TECHE HOLDING CO - FORM 10-Q

Attached files

file	filename
EX-32 - EXHIBIT 32 - CERTIFCATIONS - TECHE HOLDING CO	ex32.htm
EX-31.2 - EXHIBIT 31.2 - CERTIFICATION OF CFO - TECHE HOLDING CO	ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - CERTIFICATION OF CEO - TECHE HOLDING CO	ex31-1.htm
EXCEL - IDEA: XBRL DOCUMENT - TECHE HOLDING CO	Financial_Report.xls

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended

June 30, 2011

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

For the transition period from _________________________ to _________________________

Commission file number 1-13712

TECHE HOLDING COMPANY

(Exact name of registrant as specified in its charter)

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

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

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

N/A

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

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

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

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

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: August 9 , 2011.

Class		2,070,015
$.01 par value common stock		Outstanding Shares

TECHE HOLDING COMPANY

QUARTERLY REPORT ON FORM 10-Q

INDEX

		Page
PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

Consolidated Balance Sheets as of June 30, 2011 (unaudited) and September 30, 2010			3
Unaudited Consolidated Statements of Income for the three and nine months ended June 30, 2011 and 2010			4
Unaudited Consolidated Statements of Cash Flows for the nine months ended June 30, 2011 and 2010			5
Notes to Unaudited Consolidated Financial Statements			6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		25

Item 3.	Quantitative and Qualitative Disclosure About Market Risk		32

Item 4	Controls and Procedures		32

PART II.	OTHER INFORMATION		32

Item 1.	Legal Proceedings		32

I Item 1A.	Risk Factors		32

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		32

I Item 3.	Defaults Upon Senior Securities		33

Item 4.	[Reserved]		33

Item 5.	Other Information		33

Item 6.	Exhibits		33

Signatures			34

TECHE HOLDING COMPANY

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

	June 30, 2011			September 30, 2010*
ASSETS	(unaudited)

Cash and due from banks	$	15,645		$	15,420
Interest-bearing deposits		37,557			25,235
Securities available-for-sale at fair value		25,956			14,996
Securities held-to-maturity—at amortized cost (estimated fair value of $76,772 and $61,711)		74,902			59,566
Loans receivable—net of allowance for loan losses of $8,123 and $9,256		575,253			586,635
Accrued interest receivable		2,380			2,480
Investment in Federal Home Loan Bank stock, at cost		3,891			5,402
Real estate owned, net		2,694			1,181
Prepaid expenses and other assets		7,080			6,898
Goodwill		3,647			3,647
Life insurance contracts		13,754			13,310
Premises and equipment, net		26,245			26,754

TOTAL ASSETS	$	789,004		$	761,524

LIABILITIES AND STOCKHOLDERS’ EQUITY

Deposits	$	625,323		$	579,355
Advances from Federal Home Loan Bank		79,533			100,017
Advance payments by borrowers for taxes and insurance		1,904			2,463
Accrued interest payable		325			429
Accounts payable and other liabilities		3,337			3,747

TOTAL LIABILITIES		710,422			686,011

COMMITMENTS AND CONTINGENCIES		-			-

STOCKHOLDERS’ EQUITY:
Preferred stock, 5,000,000 shares authorized, none issued		-			-
Common stock, $.01 par value, 10,000,000 shares authorized; 4,685,398 and 4,672,567 shares issued		47			47
Additional paid-in capital		53,181			52,685
Retained earnings		76,843			73,942
Unearned ESOP shares		(130	)		(326	)
Treasury stock, 2,610,383 and 2,591,081 shares - at cost		(51,535	)		(50,862	)
Accumulated other comprehensive loss on held-to-maturity securities		(446	)		(428	)
Accumulated other comprehensive income on available for sale securities		622			455

TOTAL STOCKHOLDERS’ EQUITY		78,582			75,513

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	789,004		$	761,524

See Notes to Unaudited Consolidated Financial Statements.

