LPSB Laporte Bancorp, Inc.

LAPORTE BANCORP, INC.

(Exact name of Registrant as Specified in Its Charter)

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

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LAPORTE BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	Three Months Ended March 31,
	2014				2013
	(Dollars in thousands, except per share data)
Interest and dividend income:
Loans, including fees	$	3,250			$	3,577
Taxable securities	538				462
Tax exempt securities	414				342
Federal Home Loan Bank stock	52				34
Other interest income	23				25
Total interest and dividend income	4,277				4,440
Interest expense:
Deposits	477				578
Federal Home Loan Bank advances	253				227
Subordinated debentures	65				69
Total interest expense	795				874
Net interest income	3,482				3,566
Provision for loan losses	—				3
Net interest income after provision for loan losses	3,482				3,563
Noninterest income:
Service charges on deposit accounts	104				99
ATM and debit card fees	100				98
Earnings on bank owned life insurance, net	104				93
Net gains on mortgage banking activities	119				340
Loan servicing fees, net	34				24
Net gains on the sale of securities	10				253
Losses on other assets	(36		)		(91		)
Other income	86				90
Total noninterest income	521				906
Noninterest expense:
Salaries and employee benefits	1,784				1,667
Occupancy and equipment	483				456
Data processing	150				185
Advertising	73				91
Bank examination fees	43				81
Amortization of intangible assets	18				24
FDIC insurance	83				83
Collection and other real estate owned	53				65
Other expenses	418				395
Total noninterest expense	3,105				3,047
Income before income taxes	898				1,422
Income tax expense	48				334
Net income	$	850			$	1,088
Earnings per share (Note 3):
Basic	$	0.15			$	0.19
Diluted	0.15				0.19

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LAPORTE BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	Three Months Ended March 31,
	2014				2013
	(Dollars in thousands)
Net income	$	850			$	1,088
Other comprehensive income (loss):
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period	1,499				(551		)
Reclassification adjustment for net gains included in net income	(10		)		(253		)
Gross unrealized gains (losses)	1,489				(804		)
Related income tax (expense) benefit	(507		)		274
Net unrealized gains (losses)	982				(530		)
Unrealized gains on cash flow hedges:
Gross unrealized gains	183				198
Related income tax expense	(61		)		(67		)
Net unrealized gains	122				131
Total other comprehensive income (loss)	1,104				(399		)
Comprehensive income	$	1,954			$	689

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LAPORTE BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

	Common Stock				Additional Paid-In Capital				Retained Earnings				Accumulated Other Comprehensive Income (Loss), Net of Tax				Unearned ESOP Shares				Total
	(Dollars in thousands, except per share data)
Balance at January 1, 2013	$	62			$	47,302			$	37,745			$	2,364			$	(3,418	)		$	84,055
Net income	—				—				1,088				—				—				1,088
Other comprehensive loss	—				—				—				(399		)		—				(399		)
Cash dividends on common stock ($0.04 per share)	—				—				(248		)		—				—				(248		)
ESOP shares earned, 5,621 shares	—				9				—				—				45				54
Stock based compensation expense	—				61				—				—				—				61
Balance at March 31, 2013	$	62			$	47,372			$	38,585			$	1,965			$	(3,373	)		$	84,611
Balance at January 1, 2014	$	59			$	44,495			$	40,771			$	(1,838	)		$	(3,238	)		$	80,249
Net income	—				—				850				—				—				850
Other comprehensive income	—				—				—				1,104				—				1,104
Cash dividends on common stock ($0.04 per share)	—				—				(236		)		—				—				(236		)
Repurchase of common stock	(1		)		(1,109		)		—				—				—				(1,110		)
ESOP shares earned, 5,621 shares	—				16				—				—				45				61
Stock activity under stock compensation plans (2,236 shares)	—				14				—				—				—				14
Stock based compensation expense	—				62				—				—				—				62
Balance at March 31, 2014	$	58			$	43,478			$	41,385			$	(734	)		$	(3,193	)		$	80,994

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LAPORTE BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Three Months Ended March 31,
	2014				2013
	(Dollars in thousands)
Cash flows from operating activities:
Net income	$	850			$	1,088
Adjustments to reconcile net income to net cash from operating activities:
Depreciation	140				141
Provision for loan losses	—				3
Net gains on securities available-for-sale	(10		)		(253		)
Net amortization on securities available-for-sale	247				252
Net gains on sales of loans	(114		)		(296		)
Originations of loans held for sale	(3,360		)		(10,106		)
Proceeds from sales of loans held for sale	3,618				9,261
Recognition of mortgage servicing rights	(5		)		(44		)
Amortization of mortgage servicing rights	13				38
Net change in loan servicing rights valuation allowance	(6		)		(20		)
Net gains on sales of other real estate owned	(26		)		—
Write downs of other real estate owned	73				91
Earnings on bank owned life insurance, net	(104		)		(93		)
Amortization of intangible assets	18				24
ESOP compensation expense	61				54
Stock based compensation expense	62				61
Change in assets and liabilities:
Accrued interest receivable and other assets	86				352
Accrued interest payable and other liabilities	(666		)		(124		)
Net cash provided by operating activities	877				429
Cash flows from investing activities:
Purchase of interest-earning time deposits at other financial institutions	(487		)		(735		)
Proceeds from sales of securities available-for-sale	680				5,260
Proceeds from maturities, calls, and principal repayments of securities available-for-sale	3,586				3,602
Purchases of securities available-for-sale	(12,660		)		(23,142		)
Net change in loans	529				21,673
Proceeds from sales of other real estate owned	289				—
Premises and equipment expenditures, net	(64		)		(251		)
Net cash (utilized for) provided by investing activities	(8,127		)		6,407
Cash flows from financing activities:
Net change in deposits	(3,430		)		(8,444		)
Proceeds from FHLB long-term advances	—				5,000
Repayment of FHLB long-term advances	—				(4,999		)
Net change in FHLB short-term advances	(4,287		)		(1,298		)
Net change in short-term borrowings	6,580				1,000
Stock options exercised	14				—
Dividends paid on common stock	(236		)		(248		)
Repurchase of common stock	(1,110		)		—
Net cash utilized for financing activities	(2,469		)		(8,989		)
Net decrease in cash and cash equivalents	(9,719		)		(2,153		)
Cash and cash equivalents at beginning of period	18,219				6,857
Cash and cash equivalents at end of period	$	8,500			$	4,704

