UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
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 April 30, 2005
----------------------------
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file number 0-50684
SE FINANCIAL CORP.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 57-1199010
- --------------------------------------------------------------------------------
(State or other jurisdiction of incorporation (I.R.S. employer
or organization) identification no.)
1901-03 Passyunk Avenue, Philadelphia, Pennsylvania 19148
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 215-468-1700
------------
N/A
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed
since last report.
Indicate by check whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date: June 09, 2005
--------------
Class Outstanding
--------------------------- -----------------
$.10 par value common stock 2,578,875 shares
Transitional Small Business Disclosure Format (check one): Yes No X
--- ---
SE FINANCIAL CORP.
FORM 1O-QSB
FOR THE QUARTER ENDED APRIL 30, 2005
INDEX
Page
Number
------
PART I - CONSOLIDATED FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited) 1
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Controls and Procedures 12
PART II- OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits 13
SIGNATURES
EXHIBITS
31 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.1 Report of Independent Registered Public Accounting Firm
SE FINANCIAL CORP.
CONSOLIDATED BALANCE SHEET
(Unaudited)
April 30, October 31,
2005 2004
------------- -------------
ASSETS
Cash and due from banks $ 879,282 $ 817,854
Interest-bearing deposits with other institutions 1,797,222 5,362,940
------------- -------------
Cash and cash equivalents 2,676,504 6,180,794
Certificates of deposit in other financial institutions 191,082 188,490
Investment securities available for sale 45,214,275 48,437,319
Loans receivable (net of allowance for loan losses
of $406,997 and $342,875) 71,565,891 64,809,843
Accrued interest receivable 642,611 630,507
Federal Home Loan Bank Stock 1,043,000 1,179,000
Premises and equipment, net 1,124,261 1,063,921
Bank owned life insurance 1,908,357 1,866,689
Other assets 481,213 422,599
------------- -------------
TOTAL ASSETS $ 124,847,194 $ 124,779,162
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $ 77,321,000 $ 75,385,246
Short-term borrowings 5,500,000 7,000,000
Federal Home Loan Bank borrowings 9,544,277 9,576,257
Advances by borrowers for taxes and insurance 289,672 474,548
Accrued interest payable 100,426 113,839
Other liabilities 395,649 626,749
------------- -------------
TOTAL LIABILITIES 93,151,024 93,176,639
Stockholders' Equity
Preferred stock - no par value; 2,000,000 shares authorized; none issued -- --
Common stock - $0.10 par value; 8,000,000 shares authorized;
2,578,875 issued and outstanding 257,888 257,888
Additional paid-in capital 24,851,082 24,841,836
Retained earnings - substantially restricted 8,830,566 8,450,438
Unallocated shares held by Employee Stock Ownership Plan ("ESOP") (1,915,740) (2,007,498)
Accumulated other comprehensive income (loss) (327,626) 59,859
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 31,696,170 31,602,523
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 124,847,194 $ 124,779,162
============= =============
See accompanying notes to the unaudited consolidated financial statements.
1
SE FINANCIAL CORP.
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
Three Months Ended April 30, Six Months Ended April 30,
------------------------------- -------------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
INTEREST AND DIVIDEND INCOME
Loans receivable $ 1,204,385 $ 925,356 $ 2,340,202 $ 1,819,845
Investment securities
Taxable 428,328 238,081 865,973 481,351
Exempt from federal income tax 35,936 31,253 72,024 59,235
Interest-bearing deposits with other
institutions 16,270 13,738 34,407 25,929
Other dividend income 7,573 2,371 15,292 4,771
----------- ----------- ----------- -----------
Total interest and dividend income 1,692,492 1,210,799 3,327,898 2,391,131
----------- ----------- ----------- -----------
INTEREST EXPENSE
Deposits 492,571 441,883 980,167 916,902
Short-term borrowings 35,622 12,954 67,170 26,057
Federal Home Loan Bank borrowings 92,780 40,341 188,876 81,075
----------- ----------- ----------- -----------
Total interest expense 620,973 495,178 1,236,213 1,024,034
----------- ----------- ----------- -----------
NET INTEREST INCOME 1,071,519 715,621 2,091,685 1,367,097
Provision for loan losses 34,000 9,000 51,000 18,000
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,037,519 706,621 2,040,685 1,349,097
----------- ----------- ----------- -----------
NONINTEREST INCOME
Service fees on deposit accounts 71,118 64,073 137,565 131,788
Earnings on bank-owned life insurance 21,589 22,443 41,668 28,895
Net gain on sale of investment securities 10,446 - 10,446 -
Other 12,668 9,217 23,313 17,248
----------- ----------- ----------- -----------
Total noninterest income 115,821 95,733 212,992 177,931
----------- ----------- ----------- -----------
NONINTEREST EXPENSE
Compensation and employee benefits 486,741 317,288 878,763 613,795
Occupancy and equipment 52,189 59,421 101,778 114,329
Federal deposit insurance premiums 11,497 9,887 22,259 19,897
Data processing expense 85,701 77,397 158,658 143,262
Professional fees 112,236 39,507 165,668 69,951
Other 110,268 75,426 223,924 181,062
----------- ----------- ----------- -----------
Total noninterest expense 858,632 578,926 1,551,050 1,142,296
----------- ----------- ----------- -----------
INCOME BEFORE TAXES 294,708 223,428 702,627 384,732
INCOME TAXES 90,270 74,344 227,303 136,062
----------- ----------- ----------- -----------
NET INCOME $ 204,438 $ 149,084 $ 475,324 $ 248,670
=========== =========== =========== ===========
PER SHARE DATA:
Earnings per share - basic and diluted $ 0.09 NA $ 0.20 NA
Weighted average number of shares
outstanding - basic and diluted 2,386,115 NA 2,383,005 NA
Dividends per share 0.02 NA 0.04 NA
See accompanying notes to the unaudited consolidated financial statements.
