10-Q 1 rivr-20120930.htm FQE SEPTEMBER 30, 2012 rivr-20120930.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 September 30, 2012
 
       
   
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: 0-21765
 
RIVER VALLEY BANCORP
(Exact name of registrant as specified in its charter)
 
Indiana
 
35-1984567
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
     
430 Clifty Drive
Madison, Indiana
 
47250
(Address of principal executive offices)
 
(Zip Code)
(812) 273-4949
(Registrant’s telephone number, including area code)
 
[None]
(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 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. (Check One):
 
 
Large Accelerated Filer¨
Accelerated Filer ¨
 
Non-Accelerated Filer ¨
(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  ¨          No  x
 
The number of shares of the Registrant’s common stock, without par value, outstanding as of November 13, 2012, was 1,524,872.

 
 

 
 
RIVER VALLEY BANCORP
 
FORM 10-Q
 
INDEX

   
Page No.
   
PART I. FINANCIAL INFORMATION
3
Item 1.
Financial Statements
3
 
Consolidated Condensed Balance Sheets
3
 
Consolidated Condensed Statements of Operations
4
 
Consolidated Condensed Statements of Comprehensive Income
5
 
Consolidated Condensed Statements of Cash Flows
6
 
Notes to Consolidated Condensed Financial Statements
7
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
33
Item 3.
Quantitative and Qualitative Disclosure about Market Risk
45
Item 4.
Controls and Procedures
46
   
PART II. OTHER INFORMATION
46
Item 1.
Legal Proceedings
46
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
46
Item 3.
Defaults Upon Senior Securities
46
Item 4.
Mine Safety Disclosures
46
Item 5.
Other Information
46
Item 6.
Exhibits
47
   
SIGNATURES
48
EXHIBIT INDEX
49
 

 

 
2

 

PART I FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
 
RIVER VALLEY BANCORP
Consolidated Condensed Balance Sheets
 
   
September 30, 2012
   
December 31, 2011
 
   
(Unaudited)
       
   
(In Thousands, Except Share Amounts)
 
Assets
           
Cash and due from banks
  $ 1,940     $ 1,881  
Interest-bearing demand deposits
    4,545       14,928  
Federal funds sold
    1,907       1,905  
Cash and cash equivalents
    8,392       18,714  
Investment securities available for sale
    112,201       104,689  
Loans held for sale
    1,358       87  
Loans
    257,622       257,099  
Allowance for loan losses
    (3,642 )     (4,003 )
Net loans
    253,980       253,096  
Premises and equipment, net
    7,759       8,091  
Real estate, held for sale
    1,221       2,487  
Federal Home Loan Bank stock
    4,226       4,226  
Interest receivable
    2,160       1,996  
Cash value of life insurance
    10,086       9,855  
Goodwill
    79       79  
Other assets
    2,972       3,323  
Total assets
  $ 404,434     $ 406,643  
                 
Liabilities
               
Deposits
               
Noninterest-bearing
  $ 31,807     $ 24,468  
Interest-bearing
    271,353       280,758  
Total deposits
    303,160       305,226  
Borrowings
    62,217       65,217  
Interest payable
    321       401  
Other liabilities
    4,065       2,842  
Total liabilities
    369,763       373,686  
                 
Commitments and Contingencies
               
                 
Stockholders’ Equity
               
Preferred stock – liquidation preference $1,000 per share – no par value
               
Authorized – 2,000,000 shares
               
Issued and outstanding – 5,000 shares
    5,000       5,000  
Common stock, no par value
               
Authorized – 5,000,000 shares
               
Issued and outstanding – 1,524,872 and 1,514,472 shares
    7,691       7,523  
Retained earnings
    19,518       18,617  
Accumulated other comprehensive income
    2,462       1,817  
Total stockholders’ equity
    34,671       32,957  
Total liabilities and stockholders’ equity
  $ 404,434     $ 406,643  
 
See Notes to Consolidated Condensed Financial Statements.
 
 
3

 

RIVER VALLEY BANCORP
Consolidated Condensed Statements of Operations
(Unaudited)

   
Nine Months Ended September 30,
   
Three Months Ended September 30,
 
   
2012
   
2011
   
2012
   
2011
 
   
(In Thousands, Except Share Amounts)
 
Interest Income
                       
Loans receivable
  $ 10,714     $ 11,215     $ 3,596     $ 3,732  
Investment securities
    2,105       2,037       687       711  
Interest-earning deposits and other
    120       107       40       36  
Total interest income
    12,939       13,359       4,323       4,479  
                                 
Interest Expense
                               
Deposits
    2,039       2,633       638       864  
Borrowings
    1,766       1,775       592       600  
Total interest expense
    3,805       4,408       1,230       1,464  
                                 
Net Interest Income
    9,134       8,951       3,093       3,015  
Provision for loan losses
    1,064       2,297       268       1,449  
Net Interest Income After Provision for Loan Losses
    8,070       6,654       2,825       1,566  
                                 
Other Income
                               
Service fees and charges
    1,554       1,431       557       516  
Net realized gains on sale of available-for-sale securities
    450       270       119       105  
Net gains on loan sales
    844       367       335       138  
Interchange fee income
    327       303       107       103  
Increase in cash value of life insurance
    231       242       77       81  
Loss on premises, equipment and real estate held for sale
    (566 )     (683 )     (172 )     (533 )
Other income
    245       54       81       (15 )
Total other income
    3,085       1,984       1,104       395  
                                 
