UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One) | ||
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| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the quarterly period ended March 31, 2007 |
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| OR |
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| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the transition period from to |
Commission file number: 001-32971
Fox Chase Bancorp, Inc.
(Exact name of registrant as specified in its charter)
United States |
| 33-1145559 |
(State or other jurisdiction of |
| (I.R.S. Employer |
incorporation or organization) |
| Identification No.) |
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4390 Davisville Road, Hatboro, Pennsylvania |
| 19040 |
(Address of principal executive offices) |
| (Zip Code) |
(215) 682-7400
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of May 11, 2007, there were 14,679,750 shares of the registrant’s common stock outstanding.
FOX CHASE BANCORP, INC.
Table of Contents
2
FOX CHASE BANCORP, INC
Consolidated Statements of Condition
(In Thousands, Except Share Data)
|
| March 31, |
| December 31, |
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| 2007 |
| 2006 |
| ||
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| (Unaudited) |
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Assets |
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Cash and due from banks |
| $ | 2,724 |
| $ | 3,295 |
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Interest-earning demand deposits in other banks |
| 112,931 |
| 131,146 |
| ||
Total cash and cash equivalents |
| 115,655 |
| 134,441 |
| ||
Investment securities available-for-sale |
| 66,404 |
| 70,112 |
| ||
Mortgage related securities available-for-sale |
| 146,021 |
| 158,320 |
| ||
Loans held for sale |
| 1,345 |
| 1,194 |
| ||
Loans, net of allowance for loan losses of $2,949 at March 31, 2007 and December 31, 2006 |
| 376,176 |
| 355,617 |
| ||
Federal Home Loan Bank stock, at cost |
| 4,193 |
| 4,422 |
| ||
Bank-owned life insurance |
| 11,431 |
| 11,324 |
| ||
Premises and equipment |
| 14,173 |
| 14,287 |
| ||
Accrued interest and dividends receivable |
| 3,187 |
| 3,397 |
| ||
Mortgage servicing rights |
| 1,150 |
| 1,177 |
| ||
Deferred tax asset, net |
| 795 |
| 1,087 |
| ||
Other assets |
| 1,735 |
| 1,607 |
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Total Assets |
| $ | 742,265 |
| $ | 756,985 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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LIABILITIES |
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Deposits |
| $ | 582,059 |
| $ | 596,534 |
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Federal Home Loan Bank advances |
| 30,000 |
| 30,000 |
| ||
Advances from borrowers for taxes and insurance |
| 1,748 |
| 2,262 |
| ||
Accrued interest payable |
| 280 |
| 298 |
| ||
Accrued expenses and other liabilities |
| 1,604 |
| 2,246 |
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Total Liabilities |
| 615,691 |
| 631,340 |
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STOCKHOLDERS’ EQUITY |
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Preferred stock ($.01 par value; 1,000,000 shares authorized, none issued and outstanding at March 31, 2007 or December 31, 2006) |
| — |
| — |
| ||
Common stock ($.01 par value; 35,000,000 shares authorized, 14,679,750 shares issued and outstanding at March 31, 2007 and December 31, 2006) |
| 147 |
| 147 |
| ||
Additional paid-in capital |
| 62,436 |
| 62,365 |
| ||
Unearned common stock held by employee stock ownership plan |
| (5,275 | ) | (5,371 | ) | ||
Retained earnings |
| 69,838 |
| 69,545 |
| ||
Accumulated other comprehensive loss, net |
| (572 | ) | (1,041 | ) | ||
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Total Stockholders’ Equity |
| 126,574 |
| 125,645 |
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Total Liabilities and Stockholders’ Equity |
| $ | 742,265 |
| $ | 756,985 |
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See accompanying notes to the unaudited consolidated financial statements.
3
FOX CHASE BANCORP, INC
Consolidated Statements of Operations
(In Thousands, Except Per Share Data)
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| Three Months Ended March 31 |
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| 2007 |
| 2006 |
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| (Unaudited) |
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INTEREST INCOME |
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Interest and fees on loans |
| $ | 5,548 |
| $ | 5,425 |
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Interest on mortgage related securities |
| 1,818 |
| 1,886 |
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Interest on investment securities available-for-sale: |
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Taxable |
| 453 |
| 910 |
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Nontaxable |
| 245 |
| 206 |
| ||
Dividend income |
| 66 |
| 193 |
| ||
Other interest income |
| 1,457 |
| 263 |
| ||
Total Interest Income |
| 9,587 |
| 8,883 |
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INTEREST EXPENSE |
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Deposits |
| 4,870 |
| 4,485 |
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Federal Home Loan Bank advances |
| 366 |
| 366 |
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Total Interest Expense |
| 5,236 |
| 4,851 |
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Net Interest Income |
| 4,351 |
| 4,032 |
| ||
Provision for loan losses |
| — |
| — |
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Net Interest Income after Provision for Loan Losses |
| 4,351 |
| 4,032 |
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NONINTEREST INCOME |
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Service charges and other fee income |
| 216 |
| 194 |
| ||
Net gain (loss) on sale of: |
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Loans |
| 57 |
| (12 | ) | ||
Assets acquired through foreclosure |
| — |
| 85 |
| ||
Securities |
| — |
| (17 | ) | ||
Income on bank-owned life insurance |
| 107 |
| 104 |
| ||
Other |
| 56 |
| 74 |
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Total Noninterest Income |
| 436 |
| 428 |
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NONINTEREST EXPENSE |
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Salaries, benefits and other compensation |
| 2,417 |
| 2,095 |
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Occupancy expense |
| 381 |
| 349 |
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Furniture and equipment expense |
| 229 |
| 184 |
| ||
Data processing costs |
| 373 |
| 329 |
| ||
Professional fees |
| 492 |
| 480 |
| ||
Marketing expense |
| 121 |
| 82 |
| ||
FDIC premiums |
| 20 |
| 341 |
| ||
Other |
| 424 |
| 326 |
| ||
Total Noninterest Expense |
| 4,457 |
| 4,186 |
| ||
Income Before Income Taxes |
| 330 |
| 274 |
| ||
Income tax provision |
| 37 |
| 6 |
| ||
Net Income |
| $ | 293 |
| $ | 268 |
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Earnings per share (1): |
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Basic |
| $ | 0.02 |
| $ | — |
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Diluted |
| $ | 0.02 |
| $ | — |
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(1) Due to the timing of the Bank’s reorganization into the mutual holding company form and the completion of the Company’s initial public offering on September 29, 2006, earnings per share information for the three months ended March 31, 2006 is not applicable.
See accompanying notes to the unaudited consolidated financial statements.
4
FOX CHASE BANCORP, INC
Consolidated Statements of Changes in Equity
Three Months Ended March 31, 2007
(In Thousands, Unaudited)
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| Unearned |
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| Accumulated |
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| Common |
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| Other |
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| Additional |
| Stock held |
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| Comprehensive |
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| Common |
| Paid in |
| by |
| Retained |
| Income/ |
| Total |
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| Stock |
| Capital |
| ESOP |
| Earnings |
| (Loss) |
| Equity |
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BALANCE - DECEMBER 31, 2006 |
| $ | 147 |
| $ | 62,365 |
| $ | (5,371 | ) | $ | 69,545 |
| $ | (1,041 | ) | $ | 125,645 |
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Unallocated ESOP shares committed to employees |
| — |
| 35 |
| 96 |
| — |
| — |
| 131 |
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Shares allocated in long-term incentive plan |
| — |
| 36 |
| — |
| — |
| — |
| 36 |
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Net income |
| — |
| — |
| — |
| 293 |
| — |
| 293 |
| ||||||
Net change in unrealized losses on securities available-for-sale, net of taxes |
| — |
| — |
| — |
| — |
| 469 |
| 469 |
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BALANCE – MARCH 31, 2007 |
| $ | 147 |
| $ | 62,436 |
| $ | (5,275 | ) | $ | 69,838 |
| $ | (572 | ) | $ | 126,574 |
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See accompanying notes to the unaudited consolidated financial statements.
