SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended January 31, 2004
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OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-50684
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SE FINANCIAL CORP.
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(Exact name of registrant as specified in its charter)
Pennsylvania 57-1199010
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
1901-03 Passyunk Avenue, Philadelphia, Pennsylvania 19148
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 215-468-1700
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N/A
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Former name, former address and former fiscal year,
if changed since last report.
Indicate by check whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes No X
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date: April 26, 2004
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Class Outstanding
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$.10 par value common stock 0 shares
SE FINANCIAL CORP.
FORM 1O-QSB
FOR THE QUARTER ENDED JANUARY 31, 2004
INDEX
Page
Number
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PART I - CONSOLIDATED FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements 1
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Item 3. Controls and Procedures 9
PART II- OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 2. Changes in Securities and Use of Proceeds 10
Item 3. Defaults Upon Senior Securities 10
Item 4. Other Information 10
Item 5. Exhibits and Reports on Form 8-K 10
SIGNATURES
EXHIBITS
31. Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
32. Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
i
ST. EDMOND'S FEDERAL SAVINGS BANK AND
SUBSIDIARY CONSOLIDATED BALANCE SHEET
(Unaudited)
January 31, October 31,
2004 2003
------------ ------------
ASSETS
Cash and due from banks $ 1,231,775 $ 675,001
Interest-bearing deposits with other institutions 140,772 5,628,890
------------ ------------
Cash and cash equivalents 1,372,547 6,303,891
Certificates of deposit in other financial institutions 184,718 183,483
Investment securities available for sale 29,021,450 27,337,238
Loans receivable (net of allowance for loan losses
of $273,686 and $262,561) 51,399,171 50,729,660
Accrued interest receivable 495,896 482,538
Federal Home Loan Bank stock 683,500 735,000
Real estate owned 10,000 38,881
Premises and equipment, net 1,136,419 1,148,993
Bank-owned life insurance 1,540,000 --
Other assets 379,052 407,622
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TOTAL ASSETS $ 86,222,753 $ 87,367,306
============ ============
LIABILITIES AND RETAINED EARNINGS
Deposits $ 70,646,578 $ 72,272,834
Federal Home Loan Bank borrowings 6,622,334 6,637,204
Advances by borrowers for taxes and insurance 679,688 477,386
Accrued interest payable 43,908 49,703
Other liabilities 283,812 258,521
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TOTAL LIABILITIES 78,276,320 79,695,648
------------ ------------
Commitments and contingencies
Retained earnings - substantially restricted 7,855,144 7,755,558
Accumulated other comprehensive income (loss) 91,289 (83,900)
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TOTAL RETAINED EARNINGS 7,946,433 7,671,658
------------ ------------
TOTAL LIABILITIES AND RETAINED EARNINGS $ 86,222,753 $ 87,367,306
============ ============
See accompanying notes to the unaudited consolidated financial statements.
1
ST. EDMOND'S FEDERAL SAVINGS BANK AND SUBSIDIARY CONSOLIDATED
STATEMENT OF INCOME
(Unaudited)
Three-months Ended January 31,
2004 2003
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INTEREST AND DIVIDEND INCOME
Loans receivable $ 894,489 $1,061,866
Investment securities:
Taxable 243,270 264,974
Exempt from federal income tax 27,982 13,590
Interest-bearing deposits with other institutions 12,192 19,515
Other dividend income 2,400 5,239
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Total interest and dividend income 1,180,333 1,365,184
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INTEREST EXPENSE
Deposits 475,019 624,156
Federal Home Loan Bank borrowings 53,837 57,010
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Total interest expense 528,856 681,166
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NET INTEREST INCOME 651,477 684,018
Provision for loan losses 9,000 9,000
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NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 642,477 675,018
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NONINTEREST INCOME
Service fees on deposit accounts 67,715 87,464
Other 14,483 22,391
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Total noninterest income 82,198 109,855
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NONINTEREST EXPENSE
Compensation and employee benefits 296,507 290,705
Occupancy and equipment 54,908 74,289
Real estate operations, net 1,484 6,905
Federal deposit insurance premiums 10,010 15,489
Data processing expense 65,865 70,294
Professional fees 30,443 15,488
Other 104,154 98,381
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Total noninterest expense 563,371 571,551
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Income before income taxes 161,304 213,322
Income taxes 61,718 79,569
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NET INCOME $ 99,586 $ 133,753
========== ==========
See accompanying notes to the unaudited consolidated financial statements.
