LPSB Laporte Bancorp, Inc.

 

 

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, 2012

OR

 

¨	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)

 

 

 

Federal				26-1231235
(State or Other Jurisdiction of Incorporation or Organization)		001-33733 (Commission File Number)		(I.R.S. Employer 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, or a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer		¨		Accelerated filer		¨
Non-accelerated filer		¨		Smaller reporting company		x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES   ¨     NO   x

Number of shares of common stock outstanding at May 11, 2012: 4,660,871

 

 

 

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TABLE OF CONTENTS

 

				Page Number
PART I – FINANCIAL INFORMATION
Item 1.		Consolidated Financial Statements – LaPorte Bancorp, Inc.
		Consolidated Balance Sheets, March 31, 2012 (Unaudited) and December 31, 2011			3
		Consolidated Statements of Income, Three Months Ended March 31, 2012 and 2011 (Unaudited)			4
		Consolidated Statements of Comprehensive Income, Three Months Ended March 31, 2012 and 2011 (Unaudited)			5
		Consolidated Statements of Changes in Shareholders’ Equity, Three Months Ended March 31, 2012 and 2011 (Unaudited)			6
		Consolidated Statements of Cash Flows, Three Months Ended March 31, 2012 and 2011 (Unaudited)			7
		Notes to Consolidated Financial Statements (Unaudited)			8
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			39
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			50
Item 4.		Controls and Procedures			51
PART II – OTHER INFORMATION
Item 1.		Legal Proceedings			52
Item 1A.		Risk Factors			52
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			52
Item 3.		Defaults Upon Senior Securities			52
Item 4.		Mine Safety Disclosures			52
Item 5.		Other Information			52
Item 6.		Exhibits			53
Signatures					54

 

2

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PART I – FINANCIAL INFORMATION

ITEM 1.   CONSOLIDATED FINANCIAL STATEMENTS

LAPORTE BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except per share data)

 

		March 31, 2012				December 31, 2011
		(Unaudited)
ASSETS
Cash and due from financial institutions		$	5,668			$	8,146
Interest-earning time deposits in other financial institutions			2,450				—
Securities available for sale			125,185				131,974
Federal Home Loan Bank (FHLB) stock, at cost (restricted)			3,817				3,817
Loans held for sale, at fair value			3,532				3,049
Loans, net of allowance for loan losses of $3,964 at March 31, 2012, $3,772 at December 31, 2011			294,576				295,359
Mortgage servicing rights			342				348
Other real estate owned			756				1,012
Premises and equipment, net			9,770				9,840
Goodwill			8,431				8,431
Other intangible assets			444				474
Bank owned life insurance			10,970				10,876
Accrued interest receivable and other assets			3,369				3,819
Total assets		$	469,310			$	477,145
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Non-interest bearing		$	42,114			$	38,977
Interest bearing			299,757				294,583
Total deposits			341,871				333,560
Federal Home Loan Bank advances			60,007				72,021
Subordinated debentures			5,155				5,155
Federal Deposit Insurance Corporation guaranteed unsecured borrowings			—				4,981
Accrued interest payable and other liabilities			5,687				5,725
Total liabilities			412,719				421,442
Shareholders’ equity
Preferred stock, no par value; 1,000,000 shares authorized; none issued			—				—
Common stock, $0.01 par value; 19,000,000 shares authorized; 4,871,801 shares issued; and 4,660,871 shares outstanding at March 31, 2012 and December 31, 2011			49				49
Additional paid-in capital			21,279				21,221
Surplus			770				770
Retained earnings			35,008				34,267
Accumulated other comprehensive income, net of tax of $797 at March 31, 2012 and $1,046 at December 31, 2011			2,096				2,031
Treasury stock, at cost (210,930 shares at March 31, 2012 and December 31, 2011)			(1,278	)			(1,278	)
Unearned Employee Stock Ownership Plan (ESOP) shares			(1,334	)			(1,357	)
Total shareholders’ equity			56,590				55,703
Total liabilities and shareholders’ equity		$	469,310			$	477,145

See accompanying notes to consolidated financial statements (unaudited)

 

3

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PART I – FINANCIAL INFORMATION

ITEM 1.   CONSOLIDATED FINANCIAL STATEMENTS - continued

 

LAPORTE BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(dollars in thousands, except per share data)

 

		Three Months Ended March 31,
		2012				2011
Interest and dividend income
Loans, including fees		$	4,109			$	3,898
Taxable securities			503				575
Tax exempt securities			352				364
FHLB stock			28				26
Other interest income			5				11
Total interest and dividend income			4,997				4,874
Interest expense
Deposits			798				1,083
Federal Home Loan Bank advances			322				395
Subordinated debentures			70				69
FDIC guaranteed unsecured borrowings			37				50
Federal funds purchased and other short-term borrowings			1				—
Total interest expense			1,228				1,597
Net interest income			3,769				3,277
Provision for loan losses			228				28
Net interest income after provision for loan losses			3,541				3,249
Noninterest income
Service charges on deposits			107				136
ATM and debit card fees			97				93
Earnings on life insurance, net			94				96
Net gains on mortgage banking activities			222				96
Loan servicing fees, net			12				13
Net gains on sales and calls of securities			109				25
Losses on other assets			(150	)			(21	)
Other income			98				103
Total noninterest income			589				541
Noninterest expense
Salaries and employee benefits			1,658				1,521
Occupancy and equipment			489				505
Data processing			127				108
Advertising			74				39
Bank examination fees			81				82
Amortization of intangibles			30				58
FDIC insurance			84				133
Collection and other real estate owned			28				34
Other expenses			385				362
Total noninterest expense			2,956				2,842
Income before income taxes			1,174				948
Income tax expense			247				170
Net income		$	927			$	778
Earnings per share (Note 3):
Basic		$	0.20			$	0.18
Diluted			0.20				0.18

See accompanying notes to consolidated financial statements (unaudited)

 

4

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PART I – FINANCIAL INFORMATION

ITEM 1.   CONSOLIDATED FINANCIAL STATEMENTS - continued

 

LAPORTE BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(dollars in thousands, except per share data)

 

		Three Months Ended March 31,
		2012				2011
Net income		$	927			$	778
Other comprehensive income:
Unrealized gains/losses on securities
Unrealized holding gain arising during the period			124				581
Reclassification adjustment for gains included in net income			(109	)			(25	)
Net unrealized gains			15				556
Tax effect			(6	)			(189	)
Net of tax			9				367
Unrealized gains/losses on cash flow hedges
Unrealized holding gain arising during the period			83				314
Net unrealized gains			83				314
Tax effect			(27	)			(107	)
Net of tax			56				207
Total other comprehensive income			65				574
Comprehensive income		$	992			$	1,352

See accompanying notes to consolidated financial statements (unaudited)

 

5

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PART I – FINANCIAL INFORMATION

ITEM 1.   CONSOLIDATED FINANCIAL STATEMENTS - continued

 

LAPORTE BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

Three months ended March 31, 2012 and 2011

(dollars in thousands, except per share data)

 

		Common Stock				Additional Paid-In Capital				Surplus				Retained Earnings				Accumulated Other Comprehensive Income (Loss), Net of Tax				Treasury Stock				Unearned ESOP Shares				Total
Balance at January 1, 2011		$	48			$	21,160			$	770			$	31,211			$	(550	)		$	(1,144	)		$	(1,447	)		$	50,048
Net income			—				—				—				778				—				—				—				778
Other comprehensive income			—				—				—				—				574				—				—				574
ESOP shares earned, 2,261 shares			—				(1	)			—				—				—				—				22				21
Balance at March 31, 2011		$	48			$	21,159			$	770			$	31,989			$	24			$	(1,144	)		$	(1,425	)		$	51,421
Balance at January 1, 2012		$	49			$	21,221			$	770			$	34,267			$	2,031			$	(1,278	)		$	(1,357	)		$	55,703
Net income			—				—				—				927				—				—				—				927
Other comprehensive income			—				—				—				—				65				—				—				65
Cash dividends on common stock ($0.04 per share)			—				—				—				(186	)			—				—				—				(186	)
ESOP shares earned, 2,261 shares			—				(3	)			—				—				—				—				23				20
Stock award and option expense			—				61				—				—				—				—				—				61
Balance at March 31, 2012		$	49			$	21,279			$	770			$	35,008			$	2,096			$	(1,278	)		$	(1,334	)		$	56,590

See accompanying notes to consolidated financial statements (unaudited)

 

 

6

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PART I – FINANCIAL INFORMATION

ITEM 1.   CONSOLIDATED FINANCIAL STATEMENTS - continued

 

LAPORTE BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(dollars in thousands, except per share data)

 

		Three Months Ended March 31,
		2012				2011
Cash flows from operating activities
Net income		$	927			$	778
Adjustments to reconcile net income to net cash from operating activities:
Depreciation			150				169
Provision for loan losses			228				28
Net gains on securities			(109	)			(25	)
Net gains on sales of loans			(204	)			(80	)
Originations of loans held for sale			(10,890	)			(6,464	)
Proceeds from sales of loans held for sale			10,611				10,099
Recognition of mortgage servicing rights			(19	)			(16	)
Amortization of mortgage servicing rights			29				28
Net change in loan servicing rights valuation allowance			(4	)			—
Net losses on sales of other real estate owned			14				11
Write down of other real estate owned			137				2
Earnings on life insurance, net			(94	)			(96	)
Amortization of intangible assets			30				58
ESOP compensation expense			20				21
Stock compensation expense			61				—
Amortization of issuance costs of unsecured borrowings			19				16
Change in assets and liabilities:
Accrued interest receivable and other assets			417				393
Accrued interest payable and other liabilities			45				123
Net cash from operating activities			1,368				5,045
Cash flows from investing activities
Net change in loans			436				8,017
Proceeds from sales of other real estate owned			224				150
Proceeds from maturities, calls and principal repayments of securities available for sale			7,388				3,922
Proceeds from sales of securities available for sale			12,668				923
Purchase of interest-bearing time deposits at other financial institutions			(2,450	)			—
Purchases of securities available for sale			(13,143	)			(14,319	)
Premises and equipment expenditures, net			(80	)			(40	)
Net cash from investing activities			5,043				(1,338	)
Cash flows from financing activities
Net change in deposits			8,311				6,051
Net change in FHLB advances			(12,014	)			(8,831	)
Dividends paid on common stock			(186	)			—
Repayment of FDIC guaranteed unsecured borrowing			(5,000	)			—
Net cash from financing activities			(8,889	)			(2,780	)
Net change in cash and cash equivalents			(2,478	)			927
Cash and cash equivalents at beginning of period			8,146				5,868
Cash and cash equivalents at end of period		$	5,668			$	6,795
Supplemental cash flow information:
Cash paid during the period for:
Interest paid		$	1,270			$	1,632
Income taxes paid			—				—
Supplemental noncash disclosures:
Transfers from loans receivable to other real estate owned		$	119			$	472

See accompanying notes to consolidated financial statements (unaudited)

 

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PART I – FINANCIAL INFORMATION

ITEM 1.   CONSOLIDATED FINANCIAL STATEMENTS - continued

 

LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(dollars in thousands, except per share data)

NOTE 1 – BASIS OF PRESENTATION AND CONSOLIDATION

The unaudited consolidated financial statements included herein include the accounts of LaPorte Bancorp, Inc. (“the Bancorp”), its wholly owned subsidiary, The LaPorte Savings Bank (“the Bank”) and the Bank’s wholly owned subsidiary, LSB Investments, Inc., Nevada (“LSB Inc.”), together referred to as “the Company”. The Bancorp was formed on October 12, 2007. LSB Inc. was formed on October 1, 2011 to manage a portion of the Bank’s investment portfolio. Intercompany transactions and balances are eliminated in consolidation.

