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

For the quarterly period ended
June 30, 2011
 

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

For the transition period from _________________________ to _________________________

Commission file number 1-13712
TECHE HOLDING COMPANY
(Exact name of registrant as specified in its charter)

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

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

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

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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X ] No [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o   No x
 
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: August 9 , 2011.
Class
 
2,070,015
$.01 par value common stock
 
Outstanding Shares
 
 
 

 
TECHE HOLDING COMPANY

QUARTERLY REPORT ON FORM 10-Q

INDEX


      Page  
 
   PART I.
  FINANCIAL INFORMATION
     
         
 
   Item 1.
  Financial Statements
     
         
 
   Consolidated Balance Sheets as of June 30, 2011 (unaudited)  and September 30, 2010
 
3
 
  
   Unaudited Consolidated Statements of Income for the three and nine months ended June 30, 2011 and 2010
 
4
 
 
   Unaudited Consolidated Statements of Cash Flows for the nine months ended June 30, 2011 and 2010
 
5
 
 
   Notes to Unaudited Consolidated Financial Statements
 
6
 
           
 
   Item 2.
  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
25
 
           
 
   Item 3.
 Quantitative and Qualitative Disclosure About Market Risk
 
32
 
           
 
   Item 4
 Controls and Procedures
 
32
 
           
 
   PART II.
 OTHER INFORMATION
 
32
 
           
 
   Item 1.
 Legal Proceedings
 
32
 
           
 
I  Item 1A.
 Risk Factors
 
32
 
           
     
   Item 2.
 Unregistered Sales of Equity Securities and Use of Proceeds
 
32
 
           
 
I  Item 3.
 Defaults Upon Senior Securities
 
33
 
           
 
   Item 4.
 [Reserved]
 
33
 
           
 
   Item 5.
 Other Information
 
33
 
           
 
   Item 6.
 Exhibits
 
33
 
           
 
   Signatures
   
34
 




 
2

 

TECHE HOLDING COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
 
   
June 30,
2011
   
September 30,
2010*
 
   ASSETS
 
(unaudited)
       
             
   Cash and due from banks
  $ 15,645     $ 15,420   
   Interest-bearing deposits
    37,557       25,235  
   Securities available-for-sale at fair value
    25,956       14,996  
   Securities held-to-maturity—at amortized cost (estimated fair
value of $76,772 and $61,711)
    74,902       59,566  
   Loans receivable—net of allowance for loan losses of $8,123 and $9,256
    575,253       586,635  
   Accrued interest receivable
    2,380       2,480    
   Investment in Federal Home Loan Bank stock, at cost
    3,891       5,402  
   Real estate owned, net
    2,694       1,181  
   Prepaid expenses and other assets
    7,080       6,898  
   Goodwill
    3,647       3,647  
   Life insurance contracts
    13,754       13,310  
   Premises and equipment, net
    26,245       26,754  
                 
TOTAL ASSETS
  $ 789,004     $ 761,524  
                 
   LIABILITIES AND STOCKHOLDERS’ EQUITY
               
                 
   Deposits
  $ 625,323     $ 579,355  
   Advances from Federal Home Loan Bank
    79,533       100,017  
   Advance payments by borrowers for taxes and insurance
    1,904       2,463  
   Accrued interest payable
    325       429  
   Accounts payable and other liabilities
    3,337       3,747  
                 
TOTAL LIABILITIES
    710,422       686,011  
                 
   COMMITMENTS AND CONTINGENCIES
    -       -  
                 
   STOCKHOLDERS’ EQUITY:
               
   Preferred stock, 5,000,000 shares authorized, none issued
    -       -  
   Common stock, $.01 par value, 10,000,000 shares authorized;
4,685,398 and 4,672,567 shares issued
    47       47  
   Additional paid-in capital
    53,181       52,685  
   Retained earnings
    76,843       73,942  
   Unearned ESOP shares
    (130 )     (326 )
   Treasury stock, 2,610,383 and 2,591,081 shares - at cost
    (51,535 )     (50,862 )
   Accumulated other comprehensive loss on held-to-maturity securities
    (446 )     (428 )
   Accumulated other comprehensive income on available for sale securities
    622       455  
                 
TOTAL STOCKHOLDERS’ EQUITY
    78,582       75,513  
                 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 789,004     $ 761,524  
See Notes to Unaudited Consolidated Financial Statements.

*  derived from audited financial statements
 
3

 

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

   
Three Months Ended
   
Nine Months Ended
 
   
June 30,
   
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
       
   INTEREST INCOME
                       
    Interest and fees on loans
  $ 9,083     $ 9,578     $ 27,550     $ 28,911  
    Interest and dividends on investments
    532       663       1,503       2,077  
    Other interest income
    143       58       444       186  
TOTAL INTEREST INCOME
    9,758       10,299       29,497       31,174  
                                 
   INTEREST EXPENSE:
                               
    Deposits
    1,265       1,822       4,122       5,573  
    Advances from Federal Home Loan Bank
    920       1,147       2,968       3,403  
TOTAL INTEREST EXPENSE
    2,185       2,969       7,090       8,976    
   NET INTEREST INCOME
    7,573       7,330       22,407       22,198  
                                 
   PROVISION FOR LOAN LOSSES
    1,000       900       3,150       2,996  
                                 
 NET INTEREST INCOME AFTER PROVISION
    FOR LOAN LOSSES
    6,573       6,430       19,257       19,202  
                                 
   NON INTEREST INCOME:
                               
    Total other-than temporary impairment losses
    (87 )     -       (87 )     (374 )
    Portion of impairment losses recognized in
      other comprehensive loss
    28       -       28       262  
    Net impairment losses recognized in earnings
    (59 )     -       (59 )     (112 )
    Service charges and other
    3,749       3,955       11,013       11,469  
    Gain on sale of premises and equipment
    -       -       103       -  
    Gain on equity securities
    6       -       15       67  
    Gain on sale of loans
    4       7       22       7  
    Other income
    189       198       627       654  
TOTAL NON INTEREST INCOME
    3,889       4,160       11,721       12,085  
                                  
   NON INTEREST EXPENSE:
                               
    Compensation and employee benefits
    4,325       4,118       12,518       12,389  
    Occupancy expense
    1,555       1,633       4,473       4,726  
    Marketing and professional
    664       637       2,198       2,054  
    FDIC premiums and assessment
    225       230       674       865  
    Other operating expenses
    1,007       1,259       3,414       3,464  
TOTAL NON INTEREST EXPENSE
    7,776       7,877       23,277       23,498  
                                 
   INCOME BEFORE INCOME TAXES
    2,686       2,713       7,701       7,789  
   INCOME TAXES
    896       892       2,574       2,535  
   NET INCOME
  $ 1,790     $ 1,821     $ 5,127     $ 5,254  
   BASIC EARNINGS PER COMMON SHARE
  $ 0.86     $ 0.87     $ 2.48     $ 2.51  
   DILUTED EARNINGS PER COMMON SHARE
  $ 0.85     $ 0.87     $ 2.45     $ 2.49  

See Notes to Unaudited Consolidated Financial Statements.


 
4

 

TECHE HOLDING COMPANY
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
   
For the Nine Months
Ended June 30,
 
   
2011
   
2010
 
   CASH FLOWS FROM OPERATING ACTIVITIES
                 
    Net income
 
$
5,127
   
$
5,254
 
    Adjustments to reconcile net income to net cash provided by operating activities:
               
  Accretion of discount on investments
       and mortgage-backed securities, net
   
(308
)
   
(178
)
    Impairment of debt securities
   
59
     
112
 
    Provision for loan losses
   
3,150
     
2,996
 
    Provision for real estate owned
   
2
     
20
 
    Gain on sale of land
   
(103
)
   
-
 
    (Gain) Loss on sale of OREO
   
(62
)
   
24
 
    Gain on securities
   
(15
)
   
(67
)
    Gain on sale of loans
   
(22
)
   
(7
)
    Depreciation
   
1,077
     
1,184
 
    Excess tax benefits from share-based payment arrangements
   
(29
)
   
(36
)
    Stock-based compensation
   
408
     
300
 
    Change in accounts payable and other liabilities
   
(410
)
   
(451
)
    Change in life insurance contracts
   
(444
)
   
(439
)
    Change in prepaid expenses and other assets
   
(182
)
   
(3,620
)
    Change in accrued interest payable
   
(104
)
   
(273
)
    Other– net
   
262
     
(139
)
    Net cash provided by operating activities
   
8,406
     
4,680
 
                 
   CASH FLOWS FROM INVESTING ACTIVITIES:
               