(continued)

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LAPORTE BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(Unaudited)

	Three Months Ended March 31,
	2014				2013
	(Dollars in thousands)
Supplemental cash flow information:
Cash paid during the period for:
Interest	$	807			$	887
Income taxes	—				—
Supplemental noncash disclosures:
Transfers from loans receivable to other real estate owned	$	32			$	509

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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:

	Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
At March 31, 2014:	(Dollars in thousands)
U.S. federal agency obligations	$	7,706			$	32			$	(113	)		$	7,625
State and municipal	56,538				2,083				(371		)		58,250
Mortgage-backed securities – residential	34,280				169				(223		)		34,226
Government agency sponsored collateralized mortgage obligations	72,388				321				(2,023		)		70,686
Corporate debt securities	3,121				25				(15		)		3,131
Total	$	174,033			$	2,630			$	(2,745	)		$	173,918

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	March 31, 2014
	Continuing Unrealized Loss For Less Than 12 Months								Continuing Unrealized Loss For 12 Months or More								Total
	Fair Value				Unrealized Loss				Fair Value				Unrealized Loss				Fair Value				Unrealized Loss
	(Dollars in thousands)
U.S. federal agency obligations	$	5,468			$	(113	)		$	—			$	—			$	5,468			$	(113	)
State and municipal	12,958				(275		)		1,852				(96		)		14,810				(371		)
Mortgage-backed securities – residential	18,088				(189		)		2,640				(34		)		20,728				(223		)
Government agency sponsored collateralized mortgage obligations	35,962				(1,460		)		11,709				(563		)		47,671				(2,023		)
Corporate debt securities	985				(15		)		—				—				985				(15		)
Total temporarily impaired	$	73,461			$	(2,052	)		$	16,201			$	(693	)		$	89,662			$	(2,745	)

	December 31, 2013
	Continuing Unrealized Loss For Less Than 12 Months								Continuing Unrealized Loss For 12 Months or More								Total
	Fair Value				Unrealized Loss				Fair Value				Unrealized Loss				Fair Value				Unrealized Loss
	(Dollars in thousands)
U.S. federal agency obligations	$	2,858			$	(142	)		$	—			$	—			$	2,858			$	(142	)
State and municipal	17,352				(558		)		1,524				(116		)		18,876				(674		)
Mortgage-backed securities – residential	22,432				(366		)		—				—				22,432				(366		)
Government agency sponsored collateralized mortgage obligations	46,555				(2,023		)		6,708				(357		)		53,263				(2,380		)
Total temporarily impaired	$	89,197			$	(3,089	)		$	8,232			$	(473	)		$	97,429			$	(3,562	)

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	Amortized Cost				Fair Value
	(Dollars in thousands)
Due in one year or less	$	3,009			$	3,031
Due from more than one to five years	13,658				13,893
Due from more than five to ten years	35,761				36,342
Due after ten years	14,937				15,740
Subtotal	67,365				69,006
Mortgage-backed securities and government agency sponsored collateralized mortgage obligations	106,668				104,912
Total	$	174,033			$	173,918

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	Commercial				Mortgage				Mortgage Warehouse				Residential Construction				Home Equity				Consumer and Other				Unallocated				Total
	(Dollars in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	792			$	135			$	—			$	—			$	32			$	—			$	—			$	959
Collectively evaluated for impairment	1,933				323				508				—				79				83				20				2,946
Acquired with deteriorated credit quality	—				—				—				—				—				—				—				—
Total ending allowance	$	2,725			$	458			$	508			$	—			$	111			$	83			$	20			$	3,905
Loans:
Individually evaluated for impairment	$	9,930			$	1,472			$	—			$	—			$	43			$	—			$	—			$	11,445
Collectively evaluated for impairment	118,324				33,842				115,443				792				11,354				4,920				—				284,675
Acquired with deteriorated credit quality	668				124				—				—				—				—				—				792
Total ending loan balance	$	128,922			$	35,438			$	115,443			$	792			$	11,397			$	4,920			$	—			$	296,912

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	Unpaid Principal Balance				Recorded Investment				Allowance for Loan Losses Allocated
	(Dollars in thousands)
With no related allowance recorded:
Commercial:
Real estate	$	2,832			$	2,832			$	—
Five or more family	3,508				3,508				—
Land	201				201				—
Mortgage	769				769				—
Home equity	11				11				—
Subtotal	7,321				7,321				—
With an allowance recorded:
Commercial:
Real estate	843				843				275
Land	2,547				2,547				517
Mortgage	702				702				135
Home equity	32				32				32
Subtotal	4,124				4,124				959
Total	$	11,445			$	11,445			$	959

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	Nonaccrual								Loans Past Due Over 90 Days Still Accruing
	March 31, 2014				December 31, 2013				March 31, 2014				December 31, 2013
	(Dollars in thousands)
Commercial:
Commercial and other	$	27			$	27			$	—			$	—
Real estate	868				897				—				—
Land	2,770				2,748				—				—
Mortgage	1,483				1,190				—				—
Home equity	39				43				—				—
Consumer and other	2				3				—				—
Total	$	5,189			$	4,908			$	—			$	—

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	30-59 Days Past Due				60-89 Days Past Due				Greater than 90 Days Past Due				Total Past Due				Loans Not Past Due				Total
	(Dollars in thousands)
Commercial:
Commercial and other	$	2			$	—			$	—			$	2			$	17,638			$	17,640
Real estate	2,377				—				874				3,251				80,531				83,782
Five or more family	76				—				—				76				15,326				15,402
Construction	—				—				—				—				3,949				3,949
Land	—				—				2,317				2,317				5,832				8,149
Mortgage	640				7				1,161				1,808				33,630				35,438
Mortgage warehouse	—				—				—				—				115,443				115,443
Residential construction:
Construction	—				—				—				—				503				503
Land	—				—				—				—				289				289
Home equity	4				—				12				16				11,381				11,397
Consumer and other	176				—				3				179				4,741				4,920
Total	$	3,275			$	7			$	4,367			$	7,649			$	289,263			$	296,912

