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, 2009 | ||
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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 |
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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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer o |
| Accelerated Filer x |
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Non-Accelerated Filer o |
| Smaller Reporting Company o |
(Do not check if a smaller reporting company) |
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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 1, 2009, there were 13,956,170 shares of the registrant’s common stock outstanding.
FOX CHASE BANCORP, INC.
2
FOX CHASE BANCORP, INC
Consolidated Statements of Condition
(In Thousands, Except Share Data)
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| March 31, |
| December 31, |
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| 2009 |
| 2008 |
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| (unaudited) |
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ASSETS |
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Cash and due from banks |
| $ | 375 |
| $ | 642 |
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Interest-earning demand deposits in other banks |
| 31,722 |
| 3,302 |
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Money market funds |
| 103,000 |
| — |
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Total cash and cash equivalents |
| 135,097 |
| 3,944 |
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Investment securities available-for-sale |
| 31,657 |
| 25,041 |
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Mortgage related securities available-for-sale |
| 307,669 |
| 269,682 |
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Loans, net of allowance for loan losses of $6,510 at March 31, 2009 and $6,260 at December 31, 2008 |
| 616,291 |
| 588,975 |
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Federal Home Loan Bank stock, at cost |
| 9,707 |
| 9,707 |
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Bank-owned life insurance |
| 12,323 |
| 12,214 |
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Premises and equipment |
| 13,540 |
| 13,705 |
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Accrued interest receivable |
| 3,907 |
| 3,721 |
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Mortgage servicing rights |
| 756 |
| 827 |
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Deferred tax asset, net |
| 719 |
| 1,869 |
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Other assets |
| 2,830 |
| 1,585 |
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Total Assets |
| $ | 1,134,496 |
| $ | 931,270 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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LIABILITIES |
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Deposits |
| $ | 810,095 |
| $ | 608,472 |
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Federal Home Loan Bank advances |
| 145,339 |
| 146,379 |
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Other borrowed funds |
| 50,000 |
| 50,000 |
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Advances from borrowers for taxes and insurance |
| 2,427 |
| 2,589 |
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Accrued interest payable |
| 733 |
| 727 |
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Accrued expenses and other liabilities |
| 1,982 |
| 1,883 |
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Total Liabilities |
| 1,010,576 |
| 810,050 |
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STOCKHOLDERS’ EQUITY |
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Preferred stock ($.01 par value; 1,000,000 shares authorized, none issued and outstanding at March 31, 2009 and December 31, 2008) |
| — |
| — |
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Common stock ($.01 par value; 35,000,000 shares authorized, 14,679,750 shares issued and 13,977,520 shares outstanding at March 31, 2009 and 14,679,750 shares issued and 14,066,559 shares outstanding at December 31, 2008) |
| 147 |
| 147 |
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Additional paid-in capital |
| 63,758 |
| 63,516 |
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Treasury stock (at cost, 702,230 shares at March 31, 2009 and 613,191 shares at December 31, 2008) |
| (8,149 | ) | (7,293 | ) | ||
Common stock acquired by benefit plans |
| (7,695 | ) | (7,819 | ) | ||
Retained earnings |
| 73,261 |
| 72,664 |
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Accumulated other comprehensive income, net |
| 2,598 |
| 5 |
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Total Stockholders’ Equity |
| 123,920 |
| 121,220 |
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Total Liabilities and Stockholders’ Equity |
| $ | 1,134,496 |
| $ | 931,270 |
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See accompanying notes to the unaudited consolidated financial statements.
3
FOX CHASE BANCORP, INC
Consolidated Statements of Operations
(Unaudited)
(In Thousands, Except Per Share Data)
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| Three Months Ended |
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| March 31, |
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| 2009 |
| 2008 |
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INTEREST INCOME |
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Interest and fees on loans |
| $ | 8,377 |
| $ | 7,128 |
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Interest on money market funds |
| 38 |
| 275 |
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Interest on mortgage related securities available-for-sale |
| 3,255 |
| 2,904 |
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Interest on investment securities available-for-sale |
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Taxable |
| 124 |
| 651 |
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Nontaxable |
| 143 |
| 168 |
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Dividend income |
| 1 |
| 58 |
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Other interest income |
| 1 |
| 70 |
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Total Interest Income |
| 11,939 |
| 11,254 |
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INTEREST EXPENSE |
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Deposits |
| 4,379 |
| 5,107 |
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Federal Home Loan Bank advances |
| 1,330 |
| 1,030 |
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Other borrowed funds |
| 429 |
| 182 |
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Total Interest Expense |
| 6,138 |
| 6,319 |
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Net Interest Income |
| 5,801 |
| 4,935 |
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Provision for loan losses |
| 395 |
| 175 |
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Net Interest Income after Provision for Loan Losses |
| 5,406 |
| 4,760 |
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NONINTEREST INCOME |
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Service charges and other fee income |
| 170 |
| 191 |
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Net gain on sale of: |
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Securities available-for-sale |
| — |
| 70 |
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Loans |
| 3 |
| 3 |
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Income on bank-owned life insurance |
| 109 |
| 111 |
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Other |
| 65 |
| 18 |
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Total Noninterest Income |
| 347 |
| 393 |
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NONINTEREST EXPENSE |
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Salaries, benefits and other compensation |
| 2,850 |
| 2,798 |
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Occupancy expense |
| 495 |
| 486 |
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Furniture and equipment expense |
| 221 |
| 216 |
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Data processing costs |
| 385 |
| 393 |
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Professional fees |
| 266 |
| 313 |
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Marketing expense |
| 84 |
| 95 |
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FDIC premiums |
| 241 |
| 30 |
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Other |
| 409 |
| 391 |
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Total Noninterest Expense |
| 4,951 |
| 4,722 |
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Income Before Income Taxes |
| 802 |
| 431 |
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Income tax provision |
| 201 |
| 86 |
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Net Income |
| $ | 601 |
| $ | 345 |
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Earnings per shares: |
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Basic |
| $ | 0.05 |
| $ | 0.03 |
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Diluted |
| $ | 0.05 |
| $ | 0.03 |
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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, 2009
(In Thousands, Unaudited)
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| Common |
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| Accumulated |
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| Additional |
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| Stock |
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| Other |
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| Common |
| Paid in |
| Treasury |
| Acquired by |
| Retained |
| Comprehensive |
| Total |
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| Stock |
| Capital |
| Stock |
| Benefit Plans |
| Earnings |
| Income, net |
| Equity |
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BALANCE - DECEMBER 31, 2008 |
| $ | 147 |
| $ | 63,516 |
| $ | (7,293 | ) | $ | (7,819 | ) | $ | 72,664 |
| $ | 5 |
| $ | 121,220 |
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Purchase of treasury stock, net |
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| (856 | ) |
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| (856 | ) | |||||||
Stock based compensation expense |
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| 243 |
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| 243 |
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Issuance of stock for vested equity awards |
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| (24 | ) |
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| 28 |
| (4 | ) |
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| — |
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Unallocated ESOP shares committed to employees |
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| (3 | ) |
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| 96 |
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| 93 |
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Shares allocated in long-term incentive plan |
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| 26 |
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| 26 |
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Net income |
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| 601 |
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| 601 |
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Other comprehensive income |
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| 2,593 |
| 2,593 |
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BALANCE - MARCH 31, 2009 |
| $ | 147 |
| $ | 63,758 |
| $ | (8,149 | ) | $ | (7,695 | ) | $ | 73,261 |
| $ | 2,598 |
| $ | 123,920 |
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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)
|
| Three Months Ended March 31, |
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| 2009 |
| 2008 |
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| (Unaudited) |
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Cash Flows From Operating Activities |
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Net income |
| $ | 601 |
| $ | 345 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Provision for loan losses |
| 395 |
| 175 |
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Depreciation |
| 238 |
| 247 |
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Net amortization of securities premiums and discounts |
| 297 |
| 253 |
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Provision for deferred income taxes |
| (221 | ) | (80 | ) | ||
Shares committed to be released to the ESOP |
| 93 |
| 107 |
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Shares earned in the long-term incentive plan |
| 26 |
| 26 |
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Stock based compensation expense |
| 243 |
| 208 |
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Origination of loans held for sale |
| (417 | ) | (497 | ) | ||
Proceeds from sales of loans held for sale |
| 416 |
| 502 |
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Net gain on sales of securities |
| — |
| (70 | ) | ||
Net gain on sales of loans and loans held for sale |
| (3 | ) | (3 | ) | ||
Earnings on investment in bank-owned life insurance |
| (109 | ) | (111 | ) | ||
Decrease in mortgage servicing rights |
| 71 |
| 34 |
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Increase in accrued interest receivable and other assets |
| (264 | ) | (286 | ) | ||
Increase (decrease) in accrued interest payable, accrued expenses and other liabilities |
| 105 |
| (33 | ) | ||
Net Cash Provided by Operating Activities |
| 1,471 |
| 817 |
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Cash Flows from Investing Activities |
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Equity investment in unconsolidated entity |
| (630 | ) | — |
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Investment securities - available for sale: |
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Purchases |
| (6,781 | ) | (12,360 | ) | ||
Proceeds from sales |
| — |
| 72,398 |
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Proceeds from maturities, calls and principal repayments |
| 505 |
| 10,265 |
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Mortgage related securities – available for sale: |
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Purchases |
| (49,444 | ) | (93,883 | ) | ||
Proceeds from sale |
| — |
| 18,653 |
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Proceeds from maturities, calls and principal repayments |
| 14,251 |
| 17,447 |
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Net increase in loans |
| (27,613 | ) | (7,629 | ) | ||
Purchases of loan participations |
| (98 | ) | (3,975 | ) | ||
Proceeds from sales of loans |
| — |
| — |
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Net increase in Federal Home Loan Bank stock |
| — |
| (1,746 | ) | ||
Purchases of premises and equipment |
| (73 | ) | (34 | ) | ||
Net Cash Used by Investing Activities |
| (69,883 | ) | (864 | ) | ||
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Cash Flows from Financing Activities |
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Net increase in deposits |
| 201,623 |
| 12,422 |
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Decrease in advances from borrowers for taxes and insurance |
| (162 | ) | (297 | ) | ||
Federal Home Loan Bank advances |
| — |
| 40,000 |
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Principal payments on Federal Home Loan Bank advances |
| (1,040 | ) | (632 | ) | ||
Purchase of treasury stock |
| (856 | ) | (352 | ) | ||
Net Cash Provided by Financing Activities |
| 199,565 |
| 51,141 |
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Net Increase in Cash and Cash Equivalents |
| 131,153 |
| 51,094 |
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Cash and Cash Equivalents – Beginning |
| 3,944 |
| 31,275 |
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Cash and Cash Equivalents – Ending |
| $ | 135,097 |
| $ | 82,369 |
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Supplemental disclosure of cash flow Information |
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Interest paid |
| $ | 6,132 |
| $ | 6,244 |
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Income taxes paid |
| $ | 501 |
| $ | 283 |
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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 “Bancorp”) 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 Bancorp 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 Bancorp’s outstanding stock, were issued to Fox Chase MHC, the Bancorp’s federally chartered mutual holding company. Additionally, the Bancorp 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 Bancorp’s primary business has been that of holding the common stock of the Bank and making a loan to the ESOP. The Bancorp is authorized to pursue other business activities permissible by laws and regulations for other savings and loan holding companies.