5
FOX CHASE BANCORP, INC
Consolidated Statements of Cash Flows
(In Thousands)
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| Three Months Ended March 31, |
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| 2007 |
| 2006 |
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| (Unaudited) |
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CASH FLOWS FROM OPERATING ACTIVITIES |
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Net income |
| $ | 293 |
| $ | 268 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation |
| 260 |
| 233 |
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Net amortization of securities premiums and discounts |
| 86 |
| 284 |
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Provision for deferred income taxes |
| 43 |
| 139 |
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Shares committed to be released to the ESOP |
| 131 |
| — |
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Shares earned in the long-term incentive plan |
| 36 |
| — |
| ||
Origination of loans held for sale |
| (5,557 | ) | (5,706 | ) | ||
Proceeds from sale of loans held for sale |
| 5,422 |
| 3,340 |
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Net realized (gains) on sales of assets acquired through foreclosure and fixed assets |
| — |
| (85 | ) | ||
Net loss on sale and impairment of securities |
| — |
| 17 |
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Net loss (gain) on sales of loans and loans held for sale |
| (57 | ) | 12 |
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Earnings on investment in bank-owned life insurance |
| (107 | ) | (104 | ) | ||
Decrease (increase) in mortgage servicing rights |
| 27 |
| (1 | ) | ||
Decrease in accrued interest and dividends receivable and other assets |
| 109 |
| 107 |
| ||
Increase (decrease) in accrued interest payable, accrued expenses and other liabilities |
| (660 | ) | (105 | ) | ||
Net Cash Provided by (Used in) Operating Activities |
| 26 |
| (1,601 | ) | ||
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CASH FLOWS FROM INVESTING ACTIVITIES |
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Investment securities available for sale securities: |
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Purchases |
| (89 | ) | (27,371 | ) | ||
Proceeds from sales |
| — |
| 17,205 |
| ||
Proceeds from maturities, calls and principal repayments |
| 4,012 |
| 21,300 |
| ||
Mortgage related securities - AFS: |
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Purchases |
| — |
| (27,102 | ) | ||
Proceeds from maturities, calls and principal repayments |
| 12,716 |
| 15,308 |
| ||
Net (increase) decrease in loans |
| (6,774 | ) | 10,664 |
| ||
Purchase of loan participations |
| (13,771 | ) | — |
| ||
Net decrease in Federal Home Loan Bank stock |
| 229 |
| 180 |
| ||
Purchases of premises and equipment |
| (146 | ) | (721 | ) | ||
Proceeds from sales of assets acquired through foreclosure |
| — |
| 192 |
| ||
Net Cash Provided by (Used in) Investing Activities |
| (3,823 | ) | 9,655 |
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CASH FLOWS FROM FINANCING ACTIVITIES |
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Net decrease in deposits |
| (14,475 | ) | (26,415 | ) | ||
Decrease in advances from borrowers for taxes and insurance |
| (514 | ) | (471 | ) | ||
Net Cash Used in Financing Activities |
| (14,989 | ) | (26,886 | ) | ||
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Net Increase in Cash and Cash Equivalents |
| (18,786 | ) | (18,832 | ) | ||
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CASH AND CASH EQUIVALENTS – BEGINNING |
| 134,441 |
| 46,086 |
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CASH AND CASH EQUIVALENTS – ENDING |
| $ | 115,655 |
| $ | 27,254 |
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION |
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Interest paid |
| $ | 5,446 |
| $ | 4,846 |
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Income taxes paid |
| $ | — |
| $ | 170 |
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See accompanying notes to the unaudited consolidated financial statements.
6
FOX CHASE BANCORP, INC
Notes to the Unaudited Consolidated Financial Statements
NOTE 1 - PRINCIPLES OF CONSOLIDATION AND PRESENTATION
Fox Chase Bancorp, Inc. (the “Company”) was organized on September 29, 2006 under the laws of the United States for the purpose of being a holding company for Fox Chase Bank (the “Bank”), a stock savings bank also organized under the laws of the United States. On September 29, 2006, the Company completed its initial public offering in which it sold 6,395,835 shares, or 43.57%, of its outstanding common stock to the public, including 575,446 shares purchased by the Fox Chase Bank Employee Stock Ownership Plan (the “ESOP”). An additional 8,148,915 shares, or 55.51% of the Company’s outstanding stock, were issued to Fox Chase MHC, the Company’s federally chartered mutual holding company. Net proceeds of the offering totaled $56.6 million. Additionally, the Company contributed $150,000 in cash and issued 135,000 shares, or 0.92% of its outstanding common stock, to the Fox Chase Bank Charitable Foundation.
The Company’s primary business is holding the common stock of the Bank and making a loan to the ESOP. Fox Chase Bancorp, Inc. is authorized to pursue other business activities permissible by laws and regulations for other savings and loan holding companies.
The Company provides a wide variety of financial products and services to individuals and businesses through its eleven branches in Philadelphia, Richboro, Willow Grove, Warminster, Lahaska, Hatboro, Media and Exton, Pennsylvania, and Ocean City, Marmora and Egg Harbor Township, New Jersey. The operations of the Company are managed as a single business segment. The Company competes with other financial institutions and other companies that provide financial services.
The Company and Bank are subject to regulations of certain federal banking agencies. These regulations can and do change significantly from period to period. The Company and Bank also undergo periodic examinations by regulatory agencies which may subject it to further changes with respect to asset valuations, amounts of required loss allowances and operating restrictions resulting from the regulators’ judgments based on information available to them at the time of their examinations.
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, the Bank. The Bank’s operations include the accounts of its wholly owned subsidiary, Fox Chase Financial, Inc. Fox Chase Financial, Inc. is a Delaware chartered investment holding company and its sole purpose is to manage and hold investment securities. The consolidated financial statements include the Company beginning on September 29, 2006. The consolidated financial statements and related notes include only the activity and balances of the Bank and its subsidiary through September 29, 2006. The financial statements do not include the transactions and balances of Fox Chase MHC. All material inter-company transactions and balances have been eliminated in consolidation. Prior period amounts are reclassified, when necessary, to conform with the current year’s presentation. The statement of cash flows has been revised to reflect the correction of certain immaterial errors identified by the Company.
The Company follows accounting principles and reporting practices which are in compliance with U.S. generally accepted accounting principles (“GAAP”). The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation and realizability of deferred tax assets and the evaluation of other than temporary impairment of investments. These financial statements do not contain all necessary disclosures required by GAAP and therefore should be read in conjunction with the audited financial statements and the notes thereto included in Fox Chase Bancorp, Inc.’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 29, 2007. These financial statements include all adjustments which management believes were necessary in order to conform to GAAP. The results for the three months ended March 31, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007.
7
Per Share Information
The Company follows the provisions of SFAS No. 128, “Earnings Per Share.” Basic earnings per share exclude dilution and are computed by dividing income available to common stockholders by the weighted-average common shares outstanding during the period. Diluted earnings per share take into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock.
Earnings per share (“EPS”), basic and diluted, were $0.02 for the three months ended March 31, 2007. Earnings per share were not calculated at March 31, 2006 since the Company did not complete its initial public offering until September 29, 2006.
