UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One) | |
 | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended January 31, 2005 | |
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 0-50684 | |
SE FINANCIAL CORP. | ||
(Exact name of registrant as specified in its charter) | ||
Pennsylvania | 57-1199010 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. employer identification no.) | |
1901-03 Passyunk Avenue, Philadelphia, Pennsylvania | 19148 | |
(Address of principal executive offices) | (Zip Code) | |
Registrant’s telephone number, including area code 215-468-1700 | ||
N/A | ||
Former name, former address and former fiscal year, if changed since last report. | ||
Indicate by check 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 No
No Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: March 09, 2005
Class | Outstanding | |
| $.10 par value common stock | 2,578,875 shares |
Transitional Small Business Disclosure Format (check one): Yes No
No SE FINANCIAL CORP.
FORM 1O-QSB
FOR THE QUARTER ENDED JANUARY 31, 2005
Page Number | |||
EXHIBITS | |||
| 31 | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
| 32 | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||
| 99.1 | Report of Independent Registered Public Accounting Firm | ||
I
SE FINANCIAL CORP.
(Unaudited)
January 31, 2005 | October 31, 2004 | ||||||
| ASSETS | |||||||
| Cash and due from banks | $ | 1,055,866 | $ | 817,854 | |||
| Interest-bearing deposits with other institutions | 1,772,732 | 5,362,940 | |||||
| Cash and cash equivalents | 2,828,598 | 6,180,794 | |||||
| Certificates of deposit in other financial institutions | 189,798 | 188,490 | |||||
| Investment securities available for sale | 47,032,428 | 48,437,319 | |||||
| Loans receivable (net of allowance for loan losses of $ 367,425 and $ 342,875) | 69,270,502 | 64,809,843 | |||||
| Accrued interest receivable | 598,469 | 630,507 | |||||
| Federal Home Loan Bank Stock | 1,043,200 | 1,179,000 | |||||
| Premises and equipment, net | 1,070,830 | 1,063,921 | |||||
| Bank owned life insurance | 1,886,768 | 1,866,689 | |||||
| Other assets | 517,961 | 422,599 | |||||
| TOTAL ASSETS | $ | 124,438,554 | $ | 124,779,162 | |||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
| Liabilities | |||||||
| Deposits | $ | 76,409,587 | $ | 75,385,246 | |||
| Short-term borrowings | 5,500,000 | 7,000,000 | |||||
| Federal Home Loan Bank borrowings | 9,560,396 | 9,576,257 | |||||
| Advances by borrowers for taxes and insurance | 642,542 | 474,548 | |||||
| Accrued interest payable | 43,352 | 113,839 | |||||
| Other liabilities | 468,469 | 626,749 | |||||
| TOTAL LIABILITIES | 92,624,346 | 93,176,639 | |||||
| Stockholders’ Equity | |||||||
| Preferred stock - no par value; 2,000,000 shares authorized; none issued | — | — | |||||
| Common stock - $0.10 par value; 8,000,000 shares authorized; 2,578,875 issued and outstanding | 257,888 | 257,888 | |||||
| Paid-in-capital in excess of par | 24,845,520 | 24,841,836 | |||||
| Retained earnings - substantially restricted | 8,673,726 | 8,450,438 | |||||
| Unallocated shares held by Employee Stock Ownership Plan (“ESOP”) | (1,952,580 | ) | (2,007,498 | ) | |||
| Accumulated other comprehensive income (loss) | (10,346 | ) | 59,859 | ||||
| TOTAL STOCKHOLDERS’ EQUITY | 31,814,208 | 31,602,523 | |||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 124,438,554 | $ | 124,779,162 | |||
See accompanying notes to the unaudited consolidated financial statements.
1
SE FINANCIAL CORP.
