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EX-32 - CERTIFICATION PURSUANT TO SECTION 906 - TECHE HOLDING COex32.htm
EX-31.2 - CERTIFICATION CFO PURSUANT TO SECTION 302 - TECHE HOLDING COex31-2.htm
EX-31.1 - CERTIFICATION CEO PURSUANT TO SECTION 302 - TECHE HOLDING COex31-1.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended
December 31, 2010
 

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

For the transition period from _________________________ to _________________________

Commission file number 1-13712


TECHE HOLDING COMPANY
(Exact name of registrant as specified in its charter)

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

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

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

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

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

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

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o   No x
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: February 7, 2011.

Class
   2,079,767  
$.01 par value common stock
 
Outstanding Shares
 

 
 
 
 

 
 
TECHE HOLDING COMPANY

QUARTERLY REPORT ON FORM 10-Q

INDEX


   
Page
       
PART I.
FINANCIAL INFORMATION
     
       
Item 1.
Financial Statements
     
       
Unaudited Consolidated Balance Sheets as of December 31, 2010 and September 30, 2010
 
3
 
Unaudited Consolidated Statements of Income for the three months ended December 31, 2010 and 2009
 
4
 
Unaudited Consolidated Statements of Cash Flows for the three months ended December 31, 2010 and 2009
 
5
 
Notes to Unaudited Consolidated Financial Statements
 
6
 
         
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
24
 
         
Item 3.
Quantitative and Qualitative Disclosure About Market Risk
 
30
 
         
Item 4T
Controls and Procedures
 
  30
 
         
PART II.
OTHER INFORMATION
     
         
Item 1.
Legal Proceedings
 
30
 
         
Item 1A.
Risk Factors
 
30
 
         
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
31
 
         
Item 3.
Defaults Upon Senior Securities
 
31
 
         
Item 4.
[Reserved]
 
31
 
         
Item 5.
Other Information
 
31
 
         
Item 6.
Exhibits
 
31
 
         
Signatures
       

2

 
 

 
TECHE HOLDING COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)


   
December 31,
2010
   
September 30,
2010*
 
ASSETS
 
(unaudited)
       
             
Cash and due from banks
  $ 13,299     $ 15,420  
Interest-bearing deposits
    22,073       25,235  
Securities available-for-sale at fair value
    13,914       14,996  
Securities held-to-maturity—at amortized cost (estimated fair value of $63,071 and $61,711)
    61,119       59,566  
Loans receivable—net of allowance for loan losses of $9,953 and $9,256
    583,778       586,635  
Accrued interest receivable
    2,478       2,480  
Investment in Federal Home Loan Bank stock, at cost
    4,766       5,402  
Real estate owned, net
    2,079       1,181  
Prepaid expenses and other assets
    7,030       6,898  
Goodwill
    3,647       3,647  
Life insurance contracts
    13,458       13,310  
Premises and equipment, net
    26,060       26,754  
                 
TOTAL ASSETS
  $ 753,701     $ 761,524  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
                 
Deposits
  $ 583,439     $ 579,355  
Advances from Federal Home Loan Bank
    87,756       100,017  
Advance payments by borrowers for taxes and insurance
    1,737       2,463  
Accrued interest payable
    372       429  
Accounts payable and other liabilities
    3,900       3,747  
                 
TOTAL LIABILITIES
    677,204       686,011  
                 
COMMITMENTS AND CONTINGENCIES
               
                 
STOCKHOLDERS’ EQUITY:
               
Preferred stock, 5,000,000 shares authorized, none issued
    -       -  
Common stock, $.01 par value, 10,000,000 shares authorized; 4,676,000 and 4,672,567 shares issued
    47       47  
Additional paid-in capital
    52,771       52,685  
Retained earnings
    75,032       73,942  
Unearned ESOP shares
    (260 )     (326 )
Treasury stock, 2,597,983 and 2,591,081 shares - at cost
    (51,088 )     (50,862 )
Accumulated other comprehensive loss on held-to-maturity securities
    (428 )     (428 )
Accumulated other comprehensive income on available for sale securities
    423       455  
                 
TOTAL STOCKHOLDERS’ EQUITY
    76,497       75,513  
                 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 753,701     $ 761,524  

See Notes to Unaudited Consolidated Financial Statements.