* derived from audited financial statements

TECHE HOLDING COMPANY

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

(IN THOUSANDS, EXCEPT PER SHARE DATA)

	Three Months Ended					Nine Months Ended
	June 30,					June 30,
	2011			2010		2011			2010

INTEREST INCOME
Interest and fees on loans	$	9,083		$	9,578	$	27,550		$	28,911
Interest and dividends on investments		532			663		1,503			2,077
Other interest income		143			58		444			186
TOTAL INTEREST INCOME		9,758			10,299		29,497			31,174

INTEREST EXPENSE:
Deposits		1,265			1,822		4,122			5,573
Advances from Federal Home Loan Bank		920			1,147		2,968			3,403
TOTAL INTEREST EXPENSE		2,185			2,969		7,090			8,976
NET INTEREST INCOME		7,573			7,330		22,407			22,198

PROVISION FOR LOAN LOSSES		1,000			900		3,150			2,996

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		6,573			6,430		19,257			19,202

NON INTEREST INCOME:
Total other-than temporary impairment losses		(87	)		-		(87	)		(374	)
Portion of impairment losses recognized in other comprehensive loss		28			-		28			262
Net impairment losses recognized in earnings		(59	)		-		(59	)		(112	)
Service charges and other		3,749			3,955		11,013			11,469
Gain on sale of premises and equipment		-			-		103			-
Gain on equity securities		6			-		15			67
Gain on sale of loans		4			7		22			7
Other income		189			198		627			654
TOTAL NON INTEREST INCOME		3,889			4,160		11,721			12,085

NON INTEREST EXPENSE:
Compensation and employee benefits		4,325			4,118		12,518			12,389
Occupancy expense		1,555			1,633		4,473			4,726
Marketing and professional		664			637		2,198			2,054
FDIC premiums and assessment		225			230		674			865
Other operating expenses		1,007			1,259		3,414			3,464
TOTAL NON INTEREST EXPENSE		7,776			7,877		23,277			23,498

INCOME BEFORE INCOME TAXES		2,686			2,713		7,701			7,789
INCOME TAXES		896			892		2,574			2,535
NET INCOME	$	1,790		$	1,821	$	5,127		$	5,254
BASIC EARNINGS PER COMMON SHARE	$	0.86		$	0.87	$	2.48		$	2.51
DILUTED EARNINGS PER COMMON SHARE	$	0.85		$	0.87	$	2.45		$	2.49

See Notes to Unaudited Consolidated Financial Statements.

TECHE HOLDING COMPANY

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

	For the Nine Months Ended June 30,
	2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	5,127		$	5,254
Adjustments to reconcile net income to net cash provided by operating activities:
Accretion of discount on investments and mortgage-backed securities, net		(308	)		(178	)
Impairment of debt securities		59			112
Provision for loan losses		3,150			2,996
Provision for real estate owned		2			20
Gain on sale of land		(103	)		-
(Gain) Loss on sale of OREO		(62	)		24
Gain on securities		(15	)		(67	)
Gain on sale of loans		(22	)		(7	)
Depreciation		1,077			1,184
Excess tax benefits from share-based payment arrangements		(29	)		(36	)
Stock-based compensation		408			300
Change in accounts payable and other liabilities		(410	)		(451	)
Change in life insurance contracts		(444	)		(439	)
Change in prepaid expenses and other assets		(182	)		(3,620	)
Change in accrued interest payable		(104	)		(273	)
Other– net		262			(139	)
Net cash provided by operating activities		8,406			4,680

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of available for sale securities		(13,876	)		(36	)
Purchase of securities held to maturity		(19,729	)		-
Proceeds from sale of equity securities		71			384
Principal repayments and proceeds from sale of mortgage-backed securities available for sale		2,839			4,657
Principal repayments of securities held to maturity		4,663			9,657
Net loan originations		3,840			(4,336	)
Purchase of loans		-			(1,273	)
Proceeds from sale of loan participations		1,969			1,323
Purchase (redemption) of FHLB stock		1,511			(333	)
Proceeds from sale of land		499			-
Proceeds from sale of OREO		990			1,358
Purchase of premises and equipment		(964	)		(941	)
Net cash (used) provided by investing activities		(18,187	)		10,460

CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of ESOP loan		196			195
Net increase (decrease) in deposits		45,968			(7,367	)
Net (decrease) increase in FHLB advances		(20,484	)		5,817
Net decrease in advance payments by borrowers for taxes and insurance		(559	)		(378	)
Proceeds from exercise of stock options		77			20
Dividends paid		(2,226	)		(2,211	)
Excess tax benefits from share-based payment arrangements		29			36
Purchase of common stock for treasury		(673	)		(332	)
Net cash provided (used) by financing activities		22,328			(4,220	)

NET INCREASE IN CASH AND CASH EQUIVALENTS		12,547			10,920
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		40,655			23,675
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	53,202		$	34,595

Supplemental schedule of noncash investing activities:
Transfer from loans to real estate owned		2,713			2,360
Loans originated to finance sale of real estate owned		268			1,397

See Notes to Unaudited Consolidated Financial Statements.

TECHE HOLDING COMPANY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - PRINCIPLES OF CONSOLIDATION

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

NOTE 2 - BASIS OF PRESENTATION

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

NOTE 3 - INCOME PER SHARE

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

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

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

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

NOTE 4 - COMPREHENSIVE INCOME

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

	For Three Months					For Nine Months
	Ended June 30,					Ended June 30,
	2011			2010		2011			2010

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

NOTE 5 - NEW ACCOUNTING PRONOUNCEMENTS

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

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

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

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

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

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

ASU – Accounting Standards Update (2011-02), Receivables (Topic 310), A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring, provides additional guidance to assist creditors in determining whether a restructuring of a receivable meets the criteria to be considered a troubled debt restructuring. This standard should be applied to the first period beginning after June 15, 2011 and should be applied retrospectively to the beginning of the annual period in the year of adoption. The Company does not anticipate the standard having a material impact on the consolidated financial statements.

ASU – Accounting Standards Update (2011-05), Comprehensive Income (Topic 220): Presentation of Comprehensive Income. The amendments in this Update allows an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This Update eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments in this Update do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendments in this Update should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. For nonpublic entities, the amendments are effective for fiscal years ending after

December 15, 2012, and interim and annual periods thereafter. Early adoption is permitted, because compliance with the amendments is already permitted. The amendments do not require any transition disclosures.

NOTE 6 – FAIR VALUE MEASUREMENTS

The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Available for sale securities are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as securities held-to-maturity, loans held for sale, loans held for investment and certain other assets. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting, other than temporary impairment accounting or impairments of individual assets.

This is a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value as follows:

Level 1 - Observable inputs such as quoted prices in active markets;

Level 2 - Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

Level 3 - Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

Following is a description of valuation methodologies used for assets recorded at fair value.

Investment Securities

Securities available for sale are valued at quoted market prices where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable securities. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds. Securities classified as Level 3 include asset-backed securities in less liquid markets. Securities held to maturity are valued using discounted cash flow models that use assumptions about prepayment speeds, coupon default rates, discount rates and timing and other assumptions that may affect the amounts of cash flows.

Loans

The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with ASC (310), “Accounting by Creditors for Impairment of a Loan.” The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At June 30, 2011, substantially all

of the impaired loans were evaluated based on the fair value of the collateral less estimated costs to sell. Impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.

Other Real Estate Owned

OREO, consisting of properties obtained through foreclosure or in satisfaction of loans, is reported at the lower of cost or fair value, determined on the basis of current appraisals, comparable sales, and other estimates of value obtained principally from independent sources, adjusted for estimated selling costs (Level 2). At the time of foreclosure, any excess of the loan balance over the fair value of the real estate held as collateral is treated as a charge against the allowance for loan losses. Gains or losses on sale and generally any subsequent adjustments to the value are recorded as a component of OREO expense.