The Bancorp and the Bank (collectively referred to as the “Company”) provide a wide variety of financial products and services to individuals and businesses through the Bank’s eleven branches in Philadelphia, Richboro, Willow Grove, Warminster, Lahaska, Hatboro, Media and West Chester, Pennsylvania, and Ocean City, Marmora and Egg Harbor Township, New Jersey. In February 2009, the Bank increased its ownership in Philadelphia Mortgage Advisors, a mortgage banker located in Blue Bell, Pennsylvania, from 20% to approximately 45%. 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 is subject to regulations of certain federal banking agencies. These regulations can and do change significantly from period to period. The Company also undergoes periodic examinations by regulatory agencies which may subject them to further changes with respect to asset valuations, amounts of required loan 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 Bancorp and the Bank. The Bank’s operations include the accounts of its wholly owned subsidiaries, Fox Chase Financial, Inc. and Fox Chase Service Corporation. Fox Chase Financial, Inc. is a Delaware chartered investment holding company and its sole purpose is to manage and hold investment securities. Fox Chase Service Corporation is Pennsylvania chartered company and its sole purpose is to facilitate the Company’s investment in Philadelphia Mortgage Advisors. The consolidated 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 Company follows accounting principles and reporting practices that 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 disclose 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 and valuation of investment securities.
These interim financial statements do not contain all necessary disclosures required by GAAP for complete financial statements 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, as filed with the Securities and Exchange Commission on March 12, 2009. These financial statements include all normal and recurring adjustments which management believes were necessary in order to conform to GAAP. The results for the three months ended March 31, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009.
7
Per Share Information
The Company follows the provisions of SFAS No. 128, “Earnings Per Share.” Basic earnings per share excludes dilution and is computed by dividing income available to common stockholders by the weighted-average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock. Unallocated shares in the Bank’s employee stock ownership plan (“ESOP”) and shares purchased to fund the Bancorp’s 2007 Equity Incentive Plan are not included in either basic or diluted earnings per share. Unvested shares in the Bancorp’s long-term incentive plan are not included in basic earnings per share.
The following table presents the reconciliation of the numerators and denominators of the basic and diluted earnings per share computations (unaudited).
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| Three Months Ended |
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| March 31, |
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| 2009 |
| 2008 |
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Net income |
| $ | 601,000 |
| $ | 345,000 |
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Weighted-average common shares outstanding (1) |
| 14,021,468 |
| 14,344,277 |
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Average common stock acquired by stock benefit plans: |
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Unvested shares – long-term incentive plan |
| (16,743 | ) | (25,114 | ) | ||
ESOP shares unallocated |
| (457,054 | ) | (495,418 | ) | ||
Shares purchased by trust |
| (246,209 | ) | (287,500 | ) | ||
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Weighted-average common shares used to calculate basic earnings per share |
| 13,301,462 |
| 13,536,245 |
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Dilutive effect of: |
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Unvested shares – long-term incentive plan |
| 16,743 |
| 25,114 |
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Restricted stock awards |
| 1,576 |
| 4 |
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Weighted-average common shares used to calculate diluted earnings per share |
| 13,319,781 |
| 13,561,363 |
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Earnings per share-basic |
| $ | 0.05 |
| $ | 0.03 |
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Earnings per share-diluted |
| $ | 0.05 |
| $ | 0.03 |
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Outstanding common stock equivalents having no dilutive effect |
| 879,643 |
| 806,196 |
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(1) Excludes treasury stock
8
NOTE 2 - INVESTMENT AND MORTGAGE RELATED SECURITIES
The amortized cost and fair value of securities available-for-sale as of March 31, 2009 and December 31, 2008 are summarized as follows:
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| March 31, 2009 (Unaudited) |
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| Gross |
| Gross |
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| Amortized |
| Unrealized |
| Unrealized |
| Fair |
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| Cost |
| Gains |
| Losses |
| Value |
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| (In Thousands) |
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Obligations of U.S. government agencies |
| $ | 313 |
| $ | — |
| $ | — |
| $ | 313 |
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State and political subdivisions |
| 14,176 |
| 123 |
| (92 | ) | 14,207 |
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Corporate securities |
| 17,661 |
| 20 |
| (544 | ) | 17,137 |
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| 32,150 |
| 143 |
| (636 | ) | 31,657 |
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Private label residential mortgage related security |
| 866 |
| — |
| (634 | ) | 232 |
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Private label commercial mortgage related securities |
| 13,989 |
| 29 |
| (2,084 | ) | 11,934 |
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Agency residential mortgage related securities |
| 288,365 |
| 7,288 |
| (150 | ) | 295,503 |
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Total mortgage related securities |
| 303,220 |
| 7,317 |
| (2,868 | ) | 307,669 |
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Total securities |
| $ | 335,370 |
| $ | 7,460 |
| $ | (3,504 | ) | $ | 339,326 |
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| December 31, 2008 |
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| Gross |
| Gross |
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| Amortized |
| Unrealized |
| Unrealized |
| Fair |
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| Cost |
| Gains |
| Losses |
| Value |
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| (In Thousands) |
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State and political subdivisions |
| $ | 14,679 |
| $ | 35 |
| $ | (251 | ) | $ | 14,463 |
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Corporate securities |
| 11,124 |
| 4 |
| (550 | ) | 10,578 |
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| 25,803 |
| 39 |
| (801 | ) | 25,041 |
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|
|
| ||||
Private label residential mortgage related security |
| 889 |
| — |
| (620 | ) | 269 |
| ||||
Private label commercial mortgage related securities |
| 10,049 |
| — |
| (2,745 | ) | 7,304 |
| ||||
Agency residential mortgage related securities |
| 257,990 |
| 4,442 |
| (323 | ) | 262,109 |
| ||||
Total mortgage related securities |
| 268,928 |
| 4,442 |
| (3,688 | ) | 269,682 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Total securities |
| $ | 294,731 |
| $ | 4,481 |
| $ | (4,489 | ) | $ | 294,723 |
|
9
NOTE 2 - INVESTMENT AND MORTGAGE RELATED SECURITIES (CONTINUED)
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, 2009 and December 31, 2008:
|
| March 31, 2009 (Unaudited) |
| ||||||||||||||||
|
| Less than 12 Months |
| 12 Months or More |
| Total |
| ||||||||||||
|
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| ||||||
|
| Value |
| Losses |
| Value |
| Losses |
| Value |
| Losses |
| ||||||
|
| (In Thousands) |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
State and political subdivisions |
| $ | 3,096 |
| $ | (92 | ) | $ | — |
| $ | — |
| $ | 3,096 |
| $ | (92 | ) |
Corporate securities |
| 15,755 |
| (544 | ) | — |
| — |
| 15,755 |
| (544 | ) | ||||||
|
| 18,851 |
| (636 | ) |
|
| — |
| 18,851 |