Other Expenses
                               
Salaries and employee benefits
    4,295       3,945       1,395       1,329  
Net occupancy and equipment expenses
    1,069       1,069       359       363  
Data processing fees
    333       312       118       101  
Advertising
    294       318       93       128  
Mortgage servicing rights
    199       87       82       45  
Office supplies
    98       92       31       30  
Professional fees
    289       291       97       111  
Federal Deposit Insurance Corporation assessment
    257       290       90       47  
Loan-related expenses
    441       152       118       73  
Acquisition expense
    235       33       111       33  
Other expenses
    944       812       311       290  
Total other expenses
    8,454       7,401       2,805       2,550  
                                 
Income (Loss) Before Income Tax
    2,701       1,237       1,124       (589 )
Income tax expense (benefit)
    572       21       278       (382 )
                                 
Net Income (Loss)
    2,129       1,216       846       (207 )
Preferred stock dividends
    (272 )     (272 )     (91 )     (91 )
Net Income (Loss) Available to Common Stockholders
  $ 1,857     $ 944     $ 755     $ (298 )
                                 
Basic earnings per common share
  $ 1.23     $ .62     $ .50     $ (.20 )
Diluted earnings per common share
    1.22       .62       .50       (.20 )
Dividends per share
    .63       .63       .21       .21  
 
See Notes to Consolidated Condensed Financial Statements.

 
4

 
 
RIVER VALLEY BANCORP
Consolidated Condensed Statements of Comprehensive Income
(Unaudited)

   
Nine Months Ended
September 30,
   
Three Months Ended
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
   
(In Thousands)
 
                         
Net income (loss)
  $ 2,129     $ 1,216     $ 846     $ (207 )
Other comprehensive income, net of tax
                               
Unrealized gains on securities available for sale
                               
Unrealized holding gains arising during the period, net of tax expense of $503, $990, $275 and $424
    933       1,805       511       770  
Less: Reclassification adjustment for gains included in net income, net of tax expense of $162, $94, $45 and $38
    288       176       74       67  
      645       1,629       437       703  
Comprehensive income
  $ 2,774     $ 2,845     $ 1,283     $ 496  
 
 
 
 
See Notes to Consolidated Condensed Financial Statements.
 

 
5

 

RIVER VALLEY BANCORP
Consolidated Condensed Statements of Cash Flows
(Unaudited)
 
   
Nine Months Ended September 30,
 
   
2012
   
2011
 
   
(In Thousands)
 
Operating Activities
           
Net income
  $ 2,129     $ 1,216  
Adjustments to reconcile net income to net cash provided by operating activities
               
Provision for loan losses
    1,064       2,297  
Depreciation and amortization
    504       441  
Investment securities gains
    (450 )     (270 )
Loans originated for sale in the secondary market
    (25,685 )     (12,932 )
Proceeds from sale of loans in the secondary market
    25,017       13,020  
Gain on sale of loans
    (844 )     (367 )
Amortization of net loan origination cost
    107       103  
Loss on premises, equipment and real estate held for sale
    566       683  
Employee Stock Ownership Plan compensation
    23       26  
Net change in
               
Interest receivable
    (164 )     (9 )
Interest payable
    (80 )     (87 )
Prepaid Federal Deposit Insurance Corporation assessment
    242       268  
Other adjustments
    1,036       (292 )
Net cash provided by operating activities
    3,465       4,097  
                 
Investing Activities
               
Proceeds from sale of FHLB Stock
    -       270  
Purchases of securities available for sale
    (31,071 )     (31,803 )
Proceeds from maturities of securities available for sale
    18,270       7,057  
Proceeds from sales of securities available for sale
    6,561       7,585  
Net change in loans
    (3,699 )     3,602  
Purchases of premises and equipment
    (172 )     (585 )
Proceeds from sale of real estate acquired through foreclosure
    2,373       893  
Other investing activity
    (62 )     (182 )
Net cash used in investing activities
    (7,800 )     (13,163 )
                 
Financing Activities
               
Net change in
               
Noninterest-bearing, interest-bearing demand and savings deposits
    2,134       6,046  
Certificates of deposit
    (4,200 )     6,753  
Proceeds from borrowings
    -       15,000  
Repayment of borrowings
    (3,000 )     (15,000 )
Cash dividends
    (1,226 )     (1,226 )
Proceeds from exercise of stock options
    140       -  
Acquisition of stock for stock benefit plans
    -       (16 )
Advances by borrowers for taxes and insurance
    165       126  
Net cash provided by (used in) financing activities
    (5,987 )     11,683  
                 
Net Change in Cash and Cash Equivalents
    (10,322 )     2,617  
Cash and Cash Equivalents, Beginning of Period
    18,714       16,788  
Cash and Cash Equivalents, End of Period
  $ 8,392     $ 19,405  
                 
Additional Cash Flows and Supplementary Information
               
Interest paid
  $ 3,885     $ 4,495  
Income tax paid, net of refunds
    309       388  
Transfers to real estate held for sale
    1,643       4,311  
 
See Notes to Consolidated Condensed Financial Statements.

 
6

 

RIVER VALLEY BANCORP
 
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 
River Valley Bancorp (the “Corporation” or the “Company”) is a unitary savings and loan holding company whose activities are primarily limited to holding the stock of River Valley Financial Bank (“River Valley” or the “Bank”). The Bank conducts a general banking business in southeastern Indiana and Carroll County, Kentucky which consists of attracting deposits from the general public and applying those funds to the origination of loans for consumer, residential and commercial purposes. River Valley’s profitability is significantly dependent on net interest income, which is the difference between interest income generated from interest-earning assets (i.e. loans and investments) and the interest expense paid on interest-bearing liabilities (i.e. customer deposits and borrowed funds). Net interest income is affected by the relative amount of interest-earning assets and interest-bearing liabilities and the interest received or paid on these balances. The level of interest rates paid or received by the Bank can be significantly influenced by a number of competitive factors, such as governmental monetary policy, that are outside of management’s control.
 