The following table presents the reconciliation of the numerators and denominators of the basic and diluted EPS computations.
| Three |
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| Months Ended |
| |
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| March 31, |
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| 2007 |
| |
Net income |
| $ | 293,000 |
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| |
Weighted-average common shares outstanding |
| 14,679,750 |
| |
Average common stock acquired by stock benefit plans: |
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| |
Unvested shares – long-term incentive plan |
| (38,867 | ) | |
ESOP shares unallocated, net |
| (533,780 | ) | |
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| |
Weighted-average common shares used to calculate basic earnings per share |
| 14,107,103 |
| |
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| |
Dilutive effect of shares in long-term incentive plan |
| 38,867 |
| |
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| |
Weighted-average common shares used to calculate diluted earnings per share |
| 14,145,970 |
| |
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| |
Earnings per share-basic |
| $ | 0.02 |
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Earnings per share-diluted |
| $ | 0.02 |
|
NOTE 2 - INVESTMENT AND MORTGAGE RELATED SECURITIES
The amortized cost and fair value of securities available-for-sale as of March 31, 2007 and December 31, 2006 are summarized as follows:
| March 31, 2007 |
| |||||||||||
|
| Amortized |
| Gross |
| Gross |
| Fair |
| ||||
|
| (In Thousands) |
| ||||||||||
Obligations of U.S. government agencies |
| $ | 42,357 |
| $ | 25 |
| $ | (282 | ) | $ | 42,100 |
|
State and political subdivisions |
| 24,126 |
| 135 |
| (42 | ) | 24,219 |
| ||||
Equity securities |
| 89 |
| — |
| (4 | ) | 85 |
| ||||
|
| 66,572 |
| 160 |
| (328 | ) | 66,404 |
| ||||
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| ||||
Mortgage related securities |
| 146,561 |
| 349 |
| (889 | ) | 146,021 |
| ||||
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| ||||
Total securities |
| $ | 213,133 |
| $ | 509 |
| $ | (1,217 | ) | $ | 212,425 |
|
8
|
| December 31, 2006 |
| ||||||||||
|
| Amortized |
| Gross |
| Gross |
| Fair |
| ||||
|
| (In Thousands) |
| ||||||||||
Obligations of U.S. government agencies |
| $ | 42,344 |
| $ | 4 |
| $ | (470 | ) | $ | 41,878 |
|
State and political subdivisions |
| 24,126 |
| 141 |
| (48 | ) | 24,219 |
| ||||
Corporate debt securities |
| 4,017 |
| — |
| (2 | ) | 4,015 |
| ||||
|
| 70,487 |
| 145 |
| (520 | ) | 70,112 |
| ||||
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| ||||
Mortgage related securities |
| 159,369 |
| 299 |
| (1,348 | ) | 158,320 |
| ||||
|
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|
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|
|
|
|
| ||||
Total securities |
| $ | 229,856 |
| $ | 444 |
| $ | (1,868 | ) | $ | 228,432 |
|
The following tables show gross unrealized losses and fair value of securities, aggregated by security category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2007 and December 31, 2006:
| March 31, 2007 |
| |||||||||||||||||
|
| Less than 12 Months |
| 12 Months or More |
| Total |
| ||||||||||||
|
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| ||||||
|
| (In Thousands) |
| ||||||||||||||||
Obligations of U.S. government agencies |
| $ | — |
| $ | — |
| $ | 32,780 |
| $ | (282 | ) | $ | 32,780 |
| $ | (282 | ) |
State and political subdivisions |
| 1,846 |
| (5 | ) | 2,712 |
| (37 | ) | 4,558 |
| (42 | ) | ||||||
Equity securities |
| 85 |
| (4 | ) | — |
| — |
| 85 |
| (4 | ) | ||||||
Mortgage related securities |
| 14,772 |
| (60 | ) | 62,201 |
| (829 | ) | 76,973 |
| (889 | ) | ||||||
|
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| ||||||
Total securities |
| $ | 16,703 |
| $ | (69 | ) | $ | 97,693 |
| $ | (1,148 | ) | $ | 114,396 |
| $ | (1,217 | ) |
| December 31, 2006 |
| |||||||||||||||||
|
| Less than 12 Months |
| 12 Months or More |
| Total |
| ||||||||||||
|
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| ||||||
|
| (In Thousands) |
| ||||||||||||||||
Obligations of U.S. government agencies |
| $ | 9,265 |
| $ | (19 | ) | $ | 29,614 |
| $ | (451 | ) | $ | 38,879 |
| $ | (470 | ) |
State and political subdivisions |
| 2,632 |
| (8 | ) | 2,708 |
| (40 | ) | 5,340 |
| (48 | ) | ||||||
Corporate debt securities |
| — |
| — |
| 4,015 |
| (2 | ) | 4,015 |
| (2 | ) | ||||||
Mortgage related securities |
| 52,588 |
| (249 | ) | 69,023 |
| (1,099 | ) | 121,611 |
| (1,348 | ) | ||||||
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|
|
|
|
|
|
|
| ||||||
Total securities |
| $ | 64,485 |
| $ (276) |
| $ 105,360 |
| $ | (1,592) |
| $ | 169,845 |
| $ (1,868) |
| |||
9
NOTE 3 - LOANS
The composition of net loans at March 31, 2007, and December 31, 2006 is provided below (in thousands).
| March 31, |
| December 31, |
| |||
|
| (Unaudited) |
|
|
| ||
Real estate loans: |
|
|
|
|
| ||
One-to four-family |
| $ | 208,068 |
| $ | 209,463 |
|
Multi-family and commercial |
| 43,287 |
| 41,720 |
| ||
Construction |
| 19,225 |
| 11,568 |
| ||
|
| 270,580 |
| 262,751 |
| ||
|
|
|
|
|
| ||
Consumer loans: |
|
|
|
|
| ||
Home equity |
| 70,622 |
| 73,456 |
| ||
Automobile |
| 848 |
| 1,030 |
| ||
Lines of credit |
| 9,620 |
| 10,468 |
| ||
Other |
| 140 |
| 148 |
| ||
|
| 81,230 |
| 85,102 |
| ||
Commercial loans |
| 27,847 |
| 11,155 |
| ||
Total Loans |
| 379,657 |
| 359,008 |
| ||
Unearned loan origination fees, net |
| (532 | ) | (442 | ) | ||
Allowance for loan losses |
| (2,949 | ) | (2,949 | ) | ||
Net Loans |
| $ | 376,176 |
| $ | 355,617 |
|
The following table presents changes in the allowance for loan losses (in thousands):
| Three Months |
| Year |
| ||||||
|
| 2007 |
| 2006 |
| 2006 |
| |||
|
| (Unaudited) |
|
|
| |||||
Allowance at beginning of period |
| $ | 2,949 |
| $ | 8,349 |
| $ | 8,349 |
|
Credit for loan losses |
| — |
| — |
| (5,394 | ) | |||
Loans charged off |
| (1 | ) | — |
| (8 | ) | |||
Recoveries |
| 1 |
| — |
| 2 |
| |||
Allowance at end of period |
| $ | 2,949 |
| $ | 8,349 |
| $ | 2,949 |
|
10
NOTE 4 – MORTGAGE SERVICING ACTIVITY
Loans serviced for others are not included in the accompanying consolidated statements of condition. The unpaid principal balances of these loans were $127,281,000 and $137,016,000 at March 31, 2007 and 2006, respectively, and $130,294,000 at December 31, 2006.