2
SE FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
Retained Accumulated Total
Earnings- Unallocated Other Stock- Compre-
Additional paid- Substantially shares held by Comprehensive holders' hensive
Common Stock in capital Restricted ESOP Income (Loss) Equity Income
------------ ---------------- ------------- ------------- ------------- ------------ --------
Balance,
October 31, 2004 $ 257,888 $24,841,836 $8,450,438 $ (2,007,498) $ 59,859 $31,602,523
Cash dividends paid - - (95,196) - - (95,196)
ESOP shares committed
to be released - 9,246 - 91,758 - 101,004
Net income - - 475,324 - - 475,324 $ 475,324
Other comprehensive
income:
Unrealized loss on
available for sale
securities net of
tax benefit of
$(199,613) - - - - (387,485) (387,485) (387,485)
---------
Comprehensive income - - - - - - $ 87,839
--------- ----------- ---------- ------------ ---------- ----------- =========
Balance, April 30, 2005 $ 257,888 $24,851,082 $8,830,566 $ (1,915,740) $ (327,626) $31,696,170
========= =========== ========== ============ ========== ===========
See accompanying notes to the unaudited consolidated financial statements.
3
SE FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
For the Six Months Ended April 30,
2005 2004
------------ ------------
OPERATING ACTIVITIES
Net income $ 475,324 $ 248,670
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 51,000 18,000
Depreciation, amortization, and accretion 29,314 121,224
Earnings on bank-owned life insurance (41,668) (28,895)
Increase (decrease) in principal and interest on loans
sold payable (146,622) 640,357
Increase in accrued interest receivable (12,104) (27,899)
Decrease in accrued interest payable (13,413) (4,349)
Gain on sale of investment securities (10,446)
Other, net 77,525 (176,365)
------------ ------------
Net cash provided by operating activities 408,910 790,743
------------ ------------
INVESTING ACTIVITIES
Investment securities available for sale:
Proceeds from principal repayments and maturities 2,571,629 6,900,950
Purchases (4,050,516) (16,626,557)
Proceeds from the sale of investment securities 4,099,303
Decrease (increase) in loans receivable, net (6,772,064) (3,831,105)
Proceeds from sales of real estate acquired through
foreclosure 80,000 56,763
Purchase of Federal Home Loan Bank stock (399,400)
Redemption of Federal Home Loan Bank stock 136,000
Purchase of bank-owned life insurance (1,540,000)
Purchase of premises and equipment (101,254) (34,181)
------------ ------------
Net cash used for investing activities (4,036,902) (15,473,530)
------------ ------------
FINANCING ACTIVITIES
Increase (decrease) in deposits, net 1,935,754 (429,269)
Net decrease in short-term borrowings (1,500,000)
Proceeds from Federal Home Loan Bank borrowings 10,000,000
Repayment of Federal Home Loan Bank borrowings (31,980) (29,982)
Increase in subscription rights 31,069,009
Decrease in advances by borrowers
for taxes and insurance, net (184,876) (250,564)
Cash dividends (95,196)
------------ ------------
Net cash provided by financing activities 123,702 40,359,194
------------ ------------
Increase (decrease) in cash and cash equivalents . (3,504,290) 25,676,407
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 6,180,794 6,303,891
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,676,504 $ 31,980,298
============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid:
Interest $ 1,249,626 $ 1,028,383
Income taxes 289,000 134,500
See accompanying notes to the unaudited consolidated financial statements.