| (636 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Private label residential mortgage related security |
| — |
| — |
| 232 |
| (634 | ) | 232 |
| (634 | ) | ||||||
Private label commercial mortgage related securities |
| 2,378 |
| (61 | ) | 8,021 |
| (2,023 | ) | 10,399 |
| (2,084 | ) | ||||||
Agency residential mortgage related securities |
| 45,420 |
| (144 | ) | 705 |
| (6 | ) | 46,125 |
| (150 | ) | ||||||
Total mortgage related securities |
| 47,798 |
| (205 | ) | 8,958 |
| (2,663 | ) | 56,756 |
| (2,868 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total securities |
| $ | 66,649 |
| $ | (841 | ) | $ | 8,958 |
| $ | (2,663 | ) | $ | 75,607 |
| $ | (3,504 | ) |
|
| December 31, 2008 |
| ||||||||||||||||
|
| Less than 12 Months |
| 12 Months or More |
| Total |
| ||||||||||||
|
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| ||||||
|
| Value |
| Losses |
| Value |
| Losses |
| Value |
| Losses |
| ||||||
|
| (In Thousands) |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
State and political subdivisions |
| $ | 8,645 |
| $ | (251 | ) | $ | — |
| $ | — |
| $ | 8,645 |
| $ | (251 | ) |
Corporate securities |
| 9,214 |
| (550 | ) | — |
| — |
| 9,214 |
| (550 | ) | ||||||
|
| 17,859 |
| (801 | ) | — |
| — |
| 17,859 |
| (801 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Private label residential mortgage related security |
| 269 |
| (620 | ) | — |
| — |
| 269 |
| (620 | ) | ||||||
Private label commercial mortgage related securities |
| 7,304 |
| (2,745 | ) | — |
| — |
| 7,304 |
| (2,745 | ) | ||||||
Agency residential mortgage related securities |
| 16,217 |
| (301 | ) | 717 |
| (22 | ) | 16,934 |
| (323 | ) | ||||||
Total mortgage related securities |
| 23,790 |
| (3,666 | ) | 717 |
| (22 | ) | 24,507 |
| (3,688 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total securities |
| $ | 41,649 |
| $ | (4,467 | ) | $ | 717 |
| $ | (22 | ) | $ | 42,366 |
| $ | (4,489 | ) |
The Company evaluates current characteristics of each of its private label securities such as delinquency and foreclosure levels, credit enhancement, projected losses and coverage on a quarterly basis. It is possible that the underlying collateral of these securities will perform worse than current expectations, which may lead to adverse changes in cash flows on these securities and potential future other-than-temporary impairment losses. Events that may trigger material declines in fair values for these securities in the future would include but are not limited to deterioration of credit metrics, significantly higher levels of default and severity of loss on the underlying collateral, deteriorating credit enhancement and loss coverage ratios, or further illiquidity.
10
NOTE 2 - INVESTMENT AND MORTGAGE RELATED SECURITIES (CONTINUED)
The Company had one private label residential mortgage related security and five commercial mortgage related securities at March 31, 2009. The private label mortgage related security has a credit rating of AAA and its amortized cost was $866,000 and $889,000 at March 31, 2009 and December 31, 2008, respectively. This security has an unrealized loss of $634,000 and $620,000 as of March 31, 2009 and December 31, 2008, respectively. Delinquency levels on the underlying collateral in this security increased to 17.4% at March 31, 2009 compared to 13.8% at December 31, 2008 and 7.6% at March 31, 2008. Accordingly, management’s expectations for credit losses on this security have increased since December 31, 2008. However, management believes the level of credit enhancement supporting this security is adequate to absorb management’s projected losses and, therefore, the unrealized loss on this security continues to be temporary at March 31, 2009 given management’s ability and intent to hold to recovery.
The commercial mortgage related securities each have a credit rating of AAA and an amortized cost of $12.5 million and $10.0 million at March 31, 2009 and December 31, 2008, respectively. The securities had a combined unrealized loss of $2.1 million and a combined unrealized loss of $2.7 million at March 31, 2009 and December 31, 2008, respectively. Management believes the impairment on these securities is temporary based on the cash flows, credit rating, credit enhancement, structure of the underlying securities and management’s ability and intent to hold to recovery.
NOTE 3 - LOANS
The composition of net loans at March 31, 2009, and December 31, 2008 is provided below (in thousands).
|
| March 31, |
| December 31, |
| ||
|
| (Unaudited) |
|
|
| ||
Real estate loans: |
|
|
|
|
| ||
One-to four-family |
| $ | 269,005 |
| $ | 260,833 |
|
Multi-family and commercial |
| 174,603 |
| 155,564 |
| ||
Construction |
| 65,339 |
| 65,002 |
| ||
|
| 508,947 |
| 481,399 |
| ||
Consumer loans: |
|
|
|
|
| ||
Home equity |
| 60,249 |
| 63,987 |
| ||
Automobile |
| 205 |
| 262 |
| ||
Lines of credit |
| 12,922 |
| 11,486 |
| ||
Other |
| 272 |
| 351 |
| ||
|
| 73,648 |
| 76,086 |
| ||
Commercial loans |
| 39,681 |
| 37,371 |
| ||
Total Loans |
| 622,276 |
| 594,856 |
| ||
Deferred loan origination fees, net |
| 525 |
| 379 |
| ||
Allowance for loan losses |
| (6,510 | ) | (6,260 | ) | ||
Net Loans |
| $ | 616,291 |
| $ | 588,975 |
|
The following table presents changes in the allowance for loan losses (in thousands):
|
| Three Months |
| Year |
| |||||
|
| Ended |
| Ended |
| |||||
|
| March 31, |
| December 31, |
| |||||
|
| 2009 |
| 2008 |
| 2008 |
| |||
|
| (Unaudited) |
|
|
| |||||
Balance, beginning |
| $ | 6,260 |
| $ | 3,376 |
| $ | 3,376 |
|
Provision for loan losses |
| 395 |
| 175 |
| 2,900 |
| |||
Loans charged off |
| (145 | ) | (12 | ) | (19 | ) | |||
Recoveries |
| — |
| 1 |
| 3 |
| |||
Balance, ending |
| $ | 6,510 |
| $ | 3,540 |
| $ | 6,260 |
|
11
NOTE 3 — LOANS (CONTINUED)
As of March 31, 2009, the Bank had one interest rate swap agreement that was entered into during the quarter ended June 30, 2007. The Bank had entered into a 15-year fixed rate commercial loan and the Bank’s risk management objective was to lock in the fair value of the loan. The Bank met this objective by entering into a swap agreement to exchange fixed rate cash flows for variable rate cash flows. The swap is a fair-value hedge and the value of the swap is recorded as an adjustment to other assets in the Company’s Statements of Condition. The Bank has not entered into a swap since the June 2007 quarter and currently does not consider itself to be an active participant in the swap market.
As of March 31, 2009 and December 31, 2008, the Bank’s one swap agreement had a notional amount of $1.2 million, which was earning interest at 7.43%. The Company is receiving a variable rate payment of three-month LIBOR plus 2.24% and is paying a fixed rate payment of 7.43%. The swap matures in April 2022 and had a market value loss position of $215,000 and $236,000 at March 31, 2009 and December 31, 2008, respectively.
The loan is contractually current and the critical terms of the loan and the swap are a mirror image except that the loan includes a default interest rate clause. Accordingly, the Company has determined the market value of the gain position of the loan is equal to the market value loss position of the swap as of both December 31, 2008 and March 31, 2009.
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 $104.4 million and $114.3 million at March 31, 2009 and 2008, respectively, and $109.6 million at December 31, 2008.
The following summarizes mortgage servicing rights for the three months ended March 31, 2009 and 2008 and the year ended December 31, 2008 (in thousands):
|
| Three Months |
| Year |
| |||||
|
| 2009 |
| 2008 |
| 2008 |
| |||
|
| (Unaudited) |
|
|
| |||||
Balance, beginning |
| $ | 827 |
| $ | 1,066 |
| $ | 1,066 |
|
Mortgage servicing rights capitalized |
| — |
| — |
| — |
| |||
Mortgage servicing rights amortized |
| (47 | ) | (34 | ) | (106 | ) | |||
Valuation allowance |
| (24 | ) | — |
| (133 | ) | |||
Balance, ending |
| $ | 756 |
| $ | 1,032 |
| $ | 827 |
|
At March 31, 2009, March 31, 2008 and December 31, 2008, the fair value of the mortgage servicing rights (“MSRs”) was $775,000 (unaudited), $1.2 million (unaudited) and $836,000, respectively. The fair value at these dates 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 and current interest rates. 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.
During 2008, the Bank recorded a total valuation allowance of $133,000 on its MSRs, which was due to a significant decrease in interest rates for residential mortgages during the year resulting in assumed higher mortgage prepayments. This valuation allowance was increased by $24,000 to $157,000 during the first quarter of 2009.
