LaPorte Bancorp, Inc. - FORM 10-Q

LaPorte Bancorp, Inc. - FORM 10-Q - May 5, 2016

Attached files

Attached files

LaPorte Bancorp, Inc. Reports

file	filename
EX-31.1 - EXHIBIT 31.1 - LaPorte Bancorp, Inc.	a3312016exhibit311.htm
EX-32.1 - EXHIBIT 32.1 - LaPorte Bancorp, Inc.	a3312016exhibit321.htm
EX-31.2 - EXHIBIT 31.2 - LaPorte Bancorp, Inc.	a3312016exhibit312.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



x	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2016



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

For the transition period from to

LAPORTE BANCORP, INC.

(Exact name of Registrant as Specified in Its Charter)



Maryland	001-35684	35-2456698
(State or Other Jurisdiction of	(Commission	(I.R.S. Employer
Incorporation or Organization)	File Number)	Identification Number)

710 Indiana Avenue

La Porte, IN 46350

(219) 362-7511

(Address, Including Zip Code, and Telephone Number, Including Area Code, of

Registrant’s Principal Executive Officers)

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 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 definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES ¨ NO x

Number of shares of common stock outstanding at April 29, 2016: 5,580,115

Table of Contents

TABLE OF CONTENTS



	Page Number
PART I – FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements – LaPorte Bancorp, Inc.
Consolidated Balance Sheets (Unaudited)	3
Consolidated Statements of Income (Unaudited)	4
Consolidated Statements of Comprehensive Income (Unaudited)	5
Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)	6
Consolidated Statements of Cash Flows (Unaudited)	7
Condensed Notes to Consolidated Financial Statements (Unaudited)	9

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	34

Item 3. Quantitative and Qualitative Disclosures About Market Risk	42

Item 4. Controls and Procedures	44

PART II – OTHER INFORMATION
Item 1. Legal Proceedings	44

Item 1A. Risk Factors	45

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	45

Item 3. Defaults Upon Senior Securities	45

Item 4. Mine Safety Disclosures	45

Item 5. Other Information	45

Item 6. Exhibits	45

Signatures	46

Table of Contents


PART I	FINANCIAL INFORMATION


ITEM 1	CONSOLIDATED FINANCIAL STATEMENTS

LAPORTE BANCORP, INC.

CONSOLIDATED BALANCE SHEETS



	March 31, 2016			December 31, 2015
	(Dollars in thousands, except share data)
	(Unaudited)
ASSETS
Cash and due from financial institutions	$	11,361		$	18,459
Interest-earning time deposits in other financial institutions	14,532			13,599
Securities available-for-sale	122,241			122,243
Loans held for sale, at fair value	686			3,581
Loans, net of allowance for loan losses of $3,636 at March 31, 2016 and $3,634 at December 31, 2015	337,451			341,552
Mortgage servicing rights	321			334
Other real estate owned	2,170			2,200
Premises and equipment, net	8,477			8,608
Federal Home Loan Bank stock, at cost	4,029			4,029
Goodwill	8,431			8,431
Other intangible assets	142			153
Bank owned life insurance	15,140			15,034
Accrued interest receivable and other assets	3,943			4,968
Total assets	$	528,924		$	543,191

LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Non-interest bearing	$	65,906		$	62,020
Interest bearing	295,250			328,939
Total deposits	361,156			390,959
Federal Home Loan Bank advances	69,132			55,000
Subordinated debentures	5,155			5,155
Accrued interest payable and other liabilities	6,758			6,529
Total liabilities	442,201			457,643
Commitments and contingent liabilities
Shareholders’ equity:
Preferred stock, no par value; 50,000,000 shares authorized; none issued	—			—
Common stock, $0.01 par value; 100,000,000 shares authorized at March 31, 2016 and December 31, 2015; 5,580,115 and 5,578,223 shares issued and outstanding at March 31, 2016 and December 31, 2015	56			56
Additional paid-in capital	40,421			40,120
Retained earnings	48,312			47,940
Accumulated other comprehensive income, net of tax expense of $395 at March 31, 2016 and $162 at December 31, 2015	767			310
Unearned Employee Stock Ownership Plan (ESOP) shares	(2,833		)	(2,878		)
Total shareholders’ equity	86,723			85,548
Total liabilities and shareholders’ equity	$	528,924		$	543,191

See accompanying condensed notes to consolidated financial statements (unaudited).

Table of Contents

LAPORTE BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)



	Three Months Ended March 31,
	2016			2015
	(Dollars in thousands, except per share data)
Interest and dividend income:
Loans, including fees	$	4,124		$	3,601
Taxable securities	327			410
Tax exempt securities	368			408
Federal Home Loan Bank stock	43			43
Other interest income	73			19
Total interest and dividend income	4,935			4,481
Interest expense:
Deposits	340			294
Federal Home Loan Bank advances	309			268
Subordinated debentures	47			42
Short-term borrowings	—			1
Total interest expense	696			605
Net interest income	4,239			3,876
Provision for loan losses	—			105
Net interest income after provision for loan losses	4,239			3,771
Noninterest income:
Service charges on deposit accounts	75			76
ATM and debit card fees	105			103
Wire transfer fees	118			78
Earnings on bank owned life insurance, net	106			105
Net gains on mortgage banking activities	156			130
Loan servicing fees, net	98			13
Net gains on sales of securities available-for-sale	—			50
Gains (losses) on other assets	(30		)	10
Other income	38			37
Total noninterest income	666			602
Noninterest expense:
Salaries and employee benefits	2,150			1,934
Legal and other consulting fees	659			21
Occupancy and equipment	429			468
Data processing	178			153
Bank examination fees	114			112
Collection and other real estate owned	98			31
FDIC insurance	69			70
Advertising	42			82
Amortization of intangible assets	11			14
Other expenses	409			380
Total noninterest expense	4,159			3,265
Income before income taxes	746			1,108
Income tax expense	151			156
Net income	$	595		$	952

Earnings per share (Note 3):
Basic	$	0.11		$	0.18
Diluted	0.11			0.18

See accompanying condensed notes to consolidated financial statements (unaudited).

Table of Contents

LAPORTE BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)



	Three Months Ended March 31,
	2016			2015
	(Dollars in thousands)
Net income	$	595		$	952
Other comprehensive income:
Unrealized gains on securities:
Unrealized holding gains arising during the period	1,299			1,012
Reclassification adjustment for net gains included in net income	—			(50		)
Gross unrealized gains	1,299			962
Related income tax expense	(442		)	(327		)
Net unrealized gains	857			635
Unrealized losses on cash flow hedges:
Gross unrealized losses	(607		)	(449		)
Related income tax benefit	207			153
Net unrealized losses	(400		)	(296		)
Total other comprehensive income	457			339
Comprehensive income	$	1,052		$	1,291

See accompanying condensed notes to consolidated financial statements (unaudited).

Table of Contents

LAPORTE BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)



	Common Stock			Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income, Net of Tax		Unearned ESOP Shares			Total
	(Dollars in thousands, except per share data)
Balance at January 1, 2015	$	57		$	40,609		$	44,258		$	522	$	(3,058	)	$	82,388
Net income	—			—			952			—		—			952
Other comprehensive income	—			—			—			339		—			339
Cash dividends on common stock, $0.04 per share	—			—			(225		)	—		—			(225		)
Repurchase of common stock, 53,874 shares	(1		)	(675		)	—			—		—			(676		)
ESOP shares earned, 5,621 shares	—			28			—			—		45			73
Exercise of stock options, 4,472 shares	—			29			—			—		—			29
Stock based compensation expense	—			173			—			—		—			173
Balance at March 31, 2015	$	56		$	40,164		$	44,985		$	861	$	(3,013	)	$	83,053

Balance at January 1, 2016	$	56		$	40,120		$	47,940		$	310	$	(2,878	)	$	85,548
Net income	—			—			595			—		—			595
Other comprehensive income	—			—			—			457		—			457
Cash dividends on common stock, $0.04 per share	—			—			(223		)	—		—			(223		)
ESOP shares earned, 5,621 shares	—			39			—			—		45			84
Exercise of stock options, 1,892 shares	—			16			—			—		—			16
Stock based compensation expense	—			170			—			—		—			170
Tax benefit related to stock based compensation	—			76			—			—		—			76
Balance at March 31, 2016	$	56		$	40,421		$	48,312		$	767	$	(2,833	)	$	86,723

See accompanying condensed notes to consolidated financial statements (unaudited).

Table of Contents

LAPORTE BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



	Three Months Ended March 31,
	2016			2015
	(Dollars in thousands)
Cash flows from operating activities:
Net income	$	595		$	952
Adjustments to reconcile net income to net cash from operating activities:
Depreciation	142			140
Provision for loan losses	—			105
Net gains on securities available-for-sale	—			(50		)
Net amortization on securities available-for-sale	120			192
Net gains on sales of loans	(146		)	(124		)
Originations of loans held for sale	(4,166		)	(3,354		)
Proceeds from sales of loans held for sale	7,207			3,729
Recognition of mortgage servicing rights	(10		)	(6		)
Amortization of mortgage servicing rights	15			13
Net change in mortgage servicing rights valuation allowance	8			14
Net (gains) losses on sales of other real estate owned	—			(10		)
Write down of other real estate owned and assets held for sale	47			—
Earnings on bank owned life insurance, net	(106		)	(105		)
Amortization of intangible assets	11			14
ESOP compensation expense	84			73
Stock based compensation expense	170			173
Change in assets and liabilities:
Accrued interest receivable and other assets	773			192
Accrued interest payable and other liabilities	(378		)	(58		)
Net cash provided by operating activities	4,366			1,890
Cash flows from investing activities:
Net change in interest-earning time deposits at other financial institutions	(933		)	980
Proceeds from sales of securities available-for-sale	—			10,262
Proceeds from maturities, calls, and principal repayments of securities available-for-sale	2,781			5,181
Purchases of securities available-for-sale	(1,600		)	—
Net change in loans	4,101			(22,346		)
Proceeds from sales of other real estate owned	—			35
Premises and equipment expenditures, net	(11		)	(124		)
Net cash provided by (utilized for) investing activities	4,338			(6,012		)
Cash flows from financing activities:
Net change in deposits	(29,803		)	11,936
Repayment of FHLB long-term advances	—			(5,000		)
Net change in FHLB short-term advances	14,132			81
Net change in short-term borrowings	—			500
Stock options exercised	16			29
Tax benefit related to stock-based compensation	76			—
Dividends paid on common stock	(223		)	(225		)
Repurchase of common stock	—			(676		)
Net cash (utilized for) provided by financing activities	(15,802		)	6,645
Net (decrease) increase in cash and cash equivalents	(7,098		)	2,523
Cash and cash equivalents at beginning of period	18,459			8,698
Cash and cash equivalents at end of period	$	11,361		$	11,221

(continued)

Table of Contents

LAPORTE BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(Unaudited)



	Three Months Ended March 31,
	2016		2015
	(Dollars in thousands)
Supplemental cash flow information:
Cash paid during the period for:
Interest	$	689	$	607
Income taxes	53		—
Supplemental noncash disclosures:
Transfers from loans receivable to other real estate owned	$	—	$	127

See accompanying condensed notes to consolidated financial statements (unaudited).

Table Of Contents

LAPORTE BANCORP, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 – BASIS OF PRESENTATION AND CONSOLIDATION

The unaudited consolidated financial statements include the accounts of LaPorte Bancorp, Inc., a Maryland corporation (the “Bancorp”), its wholly owned subsidiaries, LSB Risk Management, Inc., The LaPorte Savings Bank (the “Bank”), the Bank’s wholly-owned subsidiary, LSB Investments, Inc. (“LSB Inc.”), and LSB Inc.’s wholly-owned subsidiary, LSB Real Estate, Inc. (“LSB REIT”), together referred to as the “Company.” The Bancorp was formed in June 2012. LSB Risk Management, LLC was formed on December 27, 2013 as a captive insurance company and is incorporated in Nevada. LSB Inc. was formed on October 1, 2011 to manage a portion of the Bank’s investment portfolio and is incorporated in Nevada. LSB REIT, a real estate investment trust, was formed on January 1, 2013 to invest in assets secured by residential or commercial real estate properties originated by the Bank and is incorporated in Maryland. Intercompany transactions and balances are eliminated in consolidation.