    Purchase of available for sale securities
   
(13,876
)
   
(36
)
    Purchase of securities held to maturity
   
(19,729
)
   
-
 
    Proceeds from sale of equity securities
   
71
     
384
 
    Principal repayments and proceeds from sale of mortgage-backed securities 
     available for sale
   
2,839
     
4,657
 
    Principal repayments of securities held to maturity
   
4,663
     
9,657
 
    Net loan originations
   
3,840
     
(4,336
)
    Purchase of loans
   
-
     
(1,273
)
    Proceeds from sale of loan participations
   
1,969
     
1,323
 
    Purchase (redemption) of FHLB stock
   
1,511
     
(333
)
    Proceeds from sale of land
   
499
     
-
 
    Proceeds from sale of OREO
   
990
     
1,358
 
    Purchase of premises and equipment
   
(964
)
   
(941
)
     Net cash (used) provided by investing activities
   
(18,187
)
   
10,460
 
                 
   CASH FLOWS FROM FINANCING ACTIVITIES:
               
    Repayment of  ESOP loan
   
196
     
195
 
    Net increase (decrease) in deposits
   
45,968
     
(7,367
)
    Net (decrease) increase in FHLB advances
   
(20,484
)
   
5,817
 
    Net decrease in advance payments by borrowers for taxes and insurance
   
(559
)
   
(378
)
    Proceeds from exercise of stock options
   
77
     
20
 
    Dividends paid
   
(2,226
)
   
(2,211
)
    Excess tax benefits from share-based payment arrangements
   
29
     
36
 
    Purchase of common stock for treasury
   
(673
)
   
(332
)
     Net cash provided (used) by financing activities
   
22,328
     
(4,220
)
                 
   NET INCREASE  IN CASH AND CASH EQUIVALENTS
   
12,547
     
10,920
 
   CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
   
40,655
     
23,675
 
   CASH AND CASH EQUIVALENTS, END OF PERIOD
 
$
53,202
   
$
34,595
 
                 
   Supplemental schedule of noncash investing activities:
               
  Transfer from loans to real estate owned
   
2,713
     
2,360
 
  Loans originated to finance sale of real estate owned
   
268
     
1,397
 
 
See Notes to Unaudited Consolidated Financial Statements.
 
5

 

TECHE HOLDING COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - PRINCIPLES OF CONSOLIDATION

The consolidated financial statements as of June 30, 2011 and September 30, 2010 and for the three and nine months ended June 30, 2011 and 2010, include the accounts of Teche Holding Company (the “Company”) and its subsidiary, Teche Federal Bank (the “Bank”). The Company’s business is conducted principally through the Bank. All significant inter-company accounts and transactions have been eliminated in consolidation.

NOTE 2 - BASIS OF PRESENTATION

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

NOTE 3 - INCOME PER SHARE

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

Following is a summary of the information used in the computation of basic and diluted income per common share for the three and nine months ended June 30, 2011 and 2010 (in thousands).


   
Three Months Ended
   
Nine Months Ended
 
   
June 30,
   
June 30,
 
   
2011
 
2010
   
2011
   
2010
 
Weighted average numbre of common
shares outstan ding - used in
computation of basic income per
common share
    2,073       2,099       2,071       2,094  
   Effect of dilutive securities:
                               
   Common stock equivalents
    23       4       23       18  
  Weighted average number of common
shares outstanding plus effect of
dilutive securities - used in
computation of diluted net
income per common share
    2,096       2,103       2,094       2,112  



 
6

 

For the three and nine months ended June 30, 2011 and 2010, net income for determining diluted earnings per share was equivalent to net income. Options to purchase shares that have been excluded from the determination of diluted earnings per share because they are antidilutive (the exercise price is higher than the current market price) amount to approximately 149,000 and 192,000 for the three and nine months ended June 30, 2011 and 2010, respectively.

NOTE 4 - COMPREHENSIVE INCOME

Comprehensive income includes net income and other comprehensive income which includes unrealized gains and losses on securities.  Following is a summary of the Company’s comprehensive income for the three and nine months ended June 30, 2011 and 2010 (in thousands).

   
For Three Months
   
For Nine Months
 
   
Ended June 30,
   
Ended June 30,
 
   
2011
   
2010
   
2011
   
2010
 
                                 
   Net income
 
$
1,790
   
$
1,821
   
$
5,127
   
$
5,254
 
   Reclassification of realized gains, net of tax
   
(18
)
   
-
     
(18
)
   
(45
)
   Noncredit portion of OTTI losses on held-to-maturity securities, net of tax
   
(4
)
   
-
     
(10
)
   
(173
)
   Unrealized gains, net of tax
   
150
     
79
     
177
     
57
 
   Total comprehensive income
 
$
1,918
   
$
1,900
   
$
5,276
   
$
5,093
 

NOTE 5 - NEW ACCOUNTING PRONOUNCEMENTS
 
ASC (860) Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, will require more information about transfers of financial assets, including securitization transactions and where companies have continuing exposure to the risks related to transferred financial assets. This guidance also eliminates the concept of a qualifying special-purpose entity, and changes the requirements for derecognizing financial assets and requires additional disclosures.

ASC (860) was adopted by the Company on October 1, 2010.  Earlier application was prohibited. The recognition and measurement provisions are being applied to transfers that occur on or after the effective date.  The adoption of this standard did not have a material impact on the consolidated financial statements.

ASU-Accounting Standards Update (2010-06) Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements (Jan 2010).   This update provides amendments to Topic 820 that will provide more robust disclosures about (1) the different classes of assets and liabilities measured at fair value, (2) the valuation techniques and inputs used, (3) the activity in Level 3 fair value measurements, and (4) the transfers between Levels 1, 2, and 3. The update is effective for interim and annual reporting periods beginning after December 15, 2009 except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements.  Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The Company adopted the fair value disclosures guidance on January 1, 2010, except for the gross presentation of the Level 3 roll forward information which is not required to be adopted by the Company until October 1, 2011.  The adoption requires additional disclosure.

 
7

 
ASU - Accounting Standards Update (2010-20), Receivables (Topic 310): Disclosure about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. The objective of this ASU is for an entity to provide disclosures that facilitate financial statement users’ evaluation of the following: (1) the nature of credit risk inherent in the entity’s portfolio of financing receivables; (2) how that risk is analyzed and assessed in arriving at the allowance for credit losses; and (3) the changes and reasons for those changes in the allowance for credit losses.

To achieve these objectives, an entity should provide disclosures on a disaggregated basis on two defined levels: (1) portfolio segment; and (2) class of financing receivable. The ASU makes changes to existing disclosure requirements and includes additional disclosure requirements about financing receivables, including:  (1) credit quality indicators of financing receivables at the end of the reporting period by class of financing receivables; (2) the aging of past due financing receivables at the end of the reporting period by class of financing receivables; and (3) the nature and extent of troubled debt restructurings that occurred during the period by class of financing receivables and their effect on the allowance for credit losses. The disclosures as of the end of a reporting period are effective for interim and annual periods ending on or after December 15, 2010.  The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010.  The adoption of this standard did not have a material impact on the Company’s financial position and results of operations; however, it increased the amount of disclosures in the notes to the consolidated financial statements.

ASU – Accounting Standards Update (2011-01), Receivables (Topic 310), Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20: Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit losses, delays the effective date of the disclosures to be concurrent with the effective date of the guidance for determining what constitutes a troubled debt restructuring, as presented in proposed ASU Receivables (Topic 310): Clarifications to Accounting for Troubled Debt Restructurings by Creditors.

ASU – Accounting Standards Update (2011-02), Receivables (Topic 310), A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring, provides additional guidance to assist creditors in determining whether a restructuring of a receivable meets the criteria to be considered a troubled debt restructuring. This standard should be applied to the first period beginning after June 15, 2011 and should be applied retrospectively to the beginning of the annual period in the year of adoption.  The Company does not anticipate the standard having a material impact on the consolidated financial statements.
 
ASU – Accounting Standards Update (2011-05), Comprehensive Income (Topic 220): Presentation of Comprehensive Income. The amendments in this Update allows an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This Update eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments in this Update do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendments in this Update should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. For nonpublic entities, the amendments are effective for fiscal years ending after
 
 
8

 
 
December 15, 2012, and interim and annual periods thereafter. Early adoption is permitted, because compliance with the amendments is already permitted. The amendments do not require any transition disclosures.
 