 
NOTE 1: BASIS OF PRESENTATION
 
The accompanying consolidated condensed financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include information or footnotes necessary for a complete presentation of financial position, results of operations, and cash flows in conformity with generally accepted accounting principles. Accordingly, these financial statements should be read in conjunction with the consolidated financial statements and notes thereto of the Corporation included in the Annual Report on Form 10-K for the year ended December 31, 2011. However, in the opinion of management, all adjustments (consisting of only normal recurring accruals) which are necessary for a fair presentation of the financial statements have been included. The results of operations for the three-month and nine-month periods ended September 30, 2012, are not necessarily indicative of the results which may be expected for the entire year. The consolidated condensed balance sheet of the Corporation as of December 31, 2011 has been derived from the audited consolidated balance sheet of the Corporation as of that date.
 
 
NOTE 2: PRINCIPLES OF CONSOLIDATION
 
The consolidated condensed financial statements include the accounts of the Corporation and its subsidiary, the Bank. The Bank currently owns four subsidiaries. Madison 1st Service Corporation, which was incorporated under the laws of the State of Indiana on July 3, 1973, currently holds land and cash but does not otherwise engage in significant business activities. RVFB Investments, Inc., RVFB Holdings, Inc., and RVFB Portfolio, LLC were established in Nevada the latter part of 2005. They hold and manage a significant portion of the Bank’s investment portfolio. All significant inter-company balances and transactions have been eliminated in the accompanying consolidated condensed financial statements.
 

 
7

 

NOTE 3: EARNINGS PER SHARE
 
Earnings per share have been computed based upon the weighted average common shares outstanding.
 
     
Nine Months Ended
   
Nine Months Ended
 
     
September 30, 2012
   
September 30, 2011
 
     
Income
   
Weighted Average Shares
   
Per Share Amount
   
Income
   
Weighted Average Shares
   
Per Share Amount
 
     
(Unaudited; In Thousands, Except Share Amounts)
 
 
Basic earnings per share
                                   
 
Income available to common stockholders
  $ 1,857       1,515,587     $ 1.23     $ 944       1,514,472     $ .62  
                                                   
 
Effect of dilutive RRP awards and stock options
            2,021                       2,034          
                                                   
 
Diluted earnings per share
                                               
 
Income available to common stockholders and assumed conversions
  $ 1,857       1,517,608     $ 1.22     $ 944       1,516,506     $ .62  
                                                   


     
Three Months Ended
   
Three Months Ended
 
     
September 30, 2012
   
September 30, 2011
 
     
Income
   
Weighted Average Shares
   
Per Share Amount
   
Income
   
Weighted Average Shares
   
Per Share Amount
 
     
(Unaudited; In Thousands, Except Share Amounts)
 
 
Basic earnings per share
                                   
 
Income (Loss) available to common stockholders
  $ 755       1,517,793     $ .50     $ (298 )     1,514,472     $ (.20 )
                                                   
 
Effect of dilutive RRP awards and stock options
            2,378                       -          
                                                   
 
Diluted earnings per share
                                               
 
Income (Loss) available to common stockholders and assumed conversions
  $ 755       1,520,171     $ .50     $ (298 )     1,514,472     $ (.20 )

 
Net income for the nine-month period ending September 30, 2012, of $2,129,000 was reduced by $272,000 for dividends on preferred stock in the same period, to arrive at income available to common stockholders of $1,857,000. For the nine-month period ending September 30, 2011, net income of $1,216,000 was reduced by $272,000 for dividends on preferred stock in the same period, to arrive at income available to common stockholders of $944,000.
 
Net income for the three-month period ending September 30, 2012, of $846,000 was reduced by $91,000 for dividends on preferred stock in the same period, to arrive at income available to common stockholders of $755,000. For the three-month period ending September 30, 2011, net loss of $207,000 was increased by $91,000 for dividends on preferred stock in the same period, to arrive at a loss of $298,000.
 
Certain groups of options were not included in the computation of diluted earnings per share because the option price was greater than the average market price of the common shares. For the three-month and nine-month periods ended September 30, 2012 and September 30, 2011, options to purchase 5,000 shares at an exercise price of $22.25 per share were outstanding and were not included in the computation of diluted earnings for those periods.  In addition, for the three months ended September 30, 2011, options to purchase 8,400 shares and 19,000 shares at exercise prices of $13.25 and $14.56 per share were also outstanding and were not included in the computation of diluted earnings per share due to the net loss reported for that period.
 
 
 
8

 
 
NOTE 4: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
 
The Corporation recognizes fair values in accordance with Financial Accounting Standards Codification (ASC) Topic 820. ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
 
 
 
Level 1
Quoted prices in active markets for identical assets or liabilities
 
 
Level 2
Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities
 
 
Level 3
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such instruments pursuant to the valuation hierarchy.
 
 
Available-for-sale Securities
 
Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. The Corporation does not currently hold any Level 1 securities. If quoted market prices are not available, then fair values are estimated by using pricing models which utilize certain market information or quoted prices of securities with similar characteristics (Level 2). For securities where quoted prices, market prices of similar securities or pricing models which utilize observable inputs are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). Discounted cash flows are calculated using spread to swap and LIBOR curves that are updated to incorporate loss severities, volatility, credit spread and optionality. Rating agency industry research reports as well as defaults and deferrals on individual securities are reviewed and incorporated into calculations. Level 2 securities include residential mortgage-backed agency securities, federal agency securities, municipal securities and corporate bonds. Securities classified within Level 3 of the hierarchy include pooled trust preferred securities which are less liquid securities.
 