The following summarizes mortgage servicing rights for the three months ended March 31, 2007 and 2006 and the year ended December 31, 2006 (in thousands):
| Three Months |
| Years |
| ||||||
|
| 2007 |
| 2006 |
| 2006 |
| |||
|
| (Unaudited) |
| |||||||
Balance, beginning |
| $ | 1,177 |
| $ | 1,168 |
| $ | 1,168 |
|
Mortgage servicing rights capitalized |
| 2 |
| 26 |
| 178 |
| |||
Mortgage servicing rights amortized |
| (29 | ) | (25 | ) | (169 | ) | |||
Balance, ending |
| $ | 1,150 |
| $ | 1,169 |
| $ | 1,177 |
|
For the periods ended March 31, 2007; March 31, 2006 and December 31, 2006, the fair value of the mortgage servicing rights (“MSRs”) was $1,546,000 (unaudited), $1,307,000 (unaudited) and $1,623,000, respectively. The fair value of the MSRs for these periods was determined using a third-party valuation model that calculates the present value of estimated future servicing income. The model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment speeds and discount rates. Mortgage loan prepayment speed is the annual rate at which borrowers are forecasted to repay their mortgage loan principal and is based on historical experience. The discount rate used to determine the present value of future net servicing income - another key assumption in the model - is the required rate of return the market would expect for an asset with similar risk. Both assumptions can, and generally will, change quarterly valuations as market conditions and interest rates change.
NOTE 5 - DEPOSITS
Deposits and their respective weighted average interest rate at March 31, 2007 and December 31, 2006 consist of the following (dollars in thousands):
|
| March 31, 2007 |
| December 31, 2006 |
| ||||||
|
| Weighted |
| Amount |
| Weighted |
| Amount |
| ||
|
| (Unaudited) |
| ||||||||
Non-interest bearing demand accounts |
| — | % | $ | 42,364 |
| — | % | $ | 41,429 |
|
NOW accounts |
| 1.78 |
| 45,142 |
| 1.80 |
| 50,717 |
| ||
Money market accounts |
| 3.96 |
| 32,297 |
| 3.92 |
| 29,770 |
| ||
Savings and club accounts |
| 0.74 |
| 62,099 |
| 0.74 |
| 64,338 |
| ||
Certificates of deposit |
| 4.56 |
| 400,157 |
| 4.43 |
| 410,280 |
| ||
|
| 3.57 | % | $ | 582,059 |
| 3.47 | % | $ | 596,534 |
|
11
NOTE 6 – FEDERAL HOME LOAN BANK ADVANCES
Pursuant to collateral agreements with the Federal Home Loan Bank of Pittsburgh (the “FHLB”), advances are secured by qualifying first mortgage loans, qualifying fixed-income securities, FHLB stock and an interest-bearing demand deposit account with the FHLB. As of March 31, 2007, the Bank has $34,500,000 in qualifying collateral pledged against its advances.
Maturity Date |
| Interest Rate |
| Strike Rate |
| Amount |
| |
|
|
|
|
|
| (in thousands) |
| |
August 2011 |
| 4.89 | % | 7.50 | % | $ | 20,000 |
|
August 2011 |
| 4.87 | % | 7.50 | % | 10,000 |
| |
|
|
|
|
|
| $ | 30,000 |
|
If the Comparative Rate Index (three-month LIBOR) is greater than or equal to the Strike Rate 15 calendar days prior to the 1st Possible Conversion Date or any subsequent Possible Conversion Date, the FHLB will notify the Bank 10 calendar days prior to conversion to an adjustable-rate Advance equal to three-month LIBOR (5.35% at March 31, 2007) plus .2175% on a quarterly basis. The Bank has the option to repay these advances at each of the option dates without penalty. Accordingly, the contractual maturities above may differ from actual maturities.
The Bank has a maximum borrowing capacity with the FHLB of approximately $433.1 million at December 31, 2006, the latest date available.
NOTE 7 - COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) for the three months ended March 31, 2007, and 2006 is as follows (in thousands):
| Three Months |
| |||||
|
| 2007 |
| 2006 |
| ||
|
| (Unaudited) |
| ||||
Net income |
| $ | 293 |
| $ | 268 |
|
|
|
|
|
|
| ||
Other comprehensive gain (loss): |
|
|
|
|
| ||
Unrealized holding gains (losses) arising during the period, net of tax expense (benefit) (three months 3/31/07 and 3/31/06-$249 and $(273), respectively) |
| 469 |
| (529 | ) | ||
Less: Reclassification adjustment for gains (losses) included in net income (loss), net of taxes (three months 3/31/07 and 3/31/06 -$0 and $(6), respectively) |
| — |
| (11 | ) | ||
Other comprehensive (loss) income |
| 469 |
| (518 | ) | ||
Comprehensive income (losses) |
| $ | 762 |
| $ | (250 | ) |
NOTE 8 – RECENT ACCOUNTING PRONOUNCEMENTS
In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets, an amendment of SFAS No. 140.” SFAS No. 156 amends SFAS No. 140 with respect to the accounting for separately recognized servicing assets and servicing liabilities by requiring an entity to recognize a servicing asset or liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract; requires all separately recognized servicing assets and liabilities to be initially measured at fair value, if practical; and permits an entity to choose either of the following methods by which it will subsequently measure each class of separately recognized servicing assets and liabilities:
1. Amortization method - Amortize the servicing assets or liabilities in proportion to and over the period of estimated net servicing income or loss and assess servicing assets and liabilities for impairment or increase obligation based on the fair value at each reporting period.
2. Fair value measurement method - Measure servicing assets or liabilities at fair value at each reporting date and report changes in fair value in earnings in the period in which the change occurs.
12
SFAS No. 156 is effective for fiscal years beginning after September 15, 2006. Earlier adoption is permitted as of the beginning of an entity’s fiscal year, provided the entity has not yet issued its financial statements, including interim financial statements, for any period of that fiscal year. The Company’s adoption of this statement does not have a material impact on its results of operations or financial position.
In June 2006, FASB issued Financial Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes – an interpretation of SFAS Statement No. 109. FIN 48 provides guidance on financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. According to the Interpretation, a tax position is recognized if it is more likely than not that the tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. If the tax position meets more-likely-than-not recognition threshold, the position is measured to determine the amount of benefit to recognize and should be measured at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. Effective January 1, 2007, the Company adopted FIN 48. As of January 1, 2007, the Company had no material unrecognized tax benefits or accrued interest and penalties. The Company’s policy is to account for interest as a component of interest expense and penalties as a component of other expense. Federal and state tax years 2003 through 2006 were open for examination as of January 1, 2007.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurement. This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. This statement applies under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this statement does not require any new fair value measurements.
SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. Earlier adoption is encouraged, provided that the reporting entity has not yet issued financial statements for that fiscal year, including financial statements for an interim period within that fiscal year. The Company is evaluating this statement and has not yet determined the impact on its results of operations or financial position, if any. The Company has determined that it will not early adopt this statement.
The FASB has recently approved the Emerging Issues Task Force (“EITF”) Issue No. 06-4 “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements.” In this issue, the EITF concluded that an endorsement split dollar life insurance policy does not effectively settle an employer’s obligation to provide the post retirement benefit that the policy was designed to provide. Therefore, some current expense recognition may need to be made for any endorsement split dollar plans with post retirement benefits.
This guidance applies to all post retirement endorsement split dollar arrangements. This will not impact split dollar plans that only provide pre-retirement death benefits.
The accrual for the liability would be calculated in one of two ways:
· the actuarial present value of the future death benefit or
· the cost of insurance of the policy during the postretirement period.