NOTE 6 – FAIR VALUE MEASUREMENTS
 
The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Available for sale securities are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as securities held-to-maturity, loans held for sale, loans held for investment and certain other assets. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting, other than temporary impairment accounting or impairments of individual assets.
 
This is a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value as follows:
 
Level 1 - Observable inputs such as quoted prices in active markets;
 
Level 2 - Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
 
Level 3 - Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
 
Following is a description of valuation methodologies used for assets recorded at fair value.
 
Investment Securities
 
Securities available for sale are valued at quoted market prices where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable securities. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds. Securities classified as Level 3 include asset-backed securities in less liquid markets. Securities held to maturity are valued using discounted cash flow models that use assumptions about prepayment speeds, coupon default rates, discount rates and timing and other assumptions that may affect the amounts of cash flows.
 
Loans
 
The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with ASC (310), “Accounting by Creditors for Impairment of a Loan.” The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At June 30, 2011, substantially all
 
 
9

 
 
of the impaired loans were evaluated based on the fair value of the collateral less estimated costs to sell.  Impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy.  When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.
 
Other Real Estate Owned
 
OREO, consisting of properties obtained through foreclosure or in satisfaction of loans, is reported at the lower of cost or fair value, determined on the basis of current appraisals, comparable sales, and other estimates of value obtained principally from independent sources, adjusted for estimated selling costs (Level 2). At the time of foreclosure, any excess of the loan balance over the fair value of the real estate held as collateral is treated as a charge against the allowance for loan losses. Gains or losses on sale and generally any subsequent adjustments to the value are recorded as a component of OREO expense.
 
    Fair Value     Fair Value Hierarchy  
   
At June 30, 2011
 
Level 1
 
Level 2
 
Level 3
 
    (In thousands)
                          
  Assets valued on a recurring basis:
                         
  Mortgage-backed securities:
                         
      Government National Mortgage Assoc.
 
$
1,930
 
$
-
 
$
1,930
 
$
-
 
      Federal Home Loan Mortgage Corp.
   
3,800
   
-
   
3,800
   
-
 
      Federal National Mortgage Assoc.
   
17,295
   
-
   
17,295
   
-
 
  Total  mortgage-backed securities
   
23,025
   
-
   
23,025
   
-
 
                           
  CMOs:
                         
      Government National Mortgage Assoc.
   
2,246
         
2,246
   
-
 
  Other equity securities
   
685
   
685
   
-
   
-
 
  Total recurring
 
$
25,956
 
$
685
 
$
25,271
 
$
-
 
 
  Assets valued on a non-recurring basis:
                             
  CMOs:  Private label
 
$
96
 
$
-
 
$
96
 
$
-
 
  Impaired loans
   
6,608
   
-
   
-
   
6,608
 
  Other real estate owned
   
2,694
   
-
   
-
   
2,694
 
  Total non-recurring
 
$
9,398
 
$
-
 
$
96
 
$
9,302
 
 

 
10

 
 
 
     Fair Value At September   Fair Value Hierarchy  
   
30, 2010
 
Level 1
 
Level 2
 
Level 3
 
  (In thousands)
                         
  Assets valued on a recurring basis:
                             
  Mortgage-backed securities:
                         
      Government National Mortgage Assoc.
 
$
2,098
 
$
-
 
$
2,098
 
$
-
 
      Federal Home Loan Mortgage Corp.
   
5,109
   
-
   
5,109
   
-
 
      Federal National Mortgage Assoc.
   
4,669
   
-
   
4,669
   
-
 
  Total mortgage-backed securities
   
11,876
   
-
   
11,876
   
-
 
                           
  CMOs:
                         
      Government National Mortgage Assoc.
   
2,652
   
-
   
2,652
   
-
 
  Marketable equity securities
   
468
   
468
   
-
   
-
 
  Total recurring
 
$
14,996
 
$
468
 
$
14,528
 
$
-
 
                           
  Assets valued on a non-recurring basis:
                         
  CMOs:  Private label
 
$
110
 
$
-
 
$
110
 
$
-
 
  Impaired loans
   
 6,484
   
-
   
6,484
   
-
 
  Other real estate owned
   
760
   
-
   
760
   
-
 
  Total non-recurring
 
$
7,354
 
$
-
 
$
7,354
 
$
-
 

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

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

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

Investment Securities – See discussion in the beginning of Note 7 on the valuation of the fair value of investment securities.  Investment securities’ fair value equals quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.

 
11

 
Loans - See discussion in the beginning of Note 6 on the valuation of fair value of impaired loans.  The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers for the same remaining maturities.  No adjustment has been made for illiquidity in the market for loans as there is no active market for many of the Company’s loans on which to reasonably base this estimate.

Federal Home Loan Bank Stock - Federal Home Loan Bank (FHLB) stock is recorded at cost and is periodically reviewed for impairment. No ready market exists for the FHLB stock.  It has no quoted market value and is carried at cost.  Cost approximates fair market value based upon the redemption requirements of the FHLB, and this investment is not considered impaired at June 30, 2011.  The FHLB of Dallas is still redeeming stock.

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

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

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

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

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


 
12

 

The estimated fair values of the Company’s financial instruments are as follows at June 30, 2011 and September 30, 2010:

    
June 30, 2011
   
September 30, 2010
 
   
Carrying
   
Estimated
   
Carrying
   
Estimated
 
   
Amount
   
Fair Value
   
Amount
   
Fair Value
 
    (In thousands)
                       
    Financial assets:
                       
    Cash and cash equivalents
  $ 53,202     $ 53,202     $ 40,655     $ 40,655  
    Investment securities
    100,858       102,728       74,562       76,707  
    FHLB stock
    3,891       3,891       5,402       5,402  
    Accrued interest receivable
    2,380       2,380       2,480       2,480  
    Life Insurance contracts
    13,754       13,754       13,310       13,310  
    Loans receivable, net
    575,253       589,422       586,635       621,556  
                                 
    Financial liabilities:
                               
    Deposits
    625,323       629,461       579,355       588,399  
    Advance from Federal Home Loan Bank
    79,533       84,983       100,017       111,619  
    Accrued interest payable
    325       325       429       429  
 
NOTE 7 – SECURITIES

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

   
June 30, 2011
 
         
Gross
   
Gross
   
Estimated
 
   
Amortized
Cost
   
Unrealized
Gains
   
Unrealized
Losses
   
Fair
Value
 
   (In thousands)
                       
    Mortgage-backed securities:
                       
      Government National Mortgage Assoc.
  $ 1,869     $ 61     $ -     $ 1,930  
      Federal Home Loan Mortgage Corp.
    3,701       99       -       3,800  
      Federal National Mortgage Assoc.
    16,924       371       -       17,295  
      22,494       531       -       23,025  
                                 
    CMOs:
                               
      Government National Mortgage Assoc.
    2,090       156       -       2,246  
      Other equity securities
    415       272       (2 )     685  
    Total
  $ 24,999     $ 959     $ (2 )   $ 25,956  
 
 
 
13

 

   
September 30, 2010
 
         
Gross
   
Gross
   
Estimated
 
   
Amortized
Cost
   
Unrealized
Gains
   
Unrealized
Losses
   
Fair
Value
 
   (In thousands)
                       
    Mortgage-backed securities:
                       
      Government National Mortgage Assoc.
  $ 2,039     $ 59     $ -     $ 2,098  
      Federal Home Loan Mortgage Corp.
    4,974       135       -       5,109  
      Federal National Mortgage Assoc.
    4,448       221       -       4,669  
      11,461       415       -       11,876  
                                 
    CMOs:
                               
      Government National Mortgage Assoc.
    2,474       178       -       2,652  
      Other equity securities
    372       96       -       468  
    Total
  $ 14,307     $ 689     $ -     $ 14,996  

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

    June 30, 2011  
         
Gross
   
Gross
   
Estimated
 
   
Amortized
Cost
   
Unrealized
Gains
   
Unrealized
Losses
   
Fair
Value
 
   (In thousands)
                       
    Investment securities:
                       
        Time deposits other banks
  $ 39,612     $ -     $ -     $ 39,612  
    Mortgage-backed securities:
                               
       Federal National Mortgage Assoc.
    25,653       882       (123 )     26,412  
       Federal Home Loan Mortgage Corp.
    5,998       488       -       6,486  
       Private Label
    1,519       352       (119 )     1,752  
    CMOs:
                               
