015			51

 

 

(Continued)

37.

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LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except share and per share data)

 

 

 

NOTE 8 – DEPOSITS

Time deposits of $100 thousand or more were $44,963 and $43,773 at year-end 2010 and 2009.

Scheduled maturities of time deposits for the next five years were as follows:

 

2011		$	67,567
2012			35,327
2013			12,898
2014			20,335
2015			5,458
Thereafter			6,920
		$	148,505

NOTE 9 – FEDERAL HOME LOAN BANK ADVANCES

The advance type, balances and interest rate ranges at December 31, 2010 and 2009 are as follows:

December 31, 2010

 

Advance Type		Balance				Interest Rate Range				Weighted Average Rate				Maturity Date Range
Fixed Rate Bullet		$	19,500				2.74% to 4.90	%			3.36	%			September 2011 through January 2015
Putable			9,000				2.95% to 5.15	%			3.93	%			June 2011 through January 2013
Mortgage			353				3.00% to 5.64	%			4.45	%			April 2011 through July 2013
Variable Rate			17,833				0.50	%			0.50	%			January 2011
LIBOR Adjustable			15,000				0.52% to 0.54	%			0.53	%			September 2015 through July 2016
Total advances			61,686
Yield adjustment on acquired FHLB advances			(11	)
Total		$	61,675

 

 

(Continued)

38.

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LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except share and per share data)

 

 

 

NOTE 9 – FEDERAL HOME LOAN BANK ADVANCES (Continued)

 

December 31, 2009

 

Advance Type		Balance				Interest Rate Range				Weighted Average Rate				Maturity Date Range
Fixed Rate Bullet		$	28,250				2.74% to 5.03	%			3.81	%			January 2010 through December 2012
Putable			24,000				2.95% to 6.09	%			5.25	%			July 2010 through January 2013
Mortgage			538				3.00% to 5.64	%			4.54	%			April 2011 through July 2013
Total advances			52,788
Yield adjustment on acquired FHLB advances			(15	)
Total		$	52,773

The Bank was authorized to borrow up to $76,562 from the Federal Home Loan Bank (FHLB) at December 31, 2010 and up to $77,621 at December 31, 2009. At December 31, 2010 and 2009 the Bank had indebtedness to the FHLB totaling $61,686 and $52,788. The FHLB advances held by the Bank consisted of five different types as of December 31, 2010 and three different types as of December 31, 2009. Fixed Rate Bullet Advances carry a fixed interest rate throughout the life of the advance and may not be prepaid prior to maturity without a fee being assessed by the FHLB. Putable Advances have stated interest adjustment dates on which the FHLB will have the option to adjust the interest rate and will continue to have this option quarterly thereafter. These advances may not be prepaid by the Bank prior to the FHLB exercising its option to adjust the interest rate. Mortgage Advances carry a fixed interest rate and require annual payments of the remaining principal balance. These advances may not be prepaid by the Bank prior to maturity without a fee being assessed by the FHLB. Variable Rate Advances carry a variable rate throughout the life of the advance. All of the Variable Rate Advances held by the Bank as of December 31, 2010 were short-term advances and may be prepaid at any time. LIBOR Adjustable Advances carry an adjustable interest rate which reset quarterly based on the 3 Month LIBOR rate at the reset date, plus a spread. These advances may be called by the FHLB on a quarterly basis.

During June 2009, the Bank retired a $7,500 FHLB advance with a stated maturity of 2010 and a cost of 5.97%. As the advance was prepaid prior to maturity, a fee of $427 was assessed and paid by the Bank.

 

 

(Continued)

39.

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LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except share and per share data)

 

 

 

NOTE 9 – FEDERAL HOME LOAN BANK ADVANCES (Continued)

 

The required payments over the next five years are as follows:

 

2011		$	30,134
2012			6,528
2013			5,023
2014			—
2015			10,000

At December 31, 2010, in addition to FHLB stock, the Bank pledged mortgage, home equity and commercial real estate loans totaling approximately $98,999 to the FHLB to secure advances outstanding. At December 31, 2009, the Bank pledged mortgage, home equity and commercial real estate loans totaling approximately $108,017 to the FHLB to secure advances outstanding. At December 31, 2010 and 2009, the Bank also pledged U.S. government sponsored agency securities totaling $20,327 and $18,022 to the FHLB to secure advances outstanding.