Compliance with this EITF must be applied to fiscal years beginning after December 15, 2007 (January 1, 2008 for calendar year entities). It can be made through a cumulative—effect adjustment to retained earnings in the year of adoption or as a change in accounting principles through retrospective application to all prior periods. The Company has not determined if this Statement will have a material impact on its consolidated financial statements upon adoption.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115 (SFAS 159).” SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value and amends SFAS 115 to, among other things, require certain disclosures for amounts for which the fair value option is applied. Additionally, this Statement provides that an entity may reclassify held-to-maturity and available-for-sale securities to the trading account when the fair value option is elected for such securities, without calling into question the intent to hold other securities to maturity in the future. This Statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of SFAS 157. The Company is reviewing the impact of SFAS No. 159 and the impact, if any, on its consolidated financial statements. The Company has determined that it will not early adopt this statement.
13
At its September 2006 meeting, the EITF reached a final consensus on Issue 06-05, “Accounting for Purchases of Life Insurance — Determining the Amount That Could be Realized in Accordance with FASB Technical Bulletin No. 85-4.” Issue 06-05 concludes that in determining the amount that could be realized under an insurance contract accounted for under FASB Technical Bulletin No. 85-4, “Accounting for Purchases of Life Insurance,” the policyholder should (1) consider any additional amounts included in the contractual terms of the policy; (2) assume the surrender value on a individual-life by individual-life policy basis; and (3) not discount the cash surrender value component of the amount that could be realized when contractual restrictions on the ability to surrender a policy exist. Issue 06-05 should be adopted through either (1) a change in accounting principle through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption or (2) a change in accounting principle through retrospective application to all prior periods. Issue 06-05 is effective for fiscal years beginning after December 15, 2006. The application of Issue 06-05 is not expected to have a material effect on the Company’s financial position or results of operations.
NOTE 9- LEGAL PROCEEDINGS
The Company is commonly subject to various pending and threatened legal actions which involve claims for monetary relief. Based upon information presently available to the Company, it is the Company’s opinion that any legal and financial responsibility arising from such claims will not have a material adverse effect on the Company’s results of operations.
On April 28, 2006, Gregory S. Cipa, the former President and Chief Executive Officer of Fox Chase Bank, filed a complaint against Fox Chase Bank in the Civil Division of the Court of Common Pleas of Bucks County, Pennsylvania. In May 2006, Fox Chase Bank moved the case to federal court, answered the complaint and filed a counterclaim. In November 2006, Mr. Cipa amended his complaint, and now alleges Fox Chase Bank breached its contract with him and violated its state statutory obligations by failing to pay Mr. Cipa certain employment benefits which he claims to have earned while serving as the President and Chief Executive Officer of Fox Chase Bank. Mr. Cipa seeks monetary damages in excess of $900,000 and the payment of litigation costs. The parties completed discovery and filed motions for summary judgment that have not yet been ruled upon. Fox Chase Bank believes this action is without merit and intends to vigorously pursue its defenses.
NOTE 10- SUBSEQUENT EVENTS
In April 2007, the Bank moved its operations center to leased space and sold its previous operations center to a third party. This sale will result in a pretax gain of approximately $850,000. Additionally, in April 2007, the Bank purchased a building for approximately $1.4 million in West Chester, Pennsylvania which is expected to open as a full-service branch location in the summer of 2007 after renovations.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation
Forward-Looking Statements
This quarterly report contains forward-looking statements that are based on assumptions and may describe future plans, strategies and expectations of the Company. These forward-looking statements are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company and its subsidiary include, but are not limited to, changes in interest rates, national and regional economic conditions, legislative and regulatory changes, monetary and fiscal policies of the U.S. government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality and composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company’s market area, changes in real estate market values in the Company’s market area, changes in relevant accounting principles and guidelines and the inability of third party service providers to perform their functions. Additional factors that may affect our results are discussed in the section titled “Risk Factors” in the Company’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 29, 2007.
These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, the Company does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.
14
Critical Accounting Policies
We consider accounting policies involving significant judgments and assumptions by management that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies. We consider the following to be our critical accounting policies: allowance for loan losses, deferred income taxes, and other-than-temporary impairment of securities.
Allowance for Loan Losses. The allowance for loan losses is maintained at a level representing management’s best estimate of known and inherent losses in the loan portfolio, based on management’s evaluation of the portfolio’s collectibility. The allowance is established through the provision for loan losses, which is charged against income. Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment. Among the material estimates required to establish the allowance are: loss exposure at default; the amount and timing of future cash flows on impacted loans; value of collateral; and determination of loss factors to be applied to the various elements of the portfolio. All of these estimates are susceptible to significant change. Management reviews the level of the allowance on a quarterly basis and establishes the provision for loan losses based upon an evaluation of the portfolio, past loss experience, current economic conditions and other relevant factors related to the collectibility of the loan portfolio. Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. In addition, the Office of Thrift Supervision, as an integral part of its examination process, periodically reviews our allowance for loan losses. Such agency may require us to recognize adjustments to the allowance based on its judgments about information available to it at the time of its examination. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would negatively affect earnings.
Deferred Income Taxes. We use the asset and liability method of accounting for income taxes as prescribed in Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes.” Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets. These judgments require us to make projections of future taxable income. The judgments and estimates we make in determining our deferred tax assets, which are inherently subjective, are reviewed on a continual basis as regulatory and business factors change. Any reduction in estimated future taxable income may require us to record a valuation allowance against our deferred tax assets. A valuation allowance would result in additional income tax expense in the period, which would negatively affect earnings.
Other-Than-Temporary Impairment of Securities. Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and FASB Staff Position FAS 115-1and 124-1 “The Meaning of Other Than Temporary Impairment and Its Application to Certain Investments,” require companies to perform periodic reviews of individual securities in their investment portfolios to determine whether a decline in the value of a security is other than temporary. A review of other-than-temporary impairment requires companies to make certain judgments regarding the nature of the decline, its effect on the financial statements and the probability, extent and timing of a valuation recovery and the company’s intent and ability to hold the security. Pursuant to these requirements, we assess valuation declines to determine the extent to which such changes are attributable to (1) fundamental factors specific to the issuer, such as financial condition, business prospects or other factors, or (2) market-related factors, such as interest rates or equity market declines. If the decline in the market value of a security is determined to be other than temporary, we reduce the book value of such security to its current market value, recognizing the decline as a realized loss on the income statement.
Comparison of Financial Condition at March 31, 2007 and December 31, 2006
Total assets decreased $14.7 million, or 1.9%, to $742.3 million at March 31, 2007, compared to $757.0 million at December 31, 2006. The reduction in assets was primarily due to an $18.8 million decrease in cash and cash equivalents, which was used to fund the increase of $20.6 million in loans. During the three months ended March 31, 2007, the Company purchased $13.8 million of commercial, construction and commercial real estate loan participations from other financial institutions. Mortgage related securities decreased $12.3 million from December 31, 2006 to March 31, 2007 due primarily to principal payments. Investment securities available-for-sale also decreased $3.7 million as the remaining corporate bonds held by the Company matured in the first quarter.
Deposits decreased $14.5 million, or 2.4%, from $596.5 at December 31, 2006 to $582.1 million at March 31, 2007, primarily certificates of deposit and NOW accounts, as the Bank’s funding needs decreased due to the decrease in assets. Additionally, the
15
Bank is located in a highly competitive deposit market, which combined with the flat yield curve, has created a difficult climate for gathering deposits cost effectively.
Stockholders’ equity increased $1.0 million to $126.6 million at March 31, 2007 compared to $125.6 million at December 31, 2006 primarily due to a decrease in unrealized losses on securities available for sale of $469,000 and net income of $293,000 for the period.