       Federal Home Loan Mortgage Corp.
    145       -       (2 )     143  
       Federal National Mortgage Assoc.
    1,117       58       -       1,175  
       Private Label
    858       336       (2 )     1,192  
    Total
  $ 74,902     $ 2,116     $ (246 )   $ 76,772  
 
 
14

 

 
    
September 30, 2010
 
         
Gross
   
Gross
   
Estimated
 
   
Amortized
Cost
   
Unrealized
Gains
   
Unrealized
Losses
   
Fair
Value
 
   (In thousands)
                       
    Investment securities:
                       
     Federal Home Loan Bank
  $ 5,000     $ 3     $ --     $ 5,003  
      Time deposits other banks
    24,219       --       --       24,219  
    Mortgage-backed securities:
                               
      Federal National Mortgage Assoc.
    17,873       1,069       --       18,942  
      Federal Home Loan Mortgage Corp.
    7,918       577       --       8,495  
      Private Label
    1,841       291       (217 )     1,915  
    CMOs:
                               
      Federal Home Loan Mortgage Corp.
    197       2       --       199  
      Federal National Mortgage Assoc.
    1,343       67       --       1,410  
      Private Label
    1,175       361       (8 )     1,528  
    Total
  $ 59,566     $ 2,370     $ (225 )   $ 61,711  
 
Details concerning available-for-sale securities with unrealized losses as of June 30, 2011 are as follows:

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

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

   
Securities with losses
   
Securities with losses
             
   
under 12 months
   
over 12 months
   
Total
 
  (In thousands)
 
Fair value
   
Unrealized
   
Fair value
   
Unrealized
   
Fair value
   
Unrealized
 
Held-to-maturity
                                   
                                     
    Investment  securities:
                                      
    Mortgage-backed securities:
                                   
    Private Label
  $ 102     $ (2 )   $ 596     $ (117 )   $ 698     $ (119 )
      Federal National Mortgage Assoc.
    12,885       (123 )     -       -       12,885       (123 )
    CMOs:
                                               
      Federal Home Loan Mortgage
       Corp.
    144       (2 )     -       -       144       (2 )
      Private Label
    506       (2 )     -       -       506       (2 )
    Total
  $ 13,637     $ (129 )   $ 596     $ (117 )   $ 14,233     $ (246 )

There were no available-for-sale securities with unrealized losses as of September 30, 2010.

 
15

 

Details concerning held-to-maturity securities with unrealized losses as of September 30, 2010 are as follows:

    
Securities with losses under 12 months
   
Securities with losses over 12 months
   
Total
 
  (In thousands)
 
Fair value
   
Unrealized
   
Fair value
   
Unrealized
   
Fair value
   
Unrealized
 
Held-to-maturity
                                   
                                     
    Investment securities:
                                   
    Private Label
  $ 53     $ (18 )   $ 809     $ (199 )   $ 862     $ (217 )
    CMOs:
                                               
    Private Label
    368       (6 )     8       (2 )     376       (8 )
    Total
  $ 421     $ (24 )   $ 817     $ (201 )   $ 1,238     $ (225 )

The Bank had a total of 35 securities classified as held-to-maturity in an unrealized loss position; with total gross unrealized losses of $246,000 as of June 30, 2011.

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

The private label mortgage backed securities and CMOs are not backed by the full faith and credit of the U.S. Government.  For each private label security, duration of the impairment, credit support and cash flows were assessed to determine whether the security was temporarily or other than temporarily impaired.  Management evaluates the actual mortgage delinquencies, foreclosures, and real estate owned for each security, as well as future expected losses in the underlying mortgage collateral to determine if there is a high probability for expected losses and contractual shortfalls of interest or principal, which could warrant further recognition of impairment.  Based upon such evaluation, it was determined that some securities have been other-than-temporarily impaired and a corresponding charge to earnings for credit related impairment was recognized with the non-credit related impairment recognized in other comprehensive income.  There were $59,000 of realized credit losses in the private label securities portfolio for the nine months ended June 30, 2011.  In the performance of cash flow analysis on private label securities, management determined impaired securities had non-credit losses that were recognized in other comprehensive income in the amount of $28,000 for the nine months ended June 30, 2011.  All private label securities that have not been written down have been determined to have sufficient credit support and cash flows to recover the amortized cost of the related securities.


 
16

 

The amortized cost and estimated fair value of available-for-sale securities by contractual maturity at June 30, 2011, are shown below.  Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

  (In thousands)
 
Amortized
Cost
   
Fair
Value
 
    Due within one year
  $ -     $ -  
    Due after one year but within five years
    -       -  
    Due after five years but within ten years
    -       -  
    Due after ten years
    -       -  
    Total
    -       -  
                 
    Mortgage-backed securities
    24,584       25,271  
    Equity securities
    415       685  
    Total
  $ 24,999     $ 25,956  

The amortized cost and estimated fair value of held-to-maturity securities by contractual maturity at June 30, 2011, are shown below.  Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

   (In thousands)
 
Amortized
Cost
   
Fair
Value
 
      Due within one year
  $ 14,309     $ 14,309  
      Due after one year but within five years
    25,303       25,303  
      Due after five years  but within ten years
    -       -  
      Due after ten years
    -       -  
      Total
    39,612       39,612  
                 
      Mortgage-backed securities
    35,290       37,160  
      Total
  $ 74,902     $ 76,772  

 
There were no impairment losses in the equity securities portfolio for the three and nine months ended June 30, 2011.  Management will continue to monitor the equity securities and make an impairment adjustment if deemed necessary based upon the prospects for recovery and the duration and severity of the unrealized losses.

The following table presents a roll-forward of the amount of credit losses on the Bank’s investment securities recognized in earnings for the nine months ended June 30, 2011 (in thousands).
   
    Beginning balance of credit losses
 
$
1,442
 
    Other-than-temporary impairment credit losses
   
59
 
    Reduction for realized losses
   
(164
)
    Ending balance of cumulative credit losses recognized in earnings
 
$
1,337
 

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


 
17

 

NOTE 8-LOANS

Loans Receivable

Loans receivable are summarized as follows:

    Jun '11     % Total      Sept '10      % Total   
   (In thousands)
                       
      Commercial real estate loans
  $ 109,497       18.7 %   $ 118,858       19.9 %
      Commercial non-real estate loans
    25,433       4.4 %     30,929       5.2 %
      Commercial-construction loans
    6,056       1.0 %     5,526       0.9 %
      Commercial-land
    16,266       2.8 %     19,004       3.2 %
      Residential-construction loans
    3,990       0.7 %     4,320       0.7 %
      Residential-real estate loans
    344,739       58.9 %     337,885       56.6 %
      Consumer-Mobile home loans
    38,585       6.6 %     40,094       6.7 %
      Consumer-other
    40,358       6.9 %     40,807       6.8 %
    Total Loans
    584,924       100.0 %     597,423       100.0 %
    Less:
                               
        Allowance for loan losses
  $ 8,123             $ 9,256          
        Deferred loan fees
    1,548               1,532          
    Total Net Loans
  $ 575,253             $ 586,635          

Commercial real estate loans declined $9.4 million mainly due to paydowns and chargeoffs of commercial real estate loans in the amount of $1.2 million.  Commercial non-real estate loans declined $5.5 million mainly due to loan payoffs from one customer relationship totaling $4.1 million.  Residential real estate loans increased $6.8 million mainly due to originations of 15 year term conforming one-to-four family mortgage loans.  At June 30, 2011 approximately $271 million of loans receivable were pledged as collateral securing advances from the FHLB. 

CREDIT QUALITY OF LOANS AND ALLOWANCE FOR LOAN LOSSES

Changes in the allowance for loan losses were as follows:


     
Three Months
Ended June 30,
   
Nine Months
Ended June 30,
 
 
(In thousands)
 
2011
   
2010
   
2011
   
2010
 
 
Beginning ALLL
  $ 10,452     $ 8,253     $ 9,256     $ 6,806  
 
Provision for Loan Losses
    1,000       900       3,150       2,996  
 
Net Charge-offs
    (3,329 )     (323 )     (4,283 )     (972 )
 
Ending ALLL
  $ 8,123     $ 8,830     $ 8,123     $ 8,830  

The amount of nonaccrual loans at June 30, 2011 and September 30, 2010 was approximately $10.8 million and $14.1 million, respectively.  The Company had total impaired loans of approximately $9.4 million and $10.5 million at June 30, 2011 and September 30, 2010, respectively.  Specific reserves allocated to impaired loans totaled approximately $22,700 and $2.1 million as of June 30, 2011 and September 30, 2010, respectively.  The difference in specific reserves from September 30, 2010 to June
 
 
18

 
 
30, 2011 is due to the reserves being charged directly against the respective loans as of June 30, 2011.  Impaired loans totaling approximately $9.1 million and $2.0 million had no specific reserves allocated as of June 30, 2011 and September 30, 2010, respectively.  Two commercial loans totaling $1.4 million were classified as troubled debt restructurings due to a modification of terms allowing the customer to make interest only payments for an amount of time.  One large commercial loan totaling $873,000 was classified as a troubled debt restructuring due to an extension of maturity date and amount borrowed.  One customer relationship with three residential real estate loans totaling $356,000 was modified by an extension of term, and reduction in interest rate to obtain a lower payment for the customer.  One large commercial credit relationship consisting of 13 loans involving a residential land development and five show homes in the Baton Rouge market area, the borrower of which filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code, was classified as a troubled debt restructuring due to modifications in accordance with a plan of Bankruptcy/reorganization.