NOTE 10 – FDIC GUARANTEED UNSECURED BORROWINGS

On February 11, 2009, the Bank issued a $5,000 note due on February 15, 2012 under the FDIC Temporary Debt Guarantee Program. The note bears an interest rate of 2.74% in addition to the 100 basis point FDIC guarantee fee paid by the Bank. Interest payments are required to be made semiannually in arrears on February 15 and August 15 in each year commencing on August 15, 2009 through the maturity date. All legal and placement fees associated with this transaction were capitalized as debt issuance costs and will be amortized to interest expense over the repayment period on a straight-line basis.

NOTE 11 – SUBORDINATED DEBENTURES

In June 2003, City Savings Statutory Trust I, a trust formed by City Savings Financial Corporation, closed a pooled private offering of 5,000 trust preferred securities with a liquidation amount of $1 per security. City Savings Financial Corporation issued $5,155 of subordinated debentures to the trust in exchange for ownership of all of the common security of the trust and the proceeds of the preferred securities sold by the trust. On October 12, 2007, the Company purchased the ownership of the common securities of the trust as a result of its acquisition of City Savings Financial Corporation. In accordance with accounting rules, the trust is not consolidated with the Company’s financial statements, but rather the subordinated debentures are shown as a liability. The Company’s investment in the common stock of the trust was $155 and is included in other assets in the December 31, 2010 and 2009 consolidated balance sheets.

The Company may redeem the subordinated debentures, in whole or in part, in a principal amount with integral multiples of $1, on or after June 26, 2008 at 100% of the principal amount, plus accrued and unpaid interest. The subordinated debentures mature on June 26, 2033.

The Company has the right to defer interest payments by extending the interest payment period during the term of the subordinated debentures for up to 20 consecutive quarterly periods.

 

 

(Continued)

40.

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LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except share and per share data)

 

 

 

NOTE 11 – SUBORDINATED DEBENTURES (Continued)

 

The subordinated debentures are also redeemable in whole or in part from time to time, upon the occurrence of specific events defined within the trust indenture.

The subordinated debentures may be included in Tier I capital (with certain limitations applicable) under current regulatory guidelines and interpretations. The subordinated debentures have a variable rate of interest equal to the three month London Interbank Offered Rate (LIBOR) plus 3.10% which was 3.40% and 3.35% at year-end 2010 and 2009.

NOTE 12 – EMPLOYEE BENEFIT PLANS

401(k) Plan: The Bank maintains a defined contribution 401(k) plan for all employees. Employees must be 21 years of age to participate in the plan. As of February 1, 2010, employees are eligible to enter the 401(k) Plan during the first quarter following one year of employment. Prior to February 1, 2010, there was no minimum service requirement to enter the 401(k) Plan. Basic contributions may be made by the Bank in the range of 1% to 6% of employee compensation. Voluntary participant contributions may be made in the range of 1% to 75% of employee compensation. The employer will make matching employer contributions equal to 25% of the participant’s voluntary contributions on the first 6% of the participant’s voluntary contributions. Employee contributions are 100% vested. Employer basic and matching contributions are vested over 5 years. Employer basic and matching contributions totaled approximately $52 and $72 for the years ended December 31, 2010 and 2009.

Supplemental Employee Retirement Plan: Effective August 1, 2002, a supplemental retirement plan covers selective officers. The Bank is recording an expense equal to the projected present value of payments due at retirement based on the projected remaining years of service. The obligation under the plans was approximately $1,705 and $1,525 for the years ended December 31, 2010 and 2009 and is included in other liabilities in the consolidated balance sheets. The expense attributable to the plan, included in salaries and employee benefits, was approximately $214 and $292 for the years ended December 31, 2010 and 2009.