The unaudited consolidated financial statements have been prepared by management in accordance with U.S. generally accepted accounting principles for interim financial statements and Article 8 of Regulation S-X of the Securities and Exchange Commission (“SEC”). In the opinion of management, the unaudited consolidated financial statements contain all material adjustments (consisting of normal recurring accruals) and disclosures which are necessary to make the financial statements not misleading and for a fair presentation of the financial position and results of operations for the interim periods presented herein.

Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with United States generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the SEC. Accordingly, the interim consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements included in the Annual Report on Form 10-K of the Company for the fiscal year ended December 31, 2015. The results for the three month periods ended March 31, 2016 may not indicate the results to be expected for any other interim period or for the full year ending December 31, 2016.

Reclassifications: Some items in the prior year financial statements were reclassified to conform to the current presentation.

NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS

In May 2014, the FASB issued ASU No. 2014-09 “Revenue from Contracts with Customers (Topic 606).” This ASU clarifies that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. This ASU is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The amendments can be applied retrospectively to each prior reporting period or retrospectively with the cumulative effect of initially applying this Update recognized at the date of initial application. The Company is still evaluating the impact relating to adopting this standard.

In June 2014, the FASB issued ASU No. 2014-12 “Compensation - Stock Compensation (Topic 718) - Accounting for Share Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period.” This ASU requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. ASU 2014-12 became effective for interim and annual periods beginning after December 15, 2015 and did not have a significant impact on the Company’s financial condition or results of operations.

In April 2015, the FASB issued ASU No. 2015-05 “Intangibles - Goodwill and Other - Internal Use Software (Subtopic 350-40) - Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.” This ASU provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The new guidance does not change the accounting for a customer’s accounting for service contracts. ASU 2015-05 became effective for interim and annual periods beginning after December 15, 2015 and did not have a significant impact on the Company’s financial condition or results of operations.

Table Of Contents

LAPORTE BANCORP, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

In January 2016, the FASB issued ASU No. 2016-01 “Financial Instruments - Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities.” This ASU is intended to improve the recognition and measurement of financial instruments by requiring equity investments to be measured at fair value with changes in fair value recognized in net income; requiring public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; requiring separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements; eliminating the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured and amortized at cost on the balance sheet; and requiring a reporting organization to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. ASU 2016-01 is effective for interim and annual reporting periods beginning after December 15, 2017. The amendments should be applied through a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values (including disclosure requirements) should be applied prospectively to equity investments that exist as of the date of adoption. The Company will be evaluating the impact of adopting this ASU.

In February 2016, the FASB issued ASU No. 2016-02 “Leases (Topic 842).” This ASU requires lessees and lessors to classify leases as either capital leases or operating leases. The ASU also requires lessees to recognized assets and liabilities for all leases with the exception of short term leases. There are new disclosure requirements for these leases which will provide users of financial statements with information to understand the amount, timing and uncertainty of cash flows arising from leases. ASU 2016-02 will become effective for fiscal years beginning after December 31, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company will be evaluating the impact of adopting this ASU.

In March 2016, the FASB issued ASU No. 2016-05 “Derivatives and Hedging (Topic 815).” This ASU applies to all reporting entities for which there is a change in the counterparty to a derivative instrument that has been designated as a hedging instrument under Topic 815. The ASU clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815 does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria as identified in Topic 815 continue to be met. ASU 2016-05 will become effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. The Company will be evaluating the impact of adopting this ASU.

In March 2016, the FASB issued ASU No. 2016-09 “Compensation - Stock Compensation (Topic 718) - Improvements to Employee Share-Based Payment Accounting.” This ASU requires all income tax effects of awards to be recognized in teh income statement when the awards vest or are settled. It also allows an employer to repurchase more of an employee’s shares than it can today for tax withholding purposes without triggering liability accounting and to make a policy election for forfeitures as they occur. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. The Company will be evaluating the impact of adopting this ASU.

NOTE 3 – EARNINGS PER SHARE

Basic earnings per common share is determined by dividing net earnings available to common shareholders by the weighted average number of common shares outstanding for the period. Employee Stock Ownership Plan (“ESOP”) shares are considered outstanding for this calculation unless unearned. Diluted earnings per common share is determined by dividing net earnings available to common shareholders by the weighted average number of common shares outstanding for the period, adjusted for the dilutive effect of common share equivalents.

Table Of Contents

LAPORTE BANCORP, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The factors used in the earnings per common share computation follow:



	Three Months Ended March 31,
	2016			2015
	(Dollars in thousands, except per share data)
Basic:
Net income	$	595		$	952

Weighted average common shares outstanding	5,579,678			5,627,687
Less: Average unallocated ESOP shares	(356,965		)	(379,449		)
Average shares	5,222,713			5,248,238

Basic earnings per common share	$	0.11		$	0.18

Diluted:
Net income	$	595		$	952

Weighted average common shares outstanding for basic earnings per common share	5,222,713			5,248,238
Add: Dilutive effects of assumed exercises of stock options	162,603			109,750
Average shares and dilutive potential common shares	5,385,316			5,357,988

Diluted earnings per common share	$	0.11		$	0.18

NOTE 4 – SECURITIES AVAILABLE-FOR-SALE

The amortized cost and fair value of available-for-sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows:



	March 31, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(Dollars in thousands)
U.S. federal agency obligations	$	11,052	$	70	$	(1	)	$	11,121
State and municipal	49,976		2,621		—			52,597
Mortgage-backed securities – residential	16,585		263		(9		)	16,839
Government agency sponsored collateralized mortgage obligations	40,595		352		(211		)	40,736
Corporate debt securities	1,000		—		(52		)	948
Total	$	119,208	$	3,306	$	(273	)	$	122,241

Table Of Contents

LAPORTE BANCORP, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



	December 31, 2015
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(Dollars in thousands)
U.S. federal agency obligations	$	9,442	$	1	$	(71	)	$	9,372
State and municipal	50,020		2,397		(17		)	52,400
Mortgage-backed securities – residential	17,671		98		(73		)	17,696
Government agency sponsored collateralized mortgage obligations	42,376		139		(679		)	41,836
Corporate debt securities	1,000		—		(61		)	939
Total	$	120,509	$	2,635	$	(901	)	$	122,243

At March 31, 2016 and December 31, 2015, all of our mortgage-backed securities were issued by U.S. government-sponsored enterprises and all of our collateralized mortgage obligations were issued by either U.S. government-sponsored enterprises or the U.S. Small Business Administration.

Securities with unrealized losses at March 31, 2016 and December 31, 2015, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows:



	March 31, 2016
	Continuing Unrealized Loss For Less Than 12 Months					Continuing Unrealized Loss For 12 Months or More					Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
	(Dollars in thousands)
U.S. federal agency obligations	$	1,099	$	(1	)	$	—	$	—		$	1,099	$	(1	)
Mortgage-backed securities – residential	900		(3		)	813		(6		)	1,713		(9		)
Government agency sponsored collateralized mortgage obligations	3,087		(32		)	15,667		(179		)	18,754		(211		)
Corporate debt securities	—		—			948		(52		)	948		(52		)
Total temporarily impaired	$	5,086	$	(36	)	$	17,428	$	(237	)	$	22,514	$	(273	)



	December 31, 2015
	Continuing Unrealized Loss For Less Than 12 Months					Continuing Unrealized Loss For 12 Months or More					Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
	(Dollars in thousands)
U.S. federal agency obligations	$	8,371	$	(71	)	$	—	$	—		$	8,371	$	(71	)
State and municipal	4,512		(14		)	856		(3		)	5,368		(17		)
Mortgage-backed securities – residential	9,259		(48		)	809		(25		)	10,068		(73		)
Government agency sponsored collateralized mortgage obligations	11,200		(136		)	18,148		(543		)	29,348		(679		)
Corporate debt securities	—		—			939		(61		)	939		(61		)
Total temporarily impaired	$	33,342	$	(269	)	$	20,752	$	(632	)	$	54,094	$	(901	)

Table Of Contents

LAPORTE BANCORP, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Management periodically evaluates each investment security for potential other-than-temporary impairment, relying primarily on industry analyst reports and observation of market conditions and interest rate fluctuations. The unrealized losses on the Company’s investments in U.S. federal agency obligations, mortgage-backed securities, agency collateralized mortgage obligations, and corporate debt securities were a result of changes in interest rates and not a result of a decline in credit quality. Management believes it will be able to collect all amounts due according to the contractual terms of the underlying investment securities and that the noted declines in fair value are considered temporary. The unrealized losses on the Company’s investment in state and municipal securities were also caused by changes in interest rates. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. The Company does not intend to sell the securities and is not more likely than not to be required to sell them before their anticipated recovery.

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



	Three Months Ended March 31,
	2016		2015
	(Dollars in thousands)
Proceeds	$	—	$	10,262
Gross gains	—		84
Gross losses	—		(34		)

The amortized cost and fair value of debt securities at March 31, 2016 by contractual maturity were as follows. Securities not due at a single maturity date, primarily mortgage-backed securities and collateralized mortgage obligations (“CMO”), are shown separately.



	March 31, 2016
	Amortized Cost		Fair Value
	(Dollars in thousands)
Due in one year or less	$	1,249	$	1,262
Due from one to five years	23,354		23,816
Due from five to ten years	26,625		27,976
Due after ten years	10,800		11,612
Subtotal	62,028		64,666
Mortgage-backed securities and government agency sponsored collateralized mortgage obligations	57,180		57,575
Total	$	119,208	$	122,241

Securities pledged at March 31, 2016 and December 31, 2015 had a carrying amount of approximately $42.3 million and $43.1 million, respectively, and were pledged to secure Federal Home Loan Bank (“FHLB”) advances and cash flow hedges.

At March 31, 2016 and December 31, 2015, the Company did not hold any securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of shareholders’ equity.

Table Of Contents

LAPORTE BANCORP, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 5 – LOANS

Loans were as follows for the dates indicated:



	March 31, 2016			December 31, 2015
	(Dollars in thousands)
Commercial	$	158,254		$	154,830
Residential mortgage	39,919			40,478
Mortgage warehouse	122,328			128,902
Residential construction	2,806			3,301
Home equity	14,311			13,990
Consumer and other	3,171			3,380
Subtotal	340,789			344,881
Net deferred loan costs	298			305
Allowance for loan losses	(3,636		)	(3,634		)
Loans, net	$	337,451		$	341,552

At March 31, 2016 and 2015, the Bank’s mortgage warehouse division had repurchase agreements with 34 and 29 mortgage companies, respectively. The following table identifies the activity and related interest and fee income attributable to the mortgage warehouse division for the periods presented:



	Three Months Ended March 31,
	2016		2015
	(Dollars in thousands)
Mortgage Warehouse:
Originations	$	1,051,049	$	765,001
Sold Loans	1,063,755		738,064
Interest income	1,264		1,246
Warehouse fees	340		235
Wire transfer fees	112		73
Loan servicing fees	84		—

At March 31, 2016, the total participated balance of mortgage warehouse loans was $91.0 million and the total lines of credit availability was $5.0 million. The Company records a servicing fee on the participated balances.