*  derived from audited financial statements
 
3
 
 
 

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

   
Three Months Ended
 
   
December 31,
 
   
2010
   
2009
 
INTEREST INCOME
           
Interest and fees on loans
  $ 9,364     $ 9,730  
Interest and dividends on investments
    496       695  
Other interest income
    143       75  
TOTAL INTEREST INCOME
    10,003       10,500  
INTEREST EXPENSE:
               
Deposits
    1,463       1,930  
Advances from Federal Home Loan Bank
    1,079       1,137  
TOTAL INTEREST EXPENSE
    2,542       3,067  
NET INTEREST INCOME
    7,461       7,433  
                 
PROVISION FOR LOAN LOSSES
    1,150       1,196  
                 
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
    6,311       6,237  
                 
NON-INTEREST INCOME:
               
Total other-than temporary impairment losses
    -       (366 )
Portion of impairment losses recognized in other comprehensive loss
    -       262  
Net impairment losses recognized in earnings
    -       (104 )
Service charges and other
    3,680       3,816  
Gain on sale of premises and equipment
    103       -  
Gain on securities
    -       68  
Gain on sale of loans
    9       -  
Other income
    189       198  
TOTAL NON-INTEREST INCOME
    3,981       3,978  
                 
NON-INTEREST EXPENSE:
               
Compensation and employee benefits
    3,998       3,998  
Occupancy expense
    1,380       1,523  
Marketing and professional
    740       661  
FDIC premiums and assessment
    223       394  
Other operating expenses
    1,242       1,065  
TOTAL NON-INTEREST EXPENSE
    7,583       7,641  
                 
INCOME BEFORE INCOME TAXES
    2,709       2,574  
INCOME TAXES
    885       841  
NET INCOME
  $ 1,824     $ 1,733  
BASIC EARNINGS PER COMMON SHARE
  $ 0.88     $ 0.83  
DILUTED EARNINGS PER COMMON SHARE
  $ 0.87     $ 0.82  

See Notes to Unaudited Consolidated Financial Statements.
 
4
 
 
 

 
 
 
TECHE HOLDING COMPANY
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

   
For the Three Months
Ended December 31,
 
   
2010
   
2009
 
CASH FLOWS (USED) PROVIDED BY OPERATING ACTIVITIES:
               
Net income
 
$
1,824
   
$
1,733
 
Adjustments to reconcile net income to net cash provided (used) by operating activities:
               
Accretion of discount and amortization of premium on investments and mortgage-backed securities
   
(72
)
   
(38
)
Impairment of debt securities
   
-
     
104
 
Provision for loan losses
   
1,150
     
1,196
 
Gain on sale of OREO
   
(16
)
   
(22
)
        Gain on sale of equity securities
   
-
     
(68
)
        Gain on sale of land
   
(103
)
   
-
 
Gain on sale of loans
   
(9
)
   
-
 
Depreciation
   
358
     
384
 
Excess tax benefits from share-based payment arrangements
   
(31
)
   
(36
)
Change in accounts payable and other liabilities
   
153
     
(381
)
Change in life insurance contracts
   
(148
)
   
(149
)
Change in prepaid expenses and other assets
   
(132
)
   
(3,519
)
Change in accrued interest payable
   
(57
)
   
(286
)
Stock-based compensation
   
109
     
84
 
Other items– net
   
(52
)
   
594
 
Net cash (used) provided by operating activities
   
2,974
     
(404
)
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Proceeds from sale of equity securities
   
-
     
355
 
Principal repayments of mortgage-backed securities available for sale
   
1,071
     
1,539
 
Principal repayments of securities held to maturity
   
8,759
     
12,527
 
Purchase of securities held to maturity
   
(10,230
)
   
-
 
Net loan originations
   
(412
)
   
(6,487
)
Purchase of loans
   
-
     
(725
)
Proceeds from sale of loans
   
632
     
-
 
Redemption (purchase) of FHLB stock
   
636
     
(66
)
Proceeds from sale of land
   
499
     
-
 
Proceeds from sale of OREO
   
614
     
384
 
Purchase of premises and equipment
   
(60
)
   