Fair value determinations for Level 3 measurements of securities are the responsibility of the VP of Finance. The VP of Finance contracts with a third party pricing specialist who generates fair value estimates on a quarterly basis. The VP of Finance’s office challenges the reasonableness of the assumptions used and reviews the methodology to ensure the estimated fair value complies with accounting standards generally accepted in the United States.
 
 
 
 
9

 
 
The following tables present the fair value measurements of assets and liabilities recognized in the accompanying balance sheets measured at fair value on a recurring basis and the level within the ASC Topic 820 fair value hierarchy in which the fair value measurements fall at September 30, 2012 and December 31, 2011, respectively.
 
 
         
September 30, 2012
 
           
Fair Value Measurements Using
 
     
Fair Value
   
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
 
     
(Unaudited; In Thousands)
 
 
Available-for-sale securities
                       
 
Federal agencies
  $ 37,990     $ -     $ 37,990     $ -  
 
State and municipal
    32,132       -       32,132       -  
 
Government-sponsored enterprise (GSE) residential mortgage-backed and other asset-backed agency securities
    38,461       -       38,461       -  
 
Corporate
    3,618       -       2,436       1,182  
 
Total
  $ 112,201     $ -     $ 111,019     $ 1,182  
                                   

 
 
         
December 31, 2011
 
           
Fair Value Measurements Using
 
     
Fair Value
   
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
 
     
(In Thousands)
 
 
Available-for-sale securities
                       
 
Federal agencies
  $ 37,917     $ -     $ 37,917     $ -  
 
State and municipal
    28,715       -       28,715       -  
 
Government-sponsored enterprise (GSE) residential mortgage-backed and other asset-backed agency securities
    34,697       -       34,697       -  
 
Corporate
    3,360       -       2,270       1,090  
 
Total
  $ 104,689     $ -     $ 103,599     $ 1,090  
                                   
 

 
 
10

 
 
The following is a reconciliation of the beginning and ending balances of recurring fair value measurements using significant unobservable (Level 3) inputs for the three-month and nine-month periods ended September 30, 2012 and September 30, 2011:
 
     
Available-For-Sale Securities
 
     
Nine Months Ended
September 30, 2012
   
Nine Months Ended
September 30, 2011
 
     
(Unaudited; In Thousands)
 
               
 
Beginning balance
  $ 1,090     $ 936  
                   
 
Total realized and unrealized gains and losses
               
 
Amortization included in net income
    6       6  
 
Unrealized gains included in other comprehensive income
    105       231  
 
Purchases
    -       -  
 
Pay downs
    (19 )     (10 )
 
Transfers in and/or out of Level 3
    -       -  
                   
 
Ending balance
  $ 1,182     $ 1,163  
 
Total gains or losses for the period included in net income attributable to the change in unrealized gains or losses related to assets and liabilities still held at the reporting date
  $ -     $ -  
                   

 
     
Available-For-Sale Securities
 
     
Three Months Ended
September 30, 2012
   
Three Months Ended
September 30, 2011
 
     
(Unaudited; In Thousands)
 
         
 
Beginning balance
  $ 1,146     $ 1,169  
                   
 
Total realized and unrealized gains and losses
               
 
Amortization included in net income
    2       3  
 
Unrealized gains (losses) included in other comprehensive income
    46       (6 )
 
Purchases
    -       -  
 
Pay downs
    (12 )     (3 )
 
Transfers in and/or out of Level 3
    -       -  
                   
 
Ending balance
  $ 1,182     $ 1,163  
 
Total gains or losses for the period included in net income attributable to the change in unrealized gains or losses related to assets and liabilities still held at the reporting date
  $ -     $ -  

 
There were no realized or unrealized gains or losses of Level 3 securities included in net income for the three-month and nine-month periods ended September 30, 2012 and September 30, 2011.
 
 
11

 
 
The following tables present the fair value measurements of assets and liabilities recognized in the accompanying balance sheets measured at fair value on a nonrecurring basis and the level within the ASC Topic 820 fair value hierarchy in which the fair value measurements fall at September 30, 2012 and December 31, 2011.
 
       
September 30, 2012
 
       
Fair Value Measurements Using
 
   
Fair Value
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
     
(Unaudited; In Thousands)
 
                                   
 
Impaired loans
  $ 4,643     $ -     $ -     $ 4,643  
 
Real estate held for sale
    936       -       -       936  
                                   
                                   
           
December 31, 2011
 
           
Fair Value Measurements Using
 
   
Fair Value
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
     
(In Thousands)
 
                                   
 
Impaired loans
  $ 5,611     $ -     $ -     $ 5,611  
 
Real estate held for sale
    752       -       -       752  

 
Following is a description of the valuation methodologies used for instruments measured at fair value on a nonrecurring basis and recognized in the accompanying balance sheets, as well as the general classification of such instruments pursuant to the valuation hierarchy.
 
 
Impaired Loans (Collateral Dependent)
 
Loans for which it is probable that the Corporation will not collect all principal and interest due according to contractual terms are measured for impairment. Allowable methods for determining the amount of impairment include estimating fair value using the fair value of the collateral for collateral dependent loans.
 
If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value.
 
Impaired loans that are collateral dependent are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method.
 
The Corporation considers the appraisal or evaluation as the starting point for determining fair value and then considers other factors and events in the environment that may affect the fair value. Appraisals of the collateral underlying collateral-dependent loans are obtained when the loan is determined to be collateral-dependent and subsequently as deemed necessary by policy. Appraisals are reviewed for accuracy and consistency by loan review personnel and reported to management. Appraisers are selected from the list of approved appraisers maintained by management. The appraised values are reduced by discounts to consider lack of marketability and estimated cost to sell if repayment or satisfaction of the loan is dependent on the sale of the collateral. These discounts and estimates are developed by loan review personnel by comparison to historical results.
 