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	Number of Loans			Pre-Modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment
	(Dollars in thousands)
Troubled Debt Restructurings:
Commercial:
Real Estate	1			$	919			$	919
Five or more family	1			3,507				3,750
Total	2			$	4,426			$	4,669

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	December 31, 2013
	Not Rated				Pass				Special Mention				Substandard				Doubtful
	(Dollars in thousands)
Commercial:
Commercial and other	$	83			$	17,159			$	380			$	18			$	—
Real estate	—				71,943				6,705				5,111				23
Five or more family	188				11,706				—				3,508				—
Construction	—				3,949				—				—				—
Land	—				5,296				106				2,747				—
Mortgage	29,977				3,323				471				1,667				—
Mortgage warehouse	115,443				—				—				—				—
Residential construction:
Construction	503				—				—				—				—
Land	289				—				—				—				—
Home equity	11,116				133				101				47				—
Consumer and other	3,985				703				232				—				—
Total	$	161,584			$	114,212			$	7,995			$	13,098			$	23

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	Three Months Ended March 31,
	2014				2013
	(Dollars in thousands)
Beginning balance	$	73			$	128
Reclassification from non-accretable yield	—				1
Accretion of income	(14		)		(15		)
Disposals	—				—
Ending balance	$	59			$	114

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	Valuation Methodology		Unobservable Inputs		Range of Inputs		Average of Inputs
Impaired loans:
Commercial:
Real estate	Appraisals		Discounts for changes in market conditions		10-65%		21%
Land	Appraisals		Discounts for changes in market conditions		0-10%		8%
Mortgage	Appraisals		Discounts for changes in market conditions		0-20%		10%
Other real estate owned, net:
Commercial:
Real estate	Appraisals		Discounts for changes in market conditions		6-100%		39%
Land	Appraisals		Discounts for changes in market conditions		25-26%		26%
Mortgage	Appraisals		Discounts for changes in market conditions		19-45%		26%

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	March 31, 2014
	Aggregate Fair Value				Difference				Contractual Principal
	(Dollars in thousands)
Loans held for sale	$	974			$	27			$	947
	December 31, 2013
	Aggregate Fair Value				Difference				Contractual Principal
	(Dollars in thousands)
Loans held for sale	$	1,118			$	30			$	1,088

	Other Gains (Losses)				Interest Income				Interest Expense				Total Changes in Fair Values Included in Current Period Earnings
	(Dollars in thousands)
Three Months Ended March 31, 2014
Assets:
Loans held for sale	$	(3	)		$	4			$	—			$	1
Three Months Ended March 31, 2013
Assets:
Loans held for sale	$	31			$	6			$	—			$	37

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					Fair Value Measurements at March 31, 2014
	Carrying Value				Quoted Prices in Active  Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
	(Dollars in thousands)
Financial assets:
Cash and due from financial institutions	$	8,500			$	8,500			$	—			$	—
Interest-earning time deposits at other financial institutions	7,129				—				7,149				—
Securities available-for-sale	173,918				—				173,918				—
Federal Home Loan Bank stock	4,375				N/A				N/A				N/A
Loans held for sale	974				—				974				—
Loans, net	292,725				—				—				296,230
Accrued interest receivable	1,571				—				902				669
Financial liabilities:
Deposits	(343,271		)		—				(340,516		)		—
Federal Home Loan Bank advances	(82,490		)		—				(83,617		)		—
Subordinated debentures	(5,155		)		—				—				(5,149		)
Short-term borrowings	(8,995		)		—				(8,995		)		—
Accrued interest payable	(165		)		—				(165		)		—
Derivatives – interest rate swaps	(998		)		—				(998		)		—

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	March 31, 2014								December 31, 2013
	Notional Amount				Fair Value				Notional Amount				Fair Value
	(Dollars in thousands)
Included in other liabilities:
Interest rate swaps related to:
Subordinated debentures	$	—			$	—			$	(5,000	)		$	(26	)
CDARS deposits	(10,250		)		(133		)		(10,250		)		(192		)
FHLB advances	(15,000		)		(865		)		(15,000		)		(963		)
Total included in other liabilities					$	(998	)						$	(1,181	)

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	Shares			Weighted Average Exercise Price				Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
	(Dollars in thousands, except per share data)
Outstanding at January 1, 2014	271,194			$	6.55			7.8 years		$	1,239
Granted	—			—
Exercised	(2,236	)		6.44
Forfeited or expired	—			—
Outstanding at March 31, 2014	268,958			$	6.55			7.6 years		1,132
Fully vested and expected to vest	268,958			$	6.55			7.6 years		1,132
Exercisable at end of period	96,334			6.44				7.6 years		416

	Shares			Weighted Average Exercise Price				Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
	(Dollars in thousands, except per share data)
Outstanding at January 1, 2013	281,829			$	6.44			8.7 years		$	2,474
Granted	—			—
Exercised	—			—
Forfeited or expired	—			—
Outstanding at March 31, 2013	281,829			$	6.44			8.5 years		2,790
Fully vested and expected to vest	281,829			$	6.44			8.5 years		2,790
Exercisable at end of period	56,366			6.44				8.5 years		195

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	Shares			Weighted-Average Grant-Date Fair Value
Nonvested at January 1, 2014	72,146			$	6.54
Granted	—			—
Vested	—			—
Forfeited	—			—
Nonvested at March 31, 2014	72,146			$	6.54

	Shares			Weighted-Average Grant-Date Fair Value
Nonvested at January 1, 2013	93,528			$	6.44
Granted	—			—
Vested	—			—
Forfeited	—			—
Nonvested at March 31, 2013	93,528			$	6.44

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Details about Accumulated Other Comprehensive Income (Loss) Components		Amount Reclassified from Accumulated Other Comprehensive  Income (Loss)				Affected Line Item in the Statement Where Net Income is Presented
		(Dollars in thousands)
Unrealized gains and losses on available-for-sale securities:
		$	10			Net gains on securities
		10				Total before tax
		(3		)		Income tax expense
		$	7			Net of tax

	Gains (Losses) on Cash Flow Hedges				Unrealized  Gains (Losses) on Available- for-Sale Securities				Total
	(Dollars in thousands)
Beginning balance	$	(1,309	)		$	3,673			$	2,364
Other comprehensive income (loss) before reclassification	131				(363		)		(232		)
Amounts reclassified from accumulated other comprehensive income	—				(167		)		(167		)
Net current period other comprehensive income (loss)	131				(530		)		(399		)
Ending balance	$	(1,178	)		$	3,143			$	1,965

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NOTE 11 – OFFSETTING FINANCIAL ASSETS AND LIABILITIES

The following tables summarize gross and net information about financial instruments and derivative instruments that are offset in the Company’s statement of consolidated balance sheets or that are subject to an enforceable master netting arrangement at March 31, 2014 and December 31, 2013 .

