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 July 31, 2005
-------------------------------------------------
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
----------------------- ----------------------
Commission file number 0-50684
-------
SE FINANCIAL CORP.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 57-1199010
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
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: September 10, 2005
------------------
Class Outstanding
--------------------------- ----------------
$.10 par value common stock 2,568,875 shares
Transitional Small Business Disclosure Format (check one): Yes No X
--- ---
SE FINANCIAL CORP.
FORM 1O-QSB
FOR THE QUARTER ENDED July 31, 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 10
Item 3. Controls and Procedures 14
PART II- OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 15
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits 15
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)
July 31, October 31,
2005 2004
------------- -------------
ASSETS
Cash and due from banks $ 590,286 $ 817,854
Interest-bearing deposits with other institutions 425,322 5,362,940
------------- -------------
Cash and cash equivalents 1,015,608 6,180,794
Certificates of deposit in other financial institutions 192,428 188,490
Investment securities held to maturity (estimated market value 2,136,156 -
of $2,149,150)
Investment securities available for sale 46,291,422 48,437,319
Loans receivable (net of allowance for loan losses
of $452,930 and $342,875) 77,412,763 64,809,843
Accrued interest receivable 661,870 630,507
Federal Home Loan Bank Stock 1,480,200 1,179,000
Premises and equipment, net 1,138,378 1,063,921
Bank owned life insurance 2,929,952 1,866,689
Other assets 664,060 422,599
------------- -------------
TOTAL ASSETS $ 133,922,837 $ 124,779,162
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $ 81,063,390 $ 75,385,246
Short-term borrowings 4,600,000 7,000,000
Federal Home Loan Bank borrowings 15,317,934 9,576,257
Advances by borrowers for taxes and insurance 405,779 474,548
Accrued interest payable 160,627 113,839
Other liabilities 660,690 626,749
------------- -------------
TOTAL LIABILITIES 102,208,420 93,176,639
Commitments and contingencies - -
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 24,860,735 24,841,836
Retained earnings - substantially restricted 8,848,375 8,450,438
Unallocated shares held by Employee Stock Ownership Plan ("ESOP") (1,878,899) (2,007,498)
Accumulated other comprehensive (loss) income (373,682) 59,859
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 31,714,417 31,602,523
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 133,922,837 $ 124,779,162
============= =============
See accompanying notes to the unaudited consolidated financial statements.
1
SE FINANCIAL CORP.
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
July 31, July 31,
----------------------- -----------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
INTEREST AND DIVIDEND INCOME
Loans receivable $1,293,867 $ 981,050 $3,634,069 $2,800,895
Investment securities
Taxable 455,171 359,515 1,321,145 840,866
Exempt from federal income tax 54,459 33,907 126,482 93,142
Interest-bearing deposits with other institutions 9,592 37,228 43,999 63,157
Other dividend income 9,916 3,415 25,208 8,186
---------- ---------- ---------- ----------
Total interest and dividend income 1,823,005 1,415,115 5,150,903 3,806,246
---------- ---------- ---------- ----------
INTEREST EXPENSE
Deposits 518,509 434,192 1,498,676 1,351,094
Short-term borrowings 50,664 26,300 117,834 52,357
Federal Home Loan Bank borrowings 163,782 95,519 352,658 176,594
---------- ---------- ---------- ----------
Total interest expense 732,955 556,011 1,969,168 1,580,045
---------- ---------- ---------- ----------
NET INTEREST INCOME 1,090,050 859,104 3,181,735 2,226,201
Provision for loan losses 45,393 9,000 96,393 27,000
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,044,657 850,104 3,085,342 2,199,201
---------- ---------- ---------- ----------
NONINTEREST INCOME
Service fees on deposit accounts 72,886 63,864 210,451 195,652
Earnings on bank-owned life insurance 21,595 20,079 63,263 48,974
Net gain on sale of investment securities 21,760 -- 32,206 --
Other 12,210 8,795 35,097 26,043
---------- ---------- ---------- ----------
Total noninterest income 128,451 92,738 341,017 270,669
---------- ---------- ---------- ----------
NONINTEREST EXPENSE
Compensation and employee benefits 442,896 343,981 1,321,659 957,776
Occupancy and equipment 61,952 62,808 163,730 177,137
Federal deposit insurance premiums 16,467 10,114 38,726 30,011
Data processing expense 68,573 72,826 227,231 216,088
Professional fees 248,017 47,030 413,685 116,981
Other 221,278 108,088 444,776 289,150
---------- ---------- ---------- ----------
Total noninterest expense 1,059,183 644,847 2,609,807 1,787,143
---------- ---------- ---------- ----------
INCOME BEFORE TAXES 113,925 297,995 816,552 682,727
INCOME TAXES 24,717 106,256 252,020 242,318
---------- ---------- ---------- ----------
NET INCOME $ 89,208 $ 191,739 $ 564,532 $ 440,409
========== ========== ========== ==========
PER SHARE DATA:
Earnings per share - basic and diluted $ 0.04 $ 0.08 $ 0.24 $ 0.19
Weighted average number of shares outstanding -
basic and diluted 2,386,086 2,374,450 2,384,036 2,374,450
Dividends per share 0.03 NA 0.07 NA
See accompanying notes to the unaudited consolidated financial statements.
2
SE FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
Retained Accumulated
Additional Earnings Unallocated Other Total
paid-in Substantially shares held Comprehensive Stockholders' Comprehensive
Common Stock Capital Restricted by ESOP Income (Loss) Equity Income
------------ ------- ---------- ------- ------------- ------ ------
(Unaudited)
Balance, October 31, 2004 $ 257,888 $24,841,836 $8,450,438 $ (2,007,498) $ 59,859 $31,602,523
Cash dividends paid - - (166,595) - - (166,595)
ESOP shares committed to be released - 18,899 - 128,599 - 147,498
Net income - - 564,532 - - 564,532 $ 564,532
Other comprehensive income:
Unrealized loss on available
for sale securities, net of
reclassification adjustment,
net of tax benefit of $223,339 (433,541) (433,541) $(433,541)
---------
Comprehensive income - - - - - - $ 130,991
--------- ----------- ---------- ------------ --------- ----------- =========
Balance, July 31, 2005 $ 257,888 $24,860,735 $8,848,375 $ (1,878,899 $(373,682) $31,714,417
========= =========== ========== ============ ========= ===========
Components of other comprehensive income (loss): July 31, 2005
-------------
Change in net unrealized gain on
investment securities available for sale $ (412,285)
Realized gains included in net income, net taxes of $10,950 (21,256)
----------
Total $ (433,541)
==========
See accompanying notes to the unaudited consolidated financial statements.
3
SE FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
For the Nine Months Ended July 31,
2005 2004
------------ ------------
OPERATING ACTIVITIES
Net income $ 564,532 $ 440,409
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 96,393 27,000
Depreciation, amortization, and accretion 161,984 115,177
Earnings on bank-owned life insurance (63,263) (48,974)
Increase in principal and interest on loans sold payable 157,265 86,083
Increase in accrued interest receivable (31,363) (98,720)
Increase (decrease) in accrued interest payable 46,788 (3,519)
Gain on sale of investment securities (32,206) -
Other, net (221,441) 300,722
------------ ------------
Net cash provided by operating activities 678,689 818,178
------------ ------------
INVESTING ACTIVITIES
Investment securities held to maturity:
Purchases (2,126,156) -
Investment securities available for sale:
Proceeds from principal repayments and maturities 5,274,180 8,524,421
Purchases (12,548,509) (34,351,781)
Proceeds from the sale of investment securities 8,757,326 -
Decrease (increase) in loans receivable, net (12,626,601) (7,017,340)
Proceeds from sales of real estate acquired through
foreclosure 80,000 57,122
Purchase of Federal Home Loan Bank stock (556,600) (403,400)
Redemption of Federal Home Loan Bank stock 255,400 -
Purchase of bank-owned life insurance (1,000,000) (1,797,636)
Purchase of premises and equipment (137,372) (45,937)
------------ ------------
Net cash used for investing activities (14,628,332) (35,034,551)
------------ ------------
FINANCING ACTIVITIES
Increase (decrease) in deposits, net 5,678,144 (2,749,287)
Net decrease in short-term borrowings (2,400,000) -
Proceeds from Federal Home Loan Bank borrowings 7,400,000 10,000,000
Repayment of Federal Home Loan Bank borrowings (1,658,323) (45,340)
Net proceeds from issuance of common stock - 23,036,446
Decrease in advances by borrowers
for taxes and insurance, net (68,769) (4,210)
Cash dividends (166,595) -
------------ ------------
Net cash provided by financing activities 8,784,457 30,237,609
------------ ------------
Decrease in cash and cash equivalents (5,165,186) (3,978,764)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 6,180,794 6,303,891
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,015,608 $ 2,325,127
============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid:
Interest $ 1,922,380 $ 1,583,564
Income taxes 328,128 147,000
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."), an inactive investment services and products provider
and SE DEL Corp., a Delaware investment subsidiary which holds investment
securities. 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 nine
months ended July 31, 2005, this activity is shown under the heading
Comprehensive Income as presented in the Consolidated Statement of Changes in
Stockholders' Equity (Unaudited). For the nine months ended July 31, 2004
comprehensive income totaled $219,376 and for the three months ended July 31,
2005 and 2004, comprehensive income (loss) totaled $43,152 and ($44,389),
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
5
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 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 investment securities held to maturity
were as follows:
July 31, 2005
----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- -------- --------- -----------
Municipal securities $ 2,136,156 $ 32,931 $ (19,937) $ 2,149,150
The amortized cost and the fair value of available-for-sale investment
securities were as follows:
July 31, 2005
------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ----------- ----------- -----------
Mortgage-backed securities:
Fannie Mae $22,073,106 $ 15,589 $ (265,418) $21,823,277
Freddie Mac 4,906,843 982 (44,044) 4,863,782
Government National Mortgage Association 2,444,358 20,954 - 2,465,312
----------- ----------- ----------- -----------
Total mortgage-backed securities 29,424,307 37,525 (309,461) 29,152,371
U.S. Government
agency securities 9,962,763 2,219 (236,656) 9,728,325
Corporate securities 3,029,405 - (14,240) 3,015,165
Municipal securities 4,252,029 2,458 (45,507) 4,208,980
----------- ----------- ----------- -----------
Total debt securities 46,668,504 42,202 (605,865) 46,104,841
Mutual funds 189,105 - (2,525) 186,580
----------- ----------- ----------- -----------
Total $46,857,609 $ 42,202 $ (608,390) $46,291,422
=========== =========== =========== ===========
6
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 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
=========== =========== =========== ===========
The amortized cost and estimated market value of debt securities at July 31,
2005, by contractual maturity, are shown below. Mortgage-backed securities
provide for periodic, generally monthly, payments of principal and interest and
have contractual maturities ranging from one to thirty years. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or repay obligations with or without call or prepayment
penalties.
Investment Securities Investment Securities
Held to Maturity Available for Sale
Estimated Market Estimated Market
Amortized Cost Value Amortized Cost Value
-------------- ---------------- -------------- ---------------
Due less than one year $ - $ - $ 215,309 $ 217,528
Due after one year through five years - - 11,766,804 11,502,174
Due after five years through ten years - - 4,032,413 3,988,944
Due after ten years 2,136,156 2,149,150 30,653,978 30,396,196
----------- ----------- ----------- -----------
$ 2,136,156 $ 2,149,150 $46,668,504 $46,104,841
=========== =========== =========== ===========
7
NOTE 5 - LOANS RECEIVABLE
- -------------------------
Loans receivable consist of the following:
July 31, 2005 October 31, 2004
-------------------------------- -------------------------------
Amount Percent Amount Percent
----------------- ------------- ----------------- ------------
Type of Loans:
- -----------------
Mortgage loans:
One-to four- family (1) $ 50,239,115 64.39% $ 43,357,098 66.45%
Multi-family 450,263 0.58% 1,036,017 1.59%
Commercial real estate 5,008,363 6.42% 4,939,451 7.57%
Construction (2) 9,723,815 12.46% 5,536,598 8.49%
Home equity loans and lines of credit 11,926,211 15.29% 9,798,082 15.02%
Loans on savings accounts 294,734 0.38% 438,588 0.67%
Other 374,420 0.48% 140,648 0.21%
------------- ------ ------------ ------
Total loans 78,016,921 100.00% 65,246,482 100.00%
====== ======
Less:
Net deferred loan fees and unamortized premiums 151,228 93,764
Allowance for loan losses 452,930 342,875
------------ ------------
Total loans, net $ 77,412,763 $ 64,809,843
============ ============
- -------------------
(1) Included in this category are mixed-use loans and investor loans.
(2) Included in this category are participation interests in two loans with an
aggregate balance of $1.8 million at July 31, 2005 and four loans with an
aggregate balance of $2.0 million at October 31, 2004.
NOTE 6 - FEDERAL HOME LOAN BANK BORROWINGS
- ------------------------------------------
The following tables set forth information concerning advances with the FHLB:
Weighted-
average Stated
Maturity range interest interest rate range At July 31, At October 31,
Description from to rate from to 2005 2004
------------ ------------ ---------- -------------------- -------------- --------------
Short-term borrowings 07/12/05 05/23/06 3.60% 3.49% 3.73% $ 4,600,000 $ 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 05/11/15 3.57% 2.63% 4.84% 10,800,000 6,000,000
Fixed Rate 08/20/08 08/20/08 6.24% 6.24% 6.24% 1,500,000 2,500,000
Fixed Rate amortizing 11/03/05 05/23/08 4.17% 4.14% 6.47% 2,017,934 76,257
------------ ------------
Total $ 19,917,934 $ 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.
8
Maturities of FHLB borrowings at July 31, 2005 are summarized as follows:
Year Ending October 31, Amount Weighted-Average Rate
----------------------- ------ ---------------------
2005 $ 2,527,896 3.52%
2006 5,100,000 3.08%
2007 4,800,000 3.56%
2008 4,490,038 4.78%
2010 1,000,000 5.91%
2015 2,000,000 4.84%
------------
$ 19,917,934 3.95%
============
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.
9
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 Nine Months Ended July 31, 2005
and July 31, 2004
The Company recorded net income of $564.5 thousand for the nine months
ended July 31, 2005, which represents an increase of $124.1 thousand, or 28.2%,
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 nine months ended July
31, 2005 increased $955.5 thousand, or 42.9% to $3.2 million from $2.2 million
for the same period in 2004 as a result of an increase in total interest income
which more than offset an increase in interest expense. The net interest margin
increased by 37 basis points to 3.54% for the nine months ended July 31, 2005
from 3.17% for the nine months ended July 31, 2004. Interest income for the nine
months ended July 31, 2005 totaled $5.1 million as compared to $3.8 million for
the nine months ended July 31, 2004. This increase of $1.3 million was primarily
attributable to an increase in the average balance of interest-earning assets to
$122.2 million for the nine months ended July 31, 2005 from $95.6 million for
the nine months ended July 31, 2004 as well as an increase in the average yield
on interest earning assets of 32 basis points to 5.69% for the nine months ended
July 31, 2005 from 5.37% for the nine months ended July 31, 2004. The average
balance of loans receivable and investment securities for the nine months ended
July 31, 2005 as compared to the same period of the prior year increased $18.2
million and $15.6 million, respectively. Loans receivable increased due to
increased loan demand and investment securities increased due to the purchase of
mortgage-backed securities, government agencies, and municipal securities.
Interest expense increased to $2.0 million for the nine months ended July 31,
2005 from $1.6 million for the nine months ended July 31, 2004 and was primarily
attributable to an increase in the average balance of interest-bearing
liabilities to $90.8 million for the nine months ended July 31, 2005 from $78.1
million for the nine months ended July 31, 2004 as well as an increase in the
average cost of funds of 19 basis points to 2.89% for the nine months ended July
31, 2005 from 2.70% for the nine months ended July 31, 2004. The average balance
of deposits and FHLB advances for the nine months ended July 31, 2005 as
compared to the same period of the prior year increased $5.4 million and $7.3
million, respectively. The increase in deposits represented an increase in
certificates of deposit, savings and interest bearing demand. Borrowings
increased as funds were used to purchase investment securities. Management
anticipates that the Company may experience margin compression in the future as
the current interest rate environment could result in interest-bearing
liabilities, primarily certificates of deposit, repricing faster than
interest-earning assets, primarily long term mortgage loans.
Loan Loss Provision. The provision for loan losses was $96.4 thousand
for the nine months ended July 31, 2005 compared to $27.0 thousand for the nine
months ended July 31, 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 levels of, and trends in, delinquencies and nonaccruals, trends in
volume and terms of loans, effects of any changes in lending policies,
historical loss experience, collectibility of collateral values and guaranties,
pending legal action for collection of loans and related guaranties, national
and economic trends and conditions and concentrations of credit. 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 $341.0
thousand for the nine months ended July 31, 2005 compared to $270.7 thousand for
the nine months ended July 31, 2004 due mainly to gains on the sale of
securities of $32.2 thousand, an increase of $14.8 thousand in service fees on
deposit accounts and an increase of $14.3 thousand from earnings on bank-owned
life insurance.
10
Non-interest Expense. Non-interest expense increased to $2.6 million
for the nine months ended July 31, 2005 from $1.8 million for the nine months
ended July 31, 2004 due to increases in compensation and employee benefits,
professional fees, and other expense of $363.9 thousand, $296.7 thousand, and
$155.6 thousand, respectively. Compensation and employee benefits increased due
to additions to staff, a severance payment to the former President, normal
salary increases, implementation of an employee stock ownership plan for 2004,
and increased medical insurance costs. Professional fees increased due mainly to
costs associated with the Company's annual meeting and legal expenses incurred
to defend against the actions of a dissident shareholder as well as accounting,
auditing and legal fees that resulted from becoming a public reporting company
including SOX compliance expenses. Other expense increased due mainly to
increased advertising costs associated with the promotion of new products,
telecommunications enhancement expense due to the enhancement of the technology
infrastructure to upgrade data security and to facilitate cost effective
franchise growth, supplies expense, costs related to the production of the
annual report and proxy, and costs associated with becoming a public company.
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 branch personnel. The Bank previously announced plans
to open two new banking offices in late 2005, one in the Roxborough section of
Philadelphia, Pennsylvania and one in Ardmore, Pennsylvania.
Income Taxes. Income tax expense increased to $252.0 thousand for the
nine months ended July 31, 2005 from $242.3 thousand for the same period in
2004. The increase was due to higher pre-tax income, however, the effective rate
decreased due to higher tax-exempt income.
Comparison of the Results of Operations for the Three Months Ended July 31, 2005
and July 31, 2004
The Company recorded net income of $89.2 thousand for the three months
ended July 31, 2005, versus $191.7 thousand over the same period in 2004. The
decrease in net income is primarily due to an increase in non-interest expense
partially offset by an increase in net interest income and non-interest income.
Net Interest Income. Net interest income for the three months ended
July 31, 2005 increased to $1.1 million from $859.1 thousand for the same period
in 2004 as a result of an increase in total interest income which more than
offset an increase in interest expense. The net interest margin increased by 49
basis points to 3.49% for the three months ended July 31, 2005 from 3.00% for
the three months ended July 31, 2004. Interest income for the three months ended
July 31, 2005 totaled $1.8 million as compared to $1.4 million for the three
months ended July 31, 2004. This increase of $407.9 thousand was primarily
attributable to an increase in the average balance of interest-earning assets to
$127.2 million for the three months ended July 31, 2005 from $115.9 million for
the three months ended July 31, 2004. This increase was also attributable to an
increase in the average yield on interest-earning assets of 87 basis points to
5.77% for the three months ended July 31, 2005 from 4.90% for the three months
ended July 31, 2004. The average balance of loans receivable and investment
securities for the three months ended July 31, 2005 as compared to the same
period of the prior year increased $19.4 million and $8.6 million, respectively.
Loans receivable increased due to increased loan demand and the addition of a
Chief Lending Officer and investment securities increased due to the purchase of
mortgage-backed securities, government agencies, and municipal securities.
Interest expense increased to $732.9 thousand for the three months ended July
31, 2005 from $556.0 thousand for the three months ended July 31, 2004 and was
primarily attributable to an increase in the average balance of interest-bearing
liabilities to $127.2 million for the three months ended July 31, 2005 from
$115.9 million for the three months ended July 31, 2004 as well as an increase
in the average cost of funds of 38 basis points to 3.02% for the three months
ended July 31, 2005 from 2.64 % for the three months ended July 31, 2004. The
average balance of deposits and FHLB advances for the nine months ended July 31,
2005 as compared to the same period of the prior year increased $7.3 million and
$5.3 million, respectively. The increase in deposits represented an increase in
certificates of deposit, savings and interest bearing demand. Borrowings
increased as funds were used to purchase investment securities.
Loan Loss Provision. The provision for loan losses was $45.4 thousand
for the three months ended July 31, 2005 compared to $9 thousand for the three
months ended July 31, 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 levels of, and trends in, delinquencies and nonaccruals, trends in
volume and terms of loans, effects of any changes in lending policies,
historical loss experience, collectibility of collateral values and guaranties,
pending legal action for collection of loans and related guaranties, national
and economic trends and conditions and concentrations of credit. 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.
11
Non-interest Income. Total non-interest income increased to $128.0
thousand for the three months ended July 31, 2005 compared to $92.7 thousand for
the three months ended July 31, 2004 due mainly to gains on the sale of
securities of $22 thousand and an increase of $9 thousand in service fees on
deposits.
Non-interest Expense. Non-interest expense increased to $1.1 million
for the three months ended July 31, 2005 from $644.8 thousand for the three
months ended July 31, 2004. The increase in non-interest expense was due to
increases in compensation and employee benefits, professional fees, and other
expense of $99 thousand, $201 thousand and $113 thousand, respectively. The
increase in compensation and employee benefits was due to additions to staff,
normal salary increases and employee stock ownership plan expense. The increases
in professional fees were due mainly to costs associated with the Company's
annual meeting and legal expenses incurred to defend against the actions of a
dissident shareholder as well as accounting, auditing and legal fees that
resulted from becoming a public reporting company, including SOX compliance
expenses. Other expense increased due mainly to increased advertising costs
associated with the promotion of new products, telecommunications enhancement
expense due to the enhancement of the technology infrastructure to upgrade data
security and to facilitate cost effective franchise growth, supplies expense,
costs related to the production of the annual report and proxy, and costs
associated with becoming a public company.
Income Taxes. Income tax expense was $24.7 thousand for the three
months ended July 31, 2005 as compared to $106.2 thousand for the same period in
2004 due mainly to a decrease in pre-tax income.
Comparison of Financial Condition at July 31, 2005 and October 31, 2004
Assets and Liabilities. The Company's total assets increased by $9.1
million to $133.9 million at July 31, 2005 from $124.8 million at October 31,
2004.
Cash and cash equivalents decreased to $1.0 million at July 31, 2005
from $6.2 million at October 31, 2004. Cash and cash equivalents decreased
during the period as funds were utilized to fund loan originations.
Investment securities held to maturity were $2.1 million at July 31,
2005 as the result of the purchase of municipal securities during the quarter.
The Company classified these securities as held to maturity in order to
diversify the portfolio. The Company has no investment securities held to
maturity at October 31, 2004.
Investment securities available for sale decreased by $2.1 million, to
$46.3 million at July 31, 2005 from $48.4 million at October 31, 2004. The
decrease is principally due to mortgage-backed security repayments and sales and
a decrease in the net unrealized gain.
Net loans receivable increased $12.6 million, or 19.4%, to $77.4
million at July 31, 2005 from $64.8 million at October 31, 2004, as the Company
continued to experience strong loan production. The increase in net loans
receivable was primarily 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 $6.9 million, $2.1
million and $4.2 million, respectively. The increase was due to the addition of
a Chief Lending Officer and strong loan volume.
The allowance for loan losses increased to $452.9 thousand at July 31,
2005 from $342.9 thousand at October 31, 2004 and represented .59% of the gross
loan portfolio at July 31, 2005. The Company had nonaccrual loans of $60.9
thousand and $53.8 thousand at July 31, 2005 and October 31, 2004, respectively.
Management does not believe the nonaccrual loans or any amounts classified as
nonperforming will have a significant effect on operations or liquidity in 2005.
Furthermore, management is not aware of any trends or uncertainties related to
any loans classified as doubtful or substandard that might have a material
effect on earnings, liquidity or capital resources.
Bank owned life insurance increased to $2.9 million at July 31, 2005
from $1.9 million at October 31, 2004 due to an additional purchase of $1.0
million.
Total deposits increased to $81.1 million at July 31, 2005 from $75.4
million at October 31, 2004. This was primarily a result of an increase in
certificates of deposit, money market accounts, and checking accounts of $3.4
million, $1.9 million and $1.2 million, respectively, offset by a decrease in
savings of $679 thousand.
Short-term borrowings decreased to $4.6 million at July 31, 2005 from
$7.0 million at October 31, 2004 due to repayments of $2.4 million.
12
Federal Home Loan Bank borrowings increased to $15.3 million at July
31, 2005 from $9.6 million at October 31, 2004. The increase is due to new
borrowings of $7.4 million offset by repayments of $1.7 million and repayments.
The Bank borrowed funds to purchase investment securities and mortgage-backed
securities.
Stockholders' Equity. Total stockholders' equity increased to $31.7
million at July 31, 2005 from $31.6 million at October 31, 2004. This increase
was attributable to net income of $564.5 thousand and the release of ESOP shares
in the amount of $147.5 thousand, offset by accumulated other comprehensive loss
of $433.5 thousand and cash dividends paid in the amount of $166.6 thousand.
Accumulated other comprehensive income decreased as a result of an increase 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. On July 29, 2005 the Company announced a
stock repurchase program authorizing the repurchase of up to 10% of the
outstanding common stock of the Company equating to 257,888 shares.
Liquidity and Capital Resources
Liquidity. Liquidity management for the Company is measured and
monitored on both a short- and long-term basis, allowing management to better
understand and react to emerging balance sheet trends. After assessing actual
and projected cash flow needs, management seeks to obtain funding at the most
economical cost to the Company. Both short- and long-term liquidity needs are
addressed by maturities and sales of investments securities, and loan repayments
and maturities. The use of these resources, in conjunction with access to
credit, provides the core ingredients for satisfying depositor, borrower, and
creditor needs.
The Company's liquid assets consist of cash and cash equivalents,
certificates of deposit in other financial institutions and investment
securities classified as available for sale. The level of these assets is
dependent on the Company's operating, investing, and financing activities during
any given period. At July 31, 2005, cash and cash equivalents totaled
approximately $1.0 million, or .76% of total assets while investment securities
classified as available for sale and certificates of deposit in other financial
institutions totaled approximately $46.5 million, or 34.7% 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 $678.7 thousand
and $818.2 thousand for the nine months ended July 31, 2005 and 2004,
respectively and were principally generated from net income of $564.5 thousand
and $440.4 thousand in each of the respective periods.
Investing activities consist primarily of loan originations and
repayments and investment purchases, sales and maturities. For the nine months
ended July 31, 2005, these cash usages primarily consisted of an increase in net
loans receivable of $12.7 million, purchases of investment securities of $14.7
million, and the purchase of bank-owned life insurance in the amount of $1.0
million. Partially offsetting the usage of investment activities is $14.1
million of proceeds from investment security sales, maturities and repayments.
For the same period ended 2004, cash usages primarily consisted of investment
purchases of $34.4 million, an increase in net loan receivable of $7.0 million
and the purchase of bank-owned life insurance in the amount of $1.8 million.
Partially offsetting the usage of investment activities were proceeds from
repayments and maturities of investment securities in the amount of $8.5
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 nine months ended
July 31, 2005, net cash provided by financing activities totaled $8.8 thousand
and was principally from an increase in deposits of $5.7 million and an increase
in FHLB borrowings of $7.4 million offset by the repayment of short-term
borrowings in the amount of $2.4 million and the repayment of FHLB borrowings of
$1.7 million. For the same period in 2004, net cash provided by financing
activities totaled $30.2 million and was primarily derived from net proceeds
derived from common stock sold in the Company's initial public offering of $23.0
million and an increase in FHLB advances in the amount of $10.0 million offset
by a decrease in deposits of $2.7 million.
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
13
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 July 31, 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.
14
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
The Annual Meeting of Stockholders (the "Meeting") of the Company was held on
June 6, 2005. There were outstanding and entitled to vote at the Meeting
2,578,875 shares of Common Stock of the Company. There were present at the
meeting or by proxy the holders of 2,499,044 shares of Common Stock representing
96.9% of the total eligible votes to be cast. The matters voted on at the
Meeting and the result of the voting at the Meeting was as follows (percentages
in terms of votes cast):
Election of Directors
Samuel Barsky FOR: 2,054,958 PERCENT FOR: 82.2%
WITHHELD: 444,086 PERCENT WITHHELD: 17.8%
Andrew A. Hines FOR: 2,055,958 PERCENT FOR: 82.3%
WITHHELD: 443,086 PERCENT WITHHELD: 17.7%
William F. Saldutti, III FOR: 2,055,958 PERCENT FOR: 82.3%
WITHHELD: 443,086 PERCENT WITHHELD: 17.7%
Ratification of Auditors
Ratification of the appointment of S.R. Snodgrass, A.C. as independent
auditor for the Company for the fiscal year ending October 31, 2005.
FOR: 2,205,168 PERCENT FOR: 88.2%
AGAINST: 91,613 PERCENT AGAINST: 3.7%
ABSTAIN: 202,263 PERCENT ABSTAIN: 8.1%
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 **
10.4 Form of Management Severance Agreement ***
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
15
* 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.
*** Incorporated by reference to the exhibit to the Company's Form 8-K
(File No. 000-50684) filed with the SEC on September 2, 2005.
16
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: September 14, 2005 /s/Pamela M. Cyr
------------------ ------------------------------------
Pamela M. Cyr
President and CEO
(Principal Executive and Financial &
Accounting Officer)