The effect on net interest income of troubled debt restructurings is insignificant for the nine months ended June 30, 2011.

Allowance for Loan Losses and Recorded Investment in Loans for the nine months ended June 30, 2011

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

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

 
19

 

       Real Estate                          
   (In thousands)
     
Commercial-real estate
   
Commercial-construction
   
Commercial-Land
   
Residential-construction
   
Residential-real estate
   
Commercial-non real estate
   
Consumer-Mobile Homes
   
Consumer-Other
   
Total
 
   Allowance for loan losses:
                                                         
                                                           
   Beginning Balance
      $ 2,402     $ 68     $ 1,076     $ 61     $ 4,173     $ 327     $ $640     $ 509     $ 9,256    
   Charge-offs
        1,461       51       1,367       -       1,041       138       201       72       4,331  
   Recoveries
        -       -       -       -       33       1       8       6       48  
   Provision
        1,158       70       519       15       1,024       62       160       142       3,150  
Ending balance
      $ 2,099     $ 87     $ 228     $ 76     $ 4,189     $ 252     $ 607     $ 585     $ 8,123  
                                                                               
 Ending balance allocation:
                                                                           
 Individually evaluated for 
    impairment
        -       -     $ 15       -     $ 33       -       -       -     $ 48  
                                                                             
 Collectively evaluated for 
    impairment
      $ 2,099     $ 87     $ 213     $ 76     $ 4,156     $ 252     $ 607     $ 585     $ 8,075  
                                                                             
 Loans:
 Ending Balance
 Collectively evaluated for 
    impairment
      $ 106,901     $ 5,004     $ 10,921     $ 3,990     $ 344,534       25,188       38,585       40,358       575,481  
                                                                             
 Ending Balance individually 
    evaluated  for impairment
        2,596       1,052       5,345       -       205       245       -       -       9,443  
 
Credit Quality Indicators
As of June 30, 2011

Commercial Credit Exposure
Credit Risk Profile by Internally Assigned Grade

Prime – Credits secured by cash (accounts held in the Bank), stocks, bonds (companies with debt ratings of “A” or better), U.S. Government securities with advance rates within bank policy and cash value of insurance policies (with sound AM Best rating).

Excellent – Demonstrates exceptional credit fundamentals, including stable and predictable profit margins and cash flows, strong liquidity and conservative balance sheet. Significant historical cash flow coverage of existing and pro-forma debt service coverage. Credits rated Excellent will have a strong primary source of repayment usually consisting of strong historical cash flows along with strong secondary and tertiary repayment sources.  Subsequent repayment sources could consist of financially strong guarantors, low loan to value ratios on collateral with a strong secondary market or resale source. Companies fitting the profile of minimal risk will have low leverage, a defined management succession plan and a broad product mix.

 
20

 
Average – Borrowers that fit this classification would most likely be a typical middle market business or high net worth individual.  Loans would typically be secured and may have some reliance on inventory. Cash flow is adequate to service debt but may be susceptible to some deterioration due to cyclical, seasonal or economic events.  Management is experienced but is concentrated in a few key people. Credits fitting this classification would typically have at least one very strong repayment source and a good secondary repayment source. Company product mix may lack diversity. The majority of loans fall within this classification. Annual financial statements on the borrower and guarantor(s) should be obtained.

Satisfactory – Displays an acceptable degree of risk in the short-term. Unfavorable characteristics may exist, however, these are offset by the positive trends. Some unpredictability in earnings and cash flow may exist. Leverage may be higher than typical in the industry and liquidity less than desirable. Management, while competent, may not be experienced and lack depth. Secondary and tertiary sources of repayment may be limited. Companies in a start-up situation typically fit this classification. Other characteristics of this classification would be companies with volatility in earning and/or increasing leverage.

Special Mention – A Special Mention asset has potential weaknesses that deserve management’s close attention. If left uncorrected these potential weaknesses may result in the deterioration of the repayment prospects for the asset or in the Bank’s credit position at some future date.  Special Mention assets are not adversely classified and do not expose the Bank to sufficient risk to warrant adverse classification.

Substandard - Assets classified Substandard have a well-defined weakness or weaknesses. A Substandard asset is inadequately protected by the current net worth or paying capacity of the obligor or pledged collateral, if any. It is characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Weaknesses are to be based upon objective evidence.

Doubtful - Assets classified Doubtful have all of the weaknesses inherent in those classified Substandard. In addition, these weaknesses make collection or liquidation in full highly questionable and improbable, on the basis of the currently existing facts, conditions and values.

Loss - Assets classified as Loss are considered uncollectible, or of such little value that the continuance of the loan or Other Asset on the books of the Bank is not warranted.  Some recovery of funds could be possible in the future, but the amount and probability of this recovery are not determinable, thus leaving little justification for the assets to remain on the books.

A Loss classification does not mean that an asset has no recovery or salvage value, but simply that it is not practical or desirable to defer writing off or reserving all or a portion of a basically worthless asset, even though partial recovery may be effected in the future.

Commercial Loans

Our underwriting philosophy is centered primarily around the borrower’s ability to generate adequate cash flow to service the debt in accordance with the terms and conditions of the loan agreement.  Understanding the borrower’s businesses along with their level of experience and the background of the principals is also a part of our lending philosophy.  Generally, our loans are secured by collateral and we assess the market value of the collateral and the strength it brings to the loan.  We generally require personal guarantees of the borrower’s principals and assess the financial strength and liquidity of each guarantor as part of our process.

 
21

 
Common risks to each class of commercial loans include risks that are not specific to the individual transactions such as general economic conditions within our markets.  There are risks associated with each individual transaction such as a change in marital status, disability or death of the borrower and the loss of value of our collateral due to market conditions.

In addition to these common risks, additional risks are inherent in certain types of commercial loans.

Commercial Construction and Land Development:
Commercial construction and land development loans are dependent upon the supply and demand for commercial real estate in the markets we serve as well as the demand for newly constructed residential homes and lots.  A continuing decrease in demand could result in significant decreases in the underlying collateral values and make repayment of the outstanding loans more difficult for our borrowers.

Commercial Mortgage and C&I Loans:
The repayment of commercial mortgage and C&I loans is primarily dependent upon the ability of our borrowers to produce cash flow consistent with original projections analyzed during the credit underwriting process.  While our loans are generally secured by collateral with limitations on maximum loan to value, there is the risk that liquidation of the collateral will not fully satisfy the loan balance.

Non-owner occupied nonresidential and multifamily properties:
Loans secured by non-residential properties such as office buildings, and loans secured by multifamily housing are dependent upon the ability of the property to produce enough cash flow sufficient to service the debt.  These types of properties are generally susceptible to high unemployment or generally weak economic conditions which can result in high vacancy rates.

Non-commercial loans

Most of our non-commercial loans are centrally underwritten.  When assessing credit risk, we analyze certain factors relating to credit performance such as payment history, credit utilization, length of credit history.  Since most of our non-commercial loans are secured, we evaluate the likely market value of the collateral.  Common risks that are not specific to individual loan transactions include economic conditions within or markets, particularly unemployment rates and potential declines in real estate values.  Personal events such as disability, death or a change in marital status also add risk to non-commercial loans.

In addition to these common risks, additional risks are inherent in certain types of non-commercial loans.

Revolving Mortgages:

Revolving loans such as HELOCs may be secured by first and junior liens on residential real estate making such loans susceptible to deterioration in residential real estate values.  Additional risks include lien perfection deficiencies.  Further, open end lines of credit have the inherent risk that the borrower may draw on the lines in excess of their collateral value particularly in a deteriorating real estate market.