	At March 31, 2014
													Gross Amounts Not Offset in the Consolidated Balance Sheet
	Gross Amounts of Recognized Liabilities				Gross  Amounts Offset in the Consolidated Balance Sheet				Net Amounts of Liabilities Presented in the Consolidated Balance  Sheet				Financial Instruments				Cash  Collateral Pledged				Net Amount
	(Dollars in thousands)
Description:
Derivatives	$	998			$	—			$	998			$	(2,080	)		$	—			$	(1,082	)
Repurchase agreements	418				—				418				(418		)		—				—
Total	$	1,416			$	—			$	1,416			$	(2,498	)		$	—			$	(1,082	)

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

Forward-Looking Statements

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

The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. The factors which could have a material adverse effect on the operations and future prospects of the Company and certain subsidiaries are detailed in “Item 1A – Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013 . In addition to these risk factors, there are other factors that may impact any public company, including ours, which could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries. These additional factors include, but are not limited to, the following:

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

•	increased competitive pressures among financial services companies;

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

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

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

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

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

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

•	our ability to successfully manage our commercial lending;

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

•	adverse changes in the securities market;

•	the new capital rules which will take effect on January 1, 2015;

•	implementation of the “qualified mortgage” rule;

•	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; 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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Comparison of Financial Condition at March 31, 2014 and December 31, 2013

General: Total assets at March 31, 2014 decreased slightly to $525.6 million compared to $526.9 million at December 31, 2013 . At March 31, 2014 , gross loans totaled $296.6 million , a 0.2% decrease from $297.2 million at December 31, 2013 . Total deposits at March 31, 2014 decreased $3.4 million , or 1.0% , to $343.3 million from $346.7 million at December 31, 2013 due to the maturity of brokered deposits totaling $9.7 million and a decrease in customer time deposits totaling $3.2 million. These decreases were partially offset by increases of $5.7 million in money market and $3.3 million in savings accounts during the first quarter of 2014. Borrowings totaled $96.6 million at March 31, 2014 , up 2.4% from $94.3 million at December 31, 2013 primarily due to short-term overnight borrowings utilized to fund the increase in mortgage warehouse outstanding balances at the end of the first quarter of 2014. Total shareholders’ equity increased $745,000 , or 0.9% , to $81.0 million at March 31, 2014 , compared to $80.2 million at December 31, 2013 primarily due to net income of $850,000 and a $1.1 million decrease in accumulated other comprehensive loss as unrealized securities losses decreased during the first quarter of 2014. These increases were partially offset by dividends declared totaling $236,000 and repurchases of 101,485 shares of the Company’s common stock totaling $1.1 million in accordance with its repurchase plans. During January 2014, the Company repurchased the final 14,800 shares authorized under its first plan announced in October 2013. In addition, the Company repurchased 86,685 shares under its second plan announced in January 2014.

Investment Securities: Total securities available-for-sale increased $9.6 million , or 5.9% to $173.9 million at March 31, 2014 from $164.3 million at December 31, 2013 with excess liquidity being utilized for purchases of securities available-for-sale.

At March 31, 2014 , management reviewed the securities portfolio for possible other-than-temporary impairment and determined there were no impairment charges to be recorded. The net unrealized losses on the available-for-sale securities portfolio totaled $115,000 at March 31, 2014 , a decrease of $1.5 million from net unrealized losses totaling $1.6 million at December 31, 2013 .

Loans Held for Sale: Loans held for sale decreased $144,000 , or 12.9% , to $974,000 at March 31, 2014 compared to $1.1 million at December 31, 2013 primarily due to the timing of when residential mortgage loans were originated and subsequently sold to the secondary market combined with a decrease in purchase and refinance activity during the first quarter of 2014.

Net Loans: Net loans decreased slightly by $560,000 , or 0.2% , to $292.7 million at March 31, 2014 compared to $293.3 million at December 31, 2013 primarily due to a decrease in commercial loans. Commercial loans decreased $2.9 million , or 2.3% , to $126.0 million at March 31, 2014 compared to $128.9 million at December 31, 2013 primarily due to one commercial real estate loan relationship secured by a hotel totaling $2.2 million being paid off prior to maturity.

Mortgage warehouse loans increased $2.8 million to $118.2 million at March 31, 2014 from $115.4 million at December 31, 2013 . During the quarter, warehouse lending fluctuated as purchase and refinance activity significantly slowed in the beginning of the quarter with activity increasing at the end of March 2014.

There was no material change in balances of residential mortgage, residential construction, home equity, and consumer loans at March 31, 2014 when compared to December 31, 2013 .

The allowance for loan losses balance was relatively stable at $3.9 million at March 31, 2014 and December 31, 2013 . The allowance for loan losses to nonperforming loans ratio decreased to 74.5% at March 31, 2014 compared to 79.6% at December 31, 2013 primarily due to a slight increase in nonperforming loans. Net charge-offs for the first quarter of 2014 totaled $37,000 compared to $91,000 for the first quarter of 2013. The Company did not record a provision for loan losses during the three months ended March 31, 2014 , as compared to the provision recorded during the prior year period of $3,000 . The Company’s analysis for the allowance for loan losses for the first quarter of 2014 reflected continued improvement in asset quality metrics and various trends, including classified assets, charge-off ratios, delinquencies, and current economic conditions. The allowance for loan losses to total loans ratio was stable at 1.30% at March 31, 2014 compared to 1.31% at December 31, 2013 .