Split-Dollar Life Insurance Plans: Effective January 1, 2003, life insurance plans were provided for certain officers on a split-dollar basis. The officer’s designated beneficiary(s) is entitled to a percentage of the death proceeds from the split-dollar policies. The Bank is entitled to the remainder of the death proceeds less any loans on the policies and unpaid interest or cash withdrawals previously incurred by the Bank. The cash surrender value of these life insurance policies related to the Bank’s supplemental employee retirement plan totaled $10,479 and $9,618 at December 31, 2010 and 2009. The Bank is the owner of the split-dollar policies. Beginning with the effective date of the plan, the Bank began to accrue a liability for the expected amount of premiums to be paid on the officer’s portion of these split-dollar policies subsequent to the officer’s retirement. At December 31, 2008, such accrued liability totaled approximately $161. In May 2009, the Bank terminated the post retirement benefit of these split-dollar policies and thus reversed the accrued liability of $161. During the month of December 2009, the Company received insurance settlement proceeds attributable to the death benefit from two insurance policies as a part of the Company’s bank owned life insurance plan. The net settlement proceeds totaled approximately $629, of which $188 was applied as a reduction of the cash value of the policy and the remaining $441 was recorded as tax-exempt income. During December 2010, the Company purchased an additional policy in the amount of $500.

 

 

(Continued)

41.

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LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except share and per share data)

 

 

 

NOTE 13 – EMPLOYEE STOCK OWNERSHIP PLAN

Employees participate in an Employee Stock Ownership Plan (ESOP). The ESOP borrowed from the Company to purchase 180,894 shares of Bancorp stock at $10 per share. The Company makes discretionary contributions to the ESOP, as well as paying dividends on unallocated shares to the ESOP, and the ESOP uses funds it receives to repay the loan. When loan payments are made, ESOP shares are allocated to participants based on relative compensation and expense is recorded. Dividends on allocated shares increase participant accounts.

Participants receive the shares at the end of employment.

Contributions to the ESOP during 2010 and 2009 were $121 and $121. ESOP related expenses totaled $62 and $43 during 2010 and 2009.

Shares held by the ESOP were as follows at year-end:

 

		2010				2009
Allocated to participants			36,179				27,134
Unearned			144,715				153,760
Total ESOP shares			180,894				180,894
Fair value of unearned shares		$	1,308			$	677

 

 

(Continued)

42.

---

LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except share and per share data)

 

 

 

NOTE 14 – INCOME TAXES

Income tax expense (benefit) was as follows:

 

		2010				2009
Current expense (benefit)
Federal		$	526			$	(128	)
State			—				—
			526				(128	)
Deferred expense
Federal			19				553
State			126				70
			145				623
Change in valuation allowance related to realization of net state deferred tax asset			(126	)			(70	)
Total		$	545			$	425

The net deferred tax assets at December 31, 2010 and 2009 are as follows:

 

		2010				2009
Deferred tax assets
Deferred officer compensation		$	656			$	587
Bad debt expense			1,517				1,069
Federal net operating loss carryforwards			311				950
Indiana net operating loss carryforwards			207				415
Tax credit carryforwards			308				353
Write downs of other real estate owned			51				30
Capital loss carryforwards			107				113
Nonaccrual loan interest			149				151
Market value adjustment on acquired assets and liabilities			115				44
Net unrealized losses on interest rate swaps			510				—
Other			105				102
			4,036				3,814
Deferred tax liabilities
Mortgage servicing rights			(159	)			(163	)
Accretion			(2	)			(1	)
FHLB stock dividends			(145	)			(151	)
Deferred loan fees			(51	)			(47	)
Prepaid expenses			(108	)			(84	)
Depreciation			(364	)			(424	)
Net unrealized gains on securities available for sale			(227	)			(906	)
Net unrealized gains on interest rate swap			—				(30	)
Amortization of other intangible assets			(260	)			(362	)
			(1,316	)			(2,168	)
Valuation allowance			(554	)			(680	)
		$	2,166			$	966

 

 

(Continued)

43.