4
SE FINANCIAL CORP.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
- ------------------------------
The consolidated financial statements include the accounts of SE Financial Corp.
(the "Company") and St. Edmond's Federal Savings Bank (the "Bank"). The Bank
includes its wholly-owned subsidiary, SE Investment Services Corp. ("Services
Corp."). All intercompany transactions have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with U. S. generally accepted accounting principles for interim
financial information and the instructions for Form 10-QSB. In management's
opinion, the financial statements include all adjustments, consisting of normal
recurring adjustments, that the Company considers necessary to fairly state the
Company's financial position and the results of operations and cash flows. The
balance sheet at October 31, 2004, has been derived from the audited financial
statements at that date but does not include all of the necessary informational
disclosures and footnotes as required by U. S. generally accepted accounting
principles. The results of the Company's operations for any interim period are
not necessarily indicative of the results of the Company's operations for any
other interim period or for a full fiscal year.
NOTE 2 - COMPREHENSIVE INCOME
- -----------------------------
The components of comprehensive income consist exclusively of unrealized gains
and losses on available for sale securities. For the six months ended April 30,
2005, this activity is shown under the heading Comprehensive Income as presented
in the Consolidated Statement of Changes in Stockholders' Equity (Unaudited).
For the six months ended April 30, 2004, comprehensive income totaled $263,765.
For the three months ended April 30, 2005 and 2004, comprehensive loss totaled
$112,842 and $11,010, respectively.
NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENTS
- -----------------------------------------
In April 2005, the Securities and Exchange Commission adopted a new rule that
amends the compliance dates for Financial Accounting Standards Board's ("FASB")
Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based
Payment (FAS No. 123R). The Statement requires that compensation cost relating
to share-based payment transactions be recognized in financial statements and
that this cost be measured based on the fair value of the equity or liability
instruments issued. FAS No. 123 (Revised 2004) covers a wide range of
share-based compensation arrangements including share options, restricted share
plans, performance-based awards, share appreciation rights, and employee share
purchase plans. The Company will adopt FAS No. 123 (Revised 2004) on November 1,
2006 and is currently evaluating the impact the adoption of the standard will
have on the Company's results of operations.
In March 2005, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 107 ("SAB No. 107"), "Share-Based Payment," providing
guidance on option valuation methods, the accounting for income tax effects of
share-based payment arrangements upon adoption of SFAS No. 123-R, and the
disclosures in MD&A subsequent to the adoption. The Company will provide SAB No.
107 required disclosures upon adoption of SFAS No. 123-R on November 1, 2006 and
is currently evaluating the impact the adoption of the standard will have on the
Company's financial condition, results of operations, and cash flows.
In October 2003 the American Institute of Certified Public Accountants issued
SOP 03-3, Accounting for Loans or Certain Debt Securities Acquired in a
Transfer. SOP 03-3 applies to a loan that is acquired where it is probable, at
acquisition, that a transferee will be unable to collect all contractually
required payments receivable. SOP 03-3 requires the recognition, as accretable
yield, of the excess of all cash flows expected at acquisition over the
investor's initial investment in the loan as interest income on a level-yield
basis over the life of the loan. The amount by which the loan's contractually
required payments exceed the amount of its expected cash flows at acquisition
may not be recognized as an adjustment to yield, a loss accrual, or a valuation
allowance for credit risk. SOP 03-3 is effective for loans acquired in fiscal
years beginning after December 31, 2004. Early adoption is permitted. The
adoption of SOP 03-3 is not expected to have a material impact on the
consolidated financial statements.
In December 2004, FASB issued FAS No. 153, "Exchanges of Nonmonetary Assets - An
Amendment of APB Opinion No. 29". The guidance in APB Opinion No. 29,
"Accounting for Nonmonetary Transactions", is based on the principle that
exchanges of nonmonetary assets should be measured based on the fair value of
the assets exchanged. The guidance in that Opinion, however, included certain
exceptions to that principle. FAS No. 153 amends Opinion No. 29 to eliminate the
exception for nonmonetary exchanges of similar productive assets and replaces it
with a general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. The provisions of FAS No. 153 are effective for nonmonetary
asset exchanges occurring in fiscal periods beginning after June
5
15, 2005. Early application is permitted and companies must apply the standard
prospectively. The adoption of this standard is not expected to have a material
effect on the Company's results of operations or financial position.