Table Of Contents

LAPORTE BANCORP, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 6 – ALLOWANCE FOR LOAN LOSSES

The following tables present the activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2016 and 2015:



	Three Months Ended March 31, 2016
	Commercial			Residential Mortgage			Mortgage Warehouse			Residential Construction			Home Equity			Consumer and Other			Total
	(Dollars in thousands)
Allowance for loan losses:
Beginning balance	$	2,440		$	591		$	460		$	4		$	93		$	46		$	3,634
Charge-offs	—			—			—			—			—			(4		)	(4		)
Recoveries	1			—			—			—			—			5			6
Provision	42			(13		)	(14		)	(1		)	(9		)	(5		)	—
Ending balance	$	2,483		$	578		$	446		$	3		$	84		$	42		$	3,636

	Three Months Ended March 31, 2015
	Commercial			Residential Mortgage			Mortgage Warehouse			Residential Construction			Home Equity			Consumer and Other			Total
	(Dollars in thousands)
Allowance for loan losses:
Beginning balance	$	2,116		$	676		$	654		$	4		$	90		$	55		$	3,595
Charge-offs	(20		)	(5		)	—			—			—			(5		)	(30		)
Recoveries	—			—			—			—			—			5			5
Provision	154			(59		)	19			1			(5		)	(5		)	105
Ending balance	$	2,250		$	612		$	673		$	5		$	85		$	50		$	3,675

Table Of Contents

LAPORTE BANCORP, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of the dates indicated:



	March 31, 2016
	Commercial		Residential Mortgage		Mortgage Warehouse		Residential Construction		Home Equity		Consumer and Other		Total
	(Dollars in thousands)
Allowance for loan losses:
Ending balance attributable to loans:
Individually evaluated for impairment	$	898	$	36	$	—	$	—	$	15	$	—	$	949
Collectively evaluated for impairment	1,585		542		446		3		69		42		2,687
Acquired with deteriorated credit quality	—		—		—		—		—		—		—
Total ending allowance	$	2,483	$	578	$	446	$	3	$	84	$	42	$	3,636

Loans:
Individually evaluated for impairment	$	2,850	$	1,309	$	—	$	—	$	94	$	—	$	4,253
Collectively evaluated for impairment	155,404		38,505		122,328		2,806		14,217		3,171		336,431
Acquired with deteriorated credit quality	—		105		—		—		—		—		105
Total ending loan balance	$	158,254	$	39,919	$	122,328	$	2,806	$	14,311	$	3,171	$	340,789



	December 31, 2015
	Commercial		Residential Mortgage		Mortgage Warehouse		Residential Construction		Home Equity		Consumer and Other		Total
	(Dollars in thousands)
Allowance for loan losses:
Ending balance attributable to loans:
Individually evaluated for impairment	$	885	$	43	$	—	$	—	$	17	$	—	$	945
Collectively evaluated for impairment	1,555		548		460		4		76		46		2,689
Acquired with deteriorated credit quality	—		—		—		—		—		—		—
Total ending allowance	$	2,440	$	591	$	460	$	4	$	93	$	46	$	3,634

Loans:
Individually evaluated for impairment	$	2,920	$	1,283	$	—	$	—	$	97	$	—	$	4,300
Collectively evaluated for impairment	151,910		39,089		128,902		3,301		13,893		3,380		340,475
Acquired with deteriorated credit quality	—		106		—		—		—		—		106
Total ending loan balance	$	154,830	$	40,478	$	128,902	$	3,301	$	13,990	$	3,380	$	344,881

Table Of Contents

LAPORTE BANCORP, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents information related to impaired loans by class of loans as of the dates indicated:



	March 31, 2016						December 31, 2015
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
	(Dollars in thousands)
With no related allowance recorded:
Commercial:
Real estate	$	1,334	$	1,312	$	—	$	1,436	$	1,366	$	—
Residential mortgage	1,144		1,074		—		1,054		988		—
Home equity	79		79		—		81		80		—
Subtotal	2,557		2,465		—		2,571		2,434		—
With an allowance recorded:
Commercial:
Real estate	1,214		1,214		624		1,214		1,214		624
Construction	25		25		25		41		41		41
Land	430		299		249		431		299		220
Residential mortgage	295		235		36		355		295		43
Home equity	16		15		15		17		17		17
Subtotal	1,980		1,788		949		2,058		1,866		945
Total	$	4,537	$	4,253	$	949	$	4,629	$	4,300	$	945

The following tables present loans individually evaluated for impairment by class of loans for the periods indicated:



	Three Months Ended March 31,
	2016				2015
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(Dollars in thousands)
With no related allowance recorded:
Commercial:
Real estate	$	1,350	$	19	$	2,933	$	45
Five or more family	—		—		3,692		60
Land	—		—		120		—
Residential mortgage	1,081		7		1,098		1
Home equity	80		1		—		—
Subtotal	2,511		27		7,843		106
With an allowance recorded:
Commercial:
Real estate	1,214		—		933		—
Construction	29		—		—		—
Land	299		—		1,440		—
Residential mortgage	236		5		916		2
Home equity	16		—		7		—
Subtotal	1,794		5		3,296		2
Total	$	4,305	$	32	$	11,139	$	108

Table Of Contents

LAPORTE BANCORP, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the recorded investment in nonaccrual loans and loans past due over 90 days still on accrual by class of loans as of the dates indicated.



	Nonaccrual				Loans Past Due Over 90 Days Still Accruing
	March 31, 2016		December 31, 2015		March 31, 2016		December 31, 2015
	(Dollars in thousands)
Commercial:
Real estate	$	1,362	$	1,396	—		$	—
Construction	25		41		—		—
Land	299		299		—		—
Residential mortgage	620		590		94		—
Home equity	21		23		—		—
Total	$	2,327	$	2,349	$	94	$	—

The following tables present the aging of the recorded investment in past due loans by class of loans as of the dates indicated:



	March 31, 2016
	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Current		Total
	(Dollars in thousands)
Commercial:
Commercial and industrial	$	—	$	—	$	—	$	—	$	17,377	$	17,377
Real estate	401		37		1,311		1,749		94,714		96,463
Five or more family	18		—		—		18		22,470		22,488
Construction	—		—		25		25		12,174		12,199
Land	—		—		—		—		9,727		9,727
Residential mortgage	—		—		624		624		39,295		39,919
Mortgage warehouse	—		—		—		—		122,328		122,328
Residential construction:
Construction	—		—		—		—		1,939		1,939
Land	—		—		—		—		867		867
Home equity	—		—		7		7		14,304		14,311
Consumer and other	—		—		—		—		3,171		3,171
Total	$	419	$	37	$	1,967	$	2,423	$	338,366	$	340,789

Table Of Contents

LAPORTE BANCORP, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



	December 31, 2015
	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Current		Total
	(Dollars in thousands)
Commercial:
Commercial and industrial	$	—	$	—	$	—	$	—	$	18,117	$	18,117
Real estate	1,282		—		102		1,384		90,916		92,300
Five or more family	20		—		—		20		22,672		22,692
Construction	41		—		—		41		11,041		11,082
Land	—		—		—		—		10,639		10,639
Residential mortgage	176		—		495		671		39,807		40,478
Mortgage warehouse	—		—		—		—		128,902		128,902
Residential construction:
Construction	—		—		—		—		2,423		2,423
Land	—		—		—		—		878		878
Home equity	—		—		8		8		13,982		13,990
Consumer and other	—		—		—		—		3,380		3,380
Total	$	1,519	$	—	$	605	$	2,124	$	342,757	$	344,881

Troubled Debt Restructurings

A loan modification is considered a troubled debt restructuring (“TDR”) when a borrower is experiencing financial difficulty and the Company grants a concession it would not otherwise consider but for the borrower’s financial difficulties. The following table presents the Company’s TDRs as of the dates indicated:



	March 31, 2016		December 31, 2015
	(Dollars in thousands)
TDRs:
Performing in accordance with modified repayment terms	$	1,699	$	1,720
Nonperforming	—		—
	$	1,699	$	1,720

Specific reserve	$	—	$	—

TDRs previously disclosed resulted in no charge-offs during the three months ended March 31, 2016 and 2015. The Company had not committed to lend additional amounts to customers with outstanding TDR loans at March 31, 2016 and December 31, 2015.

Table Of Contents

LAPORTE BANCORP, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following tables present loans by class modified as TDRs that occurred during the periods indicated:



	Three Months Ended March 31,
	2016					2015
	Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
	(Dollars in thousands)
Commercial:
Real Estate	—	$	—	$	—	1	$	207	$	207
Total	—	$	—	$	—	1	$	207	$	207

During the three months ended March 31, 2015, the concession granted by the Company consisted of a reduction in monthly payments.

There were no TDRs that defaulted within twelve months following the modification during the three months ended March 31, 2016 and 2015.

A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed by the Company’s Officer Loan Committee.

Credit Quality Indicators

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

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

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

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

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass-rated loans. The Bank monitors credit quality on loans not rated through the loan’s individual payment performance.

Table Of Contents

LAPORTE BANCORP, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following tables present the risk category of loans by class based on the most recent analysis performed as of the dates indicated:



	March 31, 2016
	Pass		Special Mention		Substandard		Doubtful
	(Dollars in thousands)
Commercial:
Commercial and industrial	$	16,963	$	414	$	—	$	—
Real estate	92,274		1,570		2,619		—
Five or more family	22,488		—		—		—
Construction	12,174		—		25		—
Land	9,327		101		299		—
Residential mortgage	38,904		21		994		—
Mortgage warehouse	122,328		—		—		—
Residential construction:
Construction	1,939		—		—		—
Land	867		—		—		—
Home equity	14,217		—		94		—
Consumer and other	3,171		—		—		—
Total	$	334,652	$	2,106	$	4,031	$	—



	December 31, 2015
	Pass		Special Mention		Substandard		Doubtful
	(Dollars in thousands)
Commercial:
Commercial and industrial	$	17,807	$	310	$	—	$	—
Real estate	86,548		3,075		2,677		—
Five or more family	22,692		—		—		—
Construction	11,041		—		41		—
Land	10,258		82		299		—
Residential mortgage	39,490		21		967		—
Mortgage warehouse	128,902		—		—		—
Residential construction:
Construction	2,423		—		—		—
Land	878		—		—		—
Home equity	13,893		—		97		—
Consumer and other	3,380		—		—		—
Total	$	337,312	$	3,488	$	4,081	$	—

Table Of Contents

LAPORTE BANCORP, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Purchased Loans

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



	March 31, 2016		December 31, 2015
	(Dollars in thousands)
Residential mortgage	105		106
Carrying amount, net of allowance of $0	$	105	$	106

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



	Three Months Ended March 31,
	2016		2015
	(Dollars in thousands)
Beginning balance	$	—	$	18
Reclassification from non-accretable yield	—		—
Accretion of income	—		(11		)
Ending balance	$	—	$	7

For the purchased loans disclosed above, the Company did not increase the allowance for loan losses during the three months ended March 31, 2016 or 2015. No allowance for loan losses was reversed during the three months ended March 31, 2016 or 2015.

NOTE 7 – FAIR VALUE

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

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

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

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

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

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

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

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

Table Of Contents

LAPORTE BANCORP, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Impaired Loans: At the time a loan is considered impaired, it is valued at the lower of cost or fair value, less estimated costs to sell. Impaired loans carried at fair value generally receive specific allocations of the allowance for loan losses. For collateral dependent loans, fair value is commonly based on recent real estate appraisals performed by qualified independent third-party appraisers. These appraisals may utilize a single valuation approach or a combination of approaches including cost, comparable sales, and the income approach. The cost approach is based on the cost to replace the existing property. The comparable sales approach evaluates the sales prices of comparable properties within the same market area. The income approach considers net operating income generated by the property and the rate of return required by an investor. Adjustments are routinely made in the appraisal process by the independent third-party appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Other Real Estate Owned: Assets acquired through or instead of loan foreclosures are initially recorded at fair value less cost to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at the lower of cost or fair value, less estimated costs to sell. Fair value is commonly based on recent real estate appraisals performed by qualified independent third-party appraisers. These appraisals may utilize a single valuation approach or a combination of approaches including cost, comparable sales, and the income approach. The cost approach is based on the cost to replace the existing property. The comparable sales approach evaluates the sales prices of comparable properties within the same market area. The income approach considers net operating income generated by the property and the rate of return required by an investor. Adjustments are routinely made in the appraisal process by the independent third-party appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

The President and Chief Financial Officer (“President/CFO”), Senior Vice President – Chief Accounting Officer (“SVP – CAO”), and Executive Vice President – Credit (“EVP – Credit”) are responsible for determining the valuation processes and procedures for the fair value measurement of impaired loans and other real estate owned properties. The President/CFO, SVP – CAO, and EVP – Credit review impaired loans and other real estate owned properties on a quarterly basis to determine the accuracy of third-party appraisals, auction values, values derived from trade publications, any additional data received from the borrower, and the appropriateness of unobservable inputs, generally discounts due to collection issues and current market conditions which are utilized in determining the fair value. The EVP – Credit determines discounts based on the valuation source and asset type for impaired loans. These discounts are reviewed periodically, annually at a minimum, for appropriateness. Current trends in market values and gains and losses on sales of similar assets are also considered when determining discounts of asset categories.

The tables below present the valuation methodology and unobservable inputs for impaired loans and other real estate owned at March 31, 2016 and December 31, 2015.