---

LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except share and per share data)

 

 

 

NOTE 14 – INCOME TAXES (Continued)

 

The valuation allowance has been established against the portion of the Company’s net state tax deferred tax asset that management feels is not realizable as of December 31, 2010 and 2009. The Company has an Indiana net operating loss carryforward of approximately $3,735 and $7,470 at December 31, 2010 and 2009 which will expire in 2018 through 2022, if not used. The Company also has Indiana enterprise zone credit carryforwards of approximately $118 at December 31, 2010 and 2009 which will expire in 2013 through 2017, if not used. The Company has federal net operating loss carryforwards of $915 and $2,793 as of December 31, 2010 and 2009 which will expire in 2025 through 2027. The Company also has a capital loss carryforward of $48 and $63 at December 31, 2010 and 2009, which will expire in 2012. Additionally, the Bank also has federal AMT credit carryforwards of approximately $230 and $276 at December 31, 2010 and 2009 which has no expiration date.

Total income tax expense differed from the amounts computed by applying the U.S. Federal income tax rate of 34% to income (loss) before income taxes as a result of the following:

 

		2010				2009
Expected income tax expense at
Federal tax rate		$	1,066			$	999
Increase (decrease) resulting from:
Effect of tax exempt income (net)			(513	)			(556	)
Other, net			(8	)			(18	)
Total income tax expense		$	545			$	425
Effective tax rate			17.38	%			14.47	%

Unrecognized Tax Benefits

The Company has no unrecognized tax positions at December 31, 2010 or 2009 not already addressed by the deferred tax asset valuation allowance.

Federal income tax laws provided savings banks with additional bad debt deductions through 1995, totaling $2,659 for the Company. Accounting standards do not require a deferred tax liability to be recorded on this amount, which liability would otherwise total $904 at December 31, 2010 and 2009. If the Company were liquidated or otherwise ceases to be a bank or if tax laws change, the $904 would be recorded as expense.

 

 

(Continued)

44.

---

LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except share and per share data)

 

 

 

NOTE 15 – RELATED-PARTY TRANSACTIONS

Loans to principal officers, directors, and their affiliates were as follows:

 

		2010				2009
Beginning balance		$	1,763			$	1,385
New loans			175				969
Effect of changes in composition of related parties			(182	)			74
Repayments			(288	)			(665	)
Ending balance		$	1,468			$	1,763

Deposits from principal officers, directors, and their affiliates at year-end 2010 and 2009 were $2,520 and $1,222.

NOTE 16 – REGULATORY CAPITAL MATTERS

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. Management believes as of December 31, 2010, the Bank met all capital adequacy requirements to which it is subject. Companies under $500 million in consolidated assets at the beginning of the year are not required to report consolidated regulatory capital ratios.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If only adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At year-end 2010 and 2009, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s category.

 

 

(Continued)

45.

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LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except share and per share data)

 

 

 

NOTE 16 – REGULATORY CAPITAL MATTERS (Continued)

 

Actual and required Bank capital amounts (in millions) and ratios are presented below at year end.

 

		Actual								Required Adequacy Purposes								Minimum Required To Be Well Capitalized Under Prompt Corrective Action Regulations
		Amount				Ratio				Amount				Ratio				Amount				Ratio
2010
Total Capital to risk weighted assets Bank		$	46.6				15.2	%		$	24.4				8.0	%		$	30.5				10.0	%
Tier 1 (Core) Capital to risk weighted assets Bank			42.8				14.0				12.2				4.0				18.3				6.0
Tier 1 (Core) Capital to average assets Bank			42.8				9.9				17.3				4.0				21.6				5.0
2009
Total Capital to risk weighted assets Bank		$	42.9				15.3	%		$	22.4				8.0	%		$	28.0				10.0	%
Tier 1 (Core) Capital to risk weighted assets Bank			40.2				14.3				11.2				4.0				16.8				6.0
Tier 1 (Core) Capital to average assets Bank			40.2				10.4				15.4				4.0				19.3				5.0

The Qualified Thrift Lender test requires at least 65% of assets be maintained in housing-related finance and other specified areas. If this test is not met, limits are placed on growth, branching, new investments, FHLB advances and dividends, or the Bank must convert to a commercial bank charter. Management believes that this test is met.