12
NOTE 5 - DEPOSITS
Deposits and their respective weighted average interest rate at March 31, 2009 and December 31, 2008 consist of the following (dollars in thousands):
|
| March 31, 2009 |
| December 31, 2008 |
| ||||||
|
| Weighted Average Interest Rate |
| Amount |
| Weighted Average Interest Rate |
| Amount |
| ||
|
| (Unaudited) |
|
|
|
|
| ||||
Non-interest bearing demand accounts |
| — | % | $ | 46,094 |
| — | % | $ | 46,716 |
|
NOW accounts |
| 1.12 |
| 35,827 |
| 1.13 |
| 35,330 |
| ||
Money market accounts |
| 2.31 |
| 126,492 |
| 2.01 |
| 101,295 |
| ||
Savings and club accounts |
| 0.25 |
| 51,045 |
| 0.25 |
| 51,196 |
| ||
Certificates of deposit |
| 3.71 |
| 550,637 |
| 3.96 |
| 373,935 |
| ||
|
| 2.95 | % | $ | 810,095 |
| 2.86 | % | $ | 608,472 |
|
NOTE 6 — BORROWINGS
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, 2009, the Bank has $177.5 million in qualifying collateral pledged against its advances.
Maturity Date |
| Interest Rate |
| Strike Rate |
| Call Date |
| Amount |
| |
|
|
|
|
|
|
|
| (in thousands) |
| |
|
|
|
|
|
|
|
|
|
| |
December 2009 |
| 2.26 | % |
|
|
|
| $ | 5,000 |
|
February 2010 |
| 2.84 | % |
|
|
|
| 10,000 |
| |
August 2011 |
| 4.89 | % | 7.50 | % | May 2009 |
| 20,000 |
| |
August 2011 |
| 4.87 | % | 7.50 | % | May 2009 |
| 10,000 |
| |
July 2013 |
| 4.10 | % |
|
|
|
| 9,845 |
| |
December 2013 |
| 2.80 | % |
|
| December 2010 |
| 5,000 |
| |
January 2015 |
| 3.49 | % |
|
|
|
| 25,494 |
| |
December 2015 |
| 3.06 | % |
|
| December 2011 |
| 5,000 |
| |
November 2017 |
| 3.62 | % |
|
| November 2010 |
| 15,000 |
| |
November 2017 |
| 3.87 | % |
|
| November 2011 |
| 15,000 |
| |
December 2017 |
| 2.83 | % |
|
| June 2009 |
| 20,000 |
| |
December 2018 |
| 3.15 | % |
|
| December 2012 |
| 5,000 |
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
| $ | 145,339 |
|
For the borrowings that contractually mature in August 2011, if three-month LIBOR is greater than or equal to the Strike Rate, the FHLB can notify the Bank of its intention to convert the borrowing to an adjustable-rate advance equal to three-month LIBOR (1.19% at March 31, 2009) 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 borrowing that contractually matures in December 2013 may be called by the FHLB on the call date disclosed in the above table. If the borrowing is called, the Bank has the option to either pay off the borrowing without penalty or the borrowing’s fixed rate resets to a variable rate of three-month LIBOR plus 1.04%. Subsequent to the call date, the borrowings are callable by the FHLB quarterly. Accordingly, the contractual maturities above may differ from actual maturities.
13
NOTE 6 — BORROWINGS (CONTINUED)
The borrowing that contractually matures in December 2015 may be called by the FHLB on the call date disclosed in the above table. If the borrowing is called, the Bank has the option to either pay off the borrowing without penalty or the borrowing’s fixed rate resets to a variable rate of three-month LIBOR plus 1.12%. Subsequent to the call date, the borrowings are callable by the FHLB quarterly. Accordingly, the contractual maturities above may differ from actual maturities.
The borrowings that contractually mature in November 2017 may be called by the FHLB on the call dates disclosed in the above table. If the borrowing is called, the Bank has the option to either pay off the borrowing without penalty or the borrowing’s fixed rate resets to a variable rate of three-month LIBOR plus .10%. Subsequent to the call date, the borrowings are callable by the FHLB quarterly. Accordingly, the contractual maturities above may differ from actual maturities.
The borrowing that contractually matures in December 2017 may be called by the FHLB on the call date disclosed in the above table. If the borrowing is called, the Bank has the option to either pay off the borrowing without penalty or the borrowing’s fixed rate resets to a variable rate of three-month LIBOR plus ..11%. Subsequent to the call date, the borrowing is callable by the FHLB quarterly. Accordingly, the contractual maturities above may differ from actual maturities.
The borrowing that contractually matures in December 2018 may be called by the FHLB on the call date disclosed in the above table. If the borrowing is called, the Bank has the option to either pay off the borrowing without penalty or the borrowing’s fixed rate resets to a variable rate of three-month LIBOR plus 1.14%. Subsequent to the call date, the borrowings are callable by the FHLB quarterly. Accordingly, the contractual maturities above may differ from actual maturities.
The Bank has a maximum borrowing capacity with the FHLB of approximately $479.3 million at December 31, 2008, the latest date for which information is available.
As a member of the FHLB, the Bank is required to acquire and hold shares of capital stock in the FHLB in an amount of at least equal to 4.75% of its advances from the FHLB, plus 0.75% of the unused borrowing capacity. The Bank was in compliance with this requirement with a stock investment in the FHLB of $9.7 million at March 31, 2009.
During December 2008, the FHLB announced that it does not intend to pay a dividend on its common stock for the foreseeable future. Additionally, the FHLB indicated it would not redeem any common stock associated with member advance repayments and that it may increase its individual member stock investment requirements. The FHLB is permitted to increase the amount of capital stock required to be owned by an FHLB member to 6.00% of a member’s advances, plus 1.50% of the unused borrowing capacity. As of March 31, 2009 the Company’s maximum stock obligation was $13.7 million.
Other Borrowed Funds
Other borrowed funds obtained from large commercial banks totaled $50.0 million at March 31, 2009. These borrowings contractually mature with dates ranging from November 2014 thru November 2018 and may be called by the lender based on the underlying agreements. Subsequent to the call date, these borrowings are callable by the lender quarterly. Accordingly, the contractual maturities above may differ from actual maturities.
Maturity |
| Interest |
|
|
|
|
| |
Date |
| Rate |
| Call Date |
| Amount |
| |
|
|
|
|
|
| (in thousands) |
| |
November 2014 |
| 3.60 | % | November 2009 |
| $ | 20,000 |
|
September 2018 |
| 3.40 | % | September 2012 |
| 10,000 |
| |
September 2018 |
| 3.20 | % | September 2012 |
| 5,000 |
| |
October 2018 |
| 3.15 | % | October 2011 |
| 5,000 |
| |
October 2018 |
| 3.27 | % | October 2011 |
| 5,000 |
| |
November 2018 |
| 3.37 | % | November 2013 |
| 5,000 |
| |
|
|
|
|
|
| $ | 50,000 |
|
Mortgage backed securities with a fair value of $64.0 million at March 31, 2009 were pledged as collateral for these other borrowed funds.
14
NOTE 7 — STOCK BASED COMPENSATION
During the three months ended March 31, 2009, the Company recorded $243,000 of stock based compensation expense in connection with the 2007 Equity Incentive Plan, comprised of stock option expense of $107,000 and restricted stock expense of $136,000.
The following is a summary of the Company’s stock option activity and related information for the 2007 Equity Incentive Plan for the three months ended March 31, 2009:
|
|
|
| Weighted |
| |
|
| Number of |
| Average |
| |
|
| Stock |
| Exercise |
| |
|
| Options |
| Price |
| |
|
|
|
|
|
| |
Outstanding at December 31, 2008 |
| 615,200 |
| $ | 12.22 |
|
Granted |
| 80,359 |
| 8.79 |
| |
Exercised |
| — |
| — |
| |
Forfeited |
| — |
| — |
| |
Outstanding at March 31, 2009 |
| 695,559 |
| $ | 11.83 |
|
Exercisable at March 31, 2009 |
| 117,440 |
| $ | 12.26 |
|
The following is a summary of the Company’s unvested options as of March 31, 2009 and changes therein during the three months then ended:
|
|
|
| Weighted |
| |
|
| Number of |
| Average |
| |
|
| Stock |
| Grant Date |
| |
|
| Options |
| Fair Value |
| |
|
|
|
|
|
| |
Unvested at December 31, 2008 |
| 512,140 |
| $ | 3.28 |
|
Granted |
| 80,359 |
| 2.39 |
| |
Exercised |
| — |
| — |
| |
Vested |
| (14,380 | ) | 2.73 |
| |
Forfeited |
| — |
| — |
| |
Unvested at March 31, 2009 |
| 578,119 |
| $ | 3.17 |
|
Expected future expense relating to the 578,119 non-vested options outstanding as of March 31, 2009 is $1.6 million over a weighted average period of 3.7 years.