In June 2005, the FASB issued FAS No. 154, "Accounting Changes and Errors
Corrections, a replacement of APB Opinion No. 20 and FAS No. 3". The Statement
applies to all voluntary changes in accounting principle, and changes the
requirements for accounting for and reporting of a change in accounting
principle. FAS No. 154 requires retrospective application to prior periods'
financial statements of a voluntary change in accounting principle unless it is
impractical. APB Opinion No. 20 previously required that most voluntary changes
in accounting principle be recognized by including in net income of the period
of the change the cumulative effect of changing to the new accounting principle.
FAS No. 154 improves the financial reporting because its requirements enhance
the consistency of financial reporting between periods.
NOTE 4 - INVESTMENTS
- --------------------
The amortized cost and the fair value of available-for-sale investment
securities were as follows:
April 30, 2005
----------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ -------- ---------- ------------
Mortgage-backed securities:
Fannie Mae $ 25,103,389 $ 42,140 $ (148,003) $ 24,997,526
Freddie Mac 2,131,368 6,380 (12,034) 2,125,714
Government National Mortgage
Association securities 2,716,592 22,968 (132) 2,739,428
------------ -------- ---------- ------------
Total mortgage-backed securities 29,951,349 71,488 (160,169) 29,862,668
U.S. Government agency securities 10,459,985 4,752 (281,121) 10,183,616
Corporate securities 1,000,000 - (16,300) 983,700
Municipal securities 4,111,848 9,208 (122,864) 3,998,192
------------ -------- ---------- ------------
Total debt securities 45,523,182 85,448 (580,454) 45,028,176
Mutual funds 187,497 - (1,398) 186,099
------------ -------- ---------- ------------
Total $ 45,710,679 $ 85,448 $ (581,852) $ 45,214,275
============ ======== ========== ============
October 31, 2004
----------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ -------- ---------- ------------
Mortgage-backed securities:
Fannie Mae $ 23,725,032 $138,467 $ (50,781) $ 23,812,718
Freddie Mac 2,673,274 19,086 (13,993) 2,678,367
Government National Mortgage
Association securities 3,192,711 65,014 (236) 3,257,489
------------ -------- ---------- ------------
Total mortgage-backed securities 29,591,017 222,567 (65,010) 29,748,574
U.S. Government agency securities 13,457,313 44,475 (156,453) 13,345,335
Corporate securities 1,000,000 - (6,500) 993,500
Municipal securities 4,113,449 68,113 (16,025) 4,165,537
------------ -------- ---------- ------------
Total debt securities 48,161,779 335,155 (243,988) 48,252,946
Mutual funds 184,843 - (470) 184,373
------------ -------- ---------- ------------
Total $ 48,346,622 $335,155 $ (244,458) $ 48,437,319
============ ======== ========== ============
6
The amortized cost and estimated market value of debt securities at April 30,
2005, by contractual maturity, are shown below. Mortgage-backed securities
provide for periodic, generally monthly, payments of principal and interest and
have contractual maturities ranging from one to thirty years. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or repay obligations with or without call or prepayment
penalties.
Estimated Market
Amortized Cost Value
----------- -----------
Due less than one year $ 118,968 $ 120,950
Due after one year through five years 10,138,746 9,910,712
Due after five years through ten years 6,850,047 6,644,616
Due after ten years 28,415,421 28,351,898
----------- -----------
$45,523,182 $45,028,176
=========== ===========
NOTE 5 - LOANS RECEIVABLE
- -------------------------
Loans receivable consist of the following:
April 30, 2005 October 31, 2004
------------------------ ------------------------
Amount Percent Amount Percent
------------ ------- ----------- -------
Type of Loans:
- --------------
Mortgage loans:
One-to four- family (1) $ 46,675,239 64.71% $ 43,357,098 66.45%
Multi-family 459,832 0.64% 1,036,017 1.59%
Commercial real estate 4,945,787 6.86% 4,939,451 7.57%
Construction (2) 8,702,956 12.07% 5,536,598 8.49%
Home equity loans and lines of credit 10,868,682 15.07% 9,798,082 15.02%
Loans on savings accounts 341,002 0.47% 438,588 0.67%
Other 128,682 0.18% 140,648 0.21%
------------ ------ ------------ ------
Total loans 72,122,180 100.00% 65,246,482 100.00%
====== ======
Less:
Net deferred loan fees and unamortized premiums 149,292 93,764
Allowance for loan losses 406,997 342,875
------------ ------------
Total loans, net $ 71,565,891 $ 64,809,843
============ ============
__________
(1) Included in this category are mixed-use loans and investor loans.
(2) Included in this category are participation interest in five loans with an
aggregate balance of $3.5 million at April 30, 2005 and four loans with an
aggregate balance of $2.0 million at October 31, 2004.