The unaudited consolidated financial statements included herein have been prepared by management in accordance with accounting principles generally accepted in the United States of America for interim financial statements and Article 8 of Regulation S-X of the Securities and Exchange Commission. In the opinion of management, the unaudited consolidated financial statements contain all material adjustments (consisting of normal recurring accruals) and disclosures which are necessary in the opinion of management 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 Securities and Exchange Commission. Accordingly, the interim consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2011 included in the Form 10-K Annual Report of LaPorte Bancorp, Inc. for the fiscal year ended December 31, 2011.

The results for the three-month period ended March 31, 2012 may not indicate the results to be expected for the full year ending December 31, 2012.

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

NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS

In May 2011, the FASB issued an amendment to achieve common fair value measurement and disclosure requirements between U.S. and International accounting principles. Overall, the guidance is consistent with existing U.S. accounting principles; however, there are some amendments that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The amendments in this guidance are effective for interim and annual reporting periods beginning after December 15, 2011. The effect of adopting this standard did not have a material effect on the Company’s operating results or financial condition, but the additional disclosures are included in Note 6.

In June 2011, the FASB amended existing guidance and eliminated the option to present the components of other comprehensive income as part of the statement of changes in shareholders’ equity. The amendment requires that comprehensive income be presented in either a single continuous statement or in two separate consecutive statements. The amendments in this guidance are effective as of the beginning of a fiscal reporting year, and interim periods within that year, that begins after December 15, 2011. The adoption of this amendment changed the presentation of the statement of comprehensive income for the Company to two consecutive statements instead of presented as part of the consolidated statement of shareholders’ equity.

 

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PART I – FINANCIAL INFORMATION

ITEM 1.   CONSOLIDATED FINANCIAL STATEMENTS - continued

LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(dollars in thousands, except per share data)

 

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 (-0- for the three months ended March 31, 2012 and 2011). Stock options for 213,678 and 0 shares for the three months ended March 31, 2012 and 2011 were not considered in computing diluted earnings per share because they were antidilutive. The factors used in the earnings per common share computation follow:

 

		Three Months Ended March 31, 2012				Three Months Ended March 31, 2011
Basic
Net income		$	927			$	778
Weighted average common shares outstanding			4,660,871				4,586,363
Less: Average unallocated ESOP shares			(134,540	)			(143,585	)
Average shares			4,526,332				4,442,778
Basic earnings per common share		$	0.20			$	0.18
Diluted
Net income		$	927			$	778
Weighted average common shares outstanding for basic earnings per common share			4,526,332				4,442,778
Add: Dilutive effects of assumed exercises of stock options			—				—
Average shares and dilutive potential common shares			4,526,332				4,442,778
Diluted earnings per common share		$	0.20			$	0.18

 

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PART I – FINANCIAL INFORMATION

ITEM 1.   CONSOLIDATED FINANCIAL STATEMENTS - continued

LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(dollars in thousands, except per share data)

 

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, 2012

 

		Amortized Cost				Unrealized Gains				Unrealized Losses				Fair Value
U.S. federal agency obligations		$	9,154			$	389			$	(19	)		$	9,524
State and municipal			39,150				3,135				(1	)			42,284
Mortgage-backed securities – residential			18,950				735				(14	)			19,671
Government agency sponsored collateralized mortgage obligations			49,770				1,152				(56	)			50,866
Corporate debt securities			2,808				50				(18	)			2,840
Total		$	119,832			$	5,461			$	(108	)		$	125,185

December 31, 2011

 

		Amortized Cost				Unrealized Gains				Unrealized Losses				Fair Value
U.S. federal agency obligations		$	12,187			$	414			$	—			$	12,601
State and municipal			40,012				3,094				—				43,106
Mortgage-backed securities – residential			30,946				872				(29	)			31,789
Government agency sponsored collateralized mortgage obligations			43,491				1,001				(14	)			44,478
Total		$	126,636			$	5,381			$	(43	)		$	131,974

At March 31, 2012 and December 31, 2011, 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.

 

10

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PART I – FINANCIAL INFORMATION

ITEM 1.   CONSOLIDATED FINANCIAL STATEMENTS - continued

LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(dollars in thousands, except per share data)

NOTE 4 – SECURITIES AVAILABLE FOR SALE—continued

 

Securities with unrealized losses at March 31, 2012 and December 31, 2011, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows:

 

March 31, 2012		Continuing Unrealized Loss For Less Than 12 Months								Continuing Unrealized Loss For 12 Months or More								Total
Description of Securities		Fair Value				Unrealized Loss				Fair Value				Unrealized Loss				Fair Value				Unrealized Loss
U.S. federal agency obligations		$	981			$	(19	)		$	—			$	—			$	981			$	(19	)
State and municipal			248				(1	)			—				—				248				(1	)
Mortgage-backed securities – Residential			1,049				(14	)			—				—				1,049				(14	)
Government agency sponsored collateralized mortgage obligations			8,886				(56	)			—				—				8,886				(56	)
Corporate debt securities			982				(18	)			—				—				982				(18	)
Total temporarily impaired		$	12,146			$	(108	)		$	—			$	—			$	12,146			$	(108	)
December 31, 2011		Continuing Unrealized Loss For Less Than 12 Months								Continuing Unrealized Loss For 12 Months or More								Total
Description of Securities		Fair Value				Unrealized Loss				Fair Value				Unrealized Loss				Fair Value				Unrealized Loss
Mortgage-backed securities – residential		$	5,646			$	(29	)		$	—			$	—			$	5,646			$	(29	)
Government agency sponsored collateralized mortgage obligations			2,147				(14	)			—				—				2,147				(14	)
Total temporarily impaired		$	7,793			$	(43	)		$	—			$	—			$	7,793			$	(43	)

At March 31, 2012, the Company held 9 investments in debt securities which were in an unrealized loss position of which all were in an unrealized loss position for less than twelve months. At December 31, 2011, the Company held 6 investments in debt securities which were in an unrealized loss position of which all were in an unrealized loss position for less than twelve months. Management periodically evaluates each investment security for potential other-than-temporary impairment, relying primarily on industry analyst reports and observation of market conditions and interest rate fluctuations. Management believes it will be able to collect all amounts due according to the contractual terms of the underlying investment securities and that the noted declines in fair value are considered temporary and due only to normal market interest rate fluctuations. The Company does not intend to sell the securities and is not more likely than not to be required to sell these debt securities before their anticipated recovery.

 

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PART I – FINANCIAL INFORMATION

ITEM 1.   CONSOLIDATED FINANCIAL STATEMENTS - continued

LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(dollars in thousands, except per share data)

NOTE 4 – SECURITIES AVAILABLE FOR SALE—continued

 

Sales of securities available for sale for the three months ended March 31, 2012 and 2011 were as follows:

 

		Three Months Ended March 31,
		2012				2011
Proceeds		$	12,668			$	932
Gross gains			121				25
Gross losses			(16	)			—

Proceeds from calls of securities available for sale during the three months ended March 31, 2012 and 2011 were $3,275 and $45, with gross gains of $4 and $0 and gross losses of $0 and $15, respectively.

The amortized cost and fair value of debt securities at March 31, 2012 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.

 

		Amortized Cost				Fair Value
Due in one year or less		$	—			$	—
Due from one to five years			14,328				14,941
Due from five to ten years			9,940				10,832
Due after ten years			26,844				28,875
Subtotal			51,112				54,648
Mortgage-backed securities and CMOs			68,720				70,537
Total		$	119,832			$	125,185

Securities pledged at March 31, 2012 and December 31, 2011 had a carrying amount of approximately $37,562 and $33,661, respectively, and were pledged to secure public deposits, FHLB advances, short-term borrowings through the Federal Reserve Discount Window, treasury tax and loan payments and cash flow hedges.

 

12

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PART I – FINANCIAL INFORMATION

ITEM 1.   CONSOLIDATED FINANCIAL STATEMENTS - continued

LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(dollars in thousands, except per share data)

 

NOTE 5 – LOANS

Loans at March 31, 2012 and December 31, 2011 were as follows:

 

		March 31, 2012				December 31, 2011
Commercial		$	127,495			$	126,559
Mortgage			42,605				45,576
Mortgage warehouse			105,879				103,864
Residential construction			2,660				3,047
Indirect auto			1,971				2,249
Home equity			13,070				12,966
Consumer and other			4,708				4,693
Subtotal			298,388				298,954
Less: Net deferred loan (fees) costs			152				177
Allowance for loan losses			(3,964	)			(3,772	)
Loans, net		$	294,576			$	295,359

As of March 31, 2012, the Bank’s mortgage warehouse division had repurchase agreements with ten mortgage companies. During the first quarter of 2012, the mortgage companies originated $538,161 in mortgage loans and sold $534,786 in mortgage loans. The Bank recorded interest income of $1,204 and mortgage warehouse loan fees of $167 which are included in loan interest income and wire transfer fees of $54 which are included in noninterest income during the first quarter of 2012 attributable to the mortgage warehouse lines.

As of March 31, 2011, the Bank’s mortgage warehouse division had repurchase agreements with nine mortgage companies. During the first quarter of 2011, the mortgage companies originated $555,622 in mortgage loans and sold $565,767 in mortgage loans. The Bank recorded interest income of $762 and mortgage warehouse loan fees of $172 which are included in loan interest income and wire transfer fees of $56 which are included in noninterest income during the first quarter of 2011 attributable to the mortgage warehouse lines.

 

13

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PART I – FINANCIAL INFORMATION

ITEM 1.   CONSOLIDATED FINANCIAL STATEMENTS - continued

LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(dollars in thousands, except per share data)

NOTE 5 – LOANS – continued

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2012 and 2011:

 

		Commercial				Mortgage				Mortgage Warehouse				Residential Construction				Indirect Auto				Home Equity				Consumer and Other				Unallocated				Total
For the three months ended March 31, 2012
Allowance for loan losses:
Beginning balance		$	2,774			$	374			$	393			$	3			$	19			$	119			$	90			$	—			$	3,772
Charge-offs			(19	)			(21	)			—				—				—				—				(6	)			—				(46	)
Recoveries			—				—				—				—				3				—				7				—				10
Provision			245				(18	)			13				1				(5	)			1				(9	)			—				228
Ending balance		$	3,000			$	335			$	406			$	4			$	17			$	120			$	82			$	—			$	3,964
For the three months ended March 31, 2011
Allowance for loan losses:
Beginning balance		$	3,147			$	389			$	139			$	17			$	28			$	142			$	81			$	—			$	3,943
Charge-offs			(368	)			(70	)			—				—				—				—				(10	)			—				(448	)
Recoveries			—				—				—				—				1				—				6				—				7
Provisions			(144	)			110				23				—				(1	)			16				24				—				28
Ending balance		$	2,635			$	429			$	162			$	17			$	28			$	158			$	101			$	—			$	3,530

 

14

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PART I – FINANCIAL INFORMATION

ITEM 1.   CONSOLIDATED FINANCIAL STATEMENTS - continued

LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(dollars in thousands, except per share data)

NOTE 5 – LOANS – continued

 

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of March 31, 2012:

 

		Commercial				Mortgage				Mortgage Warehouse				Residential Construction				Indirect Auto				Home Equity				Consumer and Other				Unallocated				Total
March 31, 2012
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment		$	196			$	98			$	—			$	—			$	—			$	10			$	—			$	—			$	304
Collectively evaluated for impairment			2,804				237				406				4				17				110				82				—				3,660
Acquired with deteriorated credit quality			—				—				—				—				—				—				—				—				—
Total ending allowance		$	3,000			$	335			$	406			$	4			$	17			$	120			$	82			$	—			$	3,964
Loans:
Loans individually evaluated for impairment		$	4,980			$	1,641			$	—			$	—			$	—			$	14			$	—			$	—			$	6,635
Loans collectively evaluated for impairment			121,801				40,809				105,879				2,660				1,970				13,105				4,712				—				290,936
Loans acquired with deteriorated credit quality			818				151				—				—				—				—				—				—				969
Total ending loan balance		$	127,599			$	42,601			$	105,879			$	2,660			$	1,970			$	13,119			$	4,712			$	—			$	298,540

The recorded investment in loans does not include accrued interest.