	March 31, 2016
	Valuation Methodology	Unobservable Inputs	Range of Inputs	Average of Inputs
Impaired loans:
Commercial land	Appraisals	Discounts for changes in market conditions	74%	74%
Other real estate owned, net:
Commercial real estate	Appraisals	Discounts for changes in market conditions	54%	54%

Table Of Contents

LAPORTE BANCORP, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



	December 31, 2015
	Valuation Methodology	Unobservable Inputs	Range of Inputs	Average of Inputs
Impaired loans:
Commercial:
Real estate	Appraisals	Discounts for changes in market conditions	8%	8%
Land	Appraisals	Discounts for changes in market conditions	10%	10%
Residential mortgage	Appraisals	Discounts for changes in market conditions	0-20%	10%
Other real estate owned, net:
Residential mortgage	Appraisals	Discounts for changes in market conditions	30%	30%

Mortgage Servicing Rights: On a quarterly basis, loan servicing rights are evaluated for impairment based on the fair value of the rights as compared to the carrying amount. If the carrying amount of an individual tranche exceeds fair value, impairment is recorded on that tranche so that the servicing asset is carried at fair value. Fair value is determined at a tranche level, based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model utilizes assumptions that market participants would use in estimating future net servicing income and that can be validated against available market data (Level 2).

Fair value at March 31, 2016 was determined using a discount rate of 10.0%; prepayment speeds ranging from 8.0% to 20.9%, depending on the stratification of the specific right; and a weighted average default rate of approximately 0.5%. Fair value at December 31, 2015 was determined using a discount rate of 10.0%; prepayment speeds ranging from 6.9% to 22.1%, depending on the stratification of the specific right; and a weighted average default rate of approximately 0.5%.

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



				March 31, 2016
	Carrying Value			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
	(Dollars in thousands)
Financial Assets:
Investment securities available-for-sale:
U.S. federal agency obligations	$	11,121		$	—	$	11,121		$	—
State and municipal	52,597			—		52,597			—
Mortgage-backed securities – residential	16,839			—		16,839			—
Government agency sponsored collateralized mortgage obligations	40,736			—		40,736			—
Corporate debt securities	948			—		948			—
Total investment securities available-for-sale	$	122,241		$	—	$	122,241		$	—
Loans held for sale	$	686		$	—	$	686		$	—
Derivatives – residential mortgage loan commitments	$	54		$	—	$	54		$	—
Financial Liabilities:
Derivatives – interest rate swaps	$	(1,872	)	$	—	$	(1,872	)	$	—

Table Of Contents

LAPORTE BANCORP, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



				December 31, 2015
	Carrying Value			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
	(Dollars in thousands)
Financial Assets:
Investment securities available-for-sale:
U.S. federal agency obligations	$	9,372		$	—	$	9,372		$	—
State and municipal	52,400			—		52,400			—
Mortgage-backed securities – residential	17,696			—		17,696			—
Government agency sponsored collateralized mortgage obligations	41,836			—		41,836			—
Corporate debt securities	939			—		939			—
Total investment securities available-for-sale	$	122,243		$	—	$	122,243		$	—
Loans held for sale	$	3,581		$	—	$	3,581		$	—
Derivatives – residential mortgage loan commitments	$	39		$	—	$	39		$	—
Financial Liabilities:
Derivatives – interest rate swaps	$	(1,265	)	$	—	$	(1,265	)	$	—

There were no transfers between Level 1, Level 2, and Level 3 during the periods indicated above.

The difference between the aggregate fair value and the aggregate remaining contractual principal balance outstanding for loans held for sale was:



	March 31, 2016						December 31, 2015
	Aggregate Fair Value		Difference		Contractual Principal		Aggregate Fair Value		Difference		Contractual Principal
	(Dollars in thousands)
Loans held for sale	$	686	$	22	$	664	$	3,581	$	110	$	3,471

The following table presents the amount of gains and losses from fair value changes included in income before income taxes for financial assets carried at fair value for the three months ended March 31, 2016 and 2015:



	Three Months Ended March 31,
	2016			2015
	(Dollars in thousands)
Loans held for sale:
Other gains (losses)	$	(88	)	$	(11	)
Interest income	15			5
Interest expense	—			—
Total changes in fair values included in current period earnings	$	(73	)	$	(6	)

For items for which the fair value option has been elected, interest income is recorded within the consolidated statements of income and comprehensive income (loss) based on the contractual amount of interest income earned on financial assets (none were delinquent or in nonaccrual status).

Table Of Contents

LAPORTE BANCORP, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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



			March 31, 2016
	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in thousands)
Impaired loans:
Commercial land	$	50	$	—	$	—	$	50
Other real estate owned, net:
Commercial real estate	41		—		—		41
Mortgage servicing rights	180		—		180		—



			December 31, 2015
	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in thousands)
Impaired loans:
Commercial:
Real estate	$	590	$	—	$	—	$	590
Land	79		—		—		79
Residential mortgage	252		—		—		252
Other real estate owned, net:
Residential mortgage	36		—		—		36
Mortgage servicing rights	145		—		145		—

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a gross carrying amount of $299,000, with a valuation allowance of $249,000 at March 31, 2016, resulting in an additional provision of $29,000 for the three months ended March 31, 2016. At March 31, 2015, impaired loans had a carrying amount of $1.8 million, with a valuation allowance of $767,000, resulting in an additional provision for loan losses of $261,000 for the three months ended March 31, 2015.

At March 31, 2016, other real estate owned had a carrying amount of $41,000, which resulted in write-downs of $30,000 for the three months ended March 31, 2016. During the three months ended March 31, 2015, no write-downs were recorded on the carrying amount of other real estate owned, which is measured at the lower of cost or fair value less costs to sell.

Mortgage servicing rights, which are carried at lower of cost or fair value, were carried at their fair value of $180,000 at March 31, 2016, which was made up of the outstanding balance of $274,000, net of a valuation allowance of $94,000, resulting in a charge of $8,000 for the three months ended March 31, 2016. At March 31, 2015, mortgage servicing rights were carried at their fair value of $196,000, which was made up of the outstanding balance of $301,000, net of a valuation allowance of $105,000, resulting in a charge of $14,000 for the three months ended March 31, 2015.

Table Of Contents

LAPORTE BANCORP, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The carrying amounts and estimated fair values of financial instruments for the periods presented are as follows:



				March 31, 2016
	Carrying Value			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
	(Dollars in thousands)
Financial assets:
Cash and due from financial institutions	$	11,361		$	11,361	$	—		$	—
Interest-earning time deposits at other financial institutions	14,532			—		14,596			—
Securities available-for-sale	122,241			—		122,241			—
Loans held for sale	686			—		686			—
Loans, net	337,451			—		—			340,354
Federal Home Loan Bank stock	4,029			—		4,029			—
Accrued interest receivable	1,404			—		689			716
Financial liabilities:
Deposits	$	(361,156	)	$	—	$	(361,719	)	$	—
Federal Home Loan Bank advances	(69,132		)	—		(69,786		)	—
Subordinated debentures	(5,155		)	—		—			(5,146		)
Accrued interest payable	(182		)	—		(179		)	(3		)
Derivatives – interest rate swaps	(1,872		)	—		(1,872		)	—



				December 31, 2015
	Carrying Value			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
	(Dollars in thousands)
Financial assets:
Cash and due from financial institutions	$	18,459		$	18,459	$	—		$	—
Interest-earning time deposits at other financial institutions	13,599			—		13,641			—
Securities available-for-sale	122,243			—		122,243			—
Loans held for sale	3,581			—		3,581			—
Loans, net	341,552			—		—			344,488
Federal Home Loan Bank stock	4,029			—		4,029			—
Accrued interest receivable	1,519			—		760			759
Financial liabilities:
Deposits	$	(390,959	)	$	—	$	(390,914	)	$	—
Federal Home Loan Bank advances	(55,000		)	—		(55,197		)	—
Subordinated debentures	(5,155		)	—		—			(5,139		)
Accrued interest payable	(175		)	—		(172		)	(3		)
Derivatives – interest rate swaps	(1,265		)	—		(1,265		)	—

Table Of Contents

LAPORTE BANCORP, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

Cash and due from financial institutions: The carrying amounts of cash and due from financial institutions approximate fair values and are classified as Level 1.

Interest-earning time deposits at other financial institutions: The fair values of the Company’s interest-earning time deposits at other financial institutions are estimated using discounted cash flow analyses based on current rates for similar types of interest-earning time deposits and are classified as Level 2.

Loans held for sale: The fair value of loans held for sale is estimated based upon binding contracts and quotes from third-party investors resulting in Level 2 classification.

Loans: The fair values of loans are based on discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

Federal Home Loan Bank stock: The fair value of Federal Home Loan Bank stock is based on the price at which it may be resold to the Federal Home Loan Bank.

Deposits: The carrying amounts of demand deposits approximate their fair values and are classified as Level 2. Fair values of fixed rate certificates of deposit are estimated using a cash flow calculation reduced by known maturities, estimated principal payments, and estimated early withdrawal amounts. These cash flows are discounted to the current market rate. This method results in a Level 2 calculation.

Federal Home Loan Bank Advances: The fair values of the Company’s Federal Home Loan Bank advances are estimated using discounted cash flow analyses based on current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.

Subordinated Debentures: The fair value of the Company’s subordinated debentures are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 3 classification.

Short-term borrowings: The carrying amounts of short-term borrowings approximate fair values and are classified as Level 2.

Accrued Interest Receivable/Payable: The carrying amounts of accrued interest approximate fair value resulting in a Level 1, Level 2, or Level 3 classification based on the underlying asset or liability.

NOTE 8 – DERIVATIVES

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

The counterparties to the Company’s derivatives are exposed to credit risk whenever the derivative is in a liability position. As a result, the Company has collateralized these liabilities with securities held in safekeeping by The Bank of New York and PNC Bank. At March 31, 2016 and December 31, 2015, the Company had securities with a fair value of $4.0 million and $3.7 million, respectively, posted as collateral for these derivatives.

Interest Rate Swaps Designated as Cash Flow Hedges: Interest rate swaps with notional amounts of $40.0 million as of March 31, 2016 and December 31, 2015, respectively, were designated as cash flow hedges of FHLB advances.

Table Of Contents

LAPORTE BANCORP, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

All interest rate swaps were determined to be fully effective during the periods presented. As such, no amount of ineffectiveness has been included in net income. Therefore, the aggregate fair value of the swaps is recorded in other assets (liabilities) with changes in fair value recorded in other comprehensive income (loss). The amount included in accumulated other comprehensive income (loss) would be reclassified to current earnings should the hedges no longer be considered effective. The hedge would no longer be considered effective if a portion of the hedge becomes ineffective, the item hedged is no longer in existence, or the Company discontinues hedge accounting. The Company expects the hedges to remain fully effective during the remaining terms of the swaps. The Company does not expect any amounts to be reclassified from other comprehensive income (loss) over the next 12 months.

Information related to the interest-rate swaps designated as cash flow hedges as of March 31, 2016 and December 31, 2015 were as follows:



	March 31, 2016			December 31, 2015
	(Dollars in thousands)
FHLB advance:
Notional amount	$	10,000		$	10,000
Unrealized losses	(86		)	(154		)
Fixed interest rate payable	3.69		%	3.69		%
Variable interest rate receivable (Three month LIBOR plus 0.25%)	0.87			0.57
Maturity date	July 19, 2016
FHLB advance:
Notional amount	$	10,000		$	10,000
Unrealized losses	(466		)	(276		)
Fixed interest rate payable	2.09		%	2.09		%
Variable interest rate receivable (One month LIBOR)	0.44			0.35
Maturity date	March 15, 2020
FHLB advance:
Notional amount	$	10,000		$	10,000
Unrealized losses	(541		)	(339		)
Fixed interest rate payable	2.23		%	2.23		%
Variable interest rate receivable (One month LIBOR)	0.44			0.35
Maturity date	June 15, 2020
FHLB advance:
Notional amount	$	10,000		$	10,000
Unrealized losses	(779		)	(496		)
Fixed interest rate payable	2.62		%	2.62		%
Variable interest rate payable (One month LIBOR)	0.44			—
Maturity date	March 15, 2021

Interest expense recorded on these swap transactions is reported as a component of interest expense on FHLB advances. Interest expense recorded on these swap transactions totaled $171,000 and $127,000 during the three months ended March 31, 2016 and 2015, respectively.