2
ST. EDMOND'S FEDERAL SAVINGS BANK AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN RETAINED EARNINGS
(Unaudited)
Retained Accumulated
Earnings - Other Total
Substantially Comprehensive Retained Comprehensive
Restricted Income (Loss) Earnings Income
------------------ ----------------- ----------------- -----------------
Balance, October 31, 2003 $ 7,755,558 $ (83,900) $ 7,671,658
Net income 99,586 99,586 $ 99,586
Other comprehensive income:
Unrealized gain on available
for sale securities
net of taxes of $90,249 175,189 175,189 175,189
---------------
Comprehensive income $ 274,775
-------------- ---------------- -------------- ===============
Balance, January 31, 2004 $ 7,855,144 $ 91,289 $ 7,946,433
============== ================ ==============
See accompanying notes to the unaudited consolidated financial statements.
3
ST. EDMOND'S FEDERAL SAVINGS BANK AND SUBSIDIARY CONSOLIDATED
STATEMENT OF CASH FLOWS
(Unaudited)
Three-months ended January 31,
2004 2003
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OPERATING ACTIVITIES
Net income $ 99,586 $ 133,753
Adjustments to reconcile net income to net cash provided
by (used for) operating activities:
Provision for loan losses 9,000 9,000
Depreciation, amortization, and accretion 39,634 7,914
Decrease (increase) in accrued interest receivable (13,358) 103
Decrease in accrued interest payable (5,795) (6,178)
Other, net (52,080) (349,009)
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Net cash provided by (used for) operating activities 76,987 (204,417)
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INVESTING ACTIVITIES
Investment securities available for sale:
Proceeds from principal repayments and maturities 3,820,967 2,858,356
Purchases (5,247,800) (6,842,599)
Decrease (increase) in loans receivable, net (661,671) 1,672,536
Proceeds from sales of real estate acquired through
foreclosure 27,573 17,821
Redemption (purchase) of Federal Home Loan Bank stock 51,500 (53,000)
Purchase of bank-owned life insurane (1,540,000) -
Purchase of premises and equipment (20,076) (37,866)
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Net cash used for investing activities (3,569,507) (2,384,752)
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FINANCING ACTIVITIES
Increase (decrease) in deposits, net (1,626,256) 537,641
Repayment of Federal Home Loan Bank borrowings (14,870) (13,941)
Increase in advances by borrowers
for taxes and insurance, net 202,302 222,015
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Net cash provided by (used for) financing activities (1,438,824) 745,715
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Decrease in cash and cash equivalents (4,931,344) (1,843,454)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 6,303,891 7,300,707
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,372,547 $ 5,457,253
=========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid:
Interest $ 534,651 $ 687,344
Income taxes 60,000 12,500
Noncash transactions:
Transfers from loans to real estate acquired through foreclosure - 23,000
See accompanying notes to the unaudited consolidated financial statements.
4
ST. EDMOND'S FEDERAL SAVINGS BANK AND SUBSIDIARY
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
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The consolidated financial statements include the accounts of the Bank
and its wholly-owned subsidiary, SE Investment Services Corp. ("Services
Corp."). All intercompany transactions have been eliminated in consolidation.