	Fair Value		Fair Value Hierarchy
	At June 30, 2011		Level 1		Level 2		Level 3
(In thousands)
Assets valued on a recurring basis:
Mortgage-backed securities:
Government National Mortgage Assoc.	$	1,930	$	-	$	1,930	$	-
Federal Home Loan Mortgage Corp.		3,800		-		3,800		-
Federal National Mortgage Assoc.		17,295		-		17,295		-
Total mortgage-backed securities		23,025		-		23,025		-

CMOs:
Government National Mortgage Assoc.		2,246				2,246		-
Other equity securities		685		685		-		-
Total recurring	$	25,956	$	685	$	25,271	$	-
Assets valued on a non-recurring basis:
CMOs: Private label	$	96	$	-	$	96	$	-
Impaired loans		6,608		-		-		6,608
Other real estate owned		2,694		-		-		2,694
Total non-recurring	$	9,398	$	-	$	96	$	9,302

	Fair Value At September		Fair Value Hierarchy
	30, 2010		Level 1		Level 2		Level 3
(In thousands)
Assets valued on a recurring basis:
Mortgage-backed securities:
Government National Mortgage Assoc.	$	2,098	$	-	$	2,098	$	-
Federal Home Loan Mortgage Corp.		5,109		-		5,109		-
Federal National Mortgage Assoc.		4,669		-		4,669		-
Total mortgage-backed securities		11,876		-		11,876		-

CMOs:
Government National Mortgage Assoc.		2,652		-		2,652		-
Marketable equity securities		468		468		-		-
Total recurring	$	14,996	$	468	$	14,528	$	-

Assets valued on a non-recurring basis:
CMOs: Private label	$	110	$	-	$	110	$	-
Impaired loans		6,484		-		6,484		-
Other real estate owned		760		-		760		-
Total non-recurring	$	7,354	$	-	$	7,354	$	-

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

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

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

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

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

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

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

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

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

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

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

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

	June 30, 2011				September 30, 2010
	Carrying		Estimated		Carrying		Estimated
	Amount		Fair Value		Amount		Fair Value
(In thousands)
Financial assets:
Cash and cash equivalents	$	53,202	$	53,202	$	40,655	$	40,655
Investment securities		100,858		102,728		74,562		76,707
FHLB stock		3,891		3,891		5,402		5,402
Accrued interest receivable		2,380		2,380		2,480		2,480
Life Insurance contracts		13,754		13,754		13,310		13,310
Loans receivable, net		575,253		589,422		586,635		621,556

Financial liabilities:
Deposits		625,323		629,461		579,355		588,399
Advance from Federal Home Loan Bank		79,533		84,983		100,017		111,619
Accrued interest payable		325		325		429		429

NOTE 7 – SECURITIES

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

	June 30, 2011
			Gross		Gross			Estimated
	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
(In thousands)
Mortgage-backed securities:
Government National Mortgage Assoc.	$	1,869	$	61	$	-		$	1,930
Federal Home Loan Mortgage Corp.		3,701		99		-			3,800
Federal National Mortgage Assoc.		16,924		371		-			17,295
		22,494		531		-			23,025

CMOs:
Government National Mortgage Assoc.		2,090		156		-			2,246
Other equity securities		415		272		(2	)		685
Total	$	24,999	$	959	$	(2	)	$	25,956

	September 30, 2010
			Gross		Gross		Estimated
	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
(In thousands)
Mortgage-backed securities:
Government National Mortgage Assoc.	$	2,039	$	59	$	-	$	2,098
Federal Home Loan Mortgage Corp.		4,974		135		-		5,109
Federal National Mortgage Assoc.		4,448		221		-		4,669
		11,461		415		-		11,876

CMOs:
Government National Mortgage Assoc.		2,474		178		-		2,652
Other equity securities		372		96		-		468
Total	$	14,307	$	689	$	-	$	14,996

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

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

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

Details concerning available-for-sale securities with unrealized losses as of June 30, 2011 are as follows:

	Securities with losses							Securities with losses
	under 12 months							over 12 months						Total
(In thousands)	Fair Value			Unrealized				Fair value			Unrealized			Fair value			Unrealized
Available-for-sale

Marketable equity securities		$	4		$	(2	)		$	-		$	-		$	4		$	(2	)
Total		$	4		$	(2	)		$	-		$	-		$	4		$	(2	)

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

	Securities with losses					Securities with losses
	under 12 months					over 12 months					Total
(In thousands)	Fair value		Unrealized			Fair value		Unrealized			Fair value		Unrealized
Held-to-maturity

Investment securities:
Mortgage-backed securities:
Private Label	$	102	$	(2	)	$	596	$	(117	)	$	698	$	(119	)
Federal National Mortgage Assoc.		12,885		(123	)		-		-			12,885		(123	)
CMOs:
Federal Home Loan Mortgage Corp.		144		(2	)		-		-			144		(2	)
Private Label		506		(2	)		-		-			506		(2	)
Total	$	13,637	$	(129	)	$	596	$	(117	)	$	14,233	$	(246	)

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

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

	Securities with losses under 12 months					Securities with losses over 12 months					Total
(In thousands)	Fair value		Unrealized			Fair value		Unrealized			Fair value		Unrealized
Held-to-maturity

Investment securities:
Private Label	$	53	$	(18	)	$	809	$	(199	)	$	862	$	(217	)
CMOs:
Private Label		368		(6	)		8		(2	)		376		(8	)
Total	$	421	$	(24	)	$	817	$	(201	)	$	1,238	$	(225	)

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

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

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

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

(In thousands)	Amortized Cost		Fair Value
Due within one year	$	-	$	-
Due after one year but within five years		-		-
Due after five years but within ten years		-		-
Due after ten years		-		-
Total		-		-

Mortgage-backed securities		24,584		25,271
Equity securities		415		685
Total	$	24,999	$	25,956

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

(In thousands)	Amortized Cost		Fair Value
Due within one year	$	14,309	$	14,309
Due after one year but within five years		25,303		25,303
Due after five years but within ten years		-		-
Due after ten years		-		-
Total		39,612		39,612

Mortgage-backed securities		35,290		37,160
Total	$	74,902	$	76,772

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

The following table presents a roll-forward of the amount of credit losses on the Bank’s investment securities recognized in earnings for the nine months ended June 30, 2011 (in thousands).

Beginning balance of credit losses	$	1,442
Other-than-temporary impairment credit losses		59
Reduction for realized losses		(164	)
Ending balance of cumulative credit losses recognized in earnings	$	1,337

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

NOTE 8-LOANS

Loans Receivable

Loans receivable are summarized as follows:

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

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

CREDIT QUALITY OF LOANS AND ALLOWANCE FOR LOAN LOSSES

Changes in the allowance for loan losses were as follows:

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

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

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

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

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

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

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

	Real Estate
(In thousands)		Commercial-real estate		Commercial-construction		Commercial-Land		Residential-construction		Residential-real estate		Commercial-non real estate		Consumer-Mobile Homes		Consumer-Other		Total
Allowance for loan losses:

Beginning Balance		$	2,402	$	68	$	1,076	$	61	$	4,173	$	327	$	$640	$	509	$	9,256
Charge-offs			1,461		51		1,367		-		1,041		138		201		72		4,331
Recoveries			-		-		-		-		33		1		8		6		48
Provision			1,158		70		519		15		1,024		62		160		142		3,150
Ending balance		$	2,099	$	87	$	228	$	76	$	4,189	$	252	$	607	$	585	$	8,123

Ending balance allocation:
Individually evaluated for impairment			-		-	$	15		-	$	33		-		-		-	$	48

Collectively evaluated for impairment		$	2,099	$	87	$	213	$	76	$	4,156	$	252	$	607	$

TECHE HOLDING CO - FORM 10-Q - August 12, 2011

Attached files