 
12

 

Real Estate Held for Sale
 
Real estate held for sale is carried at the fair value less cost to sell and is periodically evaluated for impairment. Real estate held for sale recorded during the current accounting period is recorded at fair value less cost to sell and is disclosed as a nonrecurring measurement. Appraisals of real estate held for sale are obtained when the real estate is acquired and subsequently as deemed necessary by policy. Appraisals are reviewed for accuracy and consistency by loan review personnel and reported to management. Appraisers are selected from the list of approved appraisers maintained by management. Real estate held for sale is classified within Level 3 of the fair value hierarchy.
 
The following is a discussion of the sensitivity of significant unobservable inputs, the interrelationships between those inputs and other unobservable inputs used in recurring and nonrecurring fair value measurement and of how those inputs might magnify or mitigate the effect of changes in the unobservable inputs on the fair value measurement.
 
 
Unobservable (Level 3) Inputs
 
The following table represents quantitative information about Level 3 fair value measurements:
 
   
Fair Value at
September 30, 2012
 
Valuation Techniques
 
Unobservable Input
 
Range (Weighted Average)
   
(Unaudited; In Thousands)
                   
 
Impaired loans
$4,643  
Comparative sales based on independent appraisal
 
Marketability Discount
  10%-20 %
                   
 
Real estate held for sale
$   936  
Comparative sales based on independent appraisal
 
Marketability Discount
  10%-20 %
                   
 
Securities available for sale
               
                   
 
Pooled Trust Preferred
$1,182  
Discounted cash flows
 
*Default probability
  2.81%-4.93 %
           
*Loss, given default
  100 %
           
*Asset correlation
  30%-50 %
           
*Recovery rate
  0 %
           
*Prepayment rate
  0 %

 
Sensitivity of Significant Unobservable Inputs
 
Securities Available for Sale - Pooled Trust Preferred Securities
 
Pooled trust preferred securities are collateralized debt obligations (CDOs) backed by a pool of debt securities issued by financial institutions. The collateral generally consists of trust-preferred securities and subordinated debt securities issued by banks, bank holding companies, and insurance companies. A full discounted cash flow analysis is used to estimate fair values and assess impairment for each security within this portfolio. A third party specialist with direct industry experience in pooled trust preferred security evaluations is engaged to provide assistance estimating the fair value and expected cash flows on this portfolio. The full cash flow analysis is completed by evaluating the relevant credit and structural aspects of each pooled trust preferred security in the portfolio, including collateral performance projections for each piece of collateral in the security, and terms of the security’s structure. The credit review includes an analysis of profitability, credit quality, operating efficiency, leverage, and liquidity using available financial and regulatory information for each underlying collateral issuer. The analysis also includes a review of historical industry default data, current/near term operating conditions, prepayment projections, credit loss assumptions, and the impact of macroeconomic and regulatory changes. Where available, actual trades of securities with similar characteristics are used to further support the value. The cumulative probability of default ranges from a low of 2.81% to 4.93%, and the estimates used for loss given default are 100%.
 
The significant unobservable inputs used in the fair value measurement of the Corporation’s pooled trust preferred securities are probability of default, estimated loss given default, asset correlation for issuers in the same industry (50%) and different industries (30%), and recovery and prepayment rates. Significant increases (decreases) in any of those inputs in isolation could result in a significant change in the fair value measurement.
 
 
 
13

 
 
The following methods and assumptions were used to estimate the fair value of each class of financial instrument:
 
Cash and Cash Equivalents - The fair value of cash and cash equivalents approximates carrying value.
 
Loans Held for Sale - Fair values are based on quoted market prices.
 
Loans - The fair value for loans is estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.
 
FHLB Stock - Fair value of FHLB stock is based on the price at which it may be resold to the FHLB.
 
Interest Receivable/Payable - The fair values of interest receivable/payable approximate carrying values.
 
Deposits - The fair values of noninterest-bearing, interest-bearing demand and savings accounts are equal to the amount payable on demand at the balance sheet date. The carrying amounts for variable rate, fixed-term certificates of deposit approximate their fair values at the balance sheet date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on such time deposits.
 
Borrowings - The fair value of these borrowings are estimated using a discounted cash flow calculation, based on current rates for similar debt or as applicable, based on quoted market prices for the identical liability when traded as an asset.
 
Off-balance sheet Commitments - Commitments include commitments to originate mortgage and consumer loans and standby letters of credit and are generally of a short-term nature. The fair value of such commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The carrying amounts of these commitments, which are immaterial, are reasonable estimates of the fair value of these financial instruments.
 

 
14

 

The following tables present estimated fair values of the Corporation’s financial instruments and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2012 and the fair values of the Corporation’s financial instruments at December 31, 2011.
 
           
Fair Value Measurements Using
 
     
Carrying Amount
   
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
 
     
(Unaudited; In Thousands)
 
 
September 30, 2012:
                       
 
Assets
                       
 
Cash and cash equivalents
  $ 8,392     $ 8,392     $ -     $ -  
 
Investment securities available for sale
    112,201       -       111,019       1,182  
 
Loans, held for sale
    1,358       -       1,358       -  
 
Loans, net of allowance for losses
    253,980       -       -       274,438  
 
Stock in Federal Home Loan Bank
    4,226       -       4,226       -  
 
Interest receivable
    2,160       -       2,160          
 
Liabilities
                               
 
Deposits
    303,160       -       305,120       -  
 
Borrowings
    62,217       -       58,982       6,651  
 
Interest payable
    321       -       321       -  


     
Carrying Amount
   
Fair Value
 
     
(In Thousands)
 