Table Of Contents

LAPORTE BANCORP, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the net gains (losses) recorded in accumulated other comprehensive income (loss) and the Consolidated Statements of Income relating to the Company’s cash flow derivative instruments for the periods indicated:



	Three Months Ended March 31,
	2016		2015
	(Dollars in thousands)
Interest rate contracts:
Net amount of gain (loss):
Recognized in OCI (Effective Portion)	$	400	$	296
Reclassified from OCI to interest income	—		—
Recognized in other non-interest income (Ineffective Portion)	—		—

The following table reflects the cash flow hedges included in the Consolidated Balance Sheets as of the dates indicated:



	March 31, 2016						December 31, 2015
	Notional Amount			Fair Value			Notional Amount			Fair Value
	(Dollars in thousands)
Included in other liabilities:
Interest rate swaps related to FHLB advances	$	(40,000	)	$	(1,872	)	$	(40,000	)	$	(1,265	)

NOTE 9 – STOCK-BASED COMPENSATION

During the month of September 2011, the Company implemented the 2011 Equity Incentive Plan (the “2011 Plan”) which was approved by shareholders on May 10, 2011. The 2011 Plan provided for the issuance of stock options or restricted share awards to directors and employees. Total shares authorized for issuance under the 2011 Plan were 417,543.

On May 13, 2014, the Company’s shareholders approved the 2014 Equity Incentive Plan (the “2014 Plan”) which provides for the issuance of stock options or restricted share awards to directors and employees and effectively terminated the 2011 Plan. The total shares authorized for issuance under the 2014 Plan are 473,845 shares of the Company’s common stock plus, at the date the 2014 Plan was approved, there were 14,471 shares of stock that were rolled over from the terminated 2011 Plan and added to the shares available for awards under the 2014 Plan. In addition, any stock awards that had been granted under the 2011 Plan and subsequently forfeited were also included for issuance under the 2014 Plan.

On October, 14, 2014, the Company implemented the 2014 Plan and granted 332,250 shares of stock as stock options and 126,800 shares of stock as restricted share awards to directors and employees. Compensation costs related to these grants will be amortized over a five year period on a straight-line basis. The options and restricted share awards vest 20% annually.

Compensation expense related to the Plans totaled $170,000 and $173,000 for the three months ended March 31, 2016 and 2015, respectively.

Stock-Based Compensation

Compensation expense is recognized for stock options and restricted stock awards issued to employees or directors based on their grant date fair value. A Black-Scholes model is utilized to estimate the fair value of stock options. The market price of the Company’s common stock at the grant date is used for restricted stock awards.

Compensation expense is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation expense is recognized on a straight-line basis over the requisite service period for the entire award.

Table Of Contents

LAPORTE BANCORP, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Stock Options

The 2011 Plan permitted the stock option grants to employees or directors for up to 298,245 shares of common stock. The 2014 Plan permits stock option grants to directors and employees for up to 352,544 shares of common stock. Option awards are generally granted with an exercise price equal to the market price of the Company’s common stock on the grant date. Option awards have vesting periods of five years and ten-year contractual terms. Options granted generally vest 20% annually.

The fair value of each option award is estimated on the grant date using a closed form option valuation (Black-Scholes) model. Expected volatilities are based on historical volatilities of companies within the Company’s peer group. The expected term of options granted represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant.

Below is the summary of the activity in the stock option plan for the period presented:



	Three Months Ended March 31, 2016
	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
	(Dollars in thousands, except per share data)
Outstanding at January 1, 2016	581,826		$	9.40	7.5 years	$	3,377
Granted	—		—
Exercised	(1,892	)	8.31
Forfeited or expired	—		—
Outstanding at March 31, 2016	579,934		$	9.40	7.3 years	$	3,689
Exercisable at end of period	256,962		$	7.79	6.3 years	$	2,048

During the three months ended March 31, 2016, 1,892 options were exercised which had an intrinsic value of $13,000. The Company received $16,000 in cash and realized $6,000 in tax benefits related to the exercise of these options. At March 31, 2016, there was $587,000 of total unrecognized compensation cost related to nonvested stock options granted, which is expected to be expensed over a weighted-average period of 3.3 years. The 2014 Plan had 22,132 shares available for future grant at March 31, 2016.

Restricted Share Awards

The 2011 Plan provided for the issuance of up to 119,298 restricted shares to directors and employees. The 2014 Plan provides for the issuance of up to 135,772 of restricted shares to directors and employees. Compensation expense is recognized over the vesting period of the awards based on the grant date fair value of the Company’s common stock at issue date as determined by the listing price on the respective date. Shares vest 20% annually over five years. The 2014 Plan had 9,870 shares available for future grant at March 31, 2016.

A summary of changes in the Company’s nonvested restricted shares the was as follows for the period presented:



	Three Months Ended March 31, 2016
	Shares	Weighted-Average Grant-Date Fair Value
Nonvested at January 1, 2016	125,152	$	10.58
Granted	—	—
Vested	—	—
Forfeited	—	—
Nonvested at March 31, 2016	125,152	$	10.58

Table Of Contents

LAPORTE BANCORP, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

At March 31, 2016, there was $1.1 million of total unrecognized compensation expense related to nonvested shares granted, which is expected to be recognized over a weighted-average period of 3.3 years. At March 31, 2016, the nonvested shares had an intrinsic value of $649,000.

NOTE 10 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

A summary of the changes in accumulated other comprehensive income (loss) by component for the periods indicated is as follows:



	Three Months Ended March 31,
	2016							2015
	Gains (Losses) on Cash Flow Hedges			Unrealized Gains (Losses) on Available- for-Sale Securities		Total		Gains (Losses) on Cash Flow Hedges			Unrealized Gains (Losses) on Available- for-Sale Securities			Total
	(Dollars in thousands)
Beginning balance	$	(836	)	$	1,146	$	310	$	(763	)	$	1,285		$	522
Other comprehensive income (loss) before reclassification	(400		)	857		457		(296		)	668			372
Amounts reclassified from accumulated other comprehensive income (loss)	—			—		—		—			(33		)	(33		)
Net current period other comprehensive income (loss)	(400		)	857		457		(296		)	635			339
Ending balance	$	(1,236	)	$	2,003	$	767	$	(1,059	)	$	1,920		$	861

A summary of the reclassifications out of accumulated other comprehensive income (loss) for the periods indicated is as follows:



	Three Months Ended March 31,
	2016		2015
	Amount Reclassified from Accumulated Other Comprehensive Income (Loss)		Amount Reclassified from Accumulated Other Comprehensive Income (Loss)
	(Dollars in thousands)
Unrealized gains and losses on available-for-sale securities:
Net gains on securities	$	—	$	50
Income tax expense	—		(17		)
Net of tax	$	—	$	33

NOTE 11 – OFFSETTING FINANCIAL ASSETS AND LIABILITIES

The following tables summarize gross and net information about financial instruments and derivative instruments that are offset in the Company’s statement of Consolidated Balance Sheets or that are subject to an enforceable master netting arrangement at March 31, 2016 and December 31, 2015.



	March 31, 2016
	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Consolidated Balance Sheet		Net Amounts of Liabilities Presented in the Consolidated Balance Sheet		Gross Amounts Not Offset in the Consolidated Balance Sheet
	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Consolidated Balance Sheet				Financial Instruments			Cash Collateral Pledged		Net Amount
	(Dollars in thousands)
Derivatives	$	1,872	$	—	$	1,872	$	(3,977	)	$	—	$	(2,105	)

Table Of Contents

LAPORTE BANCORP, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



	December 31, 2015
	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Consolidated Balance Sheet		Net Amounts of Liabilities Presented in the Consolidated Balance Sheet		Gross Amounts Not Offset in the Consolidated Balance Sheet
	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Consolidated Balance Sheet				Financial Instruments			Cash Collateral Pledged		Net Amount
	(Dollars in thousands)
Derivatives	$	1,265	$	—	$	1,265	$	(3,696	)	$	—	$	(2,431	)

If an event of default occurs causing an early termination of an interest rate swap derivative, an early termination amount payable to one party by the other party may be reduced by set-off against any other amount payable by the one party to the other party. If a default in performance of any obligation of a repurchase agreement occurs, each party will set-off property held in respect of transactions against obligations owing in respect of any other transactions.

NOTE 12 – PENDING MERGER

On March 10, 2016, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Horizon Bancorp (“Horizon”), an Indiana corporation. Pursuant to the Merger Agreement, the Company will merge with and into Horizon, with Horizon as the surviving corporation (the “Merger”). Immediately following the Merger, The La Porte Savings Bank, an Indiana chartered savings bank and wholly-owned subsidiary of the Company (“LPS Bank”), will merge with and into Horizon Bank, National Association, the wholly-owned national bank subsidiary of Horizon (“Horizon Bank”), with Horizon Bank as the surviving bank.

Subject to the terms and conditions of the Merger Agreement, upon the completion of the Merger, each share of outstanding Company common stock, $0.01 par value per share, will be converted into 0.629 shares (the “Exchange Ratio”) of Horizon common stock, no par value, or $17.50 per share in cash. The Merger Agreement provides that, in the aggregate, 65% of the outstanding shares of the Company will be converted into the right to receive shares of Horizon common stock and the remaining 35% of the outstanding shares of the Company will be converted into the right to receive cash. The Exchange Ratio is subject to adjustments for stock splits, stock dividends, recapitalization, or similar transactions, or as otherwise described in the Merger Agreement. No fractional shares of Horizon common stock will be issued arising from the Exchange Ratio, instead, Horizon will pay each holder of Company stock an amount in cash determined by multiplying the fractional shares by an average of the daily closing sales price of a share of Horizon’s common stock during the 15 consecutive trading days immediately preceding the second business day prior to the closing date of the Merger. Immediately prior to the Merger, each outstanding stock option to purchase Company common stock will be converted into the right to receive cash equal to $17.50 minus the per share exercise price for each stock option, minus any applicable taxes required to be withheld by law. The Merger remains subject to regulatory approval, Company shareholder approval and other customary closing conditions. Based on Horizon’s March 9, 2016 closing price of $24.21 per share as reported on the NASDAQ Global Select Market, the transaction value is estimated at $94.1 million.

NOTE 13 – SUBSEQUENT EVENT

On April 26, 2016, a shareholder class and derivative action lawsuit was filed against the Company, each of LaPorte Bancorp’s directors, and Horizon in connection with the Company entering into the Merger Agreement with Horizon. The lawsuit, which was filed in the Superior Court of LaPorte County, Indiana, alleges that the members of LaPorte Bancorp’s Board of Directors breached their fiduciary duties to the Company’s shareholders by approving the proposed Merger for inadequate consideration; entering into the Merger Agreement containing unreasonable deal protection devices; and approving the transaction in order to receive benefits not equally shared by all other LaPorte Bancorp shareholders. The lawsuit also alleges claims against Horizon for aiding and abetting these alleged breaches of fiduciary duties. The plaintiff seeks, among other things, class certification, declaratory relief, to enjoin the consummation of the proposed transaction, rescission or recissory damages if the Merger is consummated, costs and reasonable attorneys’ and experts’ fees. The Company believes the claims asserted in this action to be without merit and intends to vigorously defend against this lawsuit. However, at this time, it is not possible to predict the outcome of the proceeding or its impact on LaPorte Bancorp, Horizon, or the proposed Merger.

Table of Contents


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

Forward-Looking Statements

This document (including information incorporated by reference) contains future oral and written statements of LaPorte Bancorp, Inc. (the “Company”) and its management and may contain, forward-looking statements, as such term is defined in the Private Securities Litigation Reform Act of 1995, with respect to the financial condition, results of operations, plans, objectives, future performance, and business of the Company. Forward-looking statements, which may be based upon beliefs, expectations, and assumptions of the Company’s management and on information currently available to management, are generally identifiable by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “intend,” “estimate,” “may,” “will,” “would,” “could,” “should,” or other similar expressions. Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no obligation to update any statement in light of new information or future events.