(519
)
Net cash provided by investing activities
   
1,509
     
7,008
 
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Repayment of (loan to) ESOP
   
65
     
65
 
Net (decrease) increase in deposits
   
4,084
     
(9,978
)
Net increase (decrease) in FHLB advances
   
(12,261
)
   
2,823
 
Net decrease in advance payments by borrowers for taxes and insurance
   
(726
)
   
(822
)
Dividends paid
   
(733
)
   
(733
)
Excess tax benefits from share-based payment arrangements
   
31
     
36
 
Purchase of common stock for treasury
   
(226
)
   
--
 
Net cash used by financing activities
   
(9,766
)
   
(8,609
)
                 
NET DECREASE  IN CASH
   
(5,283
)
   
(2,005
)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
   
40,655
     
23,675
 
CASH AND CASH EQUIVALENTS, END OF PERIOD
 
$
35,372
   
$
21,670
 
                 
Supplemental schedule of noncash investing activities:
               
Transfer from loans to real estate owned
 
$
1,563
   
$
726
 
Loans originated to finance sale of real estate owned
   
67
     
1,311
 
 
See Notes to Unaudited Consolidated Financial Statements.
 
5
 
 
 

 
 
 
TECHE HOLDING COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - PRINCIPLES OF CONSOLIDATION

The consolidated financial statements as of December 31, 2010 and September 30, 2010 and for the three months ended December 31, 2010 and 2009, include the accounts of Teche Holding Company (the “Company”) and its subsidiary, Teche Federal Bank (the “Bank”). The Company’s business is conducted principally through the Bank. All significant inter-company accounts and transactions have been eliminated in consolidation.

NOTE 2 - BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include all information necessary for a complete presentation of consolidated financial condition, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America. However, all adjustments, consisting of normal recurring accruals, which, in the opinion of management, are necessary for a fair presentation of the consolidated financial statements have been included. The results of operations for the three months ended December 31, 2010 are not necessarily indicative of the results that may be expected for the entire fiscal year or any other period. These financial statements should be read in conjunction with the audited consolidated financial statements and the accompanying notes thereto included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2010.

NOTE 3 - INCOME PER SHARE

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

Following is a summary of the information used in the computation of basic and diluted income per common share for the three months ended December 31, 2010 and 2009 (in thousands).

 
Three Months Ended
 
December 31,
 
2010
 
2009
Weighted average number of common shares outstanding - used in computation of basic income per common share
 
2,080
   
2,098
Effect of dilutive securities:
           
Stock options
   
9
   
18
Weighted average number of common shares outstanding plus effect of dilutive securities - used in computation of diluted net income per common share
   
2,089
   
2,116
 
6
 
 
 

 
 
For the three months ending December 31, 2010 and 2009, net income for determining diluted earnings per share was equivalent to net income. Options to purchase shares that have been excluded from the determination of diluted earnings per share because they are antidilutive (the exercise price is higher than the current market price) amount to approximately 190,000 for the three months ended December 31, 2010 and 192,000 for the three months ended December 31, 2009.

NOTE 4 - COMPREHENSIVE INCOME

Comprehensive income includes net income and other comprehensive income which includes unrealized gains and losses on securities.  Following is a summary of the Company’s comprehensive income for the three months ended December 31, 2010 and 2009 (in thousands).

   
For Three Months
 
   
Ended December 31,
 
   
2010
   
2009
 
                 
Net income
 
$
1,824
   
$
1,733
 
Reclassification of realized losses (gains), net of  tax
   
-
     
(45
)
Noncredit portion of OTTI losses on held-to-maturity securities, net of tax
   
-
     
(173
)
Unrealized gains (losses), net of tax
   
(32
)
   
(61
)
Total comprehensive income
 
$
1,792
   
$
1,454
 


NOTE 5 - NEW ACCOUNTING PRONOUNCEMENTS
 
ASC (860) Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, will require more information about transfers of financial assets, including securitization transactions, and where companies have continuing exposure to the risks related to transferred financial assets. This guidance also eliminates the concept of a qualifying special-purpose entity, and changes the requirements for derecognizing financial assets and requires additional disclosures.
 