During the three months ended March 31, 2009, the Company determined the fair value of the options granted was $2.39. This value was based on the following assumptions:
Expected dividend yield |
| 1.90 | % |
Expected volatility |
| 30.00 | % |
Risk –free interest rate |
| 2.33 | % |
Expected option life in years |
| 6.50 |
|
The following is a summary of the status of the Company’s restricted stock as of March 31, 2009 and changes therein during the three months then ended:
|
|
|
| Weighted |
| |
|
| Number of |
| Average |
| |
|
| Restricted |
| Grant Date |
| |
|
| Shares |
| Fair Value |
| |
Unvested at December 31, 2008 |
| 179,580 |
| $ | 12.29 |
|
Granted |
| 8,200 |
| 8.79 |
| |
Vested |
| (2,120 | ) | 11.39 |
| |
Forfeited |
| — |
| — |
| |
Unvested at March 31, 2009 |
| 185,660 |
| $ | 12.15 |
|
Expected future compensation expense relating to the 185,660 restricted shares at March 31, 2009 is $1.9 million over a weighted average period of 3.5 years.
15
NOTE 8 — FAIR VALUE
SFAS No. 157, “Fair Value Measurement” 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 standard describes three levels of inputs that may be used to measure fair value:
Level 1 — Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that are accessible at the measurement date.
Level 2 — Inputs are other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 — Valuations are observed from unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The Company classified three types of financial instruments as Level 3 as of March 31, 2009. The first instrument is a private label collateralized mortgage obligation (“CMO”), the fair value of which, unlike U.S. agency mortgage related securities, is more difficult to determine because they are not actively traded in securities markets. The second instrument is its private label commercial mortgage backed securities (“CMBS”), the fair value of which is also more difficult to determine because they are not actively traded in securities markets. The third instrument is a loan, which was recorded at fair value when the Company adopted SFAS No. 159, since lending credit risk is not an observable input for this individual commercial loan (see Note 3). The unrealized loss in the private label CMO was $634,000 at March 31, 2009 compared to $620,000 at December 31, 2008. The unrealized loss in the private label CMBS portfolio was $2.1 million at March 31, 2009 compared to $2.7 million at December 31, 2008. The unrealized gain on the loan was $215,000 at March 31, 2009 compared to an unrealized gain of $236,000 at December 31, 2008.
The following table, which sets forth the Company’s fair value measurements at March 31, 2009, includes (1) investment securities and mortgage related securities available-for-sale; (2) the two financial instruments recorded at fair value in conjunction with the Company’s adoption of SFAS No. 159 in the first quarter of 2008 and (3) tranches of MSRs recorded at fair value.
|
|
|
| Fair Value Measurements at Reporting Date Using |
| ||||||||
|
|
|
| Quoted Prices in |
| Significant |
| Significant |
| ||||
|
|
|
| Active Markets |
| Other |
| Other |
| ||||
|
|
|
| for Identical |
| Observable |
| Unobservable |
| ||||
|
| As of |
| Assets |
| Inputs |
| Inputs |
| ||||
Description |
| March 31, 2009 |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| ||||
|
| (In Thousands) |
|
|
|
|
|
|
| ||||
Obligations of U.S. government agencies |
| $ | 313 |
| $ | — |
| $ | 313 |
| $ | — |
|
State and political subdivisions |
| 14,207 |
| — |
| 14,207 |
| — |
| ||||
Corporate securities |
| 17,137 |
| — |
| 17,137 |
| — |
| ||||
Private label residential mortgage related security |
| 232 |
| — |
| — |
| 232 |
| ||||
Private label commercial mortgage related securities |
| 11,934 |
| — |
| — |
| 11,934 |
| ||||
Agency residential mortgage related securities |
| 295,503 |
| — |
| 295,503 |
| — |
| ||||
Loans (1) |
| 1,390 |
| — |
| — |
| 1,390 |
| ||||
Mortgage servicing rights |
| 675 |
| — |
| 675 |
| — |
| ||||
Other assets — swap contract (1) |
| (215 | ) | — |
| (215 | ) | — |
| ||||
Total |
| $ | 341,176 |
| $ | — |
| $ | 327,620 |
| $ | 13,556 |
|
(1) Such assets recorded at fair value in conjunction with adoption of SFAS No. 159.
16
NOTE 8 — FAIR VALUE (CONTINUED)
The following table includes a roll forward of the Significant Other Unobservable Inputs (Level 3) for the period of January 1, 2009 to March 31, 2009.
|
| Private Label |
| Private Label |
|
|
|
|
| ||||
|
| Residential |
| Commercial |
|
|
|
|
| ||||
|
| Mortgage |
| Mortgage |
|
|
|
|
| ||||
|
| Security |
| Securities |
| Loans |
| Total |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Beginning balance, January 1, 2009 |
| $ | 269 |
| $ | 7,304 |
| $ | 1,425 |
| $ | 8,998 |
|
Purchases of securities |
| — |
| 3,945 |
|
|
| 3,945 |
| ||||
Payments received |
| (23 | ) | — |
| (14 | ) | (37 | ) | ||||
Premium amortization |
| — |
| (5 | ) | — |
| (5 | ) | ||||
Increase/(decrease) in value |
| (14 | ) | 690 |
| (21 | ) | 655 |
| ||||
Reclassification to Level 3 |
| — |
| — |
| — |
| — |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Ending balance, March 31, 2009 |
| $ | 232 |
| $ | 11,934 |
| $ | 1,390 |
| $ | 13,556 |
|
The Company utilizes an external third-party pricing service to perform evaluations on its investment portfolio on at least a quarterly basis. The Company made no adjustments to the values obtained from the pricing service at March 31, 2009. The Company will continue to evaluate the appropriateness of the identified Level 1, 2 or 3 classifications on a recurring basis.
NOTE 9 - COMPREHENSIVE INCOME
Comprehensive income for the three months ended March 31, 2009, and 2008 is as follows (in thousands):
|
| Three Months |
| ||||
|
| 2009 |
| 2008 |
| ||
|
| (Unaudited) |
| ||||
Net income |
| $ | 601 |
| $ | 345 |
|
|
|
|
|
|
| ||
Other comprehensive income: |
|
|
|
|
| ||
Unrealized holding gains arising during the period, net of tax expense ($1,371 and $369 for the three months ended March 31, 2009 and 2008, respectively) |
| 2,593 |
| 751 |
| ||
Less: Reclassification adjustment for gains included in net income, net of taxes ($0 and $24 for the three months ended March 31, 2009 and 2008, respectively) |
| — |
| 46 |
| ||
Plus: Amortization of pension actuarial loss |
| — |
| 2 |
| ||
Other comprehensive income |
| 2,593 |
| 707 |
| ||
Comprehensive income |
| $ | 3,194 |
| $ | 1,052 |
|
17
NOTE 10 — ACCOUNTING PRONOUNCEMENTS
In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1 “Interim Disclosures about Fair Value of Financial Instruments.” FSP FAS 107-1 amends SFAS No. 107,”Disclosures about Fair Value of Financial Instruments”, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. All publicly traded companies are required to include disclosures about the fair value of its financial instruments whenever it issues summarized financial information for interim reporting periods. FAS 107-1 is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. An entity may early adopt this statement only if it also elects to early adopt FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset and Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly”, and FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments”, which are both discussed in the next two paragraphs. The Company did not early adopt this statement as of March 31, 2009 and does not believe the adoption of this statement will have a material effect on its results of operations or financial position, if any. The Company will make the required disclosures in the second quarter 2009 Form 10-Q.
In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments.” FSP FAS 115-2 and FAS 124-2 amend the other-than-temporary impairment guidance for debt securities. FSP FAS 115-2 and 124-2 is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. If any entity elects to early adopt FSP FAS 157-4, the entity must also early adopt FSP FAS 115-2 and FAS 124-2. The Company did not early adopt this statement as of March 31, 2009. Since the Company has not had any other-than-temporary impairment as of March 31, 2009, no cumulative-effect adjustments will be required to be recorded at adoption.
In April 2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions that are not Orderly.” This FSP provides additional guidance for estimating fair value in accordance with FASB No. 157, “Fair Value Measurements”, when the volume and level of activity for the asset or liability have significantly decreased. FSP FAS 157-4 is effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied prospectively. Early adoption is permitted for periods ending after March 15, 2009. If a reporting entity elects to early adopt either FSP FAS 115-2 and FAS 124-2 or FSP FAS 107-1 and APB 28-1, the reporting entity must also early adopt this FSP. The Company did not early adopt this statement as of March 31, 2009 and is currently evaluating the impact the FSP will have on the results of operations or financial position, if any.
In March 2008, the FASB issued SFAS No. 161 “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133” (SFAS No. 161). SFAS No. 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The Company adopted this statement in the first quarter of 2009. The additional disclosure required regarding the Bank’s one interest rate swap agreement has been provided in Note 3 — Loans.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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, as filed with the Securities and Exchange Commission on March 12, 2009, and its other Securities and Exchange Commission reports.
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
18
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.
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, valuation and other-than-temporary impairment of securities, and deferred income taxes.
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 size and composition of the portfolio, loss experience in particular segments of the portfolio, trends and absolute levels of classified and criticized loans, trends and absolute levels in delinquent loans, trends in risk ratings, actual charge-offs, trends in industry charge-offs by particular segments and changes in local and national economic and business conditions. 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. Further, current economic conditions have increased the uncertainty inherent in these estimates and assumptions. 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.