Comparison of Operating Results for the Three Months Ended March 31, 2007 and 2006
General. Net income increased $25,000, or 9.3%, for the three months ended March 31, 2007 compared to the three months ended March 31, 2006, primarily due to a $704,000 increase in interest income offset by an increase in deposit expense of $385,000, an increase of $271,000 in other noninterest expense and an increase in tax expense of $31,000.
Net Interest Income. Net interest income increased $319,000, or 7.9%, to $4.4 million for the three months ended March 31, 2007 compared the same period in 2006 primarily due to an increase in the average yield on earning assets from 4.86% to 5.39% and a decrease in the average balance of interest-bearing liabilities. These changes were offset by a decrease in the average balance of interest-earning assets of $14.7 million and an increase in the average yield on interest-bearing liabilities from 3.00% to 3.70%. The decrease in the average balance of earning assets was primarily due to decreases in mortgage-backed and taxable securities. The decrease in the average balance of interest bearing liabilities was primarily due to decreases in deposit accounts.
16
The following table summarizes average balances and average yields and costs of interest-earning assets and interest-bearing liabilities for the three months ended March 31, 2007 and 2006. Yields are not presented on a tax-equivalent basis. Any adjustments necessary to present yields on a tax-equivalent basis are insignificant. (See also nonperforming loan table).
| Three Months Ended March 31, |
| |||||||||||||||
|
| 2007 |
| 2006 |
| ||||||||||||
|
|
|
| Interest |
|
|
|
|
| Interest |
|
|
| ||||
|
| Average |
| and |
| Yield/ |
| Average |
| and |
| Yield/ |
| ||||
|
| Balance |
| Dividends |
| Cost |
| Balance |
| Dividends |
| Cost |
| ||||
|
| (Dollars in thousands) |
| ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest-bearing demand deposits |
| $ | 113,803 |
| $ | 1,457 |
| 5.12 | % | $ | 21,781 |
| $ | 263 |
| 4.83 | % |
Mortgage-backed securities |
| 152,549 |
| 1,818 |
| 4.77 |
| 193,958 |
| 1,886 |
| 3.89 |
| ||||
Taxable securities |
| 47,457 |
| 519 |
| 4.38 |
| 124,472 |
| 1,103 |
| 3.54 |
| ||||
Nontaxable securities |
| 24,143 |
| 245 |
| 4.06 |
| 21,346 |
| 206 |
| 3.86 |
| ||||
Loans |
| 373,287 |
| 5,548 |
| 5.95 |
| 369,771 |
| 5,425 |
| 5.87 |
| ||||
Allowance for loan losses |
| (2,970 | ) | — |
| — |
| (8,349 | ) | — |
| — |
| ||||
Net loans |
| 370,317 |
| — |
| 5.95 |
| 361,422 |
| — |
| 5.87 |
| ||||
Total interest-earning assets |
| 708,269 |
| 9,587 |
| 5.39 |
| 722,979 |
| 8,883 |
| 4.86 |
| ||||
Noninterest-earning assets |
| 36,132 |
|
|
|
|
| 38,783 |
|
|
|
|
| ||||
Total assets |
| $ | 744,401 |
|
|
|
|
| $ | 761,762 |
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Liabilities and equity: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
NOW and money market deposit accounts |
| $ | 76,111 |
| 395 |
| 2.11 |
| $ | 108,924 |
| 381 |
| 1.42 |
| ||
Savings accounts |
| 63,142 |
| 114 |
| 0.73 |
| 77,094 |
| 134 |
| 0.70 |
| ||||
Certificates of deposit |
| 404,481 |
| 4,361 |
| 4.37 |
| 440,144 |
| 3,970 |
| 3.66 |
| ||||
Total interest-bearing deposits |
| 543,734 |
| 4,870 |
| 3.63 |
| 626,162 |
| 4,485 |
| 2.90 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
FHLB advances |
| 30,000 |
| 366 |
| 4.88 |
| 30,000 |
| 366 |
| 4.88 |
| ||||
Total interest-bearing liabilities |
| 573,734 |
| 5,236 |
| 3.70 |
| 656,162 |
| 4,851 |
| 3.00 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Noninterest-bearing liabilities |
| 39,896 |
|
|
|
|
| 33,379 |
|
|
|
|
| ||||
Other non-interest bearing liabilities |
| 5,695 |
|
|
|
|
| 8,329 |
|
|
|
|
| ||||
Total liabilities |
| 619,325 |
|
|
|
|
| 697,870 |
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total stockholders’ equity |
| $ | 125,076 |
|
|
|
|
| $ | 63,892 |
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total liabilities and stockholders’ equity |
| $ | 744,401 |
|
|
|
|
| $ | 761,762 |
|
|
|
|
| ||
Net interest income |
|
|
| $ | 4,351 |
|
|
|
|
| $ | 4,032 |
|
|
| ||
Interest rate spread |
|
|
|
|
| 1.69 | % |
|
|
|
| 1.86 | % | ||||
Net interest margin |
|
|
|
|
| 2.45 | % |
|
|
|
| 2.21 | % | ||||
Average interest-earning assets to average interest-bearing liabilities |
|
|
|
|
| 123.45 | % |
|
|
|
| 110.18 | % |
(1) Nonperforming loans are included in average balance computations
17
The following table summarizes changes in interest income and interest expense for the three months ended March 31, 2007, and 2006.
| Three Months |
|
|
| |||||
|
| 2007 |
| 2006 |
| % Change |
| ||
|
| (Dollars in thousands) |
|
|
| ||||
Interest income: |
|
|
|
|
|
|
| ||
Loans |
| $ | 5,548 |
| $ | 5,425 |
| 2.27 | % |
Mortgage related securities |
| 1,818 |
| 1,886 |
| (3.61 | ) | ||
Investment securities |
| 698 |
| 1,116 |
| (37.45 | ) | ||
Dividend income |
| 66 |
| 193 |
| (65.80 | ) | ||
Other interest-earning assets |
| 1,457 |
| 263 |
| 453.99 |
| ||
Total interest income |
| 9,587 |
| 8,883 |
| 7.93 | % | ||
|
|
|
|
|
|
|
| ||
Interest expense: |
|
|
|
|
|
|
| ||
NOW and money market deposit accounts |
| $ | 395 |
| $ | 381 |
| 3.67 | % |
Savings accounts |
| 114 |
| 134 |
| (14.93 | ) | ||
Certificates of deposit |
| 4,361 |
| 3,970 |
| 9.85 |
| ||
Total interest-bearing deposits |
| 4,870 |
| 4,485 |
| 8.58 |
| ||
FHLB advances |
| 366 |
| 366 |
| — |
| ||
Total interest expense |
| 5,236 |
| 4,851 |
| 7.94 |
| ||
Net interest income |
| $ | 4,351 |
| $ | 4,032 |
| 7.91 | % |
18
Provision for Loan Losses. The Bank did not record a provision for loan losses in either of the three months periods ending March 31, 2007 and 2006 as the decrease in nonperforming loans was offset by loan growth, particularly commercial, commercial real estate and construction loans, which carry a higher risk of default than one-to-four family loans.