ASC (860) was adopted by the company on October 1, 2010.  Earlier application is prohibited. The recognition and measurement provisions shall be applied to transfers that occur on or after the effective date.  The adoption of this standard did not have a material impact on the consolidated financial statements.
 
ASU-Accounting Standards Update (2010-06) Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements (Jan 2010).   This update provides amendments to Topic 820 that will provide more robust disclosures about (1) the different classes of assets and liabilities measured at fair value, (2) the valuation techniques and inputs used, (3) the activity in Level 3 fair value measurements, and (4) the transfers between Levels 1, 2, and 3. The update is effective for interim and annual reporting periods beginning after December 15, 2009 except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements.  Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The Company adopted the fair value disclosures guidance on January 1, 2010, except for the gross presentation of the Level 3 rollforward information which is not required to be adopted by the Company until October 1, 2011.  The adoption requires additional disclosure.
 
7
 
 
 
 

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

To achieve these objectives, an entity should provide disclosures on a disaggregated basis on two defined levels: (1) portfolio segment; and (2) class of financing receivable. The ASU makes changes to existing disclosure requirements and includes additional disclosure requirements about financing receivables, including:  (1) credit quality indicators of financing receivables at the end of the reporting period by class of financing receivables; (2) the aging of past due financing receivables at the end of the reporting period by class of financing receivables; and (3) the nature and extent of troubled debt restructurings that occurred during the period by class of financing receivables and their effect on the allowance for credit losses.

For public entities, the disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010.   The adoption of this standard required additional disclosures.

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

NOTE 6 – FAIR VALUE MEASUREMENTS
 
The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Available for sale securities are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as securities held-to-maturity, loans held for sale, loans held for investment and certain other assets. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting, other than temporary impairment accounting or impairments of individual assets.
 
A three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value as follows:
 
Level 1 - Observable inputs such as quoted prices in active markets;
 
Level 2 - Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
 
Level 3 - Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
 
Following is a description of valuation methodologies used for assets recorded at fair value.
 
8
 
 
 

 
 
Investment Securities
 
Securities available for sale are valued at quoted market prices where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable securities. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds. Securities classified as Level 3 include asset-backed securities in less liquid markets. Securities held to maturity are valued using discounted cash flow models that use assumptions about prepayment speeds, coupon default rates, discount rates and timing and other assumptions that may affect the amounts of cash flows.
 
Loans
 
The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with ASC (310), “Accounting by Creditors for Impairment of a Loan.” The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At December 31, 2010, substantially all of the impaired loans were evaluated based on the fair value of the collateral less estimated costs to sell.  Impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy.  When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.
 
Other Real Estate Owned
 
OREO, consisting of properties obtained through foreclosure or in satisfaction of loans, is reported at the lower of cost or fair value, determined on the basis of current appraisals, comparable sales, and other estimates of value obtained principally from independent sources, adjusted for estimated selling costs (Level 2). At the time of foreclosure, any excess of the loan balance over the fair value of the real estate held as collateral is treated as a charge against the allowance for loan losses. Gains or losses on sale and generally any subsequent adjustments to the value are recorded as a component of OREO expense.
 
9
 
 
 

 
 
 
   
Fair Value
   
Fair Value Hierarchy
 
   
At December 31, 2010
   
Level 1
   
Level 2
   
Level 3
 
(In thousands)
                       
Assets valued on a recurring basis:
                       
Mortgage-backed securities:
                       
  Government National Mortgage Assoc.
  $ 2,031     $ -     $ 2,031     $ -  
  Federal Home Loan Mortgage Corp.
    4,669       -       4,669       -  
  Federal National Mortgage Assoc.
    4,259       -       4,259       -  
      10,959       -       10,959       -  
                                 
CMOs:
                               
  Government National Mortgage Assoc.
    2,452       -       2,452       -  
Other equity securities
    503       503       -       -  
Total AFS securities
  $ 13,914     $ 503     $ 13,411     $ -  
 
Assets valued on a non-recurring basis:
                               