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
Three Months Ended January 31, | |||||||
2005 | 2004 | ||||||
| INTEREST AND DIVIDEND INCOME | |||||||
| Loans receivable | $ | 1,135,817 | $ | 894,489 | |||
| Investment securities | |||||||
| Taxable | 437,645 | 243,270 | |||||
| Exempt from federal income tax | 36,088 | 27,982 | |||||
| Interest-bearing deposits with other institutions | 18,137 | 12,192 | |||||
| Other dividend income | 7,719 | 2,400 | |||||
| Total interest and dividend income | 1,635,406 | 1,180,333 | |||||
| INTEREST EXPENSE | |||||||
| Deposits | 487,596 | 475,019 | |||||
| Short-term borrowings | 31,548 | 13,103 | |||||
| Federal Home Loan Bank borrowings | 96,096 | 40,734 | |||||
| Total interest expense | 615,240 | 528,856 | |||||
| NET INTEREST INCOME | 1,020,166 | 651,477 | |||||
| Provision for loan losses | 17,000 | 9,000 | |||||
| NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES | 1,003,166 | 642,477 | |||||
| NONINTEREST INCOME | |||||||
| Service fees on deposit accounts | 66,447 | 67,715 | |||||
| Earnings on bank-owned life insurance | 20,079 | 6,452 | |||||
| Other | 10,220 | 8,031 | |||||
| Total noninterest income | 96,746 | 82,198 | |||||
| NONINTEREST EXPENSE | |||||||
| Compensation and employee benefits | 392,022 | 296,507 | |||||
| Occupancy and equipment | 49,589 | 54,908 | |||||
| Federal deposit insurance premiums | 10,762 | 10,010 | |||||
| Data processing expense | 72,957 | 65,865 | |||||
| Professional fees | 53,432 | 30,444 | |||||
| Other | 113,232 | 105,637 | |||||
| Total noninterest expense | 691,994 | 563,371 | |||||
| INCOME BEFORE TAXES | 407,918 | 161,304 | |||||
| INCOME TAXES | 137,033 | 61,718 | |||||
| NET INCOME | $ | 270,885 | $ | 99,586 | |||
| PER SHARE DATA: | |||||||
| Earnings per share - basic and diluted | $ | 0.11 | Na | ||||
| Weighted average number of shares outstanding - basic and diluted | 2,382,402 | Na | |||||
See accompanying notes to the unaudited consolidated financial statements.
2
SE FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
Common Stock at Par | Additional paid-in Capital | Retained Earnings- Substantially Restricted | Unallocated shares held by ESOP | Accumulated Other Comprehen- sive Income (Loss) | Total Stockholders’ Equity | Comprehen- sive Income | ||||||||||||||||
(Unaudited) | ||||||||||||||||||||||
| Balance, October 31, 2004 | $ | 257,888 | $ | 24,841,836 | $ | 8,450,438 | $ | (2,007,498 | ) | $ | 59,859 | $ | 31,602,523 | |||||||||
| Cash dividends paid | — | — | (47,597 | ) | — | — | (47,597 | ) | ||||||||||||||
| ESOP shares committed to be released | — | 3,684 | — | 54,918 | — | 58,602 | ||||||||||||||||
| Net income | — | — | 270,885 | — | — | 270,885 | $ | 270,885 | ||||||||||||||
| Other comprehensive income: | ||||||||||||||||||||||
| Unrealized loss on avail-able for sale securities net of tax benefit of $(36,166) | — | — | — | — | (70,205 | ) | (70,205 | ) | (70,205 | ) | ||||||||||||
| Comprehensive income | — | — | — | — | — | — | $ | 200,680 | ||||||||||||||
| Balance, January 31, 2005 | $ | 257,888 | $ | 24,845,520 | $ | 8,673,726 | $ | (1,952,580 | ) | $ | (10,346 | ) | $ | 31,814,208 | ||||||||
See accompanying notes to the unaudited consolidated financial statements.