Consumer Loans:

Consumer loans include loans secured by personal property such as automobiles, mobile homes, and other title recreational vehicles such as boats, RV’s and motorcycles.  Consumer loans also
 
 
22

 
 
 may include unsecured loans.  The value of the underlying collateral within this group of loans is especially volatile due to the potential rapid depreciation in values.

Residential Construction and Permanent Mortgages:
Residential mortgages are typically secured by 1-4 family residential property and residential lots.  Declines in market value can result in residential mortgages with balances in excess of the value of the property securing the loan. Residential construction loans can experience delays in construction and cost overruns that can exceed the borrower’s financial ability to complete the home leading to unmarketable collateral.

Commercial Credit Exposure
Credit Risk Profile by Internally Assigned Grade

   (In thousands)  
Commercial-
Land
   
Commercial- Construction
   
Commercial-Non-Real Estate
   
Commercial-Real-Estate
   
Total
   
% Total
 
                                     
    Prime
  $ -     $ -     $ 3,201     $ -     $ 3,201       2.0 %
    Excellent
    -       -       38       32       70       0.0  
    Average
    7,726       4,084       19,859       79,117       110,786       70.5  
    Satisfactory
    3,026       568       1,722       24,440       29,756       18.9  
    Special Mention
    170       383       530       3,312       4,395       2.8  
    Substandard
    5,329       1,021       83       2,596       9,029       5.8  
    Doubtful
    -       -       -       -       -       0.0  
    Loss
    15       -       -       -       15       0.0  
    Total
  $ 16,266     $ 6,056     $ 25,433     $ 109,497     $ 157,252       100.0 %

Consumer Credit Exposure Credit Risk Profile
By Creditworthiness Category

    (In thousands)
 
Residential-Real-Estate Construction
   
Residential-Prime
   
Total
 
                   
    Grade:
                 
    Pass
  $ 3,990     $ 340,836     $ 344,826  
    Special Mention
    -       184       184  
    Substandard
    -       3,687       3,687  
    Loss
     -       32       32  
    Total
  3,990     344,739     348,729  

Consumer Credit Exposure
Credit Risk Profile Based on Payment Activity

      (In thousands)
 
Consumer-
Mobile Homes
   
Consumer-
Other Loans
   
Total
 
                   
        Performing
  $ 38,147     $ 40,188     $ 78,335  
        Nonperforming
    438       170       608  
        Total
  $ 38,585     $ 40,358     $ 78,943  


 
23

 

Age Analysis of Past Due Loans
As of June 30, 2011

 (In thousands)
 
30-89 Days Past Due
   
Greater than 90 days Past Due
   
Total Past Due
   
Current
   
Total Loans
   
Recorded Investment > 90 days and Accruing
 
                                     
    Commercial real estate loans
  $ 88     $ 1,241     $ 1,329     $ 108,168     $ 109,497     $ -  
    Commercial non-real estate loans
    -       -       -       25,433       25,433       -  
    Commercial-construction loans
    68       1,052       1,120       4,936       6,056       -  
    Commercial-land
    -       5,329       5,329       10,937       16,266       242  
    Residential-construction loans
    -       -       -       3,990       3,990       -  
    Residential-real estate loans
    4,658       3,439       8,097       336,642       344,739       558  
    Consumer-Mobile home loans
    894       372       1,266       37,319       38,585       -  
    Consumer-other
    675       182       857       39,501       40,358       -  
    Total
  $ 6,383     $ 11,615     $ 17,998     $ 566,926     $ 584,924     $ 800  

The recorded investment in loans past due greater than 90 days and still accruing at September 30, 2010 was $805 thousand.

Impaired Loans
For the Quarter ended June 30, 2011
                      This Quarter     Year to Date  
(In thousands)
 
Recorded Investment
   
Unpaid
Principal
Balance
   
Related Allowance
   
Average
Recorded
Investment
   
Interest
Income
Recognized
   
Average
Recorded
Investment
   
Interest
Income
Recognized
 
                                           
   With no related allowance
       recorded:
                                         
   Commercial real
       estate loans
  $ 2,596     $ 3,494     $ -     $ 3,617     $ 21     $ 3,907     $ 69  
   Commercial non-
       real estate
    245       245       -       252       3       275       15  
   Commercial-construction 
       loans
    1,052       1,103       -       1,076       2       770       -  
   Commercial-land
    5,255       6,621       -       6,044       0       6,488       -  
   Residential-real
       estate loans
    102       102       -       399       0       496       -  
   Subtotal:
    9,250       11,565       -       11,388       26       11,936       84    
With an allowance 
    recorded:
                                                       
   Commercial real estate
       loans
    -       -       -       -       -       -       -  
   Commercial non-real
       estate
    -       -       -       -       -       -       -  
   Commercial-construction
       loans
    -       -       -       -       -       -       -  
   Commercial-land
    90       90       15       90       -       90       -  
   Residential-real estate
       loans
    103       103       7       103       -       102       -  
 Subtotal:
    193       193       22       193       -       192       -  
 Totals:
                                                       
 Commercial
    9,238       11,553       15       11,079       26       11,530       84  
 Residential
    205       205       7       502       -       598       -  
    Total
  $ 9,443     $ 11,758     $ 22     $ 11,581     $ 26     $ 12,128     $ 84  


 
24

 

Modifications
As of June 30, 2011

(Dollars in thousands)
 
Number of
Contracts
   
Pre-Modification
Outstanding
Recorded
Investment
   
Post-Modification
 Outstanding
Recorded
Investment
 
                   
                   
  Troubled debt restructuring occurring during
    the nine months ended June 30, 2011:
                 
Commercial real estate loans
    3     $ 3,126     $ 2,228  
Commercial construction loans
    10       787       787  
Commercial land
    3       5,811       4,839  
Residential real estate loans
    3       356       356  
  Total
    19     $ 10,080     $ 8,210  

Loans on Nonaccrual Status
At June 30, 2011 and September 30, 2010

(In thousands)
 
June 30,
 2011
   
September 30,
2010
 
             
   Commercial real estate loans
  $ 1,241     $ 1,640  
   Commercial non-real estate loans
    -       154  
   Commercial-construction loans
    1,052       1,066  
   Commercial-land
    5,087       6,042  
   Residential-construction loans
    -       -  
   Residential-real estate loans
    2,882       4,594  
   Consumer-Mobile home loans
    371       458  
   Consumer-other
    182       184  
   Total
  $ 10,815     $ 14,138  


A significant portion of total nonaccrual loans in 2010 and 2011 is related to a $5.6 million commercial credit relationship involving a residential land development and five show homes in the Baton Rouge market area, the borrower of which filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code.

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

The Private Securities Litigation Reform Act of 1995 contains safe harbor provisions regarding forward-looking statements. When used in this discussion, the words “believe”, “anticipates”, “contemplates”, “expects”, and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. Those risks and uncertainties include financial market volatility, changes in interest rates, risk associated with the effect of opening new branches, the ability to control costs and expenses, potential changes in regulation which could result in increased expenses and general economic conditions. The Company undertakes no obligation to publicly release the results of any revisions to those
 
 
25

 
 
forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrences of unanticipated events. The Company is a “smaller reporting company” as defined by Item 10 of Regulation S-K and its financial statements were prepared in accordance with instructions applicable for such companies.

The Company’s consolidated results of operations are primarily dependent on the Bank’s net interest income, or the difference between the interest income earned on its loan, mortgage-backed securities and investment securities portfolios, and the interest expense paid on its savings deposits and other borrowings. Net interest income is affected not only by the difference between the yields earned on interest-earning assets and the costs incurred on interest-bearing liabilities, but also by the relative amounts of such interest-earning assets and interest-bearing liabilities.

Other components of net income include: provisions for losses on loans; non-interest income (primarily, service charges on deposit accounts and other fees, net rental income, and gains and losses on investment activities); non-interest expenses (primarily, compensation and employee benefits, federal insurance premiums, office occupancy expense, marketing expense and expenses associated with foreclosed real estate) and income taxes.

Earnings of the Company also are significantly affected by economic and competitive conditions, particularly changes in interest rates, government policies and regulations of regulatory authorities. References to the “Bank” herein, unless the context requires otherwise, refer to the Company on a consolidated basis.