Impaired loans
    8,114       -       8,114       -  
Total non-recurring
  $ 8,114     $ -     $ 8,114     $ -  


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

The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation.  Fair value is best determined based upon quoted market prices.  However, in many instances, there are no quoted market prices for the Company’s various financial instruments.  In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques.  Those techniques are significantly affected by the
 
10
 
 
 

 
 
assumptions used, including the discount rate and estimates of future cash flows.  Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.  ASC 825 excludes certain financial instruments and all non-financial instruments from its disclosure requirements.  Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

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

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

Investment Securities – See discussion in the beginning of Note 6 on the valuation of fair value of investment securities.  Investment securities’ fair value equals quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.

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

Federal Home Loan Bank Stock - Federal Home Loan Bank (FHLB) stock is recorded at cost and is periodically reviewed for impairment. No ready market exists for the FHLB stock.  It has no quoted market value and is carried at cost.  Cost approximates fair market value based upon the redemption requirements of the FHLB, and this investment is not considered impaired at December 31, 2010.   The FHLB of Dallas is still redeeming stock.

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

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

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

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

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

11

 
 

 

The estimated fair values of the Company’s financial instruments are as follows at December 31, 2010 and September 30, 2010:

   
December 31, 2010
   
September 30, 2010
 
   
Carrying
   
Estimated
   
Carrying
   
Estimated
 
   
Amount
   
Fair Value
   
Amount
   
Fair Value
 
(In thousands)
                       
Financial assets:
                       
Cash and cash equivalents
  $ 35,372     $ 35,372     $ 40,655     $ 40,655  
Investment securities
    75,033       76,985       74,562       76,707  
FHLB stock
    4,766       4,766       5,402       5,402  
Accrued interest receivable
    2,478       2,478       2,480       2,480  
Life Insurance contracts
    13,458       13,458       13,310       13,310  
Loans receivable, net
    583,778       615,698       586,635       621,556  
                                 
Financial liabilities:
                               
Deposits
    583,439       590,313       579,355       588,399  
Advance from Federal Home Loan Bank
    87,756       95,602        100,017        111,619  
   Accrued interest payable
    372       372       429       429  


NOTE 7 – SECURITIES

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

   
December 31, 2010
 
         
Gross
   
Gross
   
Estimated
 
   
Amortized Cost
   
Unrealized Gains
   
Unrealized Losses
   
Fair
Value
 
(In thousands)
                       
Mortgage-backed securities:
                       
  Government National Mortgage Assoc.
  $ 1,984     $ 47     $ -     $ 2,031  
  Federal Home Loan Mortgage Corp.
    4,549       122       (2 )     4,669  
  Federal National Mortgage Assoc.
    4,053       206       -       4,259  
      10,586       375       (2 )     10,959  
                                 
CMOs:
                               
  Government National Mortgage Assoc.
    2,315       137       -       2,452  
  Other equity securities
    372       144       (13 )     503  
Total
  $ 13,273     $ 656     $ (15 )   $ 13,914  
 
12
 
 
 

 

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

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

   
December 31, 2010
 
         
Gross
   
Gross
   
Estimated
 
   
Amortized Cost
   
Unrealized Gains
   
Unrealized Losses
   
Fair
Value
 
(In thousands)
                       
Investment securities:
                       
  Time deposits other banks
  $ 33,869     $ -     $ -     $ 33,869  
Mortgage-backed securities:
                               
  Federal National Mortgage Assoc.
    15,843       932       -       16,775  
  Federal Home Loan Mortgage Corp.
    7,204       501       -       7,705  
  Private Label
    1,738       331       (216 )     1,853  
CMOs:
                               
  Federal Home Loan Mortgage Corp.
    166       1       -       167  
  Federal National Mortgage Assoc.
    1,245       54       -       1,299  
  Private Label
    1,054       358       (9 )     1,403  
Total
  $ 61,119     $ 2,177     $ (225 )   $ 63,071  

13
 
 
 

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

Details concerning available for sale securities with unrealized losses as of December 31, 2010 are as follows:

   
Securities with losses
   
Securities with losses
             
   
under 12 months
   
over 12 months
   
Total
 
(In thousands)
 