3
SE FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
For the Three Months Ended January 31, | |||||||
2005 | 2004 | ||||||
| OPERATING ACTIVITIES | |||||||
| Net income | $ | 270,885 | $ | 99,586 | |||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
| Provision for loan losses | 17,000 | 9,000 | |||||
| Depreciation, amortization, and accretion | 18,242 | 63,673 | |||||
| Earnings on bank-owned life insurance | (20,079 | ) | (6,452 | ) | |||
| Decrease in principal and interest on loans sold payable | (154,190 | ) | (18,148 | ) | |||
| Increase (decrease) in accrued interest receivable | 32,038 | (13,358 | ) | ||||
| Decrease in accrued interest payable | (70,487 | ) | (5,795 | ) | |||
| Other, net | (84,685 | ) | (47,906 | ) | |||
| Net cash provided by operating activities | 8,724 | 80,600 | |||||
| INVESTING ACTIVITIES | |||||||
| Investment securities available for sale: | |||||||
| Proceeds from principal repayments and maturities | 1,282,048 | 3,819,732 | |||||
| Purchases | (1,262 | ) | (5,247,800 | ) | |||
| Increase in loans receivable, net | (4,459,817 | ) | (684,474 | ) | |||
| Proceeds from sales of real estate owned | 80,000 | 48,000 | |||||
| Redemption of Federal Home Loan Bank stock | 135,800 | 51,500 | |||||
| Purchase of bank-owned life insurance | — | (1,540,000 | ) | ||||
| Purchase of premises and equipment | (26,566 | ) | (20,077 | ) | |||
| Net cash used for investing activities | (2,989,797 | ) | (3,573,119 | ) | |||
| FINANCING ACTIVITIES | |||||||
| Increase (decrease) in deposits, net | 1,024,341 | (1,626,256 | ) | ||||
| Net decrease in short-term borrowings | (1,500,000 | ) | — | ||||
| Repayment of Federal Home Loan Bank borrowings | (15,861 | ) | (14,870 | ) | |||
| Increase in advances by borrowers for taxes and insurance, net | 167,994 | 202,301 | |||||
| Cash dividends | (47,597 | ) | — | ||||
| Net cash used for financing activities | (371,123 | ) | (1,438,825 | ) | |||
| Decrease in cash and cash equivalents | (3,352,196 | ) | (4,931,344 | ) | |||
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 6,180,794 | 6,303,891 | |||||
| CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 2,828,598 | $ | 1,372,547 | |||
| SUPPLEMENTAL CASH FLOW DISCLOSURES | |||||||
| Cash paid: | |||||||
| Interest | $ | 685,727 | $ | 534,651 | |||
| Income taxes | 173,250 | 12,500 | |||||
See accompanying notes to the unaudited consolidated financial statements.
4
SE FINANCIAL CORP.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements include the accounts of SE Financial Corp. (the “Company”) and St. Edmond’s Federal Savings Bank (the “Bank”). The Bank includes its wholly-owned subsidiary, SE Investment Services Corp. (“Services Corp.”). All intercompany transactions have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements have been prepared in accordance with U. S. generally accepted accounting principles for interim financial information and the instructions for Form 10-QSB. In management’s opinion, the financial statements include all adjustments, consisting of normal recurring adjustments, that the Company considers necessary to fairly state the Company’s financial position and the results of operations and cash flows. The balance sheet at October 31, 2004, has been derived from the audited financial statements at that date but does not include all of the necessary informational disclosures and footnotes as required by U. S. generally accepted accounting principles. The results of the Company’s operations for any interim period are not necessarily indicative of the results of the Company’s operations for any other interim period or for a full fiscal year.
NOTE 2 – COMPREHENSIVE INCOME
The components of comprehensive income consist exclusively of unrealized gains and losses on available for sale securities. For the three months ended January 31, 2005, this activity is shown under the heading Comprehensive Income as presented in the Consolidated Statement of Changes in Stockholders’ Equity (Unaudited). For the three months ended January 31, 2004, comprehensive income totaled $274,776.
NOTE 3 – RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004 the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“FAS”) No. 123 (Revised 2004), Share-Based Payment. The statement requires that compensation cost relating to share-based payment transactions be recognized in financial statements and that this cost be measured on the fair value of the equity or liability instruments issued. FAS No. 123 (Revised 2004) covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. The Company will adopt FAS No. 123 (Revised 2004) on July 1, 2006, and is currently evaluating the impact the adoption of the standard will have on the Company’s results of operation.