 

15

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PART I – FINANCIAL INFORMATION

ITEM 1.   CONSOLIDATED FINANCIAL STATEMENTS - continued

LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(dollars in thousands, except per share data)

NOTE 5 – LOANS – continued

 

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2011:

 

		Commercial				Mortgage				Mortgage Warehouse				Residential Construction				Indirect Auto				Home Equity				Consumer and Other				Unallocated				Total
December 31, 2011
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment		$	112			$	128			$	—			$	—			$	—			$	11			$	—			$	—			$	251
Collectively evaluated for impairment			2,662				246				393				3				19				108				90				—				3,521
Acquired with deteriorated credit quality			—				—				—				—				—				—				—				—				—
Total ending allowance		$	2,774			$	374			$	393			$	3			$	19			$	119			$	90			$	—			$	3,772
Loans:
Loans individually evaluated for impairment		$	4,630			$	1,630			$	—			$	—			$	—			$	14			$	—			$	—			$	6,274
Loans collectively evaluated for impairment			121,236				43,788				103,864				3,045				2,249				13,002				4,697				—				291,881
Loans acquired with deteriorated credit quality			824				152				—				—				—				—				—				—				976
Total ending loan balance		$	126,690			$	45,570			$	103,864			$	3,045			$	2,249			$	13,016			$	4,697			$	—			$	299,131

The recorded investment in loans does not include accrued interest.

 

16

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PART I – FINANCIAL INFORMATION

ITEM 1.   CONSOLIDATED FINANCIAL STATEMENTS - continued

LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(dollars in thousands, except per share data)

NOTE 5 – LOANS – continued

 

The following table presents information related to impaired loans by class of loans as of and for the three months ended March 31, 2012:

 

		Unpaid Principal Balance				Recorded Investment				Allowance for Loan Losses Allocated				Average Recorded Investment				Interest Income Recognized				Cash Basis Interest Recognized
With no related allowance recorded:
Commercial:
Real estate		$	1,408			$	1,408			$	—			$	1,422			$	2			$	—
Land			2,527				2,527				—				2,528				3				—
Mortgage			1,044				1,044				—				1,079				3				—
Subtotal			4,979				4,979				—				5,029				8				—
With an allowance recorded:
Commercial:
Commercial and other			—				—				—				23				—				—
Real estate			500				501				76				502				—				—
Land			544				544				120				549				—				—
Mortgage			597				597				98				633				—				—
Home equity			14				14				10				14				—				—
Subtotal			1,655				1,656				304				1,721				—				—
Total		$	6,634			$	6,635			$	304			$	6,750			$	8			$	—

The recorded investment in loans does not include accrued interest.

 

17

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PART I – FINANCIAL INFORMATION

ITEM 1.   CONSOLIDATED FINANCIAL STATEMENTS - continued

LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(dollars in thousands, except per share data)

NOTE 5 – LOANS – continued

 

The following table presents information related to impaired loans by class of loans as of and for the three months ended March 31, 2011:

 

		Unpaid Principal Balance				Recorded Investment				Allowance for Loan Losses Allocated				Average Recorded Investment				Interest Income Recognized				Cash Basis Interest Recognized
With no related allowance recorded:
Commercial:
Commercial and other		$	28			$	28			$	—			$	29			$	—			$	—
Real estate			1,166				1,166				—				1,162				4				—
Land			2,248				2,248				—				2,248				12				—
Mortgage			637				636				—				640				11				—
Residential construction:
Land			87				87				—				87				—				—
Subtotal			4,166				4,165				—				4,166				27				—
With an allowance recorded:
Commercial:
Real estate			1,298				1,299				357				1,300				6				—
Land			712				713				119				713				—				—
Mortgage			271				271				52				274				—				—
Home equity			377				377				26				377				—				—
Subtotal			2,658				2,660				554				2,664				6				—
Total		$	6,824			$	6,825			$	554			$	6,830			$	33			$	—

The recorded investment in loans does not include accrued interest.

 

18

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PART I – FINANCIAL INFORMATION

ITEM 1.   CONSOLIDATED FINANCIAL STATEMENTS - continued

LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(dollars in thousands, except per share data)

NOTE 5 – LOANS – continued

 

The following table presents information related to impaired loans by class of loans as of December 31, 2011:

 

		Unpaid Principal Balance				Recorded Investment				Allowance for Loan Losses Allocated
With no related allowance recorded:
Commercial:
Real estate		$	1,299			$	1,298			$	—
Land			2,248				2,248				—
Mortgage			945				945				—
Subtotal			4,492				4,491				—
With an allowance recorded:
Commercial:
Commercial and other			28				29				6
Real estate			502				503				29
Land			552				552				77
Mortgage			685				685				128
Home equity			14				14				11
Subtotal			1,781				1,783				251
Total		$	6,273			$	6,274			$	251

The recorded investment in loans does not include accrued interest.

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 March 31, 2012 and December 31, 2011:

 

		Nonaccrual								Loans Past Due Over 90 Days Still Accruing
		March 31, 2012				December 31, 2011				March 31, 2012				December 31, 2011
Commercial:
Commercial and other		$	32			$	62			$	—			$	—
Real estate			2,007				2,027				—				—
Land			3,005				2,800				—				—
Mortgage			1,448				1,454				—				—
Indirect auto			7				8				—				—
Home equity			14				14				—				—
Total		$	6,513			$	6,365			$	—			$	—

The recorded investment in loans does not include accrued interest.

 

19

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PART I – FINANCIAL INFORMATION

ITEM 1.   CONSOLIDATED FINANCIAL STATEMENTS - continued

LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(dollars in thousands, except per share data)

NOTE 5 – LOANS – continued

 

The following table presents the aging of the recorded investment in past due loans as of March 31, 2012 and December 31, 2011 by class of loans:

 

		30-59 Days Past Due				60-89 Days Past Due				Greater than 90 Days Past Due				Total Past Due				Loans Not Past Due				Total
March 31, 2012
Commercial:
Commercial and other		$	—			$	—			$	—			$	—			$	21,549			$	21,549
Real estate			1,042				—				1,542				2,584				80,733				83,317
Five or more family			—				—				—				—				12,995				12,995
Construction			—				—				—				—				590				590
Land			213				66				2,248				2,527				6,621				9,148
Mortgage			1,158				—				1,054				2,212				40,389				42,601
Mortgage warehouse			—				—				—				—				105,879				105,879
Residential construction:
Construction			96				—				—				96				2,150				2,246
Land			—				—				—				—				414				414
Indirect			17				—				7				24				1,946				1,970
Home equity			15				—				14				29				13,090				13,119
Consumer and other			133				—				—				133				4,579				4,712
Total		$	2,674			$	66			$	4,865			$	7,605			$	290,935			$	298,540

 

		30-59 Days Past Due				60-89 Days Past Due				Greater than 90 Days Past Due				Total Past Due				Loans Not Past Due				Total
December 31, 2011
Commercial:
Commercial and other		$	—			$	—			$	29			$	29			$	18,077			$	18,106
Real estate			1,057				128				1,589				2,774				77,702				80,476
Five or more family			43				—				—				43				17,670				17,713
Construction			—				—				—				—				1,172				1,172
Land			216				—				2,248				2,464				6,759				9,223
Mortgage			1,293				55				1,115				2,463				43,107				45,570
Mortgage warehouse			—				—				—				—				103,864				103,864
Residential construction:
Construction			—				—				—				—				2,629				2,629
Land			—				—				—				—				416				416
Indirect auto			27				—				8				35				2,214				2,249
Home equity			—				—				14				14				13,002				13,016
Consumer and other			—				14				—				14				4,683				4,697
Total		$	2,636			$	197			$	5,003			$	7,836			$	291,295			$	299,131

The recorded investment in loans does not include accrued interest.

 

20

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PART I – FINANCIAL INFORMATION

ITEM 1.   CONSOLIDATED FINANCIAL STATEMENTS - continued

LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(dollars in thousands, except per share data)

NOTE 5 – LOANS – continued

 

Troubled Debt Restructurings:

At March 31, 2012 and December 31, 2011, the outstanding balance of loans that were modified as troubled debt restructurings totaled $251 and $254, respectively. All of these loans were considered nonperforming troubled debt restructurings. The Company has allocated $13 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of March 31, 2012 and December 31, 2011. The Company has not committed to lend additional amounts as of March 31, 2012 to customers with outstanding loans that are classified as troubled debt restructurings.

During the three months ended March 31, 2012, the Bank did not modify any loans which were considered to be troubled debt restructurings. During the year ending December 31, 2011, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan.

For the three months ended March 31, 2012, no troubled debt restructurings defaulted within twelve months following the modification.

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 under the Company’s management loan committee.

Credit Quality Indicators

The Company categorized 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.

 

21

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PART I – FINANCIAL INFORMATION

ITEM 1.   CONSOLIDATED FINANCIAL STATEMENTS - continued

LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(dollars in thousands, except per share data)

NOTE 5 – LOANS – continued

 

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. The Bank monitors credit quality on loans not rated through the loan’s individual payment performance. As of March 31, 2012, the most recent analysis performed, and December 31, 2011 the risk category of loans by class of loans is as follows:

 

		Not Rated				Pass				Special Mention				Substandard				Doubtful
March 31, 2012
Commercial:
Commercial and other		$	152			$	21,024			$	373			$	—			$	—
Real estate			74				69,074				7,573				6,535				61
Five or more family			205				9,006				3,784				—				—
Construction			—				506				84				—				—
Land			—				5,416				660				3,072				—
Mortgage			35,160				5,091				466				1,884				—
Mortgage warehouse			105,879				—				—				—				—
Residential construction:
Construction			2,246				—				—				—				—
Land			414				—				—				—				—
Indirect auto			1,970				—				—				—				—
Home equity			12,563				307				91				158				—
Consumer and other			3,815				897				—				—				—
Total		$	162,478			$	111,321			$	13,031			$	11,649			$	61

 

		Not Rated				Pass				Special Mention				Substandard				Doubtful
December 31, 2011
Commercial:
Commercial and other		$	67			$	17,500			$	510			$	29			$	—
Real estate			16				65,136				11,658				3,605				61
Five or more family			208				13,520				3,985				—				—
Construction			—				1,079				93				—				—
Land			—				5,447				694				3,082				—
Mortgage			37,769				4,946				722				2,133				—
Mortgage warehouse			103,864				—				—				—				—
Residential construction:
Construction			2,629				—				—				—				—
Land			416				—				—				—				—
Indirect auto			2,249				—				—				—				—
Home equity			12,623				121				92				180				—
Consumer and other			3,776				921				—				—				—
Total		$	163,617			$	108,670			$	17,754			$	9,029			$	61

The recorded investment in loans does not include accrued interest.