The following table provides information with respect to the Bank’s nonperforming assets at the dates indicated. We did not have any troubled debt restructurings at the dates presented.
|
| At March 31, |
| At December 31, |
| ||
|
| (Dollars in thousands) |
| ||||
Nonaccrual loans: |
|
|
|
|
| ||
One- to four-family |
| $ | 114 |
| $ | 284 |
|
Consumer |
| 44 |
| — |
| ||
Multi-family and commercial real estate |
| — |
| — |
| ||
Total |
| 158 |
| 284 |
| ||
Accruing loans past due 90 days or more: |
|
|
|
|
| ||
Multi-family and commercial real estate |
| — |
| 2,941 |
| ||
Total |
| — |
| 2,941 |
| ||
Total of nonaccrual loans and accruing loans 90 days or more past due |
| $ | 158 |
| $ | 3,225 |
|
Real estate owned |
| — |
| — |
| ||
Total nonperforming assets |
| $ | 158 |
| $ | 3,225 |
|
Total nonperforming loans to total loans |
| 0.04 | % | 0.90 | % | ||
Total nonperforming loans to total assets |
| 0.02 |
| 0.43 |
| ||
Total nonperforming assets to total assets |
| 0.02 |
| 0.43 |
|
Nonperforming assets totaled $158,000, or 0.02% of total assets, at March 31, 2007 compared to $3.2 million, or 0.43% of total assets, at December 31, 2006. During the three months ended December 31, 2006, a loan totaling $2.9 million went past its contractual maturity and was included in the accruing loans past due 90 days or more category of nonperforming assets. The Bank extended the maturity on this loan in the first quarter of 2007 and therefore removed it from the total nonperforming assets, accounting for a majority of the $3.1 million decrease in nonperforming assets. This loan remains current on all required payments under the extension agreement and is secured by real estate. Additionally, the property is under an agreement of sale and expected to be sold in 2007.
Noninterest Income. The following table summarizes other income for the three months ended March 31, 2007, and 2006.
| Three Months |
|
|
| |||||
|
| 2007 |
| 2006 |
| % Change |
| ||
|
| (Dollars in thousands) |
|
|
| ||||
Service charges |
| $ | 216 |
| $ | 194 |
| 11.34 | % |
Net gain (loss) on sale of: |
|
|
|
|
|
|
| ||
Loans |
| 57 |
| (12 | ) | 575.00 |
| ||
Assets acquired through foreclosure |
| — |
| 85 |
| (100.00 | ) | ||
Fixed assets |
| — |
| — |
| — |
| ||
Securities (losses) gains and impairment losses, net |
| — |
| (17 | ) | 100.00 |
| ||
Income on bank-owned life insurance |
| 107 |
| 104 |
| 2.88 |
| ||
Other |
| 56 |
| 74 |
| (24.32 | ) | ||
Total |
| $ | 436 |
| $ | 428 |
| 1.87 | % |
19
The noninterest income for the three months ended March 31, 2007 compared to 2006 remained relatively flat. The increases in gains on sales of loans and service charges were offset by the previous period gain on sale of a foreclosed property. The gains on sales of loans increased as the loans sold in the secondary market increased from $3.3 million in 2006 to $5.4 million in 2007.
Noninterest Expense. The following table summarizes noninterest expense for the three months ended March 31, 2007, and 2006.
| Three Months |
|
|
| |||||
|
| 2007 |
| 2006 |
| % Change |
| ||
|
| (Dollars in thousands) |
|
|
| ||||
Salaries, benefits and other compensation |
| $ | 2,417 |
| $ | 2,095 |
| 15.37 | % |
Occupancy expense |
| 381 |
| 349 |
| 9.17 |
| ||
Furniture and equipment expense |
| 229 |
| 184 |
| 24.46 |
| ||
Data processing costs |
| 373 |
| 329 |
| 13.37 |
| ||
Professional fees |
| 492 |
| 480 |
| 2.50 |
| ||
Marketing expense |
| 121 |
| 82 |
| 47.56 |
| ||
FDIC premiums |
| 20 |
| 341 |
| (94.13 | ) | ||
Other operating expenses |
| 424 |
| 326 |
| 30.06 |
| ||
Total |
| $ | 4,457 |
| $ | 4,186 |
| 6.47 | % |
Noninterest expense increased by $271,000, or 6.5%, between the three months ended March 31, 2007 and 2006. The two largest changes period over period were an increase in salaries and benefits and a decrease in Federal Deposit Insurance Corporation insurance premiums. Salaries and benefits costs rose $322,000 between three month periods due to the hiring of a team of experienced commercial lenders and commercial credit staff in the spring of 2006 and the adoption of an Employee Stock Ownership Plan in September 2006 in conjunction with the Bank’s conversion to a public entity. Federal Deposit Insurance Corporation premiums decreased $321,000 for the three months March 31, 2007 compared to 2006. The reduction in the levels of premiums was primarily due to the lifting of the Bank’s Cease and Desist order on June 28, 2006 and, to a lesser extent, to changes made by the FDIC in the way it assesses financial institutions. The majority of remaining increases in operating expenses were related to the addition of the Marmora, New Jersey branch office and the opening of two loan production offices in Media and Exton, Pennsylvania in the second quarter of 2006. Additionally, marketing costs increased between periods due to additional expenditures to market and promote the Bank’s commercial lending and deposit initiatives.
Income Taxes. The income tax provision for the three months ended March 31, 2007 was $37,000 compared to $6,000 for the three months ended March 31, 2006. The Company’s effective income tax rate was 11.2% and 2.2% for the three-month periods ended March 31, 2007 and 2006, respectively. These rates reflect the Company’s levels of tax-exempt income for both periods relative to the overall level of taxable income.
Liquidity and Capital Management
Liquidity Management. Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, loan sales and repayments, maturities and sales of securities and proceeds from the stock offering. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition.
20
The following table presents certain of our contractual obligations as of March 31, 2007 and December 31, 2006.
|
|
| Payments Due by period |
| ||||||||||||
Contractual Obligations |
| Total |
| Less than |
| One to |
| Three to |
| More Than |
| |||||
|
| (In thousands) |
| |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
At March 31, 2007 |
|
|
|
|
|
|
|
|
|
|
| |||||
Operating lease obligations (1) |
| $ | 2,345 |
| $ | 381 |
| $ | 892 |
| $ | 914 |
| $ | 158 |
|
FHLB advances |
| 36,550 |
| 1,488 |
| 2,978 |
| 32,084 |
| — |
| |||||
Other long-term obligations (2) |
| 4,430 |
| 1,705 |
| 2,725 |
| — |
| — |
| |||||
Total |
| $ | 43,325 |
| $ | 3,574 |
| $ | 6,595 |
| $ | 32,998 |
| $ | 158 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
At December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
| |||||
Operating lease obligations (1) |
| $ | 158 |
| $ | 120 |
| $ | 38 |
| $ | — |
| $ | — |
|
FHLB advances |
| 36,922 |
| 1,487 |
| 2,979 |
| 32,456 |
| — |
| |||||
Other long-term obligations (2) |
| 4,995 |
| 1,754 |
| 3,238 |
| 3 |
| — |
| |||||
Total |
| $ | 42,075 |
| $ | 3,361 |
| $ | 6,255 |
| $ | 32,459 |
| $ | — |
|
(1) Represents lease obligation for commercial loan processing offices.
(2) Represents obligations to the Company’s third party data processing provider.
We regularly adjust our investments in liquid assets based upon our assessment of: (1) expected loan demands; (2) expected deposit flows; (3) yields available on interest-earning deposits and securities; and (4) the objectives of our asset/liability management policy. We use a variety of measures to assess our liquidity needs, which are provided to our Asset/Liability Management Committee on a regular basis. Our policy is to maintain net liquidity of at least 50% of our funding obligations over the next month. Additionally, our policy is to maintain an amount of cash and short-term marketable securities equal to at least 15% of net deposits and liabilities that will mature in one year or less.