In October 2003 the American Institute of Certified Public Accountants issued SOP 03-3, Accounting for Loans or Certain Debt Securities Acquired in a Transfer. SOP 03-3 applies to a loan that is acquired where it is probable, at acquisition, that a transferee will be unable to collect all contractually required payments receivable. SOP 03-3 requires the recognition, as accretable yield, of the excess of all cash flows expected at acquisition over the investor’s initial investment in the loan as interest income on a level-yield basis over the life of the loan. The amount by which the loan’s contractually required payments exceed the amount of its expected cash flows at acquisition may not be recognized as an adjustment to yield, a loss accrual, or a valuation allowance for credit risk. SOP 03-3 is effective for loans acquired in fiscal years beginning after December 31, 2004. Early adoption is permitted. The adoption of SOP 03-3 is not expected to have a material impact on the consolidated financial statements.
5
NOTE 4 – INVESTMENTS
The amortized cost and the fair value of available-for-sale investment securities were as follows:
January 31, 2005 | |||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Market Value | ||||||||||
| Mortgage-backed securities: | |||||||||||||
| Fannie Mae | $ | 22,725,476 | $ | 110,173 | $ | (62,916 | ) | $ | 22,772,733 | ||||
| Freddie Mac | 2,505,132 | 14,474 | (7,403 | ) | 2,512,203 | ||||||||
| Government National Mortgage Association securities | 3,062,850 | 54,652 | (39 | ) | 3,117,463 | ||||||||
| Total mortage-backed securities | 28,293,458 | 179,299 | (70,358 | ) | 28,402,399 | ||||||||
| U.S. Government agency securities | 13,455,815 | 28,936 | (164,228 | ) | 13,320,523 | ||||||||
| Corporate securities | 1,000,000 | — | (2,500 | ) | 997,500 | ||||||||
| Municipal securities | 4,112,725 | 41,133 | (27,118 | ) | 4,126,740 | ||||||||
| Total debt securities | 46,861,998 | 249,368 | (264,204 | ) | 46,847,162 | ||||||||
| Mutual funds | 186,106 | — | (840 | ) | 185,266 | ||||||||
| Total | $ | 47,048,104 | $ | 249,368 | $ | (265,044 | ) | $ | 47,032,428 | ||||
October 31, 2004 | ||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Market Value | |||||||||||
| Mortgage-backed securities: | ||||||||||||||
| Fannie Mae | $ | 23,725,032 | $ | 138,467 | $ | (50,781 | ) | $ | 23,812,718 | |||||
| Freddie Mac | 2,673,274 | 19,086 | (13,993 | ) | 2,678,367 | |||||||||
| Government National Mortgage Association securities | 3,192,711 | 65,014 | (236 | ) | 3,257,489 | |||||||||
| Total mortage-backed securities | 29,591,017 | 222,567 | (65,010 | ) | 29,748,574 | |||||||||
| U.S. Government agency securities | 13,457,313 | 44,475 | (156,453 | ) | 13,345,335 | |||||||||
| Corporate securities | 1,000,000 | — | (6,500 | ) | 993,500 | |||||||||
| Municipal securities | 4,113,449 | 68,113 | (16,025 | ) | 4,165,537 | |||||||||
| Total debt securities | 48,161,779 | 335,155 | (243,988 | ) | 48,252,946 | |||||||||
| Mutual funds | 184,843 | — | (470 | ) | 184,373 | |||||||||
| Total | $ | 48,346,622 | $ | 335,155 | $ | (244,458 | ) | $ | 48,437,319 | |||||
The amortized cost and estimated market value of debt securities at January 31, 2005, by contractual maturity, are shown below. Mortgage-backed securities provide for periodic, generally monthly, payments of principal and interest and have contractual maturities ranging from one to thirty years. Expected maturities will differ from contractual maturities because borrowers may have the right to call or repay obligations with or without call or prepayment penalties.