 
December 31, 2011:
           
 
Assets
           
 
Cash and cash equivalents
  $ 18,714     $ 18,714  
 
Investment securities available for sale
    104,689       104,689  
 
Loans, held for sale
    87       87  
 
Loans, net of allowance for losses
    253,096       260,907  
 
Stock in Federal Home Loan Bank
    4,226       4,226  
 
Interest receivable
    1,996       1,996  
 
Liabilities
               
 
Deposits
    305,226       309,156  
 
Borrowings
    65,217       68,546  
 
Interest payable
    401       401  

 
15

 
 
NOTE 5:  INVESTMENT SECURITIES
 
The amortized cost and approximate fair values of securities as of September 30, 2012 and December 31, 2011 are as follows:
 
     
September 30, 2012
 
     
Amortized Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair Value
 
     
(Unaudited; In Thousands)
 
 
Available-for-sale Securities
                       
 
Federal agencies
  $ 37,099     $ 891     $ -     $ 37,990  
 
State and municipal
    30,022       2,114       (4 )     32,132  
 
Government-sponsored enterprise (GSE) residential mortgage-backed and other asset-backed agency securities
    37,142       1,325       (6 )     38,461  
 
Corporate
    4,127       57       (566 )     3,618  
 
Total investment securities
  $ 108,390     $ 4,387     $ (576 )   $ 112,201  
                                   
                                   
     
December 31, 2011
 
     
Amortized Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair Value
 
     
(In Thousands)
 
 
Available-for-sale Securities
                               
 
Federal agencies
  $ 37,107     $ 844     $ (34 )   $ 37,917  
 
State and municipal
    27,076       1,663       (24 )     28,715  
 
Government-sponsored enterprise (GSE) residential mortgage-backed and other asset-backed agency securities
    33,565       1,138       (6 )     34,697  
 
Corporate
    4,115       -       (755 )     3,360  
 
Total investment securities
  $ 101,863     $ 3,645     $ (819 )   $ 104,689  
 

 

 
16

 
 
The amortized cost and fair value of available-for-sale securities at September 30, 2012, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
     
Available-for-Sale
 
     
Amortized Cost
   
Fair Value
 
     
(Unaudited; In Thousands)
 
         
 
Within one year
  $ 5,358     $ 5,415  
 
One to five years
    21,945       22,670  
 
Five to ten years
    25,736       26,671  
 
After ten years
    18,209       18,984  
        71,248       73,740  
 
Government-sponsored enterprise (GSE) residential mortgage-backed and other asset-backed agency securities
    37,142       38,461  
 
Totals
  $ 108,390     $ 112,201  
                   

 
No securities were pledged at September 30, 2012 or at December 31, 2011 to secure FHLB advances. Securities with a carrying value of $47,628,000 and $14,562,000 were pledged at September 30, 2012 and December 31, 2011 to secure public deposits and for other purposes as permitted or required by law.
 
Beginning July 30, 2012 the Indiana Board for Depositories required the Corporation to pledge securities equal to 50% of the average daily balance of public funds as reported each quarter. Of the total pledged at September 30, 2012, $33,979,000 was for this purpose. The requirement was removed effective October 2012.
 
Proceeds from sales of securities available for sale during the nine-month periods ended September 30, 2012 and September 30, 2011 were $6,561,000 and $7,585,000. Gross gains of $450,000 and $270,000 resulting from sales and calls of available-for-sale securities were realized for the nine-month periods ended September 30, 2012 and September 30, 2011, respectively. No losses were recorded for the nine-month periods ended September 30, 2012 or September 30, 2011. Proceeds from sales of securities available for sale during the three-month periods ended September 30, 2012 and September 30, 2011 were $1,740,000 and $4,251,000. Gross gains of $119,000 and $105,000 resulting from sales and calls of available-for-sale securities were realized for the three-month periods ended September 30, 2012 and September 30, 2011, respectively. No losses were recorded for the three-month periods ended September 30, 2012 or September 30, 2011.
 
Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.
 
Certain investments in debt securities are reported in the financial statements at an amount less than their historical cost. Total fair value of these investments at September 30, 2012 was $3,123,000, which is approximately 2.78% of the Corporation’s investment portfolio. The fair value of these investments at December 31, 2011 was $10,869,000, which represented 10.4% of the Corporation’s investment portfolio. Management has the ability and intent to hold securities with unrealized losses to recovery, which may be maturity. Based on evaluation of available evidence, including recent changes in market interest rates, management believes that any declines in fair values for these securities are temporary.
 
Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting credit portion of the loss recognized in net income and the noncredit portion of the loss would be recognized in accumulated other comprehensive income in the period the other-than-temporary impairment is identified.
 

 
17

 
 
The following tables show the Corporation’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2012 and December 31, 2011:
 
   
September 30, 2012
 
   
Less than 12 Months
   
12 Months or More
   
Total
 
Description of Securities
 
Fair Value
   
Unrealized
Losses
   
Fair Value
   
Unrealized
Losses
   
Fair Value
   
Unrealized
Losses
 
   
(Unaudited; In Thousands)
 
                                                 
State and municipal
  $ 645     $ (4 )   $ -     $ -     $ 645     $ (4 )
Government-sponsored enterprise (GSE) residential mortgage-backed and other asset-backed agency securities
    1,296       (6 )     -       -       1,296       (6 )
Corporate
    -       -       1,182       (566 )     1,182       (566 )
                                                 
Total temporarily impaired securities
  $ 1,941     $ (10 )   $ 1,182     $ (566 )   $ 3,123     $ (576 )
                                                 
   
   