7
NOTE 6 - FEDERAL HOME LOAN BANK BORROWINGS
- ------------------------------------------
The following tables set forth information concerning advances with the FHLB:
Weighted-
Maturity range average Stated interest rate range At April 30, At October 31,
Description from to interest rate from to 2005 2004
- ----------- -------- --------- ------------- ----- ----- ----------- -----------
Short-term borrowings 04/12/05 05/02/05 2.29% 1.88% 2.76% $ 5,500,000 $ 7,000,000
Convertible 02/18/10 02/18/10 5.91% 5.91% 5.91% 1,000,000 1,000,000
Mid Term Repo Fixed 05/01/06 04/30/07 2.97% 2.63% 3.30% 6,000,000 6,000,000
Fixed Rate 04/30/08 08/20/08 5.29% 3.86% 6.24% 2,500,000 2,500,000
Fixed Rate amortizing 11/03/05 11/03/05 6.47% 6.47% 6.47% 44,277 76,257
----------- -----------
Total $15,044,277 $16,576,257
=========== ===========
The Bank entered into a ten-year "Convertible Select" fixed commitment advance
arrangement for $1,000,000 with the FHLB. Rates may be reset at the FHLB's
discretion on a quarterly basis based on the three-month LIBOR rate. At each
rate change the Bank may exercise a put option and satisfy the obligation
without penalty. The fixed rate amortizing borrowing requires monthly payments
of principal and interest of $5,670 through November 2005.
All borrowings from the FHLB are secured by a blanket lien on qualified
collateral, defined principally as investment securities and mortgage loans
which are owned by the Bank free and clear of any liens or encumbrances.
Year Ending October 31, Amount Weighted-Average Rate
---------------------- ----------- ---------------------
2005 $ 5,538,607 2.32%
2006 3,005,670 2.64%
2007 3,000,000 3.30%
2008 2,500,000 5.29%
2010 1,000,000 5.91%
------------
$ 15,044,277 3.31%
============
Maturities of FHLB borrowings at April 30, 2005 are summarized as follows:
NOTE 7 - EARNINGS PER SHARE
- ---------------------------
The Company currently maintains a simple capital structure; thus, there are no
dilutive effects on earnings per share. As such, earnings per share are
calculated using the weighted-average number of shares outstanding, less average
unallocated shares held by the ESOP, for the period.
8
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 OPERATIONS FOR THE SIX MONTHS ENDED APRIL 30, 2005
AND APRIL 30, 2004
The Company recorded net income of $475.3 thousand for the six months ended
April 30, 2005, which represents an increase of $226.7 thousand, or 91.1%, over
the same period in 2004. The increase in net income is primarily due to an
increase in net interest income and non-interest income partially offset by an
increase in non-interest expense.
NET INTEREST INCOME. Net interest income for the six months ended April 30,
2005 increased to $2.1 million from $1.4 million for the same period in 2004 as
a result of an increase in total interest income which more than offset by an
increase in interest expense. Interest income for the six months ended April 30,
2005 totaled $3.3 million as compared to $2.4 million for the six months ended
April 30, 2004. This increase of $936.8 thousand was attributed primarily to an
increase in the average balance of interest-earning assets to $119.5 million for
the six months ended April 30, 2005 from $85.4 million for the six months ended
April 30, 2004. This increase was offset by a decrease in the average yield on
interest-earning assets to 5.63% for the six months ended April 30, 2005 from
5.67% for the six months ended April 30, 2004. The decrease in average yield was
due mainly to a decrease in the average yield on net loans of 29 basis points
offset somewhat by an increase in the average balance of net loans receivable
and investment securities of $17.5 million and $19.0 million, respectively.
Interest expense increased to $1.2 million for the six months ended April
30, 2005 from $1.0 million for the six months ended April 30, 2004 and was
primarily attributable to an increase in the average balance of interest-bearing
liabilities to $88.1 million for the six months ended April 30, 2005 from $75.3
million for the six months ended April 30, 2004 while the average cost of funds
increased to 2.81% for the six months ended April 30, 2005 from 2.72% for the
six months ended April 30, 2004. This increase is mainly due to additional FHLB
borrowings, the proceeds of which were used to purchase mortgage-backed
securities.
LOAN LOSS PROVISION. The provision for loan losses was $51.0 thousand for
the six months ended April 30, 2005 compared to $18.0 thousand for the six
months ended April 30, 2004 due to the increase in volume and loan mix. 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.