The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. The factors which could have a material adverse effect on the operations and future prospects of the Company and certain subsidiaries are detailed in “Item 1A – Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2015. In addition to these risk factors, there are other factors that may impact any public company, including ours, which could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries. These additional factors include, but are not limited to, the following:


•	changes in prevailing real estate values and loan demand both nationally and within our current and future market area;


•	increased competitive pressures among financial services companies;


•	changes in consumer spending, borrowing, and savings habits;


•	the amount of assessments and premiums we are required to pay for FDIC deposit insurance;


•	legislative or regulatory changes that affect our business including the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) and its impact on our compliance costs;


•	the success of our mortgage warehouse lending program including the impact of the Dodd-Frank Act on the mortgage companies;


•	our ability to manage the impact of changes in interest rates, spreads on interest earning assets and interest-bearing liabilities, and interest rate sensitivity;


•	rising interest rates and their impact on mortgage loan volumes;


•	our ability to successfully manage our commercial lending;


•	the financial health of certain entities, including government sponsored enterprises, the securities of which are owned or acquired by the Company;


•	adverse changes in the securities market;


•	the new capital rules effective on January 1, 2015 and the implementation of the capital buffer beginning with the first quarter of 2016;


•	the costs, effects, and outcomes of existing or future litigation;


•	the economic impact of past and any future terrorist attacks, acts of war, or threats thereof and the response of the United States to any such threats and attacks;


•	delays in closing the Merger with and into Horizon Bancorp;


•	the potential impact of the announcement of the proposed Merger with and into Horizon Bancorp on relationships with third parties, including customers, employees, and competitors;


•	the actual results of our proposed Merger with and into Horizon Bancorp could vary materially as a result of a number of factors, including the possibility that various closing conditions for the transaction may not be satisfied or waived, and the merger agreement could be terminated under certain circumstances; and


•	the ability of the Company to manage the risks associated with the foregoing factors as well as anticipated risk factors.

These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.

Table of Contents

Critical Accounting Policies

We consider accounting policies that require management to exercise significant judgment or discretion or make significant assumptions that have, or could have, a material impact on the carrying value of certain assets or on income, to be critical accounting policies. These policies are detailed in our Annual Report on Form 10-K for the year ended December 31, 2015 and have not materially changed during the three months ended March 31, 2016.

Recent Events

Comparison of Financial Condition at March 31, 2016 and December 31, 2015

General: Total assets at March 31, 2016 decreased $14.3 million, or 2.6%, to $528.9 million compared to $543.2 million at December 31, 2015 primarily due to a $7.1 million, or 38.5%, decrease in cash and due from financial institutions and fed funds sold, a $4.1 million, or 1.2%, decrease in loans, and a $2.9 million, or 80.8%, decrease in loans held for sale.

Investment Securities: Total securities available-for-sale were stable at $122.2 million at both March 31, 2016 and December 31, 2015. During the three months ended March 31, 2016, proceeds from paydowns and maturities totaling $2.8 million were reinvested in additional securities available-for-sale and interest-earning time deposits at other financial institutions.

At March 31, 2016, management reviewed the securities portfolio for possible other-than-temporary impairment and determined there were no impairment charges to be recorded. The net unrealized gains on the available-for-sale securities portfolio totaled $3.0 million at March 31, 2016, an increase of $1.3 million from net unrealized gains totaling $1.7 million at December 31, 2015.

Loans Held for Sale: Loans held for sale decreased $2.9 million, or 80.8%, to $686,000 at March 31, 2016 compared to $3.6 million at December 31, 2015 primarily due to the timing of when residential mortgage loans were originated and subsequently sold to the secondary market.

Loans: Loans decreased by $4.1 million, or 1.2%, to $341.1 million at March 31, 2016 compared to $345.2 million at December 31, 2015. The decrease was primarily due to a $6.6 million, or 5.1%, decrease in mortgage warehouse loans to $122.3 million at March 31, 2016 from $128.9 million at December 31, 2015. The decease in mortgage warehouse loans was primarily due to a three day faster turn time during the first quarter of 2016 compared to the last few months of 2015 as mortgage companies were able to comply more efficiently with new regulations on mortgage loans. We continue to utilize the warehouse participation program to provide additional availability to our customers when their demand increases, primarily at month end, or when there are backlogs in the secondary markets. The participation program allows us to utilize our liquidity to fund commercial loan growth while retaining processing, servicing, and wire transfer fees related to the mortgage warehouse loans.

Table of Contents

Partially offsetting the decrease in mortgage warehouse loans was a $3.4 million, or 2.2%, increase in commercial loans to $158.3 million at March 31, 2016 from $154.8 million at December 31, 2015. The increase was primarily due to new originations as well as fundings of commercial real estate and commercial construction loans during 2015. The Company originated $5.4 million in commercial real estate loans during the first quarter of 2016 with an additional $1.0 million moving into permanent financing from commercial construction loans. During the first quarter of 2016, the Company funded $2.0 million on previously originated or purchased commercial construction loans.

Allowance for Loan Losses: The allowance for loan losses balance was stable at $3.6 million at both March 31, 2016 and December 31, 2015. The Company’s analysis for the allowance for loan losses for the first quarter of 2016 reflected continued improvement in several asset quality metrics and trends, including classified assets, troubled debt restructurings, delinquencies, and current economic conditions. As such, no provision for the allowance for loan losses was recorded during the first quarter of 2016. Net recoveries for the three months ended March 31, 2016 totaled $2,000, compared to $25,000 in net charge-offs for the prior year period.

The allowance for loan losses to nonperforming loans ratio decreased to 150.2% at March 31, 2016 compared to 154.7% at December 31, 2015 primarily due to a $72,000 increase in nonperforming loans. The allowance for loan losses to total loans ratio increased to 1.07% at March 31, 2016 from 1.05% at December 31, 2015 primarily due to the decrease in total loans at March 31, 2016 from December 31, 2015.

Nonperforming Assets: The table below sets forth the amounts and categories of our nonperforming assets at the dates indicated.



	March 31, 2016			December 31, 2015
	(Dollars in thousands)
Nonaccrual loans:
Commercial:
Real estate	$	1,362		$	1,396
Construction	25			41
Land	299			299
Total commercial	1,686			1,736
Residential mortgage	620			590
Home equity	21			23
Total nonaccrual loans	2,327			2,349
Loans greater than 90 days delinquent and still accruing:
Residential mortgage	94			—
Total loans greater than 90 days delinquent and still accruing	94			—
Total nonperforming loans	2,421			2,349

Foreclosed assets:
Commercial:
Real estate	42			72
Land	1,789			1,789
Total commercial	1,831			1,861
Residential mortgage	339			339
Total foreclosed assets	2,170			2,200
Total nonperforming assets	$	4,591		$	4,549

Ratios:
Nonperforming loans to total loans	0.71		%	0.68		%
Nonperforming assets to total assets	0.87			0.84

Table of Contents

Total nonperforming assets increased $42,000, or 0.9%, to $4.6 million at March 31, 2016 from $4.5 million at December 31, 2015. Our nonperforming assets to total assets ratio increased to 0.87% at March 31, 2016 compared to 0.84% at December 31, 2015 as a result of the increase in nonperforming assets combined with a decrease in total assets at March 31, 2016.

Total nonperforming loans increased $72,000, or 3.1%, to $2.4 million at March 31, 2016 compared to $2.3 million at December 31, 2015. At March 31, 2016, our nonperforming loans to total loans ratio increased to 0.71% from 0.68% at December 31, 2015 as a result of the increase in nonperforming loans and the decrease in total loans outstanding at March 31, 2016.

The primary increase in nonperforming loans from December 31, 2015 to March 31, 2016 was due to a $94,000 residential mortgage loan that is past due 90 days and still accruing as the borrower was waiting to receive payment assistance through a government program. The loan was subsequently brought current as the payments were received by the Bank in April 2016. In addition, the Bank transferred a $40,000 residential mortgage loan to nonaccrual status during the first quarter of 2016. These increases were partially offset by payments received on nonaccrual commercial real estate, construction, and home equity loans.

Other real estate owned decreased $30,000 to $2.2 million at March 31, 2016 from December 31, 2015. During the first quarter of 2016, we recorded a $30,000 write-down on one commercial real estate property. There was no other activity in foreclosed assets during the first quarter of 2016.

Goodwill and Other Intangible Assets: Our goodwill totaled $8.4 million at March 31, 2016 and December 31, 2015. Accounting standards require goodwill to be tested for impairment on an annual basis, or more frequently if circumstances indicate that an asset might be impaired. Impairment exists when a reporting unit’s carrying value of goodwill exceeds its fair value, which is determined through a two-step impairment test. Step 1 includes the determination of the carrying value of the reporting unit, including the existing goodwill and intangible assets, and estimating the fair value of the reporting unit. If the carrying amount of a reporting unit exceeds its fair value, we are required to perform a second step to the impairment test. The most recent annual impairment review of our goodwill was completed in February 2016 as of October 31, 2015. Based on this evaluation, management determined that the fair value of the reporting unit, which is defined as LaPorte Bancorp, Inc. as a whole, exceeded the book value of the goodwill, based on the opinion of an independent expert in valuations, such that the sales price per common share would exceed our book value per common share. Accordingly, no goodwill impairment was recognized during the three months ended March 31, 2016.

Our stock price has increased from the previous analysis and the Company continues to be profitable, therefore, management determined that an updated analysis from an independent third party during the three months ended March 31, 2016 was not necessary. At March 31, 2016, our market price per common share was greater than our book value per common share. If, in the future, our market price per common share falls below our book value per common share or other factors arise which may lead to a deterioration in the valuation of the Company, management may conclude that the goodwill is impaired as a result of a future assessment. If our goodwill is determined to be impaired, the related charge to earnings could be material.

Deposits: Total deposits at March 31, 2016 decreased $29.8 million, or 7.6%, to $361.2 million from $391.0 million at December 31, 2015. Interest checking deposits decreased $15.2 million, or 14.3%, primarily due to decreases in mortgage warehouse participant accounts, which will fluctuate due to funding needs in mortgage warehouse lending. Certificates of deposit and IRAs decreased $12.0 million, or 12.1%, due to maturities in brokered deposits that were not renewed. Money market accounts decreased $8.2 million, or 14.1%, primarily due to a decrease in one large public fund account.

Borrowed Funds: Total borrowed funds increased $14.1 million, or 23.5%, to $74.3 million at March 31, 2016 compared to $60.2 million at December 31, 2015. The increase in borrowings was primarily related to a $10.0 million advance entered into during March 2016 related to the start of the third forward-starting swap combined with the utilization of our short-term lines of credit to fund the decrease in deposits.

The Bank has unsecured lines of credit at First Tennessee Bank totaling $15.0 million and Zions Bank totaling $9.0 million at March 31, 2016. Neither of these lines were utilized during the first quarter of 2016.

Total Shareholders’ Equity: Total shareholders’ equity increased $1.2 million, or 1.4%, to $86.7 million at March 31, 2016 compared to $85.5 million at December 31, 2015. Retained earnings increased $372,000 due to net income totaling $595,000 for the three months ended March 31, 2016, which was reduced by cash dividends paid totaling $223,000. Accumulated other comprehensive income increased $457,000 as unrealized gains on available-for-sale investment securities increased, which were partially offset by an increase in unrealized losses on interest rate swaps. At March 31, 2016, the Bank continued to be well capitalized under its applicable regulatory capital requirements.

Table of Contents

Comparison of Operating Results for the Three Month Periods Ended March 31, 2016 and March 31, 2015

Net Income: Net income totaled $595,000, or $0.11 per diluted share, for the three months ended March 31, 2016 compared to $952,000, or $0.18 per diluted share, for the three months ended March 31, 2015. The decrease in net income was primarily due to merger related expenses totaling $641,000. Partially offsetting this decrease was an increase in net interest income totaling $363,000 and a decrease of $105,000 in provision for loan losses.

Net Interest Income: Net interest income increased to $4.2 million for the three months ended March 31, 2016 from $3.9 million for the comparable 2015 period. Net interest margin increased 13 basis points to 3.49% for the three months ended March 31, 2016 compared to 3.36% for the prior year period. Interest income increased $454,000 for the three months ended March 31, 2016 as the average balance of interest earning assets increased $24.9 million, or 5.40%, and the average yield earned on these assets increased 18 basis points from the comparable 2015 period. Partially offsetting this increase was a $91,000 increase in interest expense as the average balance of interest-bearing liabilities increased $15.5 million, or 4.3%, and the average cost of interest-bearing liabilities increased by seven basis points for the three months ended March 31, 2016 as compared to the prior year period.

Interest and Dividend Income: Interest and dividend income increased $454,000, or 10.1%, to $4.9 million for the three months ended March 31, 2016 compared to $4.5 million for the prior year period. During the first quarter of 2016, interest income from loans increased $523,000 from the prior year period to $4.1 million primarily due to a 10.2% increase in the average balance of loans outstanding to $326.0 million for the three months ended March 31, 2016 from $295.7 million for the prior year period. The average yield earned on loans also increased to 5.06% for the three months ended March 31, 2016 from 4.87% for the prior year period.