 

22

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PART I – FINANCIAL INFORMATION

ITEM 1.   CONSOLIDATED FINANCIAL STATEMENTS - continued

LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(dollars in thousands, except per share data)

NOTE 5 – LOANS – continued

 

Purchased Loans

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

 

		March 31, 2012				December 31, 2011
Commercial:
Commercial and other		$	32			$	36
Real estate			917				923
Mortgage			153				154
Outstanding balance		$	1,102			$	1,113
Carrying amount, net of allowance of $0		$	970			$	977

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

 

		Three Months Ended March 31,
		2012				2011
Beginning balance		$	193			$	250
Reclassification from non-accretable yield			4				8
Accretion of income			(18	)			(22	)
Ending balance		$	179			$	236

For the purchased loans disclosed above, the Company did not increase the allowance for loan losses during 2012 or 2011. No allowance for loan losses were reversed during 2012 or 2011.

 

23

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PART I – FINANCIAL INFORMATION

ITEM 1.   CONSOLIDATED FINANCIAL STATEMENTS - continued

LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(dollars in thousands, except per share data)

 

NOTE 6 – 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 value of derivatives are based on valuation models using observable market data as of the measurement date (Level 2).

Impaired Loans : At the time a loan is considered impaired, it is valued at the lower of cost or fair value. 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.

 

24

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PART I – FINANCIAL INFORMATION

ITEM 1.   CONSOLIDATED FINANCIAL STATEMENTS - continued

LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(dollars in thousands, except per share data)

NOTE 6 – FAIR VALUE - continued

 

Other Real Estate Owned : Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. 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/Chief Financial Officer (“President/CFO”) 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 and EVP – Credit review impaired loans and other real estate owned properties on a quarterly basis to determine the accuracy of the observable inputs, generally third party appraisals, auction values, values derived from trade publications and any additional data received from the borrower, and the appropriateness of unobservable inputs, generally discounts due to collection issues and current market conditions. 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.

At March 31, 2012, discounts applied when calculating the fair value of impaired loans ranged from 0% to approximately 35% depending on the source of value and the nature of the assets securing these loans. Real estate collateral is valued based on evaluations or appraisals and are generally discounted by 20%, with higher discounts for properties in poor condition or property with characteristics which may make it more difficult to market. Commercial loans not secured by real estate are generally discounted 30% for receivables, 50% to 75% for inventory with higher discounts when monthly borrowing base certificates are not required or received and 15% of trade publication and auction values for automobiles.

At March 31, 2012, discounts applied to the calculation of the fair value of other real estate owned properties ranged from 0% to approximately 40%. The fair value of other real estate owned properties are based on the lower of cost or fair value of the underlying collateral less expected selling costs. Collateral values are estimated primarily through appraisals. If properties are held in other real estate owned for longer than 12 – 18 months a new appraisal is obtained.

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, 2012 was determined using a discount rate of 9.0%, prepayment speeds ranging from 9.6% to 24.0%, depending on the stratification of the specific right, and a weighted average default rate of approximately 0.5%. Fair value at December 31, 2011 was determined using a discount rate of 9.0%, prepayment speeds ranging from 14.3% to 23.8%, depending on the stratification of the specific right, and a weighted average default rate of approximately 0.5%.

 

25

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PART I – FINANCIAL INFORMATION

ITEM 1.   CONSOLIDATED FINANCIAL STATEMENTS - continued

LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(dollars in thousands, except per share data)

NOTE 6 – FAIR VALUE - continued

 

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

 

						Fair Value Measurements at
						March 31, 2012
						Quoted Prices in				Significant				Significant
						Active Markets for				Other				Unobservable
		Carrying				Identical Assets				Observable Inputs				Inputs
		Value				(Level 1)				(Level 2)				(Level 3)
Financial Assets
Investment securities available for sale
U.S. federal agency obligations		$	9,524			$	—			$	9,524			$	—
State and municipal			42,284				—				42,284				—
Mortgage-backed securities-residential			19,671				—				19,671				—
Government agency sponsored collateralized mortgage obligations			50,866				—				50,866				—
Corporate debt securities			2,840				—				2,840				—
Total investment securities Available-for-sale		$	125,185			$	—			$	125,185			$	—
Loans held for sale		$	3,532			$	—			$	3,532			$	—
Derivatives – residential mortgage loan commitments		$	65			$	—			$	65			$	—
Financial Liabilities
Derivatives – interest rate swaps		$	(2,190	)		$	—			$	(2,190	)		$	—

 

26

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PART I – FINANCIAL INFORMATION

ITEM 1.   CONSOLIDATED FINANCIAL STATEMENTS - continued

LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(dollars in thousands, except per share data)

NOTE 6 – FAIR VALUE - continued

 

 

						Fair Value Measurements at
						December 31, 2011
						Quoted Prices in				Significant				Significant
						Active Markets for				Other				Unobservable
		Carrying				Identical Assets				Observable Inputs				Inputs
		Value				(Level 1)				(Level 2)				(Level 3)
Financial Assets
Investment securities available for sale
U.S. federal agency obligations		$	12,601			$	—			$	12,601			$	—
State and municipal			43,106				—				43,106				—
Mortgage-backed securities – residential			31,789				—				31,789				—
Government agency sponsored collateralized mortgage obligations			44,478				—				44,478				—
Total investment securities available-for-sale		$	131,974			$	—			$	131,974			$	—
Loans held for sale		$	3,049			$	—			$	3,049			$	—
Derivatives – residential mortgage loan commitments		$	57			$	—			$	57			$	—
Financial Liabilities
Derivatives – interest rate swaps		$	(2,283	)		$	—			$	(2,283	)		$	—

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

Loans held for sale were carried at the fair value of $3,532, which was made up of the outstanding balance of $3,485, net of a valuation of $47 at March 31, 2012, resulting in income of $4 for the three months ended March 31, 2012. At March 31, 2011, loans held for sale were carried at the fair value of $601, which was made up of the outstanding balance of $591, net a valuation of $10, resulting in income of $(36) for the three months ended March 31, 2011.

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

 

		March 31, 2012
		Aggregate								Contractual
		Fair Value				Difference				Principal
Loans held for sale		$	3,532			$	47			$	3,485

 

		December 31, 2011
		Aggregate								Contractual
		Fair Value				Difference				Principal
Loans held for sale		$	3,049			$	43			$	3,006

 

27

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PART I – FINANCIAL INFORMATION

ITEM 1.   CONSOLIDATED FINANCIAL STATEMENTS - continued

LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(dollars in thousands, except per share data)

NOTE 6 – FAIR VALUE - continued

 

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

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, 2012 and 2011:

 

		Changes in Fair Values for the three months ended March  31, 2012 and 2011, for the Items Measured at Fair Value Pursuant to Election of the Fair Value  Option
														Total Changes
														in Fair Values
		Other												Included in
		Gains and				Interest				Interest				Current Period
		Losses				Income				Expense				Earnings
Three Months Ended March 31, 2012
Assets:
Loans held for sale		$	4			$	12			$	—			$	16
Three Months Ended March 31, 2011
Assets:
Loans held for sale		$	(36	)		$	10			$	—			$	(26	)

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

 

						Fair Value Measurements at
						March 31, 2012
						Quoted Prices in				Significant				Significant
						Active Markets for				Other				Unobservable
		Carrying				Identical Assets				Observable Inputs				Inputs
		Value				(Level 1)				(Level 2)				(Level 3)
Impaired loans Commercial:
Real estate		$	424			$	—			$	—			$	424
Land			424				—				—				424
Mortgage			499				—				—				499
Home equity			4				—				—				4
Other real estate owned, net Commercial:
Real estate			178				—				—				178
Land			412				—				—				412
Mortgage servicing rights			275				—				275				—

 

28

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PART I – FINANCIAL INFORMATION

ITEM 1.   CONSOLIDATED FINANCIAL STATEMENTS - continued

LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(dollars in thousands, except per share data)

NOTE 6 – FAIR VALUE - continued

 

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

 

						Fair Value Measurements at
						December 31, 2011
						Quoted Prices in				Significant				Significant
						Active Markets for				Other				Unobservable
		Carrying				Identical Assets				Observable Inputs				Inputs
		Value				(Level 1)				(Level 2)				(Level 3)
Impaired loans Commercial:
Commercial and other		$	22			$	—			$	—			$	22
Real Estate			473				—				—				473
Land			475				—				—				475
Mortgage			557				—				—				557
Home equity			3				—				—				3
Other real estate owned, net Commercial:
Real Estate			365				—				—				365
Mortgage			93				—				—				93
Mortgage servicing rights			271				—				271				—

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $1,655, with a valuation allowance of $304 at March 31, 2012, resulting in an additional provision for loan losses of $71 for the three months ended March 31, 2012. At March 31, 2011, impaired loans had a carrying amount of $2,658, with a valuation allowance of $554, resulting in an additional provision for loan losses of $93 for the three months ended March 31, 2011.

Other real estate owned, which is measured at the lower of cost or fair value less costs to sell, had a net carrying amount of $590, which was made up of the outstanding balance of $727 net a valuation allowance of $137 at March 31, 2012, resulting in a write-down of $137 for the three months ended March 31, 2012. At March 31, 2011, other real estate owned had a net carrying amount of $10, which was made up of the outstanding balance of $12 net a valuation allowance of $2, resulting in a write-down of $2 for the three months ended March 31, 2011.

Mortgage servicing rights, which are carried at lower of cost or fair value, were carried at their fair value of $275, which was made up of the outstanding balance of $389, net of a valuation allowance of $114, resulting in a charge of $(5) for the three months ended March 31, 2012. At March 31, 2011, mortgage servicing rights were carried at their fair value of $263, which was made up of the outstanding balance of $355, net of a valuation allowance of $92, resulting in a charge of $0 for the three months ended March 31, 2011.