NON-INTEREST INCOME. Total non-interest income increased to $213.0 thousand
for the six months ended April 30, 2005 compared to $177.9 thousand for the six
months ended April 30, 2004. The increase is principally due to the increase on
the earnings on bank-owned life insurance of approximately $12.8 thousand, an
increase in service fees on deposit accounts of approximately $5.8 thousand, net
gains on the sale of investment securities of approximately $10.4 thousand and
an increase in miscellaneous income of approximately $5.6 thousand.
NON-INTEREST EXPENSE. Non-interest expense increased to $1.6 million for
the six months ended April 30, 2005 from $1.1 million for the six months ended
April 30, 2004. Compensation and employee benefit expense increased by
approximately $265.0 thousand. This increase was due to a normal increase in
salaries, a severance package paid to the former President, an increase in
medical insurance costs, implementation of an incentive retirement plan and
implementation of an employee stock ownership plan during 2004. Occupancy and
equipment expense decreased by approximately $12.6 thousand. This decrease was
attributable to a reduction in depreciation expense. Data processing
9
expense increased by $15.4 thousand. Professional fees increased by
approximately $95.7 thousand. This increase was mainly due to an increase in
accounting, auditing and legal fees that resulted from becoming a public
reporting company and the expansion of internal audit services to comply with
Sarbanes Oxley Section 404. Miscellaneous expense increased by $42.9 thousand
mainly due to increased advertising. We anticipate higher non-interest expenses
for the quarter ending July 31, 2005 as a result of professional fees incurred
related to our annual meeting of shareholders.
Additionally, the Bank currently plans to add full time employees to its
staff over the next several years, including new lending/business development
officers and a support staff employee in each of the accounting, lending and
customer service departments.
INCOME TAXES. Income tax expense increased to $227.3 thousand for the six
months ended April 30, 2005 from $136.1 thousand for the same period in 2004.
This was due to an increase in pre-tax income.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED APRIL 30,
2005 AND APRIL 30, 2004
The Company recorded net income of $204.4 thousand for the three months
ended April 30, 2005, which represents an increase of $55.4 thousand, or 37.1%,
over the same period in 2004. The increase in net income is primarily due to an
increase in net interest income and non-interest income partially offset by an
increase in non-interest expense.
NET INTEREST INCOME. Net interest income for the three months ended April
30, 2005 increased to $1.1 million from $715.6 thousand for the same period in
2004 as a result of an increase in total interest income which more than offset
by an increase in interest expense. Interest income for the three months ended
April 30, 2005 totaled $1.7 million as compared to $1.2 million for the three
months ended April 30, 2004. This increase of $481.7 thousand was attributed
primarily to an increase in the average balance of interest-earning assets to
$120.0 million for the three months ended April 30, 2005 from $87.5 million for
the three months ended April 30, 2004. This increase was also attributable to an
increase in the average yield on interest-earning assets to 5.70% for the three
months ended April 30, 2005 from 5.56% for the three months ended April 30,
2004. The increase in the average yield was due mainly to increases in the
average balance of net loans receivable and investment securities of $18.2
million and $18.0 million, respectively, an increase in the average yield on
investment securities of 16 basis points offset somewhat by a dcrease in the
average yield on net loans receivable of 18 basis points.
Interest expense increased to $621.0 thousand for the three months ended
April 30, 2005 from $495.2 thousand for the three months ended April 30, 2004
and was primarily attributable to an increase in the average balance of
interest-bearing liabilities to $88.7 million for the three months ended April
30, 2005 from $75.3 million for the three months ended April 30, 2004 while the
average cost of funds increased to 2.80% for the three months ended April 30,
2005 from 2.61% for the three months ended April 30, 2004. This increase is
mainly due to additional FHLB borrowings, the proceeds of which were used to
purchase mortgage-backed securities.
LOAN LOSS PROVISION. The provision for loan losses was $34.0 thousand for
the three months ended April 30, 2005 compared to $9.0 thousand for the three
months ended April 30, 2004. The loan loss provision is based upon management's
assessment of a variety of factors, including types and amounts of nonperforming
loans, historical loss experience, collectibility of collateral values and
guaranties, pending legal action for collection of loans and related guaranties,
and current economic conditions. The allowance represents management's best
estimate of known and inherent losses in the loan portfolio at the balance sheet
date that are both probable and reasonable to estimate. However, actual loan
losses could exceed the amounts that have been charged to operations.
NON-INTEREST INCOME. Total non-interest income increased to $115.8 thousand
for the three months ended April 30, 2005 compared to $95.7 thousand for the
three months ended April 30, 2004. The increase is principally due to the
increase in the service fees on deposit accounts in the amount of $7.0 thousand,
net gains on the sale of investment securities in the amount of $10.4 thousand
and an increase in miscellaneous operating income.