Dividend Restrictions – The Bancorp’s principal source of funds for dividend payments is dividends received from the Bank. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s net profits, combined with the retained net profits of the preceding two years, subject to the capital requirements described above. During 2011, the Company could, without prior approval, declare dividends of approximately $5,103 plus any 2011 net profits retained to the date of the dividend declaration.

 

 

(Continued)

46.

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LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except share and per share data)

 

 

 

NOTE 17 – DERIVATIVES

The Company utilizes interest rate swap agreements as part of its asset liability management strategy to help manage its interest rate risk position. The notional amount of the interest rate swaps does not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual interest rate swap agreements.

Interest Rate Swaps Designated as Cash Flow Hedges: Interest rate swaps with notional amounts of $30.25 million and $15.25 million as of December 31, 2010 and 2009, were designated as cash flow hedges of subordinated debentures, certain CDARS deposits and FHLB advances and were determined to be fully effective during all periods presented. As such, no amount of ineffectiveness has been included in net income. Therefore, the aggregate fair value of the swaps is recorded in other assets (liabilities) with changes in fair value recorded in other comprehensive income (loss). The amount included in accumulated other comprehensive income (loss) would be reclassified to current earnings should the hedges no longer be considered effective. The hedge would no longer be considered effective if a portion of the hedge becomes ineffective, the item hedged is no longer in existence or the Company discontinues hedge accounting. The Company expects the hedges to remain fully effective during the remaining terms of the swaps. The Company does not expect any amounts to be reclassed from other comprehensive income over the next 12 months.

Information related to the interest-rate swaps designated as cash flow hedges as of year-end is as follows:

 

		2010				2009
Subordinated debentures
Notional amount		$	5,000			$	5,000
Fixed interest rate payable			5.54	%			5.54	%
Variable interest rate receivable (Three month LIBOR plus 3.10%)			3.40	%			3.35	%
Unrealized gains (losses)			(176	)			34
Maturity date			March 26, 2014
CDARS deposits
Notional amount		$	10,250			$	10,250
Fixed interest rate payable			3.19	%			3.19	%
Variable interest rate receivable (One month LIBOR plus 0.55%)			0.81	%			0.78	%
Unrealized gains (losses)			(420	)			54
Maturity date			October 9, 2014
FHLB Advance
Notional amount		$	5,000			$	—
Fixed interest rate payable			3.54	%			—
Variable interest rate receivable (Three month LIBOR plus 0.22%)			0.52	%			—
Unrealized gains (losses)			(303	)			—
Maturity date			September 20, 2015

 

 

(Continued)

47.

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LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except share and per share data)

 

 

 

NOTE 17 – DERIVATIVES (Continued)

 

		2010				2009
FHLB Advance
Notional amount		$	10,000			$	—
Fixed interest rate payable			3.69	%			—
Variable interest rate receivable (Three month LIBOR plus 0.25%)			0.54	%			—
Unrealized gains (losses)			(601	)			—
Maturity date			July 19, 2016

Interest expense recorded on these swap transactions totaled $(530) and $(122) during 2010 and 2009 and is reported as a component of interest expense on subordinated debentures, deposits and FHLB advances.

The following table presents the net gains recorded in accumulated other comprehensive income (loss) and the Consolidated Statements of Income relating to the cash flow derivative instruments for the year ended December 31:

 

		Net amount of gain (loss) recognized in OCI (Effective Portion) 2010				Net amount of gain (loss) reclassified from OCI to interest income 2010				Net amount of gain (loss) recognized in other non interest income (Ineffective Portion) 2010
Interest rate contracts		$	(1,048	)		$	—			$	—
		Net amount of gain (loss) recognized in OCI (Effective Portion) 2009				Net amount of gain (loss) reclassified from OCI to interest income 2009				Net amount of gain (loss) recognized in other non interest income (Ineffective Portion) 2009
Interest rate contracts		$	58			$	—			$	—

The following table reflects the cash flow hedges included in the Consolidated Balance Sheet as of December 31:

 

		2010
		Notional Amount				Fair Value
Included in other liabilities:
Interest rate swaps related to Subordinated debentures		$	(5,000	)		$	(176	)
CDARS deposits			(10,250	)			(420	)
FHLB advances			(15,000	)			(904	)
Total included in other liabilities						$	(1,500	)

 

 

(Continued)

48.