 

29

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PART I – FINANCIAL INFORMATION

ITEM 1.   CONSOLIDATED FINANCIAL STATEMENTS - continued

LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(dollars in thousands, except per share data)

NOTE 6 – FAIR VALUE - continued

 

The carrying amounts and estimated fair values of financial instruments, at March 31, 2012 are as follows:

 

						Fair Value Measurements at
						March 31, 2012
						Quoted Prices in				Significant				Significant
						Active Markets for				Other				Unobservable
		Carrying				Identical Assets				Observable Inputs				Inputs
		Value				(Level 1)				(Level 2)				(Level 3)
Financial assets
Cash and due from financial institutions		$	5,668			$	5,668			$	—			$	—
Interest-earning time deposits at other financial institutions			2,450				2,450				—				—
Securities available for sale			125,185				—				125,185				—
Federal Home Loan Bank stock			3,817				N/A				N/A				N/A
Loans held for sale			3,532				—				3,532				—
Loans, net			294,576				—				—				299,995
Accrued interest receivable			1,395				4				803				588
Financial liabilities
Deposits			(341,871	)			—				(339,019	)			—
Federal Home Loan Bank advances			(60,007	)			—				(62,253	)			—
Subordinated debentures			(5,155	)			—				—				(4,905	)
Accrued interest payable			(354	)			—				(354	)			—
Derivatives – interest rate swaps			(2,190	)			—				(2,190	)			—

 

30

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PART I – FINANCIAL INFORMATION

ITEM 1.   CONSOLIDATED FINANCIAL STATEMENTS - continued

LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(dollars in thousands, except per share data)

NOTE 6 – FAIR VALUE - continued

 

The carrying amounts and estimated fair values of financial instruments, at December 31, 2011 are as follows:

 

		Carrying				Fair
		Amount				Value
Financial assets
Cash and due from financial institutions		$	8,146			$	8,146
Securities available-for-sale			131,974				131,974
Federal Home Loan Bank stock			3,817				N/A
Loans held for sale			3,049				3,049
Loans, net			295,359				301,293
Accrued interest receivable			1,518				1,518
Financial liabilities
Deposits		$	(333,560	)		$	(331,486	)
Federal Home Loan Bank advances			(72,021	)			(74,307	)
Subordinated debentures			(5,155	)			(4,582	)
FDIC guaranteed unsecured borrowings			(4,981	)			(4,989	)
Accrued interest payable			(396	)			(396	)
Derivatives – interest rate swaps			(2,283	)			(2,283	)

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 carrying amounts of interest-earning time deposits at other financial institutions approximate fair values and are classified as Level 1.

Federal Home Loan Bank stock : It is not practical to determine the fair value of Federal Home Loan Bank stock due to restrictions placed on its transferability.

Loans : The fair values of loans is 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.

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.

Deposits : The fair values disclosed for demand deposits are estimated using a cash flow calculation reduced by decay rate assumptions. These cash flows are discounted to the current market rate and a functional cost to recognize the inherent costs of servicing these accounts. This results in a Level 2 classification. 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 results in a Level 2 calculation.

 

31

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PART I – FINANCIAL INFORMATION

ITEM 1.   CONSOLIDATED FINANCIAL STATEMENTS - continued

LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(dollars in thousands, except per share data)

NOTE 6 – FAIR VALUE - continued

 

Borrowings : 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.

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.

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 7 – 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.

Interest Rate Swaps Designated as Cash Flow Hedges : Interest rate swaps with notional amounts of $30.25 million as of March 31, 2012 and December 31, 2011, were designated as cash flow hedges of subordinated debentures, certain CDARS deposits and FHLB advances, and were determined to be fully effective during all periods presented. As such, no amount of ineffectiveness has been included in net income. Therefore, the aggregate fair value of the swaps is recorded in other assets (liabilities) with changes in fair value recorded in other comprehensive income (loss). The amount included in accumulated other comprehensive income (loss) would be reclassified to current earnings should the hedges no longer be considered effective. The hedge would no longer be considered effective if a portion of the hedge becomes ineffective, the item hedged is no longer in existence or the Company discontinues hedge accounting. The Company expects the hedges to remain fully effective during the remaining terms of the swaps. The Company does not expect any amounts to be reclassed from other comprehensive income (loss) over the next 12 months.

Information related to the interest-rate swaps designated as cash flow hedges as of March 31, 2012 and December 31, 2011 are as follows:

 

		March 31, 2012				December 31, 2011
Subordinated debentures
Notional amount		$	5,000			$	5,000
Fixed interest rate payable			5.54	%			5.54	%
Variable interest rate receivable (Three month LIBOR plus 3.10%)			3.57	%			3.67	%
Unrealized losses			(187	)			(192	)
Maturity date			March 26, 2014

 

32

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PART I – FINANCIAL INFORMATION

ITEM 1.   CONSOLIDATED FINANCIAL STATEMENTS - continued

LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(dollars in thousands, except per share data)

NOTE 7 – DERIVATIVES – continued

 

 

		March 31, 2012				December 31, 2011
CDARS deposits
Notional amount		$	10,250			$	10,250
Fixed interest rate payable			3.19	%			3.19	%
Variable interest rate receivable (One month LIBOR plus 0.55%)			0.79	%			0.84	%
Unrealized losses			(543	)			(569	)
Maturity date			October 9, 2014
FHLB advance
Notional amount		$	5,000			$	5,000
Fixed interest rate payable			3.54	%			3.54	%
Variable interest rate receivable (Three month LIBOR plus 0.22%)			0.69	%			0.78	%
Unrealized losses			(429	)			(443	)
Maturity date			September 20, 2015
FHLB advance
Notional amount		$	10,000			$	10,000
Fixed interest rate payable			3.69	%			3.69	%
Variable interest rate receivable (Three month LIBOR plus 0.25%)			0.81	%			0.66	%
Unrealized losses			(1,019	)			(1,057	)
Maturity date			July 19, 2016

Interest expense recorded on these swap transactions totaled $(193) and $(179) during the three months ended March 31, 2012 and 2011, respectively, and is reported as a component of interest expense on subordinated debentures, deposits and FHLB advances.

 

33

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PART I – FINANCIAL INFORMATION

ITEM 1.   CONSOLIDATED FINANCIAL STATEMENTS - continued

LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(dollars in thousands, except per share data)

NOTE 7 – DERIVATIVES – continued

 

The following table presents the net losses recorded in accumulated other comprehensive income (loss) and the Consolidated Statements of Income relating to the cash flow derivative instruments for the three months ended March 31, 2012 and 2011:

 

		Net amount of								Net amount of gain
		gain (loss) recognized				Net amount of gain				(loss) recognized in other
		in OCI				(loss) reclassified from OCI				non interest income
		(Effective Portion)				to interest income				(Ineffective Portion)
		2012				2012				2012
Interest rate contracts		$	1,437			$	—			$	—

 

		Net amount of								Net amount of gain
		gain (loss) recognized				Net amount of gain				(loss) recognized in other
		in OCI				(loss) reclassified from OCI				non interest income
		(Effective Portion)				to interest income				(Ineffective Portion)
		2011				2011				2011
Interest rate contracts		$	207			$	—			$	—

The following table reflects the cash flow hedges included in the Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011:

 

		March 31, 2012								December 31, 2011
		Notional				Fair				Notional				Fair
		Amount				Value				Amount				Value
Included in other liabilities:
Interest rate swaps related to
Subordinated debentures		$	(5,000	)		$	(187	)		$	(5,000	)		$	(192	)
CDARS deposits			(10,250	)			(543	)			(10,250	)			(569	)
FHLB advances			(15,000	)			(1,448	)			(15,000	)			(1,500	)
Total included in other liabilities						$	(2,178	)						$	(2,261	)

 

34

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PART I – FINANCIAL INFORMATION

ITEM 1.   CONSOLIDATED FINANCIAL STATEMENTS - continued

LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(dollars in thousands, except per share data)

NOTE 7 – DERIVATIVES – continued

 

Interest Rate Swaps Designated as Fair Value Hedges : An interest rate swap with a notional amount of $5.0 million as of March 31, 2012 and December 31, 2011 was designated as a fair value hedge of certain brokered deposits. Information related to the interest rate swap designated as a fair value hedge is as follows:

 

		March 31, 2012				December 31, 2011
Brokered deposits
Notional amount		$	5,000			$	5,000
Variable interest rate payable (One month LIBOR less 0.25%)			0.00	%			0.03	%
Fixed interest rate receivable			1.25	%			1.25	%
Maturity date			September 15, 2020

Interest income recorded on this swap transaction totaled $15 and $15 for the three months ended March 31, 2012 and 2011, respectively, and is reported as a component of interest expense on deposits. Gains (losses) on the fair market value hedge are recorded in other noninterest income and totaled $0 and $(4) for the three months ended March 31, 2012 and 2011, respectively.

The following table reflects the fair value hedge included in the Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011:

 

		March 31, 2012								December 31, 2011
		Notional				Fair				Notional				Fair
		Amount				Value				Amount				Value
Included in other liabilities:
Interest rate swaps related to Brokered deposits		$	(5,000	)		$	(12	)		$	(5,000	)		$	(22	)
Total included in other liabilities						$	(12	)						$	(22	)

The counterparty to the Company’s derivatives is exposed to credit risk whenever the derivative is in a liability position. As a result, the Company has collateralized the liability with cash and security collateral held in safekeeping by Bank of New York. At March 31, 2012 and December 31, 2011, the Company had $220 in cash and securities with a fair value of $3,419 and $3,761, respectively, posted as collateral for these derivatives.

 

35

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PART I – FINANCIAL INFORMATION

ITEM 1.   CONSOLIDATED FINANCIAL STATEMENTS - continued

LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(dollars in thousands, except per share data)

 

NOTE 8 – STOCK-BASED COMPENSATION

During the month of September 2011, the Company implemented the 2011 Equity Incentive Plan (the “Plan”) which was approved by shareholders on May 10, 2011. The Plan provides for issuance of stock options or restricted share awards to employees and directors. Total shares authorized for issuance under the Plan is 316,561 which is further discussed below. Total compensation cost that has been charged against income for those plans totaled $61 and $0 for the three months ended March 31, 2012 and 2011, respectively.

Stock-Based Compensation

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

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

Stock Options

The Plan permits the grant of stock options to its employees or directors for up to 226,115 shares of common stock. Option awards are generally granted with an exercise price equal to the market price of the Company’s common stock at the date of grant; those option awards have vesting periods of 5 years and have 10-year contractual terms. Options granted generally vest 20% annually.

The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model that uses the assumptions noted in the table below. Expected volatilities are based on historical volatilities of companies within La Porte Bancorp, Inc.’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. The fair value of options granted was determined using the following weighted-average assumptions as of the grant date.

 

		2011
Risk-free interest rate		1.42%
Expected term		7  1 / 2  Years
Expected stock price volatility		27.34%
Dividend yield		1.60%

 

36

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PART I – FINANCIAL INFORMATION

ITEM 1.   CONSOLIDATED FINANCIAL STATEMENTS - continued

LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(dollars in thousands, except per share data)

NOTE 8 – STOCK-BASED COMPENSATION - continued

 

A summary of the activity in the stock option plan for the three months ended March 31, 2012 follows:

 

										Weighted
						Weighted				Average
						Average				Remaining				Aggregate
						Exercise				Contractual				Intrinsic
		Shares				Price				Term				Value
Outstanding at January 1, 2012			213,678			$	8.50				10 years				—
Granted			—				—
Exercised			—				—
Forfeited or expired			—				—
Outstanding at March 31, 2012			213,678			$	8.50				10 years				—
Fully vested and expected to vest			213,678			$	8.50				10 years				—
Exercisable at end of period			—				n/a				n/a				n/a

Information related to the stock option plan for 2011 follows:

 

		2011
Weighted average fair value of options granted		$	2.16

There were no options exercised during the three months ended March 31, 2012. As of March 31, 2012, there was $412 of total unrecognized compensation cost related to nonvested stock options granted under the Plan. The cost is expected to be recognized over a weighted-average period of 5 years.