6
Amortized Cost | Estimated Market Value | ||||||
| Due after one year through five years | $ | 8,034,185 | $ | 7,925,077 | |||
| Due after five years through ten years | 10,123,215 | 10,085,300 | |||||
| Due after ten years | 28,704,598 | 28,836,785 | |||||
| $ | 46,861,998 | $ | 46,847,162 | ||||
NOTE 5 – LOANS RECEIVABLE
Loans receivable consist of the following:
January 31, 2005 | October 31, 2004 | ||||||||||||
Type of Loans: | Amount | Percent | Amount | Percent | |||||||||
(Dollars in thousands) | |||||||||||||
| Mortgage loans: | |||||||||||||
| One-to four- family (1) | $ | 44,938,928 | 64.44 | % | $ | 43,357,098 | 66.45 | % | |||||
| Multi-family | 467,621 | 0.67 | % | 1,036,017 | 1.59 | % | |||||||
| Commercial real estate | 5,118,559 | 7.34 | % | 4,939,451 | 7.57 | % | |||||||
| Construction (2) | 8,223,324 | 11.79 | % | 5,536,598 | 8.49 | % | |||||||
| Home equity loans and lines of credit | 10,459,778 | 15.00 | % | 9,798,082 | 15.02 | % | |||||||
| Loans on savings accounts | 379,556 | 0.54 | % | 438,588 | 0.67 | % | |||||||
| Other | 154,885 | 0.22 | % | 140,648 | 0.21 | % | |||||||
| Total loans | 69,742,651 | 100.00 | % | 65,246,482 | 100.00 | % | |||||||
| Less: | |||||||||||||
| Net deferred loan fees and unamortized premiums | 104,724 | 93,764 | |||||||||||
| Allowance for loan losses | 367,425 | 342,875 | |||||||||||
| Total loans, net | $ | 69,270,502 | $ | 64,809,843 | |||||||||
| (1) | Included in this category are mixed-use loans and investor loans. |
| (2) | Included in this category are participation interest in six loans with an aggregate balance of $3.3 million at January 31, 2005 and four loans with an aggregate balance of $2.0 million at October 31, 2004. |
NOTE 6 – FEDERAL HOME LOAN BANK BORROWINGS
The following tables set forth information concerning advances with the FHLB:
7
Description | Maturity range | Weighted- average interest rate | Stated interest rate range | At January 31, 2005 | At October 31, 2004 | |||||||||||||||||
from | to | from | to | |||||||||||||||||||
| Short-term borrowings | 04/12/05 | 05/02/05 | 2.29 | % | 1.88 | % | 2.76 | % | $ | 5,500,000 | $ | 7,000,000 | ||||||||||
| Convertible | 02/18/10 | 02/18/10 | 5.91 | % | 5.91 | % | 5.91 | % | 1,000,000 | 1,000,000 | ||||||||||||
| Mid Term Repo Fixed | 05/01/06 | 04/30/07 | 2.97 | % | 2.63 | % | 3.30 | % | 6,000,000 | 6,000,000 | ||||||||||||
| Fixed Rate | 04/30/08 | 08/20/08 | 5.29 | % | 3.86 | % | 6.24 | % | 2,500,000 | 2,500,000 | ||||||||||||
| Fixed Rate amortizing | 11/03/05 | 11/03/05 | 6.47 | % | 6.47 | % | 6.47 | % | 60,396 | 76,257 | ||||||||||||
| Total | $ | 15,060,396 | $ | 16,576,257 | ||||||||||||||||||
The Bank entered into a ten-year “Convertible Select” fixed commitment advance arrangement for $1,000,000 with the FHLB. Rates may be reset at the FHLB’s discretion on a quarterly basis based on the three-month LIBOR rate. At each rate change the Bank may exercise a put option and satisfy the obligation without penalty. The fixed rate amortizing borrowing requires monthly payments of principal and interest of $5,670 through November 2005.
All borrowings from the FHLB are secured by a blanket lien on qualified collateral, defined principally as investment securities and mortgage loans which are owned by the Bank free and clear of any liens or encumbrances.
Maturities of FHLB borrowings at January 31, 2005 are summarized as follows:
Year Ending October 31, | Amount | Weighted- Average Rate | |||||
| 2005 | $ | 5,549,148 | 2.55 | % | |||
| 2006 | 3,011,248 | 2.64 | % | ||||
| 2007 | 3,000,000 | 3.30 | % | ||||
| 2008 | 2,500,000 | 5.29 | % | ||||
| 2010 | 1,000,000 | 5.91 | % | ||||
| $ | 15,060,396 | 3.40 | % | ||||
NOTE 7 – EARNINGS PER SHARE
The Company currently maintains a simple capital structure; thus, there are no dilutive effects on earnings per share. As such, earnings per share are calculated using the weighted-average number of shares outstanding for the period.