 

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

	March 31, 2014				December 31, 2013
	(Dollars in thousands)
Nonaccrual loans:
Commercial:
Real estate	$	814			$	843
Land	2,770				2,748
Total commercial	3,584				3,591
Mortgage	1,338				1,044
Home equity	39				43
Consumer and other	2				3
Nonaccruing troubled debt restructured loans (1)	226				227
Total nonaccrual loans	5,189				4,908
Loans greater than 90 days delinquent and still accruing:
Total loans greater than 90 days delinquent and still accruing	—				—
Total nonperforming loans	5,189				4,908
Foreclosed assets:
Commercial:
Real estate	522				646
Land	187				205
Total commercial	709				851
Mortgage	84				281
Residential construction:
Land	56				56
Total residential construction	56				56
Total foreclosed assets	849				1,188
Total nonperforming assets	$	6,038			$	6,096
Ratios:
Nonperforming loans to total loans	1.75		%		1.65		%
Nonperforming assets to total assets	1.15				1.16

 

(1)	At March 31, 2014 , $145,000 of one- to four-family residential loans, $54,000 of commercial real estate loans, and $27,000 of commercial loans were classified as troubled debt restructured loans. At December 31, 2013 , $146,000 of one- to four-family residential loans, $54,000 of commercial real estate loans, and $27,000 of commercial loans were classified as troubled debt restructured loans.

 

Total nonperforming loans were $5.2 million at March 31, 2014 compared to $4.9 million at December 31, 2013 primarily due to an increase in nonperforming residential mortgage loans. At March 31, 2014 , our nonperforming loans to total loans ratio was 1.75% compared to 1.65% at December 31, 2013 . The increase in nonperforming residential mortgage loans resulted from two loans being transferred to nonaccrual status during the first quarter of 2014 totaling $369,000 and were partially offset by one residential mortgage loan being transferred to other real estate owned during the quarter. At March 31, 2014 , nonaccrual loans to rental, real estate, and land developers totaled $3.6 million; to construction businesses totaled $201,000; to accommodation and food services totaled $23,000; and to all other commercial industry types totaled $82,000.

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Total nonperforming assets were $6.0 million at March 31, 2014 compared to $6.1 million at December 31, 2013 . At March 31, 2014 , our nonperforming assets to total assets ratio was stable at 1.15% compared to 1.16% at December 31, 2013 with the $281,000 increase in nonperforming loans offset by a $339,000 decrease in other real estate owned. During the first three months of 2014 , one residential property was transferred into other real estate owned with a recorded fair value of $32,000 at the date of transfer and five properties were sold resulting in proceeds of $289,000. Write-downs totaling $73,000 were recorded during the three months ended March 31, 2014 on other real estate owned properties.

Goodwill and Other Intangible Assets: Our goodwill totaled $8.4 million at March 31, 2014 and December 31, 2013 . Accounting standards require goodwill to be tested for impairment on an annual basis, or more frequently if circumstances indicate that an asset might be impaired. Impairment exists when a reporting unit’s carrying value of goodwill exceeds its fair value, which is determined through a two-step impairment test. Step 1 includes the determination of the carrying value of the reporting unit, including the existing goodwill and intangible assets, and estimating the fair value of the reporting unit. If the carrying amount of a reporting unit exceeds its fair value, we are required to perform a second step to the impairment test. The most recent annual impairment review of our goodwill previously recorded was performed in February 2014 as of October 31, 2013. Based on this evaluation, management determined that the fair value of the reporting unit, which is defined as LaPorte Bancorp, Inc. as a whole, exceeded the book value of the goodwill, based on the opinion of an independent expert in valuations, such that the sales price per common share would exceed our book value per common share. Accordingly, no goodwill impairment was recognized during first three months of 2014.

Our stock price has increased from the previous analysis and the Company continues to be profitable, therefore, management determined that an updated analysis from an independent third party as of the end of the first quarter of 2014 was not necessary. As our market price per common share is currently less than our tangible book value per common share, it is reasonably possible that management may conclude that goodwill is impaired as a result of a future assessment. If our goodwill is determined to be impaired, the related charge to earnings could be material.

Deposits: Total deposits decreased $3.4 million , or 1.0% , to $343.3 million at March 31, 2014 compared to $346.7 million at December 31, 2013 due to decreases in certificates of deposit and IRA balances partially offset by increases in money market and savings deposits.

Certificates of deposit and IRA balances decreased $12.9 million, or 11.0%, to $104.8 million at March 31, 2014 compared to $117.8 million at December 31, 2013 due to the maturity of brokered time deposits of $9.7 million and a decrease in customer time deposits of $3.2 million. Although management believes the interest rates offered on certificates of deposit have remained competitive, we have positioned our non-brokered deposits at or below the average rates offered in the market due to the pricing on alternative sources of funding.

Money market deposits increased $5.7 million, or 9.1%, to $68.7 million at March 31, 2014 from $62.9 million at December 31, 2013 primarily due to a $5.0 million deposit into a public fund account during the first quarter of 2014. Savings deposits increased $3.3 million, or 5.4%, to $64.4 million at March 31, 2014 compared to $61.1 million at December 31, 2013 . Noninterest-bearing and interest-bearing demand deposits totaling $50.8 million and $54.6 million, respectively, at March 31, 2014 were relatively stable compared to $51.0 million and $53.9 million, respectively, at December 31, 2013 .

Borrowed Funds: Total borrowed funds increased $2.3 million , or 2.4% , to $96.6 million at March 31, 2014 compared to $94.3 million at December 31, 2013 due to an increase of $6.6 million in overnight borrowings which was utilized to fund the higher warehouse lending balances at March 31, 2014. Partially offsetting this increase was a $4.3 million decrease in short-term variable rate Federal Home Loan Bank of Indianapolis (“FHLBI”) advances. The Bank has unsecured lines of credit at First Tennessee Bank totaling $15.0 million and at Zions Bank totaling $9.0 million. During the three months ended March 31, 2014 , the Company did not utilize the First Tennessee Bank line. The Company utilized the Zions Bank line during the three months ended March 31, 2014 resulting in an outstanding balance of $9.0 million at March 31, 2014 , the maximum amount borrowed during the quarter. The average outstanding balance with Zions Bank for the first quarter of 2014 was $439,000 at an average rate of 40 basis points.