Fair Value
   
Unrealized
   
Fair value
   
Unrealized
   
Fair value
   
Unrealized
 
Available-for-sale
                                   
                                     
Marketable equity securities
    81       (13 )     -       -       81       (13 )
Mortgage-backed securities:
                                               
     Federal Home Loan Mortgage Corporation
    331       (2 )     -       -       331       (2 )
    $ 412     $ (15 )   $ -     $ -     $ 412     $ (15 )
                                                 

 
Details concerning held-to-maturity securities with unrealized losses as of December 31, 2010 are as follows:
 
   
Securities with losses
   
Securities with losses
             
   
under 12 months
   
over 12 months
   
Total
 
(In thousands)
 
Fair Value
   
Unrealized
   
Fair value
   
Unrealized
   
Fair value
   
Unrealized
 
Held-to-maturity
                                   
                                     
Investment securities:
                                               
Mortgage-backed securities:
                                               
         Private Label      53       (13      779       (204     832       (216
CMOs:
                                               
         Private Label     583       (7 )     7     $ (2     590       (9 )
     636      $ (20    786        (206 )    1,422     (225

There were no available-for-sale securities with unrealized losses as of September 30, 2010.
 
14
 
 
 

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

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

The Bank had a total of 33 securities classified as held-to-maturity in an unrealized loss position; with total gross unrealized losses of $225,000 as of December 31, 2010.

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

The private label mortgage backed securities and CMOs are not backed by the full faith and credit of the U.S. Government.  For each private label security, duration of the impairment, credit support and cash flows were assessed to determine whether the security was temporarily or other than temporarily impaired.  Management evaluates the actual mortgage delinquencies, foreclosures, and real estate owned for each security, as well as future expected losses in the underlying mortgage collateral to determine if there is a high probability for expected losses and contractual shortfalls of interest or principal, which could warrant further recognition of impairment.  Based upon such evaluation, it was determined that some securities have been other-than-temporarily impaired and a corresponding charge to earnings for credit related impairment was recognized with the non-credit related impairment recognized in other comprehensive income.  There were no realized credit losses in the private label securities portfolio for the three months ended December 31, 2010.  In the performance of cash flow analysis on private label securities, management determined that none of the impaired securities had non-credit losses that were required to be recognized in other comprehensive income for the three months ended December 31, 2010.  All private label securities that have not been written down have been determined to have sufficient credit support and cash flows to recover the amortized cost of the related securities.

15


 
 

 

The amortized cost and estimated fair value of available-for-sale securities by contractual maturity at December 31, 2010, are shown below.  Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.


(In thousands)
 
Amortized
Cost
   
Fair
Value
 
Due within one year
  $ -     $ -  
Due after one year but within five years
    -       -  
Due after five years within ten years
    -       -  
Due after ten years
    -       -  
Total
    -       -  
                 
Mortgage-backed securities
    12,901       13,411  
Equity securities
    372       503  
Total
  $ 13,273     $ 13,914  

The amortized cost and estimated fair value of held-to-maturity securities by contractual maturity at December 31, 2010, are shown below.  Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

(In thousands)
 
Amortized
Cost
   
Fair
Value
 
Due within one year
  $ 20,609     $ 20,609  
Due after one year but within five years
    13,260       13,260  
Due after five years within ten years
    -       -  
Due after ten years
    -       -  
Total
    33,869       33,869  
                 
Mortgage-backed securities
    27,250       29,202  
Total
  $ 61,119     $ 63,071  

There were no impairment losses in the equity securities portfolio for the three months ended December 31, 2010.  Management will continue to monitor the equity securities and make an impairment adjustment if deemed necessary based upon the prospects for recovery and the duration and severity of the unrealized losses.

The following table presents a roll-forward of the amount of credit losses on the Bank’s investment securities recognized in earnings for the three months ended December 31, 2010 (in thousands).

Beginning balance of credit losses
 
$
1,442
 
Other-than-temporary impairment credit losses
   
-
 
Reduction for realized losses
   
(49
)
Ending balance of cumulative credit losses recognized in earnings
   
1,393
 

The assumptions used to estimate credit related losses are based on estimates obtained from third parties and cash flow projections.  The assumptions used to determine the cash flows were based on estimates of loss severity, credit default, and prepayment speeds developed from third party servicers’ reports.
 