NON-INTEREST EXPENSE. Non-interest expense increased to $858.6 thousand for
the three months ended April 30, 2005 from $578.9 thousand for the three months
ended April 30, 2004. Compensation and employee benefit expense increased by
approximately $169.5 thousand. This increase was due to a normal increase in
salaries, a severance package paid to the former President, an increase in
medical insurance costs, implementation of an incentive retirement plan and
implementation of an employee stock ownership plan. Occupancy and equipment
expense decreased by approximately $7.2 thousand. This decrease was attributable
to a reduction in depreciation expense. Data processing expense increased by
$8.3 thousand. Professional fees increased by approximately $72.7 thousand
mainly due to an increase in accounting, auditing and legal fees that resulted
from becoming a public reporting company and the expansion of internal audit
services to comply with Sarbanes Oxley Section 404. This increase was mainly due
to an increase in accounting, auditing and legal fees that resulted from
becoming a public reporting company. Miscellaneous expense increased by $34.8
10
thousand mainly due to increased advertising. We anticipate higher non-interest
expenses for the six months ending July 31, 2005 as a result of professional
fees incurred related to our annual meeting of shareholders.
Additionally, the Bank currently plans to add full time employees to its
staff over the next several years, including new lending/business development
officers and a support staff employee in each of the accounting, lending and
customer service departments.
INCOME TAXES. Income tax expense increased to $90.3 thousand for the three
months ended April 30, 2005 from $74.3 thousand for the same period in 2004.
This was due to an increase in pre-tax income.
COMPARISON OF FINANCIAL CONDITION AT APRIL 30, 2005 AND OCTOBER 31, 2004
ASSETS AND LIABILITIES. The Company's total assets were $124.8 million at
April 30, 2005 and April 20, 2004.
Cash and cash equivalents decreased to $2.7 million at April 30, 2005 from
$6.2 million at October 31, 2004. Cash and cash equivalents decreased during the
period as funds were utilized to fund loan originations.
Investment securities available for sale decreased by $3.2 million to $45.2
million at April 30, 2005 from $48.4 million at October 31, 2004. The decrease
is principally due to mortgage-backed security repayments and a decrease in the
net unrealized gain.
Net loans receivable increased $6.8 million, or 10.4%, to $71.6 million at
April 30, 2005 from $64.8 million at October 31, 2004, as the Company continued
to experience strong loan production and repayments were more moderate. The
increase in net loans receivable was the result of increases in one- to
four-family residential mortgages (which includes owner and non-owner occupied
properties), home equity loans and construction financing in the amount of $3.3
million, $1.1 million and $3.2 million, respectively.
The allowance for loan losses increased to $407.0 thousand at April 30,
2005 from $342.9 thousand at October 31, 2004 and represented 0.56% of the gross
loan portfolio at April 30, 2005. The Company had nonaccrual loans of $60.6
thousand and $53.8 thousand at April 30, 2005 and October 31, 2004,
respectively. Management does not believe the nonaccrual loans or any amounts
classified as nonperforming will have a significant effect on operations or
liquidity in 2005. Furthermore, management is not aware of any trends or
uncertainties related to any loans classified as doubtful or substandard that
might have a material effect on earnings, liquidity or capital resources.
Total deposits increased to $77.3 million at April 30, 2005 from $75.4
million at October 31, 2004. This was primarily a result of an increase in
certificates of deposit of $1.9 million.
Total Federal Home Loan Bank borrowings decreased to $15.0 million at April
30, 2005 from $16.6 million at October 31, 2004. The decrease is due to a payoff
on short-term borrowings in the amount of $1.5 million.
STOCKHOLDERS' EQUITY. Total stockholders' equity increased to $31.7 million
at April 30, 2005 from $31.6 million at October 31, 2004. This increase was
attributable to net income of $475.3 thousand and the release of ESOP shares in
the amount of $101.0 thousand, offset by accumulated other comprehensive loss of
$387.5 thousand and cash dividends paid in the amount of $95.2 thousand.
Accumulated other comprehensive income decreased as a result of changes in the
net unrealized loss on investment securities available for sale. Because of
interest rate volatility, accumulated other comprehensive income (loss) could
materially fluctuate for each interim period and year end period depending on
economic and interest rate conditions.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY. Liquidity management for the Company is measured and monitored
on both a short- and long-term basis, allowing management to better understand
and react to emerging balance sheet trends. After assessing actual and projected
cash flow needs, management seeks to obtain funding at the most economical cost
to the Company. Both short- and long-term liquidity needs are addressed by
maturities and sales of investments securities, and loan repayments and
maturities. The use of these resources, in conjunction with access to credit,
provides the core ingredients for satisfying depositor, borrower, and creditor
needs.