8
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
This document contains forward-looking statements, including statements about anticipated operating and financial performance, such as loan originations, operating efficiencies, loan sales, charge-offs and loan loss provisions, growth opportunities, interest rates, and deposit growth. Words such as “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “project,” “plan,” and similar expressions are intended to identify these forward-looking statements.
Forward-looking statements are necessarily subject to many risks and uncertainties. A number of things could cause actual results to differ materially from those indicated by the forward-looking statements. Many of the risks and uncertainties are beyond our control. Forward-looking statements are based on our beliefs, plans, objectives, goals, assumptions, expectations, estimates, and intentions as of the date the statements are made. There is no assurance that these beliefs, plans, objectives, goals, assumptions, expectations, estimates, and intentions will be realized.
Comparison of the Results of Operations for the Three Months Ended January 31, 2005 and January 31, 2004
The Company recorded net income of $270.9 thousand for the three months ended January 31, 2005, which represents an increase of $171.3 thousand, or 172.0%, over the same period in 2004. The increase in net income is primarily due to an increase in net interest income and non-interest income partially offset by an increase in non-interest expense.
Net Interest Income. Net interest income for the three months ended January 31, 2005 increased to $1.0 million from $651.5 thousand for the same period in 2004 as a result of an increase in total interest income offset by an increase in interest expense. Interest income for the three months ended January 31, 2005 totaled $1.6 million as compared to $1.2 million for the three months ended January 31, 2004. This increase of $455.1 thousand was attributed primarily to an increase in the average balance of interest-earning assets to $119.1 million for the three months ended January 31, 2005 from $83.3 million for the three months ended January 31, 2004. This increase was offset by a decrease in the average yield on interest-earning assets to 5.55% for the three months ended January 31, 2005 from 5.74% for the three months ended January 31, 2004. The average balance of net loans receivable and investment securities increased by $16.9 million and $20.0 million, respectively, while the average yield on net loans receivable decreased by 0.35% due to the interest rate environment.
Interest expense increased to $615.0 thousand for the three months ended January 31, 2005 from $528.9 thousand for the three months ended January 31, 2004 and was primarily attributable to an increase in the average balance of interest-bearing liabilities to $87.6 million for the three months ended January 31, 2005 from $75.3 million for the three months ended January 31, 2004 while the average cost of funds remained constant at 2.81%. This increase is mainly due to additional FHLB borrowings, the proceeds of which were used to purchase mortgage-backed securities.
Loan Loss Provision. The provision for loan losses was $17.0 thousand for the three months ended January 31, 2005 compared to $9.0 thousand for the three months ended January 31, 2004. The loan loss provision is based upon management’s assessment of a variety of factors, including types and amounts of nonperforming loans, historical loss experience, collectibility of collateral values and guaranties, pending legal action for collection of loans and related guaranties, and current economic conditions. The allowance represents management’s best estimate of known and inherent losses in the loan portfolio at the balance sheet date that are both probable and reasonable to estimate. However, actual loan losses could exceed the amounts that have been charged to operations.
9
Non-interest Income. Total non-interest income increased to $96.7 thousand for the three months ended January 31, 2005 compared to $82.2 thousand for the three months ended January 31, 2004. The increase is principally due to the earnings on bank-owned life insurance of $14.0 thousand.
Non-interest Expense. Non-interest expense increased to $692.0 thousand for the three months ended January 31, 2005 from $563.4 thousand for the three months ended January 31, 2004. Compensation and employee benefit expense increased by approximately $95.5 thousand. This increase was due to a normal increase in salaries, an increase in medical insurance costs, implementation of an incentive retirement plan and implementation of an employee stock ownership plan during 2004. Occupancy and equipment expense decreased by approximately $5.3 thousand. This decrease was attributable to a reduction in depreciation expense. Data processing expense increased by $7.1 thousand. Professional fees increased by approximately $23.0 thousand. This increase was mainly due to an increase in accounting, auditing and legal fees that resulted from becoming a public reporting company. Miscellaneous expense increased by $7.6 thousand mainly due to increased advertising.