The investment in subsidiary on the Bank's financial statements is carried at
the Bank's equity in the underlying net assets of the Services Corp.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and the instructions
for Form 10-QSB. In Management's opinion, the financial statements include all
adjustments, consisting of normal recurring adjustments, that the Bank considers
necessary to fairly state the Bank's financial position and the results of
operations and cash flows. The balance sheet at October 31, 2003, has been
derived from the audited financial statements at that date but does not include
all of the necessary informational disclosures and footnotes as required by
accounting principles generally accepted in the United States of America. The
results of the Bank's operations for any interim period are not necessarily
indicative of the results of the Bank's operations for any other interim period
or for a full fiscal year.
NOTE 2 - PLAN OF CONVERSION
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On January 15, 2004, the Board of Directors of the Bank, subject to
regulatory approval, ratified a Plan of Conversion (the "Plan") to convert from
a federally chartered mutual savings institution to a federally chartered stock
savings institution. The Bank will become a wholly-owned subsidiary of a
concurrently formed holding company. The plan provides that the holding company
will offer nontransferable subscription rights to purchase common stock of the
holding company. The rights will be offered first to eligible account holders,
the tax-qualified employee stock benefit plans, and other members. Any shares
remaining may then be offered to the general public.
The Plan provides for the establishment, upon completion of the
conversion, of a special "liquidation account" in an amount equal to the Bank's
net worth as of the latest practicable date prior to the conversion. This
account is for the benefit of eligible account holders in the event of
liquidation of the Bank. The interest as to each deposit account will be in the
same proportion of the total liquidation account as the balance of the deposit
account on December 31, 2002, the qualifying date, was to the aggregate balance
of all deposit account of eligible account holders on such date. The liquidation
account will be reduced in a proportionate amount if the amount in any deposit
account on any annual closing date is less that it was on the qualifying date.
The liquidation account will not be increased despite any increase in a deposit
account after the qualifying date.
The regulations of the OTS prohibit the Bank from declaring or paying a
cash dividend if the effect thereof would cause the Bank's regulatory capital to
be reduced below either the amount required for the liquidation account or the
federal regulatory capital requirement in Section 567.2 of the Rules and
Regulations of the OTS.
Costs associated with the conversion will be deferred and deducted from
the proceeds of the stock offering. If, for any reason, the offering is not
successful, the deferred costs will be charged to operations. As of January 31,
2004, the Bank had incurred conversion costs of approximately $97,000.
5
The stockholders of the holding company will be asked to approve a
stock option plan and a restricted stock plan at a meeting of the stockholders
after the conversion. Shares issued to directors and employees under these plans
may be purchased in the open market. In the event that shares are newly issued
under these plans rather than being purchased in the open market, such issuances
will be included in the earnings per share calculation; thus, the interests of
existing stockholders would be diluted.
NOTE 3 - COMPREHENSIVE INCOME
- -----------------------------
The components of comprehensive income consist exclusively of
unrealized gains and losses on available for sale securities. For the three
months ended January 31, 2004, this activity is shown under the heading
Comprehensive Income as presented in the Consolidated Statement of Changes in
Retained Earnings (Unaudited). For the three months ended January 31, 2003,
comprehensive income totaled $187,151.
NOTE 4- RECENT ACCOUNTING PRONOUNCEMENTS
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In December 2003, the FASB issued a revision to Interpretation 46,
Consolidation of Variable Interest Entities, which established standards for
identifying a variable interest entity (VIE) and for determining under what
circumstances a VIE should be consolidated with its primary beneficiary.
Application of this Interpretation is required in financial statements of public
entities that have interests in special-purpose entities for periods ending
after December 15, 2003. Application by public entities, other than small
business issuers, for all other types of VIEs is required in financial
statements for periods ending after March 15, 2004. Small business issuers must
apply this Interpretation to all other types of VIEs at the end of the first
reporting period ending after December 15, 2004. The adoption of this
interpretation has not and is not expected to have a material effect on the
Company's financial position or results of operations.
