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 January 31, 2006
---------------------------
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: March 13, 2006
Class Outstanding
--------------------------- ---------------
$.10 par value common stock 2,286,375 shares
Transitional Small Business Disclosure Format (check one): Yes No X
--- ---
SE FINANCIAL CORP.
FORM 1O-QSB
FOR THE QUARTER ENDED JANUARY 31, 2006
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 13
PART II- OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits 14
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)
January 31, October 31,
2006 2005
------------- -------------
ASSETS
Cash and due from banks $ 985,597 $ 603,912
Interest-bearing deposits with other institutions 1,883,164 1,558,899
------------- -------------
Cash and cash equivalents 2,868,761 2,162,811
Certificates of deposit in other financial institutions 195,179 193,793
Investment securities held to maturity (estimated market value 2,164,806 2,150,395
of $2,209,553 and $ 2,149,249)
Investment securities available for sale 46,567,042 50,082,732
Loans receivable (net of allowance for loan losses
of $ 542,858 and $ 506,708) 88,390,317 84,602,435
Accrued interest receivable 795,168 754,403
Federal Home Loan Bank Stock 1,634,200 1,649,900
Premises and equipment, net 3,259,091 2,142,909
Bank owned life insurance 2,989,257 2,961,261
Other assets 884,502 730,108
------------- -------------
TOTAL ASSETS $ 149,748,323 $ 147,430,747
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $ 94,430,874 $ 87,407,966
Short-term borrowings 14,600,000 12,800,000
Federal Home Loan Bank borrowings 14,955,571 15,134,917
Advances by borrowers for taxes and insurance 602,146 436,601
Accrued interest payable 184,177 124,243
Other liabilities 453,529 464,120
------------- -------------
TOTAL LIABILITIES 125,226,297 116,367,847
------------- -------------
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 257,888 257,888
Additional paid-in capital 24,886,607 24,873,013
Retained earnings - substantially restricted 8,905,870 8,968,526
Stock Compensation Trust 215,000 shares (3,021,300) -
Unallocated shares held by Employee Stock Ownership Plan ("ESOP") (1,805,217) (1,842,058)
Treasury stock at cost, 292,500 shares and 42,500 shares respectively (4,113,325) (581,125)
Accumulated other comprehensive loss (588,497) (613,344)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 24,522,026 31,062,900
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 149,748,323 $ 147,430,747
============= =============
See accompanying notes to the unaudited consolidated financial statements.
1
SE FINANCIAL CORP
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
Three Months Ended January 31,
-----------------------------------
2006 2005
----------- -----------
INTEREST AND DIVIDEND INCOME
Loans receivable $ 1,525,996 $ 1,135,817
Investment securities
Taxable 503,323 437,645
Exempt from federal income tax 61,045 36,088
Interest-bearing deposits with other institutions 23,836 18,137
Other dividend income 11,310 7,719
----------- -----------
Total interest and dividend income 2,125,510 1,635,406
----------- -----------
INTEREST EXPENSE
Deposits 717,095 487,596
Short-term borrowings 89,299 31,548
Federal Home Loan Bank borrowings 208,612 96,096
----------- -----------
Total interest expense 1,015,006 615,240
----------- -----------
NET INTEREST INCOME 1,110,504 1,020,166
Provision for loan losses 36,138 17,000
----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,074,366 1,003,166
----------- -----------
NONINTEREST INCOME
Service fees on deposit accounts 73,953 66,447
Earnings on bank-owned life insurance 27,996 20,079
Net loss on sale of investment securities (23,667) -
Other 7,871 10,220
----------- -----------
Total noninterest income 86,153 96,746
----------- -----------
NONINTEREST EXPENSE
Compensation and employee benefits 590,700 392,022
Occupancy and equipment 96,392 49,589
Federal deposit insurance premiums 14,228 10,762
Data processing expense 89,951 72,957
Professional fees 175,617 53,432
Other 212,172 113,232
----------- -----------
Total noninterest expense 1,179,060 691,994
----------- -----------
(LOSS) INCOME BEFORE TAXES (18,541) 407,918
INCOME TAX (BENEFIT) EXPENSE (27,114) 137,033
----------- -----------
NET INCOME $ 8,573 $ 270,885
=========== ===========
PER SHARE DATA:
Earnings per share - basic and diluted $ 0.00 $ 0.11
Weighted average number of shares outstanding -
basic and diluted 2,294,150 2,382,402
Dividends per share 0.03 0.02
See accompanying notes to the unaudited consolidated financial statements.
2
SE FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
Retained Unallocated Compre-
Additional Earnngs- Stock shares Treasury hensive Total Compre-
Common paid-in Substantially Compensation held by Stock Income Stockholders' hensive
Stock Capital Restricted Trust ESOP at Cost (Loss) Equity Income
-------- ----------- ---------- ----------- ----------- ----------- --------- ----------- -------
(Unaudited)
Balance,
October 31, 2005 $257,888 $24,873,013 $8,968,526 $ - $(1,842,058) $ (581,125) $(613,344) $31,062,900
Cash dividends paid - - (71,229) - - (71,229)
ESOP shares
committed to be
released - 13,594 - 36,841 - 50,435
Stock Compensation
Trust purchases (3,021,300) (3,021,300)
Treasury Stock
purchases (3,532,200) (3,532,200)
Net income - - 8,573 - - 8,573 $ 8,573
Other
comprehensive
income:
Unrealized gain
on available
for sale
securities,
net of
reclassification
adjustment, net
of taxes $12,799 24,847 24,847 $24,847
-------
Comprehensive income - - - - - - $33,420
-------- ----------- ---------- ----------- ----------- ----------- --------- ----------- =======
Balance,
January 31, 2006 $257,888 $24,886,607 $8,905,870 $(3,021,300) $(1,805,217) $(4,113,325) $(588,497) $24,522,026
======== =========== ========== =========== =========== =========== ========= ===========
Components of other comprehensive income: January 31, 2006
Change in net unrealized gain on ----------------
investment securities available for sale $ 9,227
Realized losses included in net income net of tax benefit of $8,047 15,620
-----------
Total $ 24,847
===========
See accompanying notes to the unaudited consolidated financial statements.
3
SE FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
For the Three Months Ended January 31,
2006 2005
----------- -----------
OPERATING ACTIVITIES
Net income $ 8,573 $ 270,885
Adjustments to reconcile net income (used for) to net cash provided
by operating activities:
Provision for loan losses 36,138 17,000
Depreciation, amortization, and accretion 25,875 18,242
Earnings on bank-owned life insurance (27,996) (20,079)
Decrease in principal and interest on loans sold payable (34,807) (154,190)
(Increase) decrease in accrued interest receivable (40,765) 32,038
Increase (decrease) in accrued interest payable 59,934 (70,487)
Loss on sale of investment securities 23,667 -
Other, net (142,976) (84,685)
----------- -----------
Net cash (used for) provided by operating activities (92,357) 8,724
----------- -----------
INVESTING ACTIVITIES
Investment securities available for sale:
Proceeds from principal repayments and maturities 1,382,403 1,282,048
Purchases - (1,262)
Proceeds from the sale of investment securities 2,141,519 -
Increase in loans receivable, net (3,777,047) (4,459,817)
Proceeds from sales of real estate acquired through
foreclosure - 80,000
Purchase of Federal Home Loan Bank stock (120,000) -
Redemption of Federal Home Loan Bank stock 135,700 135,800
Purchase of premises and equipment (1,148,646) (26,566)
----------- -----------
Net cash used for investing activities (1,386,071) (2,989,797)
----------- -----------
FINANCING ACTIVITIES
Increase in deposits, net 7,022,908 1,024,341
Net increase (decrease) in short-term borrowings 1,800,000 (1,500,000)
Repayment of Federal Home Loan Bank borrowings (179,346) (15,861)
Increase in advances by borrowers
for taxes and insurance, net 165,545 167,994
Purchase of stock for Stock Compensation Trust (3,021,300) -
Purchase of treasury stock (3,532,200) -
Cash dividends (71,229) (47,597)
----------- -----------
Net cash provided by (used for) financing activities 2,184,378 (371,123)
----------- -----------
Increase (decrease) in cash and cash equivalents 705,950 (3,352,196)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,162,811 6,180,794
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,868,761 $ 2,828,598
=========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid:
Interest $ 955,072 $ 685,727
Income taxes 85,000 173,250
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, 2005 has been derived from the
audited consolidated 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 three
months ended January 31, 2006, this activity is shown under the heading
Comprehensive Income as presented in the Consolidated Statement of Changes in
Stockholders' Equity (Unaudited). For the three months ended January 31, 2005
comprehensive income totaled $200,680.
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 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. The provisions of FAS
No. 154 are effective for accounting changes and corrections of errors made in
fiscal years beginning after December 15, 2005. The adoption of this standard is
not expected to have a material effect on the Company's results of operations or
financial position.
5
NOTE 4 - INVESTMENTS
- --------------------
The amortized cost and the fair value of investment securities held to maturity
were as follows:
January 31, 2006
--------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ------------ ------------ -------------
Municipal securities $2,164,806 $55,343 $(10,596) $2,209,553
October 31, 2005
--------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ------------ ------------ -------------
Municipal securities $2,150,395 $26,342 $(27,488) $2,149,249
The amortized cost and the fair value of available-for-sale investment
securities were as follows:
January 31, 2006
---------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ------ --------- -----------
Mortgage-backed securities:
Fannie Mae $24,068,116 $2,569 $(397,255) $23,673,430
Freddie Mac 4,446,754 1,315 (69,346) 4,378,723
Government National Mortgage
Association securities 1,506,760 1,372 (14,523) 1,493,609
----------- ------ --------- -----------
Total mortgage-backed
securities 30,021,630 5,256 (481,124) 29,545,762
U.S. Government
agency securities 9,969,164 296 (299,705) 9,669,755
Corporate securities 3,028,238 - (58,790) 2,969,448
Municipal securities 4,246,889 90 (54,403) 4,192,576
----------- ------ --------- -----------
Total debt securities 47,265,921 5,642 (894,022) 46,377,541
Mutual funds 192,787 - (3,286) 189,501
----------- ------ --------- -----------
Total $47,458,708 $5,642 $(897,308) $46,567,042
=========== ====== ========= ===========
6
October 31, 2005
---------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ------- --------- -----------
Mortgage-backed securities:
Fannie Mae $26,739,810 $ 1,983 $(448,608) $26,293,185
Freddie Mac 4,643,713 495 (81,412) 4,562,796
Government National Mortgage
Association securities 2,193,406 8,574 (8,271) 2,193,709
----------- ------- --------- -----------
Total mortgage-backed
securities 33,576,929 11,052 (538,291) 33,049,690
U.S. Government
agency securities 9,965,943 914 (308,072) 9,658,785
Corporate securities 3,028,815 - (25,100) 3,003,715
Municipal securities 4,249,487 - (66,722) 4,182,765
----------- ------- --------- -----------
Total debt securities 50,821,174 11,966 (938,185) 49,894,955
Mutual funds 190,870 - (3,093) 187,777
----------- ------- --------- -----------
Total $51,012,044 $11,966 $(941,278) $50,082,732
=========== ======= ========= ===========
The amortized cost and estimated market value of debt securities at January 31,
2006, 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.
Held to Maturity Available for Sale
---------------- ------------------
Estimated Market Estimated Market
Amortized Cost Value Amortized Cost Value
-------------- ---------------- -------------- ----------------
Due less than one year $ - $ - $ 221,064 $ 221,360
Due after one year through five years - - 12,359,152 12,015,473
Due after five years through ten years - - 4,228,436 4,131,346
Due after ten years 2,164,806 2,209,553 30,457,269 30,009,362
---------- ---------- ----------- -----------
Total $2,164,806 $2,209,553 $47,265,921 $46,377,541
========== ========== =========== ===========
7
NOTE 5 - LOANS RECEIVABLE
- -------------------------
Loans receivable consist of the following:
January 31, 2006 October 31, 2005
-------------------------------- -------------------------------
Amount Percent Amount Percent
----------------- ------------- ----------------- ------------
Type of Loans:
- ------------------
Mortgage loans:
One-to four- family (1) $54,042,614 60.68% $52,817,766 61.95%
Multi-family 817,827 0.92% 707,081 0.83%
Commercial real estate 6,089,189 6.84% 5,564,591 6.53%
Construction (2) 14,516,150 16.30% 13,034,853 15.29%
Home equity loans and lines of credit 12,951,019 14.54% 12,715,963 14.91%
Loans on savings accounts 356,873 0.40% 300,955 0.35%
Other 288,942 0.32% 118,856 0.14%
----------- ----- ----------- -----
Total loans 89,062,614 100.00% 85,260,065 100.00%
====== ======
Less:
Net deferred loan fees and unamortized premiums 129,439 150,922
Allowance for loan losses 542,858 506,708
----------- -----------
Total loans, net $88,390,317 $84,602,435
=========== ===========
- -------------------
(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 $2.1 million at both January 31, 2006 and October 31,
2005.
NOTE 6 - FEDERAL HOME LOAN BANK BORROWINGS
- ------------------------------------------
The following tables set forth information concerning advances with the FHLB:
Weighted- Stated interest
Maturity range average rate range At January 31, At October 31,
Description from to interest rate from to 2006 2005
------------ ----------- ----------- ------------------- ------------- -------------
Short Term Borrowings 04/11/06 05/23/06 4.51% 3.73% 4.69% $14,600,000 $12,800,000
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 10,800,000
Fixed Rate 08/20/08 08/20/08 6.24% 6.24% 6.24% 1,500,000 1,500,000
Fixed Rate amortizing 05/23/08 05/23/08 4.14% 4.14% 4.14% 1,655,571 1,834,917
----------- -----------
Total $29,555,571 $27,934,917
=========== ===========
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 $62,131 through May 2008.
8
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.
Maturities of FHLB borrowings at January 31, 2006 are summarized as follows:
Year Ending October 31, Amount Weighted-Average Rate
- ---------------------------- ------------- ---------------------
2006 $18,114,840 4.19%
2007 5,511,753 3.64%
2008 2,928,978 5.12%
2010 1,000,000 5.91%
2015 2,000,000 4.84%
-----------
Total $29,555,571 4.28%
===========
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, shares held in the Stock Compensation
Trust, and in Treasury stock for the period.
For the Three Months Ended January 31,
2006 2005
--------- ---------
Weighted-average common shares outstanding 2,578,875 2,578,875
Average treasury stock shares (70,217) -
Average unallocated shares held by ESOP (181,736) (196,473)
Average Stock compensation Trust shares (32,772) -
--------- ---------
Weighted-average common shares and
common stock equivalents used to
calculate basic earnings per share 2,294,150 2,382,402
========= =========
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 Three Months Ended January 31,
2006 and January 31, 2005
The Company recorded net income of $9.0 thousand for the three months
ended January 31, 2006, versus $270.9 thousand over the same period in 2005. The
decrease in net income is primarily due to an increase in non-interest expense.
Net Interest Income. Net interest income for the three months ended
January 31, 2006 increased to $1.1 million from $1.0 million for the same period
in 2005 as a result of an increase in total interest income which more than
offset an increase in interest expense. The net interest margin decreased by 29
basis points to 3.20% for the three months ended January 31, 2006 from 3.49% for
the three months ended January 31, 2005. Interest income for the three months
ended January 31, 2006 totaled $2.1 million as compared to $1.6 million for the
three months ended January 31, 2005. This increase of $490.1 thousand was
primarily attributable to an increase of $22.6 million in the average balance of
interest-earning assets to $141.6 million for the three months ended January 31,
2006 from $119.1 million for the three months ended January 31, 2005. This
increase was also attributable to an increase in the average yield on
interest-earning assets of 49 basis points to 6.04% for the three months ended
January 31, 2006 from 5.55% for the three months ended January 31, 2005. The
average balance of loans receivable and investment securities for the three
months ended January 31, 2006 as compared to the same period of the prior year
increased $19.6 million and $3.3 million, respectively. Loans receivable
increased due to increased loan demand and the addition of a Chief Lending
Officer. The average yield on loans receivable increased 20 basis points to
6.98% for the three months ended January 31, 2006 from 6.78% for the three
months ended January 31, 2005. The average yield on investment securities
increased 50 basis points to 4.62% for the three months ended January 31, 2006
from 4.12% for the three months ended January 31, 2005.
Interest expense increased to $1.0 million for the three months ended
January 31, 2006 from $615.2 thousand for the three months ended January 31,
2005 and was primarily attributable to an increase of $27.5 million in the
average balance of interest-bearing liabilities to $115.1 million for the three
months ended January 31, 2006 from $87.6 million for the three months ended
January 31, 2005 as well as an increase in the average cost of funds of 68 basis
points to 3.49% for the three months ended January 31, 2006 from 2.81 % for the
three months ended January 31, 2005. The average balance of deposits and FHLB
advances for the three months ended January 31, 2006 as compared to the same
period of the prior year increased $14.7 million and $12.9 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. The average cost of deposits
increased 60 basis points to 3.26% for the three months ended January 31, 2006
from 2.66% for the three months ended January 31, 2005. The average cost of
borrowings increased 82 basis points to 4.22% for the three months ended January
31, 2006 from 3.40% for the three months ended January 31, 2005.
Loan Loss Provision. The provision for loan losses was $36.1 thousand
for the three months ended January 31, 2006 compared to $17.0 thousand for the
three months ended January 31, 2005 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.
10
Non-interest Income. Total non-interest income decreased $10.6 thousand
to $86.1 thousand for the three months ended January 31, 2006 compared to $96.7
thousand for the three months ended January 31, 2005 due mainly to a loss on the
sale of securities of $23.7 thousand offset by an increase of $7.5 thousand in
service fees on deposits and an increase in earnings on bank-owned life
insurance of $7.9 thousand.
Non-interest Expense. Non-interest expense increased $487.1 thousand to
$1.2 million for the three months ended January 31, 2006 from $692.0 thousand
for the three months ended January 31, 2005. The increase in non-interest
expense was due to increases in compensation and employee benefits, professional
fees, occupancy and equipment costs, and other expense of $198.7 thousand,
$122.2 thousand, $46.8 thousand and $98.9 thousand, respectively. The increase
in compensation and employee benefits was due primarily to additions to staff
(including staff for the newly opened Roxborough and Ardmore, Pennsylvania
Neighborhood Banking Offices), payroll taxes and employee benefits expense as
well as normal salary increases. The increase in professional fees was due
mainly to costs incurred in connection with non-recurring legal expenses related
to the Company's 2005 Annual Meeting of Stockholders that were not resolved
until the first quarter of 2006. The increase in occupancy and equipment costs
was due to an increase in depreciation, rent expense, utilities and maintenance
expense related to the opening of the two new banking offices discussed above.
Other expense increased due mainly to increased advertising costs, costs
associated with the grand opening of the Roxborough banking office,
telecommunications enhancement expense, and stationery and supplies expense.
Income Taxes. Income tax benefit was $27.1 thousand for the three
months ended January 31, 2006 as compared to an expense of $137.0 thousand for
the same period in 2005 due mainly to a decrease in pre-tax income.
Comparison of Financial Condition at January 31, 2006 and October 31, 2005
Assets and Liabilities. The Company's total assets increased by $2.3
million to $149.7 million at January 31, 2006 from $147.4 million at October 31,
2005.
Investment securities available for sale decreased by $3.5 million, to
$46.6 million at January 31, 2006 from $50.1 million at October 31, 2005. The
decrease was due mainly to the sale of $2.1 million in mortgage-backed
securities and repayments.
Net loans receivable increased $3.8 million, or 4.5%, to $88.4 million
at January 31, 2006 from $84.6 million at October 31, 2005. The increase in net
loans receivable was primarily the result of increases in construction
financing, one- to four-family residential mortgages (which includes owner and
non-owner occupied properties), and commercial real estate loans in the amount
of $1.5 million, $1.2 million and $524.6 thousand, respectively.
The allowance for loan losses increased to $542.9 thousand at January
31, 2006 from $506.7 thousand at October 31, 2005 and represented .61% of the
gross loan portfolio at January 31, 2006. The Company had nonaccrual loans of
$60.1 thousand and $69.4 thousand at January 31, 2006 and October 31, 2005,
respectively. Management does not believe the nonaccrual loans or any amounts
classified as nonperforming will have a significant effect on operations or
liquidity in 2006. 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.
Premises and equipment, net increased $1.2 million to $3.3 million at
January 31, 2006 from $2.1 million at October 31, 2005. The increase was
primarily due to costs associated with the new Roxborough and Ardmore Banking
Offices.
Total deposits increased to $94.4 million at January 31, 2006 from
$87.4 million at October 31, 2005. This was primarily a result of an increase in
certificates of deposit and checking accounts of $5.3 million and $2.3 million,
respectively, offset by a decrease in money market accounts and savings accounts
of $500.2 thousand and $96.4 thousand, respectively.
Stockholders' Equity. Total stockholders' equity decreased to $24.5
million at January 31, 2006 from $31.1 million at October 31, 2005. The decrease
was due mainly to the completion of the 10% stock repurchase plan announced July
29, 2005 and the 10% stock repurchase plan announced January 17, 2006. A total
of 465,000 shares of common stock were repurchased at an average price of $14.04
excluding brokerage commissions.
11
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 January 31, 2006, cash and cash equivalents totaled
approximately $2.9 million, or 1.9% of total assets while investment securities
classified as available for sale and certificates of deposit in other financial
institutions totaled approximately $46.8 million, or 31.2% 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 used net cash of approximately $92.3 thousand for
the three months ended January 31, 2006 and provided net cash of $8.7 thousand
for the three months ended January 31, 2005. Net cash used for the three months
ended January 31, 2006 was due mainly to other net operating activities. Net
cash provided for the three months ended January 31, 2005 was generated from net
income of $270.9 thousand.
Investing activities consist primarily of loan originations and
repayments, investment purchases, sales and maturities and purchases of premises
and equipment. For the three months ended January 31, 2006 net cash used for
investing activities totaled $1.4 million and primarily consisted of an increase
in net loans receivable of $3.8 million and purchases of premises and equipment
of $1.1 million due to the opening of two new banking offices. Partially
offsetting the usage of investing activities is $2.1 million of proceeds from
investment security sales and $1.4 million in maturities and repayments. For the
same period ended 2005, cash usages totaled $2.9 million and primarily consisted
of an increase in net loans receivable of $4.5 million. Partially offsetting the
usage of investing activities is $1.3 million of proceeds from investment
security maturities and repayments.
Financing activities consist of the solicitation and repayment of
customer deposits, borrowings and repayments, advances by borrowers for taxes
and insurance, stock repurchases and the payment of cash dividends. For the
three months ended January 31, 2006, net cash provided by financing activities
totaled $2.2 million and was principally from an increase in deposits of $7.0
million and an increase in FHLB borrowings of $1.8 million offset by purchases
of treasury stock of $3.5 million and purchases of stock for the Stock
Compensation Trust of $3.0 million. For the same period in 2005, net cash used
for financing activities totaled $371.1 thousand and was principally from the
repayment of short-term borrowings in the amount of $1.5 million offset by an
increase in deposits of $1.0 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 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 January 31, 2006, the Bank exceeded the minimum
capital ratio requirements.
12
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.
(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.
13
PART II
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company made stock repurchases during the quarter ended January
31, 2006 as follows:
----------------------------------------------------------------------------------------------------------------
ISSUER PURCHASES OF EQUITY SECURITIES
----------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d)
Total Number of
Shares Purchased as Maximum Number
Total Number Average Part of Publicly of Shares that May Yet Be
of Shares Price Paid Announced Purchased Under the Plans
Period Purchased per Share Plans or Programs or Programs
---------------------- ---------------- ------------- ----------------------- -----------------------------
November 1-30, 2005 215,388
---------------------- ---------------- ------------- ----------------------- -----------------------------
December 1-31, 2005 65,000 13.49 65,000 150,388
---------------------- ---------------- ------------- ----------------------- -----------------------------
January 1-31, 2006 400,000 14.13 400,000 388
---------------------- ---------------- ------------- ----------------------- -----------------------------
Total 465,000 14.04 465,000 388
---------------------- ---------------- ------------- ----------------------- -----------------------------
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 Form of Director Incentive Retirement Plan *
10.3 Form of Executive Officer Incentive Retirement Plan *
10.4 Form of Management Severance Agreements with Marcy C. Panzer, Pamela M. Cyr,
Christopher Jacobsen, and Rick Miller **
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
14
* Incorporated by reference to the Company's registration
statement on Form SB-2 (SEC File No. 333-112153).
** Incorporated by reference to the Company's Form 8-K filed
with the SEC on September 2, 2005 (SEC File No. 000-50684).
15
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: March 17, 2006 /s/Pamela M. Cyr
--------------------------------------------------------
Pamela M. Cyr
President and CEO
(Principal Executive and Financial & Accounting Officer)
16