 

 

37

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PART I – FINANCIAL INFORMATION

ITEM 1.   CONSOLIDATED FINANCIAL STATEMENTS - continued

LAPORTE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(dollars in thousands, except per share data)

NOTE 8 – STOCK-BASED COMPENSATION - continued

 

Restricted Share Awards

The Plan provides for the issuance of up to 90,446 of restricted shares to directors and employees. Compensation expense is recognized over the vesting period of the awards based on the fair value of the stock at issue date. The fair value of the stock was determined by obtaining the listed price of the Company’s stock on the grant date. Shares vest 20% annually over five years. Total shares issuable under the plan are 1,808 at March 31, 2012, and 88,638 shares were issued in 2011.

A summary of changes in the Company’s nonvested shares for the three months ended March 31, 2012 and the year ended December 31, 2011 follows:

March 31, 2012

 

						Weighted-Average
						Grant-Date
		Shares				Fair Value
Nonvested Shares
Nonvested at January 1, 2012			88,638			$	8.50
Granted			—				—
Vested			—				—
Forfeited			—				—
Nonvested at March 31, 2012			88,638			$	8.50

As of March 31, 2012, there was $672 of total unrecognized compensation cost related to nonvested shares granted under the Plan. The cost is expected to be recognized over a weighted-average period of 5 years. There were no shares vested during the three months ended March 31, 2012 or the year ended December 31, 2011.

 

38

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PART I – FINANCIAL INFORMATION

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 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, 2011. 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;

 

•

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 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;

 

•

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

 

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PART I – FINANCIAL INFORMATION

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

 

Comparison of Financial Condition at March 31, 2012 and December 31, 2011

General: Total assets decreased $7.8 million, or 1.6%, to $469.3 million at March 31, 2012 from $477.1 million at December 31, 2011. The decrease was primarily due to a decrease in securities available for sale the proceeds of which were used to reduce total borrowings. Total borrowings decreased $17.0 million from December 31, 2011 to March 31, 2012. The Company’s total deposits increased $8.3 million, or 2.5%, from December 31, 2011 to $341.9 million at March 31, 2012. This increase was primarily due to an increase in time deposits of $8.1 million from the Company’s purchase of additional CDARS deposits totaling $10.0 million during the first quarter of 2012 which replaced higher cost borrowings.

Investment Securities: Total securities available for sale decreased $6.8 million, or 5.1%, to $125.2 million at March 31, 2012 from $132.0 million at December 31, 2011 primarily due to the sale of several mortgage-backed securities during the first quarter of 2012 when management elected to take a portion of unrealized gains permanently into income and paydown borrowings with the proceeds. The mortgage-backed securities sold were paying down at an accelerated pace due to the overall decrease in mortgage loan interest rates.

As of March 31, 2012, management reviewed the securities portfolio for possible other-than-temporary impairment and determined there was no impairment charges to be recorded for the first quarter of 2012. At March 31, 2012, the total available-for-sale securities portfolio reflected a net unrealized gain of $5.4 million compared to a net unrealized gain of $5.3 million at December 31, 2011.

Loans Held for Sale: Loans held for sale increased $483,000, or 15.8%, to $3.5 million at March 31, 2012 from $3.0 million at December 31, 2011 due to a slight increase in residential loans being sold to the secondary market during the first quarter of 2012.

Net Loans: Net loans decreased $783,000, or 0.3%, to $294.6 million at March 31, 2012 from $295.4 million at December 31, 2011. There was no material change in total loans, however, we did experience an increase in commercial, commercial real estate and mortgage warehouse loans during the first quarter of 2012. These increases were offset by a decrease in one- to four-family and five or more family residential loans.

Commercial loans increased $3.5 million, or 19.3%, to $21.5 million at March 31, 2012 from $18.0 million at December 31, 2011. This increase was primarily due to the origination of a $4.2 million commercial loan to a customer in the health care and social assistance industry.

Commercial real estate loans increased $2.8 million, or 3.5%, to $83.3 million at March 31, 2012 from $80.4 million at December 31, 2011, primarily due to the origination of a $4.6 million loan relationship to a customer in the entertainment and recreation industry.

Mortgage warehouse loans increased $2.0 million, or 1.9%, to $105.9 million at March 31, 2012 compared to $103.9 million at December 31, 2011. As in 2011, the mortgage companies have continued to sell a higher percentage of such loans to mortgage aggregators, or securitizers, in the secondary market which has resulted in a longer retention time for such loans.

There was no material change in construction, land, home equity or automobile and other consumer loans at March 31, 2012 compared to December 31, 2011.

Five or more family residential loans decreased $4.7 million, or 26.6%, to $13.0 million at March 31, 2012 compared to $17.7 million at December 31, 2011. During the first quarter of 2012, a $4.7 million loan secured by a residential apartment complex was paid off.

 

40

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PART I – FINANCIAL INFORMATION

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

 

One- to four-family residential loans decreased $3.0 million, or 6.5%, to $42.6 million at March 31, 2012 compared to $45.6 million at December 31, 2011. The decrease in this portfolio was primarily attributable to continued refinance activity and normal amortization of the seasoned loan portfolio during the first quarter of 2012. The Bank has continued to sell the majority of its fixed rate one- to four-family residential real estate loans originated during the first quarter of 2012. Management expects to continue selling the majority of the one- to four-family residential loans originated during the remainder of 2012 to reduce interest rate risk exposure of fixed rate long term mortgages remaining on the balance sheet.

The allowance for loan losses balance increased $192,000, or 5.1%, to $4.0 million at March 31, 2012 compared to $3.8 million at December 31, 2011, primarily due to a provision amount of $228,000 recorded for the first quarter of 2012. Net charge-offs during the first quarter of 2012 totaled $36,000. The allowance for loan losses to total loans ratio was 1.33% at March 31, 2012 compared to 1.26% at December 31, 2011. The increase in this ratio was primarily due to the low level of net charge-offs combined with the level of provision for loan losses recorded during the first quarter of 2012. The allowance for loan losses to nonperforming loans ratio was 60.9% at March 31, 2012 compared to 59.3% at December 31, 2011.

Nonperforming loans increased $149,000 to $6.5 million at March 31, 2012 compared to $6.4 million at December 31, 2011. The total nonperforming loans to total loans ratio was 2.18% at March 31, 2012 compared to 2.13% at December 31, 2011. As of March 31, 2012, nonaccrual loans to real estate and land developers totaled $4.3 million, to entertainment and recreation businesses totaled $460,000, to construction businesses totaled $213,000, to accommodation and food services totaled $159,000, and to all other commercial industry types totaled $98,000. Nonaccrual one- to four-family residential loans totaled $1.2 million as of March 31, 2012. All other consumer loans in nonaccrual totaled $21,000 as of March 31, 2012.

Total nonperforming assets to total assets ratio was 1.55% at March 31, 2012 and at December 31, 2011, primarily due to a decrease in other real estate owned of $256,000 offset by an increase in nonaccrual loans of $149,000. Two properties were sold during the first quarter of 2012 with a recorded market value of $237,000, and three new properties were transferred into other real estate owned during the same time period with a market value of $119,000. During the first quarter of 2012, write-downs totaling $137,000 were recorded on other real estate owned properties held at March 31, 2012. The current balance in other real estate owned included the current market value of a property the Company acquired in its acquisition of City Savings Bank in 2007, which was held for future branch development. The current market value of this property was $305,000 at March 31, 2012. The Company anticipates listing this property for sale but does not anticipate that to occur in the near future.

 

41

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PART I – FINANCIAL INFORMATION

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

 

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

 

		March 31,				December 31,
		2012				2011
		(Dollars in thousands)
Nonaccrual loans:
Real estate:
One-to four-family		$	1,320			$	1,325
Five or more family			—				—
Commercial (1)			1,916				1,935
Construction			—				—
Land			3,005				2,800
Total real estate		$	6,241			$	6,060
Consumer and other loans:
Home equity			14				14
Commercial			—				28
Automobile and other			7				8
Total consumer and other loans			21				50
Total troubled debt restructured (2)			251				254
Total nonaccrual loans		$	6,513			$	6,364
Loans greater than 90 days delinquent and still accruing:
Real estate:
One- to four- family		$	—			$	—
Five or more family			—				—
Commercial			—				—
Construction			—				—
Land			—				—
Total real estate		$	—			$	—
Consumer and other loans:
Home equity			—				—
Commercial			—				—
Automobile and other			—				—
Total consumer and other loans		$	—			$	—
Total nonperforming loans		$	6,513			$	6,364
Foreclosed assets:
One- to four- family		$	163			$	140
Five or more family			—				—
Commerical			178				365
Construction			—				—
Land			415				507
Consumer			—				—
Business assets			—				—
Total foreclosed assets		$	756			$	1,012
Total nonperforming assets		$	7,269			$	7,376
Ratios:
Nonperforming loans to total loans			2.18	%			2.13	%
Nonperforming assets to total assets			1.55	%			1.55	%

 

(1)	$159 of the nonaccrual commercial real estate loans at March 31, 2012 and December 31, 2011, were loans acquired with credit deterioration in the acquisition of City Savings Bank.

 

(2)

At March 31, 2012, $128 of one- to four-family loans, $91 commercial real estate loans and $32 commercial loans were classified as troubled debt restructured loans. At December 31, 2011, $129 of one- to four-family loans, $92 commercial real estate loans and $33 commercial loans were classified as troubled debt restructured loans.

 

42

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PART I – FINANCIAL INFORMATION

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

 

Goodwill and other Intangible Assets: The Company’s goodwill totaled $8.4 million at March 31, 2012 and at December 31, 2011. 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, by comparing the fair value of such goodwill to its recorded or carrying amount. If the carrying amount of the goodwill exceeds the fair value, an impairment charge must be recorded in an amount equal to the excess. The annual impairment review of the $8.4 million of goodwill previously recorded was performed in the fourth quarter of 2011. The fair value of goodwill was estimated using a number of measurement methods. These included the application of various metrics from bank sale transactions for institutions comparable to LaPorte Bancorp, Inc. including the application of market-derived multiples of tangible book value and earnings, as well as estimations of the present value of future cash flows. Based on this evaluation completed in February 2012, management determined that the fair value of the reporting unit, which is defined as the Company as a whole, exceeded the carrying value of the goodwill, based on the opinion of an independent third party specialist that a control premium would be paid by a potential acquirer, such that the sale price per common share of the Company would exceed its book value per common share. Accordingly, no goodwill impairment was recognized in 2011.

The Company’s stock price has increased from the previous analysis and earnings have continued to increase, therefore, management determined that an updated analysis from an independent third party as of the end of the first quarter was not necessary. A full independent review will be done to test the goodwill for impairment annually unless circumstances indicate an updated review is necessary. As the Company’s market price per share is currently trading below its tangible book value per common share, it is reasonably possible that management may conclude that goodwill, totaling $8.4 million at March 31, 2012, 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 increased $8.3 million, or 2.5%, to $341.9 million at March 31, 2012 compared to $333.6 million at December 31, 2011, primarily due to an increase in certificates of deposit and noninterest bearing deposits. The increase in certificates of deposit was primarily due to increases of $10.0 million in CDARS deposits during the first quarter of 2012. These brokered deposits were purchased to replace the repayment of a portion of higher costing Federal Home Loan Bank – Indianapolis (“FHLBI”) advances and the Federal Deposit Insurance Corporation (“FDIC”) guaranteed unsecured borrowing which matured during the first quarter of 2012. Partially offsetting the increase in brokered CDARS deposits was a decrease in non-brokered certificates of deposit and IRA time deposits of $1.9 million, primarily due to the low interest rate environment. Although management believes the interest rates offered on certificates of deposit have remained competitive, we have positioned them at or below the average rates offered in the market due to the pricing on alternative sources of funding. Noninterest bearing demand deposits increased $3.1 million, or 8.1%, over the same time period.