December 31, 2011
 
   
Less than 12 Months
   
12 Months or More
   
Total
 
Description of Securities
 
Fair Value
   
Unrealized
Losses
   
Fair Value
   
Unrealized
Losses
   
Fair Value
   
Unrealized
Losses
 
   
(In Thousands)
 
                                                 
Federal agencies
  $ 4,991     $ (34 )   $ -     $ -     $ 4,991     $ (34 )
State and municipal
    733       (20 )     773       (4 )     1,506       (24 )
Government-sponsored enterprise (GSE) residential mortgage-backed and other asset-backed agency securities
    1,012       (6 )     -       -       1,012       (6 )
Corporate
    2,270       (84 )     1,090       (671 )     3,360       (755 )
                                                 
Total temporarily impaired securities
  $ 9,006     $ (144 )   $ 1,863     $ (675 )   $ 10,869     $ (819 )
                                                 
 

 
18

 

State and Municipal
 
The unrealized losses on the Corporation’s investments in securities of state and political subdivisions were primarily caused by interest rate changes. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Corporation does not intend to sell the investments and it is not more likely than not that the Corporation will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Corporation does not consider those investments to be other-than-temporarily impaired at September 30, 2012.
 
Government- Sponsored Enterprise (GSE) Residential Mortgage-Backed and Other Asset-Backed Agency Securities
 
The unrealized losses on the Corporation’s investment in residential mortgage-backed agency securities were primarily caused by interest rate changes. The Corporation expects to recover the amortized cost bases over the term of the securities. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Corporation does not intend to sell the investments and it is not more likely than not that the Corporation will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Corporation does not consider those investments to be other-than-temporarily impaired at September 30, 2012.
 
Corporate Securities
 
The unrealized losses on the Corporation’s investment in corporate securities were due primarily to losses on two pooled trust preferred issues held by the Corporation. The two, ALESCO 9A and PRETSL XXVII, had unrealized losses at September 30, 2012 of $513,000 and $53,000, respectively. At December 31, 2011, the unrealized losses on these two investments were $412,000 and $259,000, respectively. These two securities are both “A” tranche investments (A2A and A-1 respectively) and have performed as agreed since purchase. The two are rated B2 and Baa3, respectively, by Moody’s indicating these securities are considered low medium-grade to below investment grade quality and credit risk. Both provide good collateral coverage at those tranche levels, providing protection for the Corporation. The Corporation has reviewed the pricing reports for these investments and has determined that the decline in the market price is not other than temporary and indicates thin trading activity rather than a true decline in the value of the investment. Factors considered in reaching this determination included the class or “tranche” held by the Corporation, the collateral coverage position of the tranches, the number of deferrals and defaults on the issues, projected and actual cash flows and the credit ratings. These two investments represent 1.6% of the book value of the Corporation’s investment portfolio and approximately 1.1% of market value. The Corporation does not intend to sell the investments and it is not more likely than not that the Corporation will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, and the Corporation expects to receive all contractual cash flows related to these investments. Based upon these factors, the Corporation has determined these securities are not other-than-temporarily impaired at September 30, 2012.
 
 
NOTE 6:  LOANS AND ALLOWANCE
 
The Corporation’s loan and allowance policies are as follows:
 
Loans
 
Loans that management has the intent and ability to hold for the foreseeable future, or until maturity or payoffs, are reported at their outstanding principal balances, adjusted for any charge-offs, the allowance for loan losses, any deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans. Interest income is reported on the interest method and includes amortization of net deferred loan fees and costs over the loan term.
 
Discounts and premiums on purchased residential real estate loans are amortized to income using the interest method over the remaining period to contractual maturity, adjusted for anticipated prepayments. Discounts and premiums on purchased consumer loans are recognized over the expected lives of the loans using methods that approximate the interest method.
 
 
 
19

 
 
Generally, loans are placed on nonaccrual status at 90 days past due and interest is considered a loss, unless the loan is well-secured and in the process of collection. Past due status is based on contractual terms of the loan. For all loan classes, the entire balance of the loan is considered past due if the minimum payment contractually required to be paid is not received by the contractual due date. For all loan classes, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.
 
Consistent with regulatory guidance, charge-offs on all loan segments are taken when specific loans, or portions thereof, are considered uncollectible. The Corporation’s policy is to promptly charge these loans off in the period the uncollectible loss is reasonably determined.
 
For all loan portfolio segments except one-to-four family residential properties and consumer, the Corporation promptly charges off loans, or portions thereof, when available information confirms that specific loans are uncollectible based on information that includes, but is not limited to, (1) the deteriorating financial condition of the borrower, (2) declining collateral values, and/or (3) legal action, including bankruptcy, that impairs the borrower’s ability to adequately meet its obligations. For impaired loans that are considered to be solely collateral dependent, a partial charge-off is recorded when a loss has been confirmed by an updated appraisal or other appropriate valuation of the collateral.
 
The Corporation charges off one-to-four family residential and consumer loans, or portions thereof, when the Corporation reasonably determines the amount of the loss. The Corporation adheres to timeframes established by applicable regulatory guidance which provides for the charge-down of one-to-four family first and junior lien mortgages to the net realizable value less costs to sell when the loan is 180 days past due, charge-off of unsecured open-end loans when the loan is 180 days past due, and charge-down to the net realizable value when other secured loans are 120 days past due. Loans at these respective delinquency thresholds for which the Corporation can clearly document that the loan is both well-secured and in the process of collection, such that collection will occur regardless of delinquency status, need not be charged off.
 
For all loan classes, when loans are placed on nonaccrual, or charged off, interest accrued but not collected is reversed against interest income. Subsequent payments on nonaccrual loans are recorded as a reduction of principal, and interest income is recorded only after principal recovery is reasonably assured. In general, loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Nonaccrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal. However, for impaired loans and troubled debt restructured, which is included in impaired loans, the Corporation requires a period of satisfactory performance of not less than six months before returning a nonaccrual loan to accrual status.
 