11
The Company's liquid assets consist of cash and cash equivalents,
certificates of deposit in other financial institutions and investment
securities classified as available for sale. The level of these assets is
dependent on the Company's operating, investing, and financing activities during
any given period. At April 30, 2005, cash and cash equivalents totaled
approximately $2.7 million, or 2.1% of total assets while investment securities
classified as available for sale and certificates of deposit in other financial
institutions totaled approximately $45.4 million, or 36.2% of total assets.
Management believes that the liquidity needs of the Company are satisfied by the
current balance of cash and cash equivalents, readily available access to
traditional funding sources, FHLB advances, and the portion of the investment
and loan portfolios that mature within one year.
Operating activities provided net cash of approximately $408.9 thousand and
$790.7 thousand for the six months ended April 30, 2005 and 2004, respectively
and were principally generated from net income of $475.3 thousand and $248.7
thousand in each of the respective periods.
Investing activities consist primarily of loan originations and repayments
and investment purchases, sales and maturities. For the six months ended April
30, 2005, these cash usages primarily consisted of an increase in net loans
receivable of $6.8 million and purchases of investment securities of $4.1
million. Partially offsetting the usage of investment activities is $6.7 million
of proceeds from investment security sales, maturities and repayments. For the
same period ended 2004, cash usages primarily consisted of investment purchases
of $16.6 million, an increase in net loan receivable of $3.8 million and the
purchase of bank-owned life insurance in the amount of $1.5 million. Partially
offsetting the usage of investment activities were proceeds from repayments and
maturities of investment securities in the amount of $6.9 million.
Financing activities consist of the solicitation and repayment of customer
deposits, borrowings and repayments, and advances by borrowers for taxes and
insurance and the payment of cash dividends. For the six months ended April 30,
2005, net cash provided by financing activities totaled $123.7 thousand and was
principally from an increase in deposits of $1.9 million offset by the repayment
of short-term borrowings in the amount of $1.5 million. For the same period in
2004, net cash provided by financing activities totaled $40.4 million and was
primarily derived from net proceeds from the initial public offering and an
increase in FHLB borrowings.
Liquidity may be adversely affected by unexpected deposit outflows,
interest rates paid by competitors, and similar matters. Management monitors
projected liquidity needs and determines the level desirable, based in part on
the Company's commitment to make loans, as well as management's assessment of
the Company's ability to generate funds. The Bank anticipates that it will have
sufficient liquidity to satisfy expected short-term and long-term funding needs.
CAPITAL. The Company's primary source of capital has been retained
earnings. Historically, the Bank has generated net retained income to support
normal growth and expansion. The proceeds of the stock offering in connection
with the Company's recently completed mutual-to-stock conversion are part of
management's new capital planning policy to ensure compliance with regulations
and to permit future expansion. The infusion of this new capital significantly
increased the Company's capital resources by increasing equity.
The Bank is subject to federal regulations imposing minimum capital
requirements. Management monitors the Bank's total risk-based, Tier I
risk-based, and Tier I leverage capital ratios to assess compliance with
regulatory guidelines. At April 30, 2005, the Bank exceeded the minimum capital
ratio requirements.
ITEM 3. CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Based on her 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 and financial officer has concluded that as of the end of
the period covered by this Quarterly Report on Form 10-QSB such disclosure
controls and procedures are effective to ensure that information required to be
disclosed by the Company in reports that it files or submits under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms.
(b) CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING. During the quarter
under report, there was no change in the Company's internal control over
financial reporting that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
12
PART II
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
(a) Exhibits
3(i) Articles of Incorporation of SE Financial Corp.*
3(ii) Bylaws of SE Financial Corp. *
4 Specimen Stock Certificate of SE Financial Corp. *
10.1 Executive Life Insurance Plan **
10.2 Directors' Incentive Retirement Plan **
10.3 Executive Officers' Incentive Retirement Plan **
31 Certification pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002
32 Certification pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002
99.1 Report of Independent Registered Public Accounting
Firm
* Incorporated by reference to the identically numbered exhibit
to the Company's registration statement on Form SB-2 (File No.
333-112153) filed with the SEC on January 23, 2004.
** Incorporated by reference to the identically numbered exhibit
to the Company's registration statement on Form SB-2 (File No.
333-112153) filed with the SEC on March 1, 2004.
13
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: June 10, 2005 /s/ Pamela M. Cyr
-------------- --------------------------------------------
Pamela M. Cyr
President, CEO and Chief Financial Officer
(Principal Executive and Financial &
Accounting Officer)