Money market accounts decreased $4.2 million, or 7.1%, to $55.8 million at March 31, 2012 compared to $60.0 million at December 31, 2011, primarily due to a decrease in public fund balances from Porter County. Interest bearing demand deposits decreased $1.2 million, or 2.4%, to $48.7 million at March 31, 2012 compared to $49.9 million at December 31, 2011.

Borrowed Funds: FHLBI borrowings decreased $12.0 million, or 16.7%, to $60.0 million at March 31, 2012 compared to $72.0 million at December 31, 2011. During the first quarter of 2012, $15.0 million in long-term FHLBI advances matured which were replaced by the purchase of $10.0 million in brokered CDARS deposits, as well as an increase in short-term borrowings with the FHLBI of $3.0 million. The cost of these brokered CDARS deposits and short-term borrowings with the FHLBI were lower than alternative long-term borrowings during the first quarter of 2012. During the first quarter of 2012, the $5.0 million FDIC guaranteed unsecured borrowing the Bank entered into in 2009 matured and was paid off. The Company also has an unsecured line of credit available at First Tennessee Bank that it can utilize for temporary liquidity needs. This line was not utilized at March 31, 2012 or December 31, 2011.

 

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PART I – FINANCIAL INFORMATION

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

 

Total Shareholders’ Equity: Total shareholders’ equity increased $887,000, or 1.6%, to $56.6 million at March 31, 2012 compared to $55.7 million at December 31, 2011, due to an increase of $741,000 in retained earnings, an increase of $65,000 in other comprehensive income and an increase in paid in capital of $58,000. The increase in retained earnings was the result of the Company’s first quarter of 2012 net income of $927,000 less dividends paid during the first quarter of 2012 totaling $186,000. The increase in other comprehensive income was primarily due to an increase in the fair market value of interest rate swap derivatives of $83,000 ($56,000 net of tax effect) along with an increase in the fair market value of available for sale securities of $15,000 ($9,000 net of tax effect). Paid in capital has increased $58,000 due to the expenses recorded in relation to the Company’s stock option and award plan.

Comparison of Operating Results For Three Month Periods Ended March 31, 2012 and March 31, 2011

Net Income: Net income increased $149,000, or 19.2%, to $927,000 for the three months ended March 31, 2012 compared to $778,000 for the three months ended March 31, 2011. Return on average assets for the first quarter of 2012 was 0.79% compared to 0.72% for the prior year period, and return on average equity increased to 6.58% from 6.16% over the same time period. This increase was primarily attributable to an increase in net interest income partially offset by an increase in provision for loan losses and noninterest expense.

Net Interest Income: Net interest income increased $492,000, or 15.0%, to $3.8 million for the three months ended March 31, 2012 compared to the same prior year period, primarily due to an increase in net interest margin of 17 basis points to 3.53% from 3.36%, over the same time period. The net interest spread increased 21 basis points to 3.34% from 3.13%, over the same time period. The increase in net interest margin and net interest spread was primarily due to a decrease in interest expense when comparing the two time periods. The average cost of interest bearing liabilities decreased 54 basis points to 1.34% for the first quarter of 2012 as compared to the same prior year period. Partially offsetting this decrease in cost was a decrease in the average yield on interest earning assets of 33 basis points to 4.67% for the first quarter of 2012 as compared to the same prior year period.

Interest and Dividend Income: Interest and dividend income increased $123,000, or 2.5%, to $5.0 million for the three months ended March 31, 2012 compared to $4.9 million for the same prior year period, however, the yield on interest-earning assets decreased 33 basis points to 4.67% for the three months ended March 31, 2012. Interest and fee income on loans increased $211,000, or 5.4%, when comparing the two time periods. This increase was partially offset by a decrease in interest income from taxable securities of $72,000, or 12.5%, and a decrease in income from tax exempt securities of $12,000, or 3.3%, for the three months ended March 31, 2012 compared to the same prior year period. Average outstanding loan balances increased $44.1 million, primarily due to the increase in average outstanding mortgage warehouse balances, which increased $54.5 million for the first quarter of 2012 which was offset by a decrease in the average yield on loans of 67 basis points to 5.64% when comparing the two time periods. The average yield earned on taxable and tax exempt securities decreased 49 and 29 basis points, respectively, when comparing the two time periods.

Interest and fee income on mortgage warehouse loans increased $437,000, or 46.8%, to $1.4 million for the three months ended March 31, 2012 compared to $934,000 for the same prior year period, primarily due to an increase in average outstanding balances of $54.5 million. Although the average yield of mortgage warehouse loans decreased 278 basis points to 5.50% when comparing the two time periods, this portfolio continues to provide a key source of business to the Company. An increase in competition for this type of lending, along with the decrease in overall interest rates has led to the decline in yield for this portfolio.

Interest and fee income on five or more family residential loans increased $85,000, or 53.1%, for the three months ended March 31, 2012 compared to the same prior year period, primarily due to an increase in the average outstanding balance of $5.9 million over the same time period, as a result of an increase in demand for these loans in our area.

Interest and fee income on commercial real estate loans remained relatively unchanged for the three months ended March 31, 2012 compared to the same prior year period.

 

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PART I – FINANCIAL INFORMATION

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

 

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, 2012 and March 31, 2011. No tax-equivalent yield adjustments were made. All average balances are daily average balances. Nonaccrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. 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.

 

		For the Three Months Ended March 31,
		2012												2011
		(Dollars in thousands)
		Average												Average
		Outstanding								Annualized				Outstanding								Annualized
		Balance				Interest				Yield/Cost				Balance				Interest				Yield/Cost
Loans		$	291,228			$	4,109				5.64	%		$	247,078			$	3,898				6.31	%
Taxable securities			89,283				503				2.25	%			83,837				575				2.74	%
Tax exempt securities			37,782				352				3.73	%			36,200				364				4.02	%
Federal Home Loan Bank of Indianapolis stock			3,817				28				2.93	%			4,038				26				2.58	%
Federal funds sold and other interest-earning deposits			5,477				5				0.37	%			18,620				11				0.24	%
Total interest earning assets			427,587				4,997				4.67	%			389,773				4,874				5.00	%
Non-interest earning assets			40,247												42,749
Total assets		$	467,834											$	432,522
Savings deposits		$	51,515				7				0.05	%		$	47,610				13				0.11	%
Money market and NOW accounts			100,857				120				0.48	%			91,602				169				0.74	%
CDs and IRAs			141,972				671				1.89	%			146,338				901				2.46	%
Total interest-bearing deposits			294,344				798				1.08	%			285,550				1,083				1.52	%
FHLB advances			64,501				322				2.00	%			44,766				395				3.53	%
Subordinated debentures			5,155				70				5.43	%			5,155				69				5.35	%
FDIC guaranteed unsecured borrowing			2,464				37				6.01	%			4,923				50				4.06	%
Other borrowings			259				1				1.54	%			22				—				0.00	%
Total interest-bearing liabilities			366,723				1,228				1.34	%			340,416				1,597				1.88	%
Non-interest bearing deposits			38,784												36,376
Other liabilities			6,017												5,197
Total liabilities			411,524												381,989
Shareholders’ equity			56,310												50,533
Total liabilities & shareholders’ equity		$	467,834											$	432,522
Net interest income						$	3,769											$	3,277
Net interest rate spread											3.34	%											3.13	%
Net interest margin											3.53	%											3.36	%

 

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PART I – FINANCIAL INFORMATION

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

 

Interest and fee income on one- to four-family residential loans decreased $188,000, or 22.7%, to $639,000 for the three months ended March 31, 2012 compared to the same prior year period, due to a decrease in average outstanding balances as well as the average yield on this portfolio. Average outstanding balances decreased $11.1 million, or 19.7%, to $45.2 million and the average yield decreased 22 basis points to 5.65% for the first quarter of 2012 compared to the first quarter of 2011. The Bank continues to sell the majority of its fixed rate one- to four-family residential loans originated, and as a result, the continued refinance activity has contributed to the decrease in average outstanding balances and interest income.

Interest income from taxable securities decreased $72,000, or 12.5%, to $503,000 for the three months ended March 31, 2012 compared to the same prior year period, due to a decrease in the average yield of 49 basis points, while the average outstanding balance increased $5.4 million. Management anticipates that the continued low interest rate environment will negatively impact the yield on this portfolio. Interest income from tax exempt securities decreased $12,000, or 3.3%, to $352,000 for the three months ended March 31, 2012 compared to $364,000 for the same prior year period. The average yield on tax exempt securities decreased 29 basis points when comparing the two time periods.

Interest Expense: Interest expense decreased $369,000, or 23.1%, to $1.2 million for the three months ended March 31, 2012 compared to $1.6 million for the three months ended March 31, 2011. The average cost of interest bearing liabilities decreased 54 basis points to 1.34% for the three months ended March 31, 2012 from 1.88% when comparing the two time periods, primarily due to a decrease in the cost of interest bearing deposits of 44 basis points and a decrease in the cost of FHLBI advances of 153 basis points.

Interest expense on certificates of deposit and IRA time deposits decreased $230,000, or 25.5%, to $671,000 for the three months ended March 31, 2012 compared to $901,000 for the same prior year period. Interest rates offered on certificates of deposit and IRA time deposits have decreased significantly compared to the rates on maturing certificates of deposit and IRA time deposits resulting in this decrease in interest expense. The average cost of certificates of deposit and IRA time deposits decreased 57 basis points to 1.89% for the three months ended March 31, 2012. Interest expense on money market accounts decreased $49,000, or 29.0%, to $120,000 for the three months ended March 31, 2012 compared to $169,000 for the same prior year period. The average cost of money market accounts decreased 26 basis points while the average outstanding balance increased $9.3 million when comparing the two time periods. The Company has continued to offer competitive interest rates on money market accounts in order to attract these relatively low cost deposits to aid in funding its mortgage warehouse division.

Interest expense on FHLBI advances decreased $73,000, or 18.5%, to $322,000 for the three months ended March 31, 2012 compared to $395,000 for the same prior year period. The average cost of these borrowings decreased 153 basis points for the three months ended March 31, 2012 to 2.00% compared to 3.53% for the same prior year period. This decline was primarily due to a number of fixed rate longer term advances that matured during 2011 and were replaced at a significantly lower cost of funding.

Provision for Loan Losses: The Bank recognizes 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. In evaluating the level of the allowance for loan losses, management considers historical loan loss experience, the types of loans and the amount of loans in the loan portfolio, adverse situations that may affect borrowers’ ability to repay, the estimated 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. After an evaluation of these factors, management recognized a provision for loan losses of $228,000 for the three months ended March 31, 2012 compared to $28,000 for the same prior year period. Net charge-offs for the first quarters of 2012 and 2011 totaled $36,000 and $441,000, respectively. Net charge-offs of $390,000 for the three months ended March 31, 2011 were specifically reserved for in prior periods.