RECENT DEVELOPMENTS

On June 21, 2011, the Bank completed the conversion of its existing federal savings bank charter  to that of a Louisiana commercial bank charter (the “Charter Conversion”).  Upon completion of the Charter Conversion, the Bank became a Louisiana state-chartered commercial bank regulated by the Commissioner of the Office of Financial Institutions of the State of Louisiana (the “Commissioner”) and the Federal Deposit Insurance Corporation (“FDIC”) the Company became a bank holding company regulated by the Federal Reserve Board

The Federal Reserve Board has adopted capital adequacy guidelines under which it assesses the adequacy of capital in examining and supervising bank holding companies and in processing applications to it under the Bank Holding Company Act.  The Federal Reserve’s capital adequacy guidelines are similar to those previously imposed on the Bank by the Office of Thrift Supervision (“OTS”).  In addition, under Federal Reserve Board policy, a bank holding company is expected to serve as a source of financial strength to each of its subsidiary banks and to commit resources to support each such bank.  Consistent with its source of strength policy for subsidiary banks, the Federal Reserve Board has stated that, as a matter of prudent banking, a bank holding company generally should not maintain a rate of cash dividends unless its net income available to common shareholders has been sufficient to fund fully the dividends, and the prospective rate of earnings retention appears to be consistent with the corporation’s capital needs, asset quality and overall financial condition.

COMPARISON OF FINANCIAL CONDITION

The Company’s total assets at June 30, 2011 amounted to $789.0 million, an increase of $27.5 million or 3.61% as compared to $761.5 million at September 30, 2010. The increase was primarily due to increases in interest-bearing deposits at other banks, available-for-sale and held-to-maturity securities, offset somewhat by decreases in total loans receivable.

 
26

 
Securities available-for-sale totaled $26.0 million and securities held to maturity totaled $74.9 million at June 30, 2011, which, combined, represented an increase of $26.3 million or 35.27% as compared to September 30, 2010. The increase was primarily due to purchases of interest bearing certificates of deposit at other banks, available-for-sale and held-to-maturity securities offset by normal principal repayments on the existing portfolio.

Loans receivable, net of allowance for loan losses, totaled $575.3 million at June 30, 2011, which represented a decrease of $11.4 million or 1.94% compared to September 30, 2010. The decrease was due primarily to an overall decrease in commercial loans offset slightly by increases in one-to-four family mortgage loans.

FHLB stock decreased $1.5 million due to stock redemption related to a reduction in FHLB advances.

Total deposits, after interest credited, at June 30, 2011 were $625.3 million, which represented an increase of $46.0 million or 7.93% as compared to September 30, 2010. The increase was due to increases in non-interest bearing checking, interest bearing checking, and savings accounts offset somewhat by decreases in money market and time deposit accounts.  The weighted average remaining maturity on our time deposit portfolio is approximately 19.2 months.
 
Advances from the FHLB decreased $20.5 million or 20.48% as compared to the amount at September 30, 2010. The decrease was due to a maturity of a $10 million advance and two $3 million advances along with normal principal payments on existing advances.

Stockholders’ equity was $78.6 million at June 30, 2011 and $75.5 million at September 30, 2010. The increase was due primarily to net income less dividend payments of $2.9 million.

COMPARISON OF EARNINGS FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2011 AND 2010

Net Income. The Company had net income of $1.8 million or $0.85 per diluted share, and $5.1 million or $2.45 per diluted share, for the three and nine months ended June 30, 2011 as compared to net income of $1.8 million or $0.87 per diluted share, and $5.3 million or $2.49 per diluted share, for the three and nine month periods ended June 30, 2010, respectively. The changes affecting net income are discussed in the following paragraphs by category.

Total Interest Income. Total interest income decreased $0.5 million or 5.25% and $1.7 million or 5.38% for the three and nine months ended June 30, 2011, respectively, as compared to the same periods ended June 30, 2010.  The average yield on loans decreased to 6.20% and 6.22%, respectively, for the three and nine months ended June 30, 2011, from 6.39% and 6.43%, respectively, for the same periods in 2010.  Loan yields have trended downward because of the low interest rate environment.

Total Interest Expense. Total interest expense decreased $0.8 million or 26.41% and $1.8 million or 21.01%, respectively, for the three and nine month periods ended June 30, 2011 as compared to the same periods in the prior fiscal year.  The decrease was due mainly to the average cost of deposits decreasing to 0.96% and 1.06% for the three and nine months ended June 30, 2011 compared to 1.41% and 1.45%, for the same periods in 2010.  Interest rates have steadily decreased affecting the Bank’s pricing of deposits.  The decrease in Federal Home Loan Bank advances has also contributed to the decrease in total interest expense.

 
27

 

Net Interest Income. Net interest income increased $0.2 million or 3.32% and increased $0.2 million or 0.94%, respectively, for the three and nine month periods ended June 30, 2011, as compared to the same periods ended June 30, 2010. The increase for the three month period ended June 30, 2011 in net interest income was primarily due to a decrease in rates on interest bearing liabilities.  The increase for the nine month period ended June 30, 2011 in net interest income was primarily due to a decrease in the cost of interest bearing liabilities offset somewhat by a decrease in loan volume causing a decrease in loan income and a decrease in rates on earning assets.
 
Provision for Loan Losses.  Management recorded a $3.2 million provision for the fiscal year to date as compared to a provision of $3.0 million for the first nine months of fiscal 2010, due primarily to management’s assessment of the loan portfolio for probable losses.  The ratio of the allowance for loan losses to total loans at June 30, 2011 was 1.39% compared to 1.55% at September 30, 2010 and 1.48% at June 30, 2010.  The decrease in the overall ratio of the allowance for loan losses to total loans for the quarter was due to previous specific reserves on impaired loans being charged off.  General reserves on our non-impaired loans has continued to increase due to the current economic conditions affecting our markets.  While the oil spill in the Gulf and the resulting moratorium on drilling has not had a direct effect on any of our customers, the current economic stress and uncertainty due to these events is considered in our analysis of adequacy of the allowance for loan and lease losses.

The calculation that supports the adequacy of the Allowance for Loan Losses (ALLL) includes management’s best estimates that are applied to known portfolio elements.  The Bank employs a 9-point grading system to track as accurately as possible the inherent quality of the loan portfolio.  The application of a nine point system is used on all accounts in the commercial loan portfolio.  Values of “1” or “2” are considered to be substantially risk free.  Average and acceptable risk loans are assigned point values of “3” and “4”,  Loans with some document deficiencies or are of modest financial strength are assigned a rating of “5”.  Point values of 6, 7, 8, and 9 are assigned, respectively, to loans classified as special mention, substandard, doubtful, and loss.  Consumer loans are only assigned risk ratings of “6” or worse, based on payment history.  In addition, management considers other trends such as local economic conditions, the risk rating of the loan portfolios as discussed above, amounts and trends in non-performing assets and concentration factors.

Management regularly estimates the likely level of losses to determine whether the allowance for loan losses is adequate to absorb probable losses in the existing portfolio.  Based on these estimates, an amount is charged or credited to the provision for loan losses and credited or charged to the allowance for loan losses in order to adjust the allowance to a level determined to be adequate to absorb probable losses.  There have been no significant changes in the Company's estimation methods during the current period.

Management’s judgment as to the level of the allowance for loan losses involves the consideration of current economic conditions and their potential effects on specific borrowers, an evaluation of the existing relationships among loans, known and inherent risks in the loan portfolio and the present level of the allowance, results of examination of the loan portfolio by regulatory agencies and management’s internal review of the loan portfolio.  In determining the collectability of impaired loans, management also considers the fair value of any underlying collateral.  In addition, management considers changes in loan concentrations, the level of and trends in non-performing loans during the period, the Bank’s historical loss experience and historical charge-off percentages for state and national savings associations for similar types of loans in determining the appropriate amount of the allowance for loan losses.  Because certain types of loans have higher credit risk, greater concentrations of such loans may result in an increase to the allowance.  For this reason, management segregates the loan portfolio by type of loan and number of days loans are past due.  Non-performing loans as a percent of total loans plus real estate owned were 2.02% at June 30, 2011, compared to 2.47% at September 30, 2010 and 2.53% at June 30, 2010.  Non-performing loans includes a $5.6 million commercial credit relationship involving a
 
 
28

 
 
residential land development and five show homes in the Baton Rouge market area the borrower of which filed for protection under Chapter 11 Bankruptcy, which represents 48.5% of non-performing loans to total loans plus real estate owned at June 30, 2011.
 