Valuation and Other-Than-Temporary Impairment of Investment Securities. Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and FASB Staff Position FAS 115-1 and 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 required market yields, 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. The Company did not have any other-than-temporary impairment charges during the first quarter of 2009 and management does not believe that any individual unrealized loss represents an other-than-temporary impairment at March 31, 2009. See Note 2 to the consolidated financial statements for a schedule that shows gross unrealized losses and fair value of securities, aggregated by security category and length of time that individual securities have been in a continuous realized loss position at March 31, 2009 and December 31, 2008 and Note 8 for discussion related to the determination of fair value.
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. 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. Specifically, the Company had a charitable contribution carryover of $861,000 as of March 31, 2009, resulting in a deferred tax asset of $293,000. Utilization of this carryover is limited to 10% of taxable income on an annual basis. Such carryover will expire on December 31, 2011, if not utilized. If the Company is unable to generate sufficient taxable income to utilize this carryover it may require us to record a valuation allowance against this deferred tax asset. Any valuation allowance would result in additional income tax expense in the period, which would negatively affect earnings.
19
Comparison of Financial Condition at March 31, 2009 and December 31, 2008
Total assets increased $203.2 million, or 21.8%, to $1.11 billion at March 31, 2009, compared to $931.3 million at December 31, 2008. Cash and cash equivalents increased $131.2 million from December 31, 2008 to March 31, 2009 as excess funds from deposit inflows were invested in money market funds. Loans increased $27.3 million from December 31, 2008 to March 31, 2009. Approximately $21.3 million of this increase was in commercial and commercial real estate loans as we continue our strategic initiative to increase our commercial loan portfolio. Additionally, $8.2 million of this increase was in one- to four-family real estate loans as we were able to grow this portfolio, within our geographic region, through our correspondent relationships. The increase in the real estate and commercial loans was offset by a decrease of $2.4 million in consumer loans as the Company has elected to de-emphasize these types of loans in the current economic environment. Mortgage related securities available for sale increased $38.0 million, primarily due to an increase in agency residential mortgage related securities, and investment related securities available for sale increased $6.6 million, primarily due to an increase in corporate securities. All of the increases in assets were directly funded by the increase in deposit accounts in the first quarter of 2009.
Deposits increased $201.6 million, or 33.1%, from $608.5 at December 31, 2008 to $810.1 million at March 31, 2009. Money market accounts increased $25.2 million, or 24.9%, and certificates of deposits increased $176.7 million, or 47.3%, from December 31, 2008 to March 31, 2009. During March, the Bank offered attractive rates on selected money market and certificate of deposit products to increase its market share in the Philadelphia, Pennsylvania market area resulting in approximately 6,500 new deposit accounts representing greater than $200 million in deposits, of which approximately 50% were new deposit customers. The Company intends to invest these funds in loans to qualified business and consumers.
Stockholders’ equity increased $2.7 million to $123.9 million at March 31, 2009 compared to $121.2 million at December 31, 2008 primarily due to unrealized gains, net of taxes, on the investment portfolio of $2.6 million and net income of $601,000 offset by the repurchase of 89,039 shares of common stock at a cost of $856,000.
Comparison of Operating Results for the Three Months Ended March 31, 2009 and 2008
General. Net income increased $256,000, or 74.2%, to $601,000 for the three months ended March 31, 2009 compared to $345,000 for the three months ended March 31, 2008, primarily due to a $866,000 increase in net interest income offset by an increase in the provision for loan losses of $220,000, a decrease in other noninterest income of $46,000, an increase in noninterest expense of $229,000, and an increase in tax expense of $115,000.
Net Interest Income. Net interest income increased $866,000, or 17.5%, to $5.8 million for the three months ended March 31, 2009 compared the same period in 2008. The increase in net interest income was due to an increase in total interest income of $685,000 and a $181,000 decrease in total interest expense. The increase in total interest income was primarily due to an increase in the average balances on earning assets of $114.0 million offset by a decrease in the average yield on interest-earning assets from 5.48% to 5.10%. The increase in average balances of interest-earning assets was primarily due to: (1) an increase in the average balance of loans of $142.0 million year over year primarily related to the implementation of the Company’s focus on increasing its levels of commercial lending; and (2) an increase in the average balance of mortgage related securities of $31.9 million year over year offset by (1) a decrease of $41.4 million in average taxable securities and (2) a decrease of $11.7 million in the average balance of money market funds. The decrease in net interest expense was primarily due to a decrease in the average cost on interest bearing-liabilities from 3.73% to 3.14% partially offset by an increase in the average balances on interest-bearing liabilities of $111.6 million. The increase in the average balance of interest-bearing liabilities was primarily due to an increase in the average balance of FHLB advances and other borrowed funds of $69.6 million as well as an increase of $42.1 million in total interest-bearing deposits.
The Company intends to maintain a significant portion of the first quarter increase in deposits in short-term money market funds, which it anticipates will have a negative impact on net interest income, until such funds are deployed into higher-yielding loans.
20
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, 2009 and 2008. Yields are not presented on a tax-equivalent basis. Any adjustments necessary to present yields on a tax-equivalent basis are insignificant.
|
| Three Months Ended March 31, |
| ||||||||||||||
|
| 2009 |
| 2008 |
| ||||||||||||
|
|
|
| Interest |
|
|
|
|
| Interest |
|
|
| ||||
|
| Average |
| and |
| Yield/ |
| Average |
| and |
| Yield/ |
| ||||
|
| Balance |
| Dividends |
| Cost |
| Balance |
| Dividends |
| Cost |
| ||||
|
| (Dollars in thousands) |
| ||||||||||||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest-earning demand deposits |
| $ | 11,855 |
| $ | 1 |
| 0.04 | % | $ | 13,259 |
| $ | 70 |
| 2.11 | % |
Money market funds |
| 18,183 |
| 38 |
| 0.84 |
| 29,915 |
| 275 |
| 3.70 |
| ||||
Mortgage-related securities |
| 269,523 |
| 3,255 |
| 4.83 |
| 237,640 |
| 2,904 |
| 4.89 |
| ||||
Taxable securities |
| 21,820 |
| 125 |
| 2.29 |
| 63,217 |
| 709 |
| 4.48 |
| ||||
Nontaxable securities |
| 14,538 |
| 143 |
| 3.93 |
| 16,950 |
| 168 |
| 3.96 |
| ||||
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Residential loans |
| 261,767 |
| 3,733 |
| 5.70 |
| 217,444 |
| 3,068 |
| 5.64 |
| ||||
Commercial loans |
| 263,353 |
| 3,594 |
| 5.46 |
| 162,706 |
| 2,910 |
| 7.08 |
| ||||
Consumer loans |
| 75,317 |
| 1,050 |
| 5.58 |
| 78,278 |
| 1,150 |
| 5.88 |
| ||||
Total loans |
| 600,437 |
| 8,377 |
| 5.58 |
| 458,428 |
| 7,128 |
| 6.19 |
| ||||
Allowance for loan losses |
| (6,356 | ) | — |
| — |
| (3,420 | ) | — |
| — |
| ||||
Net loans |
| 594,081 |
| 8,377 |
| — |
| 455,008 |
| 7,128 |
| — |
| ||||
Total interest-earning assets |
| 930,000 |
| 11,939 |
| 5.10 |
| 815,989 |
| 11,254 |
| 5.48 |
| ||||
Noninterest-earning assets |
| 36,266 |
|
|
|
|
| 36,485 |
|
|
|
|
| ||||
Total assets |
| $ | 966,266 |
|
|
|
|
| $ | 852,474 |
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Liabilities and equity: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
NOW and money market deposit accounts |
| $ | 140,727 |
| 629 |
| 1.81 |
| $ | 94,169 |
| 538 |
| 2.30 |
| ||
Savings accounts |
| 52,244 |
| 32 |
| 0.25 |
| 53,637 |
| 58 |
| 0.43 |
| ||||
Certificates of deposit |
| 399,700 |
| 3,718 |
| 3.77 |
| 402,810 |
| 4,511 |
| 4.50 |
| ||||
Total interest-bearing deposits |
| 592,671 |
| 4,379 |
| 3.00 |
| 550,616 |
| 5,107 |
| 3.73 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
FHLB advances |
| 146,524 |
| 1,330 |
| 3.63 |
| 107,938 |
| 1,030 |
| 3.78 |
| ||||
Other borrowed funds |
| 50,993 |
| 429 |
| 3.36 |
| 20,000 |
| 182 |
| 3.60 |
| ||||
Total borrowings |
| 197,517 |
| 1,759 |
| 3.56 |
| 127,938 |
| 1,212 |
| 3.75 |
| ||||
Total interest-bearing liabilities |
| 790,188 |
| 6,138 |
| 3.14 |
| 678,554 |
| 6,319 |
| 3.73 |
| ||||
Noninterest-bearing deposits |
| 46,950 |
|
|
|
|
| 44,417 |
|
|
|
|
| ||||
Other non-interest bearing liabilities |
| 6,820 |
|
|
|
|
| 6,416 |
|
|
|
|
| ||||
Total liabilities |
| 843,958 |
|
|
|
|
| 729,387 |
|
|
|
|
| ||||
Retained earnings |
| 121,364 |
|
|
|
|
| 121,810 |
|
|
|
|
| ||||
Accumulated comprehensive income |
| 944 |
|
|
|
|
| 1,277 |
|
|
|
|
| ||||
Total stockholders’ equity |
| $ | 122,308 |
|
|
|
|
| $ | 123,087 |
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total liabilities and stockholders’ equity |
| $ | 966,266 |
|
|
|
|
| $ | 852,474 |
|
|
|
|
| ||
Net interest income |
|
|
| $ | 5,801 |
|
|
|
|
| $ | 4,935 |
|
|
| ||
Interest rate spread |
|
|
|
|
| 1.96 | % |
|
|
|
| 1.75 | % | ||||
Net interest margin |
|
|
|
|
| 2.45 | % |
|
|
|
| 2.39 | % | ||||
Average interest-earning assets to average interest-bearing liabilities |
|
|
|
|
| 117.69 | % |
|
|
|
| 120.25 | % |
(1) Nonperforming loans are included in average balance computations
21
Rate/Volume Analysis. The following table sets forth the effects of changing rates and volumes on our net interest income. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by current volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the prior columns. For purposes of this table, changes attributable to changes in both rate and volume that cannot be segregated have been allocated proportionally based on the changes due to rate and the changes due to volume.