Our most liquid assets are cash and cash equivalents. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. At March 31, 2007, cash and cash equivalents totaled $115.7 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $212.4 million at March 31, 2007. In addition, at December 31, 2006, the latest date available, we had the ability to borrow a total of approximately $433.1 million from the Federal Home Loan Bank of Pittsburgh. On March 31, 2007, we had $30.0 million of borrowings outstanding.
At March 31, 2007, we had $85.1 million in loan commitments outstanding, which consisted of $3.7 million of mortgage loan commitments, $23.4 million in unused home equity lines of credit, $1.3 in consumer loans and $56.7 in commercial loans commitments. Certificates of deposit due within one year of March 31, 2007 totaled $225.1 million, or 56.3%, of total certificates of deposit. We believe the large percentage of certificates of deposit that mature within one year reflects customers’ hesitancy to invest their funds for long periods in the current low interest rate environment. If these maturing deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and borrowings. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before March 31, 2007. We believe, however, based on past experience, that a significant portion of these certificates of deposit will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.
Our primary investing activities are the origination and sale of loans and the purchase and sale of securities. Our primary financing activities consist of activity in deposit accounts. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors and other factors. We generally manage the pricing of our deposits to be competitive and to increase core deposit relationships. Occasionally, we offer promotional rates on certain deposit products to attract deposits.
21
The following table presents our primary investing and financing activities during the periods indicated and does not include loans originated and held for sale.
| Three Months Ended |
| Year Ended |
| |||
Investing activities: |
|
|
|
|
| ||
Loan originations |
| $ | (34,050 | ) | $ | (120,515 | ) |
Other decreases in loans |
| 27,276 |
| 137,512 |
| ||
Loan sales |
| — |
| 4,000 |
| ||
Loan purchases |
| (13,771 | ) | (4,788 | ) | ||
Security purchases |
| (89 | ) | (60,207 | ) | ||
Security sales |
| — |
| 17,205 |
| ||
Security maturities, calls and principal repayments |
| 16,728 |
| 145,471 |
| ||
Financing activities: |
|
|
|
|
| ||
Increase (decrease) in deposits |
| (14,475 | ) | (85,773 | ) | ||
Proceeds from stock issuance, net of conversion costs |
| — |
| 62,348 |
| ||
Capital Management. The Bank is subject to various regulatory capital requirements administered by the Office of Thrift Supervision, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At March 31, 2007, the Bank exceeded all of regulatory capital requirements and was considered a “well capitalized” institution under regulatory guidelines.
The following table presents the Bank’s capital ratios and the minimum capital requirements to be considered ‘‘well capitalized” by the OTS as of March 31, 2007 and December 31, 2006:
|
| Ratio |
| Minimum |
|
March 31, 2007: |
|
|
|
|
|
Tier 1 capital (to adjusted assets) |
| 27.03 | % | ³10.0 | % |
Tier 1 capital (to risk-weighted assets) |
| 26.22 | % | ³ 6.0 | % |
Total risk-based capital (to risk-weighted assets) |
| 12.81 | % | ³ 5.0 | % |
|
|
|
|
|
|
December 31, 2006: |
|
|
|
|
|
Tier 1 capital (to adjusted assets) |
| 27.62 | % | ³10.0 | % |
Tier 1 capital (to risk-weighted assets) |
| 26.79 | % | ³ 6.0 | % |
Total risk-based capital (to risk-weighted assets) |
| 12.49 | % | ³ 5.0 | % |
As a result of Fox Chase Bancorp’s initial public stock offering, the Bank’s capital was increased $30.0 million in September 2006. The remaining proceeds of the offering were retained by Fox Chase Bancorp to be used for general corporate purposes. The capital ratios above reflect this infusion of capital as well as reductions in the levels of assets since December 31, 2005.
The capital from the offering significantly increased our liquidity and capital resources. Over time, this initial level of liquidity will be reduced as net proceeds from the stock offering continue to be used for general corporate purposes, including the funding of lending activities. The Company’s financial condition and results of operations will be enhanced by the capital from the offering, resulting in increased net interest-earning assets and net income. However, the large increase in equity resulting from the capital raised in the offering will have an adverse impact on our return on equity. The Company may use capital management tools such as cash dividends and share repurchases. However, under Office of Thrift Supervision regulations, we are not allowed to repurchase any shares during the first year following the offering, except to fund restricted stock awards under stock-based benefit plans, unless extraordinary circumstances exist and we receive regulatory approval. The Company has not yet granted any restricted stock awards or stock options, but is seeking stockholder approval for a long-term equity incentive plan at its upcoming annual meeting of stockholders to be held on May 22, 2007.
22
Off-Balance Sheet Arrangements
In the normal course of operations, we engage in a variety of financial transactions that, in accordance with U.S. generally accepted accounting principles, are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments, letters of credit and lines of credit.
For the period ended March 31, 2007, we engaged in no off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There has not been any material change to the market risk disclosure from that contained in the Company’s Annual Report on Form 10-Q for the year ended December 31, 2006.
Item 4. Controls and Procedures
The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the ��SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. In addition, based on that evaluation, no change in the Company’s internal control over financial reporting occurred during the quarter ended March 31, 2007 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Periodically, there have been various claims and lawsuits against us, such as claims to enforce liens, condemnation proceedings on properties in which we hold security interests, claims involving the making and servicing of real property loans and other issues incident to our business. We are not a party to any pending legal proceedings that we believe would have a material adverse effect on our financial condition, results of operations or cash flows.
On April 28, 2006, Gregory S. Cipa, the former President and Chief Executive Officer of Fox Chase Bank, filed a complaint against Fox Chase Bank in the Civil Division of the Court of Common Pleas of Bucks County, Pennsylvania. In May 2006, Fox Chase Bank moved the case to federal court, answered the complaint and filed a counterclaim. In November 2006, Mr. Cipa amended his complaint, and now alleges Fox Chase Bank breached its contract with him and violated its state statutory obligations by failing to pay Mr. Cipa certain employment benefits which he claims to have earned while serving as the President and Chief Executive Officer of Fox Chase Bank. Mr. Cipa seeks monetary damages in excess of $900,000 and the payment of litigation costs. The parties completed discovery and filed motions for summary judgment that have not yet been ruled upon. Fox Chase Bank believes this action is without merit and intends to vigorously pursue its defenses.
As of March 31, 2007, the risk factors of the Company have not changed materially from those reported in the Annual Report on Form 10-K. In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2006, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
23
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
Not applicable.
Not applicable.
3.1 |
| Charter of Fox Chase Bancorp, Inc. (1) |
3.2 |
| Bylaws of Fox Chase Bancorp, Inc. (1) |
4.1 |
| Stock Certificate of Fox Chase Bancorp, Inc. (1) |
31.1 |
| Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer |
31.2 |
| Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer |
32.0 |
| Section 1350 Certification of Chief Executive Officer and Chief Financial Officer |
|
|
|
|
| * Management contract or compensatory plan, contract or arrangement. (1) Incorporated by reference in this document to the exhibits to the Company’s Registration Statement on Form S-1 (File No. 333-134160), as amended, initially filed with the Securities and Exchange Commission on May 16, 2006. |
24
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.
| FOX CHASE BANCORP, INC. | |||
|
|
|
|
|
Dated: May 14, 2007 |
| By: | /s/ Thomas M. Petro | |
|
|
| Thomas M. Petro |
|
|
|
| President and Chief Executive Officer | |
|
|
| (principal executive officer) |
|
|
|
|
|
|
Dated: May 14, 2007 |
| By: | /s/ Jerry D. Holbrook | |
|
|
| Jerry D. Holbrook |
|
|
|
| Chief Financial Officer and Secretary | |
|
|
| (principal accounting and financial officer) |