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LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except share and per share data)

 

 

 

NOTE 17 – DERIVATIVES (Continued)

 

		2009
		Notional Amount				Fair Value
Included in other assets:
Interest rate swaps related to Subordinated debentures		$	5,000			$	34
CDARS deposits			10,250				54
Total included in other assets						$	88

Interest Rate Swaps Designated as Fair Value Hedges: An interest rate swap with a notional amount of $5.0 million as of December 31, 2010 was designated as a fair value hedge of certain brokered deposits. Information related to the interest-rate swap designated as a fair value hedge as of December 31, 2010 is as follows:

 

Brokered deposits
Notional Amount		$	5,000
Variable interest rate payable (One month LIBOR less 0.25%)			0.01	%
Fixed interest rate receivable			1.25	%
Maturity date			September 15, 2020

Interest income (expense) recorded on this swap transaction totaled $18 for the year ended December 31, 2010 and is reported as a component of interest expense on deposits. Gains (losses) on the fair market value hedge are recorded in other noninterest income and totaled $11 for the year ended December 31, 2010.

The following table reflects the fair value hedge included in the Consolidated Balance Sheet as of December 31, 2010:

 

		Notional Amount				Fair Value
Included in other liabilities:
Interest rate swaps related to brokered deposits		$	(5,000	)		$	(328	)
Total included in other liabilities						$	(328	)

The counterparty to the Company’s derivatives is exposed to credit risk whenever the derivative is in a liability position. As a result, the Company has collateralized the liability with cash and security collateral held in safekeeping by Bank of New York. At December 31, 2010 and 2009, the Company had $220 and $100, respectively, in cash and securities with fair market values of $2,482 and $251, respectively, posted as collateral for these derivatives.

 

 

(Continued)

49.

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LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except share and per share data)

 

 

 

NOTE 18 – LOAN COMMITMENTS AND OTHER RELATED ACTIVITIES

Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance-sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment.

The contractual amounts of financial instruments with off-balance-sheet risk at year end were as follows:

 

		2010								2009
		Fixed Rate				Variable Rate				Fixed Rate				Variable Rate
Commitments to make loans		$	1,618			$	—			$	2,316			$	76
Unused lines of credit			10,415				20,978				11,078				25,588
Standby letters of credit			68				2,318				85				4,170
Total		$	12,101			$	23,296			$	13,479			$	29,834

Commitments to make loans are generally made for periods of 60 days or less. The fixed rate loan commitments have interest rates ranging from 3.70% to 7.00% at December 31, 2010 and 6.25% to 6.75% at December 31, 2009 with maturities ranging from 12 months to 10 years.

 

 

(Continued)

50.

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LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except share and per share data)

 

 

 

NOTE 19 – PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION

Condensed financial information of LaPorte Bancorp, Inc. at December 31, 2010 and 2009 and for the years ended December 31, 2010 and 2009 is as follows:

CONDENSED BALANCE SHEETS

December 31, 2010 and 2009

 

		2010				2009
ASSETS
Cash and cash equivalents		$	670			$	945
ESOP loan receivable			1,488				1,558
Investment in banking subsidiary			52,068				51,375
Investment in statutory trust			155				155
Accrued interest receivable and other assets			1,012				1,002
Total assets		$	55,393			$	55,035
LIABILITIES AND SHAREHOLDERS’ EQUITY
Subordinated debentures		$	5,155			$	5,155
Accrued interest payable and other liabilities			190				8
Shareholders’ equity			50,048				49,872
Total liabilities and shareholders’ equity		$	55,393			$	55,035

CONDENSED STATEMENTS OF INCOME

Years ended December 31, 2010 and 2009

 

		2010				2009
Dividends from banking subsidiary		$	—			$	725
Interest income			58				61
Interest expense			(281	)			(267	)
Other expense			(182	)			(179	)
Income (loss) before income tax and undistributed subsidiary income			(405	)			340
Income tax benefit			(138	)			(131	)
Equity in undistributed income or net income of banking subsidiary			2,858				2,041
Net income		$	2,591			$	2,512

 

 

(Continued)

51.