6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
This document contains forward-looking statements, including statements
about anticipated operating and financial performance, such as loan
originations, operating efficiencies, loan sales, charge-offs and loan loss
provisions, growth opportunities, interest rates, and deposit growth. Words such
as "may," "could," "should," "would," "believe," "anticipate," "estimate,"
"expect," "intend," "project," "plan," and similar expressions are intended to
identify these forward-looking statements.
Forward-looking statements are necessarily subject to many risks and
uncertainties. A number of things could cause actual results to differ
materially from those indicated by the forward-looking statements. Many of the
risks and uncertainties are beyond our control. Forward-looking statements are
based on our beliefs, plans, objectives, goals, assumptions, expectations,
estimates, and intentions as of the date the statements are made. There is no
assurance that these beliefs, plans, objectives, goals, assumptions,
expectations, estimates, and intentions will be realized.
Comparison of the Results of Operation for the Three Months Ended January 31,
2004 and January 31, 2003
The Bank recorded net income of $100,000 for the three months ended
January 31, 2004, which represents a decrease of $34,000, or 25.5%, over the
same period in 2003. The decrease in net income is primarily due to a reduction
of noninterest income and a decrease in net interest income.
Net Interest Income. Net interest income for the three months ended
January 31, 2004 decreased to $652,000 from $684,000 for the same period in
2003. Interest income for the three months ended January 31, 2004 totaled
$1,181,000 as compared to $1,365,000 for the three months ended January 31,
2003. This decrease of $184,000 was attributed primarily to a decrease in the
interest earned on loans receivable and mortgaged-backed securities and was the
product of both volume and rate fluctuations during the period.
Interest expense decreased to $529,000, representing a 22.3% decrease,
for the three months ended January 31, 2004 from $681,000 for the three months
ended January 31, 2003 and was primarily attributable to the current interest
rate environment that resulted in a lowering of the cost of funds to 2.79% for
the three months ended January 31, 2004 as compared to 3.59% for the same period
in 2003.
Loan Loss Provision. The provision for loan losses was $9,000 for the
three months ended January 31, 2004 which is the same amount as for the three
months ended January 31, 2003. The loan loss provision is based upon
management's assessment of a variety of factors, including types and amounts of
nonperforming loans, historical loss experience, collectibility of collateral
values and guaranties, pending legal action for collection of loans and related
guaranties, and current economic conditions. The allowance represents
management's best estimate of known and inherent losses in the loan portfolio at
the balance sheet date that are both probable and reasonable to estimate.
However, actual loan losses could exceed the amounts that have been charged to
operations.
Noninterest Income. Total noninterest income decreased to $82,000 for
the three months ended January 31, 2004 compared to $110,000 for the three
months ended January 31, 2003. The decrease is principally due to a reduction in
service charges and fees on deposit account activity in both the transactional
fees being charged and the volume of related transactions and a reduction in
miscellaneous
7
loan fees. The Bank anticipates the investment in a bank-owned life insurance
product in 2004 should generate additional noninterest income.
Noninterest Expense. Noninterest expense decreased slightly to $563,000
for the three months ended January 31, 2004 from $572,000 for the three months
ended January 31, 2003. Compensation and employee benefit expense increased by
approximately $6,000, occupancy and equipment expense decreased by approximately
$19,000, real estate operation expense decreased by approximately $6,000 and
miscellaneous operating expenses increased by approximately $10,000.
Noninterest expenses are expected to increase in 2004 due to the
additional costs of professional fees associated with becoming a public company,
the implementation of an incentive retirement plan for key employees and
expenses from an employee stock ownership and restricted stock plan.
Additionally, the Bank currently plans to add seven full time employees
to its staff over the next several years, including up to three new
lender/business development officers, an assistant branch manager, and a support
staff employee in each of the accounting, lending and customer service
departments.
Income Taxes. Income taxes declined to $62,000 for the three months
ended January 31, 2004 from $79,000 for the same period in 2003. This was due to
a reduction in pretax income.