Additionally, the Bank currently plans to add seven full time employees to its staff over the next several years, including up to three new lending/business development officers, an assistant branch manager, and a support staff employee in each of the accounting, lending and customer service departments.
Income Taxes. Income tax expense increased to $137.0 thousand for the three months ended January 31, 2005 from $61.7 thousand for the same period in 2004. This was due to an increase in pre-tax income.
Comparison of Financial Condition at January 31, 2005 and October 31, 2004
Assets and Liabilities. The Company’s total assets remained stable at $124.4 million at January 31, 2005. The Company’s total assets at October 31, 2004 were $124.8 million.
Cash and cash equivalents decreased to $2.8 million at January 31, 2005 from $6.2 million at October 31, 2004. Cash and cash equivalents decreased during the period as funds were utilized to fund loan originations.
Investment securities available for sale decreased by $1.4 million to $47.0 million at January 31, 2005 from $48.4 million at October 31, 2004. The decrease is principally due to mortgage-backed security repayments.
Net loans receivable increased $4.5 million, or 6.9%, to $69.3 million at January 31, 2005 from $64.8 million at October 31, 2004, as the Company continued to experience strong loan production and repayments were more moderate. The increase in net loans receivable was the result of increases in one- to four-family residential mortgages (which includes owner and non-owner occupied properties), home equity loans and construction financing in the amount of $1.6 million, $661.7 thousand and $2.7 million, respectively.
The allowance for loan losses increased to $367.4 thousand at January 31, 2005 from $342.9 thousand at October 31, 2004 and represented 0.52% of the gross loan portfolio at January 31, 2005. The Company had nonaccrual loans of $184.8 thousand and $53.8 thousand at January 31, 2005 and October 31, 2004, respectively. Management does not believe the nonaccrual loans or any amounts classified as nonperforming will have a significant effect on operations or liquidity in 2005. Furthermore, management is not aware of any trends or uncertainties related to any loans classified as doubtful or substandard that might have a material effect on earnings, liquidity or capital resources.
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Total deposits increased to $76.4 million at January 31, 2005 from $75.4 million at October 31, 2004. This was primarily a result of an increase in certificates of deposit of $2.0 million offset by an decrease in core accounts of $1.0 million.
Federal Home Loan Bank borrowings decreased to $15.1 million at January 31, 2005 from $16.6 million at October 31, 2004. The decrease is due to a payoff in the amount of $1.5 million.
Stockholders’ Equity. Total stockholders’ equity increased to $31.8 million at January 31, 2005 from $31.6 million at October 31, 2004. This increase was attributable to net income of $270.9 thousand and the release of ESOP shares in the amount of $58.6 thousand, offset by accumulated other comprehensive loss of $70.2 thousand and cash dividends paid in the amount of $47.6 thousand. Accumulated other comprehensive income decreased as a result of changes in the net unrealized loss on investment securities available for sale. Because of interest rate volatility, accumulated other comprehensive income (loss) could materially fluctuate for each interim period and year end period depending on economic and interest rate conditions.
Liquidity and Capital Resources
Liquidity. Liquidity management for the Company is measured and monitored on both a short- and long-term basis, allowing management to better understand and react to emerging balance sheet trends. After assessing actual and projected cash flow needs, management seeks to obtain funding at the most economical cost to the Company. Both short- and long-term liquidity needs are addressed by maturities and sales of investments securities, and loan repayments and maturities. The use of these resources, in conjunction with access to credit, provides the core ingredients for satisfying depositor, borrower, and creditor needs.
The Company’s liquid assets consist of cash and cash equivalents, certificates of deposit in other financial institutions and investment securities classified as available for sale. The level of these assets is dependent on the Company’s operating, investing, and financing activities during any given period. At January 31, 2005, cash and cash equivalents totaled approximately $2.8 million, or 2.3% of total assets while investment securities classified as available for sale and certificates of deposit in other financial institutions totaled approximately $47.2 million, or 37.9% of total assets. Management believes that the liquidity needs of the Company are satisfied by the current balance of cash and cash equivalents, readily available access to traditional funding sources, FHLB advances, and the portion of the investment and loan portfolios that mature within one year.