16
 
 

 
 
NOTE 8-LOANS

Loans Receivable

Loans receivable are summarized as follows:

   
              Dec ‘10
   
              %Total
   
              Sept '10
   
              %Total
 
                         
Commercial real estate loans
  $ 115,645       19.4 %   $ 118,858       19.9 %
Commercial non-real estate loans
    24,947       4.2 %     30,929       5.2 %
Commercial-construction loans
    6,036       1.0 %     5,526       0.9 %
Commercial-land
    19,521       3.3 %     19,004       3.2 %
Residential-construction loans
    5,360       0.9 %     4,320       0.7 %
Residential-real estate loans
    343,354       57.6 %     337,885       56.6 %
Consumer-Mobile home loans
    39,628       6.7 %     40,094       6.7 %
Consumer-other
    40,818       6.9 %     40,807       6.8 %
Total Loans
    595,309       100.0 %     597,423       100.0 %
Less:
                               
   Allowance for loan losses
  $ 9,953             $ 9,256          
   Deferred loan fees
    1,578               1,532          
Total Net Loans
  $ 583,778             $ 586,635          

Commercial non-real estate loans declined $6.0 million mainly due to loan payoffs from one customer relationship totaling $4.1 million.  Residential real estate loans increased $5.4 million mainly due to originations of 15 year term conforming one-to-four family mortgage loans.  At December 31, 2010 approximately $266 million of loans receivable were pledged as collateral securing advances from the FHLB. 

CREDIT QUALITY OF LOANS AND ALLOWANCE FOR LOAN LOSSES

Changes in the allowance for loan losses are as follows:

     Three Months Ended
December 31,
 
(in 000’s)
 
2010
   
2009
 
Beginning ALLL
  $ 9,256     $ 6,806  
Provision for Loan Losses
    1,150       1,196  
Recoveries
    17       3  
Charge-offs
    (470 )     (261 )
Ending ALLL
  $ 9,953     $ 7,744  

The amount of nonaccrual loans at December 31, 2010 and September 30, 2010 was approximately $13.7 million and $14.1 million, respectively.  The Company had total impaired loans of approximately $13.3 million and $10.5 million at December 31, 2010 and September 30, 2010, respectively.  Specific reserves allocated to impaired loans totaled approximately $2.8 million and $2.1 million as of December 31, 2010 and September 30, 2010, respectively.  Impaired loans totaling approximately $2.4 million and $2.0 million had no specific reserves allocated as of December 31, 2010 and September 30, 2010, respectively.  Interest recognized on impaired loans totaled $35,000 for the three months ended December 31, 2010,
 
17
 
 
 

 
 
which included $19,000 recognized on the $8.1 million of impaired loans, which represents the portion of impaired loans with an allowance recorded at December 31, 2010.  Interest recognized on impaired loans consists of accrued but uncollected interest on loans that are performing at this time.  Two commercial loans totaling $1.4 million were classified as troubled debt restructurings due to a modification of terms allowing the customer to make interest only payments for an amount of time.  One large commercial loan totaling $1.6 million was modified due to an extension of maturity date and amount borrowed.  One customer relationship with three residential real estate loans totaling $350,000 was modified by an extension of term, and reduction in interest rate to obtain a lower payment for the customer.  The effect on net interest income of troubled debt restructurings is insignificant for the three months ended December 31, 2010.