Total Shareholders’ Equity: Total shareholders’ equity increased $745,000 , or 0.9% , to $81.0 million at March 31, 2014 compared to $80.2 million at December 31, 2013 primarily due to net income of $850,000 and a $1.1 million decrease in accumulated other comprehensive loss as unrealized securities losses decreased during the first quarter of 2014. These increases were partially offset by dividends declared totaling $236,000 and repurchases of 101,485 shares of the Company’s common stock totaling $1.1 million in accordance with its repurchase plans. During January 2014, the Company repurchased the final 14,800 shares authorized under its first plan announced in October 2013. In addition, the Company repurchased 86,685 shares under its second plan announced in January 2014.

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Comparison of Operating Results for Three Month Periods Ended March 31, 2014 and March 31, 2013

Net Income: Net income totaled $850,000 , or $0.15 per diluted share, for the three months ended March 31, 2014 compared to $1.1 million , or $0.19 per diluted share, for the three months ended March 31, 2013 . The decrease in net income was primarily due to decreases in noninterest income totaling $385,000 and net interest income of $84,000 .

Net Interest Income: Net interest income decreased $84,000 , or 2.4% , to $3.5 million for the three months ended March 31, 2014 compared to $3.6 million for the same prior year period. Net interest margin decrease d to 3.06% for the three months ended March 31, 2014 compared to 3.27% for the same prior year period. The decrease in the net interest margin was primarily due to a decrease in interest and fee income on loans which was partially offset by increases in interest and dividend income on investment securities and FHLB stock and decreases in interest expense on deposits and borrowings.

Interest and Dividend Income: Interest and dividend income decrease d $163,000 , or 3.7% , to $4.3 million for the three months ended March 31, 2014 compared to $4.4 million for the prior year period. The average yield on interest earning assets decreased 32 basis points to 3.75% for the three months ended March 31, 2014 from 4.07% for the prior year period. These decreases were primarily attributable to a decrease in interest and fee income on loans totaling $327,000 related to a 5.6% decrease in the average balance of loans and a 20 basis point decrease in the average yields earned on loans as interest rates continue to remain low. Increased interest and dividend income from investment securities and FHLB stock totaling $166,000 during the 2014 quarter partially offset the decreased loan interest income.

Interest and fee income on mortgage warehouse loans decreased $337,000, or 24.8%, in the first quarter of 2014 when compared to the prior year period primarily due to a 16.1% decrease in the average outstanding balance and a 57 basis point decrease in the average yield on such loans. The first quarter of 2014 was impacted by the industry-wide decrease in mortgage loan originations and refinances as new regulations were implemented related to mortgage lending. In addition, mortgage interest rates were higher during the first quarter of 2014 compared to the first quarter of 2013, which also resulted in fewer purchase and refinance transactions. Although the interest rates charged on these loans are tied to prime, the spread has narrowed due to the competitive landscape for this line of business.

Interest and fee income from commercial and industrial loans decreased $47,000 for the three months ended March 31, 2014 when compared to the prior year period due to a $2.2 million, or 11.2%, decrease in the average outstanding balance combined with a 45 basis point decrease in the average yields on such loans. New and renewed loans have been originated with lower interest rates when compared to loans currently in the portfolio.

Interest and fee income on automobile and other consumer loans decreased $21,000, or 27.5%, for the three months ended March 31, 2014 compared to the prior year period, primarily due to a decrease in the average outstanding balance of $493,000, as well as a decrease in the average yield of 121 basis points. The decrease in the average outstanding balance was primarily due to the continued runoff of the indirect automobile portfolio as the Company has elected to exit that line of business. The decrease in the average yield was due to the lower interest rates earned on new consumer loans originated combined with the decrease in the balances of our indirect automobile portfolio, which historically had higher interest rates when compared to the other loans within this portfolio.

Interest and fee income on commercial real estate loans increased $54,000, or 5.4%, for the three months ended March 31, 2014 compared to the same prior year period, primarily due to an increase in the average outstanding balances of $4.1 million, or 5.3%. The increase was primarily attributable to new loan originations made during the first quarter of 2014.

Interest and fee income on commercial construction loans increased $40,000, or 174.5%, for the three months ended March 31, 2014 compared to the same prior year period, primarily due to an increase in the average outstanding balance of $2.1 million, or 105.6%, which included one new loan totaling $575,000 originated during the first quarter of 2014.

Interest income from taxable securities increased $76,000 , or 16.5%, for the three months ended March 31, 2014 compared to the same prior year period. The $23.4 million, or 25.0%, increase in the average outstanding balance during the 2014 period compared to the prior year period provided the increase in interest income, however the new investments and the cash flow derived from the existing portfolio was reinvested at lower interest rates resulting in a decrease in the average yield on these securities of 14 basis points for the 2014 time period.

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Interest income from tax exempt securities increased $72,000 , or 21.1%, for the three months ended March 31, 2014 compared to the same prior year period due to an increase in the average outstanding balance of $12.1 million, or 30.4%, and was partially offset by a decrease in the average yield of 25 basis points as tax exempt securities purchases have been at significantly lower interest rates since the first quarter of 2013.

Dividend income from FHLBI stock increased $18,000 , or 52.9%, for the three months ended March 31, 2014 compared to the same prior year period and was attributable to an increase in the dividend yield of 119 basis points as a result of a special dividend declared by the FHLBI during the 2014 period.

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, 2014 and 2013 . All average balances are daily average balances. The annualized yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or expense.  