Operating activities provided net cash of approximately $8.7 thousand and $80.6 thousand for the three months ended January 31, 2005 and 2004, respectively and were principally generated from net income of $270.9 thousand and $99.6 thousand in each of the respective periods.
Investing activities consist primarily of loan originations and repayments and investment purchases and maturities. For the three months ended January 31, 2005, these cash usages primarily consisted of an increase in net loans receivable of $4.5 million. Partially offsetting the usage of investment activities is $1.3 million of proceeds from investment security maturities and repayments. For the same period ended 2004, cash usages primarily consisted of investment purchases of $5.2 million and the purchase of bank-owned life insurance in the amount of $1.5 million. Partially offsetting the usage of investment activities were net repayment of loans in the amount of $684.5 thousand and proceeds from repayments and maturities of investment securities in the amount of $3.8 million.
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Financing activities consist of the solicitation and repayment of customer deposits, borrowings and repayments, and advances by borrowers for taxes and insurance and the payment of cash dividends. For the three months ended January 31, 2005, net cash used for financing activities totaled $371.1 thousand and was principally from the repayment of short-term borrowings in the amount of $1.5 million offset by an increase in deposits in the amount of $1.0 million. For the same period in 2004, net cash used for financing activities totaled $1.4 million and was primarily from a decrease in deposits.
Liquidity may be adversely affected by unexpected deposit outflows, interest rates paid by competitors, and similar matters. Management monitors projected liquidity needs and determines the level desirable, based in part on the Company’s commitment to make loans, as well as management’s assessment of the Company’s ability to generate funds. The Bank anticipates that it will have sufficient liquidity to satisfy expected short-term and long-term funding needs.
Capital. The Company’s primary source of capital has been retained earnings. Historically, the Bank has generated net retained income to support normal growth and expansion. The proceeds of the stock offering in connection with the Company’s recently completed mutual-to-stock conversion are part of management’s new capital planning policy to ensure compliance with regulations and to permit future expansion. The infusion of this new capital significantly increased the Company’s capital resources by increasing equity.
The Bank is subject to federal regulations imposing minimum capital requirements. Management monitors the Bank’s total risk-based, Tier I risk-based, and Tier I leverage capital ratios to assess compliance with regulatory guidelines. At January 31, 2005, the Bank exceeded the minimum capital ratio requirements.
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Based on his evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)), the Company’s principal financial officer and interim acting principal executive officer has concluded that as of the end of the period covered by this Quarterly Report on Form 10-QSB such disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
(b) Changes in internal control over financial reporting. During the quarter under report, there was no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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ITEM 1. | LEGAL PROCEEDINGS |
| Not applicable. | |
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
| None | |
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
| Not applicable. | |
ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
| None. | |
ITEM 5. | OTHER INFORMATION |
| None |
ITEM 6. | EXHIBITS | |
| (a) | Exhibits | |
3(i) | Articles of Incorporation of SE Financial Corp. * | |
3(ii) | Bylaws of SE Financial Corp. * | |
4 | Specimen Stock Certificate of SE Financial Corp. * | |
10.1 | Executive Life Insurance Plan ** | |
10.2 | Directors’ Incentive Retirement Plan ** | |
10.3 | Executive Officers’ Incentive Retirement Plan ** | |
31 | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32 | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
99.1 | Independent Accountant’s Report | |
| * | Incorporated by reference to the identically numbered exhibit to the Company’s registration statement on Form SB-2 (File No. 333-112153) filed with the SEC on January 23, 2004. |
| ** | Incorporated by reference to the identically numbered exhibit to the Company’s registration statement on Form SB-2 (File No. 333-112153) filed with the SEC on March 1, 2004. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
SE FINANCIAL CORP. | |
| Date: March 10, 2005 | /s/ JOSEPH SIDEBOTHAM |
| Joseph Sidebotham | |
| Executive Vice President, Chief Financial Officer, Controller and Interim President and Chief Executive Officer | |
| (Duly authorized Officer and Principal Financial & Accounting Officer) |
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