 

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PART I – FINANCIAL INFORMATION

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

 

The increase in the provision amount was primarily due to the increase in outstanding loan balances. Total outstanding loan balances, not including the allowance for loan losses, increased $30.4 million to $298.5 million at March 31, 2012 compared to $268.1 million at March 31, 2011. Also, given the overall economic concerns, we rely on more recent loan loss experience ranging from twelve to eighteen months to establish the minimum reserve ratios for our general loan pools.

Noninterest Income: Noninterest income increased $48,000, or 8.9%, to $589,000 for the three months ended March 31, 2012 compared to $541,000 for the same prior year period. Gains on mortgage banking activities increased $126,000 due to an increase in refinance activity when comparing the first quarters of 2012 and 2011. Net gain on sales of securities increased $84,000 for the three months ended March 31, 2012 compared to the same prior year period. Losses on other assets increased $129,000 primarily due to the write-down of several other real estate owned properties during the first quarter of 2012. Service charge income decreased $29,000, or 21.3%, to $107,000 for the three months ended March 31, 2012 from $136,000 for the same prior year period. The Bank continues to see a decrease in non-sufficient funds/overdraft fee income due to the regulations impacting the Bank’s ability to charge for certain types of overdraft activity.

Noninterest Expense: Noninterest expense increased $114,000, or 4.0%, to $3.0 million for the three months ended March 31, 2012 compared to $2.8 million for the same prior year period, primarily due to an increase in salaries and wages of $137,000, or 9.0%. Payroll expenses increased $93,000, or 7.8%, for the three months ended March 31, 2012 compared to the same prior year period as a result of an increase in staffing to the Bank’s commercial credit department, along with annual salary increases. During the third quarter of 2011, the Company implemented a stock award and option plan which resulted in an increase to compensation expense of $61,000 for the three months ended March 31, 2012 compared to the same prior year period. Advertising expense increased $35,000 primarily due to an increase in the Bank’s advertising design services as well as an increase in promotional items purchased when comparing the two time periods. Other expenses increased $23,000, or 6.4%, primarily due to an increase in attorney fees for the three months ended March 31, 2012 compared to the same prior year period. Data processing expense increased $19,000, or 17.6%, for the three months ended March 31, 2012 compared to the same prior year period primarily due to expense related to a new disaster recovery solution the Bank implemented in 2011.

Partially offsetting these increases was a decrease in FDIC insurance of $49,000, or 36.8%, attributable to the change in the formula of the assessment and its impact on the Bank. The amortization of intangible assets decreased $28,000, or 48.3%, as the core deposit intangible asset recorded by the Bank is amortized into expense on an accelerated basis and the customer intangible asset was fully amortized during the third quarter of 2011.

Income Taxes: Income tax expense increased $77,000, or 45.3%, to $247,000 for the three months ended March 31, 2012 compared to $170,000 for the same prior year period, primarily due to an increase in income before taxes of $226,000, as well as an increase in the effective tax rate. The effective tax rate for the three months ended March 31, 2012 was 21.0% compared to 17.9% for the same prior year period. The effective tax rates fluctuate based on the ratio of total income before tax attributable to tax exempt securities and life insurance income, in addition to the amount of loan charge-offs during the year.

 

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PART I – FINANCIAL INFORMATION

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

 

Liquidity and Capital Resources

Maintenance of adequate liquidity requires that sufficient resources be available at all times to meet cash flow requirements of the Company. Liquidity in a banking institution is required primarily to provide for deposit withdrawals and the credit needs of customers and to take advantage of investment opportunities as they arise. A bank may achieve desired liquidity from both assets and liabilities. Cash and deposits held in other financial institutions, Federal funds sold, other short term investments in interest-earning time deposits in other financial institutions and securities available-for-sale, maturing loans and investments, payments of principal and interest on loans and investments, and potential loan sales are sources of asset liquidity. Deposit growth and access to credit lines established with correspondent banks, the Federal Home Loan Bank and market sources of funds are sources of liability liquidity. The Company reviews its liquidity position on a regular basis based upon its current position and expected trends of loans and deposits. The policy of the Board of Directors is to maintain sufficient capital at not less than the “well-capitalized” thresholds established by banking regulators. Management believes that the Company maintains adequate sources of liquidity to meet its liquidity needs.

The Company’s liquid assets, defined as cash and due from financial institutions and the market value of unpledged securities available-for-sale, totaled $93.3 million at March 31, 2012 and constituted 19.88% of total assets at that date, compared to $106.5 million, or 22.31%, of total assets at December 31, 2011.

The Company also maintains lines of credit with the Federal Home Loan Bank. The total of these lines of credit were $74.9 million at March 31, 2012, of which $60.0 million in Federal Home Loan Bank advances were outstanding. 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 Federal Home Loan Bank. At March 31, 2012, we had $87.6 million in unpledged securities available for sale. The Company actively utilizes its borrowing capacity with the Federal Home Loan Bank to manage liquidity and to provide a funding alternative to time deposits, if the Federal Home Loan Bank’s rates and terms are more favorable. The advances from the Federal Home Loan Bank can have maturities from overnight to multiple years. At March 31, 2012, $35.0 million of these advances were due within one year, and $25.0 million had maturities greater than a year.

The Company may also utilize the Federal Reserve discount window as a source of short-term funding. At March 31, 2012, the Company’s overnight borrowings with the Federal Reserve Bank discount window totaled $0. The Company’s borrowing capacity at the Federal Reserve Bank discount window is based on the collateral value of pledged securities. During the second quarter of 2010, the Federal Reserve announced the discount window would return to its original intent of being a “lender of last resort”. The collateral value of securities pledged to the Federal Reserve discount window at March 31, 2012 totaled $9.8 million.

During the first quarter of 2012, the Company was extended an accommodation from First Tennessee Bank National Association to borrow federal funds up to the amount of $15.0 million. This federal funds accommodation is not and shall not be a confirmed line or loan, and First Tennessee Bank National Association may cancel such accommodation at any time, in whole or in part, without cause or notice, in its sole discretion. At March 31, 2012, the Company’s borrowings from First Tennessee Bank National Association totaled $0.

Federal regulations establish guidelines for calculating “risk-adjusted” capital ratios and minimum ratio requirements. Under these regulations, banks are required to maintain a total risk-based capital ratio of 8.0% of risk-weighted assets and a Tier 1 risk-based capital ratio (primarily total shareholders’ equity less intangible assets) of at least 4.0% of risk-weighted assets. The Bank had total and Tier 1 risk-based capital ratios of 15.2% and 14.0%, respectively, at March 31, 2012, and was “well-capitalized” under the regulatory guidelines.

 

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PART I – FINANCIAL INFORMATION

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

 

In addition, regulators have adopted a minimum leverage ratio standard for Tier 1 capital to average assets. The minimum ratio for top-rated institutions may be as low as 3%. However, regulatory agencies have stated that most institutions should maintain ratios at least 1 to 2 percentage points above the 3% minimum. As of March 31, 2012, the Bank’s leverage ratio was 10.1%. Capital levels for the Bank remain above the established regulatory capital requirements.

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.

 

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PART I – FINANCIAL INFORMATION

 

ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Proper management of the interest rate sensitivity and maturities of our assets and liabilities is required to protect and enhance our net interest margin and asset values, subject to market conditions. Interest rate sensitivity spread management is an important tool for achieving this objective and for developing ways in which to improve profitability.

The Company constantly monitors earning asset and deposit levels, developments and trends in interest rates, liquidity, capital adequacy and marketplace opportunities. Management responds to all of these to protect and possibly enhance net interest income while managing risks within acceptable levels as set forth in the Company’s policies. In addition, alternative business plans and transactions are contemplated for their potential impact. This process is known as asset/liability management and is carried out by changing the maturities and relative proportions of the various types of loans, investments, deposits and borrowings in the ways described above.

A commonly used tool to manage and analyze the interest rate sensitivity of a bank is a computer simulation model. To quantify the extent of risks in both the Company’s current position and in transactions it might make in the future, the Company uses a model to simulate the impact of different interest rate scenarios on net interest income. The hypothetical impact of a 12 month nonparallel ramp (generally, a nonparallel change in interest rates of +/- 3.00%) and smaller incremental interest rate changes are modeled at least quarterly, representing the primary means the Company uses for interest rate risk management decisions.

At March 31, 2012, given a +3.00% or –1.00% shock in interest rates, our model results in the Bank’s net interest income for the next twelve months changing by $(298,000), or (1.87)%, and $(40,000), or (0.25)%, respectively. The Bank’s Interest Rate Risk Management (“IRRM”) Policy sets limits for changes in net interest income given a +3.00% or -1.00% shock in interest rates of (15.00)% and (5.00)%, respectively.

The Company measures its economic value of equity at risk on a quarterly basis. Economic value of equity at risk measures the Company’s exposure to changes in its economic value of equity due to changes in a forecast interest rate environment. At March 31, 2012, given a +3.00% or -1.00% shock in interest rates, our model results in the Bank’s economic value of equity at risk for the next twelve months changing by (3.75)%, and (6.12)%, respectively. The Bank’s IRRM Policy sets limits for changes in the Bank’s economic value of equity at risk given a +3.00% or -1.00% shock in interest rates of (25.00)% and (15.00)%, respectively.

At March 31, 2012, the Bank was in compliance with its IRRM Policy limits regarding shocks in interest rates for changes in its net interest income and its economic value of equity.

When preparing its modeling, the Company makes significant assumptions about the lag in the rate of change in various asset and liability categories. The Company bases its assumptions on past experience and comparisons with other banks, and tests the validity of its assumptions by reviewing actual results with projected expectations.

 

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PART I – FINANCIAL INFORMATION

 

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 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, 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 likely to materially affect, our internal control over financial reporting.

 

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PART II – OTHER INFORMATION

ITEM 1.   LEGAL PROCEEDINGS

As of March 31, 2012, there are no material pending legal proceedings to which the Company or its subsidiaries is a party other than ordinary routine litigation incidental to their respective businesses.

ITEM 1A.   RISK FACTORS

As of March 31, 2012, there were no material changes to the “Risk Factors” disclosed in the Company’s Annual Report for the year ended December 31, 2011 on Form 10-K filed on March 27, 2012. However, the risks described in our 2011 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)

Unregistered Sales of Equity Securities: Not applicable

 

(b)

Use of Proceeds: Not applicable

 

(c)

Repurchase of Our Equity Securities: Not applicable

ITEM 3.   DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4.   MINE SAFETY DISCLOSURES

Not applicable

ITEM 5.   OTHER INFORMATION

None

 

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PART II – OTHER INFORMATION

 

ITEM 6.   EXHIBITS

 

Exhibit Number		Description
31.01		Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
31.02		Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
32.01		Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
101		Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011, (ii) the Consolidated Statements of Income for the three months ended March 31, 2012 and 2011, (iii) the Consolidated Statements of Comprehensive Income for the three months ended March 31, 2012 and 2011, (iv) the Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2012 and 2011, (v) the Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011, and (vi) the notes to the Consolidated Financial Statements.*

 

*	This information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of Section 18 of the Securities Exchange Act of 1934.

 

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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.
May 14, 2012 Date				/s/ Lee A. Brady Lee A. Brady, Chief Executive Officer
May 14, 2012 Date				/s/ Michele M. Thompson Michele M. Thompson, President and Chief Financial Officer

 

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