Non-Interest Income. Total non-interest income decreased $0.2 million and decreased $0.3 million for the three and nine month periods ended June 30, 2011, respectively as compared to the same periods in 2010. The decrease in both the three and nine months ended June 30, 2011 is attributable to a decrease in service charge income, partially offset by lower impairment losses on securities and a gain on a sale of land.  The decrease in service charge income was due to a decrease in debit card transaction volume and a change in the way the Bank assesses non-sufficient funds fees.  During the nine months ended June 30, 2011, this decrease was partially offset by lower impairment losses on securities and a gain on sale of land.

Non-Interest Expense.  Total non-interest expense decreased $0.1 million and $0.2 million, respectively, during the three and nine months ended June 30, 2011, as compared to the same periods in 2010.  The decrease was due primarily to a decrease in FDIC insurance expense and occupancy expense for the nine month period.  The decrease for the three month period was due to decreases in occupancy expense and fraud losses related to checking accounts offset somewhat by some increases in compensation and marketing expenses.

Income Tax Expense. Income tax expense increased by $4,000 and $39,000, respectively, during the three and nine months ended June 30, 2011 as compared to the same periods in 2010.  The increase in tax expense for the three and nine months was due to using a higher effective income tax rate and lower relative percentage of tax exempt income.  The Company’s effective tax rate was 33.36% and 33.42% for the three and nine months ended June 30, 2011 respectively as compared to 32.88% and 32.55% for the comparable 2010 periods.
 
LIQUIDITY AND CAPITAL RESOURCES

Risk-based capital regulations adopted by the Board of Governors of the FRB and the FDIC require bank holding companies and banks, respectively, to achieve and maintain specified ratios of capital to risk-weighted assets.  The risk-based capital rules are designed to measure Tier 1 Capital and Total Capital in relation to the credit risk of both on –and off-balance sheet items.  Under the guidelines, one of four risk weights is applied to the different on-balance sheet items.  Off-balance sheet items, such as loan commitments, are also subject to risk-weighting after conversion to balance sheet equivalent amounts.  All bank holding companies and banks must maintain a minimum total capital to total risk-weighted assets ratio of 8.00%, at least half of which must be in the form of core, Tier 1, capital (consisting of common equity, retained earnings, and a limited amount of qualifying perpetual preferred stock and trust preferred securities, net of goodwill and other intangible assets and accumulated other comprehensive income).  These guidelines also specify that bank holding companies that are experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels.

 
29

 
Under current Office of Financial Institutions regulations, the Bank is required to maintain certain levels of capital.  At June 30, 2011 the Bank was in compliance with its regulatory capital requirements as follows:

          Required to              
   
Required
   
be Well
             
   
Minimum Ratio
   
Capitalized
   
Bank
   
Company
 
                         
  Tier 1 risk-based capital
    4.00 %     6.00 %     13.13 %     14.39 %
  Total risk-based capital
    8.00 %     10.00 %     14.40 %     15.66 %
Leverage Ratio
    4.00 %     5.00 %     8.68 %     9.53 %

For the Bank to be well capitalized under current risk-based capital standards, it is required to have Tier I capital of at least 6% and total risk-based capital of 10%.  Based on these standards, the Bank is categorized as well capitalized at June 30, 2011.  Management believes that under current regulations, the Bank will continue to meet its minimum capital requirements in the foreseeable future. Events beyond the control of the Bank, such as increased interest rates or a downturn in the economy in areas in which the Bank operates could adversely affect future earnings and as a result, the ability of the Bank to meet its future minimum capital requirements.

The Bank’s liquidity is a measure of its ability to fund loans, pay withdrawals of deposits, and other cash outflows in an efficient, cost effective manner. The Bank’s primary sources of funds are deposits, scheduled amortization and prepayments on loan and mortgage-backed securities, and advances from the FHLB.  As of June 30, 2011, FHLB borrowed funds totaled $79.5 million.  FHLB advances are collateralized by a blanket-floating lien on the Company’s residential real estate first mortgage loans.  Additional borrowing capacity of approximately $190 million is available from the FHLB based on current collateral levels.  The Bank, if the need arises, may also access a line of credit provided by a bank to supplement its supply of lendable funds and to meet deposit withdrawal requirements.  Loan repayments, maturing investments and mortgage-backed securities prepayments are greatly influenced by general interest rates and economic conditions.

The Bank is required under federal regulations to maintain sufficient liquidity for its safe and sound operation. The Bank believes that it maintains sufficient liquidity to operate the Bank in a safe and sound manner.
 
ADDITIONAL KEY RATIOS
 
   
At or For the
 
At or For the
 
   
Three Months Ended
 
Nine Months Ended
 
   
June 30
 
June 30,
 
   
2011(1)
   
2010(1)
 
2011(1)
   
2010(1)
 
           
   Return on average assets
   
0.92
%
   
0.95
%
 
0.89
%
   
0.92
%
   Return on average equity
   
8.96
%
   
9.60
%
 
8.69
%
   
9.37
%
   Interest rate spread
   
4.03
%
   
3.94
%
 
4.04
%
   
4.02
%
   Average net interest margin
   
4.24
%
   
4.18
%
 
4.26
%
   
4.24
%
   Nonperforming assets to total assets
   
1.82
%
   
2.15
%
 
1.82
%
   
2.15
%
   Nonperforming loans to total loans
   
2.02
%
   
2.53
%
 
2.02
%
   
2.53
%
   Tangible book value per share
 
$
36.11
   
$
33.70
 
$
36.11
   
$
33.70
 

(1)
Annualized where appropriate.


 
30

 

INTEREST RATE SENSITIVITY

At June 30, 2011 the Company was in a slightly asset sensitive position.  Generally, an asset sensitive position will result in enhanced earnings in a rising interest rate environment and declining earnings in a falling interest rate environment because larger volumes of assets than liabilities will reprice.  Conversely, a liability sensitive position will be detrimental to earnings in a rising interest rate environment and will enhance earnings in a falling interest rate environment.
 
ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide the information required by this item.

ITEM 4.   CONTROLS AND PROCEDURES

(a)
Evaluation of disclosure controls and procedures. Based on their evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)), the Company’s principal executive officer and principal financial officer have concluded that as of the end of the period covered by this Quarterly Report on Form 10-Q such disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports it files and submits pursuant to the rules and forms of the SEC is accumulated and communicated to the Company’s management, including the principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures.

(b)
During the quarter under report, there was no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1.   LEGAL PROCEEDINGS

Neither the Company nor the Bank was engaged in any legal proceeding of a material nature at June 30, 2011.  From time to time, the Company is a party to legal proceedings in the ordinary course of business wherein it enforces its security interest in loans.

ITEM 1A.     RISK FACTORS

Not applicable.
 
31

 

ITEM 2.   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table provides information on repurchases by the Company of its common stock in each month of the quarter ended June 30, 2011:

ISSUER PURCHASES OF EQUITY SECURITIES

 
 
 
Total Number
of Shares
(or Units)
urchased
 
 
 Average
Price Paid
Per Share
 (or Unit)
 
 
Total Number of
Shares (or Units)
Purchased as Part
of Publicly
Announced Plans
or Programs
 
Maximum Number
(or Approximate
Dollar Value) of
Shares (or Units)
that May Yet be
Purchased Under the
Plans or Programs
   April 1–30, 2011
-
 
$
-
 
-
 
49,944
   May 1-31, 2011
7,900
   
36.31
 
7,900
 
42,044
   June 1-30, 2011
4,500
   
35.45
 
4,500
 
37,544
Total
12,400
 
$
36.00
 
12,400
 
37,544

The repurchase plan announced August 24, 2010, authorizing the repurchase of up to 63,000 shares, has no expiration date for the authorized share repurchases under this plan.

ITEM 3.   DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4.   [RESERVED]

ITEM 5.   OTHER INFORMATION

Not applicable.

ITEM 6.   EXHIBITS
 
31.1
Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
XBRL Instance Document.**
101.SCH
XBRL Taxonomy Extension Schema Document.**
101.CAL
XBRL Taxonomy Calculation Linkbase Document.**
101.LAB
XBRL Taxonomy Label Linkbase Document.**
101.PRE
XBRL Taxonomy Presentation Linkbase Document.**
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document.**
      
**
submitted electronically herewith


 
32

 


SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
   
TECHE HOLDING COMPANY
 
 
Date:  August 12, 2011
 
 
 
By:
/s/ Patrick O. Little
     
Patrick O. Little
President and Chief Executive Officer
(Principal Executive Officer)
 

 
 
Date:  August 12, 2011
 
 
 
By:
 
 
/s/ J. L. Chauvin
     
J. L. Chauvin
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
 
 
 
33