Comparison of Financial Condition at January 31, 2004 and October 31, 2003
Assets and Liabilities. The Bank's total assets decreased by $1,144,000
to $86,223,000 at January 31, 2004 from $87,367,000 at October 31, 2003.
Cash and cash equivalents decreased to $1,372,000 at January 31, 2004
from $6,304,000 at October 31, 2003. This decrease was primarily a result of a
reduction in the interest-bearing deposit account.
Investment securities available for sale increased $1,684,000 to
$29,021,000 at January 31, 2004 from $27,337,000 at October 31, 2003. The
increase is due to investment purchases primarily in U. S. government
mortgage-backed securities which were partially offset by investment calls and
maturities and principal repayment on mortgage-backed securities. The Bank
funded this growth with the utilization of excess cash and cash equivalents and
the reinvestment of called and matured securities during the three months ended
January 31, 2004.
Net loans receivable increased $669,000, or 1.3%, to $51,399,000 at
January 31, 2004 from $50,730,000 at October 31, 2003. A slight increase in net
loans receivable was noted during the three months ended January 31, 2004 as the
Bank continued to experience strong loan production and repayments were more
moderate.
The allowance for loan losses increased to $274,000 at January 31, 2004
from $263,000 at October 31, 2003 and represented .53% of the gross loan
portfolio at January 31, 2004. The Bank had nonaccrual loans of $171,000 and
$370,000 at January 31, 2004 and October 31, 2003. Management does not believe
the nonaccrual loans or any amounts classified as nonperforming will have a
significant effect on operations or liquidity in 2004. Furthermore, management
is not aware of any trends or uncertainties related to any loans classified as
doubtful or substandard that might have a material effect on earnings, liquidity
or capital resources.
8
Total deposits decreased to $70,647,000 at January 31, 2004 from
$72,273,000 at October 31, 2003. This was primarily a result of a decrease in
certificates of deposit. Although time deposits declined, they continued to
account for 71.05% of the total deposit portfolio and remain a dominant resource
for funds.
Federal Home Loan Bank borrowings decreased slightly to $6,622,000 at
January 31, 2004 from $6,637,000 at October 31, 2003.
Retained Earnings. Total retained earnings increased $274,000 to
$7,946,000 at January 31, 2004 from October 31, 2003. This increase was
attributable to net income of $100,000 and accumulated other comprehensive
income of $175,000. Accumulated other comprehensive income increased as a result
of changes in the net unrealized gain on investment securities available for
sale. Because of interest rate volatility, accumulated other comprehensive
income could materially fluctuate for each interim period and year end period
depending on economic and interest rate conditions. The Bank is currently in the
process of an initial stock offering, which will include an employee stock
ownership plan and may include a restricted stock plan. The proceeds would
result in additional equity in the immediate future which will be used for
general business purposes.
CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Based on their evaluation
of the Company's disclosure controls and procedures (as defined in Rule
13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")), the
Company's principal executive officer and principal financial officer have
concluded that as of the end of the period covered by this Quarterly Report on
Form 10-QSB such disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms.
(b) Changes in internal control over financial reporting. During the quarter
under report, there was no change in the Company's internal control over
financial reporting that has materially affected, or is reasonably likely too
materially affect, the Company's internal control over financial reporting.
9
PART II
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. OTHER INFORMATION
None.
ITEM 5. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31. Certification pursuant to 18 U.S.C.ss.1350, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32. Certification pursuant to 18 U.S.C.ss.1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(b) Reports on Form 8-K
None.
10
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SE FINANCIAL CORP.
Date: April 29, 2004 /s/Frank S. DePaolo
------------------------------------------
Frank S. DePaolo
President and CEO
(Principal Executive Officer)
Date: April 29, 2004 /s/Joseph Sidebotham
------------------------------------------
Joseph Sidebotham
Executive Vice President, Chief Financial
Officer and Controller
(Principal Financial & Accounting Officer)