	For the Three Months Ended March 31,
	2014											2013
	(Dollars in thousands)
	Average Outstanding Balance				Interest				Annualized Yield/Cost			Average Outstanding Balance				Interest				Annualized Yield/Cost
Assets:
Loans (1)	$	259,060			$	3,250			5.02	%		$	274,292			$	3,577			5.22	%
Taxable securities	116,763				538				1.84			93,381				462				1.98
Tax exempt securities (2)	52,080				414				3.18			39,938				342				3.43
Federal Home Loan Bank of Indianapolis stock	4,375				52				4.75			3,817				34				3.56
Federal funds sold and other interest-earning deposits	23,470				23				0.39			24,581				25				0.40
Total interest earning assets	455,748				4,277				3.75			436,009				4,440				4.07
Non-interest earning assets	43,501											39,368
Total assets	$	499,249										$	475,377
Liabilities and equity:
Savings deposits	$	62,689			9				0.06	%		$	57,350			8				0.06	%
Money market accounts	67,477				62				0.37			63,841				66				0.41
Interest-bearing checking	53,780				29				0.22			52,924				40				0.30
CDs and IRAs	110,560				377				1.36			114,703				464				1.62
Total interest-bearing deposits	294,506				477				0.65			288,818				578				0.80
FHLB advances	62,458				253				1.62			40,495				227				2.24
Subordinated debentures	5,155				65				5.04			5,155				69				5.35
Short-term borrowings	439				—				—			33				—				—
Total interest-bearing liabilities	362,558				795				0.88			334,501				874				1.05
Non-interest bearing deposits	50,108											50,934
Other liabilities	5,511											5,699
Total liabilities	418,177											391,134
Shareholders’ equity	81,072											84,243
Total liabilities & shareholders’ equity	$	499,249										$	475,377
Net interest income					$	3,482										$	3,566
Net interest rate spread									2.87	%										3.02	%
Net interest margin									3.06											3.27

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

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

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Interest Expense: Interest expense decrease d $79,000 , or 9.0% , to $795,000 for the three months ended March 31, 2014 compared to $874,000 for the same prior year period, primarily attributable to a decrease in the average cost of interest bearing liabilities of 17 basis points which was partially offset by an increase in the average outstanding balance of interest bearing liabilities of $28.1 million .

Interest expense on certificates of deposit and IRA time deposits decrease d $87,000 , or 18.8% , for the three months ended March 31, 2014 compared to the same prior year period, primarily due to a decrease in average outstanding balances of $4.1 million combined with a 26 basis point decrease in the average cost of these deposits. The Company has been able to shift a significant percentage of its deposit mix from fixed, higher cost certificates of deposits into lower cost money market, savings, and interest bearing checking accounts, which has assisted in lowering the Company’s average cost of funds. Interest expense on money market deposits decrease d $11,000 , or 27.5% , for the three months ended March 31, 2014 compared to the same prior year period due to a decrease in the average cost of these deposits of eight basis points which more than offset the increase of $856,000 in the average outstanding balance of these accounts during the same period.

Interest expense on FHLBI advances increase d $26,000 , or 11.5% , to $253,000 for the three months ended March 31, 2014 compared to $227,000 for the same prior year period, attributable to an increase in the average outstanding balance of FHLBI advances of $22.0 million and partially offset by a decrease in the average cost of these borrowings of 62 basis points. As advances have matured, the Company paid off a portion of the FHLBI advances with excess liquidity and renewed a portion of such borrowings at lower current market interest rates.

Provision for Loan Losses: We recognize a provision for loan losses, which is charged to earnings, at a level necessary to absorb known and inherent losses that are both probable and reasonably estimable at the date of the financial statements. 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 portfolio, adverse situations that may affect our borrowers’ ability to repay, the estimated fair value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available or as future events occur. After an evaluation of these factors, management determined that a provision for loan losses was not necessary for the three months ended March 31, 2014 compared to $3,000 for the same prior year period. The Company’s analysis of the allowance for loan losses for the first quarter of 2014 reflected continued improvement in asset quality metrics and various trends, including classified assets, charge-off ratios, delinquencies, and current economic conditions. Net charge-offs for the first quarter of 2014 totaled $37,000 compared to $91,000 for the first quarter of 2013.

 

Noninterest Income: Noninterest income decreased $385,000 , or 42.5% , to $521,000 for the three months ended March 31, 2014 compared to $906,000 for the same prior year period. The primary reason for the decrease in noninterest income was due to a $221,000 decrease in gain on mortgage banking activities as mortgage activity declined during the first quarter of 2014 as higher mortgage interest rates slowed refinance and purchase activity. Net gains on sales of securities decreased $243,000 for the three months ended March 31, 2014 when compared to the same prior year period due to fewer sales during the 2014 period.

Noninterest Expense: Noninterest expense increased $58,000 , or 1.9% , to $3.1 million for the three months ended March 31, 2014 compared to $3.0 million for the prior year period. This increase in noninterest expense was primarily due to an increase of $117,000 in salaries and wages expense, including an increase in payroll expense of $61,000 related to annual merit pay increases and an increase in full time equivalent employees as open positions in the first quarter of 2013 were filled prior to the end of 2013. In addition, deferred loan origination costs decreased $63,000 during the first quarter of 2014 due to lower loan originations compared to the same period in 2013. Partially offsetting these changes was a decrease of $28,000 in commission expense due to the lower volume of mortgage loan production.

We remain focused on increasing efficiencies and controlling operating expenses. After an extensive review of growth strategies and branch usage trends for our full service branch in Rolling Prairie, Indiana, we closed the branch during the first quarter of 2014. The decision to close this branch was further supported by the overall costs to maintain this older branch building and its close proximity to our other branch locations, which are within ten miles of this branch and would be able to service the needs of this community.

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Income Taxes: Income tax expense decreased $286,000 , or 85.6% , to $48,000 for the three months ended March 31, 2014 from $334,000 for the same prior year period, primarily due to a decrease in income before taxes of $524,000 , as well as a decrease in our effective tax rate. The effective tax rate for the three months ended March 31, 2014 was 5.3% compared to 23.5% for the same prior year period. The Company’s effective tax rate has been favorably impacted by its tax planning strategies including the captive insurance company which was formed in December 2013, the real estate investment trust company established in January 2013, and with an increase in income from bank owned life insurance.

Liquidity and Capital Resources

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

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

Our liquid assets, defined as cash and due from financial institutions, interest earning time deposits in other financial institutions, and the market value of unpledged securities available-for-sale, totaled $132.9 million at March 31, 2014 and constituted 25.3% of total assets at that date, compared to $131.4 million , or 24.9% , of total assets at December 31, 2013 .

The Company also maintains lines of credit with the Federal Home Loan Bank. The total of these lines of credit were $85.5 million at March 31, 2014 , of which $82.5 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, 2014 , we had $117.2 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, 2014 , $37.5 million of these advances were due within one year, and $45.0 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, 2014 , the Company had no outstanding overnight borrowings with the Federal Reserve Bank discount window. The Company’s borrowing capacity at the Federal Reserve Bank discount window is based on the collateral value of pledged securities which totaled $3.0 million at March 31, 2014 .