Interest income on commercial real estate loans increased $176,000, or 18.2%, during the first quarter of 2016 due to a $19.4 million, or 25.7%, increase in the average balance of these loans and was partially offset by a 31 basis point decrease in the average yield earned. The increase in the average balance was due to the higher level of originations during 2015. The average yield decreased due to competition within the lending markets that we serve.

Interest income on mortgage warehouse loans increased $123,000, or 8.3%, during the first quarter of 2016 primarily due to an increase in fees earned on loans funded as overall warehouse activity has increased as a result of the 2015 addition of the mortgage warehouse participant program. The average yield earned on mortgage warehouse loans increased 87 basis points to 5.81% for the first quarter of 2016 from 4.94% for the prior year period. These increases were partially offset by a $9.6 million, or 8.0%, decrease in the average balance of these loans during the first quarter of 2016 when compared to the prior year period. Overall, the number of transactions and activity increased from the prior year period due to an increase in the number of warehouse lines as well as the funding capacity added by the mortgage warehouse participants. We continue to receive fee income related to all warehouse transactions in addition to servicing income on the participated balances.

Interest income on commercial construction loans increased $81,000, or 172.3%, during the first quarter of 2016 primarily due to a $7.5 million, or 176.9%, increase in the average balance of these loans from the prior year period primarily as a result of construction draws on existing construction loans.

Interest income on five or more family commercial real estate loans increased $69,000, or 33.8%, during the first quarter of 2016 primarily due to a $6.3 million, or 38.5%, increase in the average balances on these loans when compared to the prior year period. The increase was partially offset by a 17 basis point decrease in the average yield earned on these loans during the first quarter of 2016.

Interest income on securities available for sale decreased $123,000, or 15.0%, to $695,000 during the first quarter of 2016 compared to the same 2015 period primarily due to a decrease of $26.7 million, or 17.9%, in the average balance of these securities to $122.2 million for the first quarter of 2016 from $148.9 million for the prior year period. The decrease in securities was primarily used to fund the increase in loan balances and to shift a portion of these funds to interest earning time deposits. Interest income on fed funds sold and other interest-earning deposits increased $54,000 primarily due to a $15.2 million, or 300%, increase in the average balance of fed funds sold combined with the reinvestment of proceeds from investment securities and paydowns into interest earning time deposits. In addition, the average yield earned on these funds increased 25 basis points due to the 25 basis point increase in the federal funds interest rate in December 2015.

Table of Contents

The following table sets forth the average balance sheet, average annualized yield and cost, and certain other information for the three months ended March 31, 2016 and 2015. All average balances are daily average balances. The annualized yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or expense.



	Three Months Ended March 31,
	2016						2015
	Average Outstanding Balance		Interest		Annualized Yield/Cost		Average Outstanding Balance		Interest		Annualized Yield/Cost
	(Dollars in thousands)
Assets:
Loans (1)	$	326,041	$	4,124	5.06	%	$	295,747	$	3,601	4.87	%
Taxable securities	73,824		327		1.77		96,291		410		1.70
Tax exempt securities (2)	48,416		368		3.04		52,640		408		3.10
FHLB stock	4,029		43		4.27		4,275		43		4.02
Federal funds sold and other interest-earning deposits	34,159		73		0.85		12,613		19		0.60
Total interest earning assets	486,469		4,935		4.06		461,566		4,481		3.88
Non-interest earning assets	45,539						41,745
Total assets	$	532,008					$	503,311

Liabilities and equity:
Savings deposits	$	66,525	$	10	0.06	%	$	63,792	$	9	0.06	%
Money market accounts	55,415		52		0.38		57,932		55		0.38
Interest-bearing checking	98,676		73		0.30		57,215		32		0.22
Certificates of deposit and IRAs	92,189		205		0.89		98,748		198		0.80
Total interest-bearing deposits	312,805		340		0.43		277,687		294		0.42
FHLB advances	57,573		309		2.15		76,137		268		1.41
Subordinated debentures	5,155		47		3.65		5,155		42		3.26
Short-term borrowings	—		—		—		1,061		1		0.38
Total borrowings	62,728		356		2.27		82,353		311		1.51
Total interest-bearing liabilities	375,533		696		0.74		360,040		605		0.67
Non-interest bearing deposits	63,111						54,850
Other liabilities	6,847						5,724
Total liabilities	445,491						420,614
Shareholders’ equity	86,517						82,697
Total liabilities & shareholders’ equity	$	532,008					$	503,311
Net interest income			$	4,239					$	3,876
Net interest rate spread					3.32	%					3.21	%
Net interest margin					3.49						3.36

(1) The average balance of loans includes loans held for sale and nonperforming loans, interest on which is recognized on a cash basis.

(2) No tax-equivalent yield adjustments have been made.

Table of Contents

Interest Expense: Interest expense increased $91,000, or 15.0%, to $696,000 for the three months ended March 31, 2016 from $605,000 for the prior year period. Interest expense on deposit accounts increased $46,000, or 15.6%, to $340,000 for the first quarter of 2016 when compared to the prior year period primarily due to interest expense on interest-bearing checking deposits. The average balance of interest-bearing deposit accounts increased by $41.5 million, or 72.5%, during the first quarter of 2016 as a result of an increase in public funds and mortgage warehouse participant accounts. The average cost paid on these deposits increased eight basis points due to rates paid on public fund accounts and the impact of the higher rates paid on our reward checking product that was implemented in the fourth quarter of 2015.

Interest expense on borrowings increased $45,000 during the first quarter of 2016 from the prior year period. Interest expense related to Federal Home Loan Bank (“FHLB”) advances increased $41,000 during the first quarter of 2016 primarily due to a 74 basis point increase in the average cost of these borrowings and the impact of the Bank’s three interest rate swaps that began in March and June 2015 and March 2016. The fixed interest rates associated with these swaps are 2.09%, 2.23%, and 2.62% with the Bank receiving one month LIBOR. These swaps mature in five years from issuance in March and June 2020 and March 2021. Partially offsetting the increase in the cost of FHLB advances was a $18.6 million decrease in the average balance of these FHLB borrowings when compared to the prior year period.

Interest expense on the Company’s subordinated debt increased $5,000 during the three months ended March 31, 2016 compared to the prior year period due to an increase in the average cost of these borrowings by 39 basis points to 3.65% for the first quarter of 2016 from 3.26% for the prior year period. The subordinated debt has a variable rate of interest tied to the three month LIBOR.

Provision for Loan Losses: We recognize a provision for loan losses, which is charged to earnings, at a level necessary to absorb known and inherent losses that are both probable and reasonably estimable at the date of the financial statements. We evaluate the level of the allowance for loan losses on a quarterly basis by considering historical loan loss experience, the types of loans and the amount of loans in the portfolio, adverse situations that may affect our borrowers’ ability to repay, the estimated fair value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available or as future events occur.

The Company’s analysis of the allowance for loan losses for the first quarter of 2016 reflected continued improvement in asset quality metrics and various positive trends, including classified assets, troubled debt restructurings, delinquencies, and current economic conditions. For the three months ended March 31, 2016 we recorded net recoveries totaling $2,000 compared to net charge-offs totaling $25,000 for the prior year period. Based upon the quarterly analysis of the allowance for loan losses and levels of charge-offs during the quarter, management did not record a provision for loan losses during the first quarter of 2016. During the prior year period, a $105,000 provision for loan losses was recorded.

Noninterest Income: Noninterest income increased $64,000, or 10.6%, to $666,000 for the three months ended March 31, 2016 from $602,000 for the prior year period. Loan servicing fees increased by $85,000 due to $84,000 of servicing fees recorded on mortgage warehouse loan participations combined with $6,000 of lower provisions for mortgage servicing rights during the first quarter of 2016 when compared to the prior year period. Wire transfer fees increased $40,000 during the first quarter of 2016 due to the increase in mortgage warehouse activity when compared to the prior year period. Gains on mortgage banking activities increased $26,000 as mortgage originations from purchase activity and associated sales were higher during the first quarter of 2016 when compared to the prior year period. Partially offsetting these increases was a decrease of $50,000 of net gains on the sales of securities when compared to the prior year period. In addition, net gains on other assets decreased $40,000 during the first quarter of 2016, primarily due to a $30,000 write-down on a commercial other real estate owned property based on a recent purchase offer.

Noninterest Expense: Noninterest expense increased $894,000, or 27.4%, to $4.2 million for the three months ended March 31, 2016 when compared to the prior year period primarily due to an increase of $638,000 in legal and other consulting expenses. During the first quarter of 2016, legal and investment banking costs associated with the pending merger with Horizon Bancorp totaled $641,000. Salaries and employee benefits expense increased $216,000, which included an increase in payroll expense related to annual merit increases, mortgage warehouse bonuses, and new positions since the first quarter of 2015. The expense related to the Company’s employee stock ownership plan also increased $26,000 in the first quarter of 2016 due to the increase in our stock price. Group insurance costs increased $21,000 due to higher health care costs in 2016. In addition, deferred lending costs decreased by $57,000 due to lower commercial and residential mortgage loan originations during the first quarter of 2016 when compared to the prior year period. Collection and other real estate owned expenses increased $67,000 during the first quarter of 2016 due to increased legal and collection costs related to one commercial real estate loan relationship and the land

Table of Contents

parcels held in other real estate owned. Data processing expense increased $25,000 during the first quarter of 2016 due to higher core processing costs combined with upgrades to our disaster recovery and back up systems.

Partially offsetting the above increases, advertising expenses decreased $40,000 during the first quarter of 2016 due to lower costs incurred for advertising campaigns for our loan production office in St. Joe, Michigan, and other promotional items. Occupancy and equipment costs decreased $39,000 primarily due to lower utilities, snow removal, and maintenance items during the first quarter of 2016 as compared to the prior year quarter.

Income Taxes: Income before income taxes decreased $362,000, or 32.7%, to $746,000 for the three months ended March 31, 2016 from $1.1 million for the prior year period, which led to a decrease in income tax expense for the three months ended March 31, 2016 to $151,000 from $156,000 for the prior year period. The Company’s effective tax rate for the three months ended March 31, 2016 was 20.2%, an increase from 14.1% for the comparable 2015 period. The increase in the effective tax rate was primarily due to the nondeductible expenses associated with the Merger that were incurred during the first quarter of 2016.

Liquidity and Capital Resources

We maintain liquid assets at levels we consider adequate to meet both our short- and long-term liquidity needs. We adjust our liquidity levels to fund loan commitments, repay our borrowings, and fund deposit outflows. We also adjust liquidity to meet asset and liability management objectives. Liquidity levels can significantly fluctuate based upon the demand in the mortgage warehouse lending division.

Our primary sources of liquidity are deposits, amortization and prepayment of loans and mortgage-backed securities, maturities of investment securities and other short-term investments, and earnings and funds provided from operations, as well as access to FHLB advances and other borrowings. While scheduled principal repayments on loans and mortgage-backed securities are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by market interest rates, economic conditions, and rates offered by our competition. We set the interest rates on our deposits to maintain a desired level of total deposits.

Our liquid assets, defined as cash and due from financial institutions, interest earning time deposits in other financial institutions, and the market value of unpledged securities available-for-sale, totaled $105.8 million at March 31, 2016 and constituted 20.0% of total assets at that date, compared to $111.2 million, or 20.5%, of total assets at December 31, 2015.

The Company also maintains lines of credit with the FHLB. Total availability under these lines of credit was $96.5 million at March 31, 2016. At March 31, 2016, the Company had borrowed $4.1 million on the overnight line of credit with the FHLB. The Company has additional securities and certain approved real estate loans available to pledge as collateral in order to increase our lines of credit with the FHLB. At March 31, 2016, we had $80.0 million in unpledged securities available-for-sale.

The Company actively utilizes its borrowing capacity with the FHLB to manage liquidity and to provide a funding alternative to time deposits, if the FHLB’s rates and terms are more favorable. The advances from the FHLB can have maturities from overnight to multiple years. At March 31, 2016, $44.1 million of these advances were due within one year and $25.0 million had maturities greater than a year. At March 31, 2016, $14.1 million of the FHLB advances were variable rate, of which $10.0 million is part of our interest rate swap strategy. This $10.0 million variable rate advance was swapped for a fixed rate advance of 3.69% and will mature in July 2016. During 2016, the last of the Company’s forward starting swaps began. The Company has three interest rate swaps that are each tied to a $10.0 million fixed rate advance. The advances are swapped for fixed rates of 2.09%, 2.23%, and 2.62%. These one month advances are renewed every month for a five year period from the date of issuance, maturing in March and June 2020 and March 2021. The remaining $55.0 million in FHLB advances were at fixed rates.