|
| Three Months Ended |
| |||||||
|
| March 31, 2009 |
| |||||||
|
| Compared to |
| |||||||
|
| Three Months Ended |
| |||||||
|
| March 31, 2008 |
| |||||||
|
| Increase (Decrease) |
|
|
| |||||
|
| Due to |
|
|
| |||||
|
| Rate |
| Volume |
| Net |
| |||
|
| (In Thousands) |
| |||||||
Interest and dividend income: |
|
|
|
|
|
|
| |||
Interest-earning demand deposits |
| $ | (61 | ) | $ | (8 | ) | $ | (69 | ) |
Money market funds |
| (129 | ) | (108 | ) | (237 | ) | |||
Mortgage related securities |
| (38 | ) | 389 |
| 351 |
| |||
Taxable securities |
| (120 | ) | (464 | ) | (584 | ) | |||
Nontaxable securities |
| (1 | ) | (24 | ) | (25 | ) | |||
Loans: |
|
|
|
|
| — |
| |||
Residential loans |
| 40 |
| 625 |
| 665 |
| |||
Commercial loans |
| (1,116 | ) | 1,800 |
| 684 |
| |||
Consumer loans |
| (57 | ) | (43 | ) | (100 | ) | |||
Total loans |
| (1,133 | ) | 2,382 |
| 1,249 |
| |||
Total interest-earning assets |
| $ | (1,482 | ) | $ | 2,167 |
| $ | 685 |
|
|
|
|
|
|
|
|
| |||
Interest expense: |
|
|
|
|
|
|
| |||
NOW and money market deposits |
| $ | (175 | ) | $ | 266 |
| $ | 91 |
|
Savings accounts |
| (25 | ) | (1 | ) | (26 | ) | |||
Certificates of deposit |
| (758 | ) | (35 | ) | (793 | ) | |||
Total interest-bearing deposits |
| (958 | ) | 230 |
| (728 | ) | |||
|
|
|
|
|
|
|
| |||
FHLB advances |
| (68 | ) | 368 |
| 300 |
| |||
Other borrowed funds |
| (35 | ) | 282 |
| 247 |
| |||
Total interest-bearing liabilities |
| (1,061 | ) | 880 |
| (181 | ) | |||
|
|
|
|
|
|
|
| |||
Net change in net interest income |
| $ | (421 | ) | $ | 1,287 |
| $ | 866 |
|
22
Provision for Loan Losses. The Bank recorded a provision for loan losses of $395,000 for the three months ended March 31, 2009 compared to $175,000 for the three months ending March 31, 2008. The increase in the provision was a result of continued loan growth, primarily in commercial loans, a $685,000, or 11.7%, increase in nonperforming assets and a $133,000 increase in charge-offs.
The following table provides information with respect to the Bank’s nonperforming assets at the dates indicated. There were no troubled debt restructurings as of the dates presented.
|
| At March 31, |
| At December 31, |
| ||
|
| 2009 |
| 2008 |
| ||
|
| (Dollars in thousands) |
| ||||
Nonaccrual loans: |
|
|
|
|
| ||
One- to four-family |
| $ | 1,445 |
| $ | 1,503 |
|
Multi-family and commercial real estate |
| 1,539 |
| 685 |
| ||
Construction |
| 3,509 |
| 3,495 |
| ||
Consumer |
| 42 |
| 167 |
| ||
|
|
|
|
|
| ||
Total |
| 6,535 |
| 5,850 |
| ||
Accruing loans past due 90 days or more: |
|
|
|
|
| ||
One- to four-family |
| — |
| — |
| ||
|
|
|
|
|
| ||
Total |
| — |
| — |
| ||
Total of nonaccrual loans and accruing loans 90 days or more past due |
| $ | 6,535 |
| $ | 5,850 |
|
|
|
|
|
|
| ||
Real estate owned |
| — |
| — |
| ||
|
|
|
|
|
| ||
Total nonperforming assets |
| $ | 6,535 |
| $ | 5,850 |
|
|
|
|
|
|
| ||
Total nonperforming loans to total loans |
| 1.05 | % | 0.98 | % | ||
Total nonperforming loans to total assets |
| 0.58 |
| 0.63 |
| ||
Total nonperforming assets to total assets |
| 0.58 |
| 0.63 |
|
The increase in nonaccrual loans of $685,000 to $6.5 million at March 31, 2009 from $5.9 million at December 31, 2008 was primarily the result of a two commercial real estate loans in the amount of $516,000 and $338,000, respectively, being placed on nonaccrual during the quarter. These loans are secured by commercial real estate in the southern New Jersey area. The Bank currently believes the borrowers have adequate collateral to pay the loans upon liquidation. This increase was offset by a $145,000 charge-off related to two loans to one borrower secured by a residential property in the southern New Jersey area.
The increase in the recorded investment in impaired loans requiring an allowance for loan losses of $169,000 to $6.5 million at March 31, 2009 from $6.4 million at December 31, 2008 was primarily due to classifying one new loan as impaired in the amount of $338,000, offset by a $145,000 charge-off related to two loans to one borrower. Both loans are discussed in the prior paragraph.
23
Noninterest Income. The following table summarizes other income for the three months ended March 31, 2009, and 2008.
|
| Three Months |
|
|
|
|
| |||||
|
| Ended March 31, |
|
|
|
|
| |||||
|
| 2009 |
| 2008 |
| $ Change |
| % Change |
| |||
|
| (Dollars in thousands) |
| |||||||||
|
|
|
|
|
|
|
|
|
| |||
Service charges and other fee income |
| $ | 170 |
| $ | 191 |
| $ | (21 | ) | (11.0 | )% |
Net gain on sale of: |
|
|
|
|
|
|
|
|
| |||
Securities available-for-sale |
| — |
| 70 |
| (70 | ) | (100.0 | )% | |||
Loans |
| 3 |
| 3 |
| — |
| — |
| |||
Income on bank-owned life insurance |
| 109 |
| 111 |
| (2 | ) | (1.8 | )% | |||
Other |
| 65 |
| 18 |
| 47 |
| 261.1 | % | |||
Total |
| $ | 347 |
| $ | 393 |
| $ | (46 | ) | (11.7 | )% |
Service charges and other fee income decreased by $21,000 primarily as a result of the Bank recording a valuation allowance of $24,000 on its mortgage servicing rights. This was due to significant decreases in interest rates for residential mortgages, resulting in assumed higher mortgage prepayments. Gain on sale of investment securities decreased $70,000 during the first quarter of 2009, as the Company sold no securities in 2009 compared to $91.1 million in the first quarter of 2008. These decreases were offset by an increase in other income of $47,000 primarily as a result of an increase of $48,000 of income earned on the Bank’s investment in Philadelphia Mortgage Advisors, Inc.
Noninterest Expense. The following table summarizes noninterest expense for the three months ended March 31, 2009 and 2008.
|
| Three Months |
|
|
|
|
| |||||
|
| Ended March 31, |
|
|
|
|
| |||||
|
| 2009 |
| 2008 |
| $ Change |
| % Change |
| |||
|
| (Dollars in thousands) |
| |||||||||
|
|
|
|
|
|
|
|
|
| |||
Salaries, benefits and other compensation |
| $ | 2,850 |
| $ | 2,798 |
| $ | 52 |
| 1.9 | % |
Occupancy expense |
| 495 |
| 486 |
| 9 |
| 1.9 | % | |||
Furniture and equipment expense |
| 221 |
| 216 |
| 5 |
| 2.3 | % | |||
Data processing costs |
| 385 |
| 393 |
| (8 | ) | (2.0 | )% | |||
Professional fees |
| 266 |
| 313 |
| (47 | ) | (15.0 | )% | |||
Marketing expense |
| 84 |
| 95 |
| (11 | ) | (11.6 | )% | |||
FDIC premiums |
| 241 |
| 30 |
| 211 |
| 703.3 | % | |||
Other |
| 409 |
| 391 |
| 18 |
| 4.6 | % | |||
Total |
| $ | 4,951 |
| $ | 4,722 |
| $ | 229 |
| 4.8 | % |
The increase in noninterest expense was primarily a result of an increase in FDIC insurance premiums of $211,000, due to the increased assessment for the three months ended March 31, 2009 by seven basis points to twelve basis points and that the Bank’s FDIC insurance credit was fully utilized during the fourth quarter of 2008. A special insurance premium assessment has been proposed by the FDIC, which will substantially increase the FDIC insurance premiums in the second quarter of 2009. In addition, salaries, benefits and other compensation increased $52,000, or 1.9%. These increases were offset by a decrease of $47,000 in professional fees primarily due to a reduction in consulting fees.