The Company has an accommodation from First Tennessee Bank National Association (“FTN”) to borrow federal funds up to the amount of $15.0 million . This federal funds accommodation is not a confirmed line or loan, and FTN may cancel such accommodation at any time, in whole or in part, without cause or notice, in its sole discretion. At March 31, 2014 and for the three months ended March 31, 2014 , the Company did not borrow from FTN.

The Company also has an agreement with Zions First National Bank (“Zions”) for an unsecured line of credit to borrow federal funds up to $9.0 million . This line of credit was established at the discretion of Zions and may be terminated at any time in its sole discretion. At March 31, 2014, the Company’s borrowings from Zions totaled $9.0 million with average outstanding borrowings during the quarter of $439,000 .

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 19.3% and 18.2% , respectively, at March 31, 2014 , and was “well-capitalized” under the regulatory guidelines.

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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, 2014 , the Bank’s leverage ratio was 13.1% . 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.

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Management of Interest Rate Risk

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

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

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

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

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

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Quantitative Analysis

The table below sets forth, as of March 31, 2014 , the estimated changes in the net interest margin and the economic value of equity that would result from the designated changes in the United States Treasury yield curve over a 12 month non-parallel ramp for The LaPorte Savings Bank. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results.

Changes in Interest  Rates (basis points) (1)						Estimated Increase (Decrease) in NIM											Estimated Increase (Decrease) in EVE							EVE as Percentage of  Economic Value of Assets
		Estimated NIM (2)				Amount				Percent			Estimated EVE (3)				Amount				Percent			EVE  Ratio   (4)			Changes in Basis Points
(Dollars in thousands)
+300		$	16,167			$	237			1.49	%		$	69,408			$	(21,064	)		(23.28	)%		14.07	%		(3.27	)%
+200		16,122				192				1.21			78,626				(11,846		)		(13.09	)		15.64			(1.70	)
+100		16,035				105				0.66			85,936				(4,536		)		(5.01	)		16.78			(0.56	)
0		15,930				—				—			90,472				—				—			17.34			—
-100		15,458				(472		)		(2.96	)		89,835				(637		)		(0.70	)		16.96			(0.38	)

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

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

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

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

The table above indicates that at March 31, 2014 , in the event of a 100 basis point decrease in interest rates over a 12 month non-parallel ramp, we would experience a 2.96% decrease in net interest income. In the event of a 100 basis point increase in interest rates over a 12 month non-parallel ramp, the net interest income would increase 0.66% .

The table above indicates that at March 31, 2014 , in the event of a 100 basis point decrease in interest rates over a 12 month non-parallel ramp, we would experience a 0.70% decrease in economic value of equity. In the event of a 100 basis point increase in interest rates over a 12 month non-parallel ramp, the economic value would decrease 5.01% in economic value of equity.

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

The Company has taken steps to address its exposure to rising interest rates. For instance management executed an interest rate swap to address the exposure on its $5.0 million floating rate trust preferred debenture in April 2009, by swapping for a fixed five year effective rate of 5.54% which matured on March 26, 2014. In October 2009, the Company executed a $10.3 million interest rate swap which took $10.3 million five year floating rate brokered certificates of deposit and swapped for a fixed five year effective rate of 3.19%. In February 2010, The LaPorte Savings Bank executed two interest rate swaps against $15.0 million in maturing FHLB advances. The first interest rate swap was against a $10.0 million adjustable rate advance tied to the three month LIBOR plus 0.25% for six years at an effective fixed rate of 3.69% and began in July 2010. The second interest rate swap was against a $5.0 million adjustable rate advance tied to the three month LIBOR plus 0.22% for five years with an effective fixed rate of 3.54% and began in September 2010. We will continue to look for opportunities to address our exposure to rising interest rates utilizing hedging strategies in the future. We are also continuing to sell most of the fixed rate one- to-four family residential real estate loans originated and continuing to originate the majority of commercial real estate loans at a variable rate with interest rate floors attached.

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ITEM 4.	CONTROLS AND PROCEDURES

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

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

ITEM 1.	LEGAL PROCEEDINGS

As of March 31, 2014 , 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, 2014 , there were no material changes to the “Risk Factors” disclosed in the Company’s Annual Report for the year ended December 31, 2013 on Form 10-K filed on March 18, 2014 . However, the risks described in our 2013 Annual Report on Form 10-K are not the only risks that we face. Additional risks not presently known to us, or that we currently deem immaterial, may also adversely affect our business, financial condition or results of operations.

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

(a)	Not applicable

(b)	Not applicable

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

Period		Total Number of Shares Purchased			Average Price Paid Per Share				Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs			Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (1)
January 1-31, 2014		14,800			$	10.82			14,800			150,000
February 1-28, 2014		35,000			10.94				35,000			115,000
March 1-31, 2014		51,685			10.95				51,685			63,315
Total		101,485							101,485

(1)

The Company publicly announced on October 22, 2013 a repurchase program for 310,809 shares. Prior to January 1, 2014, 296,009 shares had been repurchased under that program. A total of 14,800 shares were repurchased under this program during the first quarter of 2014. On January 28, 2014, the Company publicly announced a new share repurchase program for an additional 150,000 shares. A total of 86,685 shares were repurchased under this program during the first quarter of 2014.

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES

None

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ITEM 4.	MINE SAFETY DISCLOSURES

Not applicable

ITEM 5.	OTHER INFORMATION

None

ITEM 6.	EXHIBITS

		Description
31.1		Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
31.2		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*
32.1		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, 2014 and December 31, 2013, (ii) the Consolidated Statements of Income for the three months ended March 31, 2014 and 2013, (iii) the Consolidated Statements of Comprehensive Income for the three months ended March 31, 2014 and 2013, (iv) the Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2014 and 2013, (v) the Consolidated Statements of Cash Flows for the three months ended March 31, 2014 and 2013, and (vi) the notes to the Consolidated Financial Statements.

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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.
Date:	May 9, 2014		/s/ Lee A. Brady
			Lee A. Brady,
			Chief Executive Officer
Date:	May 9, 2014		/s/ Michele M. Thompson
			Michele M. Thompson,
			President and Chief Financial Officer

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