The Company has an accommodation from First Tennessee Bank National Association (“FTN”) to borrow federal funds up to $15.0 million. This federal funds accommodation is not a confirmed line or loan, and FTN may cancel such accommodation at any time, in whole or in part, without cause or notice, in its sole discretion. The Company did not utilize this line during the three months ended March 31, 2016.

The Company also has an agreement with Zions First National Bank (“Zions”) for an unsecured line of credit to borrow federal funds up to $9.0 million. This line of credit was established at the discretion of Zions and may be terminated at any time in its sole discretion. The Company did not utilize this line during the three months ended March 31, 2016.

Table of Contents

Federal regulations require FDIC-insured depository institutions to meet several minimum capital standards: a common equity Tier 1 capital to risk-based assets ratio of 4.5%, a Tier 1 capital to risk-based assets ratio of 6.0%, a total capital to risk-based assets of 8%, and a 4% Tier 1 capital to total assets leverage ratio. The existing capital requirements were effective January 1, 2015 and are the result of a final rule implementing regulatory amendments based on recommendations of the Basel Committee on Banking Supervision and certain requirements of the Dodd-Frank Act.

In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted asset above the amount necessary to meet its minimum risk-based capital requirements. The capital conservation buffer requirement is being phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and increasing each year until fully implemented at 2.5% on January 1, 2019.

At March 31, 2016, the Bank is considered “well-capitalized”. The table below presents the Bank’s capital ratios at the dates indicated:



	March 31, 2016		December 31, 2015
Total Capital to risk weighted assets	18.7	%	18.0	%
Tier 1 (Core) Capital to risk weighted assets	17.7		17.1
Tier 1 Common Equity Capital to risk weighted assets	17.7		17.1
Tier 1 (Core) Capital to average assets	13.4		13.3

Off-Balance-Sheet Arrangements: In the normal course of operations, we engage in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate, and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments, unused lines of credit, and standby letters of credit. At March 31, 2016, we had commitments to originate loans and unused lines of credit totaling $44.2 million and commercial standby letters of credit totaling $978,000. The Company utilizes hedging strategies through interest rate swaps to manage interest rate risk. See Note 8 in the Condensed Notes to the Consolidated Financial Statements for more information.

Impact of Inflation

The primary impact of inflation on the Bank is its effect on interest rates. The Bank’s primary source of income is net interest income, which is affected by changes in interest rates. The Bank attempts to limit the impact of inflation on its net interest margin through management of interest rate-sensitive assets and liabilities and analyses of interest rate sensitivity. The effect of inflation on premises and equipment as well as on noninterest expenses has not been significant for the periods presented.


ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Management of Interest Rate Risk

Our asset/liability management strategy attempts to manage the impact of changes in interest rates on net interest income, our primary source of earnings.

Historically, we have relied on funding longer term higher interest-earning assets with shorter term lower interest-bearing deposits to earn a favorable net interest rate spread. As a result, we have been vulnerable to adverse changes in interest rates. Over the past several years, management has implemented an asset/liability strategy to manage, subject to our profitability goals, our interest rate risk. Among the techniques we are currently using to manage interest rate risk are: (i) expanding, subject to market conditions, our commercial real estate loans, commercial business loans and mortgage warehouse loans as they generally reprice more quickly than residential mortgage loans; (ii) selling on the secondary market most of our originations of long-term fixed-rate one- to four-family residential mortgage loans; (iii) subject to market conditions and consumer demand, originating residential adjustable rate mortgages for our portfolio; (iv) using interest rate swaps, caps or floors to hedge our assets and/or liabilities; and (v) reducing the amount of long term, fixed rate mortgage-backed and CMO securities, which are vulnerable to an increasing interest rate environment and will extend in duration. We have also used structured rates with redemption features to improve our yield and may consider interest rate swaps and other hedging instruments although we have not done so recently.

Table of Contents

While this strategy has helped manage our interest rate exposure, it does pose risks. For instance, the prepayment options embedded in adjustable rate one- to four-family residential loans and the mortgage-backed securities and CMOs, which allow for early repayment at the borrower’s discretion may result in prepayment before the loan reaches the fully indexed rate. Conversely, in a falling interest rate environment, borrowers may refinance their loans and redeemable securities may be called. In addition, non-residential lending generally presents higher credit risks than residential one- to four-family lending.

Our Board of Directors is responsible for the review and oversight of management’s asset/liability strategies. Our Asset/Liability Committee is charged with developing and implementing an asset/liability management plan. This committee meets monthly to review pricing and liquidity needs and assess our interest rate risk. We currently utilize a third party modeling program, prepared on a quarterly basis, to evaluate our sensitivity to changing interest rates. In addition, on a monthly basis, the committee reviews our current liquidity position, investment activity, deposit and loan repricing and terms, interest rate swap effectiveness testing, and Federal Home Loan Bank and other borrowing strategies.

Depending on market conditions, we often place more emphasis on enhancing net interest margin rather than matching the interest rate sensitivity of our assets and liabilities. In particular, we believe that the increased net interest income resulting from a mismatch in the maturity of our asset and liabilities portfolios can, during periods of stable interest rates, provide high enough returns to justify increased exposure to sudden and unexpected increases in interest rates. As a result of this philosophy, our results of operations will remain vulnerable to increases in interest rates.

Quantitative Analysis

The following table sets forth, as of March 31, 2016, the estimated changes in the net interest margin and the economic value of equity that would result from the designated changes in the United States Treasury yield curve over a 12 month non-parallel ramp for The LaPorte Savings Bank. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results.



Changes in Interest Rates (basis points) (1)			Estimated Increase (Decrease) in NIM							Estimated Increase (Decrease) in EVE					EVE as Percentage of Economic Value of Assets
Changes in Interest Rates (basis points) (1)	Estimated NIM (2)		Amount			Percent		Estimated EVE (3)		Amount			Percent		EVE Ratio(4)		Changes in Basis Points
(Dollars in thousands)
+300	$	18,810	$	1,118		6.32	%	$	79,621	$	(2,230	)	(2.72	)%	16.05	%	0.33	%
+200	18,482		790			4.47		82,365		514			0.63		16.33		0.61
+100	18,128		436			2.46		83,811		1,960			2.39		16.35		0.63
0	17,692		—			—		81,851		—			—		15.72		—
-100	17,058		(634		)	(3.58	)	75,006		(6,845		)	(8.36	)	14.22		(1.50	)


(1)	Assumes changes in interest rates over a 12 month non-parallel ramp.


(2)	NIM or Net Interest Margin measures The LaPorte Savings Bank’s exposure to net interest income due to changes in a forecast interest rate environment.


(3)	EVE or Economic Value of Equity at Risk measures The LaPorte Savings Bank’s exposure to equity due to changes in a forecast interest rate environment.


(4)	EVE Ratio represents Economic Value of Equity divided by the economic value of assets which should translate into built in stability for future earnings.

The table above indicates that at March 31, 2016, in the event of a 100 basis point decrease in interest rates over a 12 month non-parallel ramp, we would experience a 3.58% decrease in net interest income. In the event of a 100 basis point increase in interest rates over a 12 month non-parallel ramp, the net interest income would increase 2.46%.

The table above indicates that at March 31, 2016, in the event of a 100 basis point decrease in interest rates over a 12 month non-parallel ramp, we would experience a 8.36% decrease in economic value of equity. In the event of a 100 basis point increase in interest rates over a 12 month non-parallel ramp, the economic value would increase 2.39% in economic value of equity.

Certain shortcomings are inherent in the methodology used in the above interest rate risk measurement. Modeling changes in the economic portfolio value of equity and net interest margin require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in interest rates. In this regard, the table above assumes that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assumes that particular changes in interest rates occur at different times and in different amounts in response to a designed change in the yield curve for U.S. Treasuries. Furthermore, although the table provides an indication of our interest rate risk exposure at a particular point in time, such

Table of Contents

measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our net interest income. Finally, the above table does not take into account the changes in the credit risk of our assets which can occur in connection with changes in interest rates.

The Company has taken steps to address its exposure to rising interest rates with respect to our economic value of equity at risk. In February 2010, the Company executed an interest rate swap against a $10.0 million adjustable rate advance tied to the three month LIBOR plus 0.25% for six years at an effective fixed rate of 3.69% and began in July 2010. In August 2014, the Company executed three $10.0 million forward starting interest rate swaps against $30.0 million in maturing one month fixed rate FHLB advances tied to the one month LIBOR. The first interest rate swap began in March 2015 for five years with an effective fixed rate of 2.085%. The second interest rate swap began in June 2015 for five years with an effective fixed rate of 2.228%. The third interest rate swap began in March 2016 for five years with an effective fixed rate of 2.618%. Management pursued this hedging strategy to address the concern over the impact to the Company’s tangible equity from the price deterioration in the Company’s available-for-sale securities portfolio in a rising rate environment.

We will continue to look for opportunities to address our exposure to rising interest rates and the related impact on our economic value of equity at risk and may utilize hedging strategies in the future. We are also continuing to sell the majority of the fixed rate one- to-four family residential real estate loans originated and retain only variable-rate one- to-four family residential loans and fixed-rate one-to-four family residential loans with maximum terms of 20 years. We continue to originate the majority of commercial real estate loans at a variable rate with interest rate floors attached.


ITEM 4.	CONTROLS AND PROCEDURES

The Company has adopted disclosure controls and procedures designed to facilitate financial reporting. The Company’s disclosure controls currently consist of communications among the Company’s Chief Executive Officer, the Company’s Chief Financial Officer, Chief Accounting Officer, and each department head to identify any transactions, events, trends, risks or contingencies which may be material to its operations. These disclosure controls also contain certain elements of the Company’s internal controls adopted in connection with applicable accounting and regulatory guidelines. In addition, the Company’s Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer, Audit Committee, and independent registered public accounting firm also meet on a quarterly basis to discuss disclosure matters. The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report and found them to be effective.

The Company maintains internal control over financial reporting. There have not been any significant changes in such internal control over financial reporting in the last quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


PART II	OTHER INFORMATION


ITEM 1.	LEGAL PROCEEDINGS

Other than the legal proceedings mentioned above, there are no other material pending legal proceedings to which the Company or its subsidiaries is a party other than ordinary routine litigation incidental to their respective businesses as of March 31, 2016.

Table of Contents


ITEM 1A.	RISK FACTORS

As of March 31, 2016, there were no material changes to the “Risk Factors” disclosed in the Company’s Annual Report for the year ended December 31, 2015 on Form 10-K filed on March 24, 2016. However, the risks described in our 2015 Annual Report on Form 10-K are not the only risks that we face. Additional risks not presently known to us, or that we currently deem immaterial, may also adversely affect our business, financial condition or results of operations.


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


(a)	Not applicable


(b)	Not applicable


(c)	The following table presents information related to purchases made by or on behalf of the Company of shares of the Company’s common stock during the periods indicated:



Period	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (1)
January 1-31, 2016	—	$	—	—	98,951
February 1-29, 2016	—	—		—	98,951
March 1-31, 2016	—	—		—	98,951
Total	—	—		—	98,951


(1)	On September 9, 2014, the Company publicly announced its fourth share repurchase program for 280,832 shares.


ITEM 3.	DEFAULTS UPON SENIOR SECURITIES

None


ITEM 4.	MINE SAFETY DISCLOSURES

Not applicable


ITEM 5.	OTHER INFORMATION

None


ITEM 6.	EXHIBITS



		Description

31.1		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101		The following materials from LaPorte Bancorp, Inc.’s Form 10-Q Report for the quarterly period ended March 31, 2016, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income (Loss), (iv) the Consolidated Statements of Changes in Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) the Notes to Consolidated Financial Statements.

Table of Contents

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.




		LaPorte Bancorp, Inc.

Date:	May 5, 2016	/s/ Lee A. Brady
		Lee A. Brady
		Chief Executive Officer

Date:	May 5, 2016	/s/ Michele M. Thompson
		Michele M. Thompson
		President and Chief Financial Officer

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company