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LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except share and per share data)

 

 

 

NOTE 19 – PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (Continued)

CONDENSED STATEMENTS OF CASH FLOWS

For the years ended December 31, 2010 and 2009

 

		2010				2009
Cash flows from operating activities
Net income		$	2,591			$	2,512
Adjustments to reconcile net income to net cash from operating activities:
Equity in undistributed income or net income of banking subsidiary			(2,858	)			(2,041	)
Change in other assets			27				(255	)
Change in other liabilities			6				(80	)
Net cash from operating activities			(234	)			136
Cash flows from investing activities
Payments received on ESOP loan			70				68
Net cash from investing activities			70				68
Cash flows from financing activities
Purchase of treasury stock			(111	)			(259	)
Net cash from financing activities			(111	)			(259	)
Net change in cash and cash equivalents			(275	)			(55	)
Beginning cash and cash equivalents			945				1,000
Ending cash and cash equivalents		$	670			$	945

 

 

(Continued)

52.

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LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except share and per share data)

 

 

 

NOTE 20 – EARNINGS PER SHARE

Diluted earnings per common share is equal to basic earnings per common share for the year ended December 31, 2010 and 2009, as there were no outstanding equity plans which would have a dilutive effect. The factors used in the earnings per common share computation follow:

 

		2010				2009
Basic
Net income		$	2,591			$	2,512
Weighted average common shares outstanding			4,587,856				4,635,823
Less: Average unallocated ESOP shares			(149,237	)			(158,283	)
Average shares			4,438,619				4,477,541
Basic and diluted earnings per common share		$	0.58			$	0.56

There were no potential dilutive common shares for the periods presented.

 

 

(Continued)

53.

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LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except share and per share data)

 

 

 

NOTE 21 – OTHER COMPREHENSIVE INCOME (LOSS)

Other comprehensive income (loss) components and related tax effects were as follows:

 

		2010				2009
Net unrealized holding gains (losses) on securities available for sale arising during the year		$	(935	)		$	2,786
Reclassification adjustment for net gains included in net income			(1,063	)			(702	)
Net unrealized gains (losses)			(1,998	)			2,084
Tax expense (benefit)			(679	)			708
Net-of-tax amount			(1,319	)			1,376
Change in fair value of derivatives used for cash flow hedges			(1,588	)			88
Reclassification adjustments for gains realized in income			—				—
Net unrealized gains (losses)			(1,588	)			88
Tax expense (benefit)			(540	)			30
Net-of-tax amount			(1,048	)			58
		$	(2,367	)		$	1,434

The following is a summary of the accumulated other comprehensive income (loss) balances, net of tax:

 

		Balance at December 31, 2009				Current Period Change				Balance at December 31, 2010
Unrealized gain (losses) on securities available for sale		$	1,759			$	(1,319	)		$	440
Unrealized gain (losses) on derivatives used for cash flow hedges			58				(1,048	)			(990	)
Total		$	1,817			$	(2,367	)		$	(550	)

 

 

(Continued)

54.

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LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except share and per share data)

 

 

 

NOTE 22 – QUARTERLY FINANCIAL DATA (UNAUDITED)

 

		Interest Income				Net Interest Income				Net Income				Earnings Per Share Basic and Diluted
2010
First quarter		$	4,822			$	2,965			$	670			$	0.15
Second quarter			4,988				3,139				568				0.13
Third quarter			5,150				3,340				801				0.18
Fourth quarter			5,220				3,468				552	1			0.12
2009
First quarter		$	4,637			$	2,510			$	490			$	0.11
Second quarter			4,634				2,519				502				0.11
Third quarter			4,799				2,785				589				0.13
Fourth quarter			4,930				2,921				931	2			0.21

 

1	Net income for the fourth quarter of 2010 included $1,180 in provision for loan losses.

2	Net income for the fourth quarter of 2009 included $441 tax-exempt income from death benefit proceeds from two insurance policies as a part of the Company’s bank owned life insurance plans.

 

 

55.