Allowance for Loan Losses and Recorded Investment in Loans for the three months ended December 31, 2010

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

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

18

 
 
 

 


   
Real Estate
                         
(in thousands)
 
Commercial-real estate
   
Commercial-construction
   
Commercial-Land
   
Residential-construction
   
Residential-real estate
   
Commercial-non real estate
   
Consumer-Mobile Homes
   
Consumer-Other
   
Total
 
Allowance for loan losses:
                                                     
                                                       
Beginning Balance
  $ 2,402     $ 68     $ 1,076     $ 61     $ 4,173     $ 327     $ 640     $ 509     $ 9,256  
Charge-offs
    5       -       -       -       377       -       73       15       470  
Recoveries
    -       -       -       -       10       -       1       6       17  
Provision
    800       55       9       3       208       16       31       28       1,150  
Ending balance
  $ 3,197     $ 123     $ 1,085     $ 64     $ 4,014     $ 343     $ 599     $ 528     $ 9,953  
                                                                         
Ending balance allocation:
                                                                       
Individually evaluated for impairment
  $ 1,446     $ 51     $ 909     $ -     $ 305     $ 127     $ -     $ -     $ 2,838  
                                                                         
                                                                         
                                                                         
Collectively evaluated for impairment
  $ 1,751     $ 72     $ 176     $ 64     $ 3,709     $ 216     $ 599     $ 528     $ 7,115  


Credit Quality Indicators
As of December 31, 2010

Commercial Credit Exposure
Credit Risk Profile by Internally Assigned Grade

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

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

Average – Companies that fit this classification would most likely be a typical middle market business or high net worth individual. Borrowers would typically be secured and may have some reliance on inventory. Cash flow is adequate to service debt but may be susceptible to some deterioration due to cyclical, seasonal or economic events.  Management is experienced but is concentrated in a few key people. Credits fitting this classification would typically have at least one very strong repayment source
 
19
 
 
 

 
 
and a good secondary repayment source. Company product mix may lack diversity. The majority of accounts fall within this classification. Annual financial statements on the borrower and guarantor(s) should be obtained.

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

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

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

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

Loss - Assets classified Loss are considered uncollectible, or of such little value that the continuance of the loan or Other Asset on the books of the Bank is not warranted.  Some recovery of funds could be possible in the future, but the amount and probability of this recovery are not determinable, thus leaving little justification for the assets to remain on the books.
 
A Loss classification does not mean that an asset has no recovery or salvage value, but simply that it is not practical or desirable to defer writing off or reserving all or a portion of a basically worthless asset, even though partial recovery may be effected in the future.

20

 
 
 

 

Commercial Credit Exposure
Credit Risk Profile by Internally Assigned Grade


   
Commercial-
Land
   
Commercial- Construction
   
Commercial-
Non-Real
Estate
   
Commercial-
Real-Estate
   
Total
   
% Total
 
                                     
Prime
  $ -     $ -     $ 2,947     $ -     $ 2,947       1.8 %
Excellent
    -       -       101       52       153       0.1  
Average
    7,710       4,525       17,342       78,688       108,265       65.2  
Satisfactory
    4,656       69       2,119       29,179       36,023       21.7  
Special Mention
    805       376       2,179       3,846       7,206       4.3  
Substandard
    5,956       1,066       132       3,053       10,207       6.1  
Doubtful
    -       -       -       -       -       0.0  
Loss
    394       -       127       827       1,348       0.8  
    $ 19,521     $ 6,036     $ 24,947     $ 115,645     $ 166,149       100.0 %



Consumer Credit Exposure Credit Risk Profile
By Creditworthiness Category

 (in thousands)
 
Residential-
Real-Estate Construction
   
Residential-
Prime
   
Total
 
                   
Grade:
                 
Pass
  $ 5,360     $ 337,987     $ 343,347  
Special Mention
    -       -       -  
Substandard
    -       3,789       3,789  
    $ 5,360     $ 341,776     $ 347,136  


Consumer Credit Exposure
Credit Risk Profile Based on Payment Activity

 (in thousands)
 
Consumer-
Mobile
Homes
   
Consumer-
Other Loans
   
Total
 
                   
Performing
  $ 39,131     $ 40,556     $ 79,687  
Nonperforming
    497       262       759  
    $ 39,628     $ 40,818     $ 80,446  

21

 
 

 

Age Analysis of Past Due Loans
As of December 31, 2010

(in thousands)
 
30-89
Days Past
Due
   
Greater than
90 days Past
Due
   
Total
Past
Due
   
Current
   
Total Loans
   
Recorded Investment >
90 days and Accruing
 
                                     
Commercial real estate loans
  $ 1,115     $ 1,724     $ 2,839     $ 112,806     $ 115,645