Income Taxes. The income tax provision for the three months ended March 31, 2009 was $201,000 compared to $86,000 for the three months ended March 31, 2008. The Company’s effective income tax rate was 25.1% and 20.0% for the three-month periods ended March 31, 2009 and 2008, respectively. These rates reflect the Company’s levels of tax-exempt income for both periods relative to the overall level of taxable income.
24
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 repayments, securities repayments, maturities and sales. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loans and securities prepayments are greatly influenced by general interest rates, economic conditions and competition.
The following table presents certain of our contractual obligations as of March 31, 2009 and December 31, 2008.
|
|
|
| Payments Due by period |
| |||||||||||
|
|
|
| Less than |
| One to |
| Three to |
| More Than |
| |||||
Contractual Obligations |
| Total |
| One Year |
| Three Years |
| Five Years |
| Five Years |
| |||||
|
| (In thousands) |
| |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
At March 31, 2009 |
|
|
|
|
|
|
|
|
|
|
| |||||
Operating lease obligations (1) |
| $ | 1,575 |
| $ | 496 |
| $ | 921 |
| $ | 158 |
| $ | — |
|
FHLB advances and other borrowings (2) |
| 225,440 |
| 16,226 |
| 50,856 |
| 32,015 |
| 126,343 |
| |||||
Other long-term obligations (3) |
| 7,101 |
| 1,653 |
| 3,086 |
| 2,362 |
| — |
| |||||
Total |
| $ | 234,116 |
| $ | 18,375 |
| $ | 54,863 |
| $ | 34,535 |
| $ | 126,343 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
At December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
| |||||
Operating lease obligations (1) |
| $ | 1,702 |
| $ | 498 |
| $ | 929 |
| $ | 275 |
| $ | — |
|
FHLB advances and other borrowings (2) |
| 238,197 |
| 16,260 |
| 61,237 |
| 32,221 |
| 128,479 |
| |||||
Other long-term obligations (3) |
| 7,443 |
| 1,651 |
| 3,131 |
| 2,661 |
| — |
| |||||
Total |
| $ | 247,342 |
| $ | 18,409 |
| $ | 65,297 |
| $ | 35,157 |
| $ | 128,479 |
|
(1) Represents lease obligations for operations center, one loan production office and equipment.
(2) Includes principal and projected interest payments.
(3) Represents obligations to the Company’s third party data processing provider and other vendors.
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 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, 2009, cash and cash equivalents totaled $135.1 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $339.3 million at March 31, 2009. In addition, at December 31, 2008, the latest date available, we had the ability to borrow a total of approximately $479.3 million from the FHLB. On March 31, 2009, we had $145.3 million of borrowings outstanding with the FHLB as well as $50.0 million of borrowings outstanding with another financial institution. The significant increase in cash and cash equivalents of $131.2 million from December 31, 2008 to March 31, 2009 was a result of the increase in deposits during the quarter.
At March 31, 2009, we had $101.5 million in loan commitments outstanding, which consisted of $3.8 million of mortgage loan commitments, $21.3 million in unused home equity lines of credit, $7.2 million in consumer loans, $69.2 million in commercial loan commitments and $16,000 in standby letters of credit. Certificates of deposit due within one year of March 31, 2009 totaled $228.4 million, or 41.5% of total certificates of deposit, at March 31, 2009. The percentage of certificates of deposit due within one year declined to 41.5% from 53.5% at December 31, 2008 as a result of the Company’s certificate of deposit promotion which attracted a greater portion of certificates of deposit with a term of eighteen months or longer. We believe, in general, the relatively large percentage of certificates of deposit that mature within one year reflects customers’ hesitancy to invest their funds for long periods in the current 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, 2010. 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.
25
Our primary investing activities are the origination of loans and the purchase and sale of securities. Our primary financing activities consist of activity in deposit accounts, FHLB advances and other borrowed funds. 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.
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 |
| $ | (45,228 | ) | $ | (207,687 | ) |
Other decreases in loans |
| 17,615 |
| 82,182 |
| ||
Purchase of loan participations |
| (98 | ) | (19,335 | ) | ||
Security purchases |
| (56,225 | ) | (163,303 | ) | ||
Security sales |
| — |
| 94,449 |
| ||
Security maturities, calls and principal repayments |
| 14,756 |
| 68,893 |
| ||
Financing activities: |
|
|
|
|
| ||
Increase in deposits |
| 201,623 |
| 22,912 |
| ||
(Decrease) increase in FHLB advances |
| (1,040 | ) | 66,379 |
| ||
Increase in other borrowings |
| — |
| 30,000 |
| ||
Purchase of treasury stock |
| (856 | ) | (3,369 | ) | ||
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, 2009, 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, 2009 and December 31, 2008:
|
| Ratio |
| Minimum |
|
March 31, 2009: |
|
|
|
|
|
Total risk-based capital (to risk-weighted assets) |
| 17.35 | % | ³10.0 | % |
Tier 1 capital (to risk-weighted assets) |
| 16.40 | % | ³ 6.0 | % |
Tier 1 capital (to adjusted assets) |
| 8.91 | % | ³ 5.0 | % |
|
|
|
|
|
|
December 31, 2008: |
|
|
|
|
|
Total risk-based capital (to risk-weighted assets) |
| 19.25 | % | ³10.0 | % |
Tier 1 capital (to risk-weighted assets) |
| 18.11 | % | ³ 6.0 | % |
Tier 1 capital (to adjusted assets) |
| 10.70 | % | ³ 5.0 | % |
Total stockholders’ equity to total assets was 10.92% at March 31, 2009, 13.02% at December 31, 2008 and 14.26% at March 31, 2008. As a result of Fox Chase Bancorp’s initial public offering in 2006, the Company has significant capital. The Company’s financial condition and results of operations have been enhanced by the capital from the offering, resulting in increased net interest-earning assets. However, the large increase in equity resulting from the capital raised in the offering has had an adverse impact on our return on equity. The Company may use capital management tools such as cash dividends and share repurchases as well as improving operating income to increase its return on equity.
26
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, 2009, we did not engage in any 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.
At March 31, 2009, there has not been any material change to the market risk disclosure from that contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.
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, no change in the Company’s internal control over financial reporting occurred during the quarter ended March 31, 2009 that has materially affected, or is reasonably likely to materially effect, 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.
As of March 31, 2009, the risk factors of the Company have not changed materially from those reported in the Company’s 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, 2008, 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.
27
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Period |
| Total |
| Average |
| Total Number |
| Maximum |
| |
|
|
|
|
|
|
|
|
|
| |
January 1, 2009 through January 31, 2009 (1) |
| 32,600 |
| $ | 10.45 |
| 32,600 |
| 335,209 |
|
|
|
|
|
|
|
|
|
|
| |
February 1, 2009 through February 28, 2009 |
| 18,309 |
| $ | 9.61 |
| 18,309 |
| 316,900 |
|
|
|
|
|
|
|
|
|
|
| |
March 1, 2009 through March 31, 2009 |
| 38,130 |
| $ | 8.84 |
| 38,130 |
| 278,770 |
|
Total |
| 89,039 |
| $ | 9.59 |
| 89,039 |
|
|
|
(1) On February 7, 2008, the Company announced that the Board of Directors had approved a stock repurchase program authorizing the Company to repurchase up to 327,000 shares of the Company’s common stock (the “February 2008 program”). The February 2008 program was completed during the first quarter of 2009. On July 31, 2008, the Company announced that the Board of Directors approved the repurchase of up to an additional 327,000 shares of the Company’s common stock (the “July 2008 program”). During the first quarter of 2009, the Company repurchased 48,230 shares as part of the July 2008 program. This repurchase program will continue until it is completed or terminated by the Board of Directors.
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. (2) |
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 |
(1) Incorporated by reference to this document from 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.
(2) Incorporated by reference to this document from the exhibits to the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 9, 2008.
28
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 8, 2009 | By: | /s/ Thomas M. Petro |
|
| Thomas M. Petro |
|
| President and Chief Executive Officer |
|
| (principal executive officer) |
|
|
|
Dated: May 8, 2009 | By: | /s/ Roger S. Deacon |
|
| Roger S. Deacon |
|
| Chief Financial Officer |
|
| (principal financial officer) |