When cash payments are received on impaired loans in each loan class, the Corporation records the payment as interest income unless collection of the remaining recorded principal amount is doubtful, at which time payments are used to reduce the principal balance of the loan. Troubled debt restructured loans recognize interest income on an accrual basis at the renegotiated rate if the loan is in compliance with the modified terms.
 
Allowance for Loan Losses
 
The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
 
The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
 
 
 
20

 
 
The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-impaired loans and is based on historical charge-off experience by segment. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Corporation over the prior three years. Management believes the three-year historical loss experience methodology is appropriate in the current economic environment. Other adjustments (qualitative/environmental considerations) for each segment may be added to the allowance for each loan segment after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data.
 
A loan is considered impaired when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent. For impaired loans where the Corporation utilizes the discounted cash flows to determine the level of impairment, the Corporation includes the entire change in the present value of cash flows as provision expense.
 
Segments of loans with similar risk characteristics, including individually evaluated loans not determined to be impaired, are collectively evaluated for impairment based on the group’s historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans. Accordingly, the Corporation does not separately identify individual consumer and residential loans for impairment measurements.
 
The following table presents the breakdown of loans as of September 30, 2012 and December 31, 2011.
 
  
   
September 30, 2012
   
December 31, 2011
 
     
(Unaudited)
       
     
(In Thousands)
 
 
Residential real estate
     
 
Construction
  $ 6,753     $ 8,308  
 
One-to-four family residential
    111,330       111,198  
 
Multi-family residential
    18,267       18,582  
 
Nonresidential real estate and agricultural land
    101,512       83,284  
 
Land (not used for agricultural purposes)
    16,540       19,081  
 
Commercial
    19,414       17,349  
 
Consumer and other
    3,668       3,840  
        277,484       261,642  
 
Unamortized deferred loan costs
    490       481  
 
Undisbursed loans in process
    (20,352 )     (5,024 )
 
Allowance for loan losses
    (3,642 )     (4,003 )
 
Total loans
  $ 253,980     $ 253,096  

 

 
21

 

The risk characteristics of each loan portfolio segment are as follows:
 
Construction
 
Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analysis of the developers and property owners. Construction loans are generally based on estimates of costs and value associated with the complete project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Corporation until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest-rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.
 
One-to-Four Family Residential and Consumer
 
With respect to residential loans that are secured by one-to-four family residences and are generally owner occupied, the Corporation generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. This segment also includes residential loans secured by non-owner occupied one-to-four family residences. Management tracks the level of owner-occupied residential loans versus non-owner occupied loans as a portion of our recent loss history relates to these loans. Home equity loans are typically secured by a subordinate interest in one-to-four family residences, and consumer loans are secured by consumer assets such as automobiles or recreational vehicles. Some consumer loans are unsecured, such as small installment loans and certain lines of credit. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas, such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.
 
Nonresidential (including agricultural land), Land, and Multi-family Residential Real Estate
 
These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Nonresidential and multi-family residential real estate lending typically involves higher loan principal amounts, and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Nonresidential and multi-family residential real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Corporation’s nonresidential and multi-family real estate portfolio are diverse in terms of type and geographic location. Management monitors and evaluates these loans based on collateral, geography and risk grade criteria. As a general rule, the Corporation avoids financing single-purpose projects unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner-occupied real estate loans versus non-owner occupied loans.
 
Commercial
 
Commercial loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory, and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.
 

 
22

 

The following tables present the activity in the allowance for loan losses for the three and nine months ended September 30, 2012 and 2011 and information regarding the breakdown of the balance in the allowance for loan losses and the recorded investment in loans, both presented by portfolio segment and impairment method, as of September 30, 2012 and December 31, 2011.

   
Residential
                               
   
Construction
   
1-4
Family
   
Multi-Family
   
Nonresidential
   
Land
   
Commercial
   
Consumer
   
Total
 
   
(Unaudited; In Thousands)
 
                                                                 
Three Months Ended September 30, 2012
Balances at beginning of period:
  $ 4     $ 1,390     $ 283     $ 1,091     $ 730     $ 8     $ 15     $ 3,521  
Provision for losses
    22       (13 )     5       301       (145 )     82       16       268  
Loans charged off
    -       (32 )     -       (102 )     -       -       (20 )     (154 )
Recoveries on loans
    -       -       -       3       -       -       4       7  
Balances at end of period
  $ 26     $ 1,345     $ 288     $ 1,293     $ 585     $ 90     $ 15     $ 3,642  
                                                                 
Nine Months Ended September 30, 2012
Balances at beginning of period:
  $ 23     $ 1,986     $ 65     $ 822     $ 993     $ 70     $ 44     $ 4,003  
Provision for losses
    (1 )     273       223       599       (68 )     20       18       1,064  
Loans charged off
    -       (994 )     -       (131 )     (340 )     -       (65 )     (1,530 )
Recoveries on loans
    4       80       -       3       -       -       18       105  
Balances at end of period
  $ 26     $ 1,345     $ 288     $ 1,293     $ 585     $ 90     $ 15     $ 3,642  
                                                                 
As of September 30, 2012
Allowance for losses:
                                                               
Individually evaluated for impairment:
  $ -     $ 184     $ 195     $ 45     $ 196     $ -     $ -     $ 620  
Collectively evaluated for impairment:
    26       1,161       93       1,248       389       90       15       3,022  
Balances at end of period
  $ 26     $ 1,345     $ 288     $ 1,293     $ 585     $ 90     $ 15     $ 3,642  
Loans: