UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended April 30, 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 by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date June 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 APRIL 30, 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 15
PART II- OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 18
EXHIBITS
31 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.1 Report of Independent Registered Public Accounting Firm
SE FINANCIAL CORP.
CONSOLIDATED BALANCE SHEET
(Unaudited)
April 30, October 31,
2006 2005
------------- -------------
ASSETS
Cash and due from banks $ 1,056,257 $ 603,912
Interest-bearing deposits with other institutions 2,678,439 1,558,899
------------- -------------
Cash and cash equivalents 3,734,696 2,162,811
Certificates of deposit in other financial institutions 196,539 193,793
Investment securities available for sale 47,268,146 50,082,732
Investment securities held to maturity (estimated market value
of $2,118,469 and $2,149,249) 2,179,243 2,150,395
Loans receivable (net of allowance for loan losses
of $743,356 and $506,708) 99,663,720 84,602,435
Accrued interest receivable 867,356 754,403
Federal Home Loan Bank Stock 1,583,900 1,649,900
Premises and equipment, net 5,036,322 2,142,909
Real estate owned 59,034 --
Bank owned life insurance 3,020,260 2,961,261
Other assets 1,344,612 730,108
------------- -------------
TOTAL ASSETS $ 164,953,828 $ 147,430,747
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $ 119,335,758 $ 87,407,966
Short-term borrowings 6,100,000 12,800,000
Federal Home Loan Bank borrowings 14,785,728 15,134,917
Advances by borrowers for taxes and insurance 231,620 436,601
Accrued interest payable 172,410 124,243
Other liabilities 351,664 464,120
------------- -------------
TOTAL LIABILITIES 140,977,180 116,367,847
------------- -------------
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 24,897,954 24,873,013
Retained earnings - substantially restricted 8,743,109 8,968,526
Stock Compensation Trust 215,000 shares (3,021,300) -
Unallocated shares held by Employee Stock Ownership Plan ("ESOP") (1,768,376) (1,842,058)
Treasury stock at cost, 292,500 shares and 42,500 shares respectively (4,113,325) (581,125)
Accumulated other comprehensive loss (1,019,302) (613,344)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 23,976,648 31,062,900
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 164,953,828 $ 147,430,747
============= =============
See accompanying notes to the unaudited consolidated financialstatements.
1
SE FINANCIAL CORP
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
Three Months Ended April 30, Six Months Ended April 30,
---------------------------- --------------------------
2006 2005 2006 2005
----------- ----------- ----------- -----------
INTEREST AND DIVIDEND INCOME
Loans receivable $ 1,617,890 $ 1,204,385 $ 3,143,886 $ 2,340,202
Investment securities
Taxable 481,457 428,328 984,780 865,973
Exempt from federal income tax 61,374 35,936 122,419 72,024
Interest-bearing deposits with other institutions 34,918 16,270 58,754 34,407
Other dividend income 13,503 7,573 24,813 15,292
----------- ----------- ----------- -----------
Total interest and dividend income 2,209,142 1,692,492 4,334,652 3,327,898
----------- ----------- ----------- -----------
INTEREST EXPENSE
Deposits 927,771 492,571 1,644,865 980,167
Short-term borrowings 89,712 35,622 231,128 67,170
Federal Home Loan Bank borrowings 149,557 92,780 306,053 188,876
----------- ----------- ----------- -----------
Total interest expense 1,167,040 620,973 2,182,046 1,236,213
----------- ----------- ----------- -----------
NET INTEREST INCOME 1,042,102 1,071,519 2,152,606 2,091,685
Provision for loan losses 215,980 34,000 252,118 51,000
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 826,122 1,037,519 1,900,488 2,040,685
----------- ----------- ----------- -----------
NONINTEREST INCOME
Service fees on deposit accounts 58,591 71,118 132,544 137,565
Earnings on bank-owned life insurance 31,003 21,589 58,999 41,668
Net gain (loss) on sale of investment securities - 10,446 (23,667) 10,446
Other 15,491 12,668 23,362 23,313
----------- ----------- ----------- -----------
Total noninterest income 105,085 115,821 191,238 212,992
----------- ----------- ----------- -----------
NONINTEREST EXPENSE
Compensation and employee benefits 623,356 486,741 1,214,056 878,763
Occupancy and equipment 148,840 52,189 245,232 101,778
Federal deposit insurance premiums 15,192 11,497 29,420 22,259
Data processing expense 63,144 85,701 153,095 158,658
Professional fees 65,992 112,236 241,609 165,668
Other 198,725 110,268 410,897 223,924
----------- ----------- ----------- -----------
Total noninterest expense 1,115,249 858,632 2,294,309 1,551,050
----------- ----------- ----------- -----------
(LOSS) INCOME BEFORE TAXES (184,042) 294,708 (202,583) 702,627
INCOME TAX (BENEFIT) EXPENSE (85,008) 90,270 (112,122) 227,303
----------- ----------- ----------- -----------
NET (LOSS) INCOME $ (99,034) $ 204,438 $ (90,461) $ 475,324
=========== =========== =========== ===========
PER SHARE DATA:
Earnings (loss) per share - basic and diluted $ (0.05) $ 0.09 $ (0.04) $ 0.20
Weighted average number of shares outstanding -
basic and diluted 1,893,338 2,386,115 2,095,850 2,383,005
Dividends per share 0.03 0.02 0.06 0.04
See accompanying notes to the unaudited consolidated financial statements.
2
SE FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
Accumulated
Retained Stock Unallocated Other Total
Additional Earnings- Compen- shares Treasury Compre- Stock- Compre-
Common paid-in Substantially sation held by Stock hensive holders' hensive
Stock Capital Restricted Trust ESOP at Cost Loss Equity Loss
-------- ----------- ---------- ----------- ----------- ------------ ----------- ----------- ----------
Balance,
October 31, 2005 $257,888 $24,873,013 $8,968,526 $ - $(1,842,058) $ (581,125) $ (613,344) $31,062,900
Cash dividends paid - - (134,956) - - (134,956)
ESOP shares committed
to be released - 24,941 - 73,682 - 98,623
Stock Compensation
Trust purchases (3,021,300) (3,021,300)
Treasury Stock
purchases (3,532,200) (3,532,200)
Net loss - - (90,461) - - (90,461)$ (90,461)
Other comprehensive loss:
Unrealized loss on
available for sale
securities, net of
reclassification
adjustment, net of
tax benefit of
$209,130 (405,958) (405,958)$(405,958)
Comprehensive loss - - - - - - $(496,419)
-------- ----------- ---------- ----------- ----------- ------------ ----------- ----------- =========
Balance,
April 30, 2006 $257,888 $24,897,954 $8,743,109 $(3,021,300) $(1,768,376) $(4,113,325) $(1,019,302) $23,976,648
======== =========== ========== =========== =========== =========== =========== ===========
Components of other comprehensive loss: April 30, 2006
--------------
Change in net unrealized loss on
investment securities available for sale $ (421,578)
Realized losses included in net loss net of tax benefit of $8,047 15,620
----------
Total $ (405,958)
==========
See accompanying notes to the unaudited consolidated financial statements.
3
SE FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
For the Six Months Ended April 30,
2006 2005
------------ ------------
OPERATING ACTIVITIES
Net income (loss) $ (90,461) $ 475,324
Adjustments to reconcile net income to net cash provided by (used for)
operating activities:
Provision for loan losses 252,118 51,000
Depreciation, amortization, and accretion 71,117 29,314
Earnings on bank-owned life insurance (58,999) (41,668)
Decrease in principal and interest on loans sold payable (36,131) (146,622)
Increase in accrued interest receivable (112,953) (12,104)
Increase (decrease) in accrued interest payable 48,167 (13,413)
Net loss (gain) on sale of investment securities 23,667 (10,446)
Other, net (356,724) 77,525
------------ ------------
Net cash provided by (used for) operating activities (260,199) 408,910
------------ ------------
INVESTING ACTIVITIES
Investment securities available for sale:
Proceeds from principal repayments and maturities 2,895,421 2,571,629
Purchases (2,991,602) (4,050,516)
Proceeds from the sale of investment securities 2,141,519 4,099,303
Increase in loans receivable, net (15,274,251) (6,772,064)
Proceeds from sales of real estate acquired through
foreclosure - 80,000
Purchase of Federal Home Loan Bank stock (132,700) -
Redemption of Federal Home Loan Bank stock 198,700 136,000
Purchase of premises and equipment (2,990,169) (101,254)
------------ ------------
Net cash used for investing activities (16,153,082) (4,036,902)
------------ ------------
FINANCING ACTIVITIES
Increase in deposits, net 31,927,792 1,935,754
Net increase (decrease) in short-term borrowings (6,700,000) (1,500,000)
Repayment of Federal Home Loan Bank borrowings (349,189) (31,980)
Decrease in advances by borrowers
for taxes and insurance, net (204,981) (184,876)
Purchase of stock for Stock Compensation Trust (3,021,300) -
Purchase of treasury stock (3,532,200) -
Cash dividends (134,956) (95,196)
------------ ------------
Net cash provided by financing activities 17,985,166 123,702
------------ ------------
Increase (decrease) in cash and cash equivalents 1,571,885 (3,504,290)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,162,811 6,180,794
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,734,696 $ 2,676,504
============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid:
Interest $ 2,133,879 $ 1,249,626
Income taxes 173,000 289,000
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, 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 (LOSS)
- -----------------------------------
The components of comprehensive income (loss) consist exclusively of
unrealized gains and losses on available for sale securities. For the six months
ended April 30, 2006, this activity is shown under the heading Comprehensive
Loss as presented in the Consolidated Statement of Changes in Stockholders'
Equity (Unaudited). For the six months ended April 30, 2005 comprehensive income
totaled $87,839. For the three months ended April 30, 2006 and 2005
comprehensive loss totaled $529,839 and $112,842, respectively.
NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENTS
- -----------------------------------------
In February 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting ("FAS") No. 155, Accounting for Certain Hybrid
Instruments, as an amendment of FASB Statements No. 133 and 140. FAS No. 155
allows financial instruments that have embedded derivatives to be accounted for
as a whole (eliminating the need to bifurcate the derivative from its host) if
the holder elects to account for the whole instrument on a fair value basis.
This statement is effective for all financial instruments acquired or issued
after the beginning of an entity's first fiscal year that begins after September
15, 2006. The adoption of this standard is not expected to have a material
effect on the Company's results of operations or financial position.
In March 2006, the FASB issued FAS No. 156, Accounting for Servicing of
Financial Assets. This Statement, which is an amendment to FAS No. 140, will
simplify the accounting for servicing assets and liabilities, such as those
common with mortgage securitization activities. Specifically, FAS No. 156
addresses the recognition and measurement of separately recognized servicing
assets and liabilities and provides an approach to simplify efforts to obtain
hedge-like (offset) accounting. FAS No. 156 also clarifies when an obligation to
service financial assets should be separately recognized as a servicing asset or
a servicing liability, requires that a separately recognized servicing asset or
servicing liability be initially measured at fair value, if practicable, and
permits an entity with a separately recognized servicing asset or servicing
liability to choose either of the amortization or fair value methods for
subsequent measurement. The provisions of FAS No. 156 are effective as of the
beginning of the first fiscal year that begins after September 15, 2006. 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 estimated market value of investment securities held
to maturity were as follows:
April 30, 2006
--------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ------------ ------------ ------------
Municipal securities $ 2,179,243 $ 436 $ (61,210) $ 2,118,469
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 estimated market value of available-for-sale
investment securities were as follows:
April 30, 2006
---------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------------- ----------------- ----------------- -----------------
Mortgage-backed securities:
Fannie Mae $ 24,122,540 $ 1,193 $ (754,107) $ 23,369,626
Freddie Mac 6,244,120 1,100 (154,233) 6,090,987
Government National Mortgage
Association securities 1,379,541 1,498 (11,024) 1,370,015
----------------- ----------------- ----------------- -----------------
Total mortgage-backed
securities 31,746,201 3,791 (919,364) 30,830,628
U.S. Government
agency securities 9,846,981 - (432,360) 9,414,621
Corporate securities 3,027,635 - (88,005) 2,939,630
Municipal securities 3,996,897 1,545 (106,308) 3,892,134
----------------- ----------------- ----------------- -----------------
Total debt securities 48,617,714 5,336 (1,546,037) 47,077,013
Mutual funds 194,806 - (3,673) 191,133
----------------- ----------------- ----------------- -----------------
Total $ 48,812,520 $ 5,336 $ (1,549,710) $ 47,268,146
================= ================= ================= =================
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 8,576 (8,271) 2,193,711
----------------- ----------------- ----------------- -----------------
Total mortgage-backed
securities 33,576,928 11,053 (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 50,821,173 11,967 (938,185) 49,894,955
Mutual funds 190,870 - (3,093) 187,777
----------------- ----------------- ----------------- -----------------
Total $ 51,012,044 $ 11,967 $ (941,278) $ 50,082,732
================= ================= ================= =================
The amortized cost and estimated market value of debt securities at April 30,
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 Estimated
Amortized Cost Market Value Amortized Cost Market Value
--------------- -------------- --------------- ---------------
Due less than one year $ - $ - $ 348,820 $ 344,632
Due after one year through five years - - 12,339,019 11,840,213
Due after five years through ten years - - 3,906,213 3,741,205
Due after ten years 2,179,243 2,118,469 32,023,662 31,150,963
----- ----------- ----------- ------------ ------------
Total $ 2,179,243 $ 2,118,469 $ 48,617,714 $ 47,077,013
=========== =========== ============ ============
7
NOTE 5 - LOANS RECEIVABLE
- -------------------------
Loans receivable consist of the following:
April 30, 2006 October 31, 2005
----------------------------- ----------------------------
Amount Percent Amount Percent
-------------- ------------- -------------- ------------
Type of Loans:
-------------------
Mortgage loans:
One-to four- family (1) $ 61,034,513 60.71% $ 52,817,766 61.95%
Multi-family 637,470 0.63% 707,081 0.83%
Commercial real estate 7,079,068 7.04% 5,564,591 6.53%
Construction (2) 17,471,244 17.37% 13,034,853 15.29%
Home equity loans and lines of credit 13,753,184 13.68% 12,715,963 14.91%
Loans on savings accounts 315,279 0.31% 300,955 0.35%
Other 263,985 0.26% 118,856 0.14%
------------ -------- ------------ --------
Total loans 100,554,743 100.00% 85,260,065 100.00%
======== ========
Less:
Net deferred loan fees and unamortized
premiums 147,667 150,922
Allowance for loan losses 743,356 506,708
------------ ------------
Total loans, net $ 99,663,720 $ 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 $2.3 million at both April 30, 2006 and October 31,
2005.
NOTE 6 - FEDERAL HOME LOAN BANK BORROWINGS
- ------------------------------------------
The following tables set forth information concerning advances with the FHLB:
Weighted
average Stated interest At At
Maturity range interest rate range January 31, October 31,
Description from to rate from to 2006 2005
------------ ----------- ----------- ------------------- ------------- -------------
Short Term Borrowings 04/11/06 05/23/06 4.62% 3.73% 5.09% $ 6,100,000 $ 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% 1,485,728 1,834,917
------------- -------------
Total $ 20,885,728 $ 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 April 30, 2006 are summarized as follows:
Year Ending October 31, Amount Weighted-Average Rate
-------------------------- --------------- -------------------------
2006 $ 9,444,997 3.97%
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 $ 20,885,728 4.22%
============
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 For the Six Months Ended
April 30, April 30,
---------------------------------- ---------------------------------
2006 2005 2006 2005
--------------- ---------------- ---------------- ---------------
Weighted-average common shares
outstanding 2,578,875 2,578,875 2,578,875 2,578,875
Average treasury stock shares (292,500) - (179,516) -
Average unallocated shares held by ESOP (178,037) (192,760) (181,133) (195,870)
Average Stock CompensationTrust shares (215,000) - (122,376) -
--------------- ---------------- ---------------- ---------------
Weighted-average common shares and
common stock equivalents used to
calculate basic earnings per share 1,893,338 2,386,115 2,095,850 2,383,005
=============== ================ =================================
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 April 30,
2006 and April 30, 2005
The Company recorded a net loss of $99.0 thousand for the three months
ended April 30, 2006, versus net income of $204.4 thousand over the same period
in 2005. The decrease in net income is due to increases in non-interest expense
and the provision for loan losses.
Net Interest Income. Net interest income for the three months ended
April 30, 2006 decreased $29.4 thousand to $1.0 million from $1.1 million for
the same period in 2005 as a result of an increase in total interest expense
which more than offset an increase in interest income. The net interest margin
decreased by 63 basis points to 3.00% for the three months ended April 30, 2006
from 3.63% for the three months ended April 30, 2005. Interest income for the
three months ended April 30, 2006 totaled $2.2 million as compared to $1.7
million for the three months ended April 30, 2005. This increase of $516.7
thousand was attributable to an increase of $26.8 million in the average balance
of interest-earning assets to $146.7 million for the three months ended April
30, 2006 from $120.0 million for the three months ended April 30, 2005. This
increase was also attributable to an increase in the average yield on
interest-earning assets of 36 basis points to 6.06% for the three months ended
April 30, 2006 from 5.70% for the three months ended April 30, 2005. The average
balances of loans receivable and investment securities for the three months
ended April 30, 2006 as compared to the same period of the prior year increased
$21.3 million and $3.9 million, respectively. Loans receivable grew due to
increased loan demand and the addition of new lending officers. The average
yield on loans receivable increased 17 basis points to 6.97% for the three
months ended April 30, 2006 from 6.80% for the three months ended April 30,
2005. The average yield on investment securities increased 36 basis points to
4.56% for the three months ended April 30, 2006 from 4.20% for the three months
ended April 30, 2005.
Interest expense increased to $1.2 million for the three months ended
April 30, 2006 from $621.0 thousand for the three months ended April 30, 2005.
The increase was attributable to an increase of $40.0 million in the average
balance of interest-bearing liabilities to $128.6 million for the three months
ended April 30, 2006 from $88.7 million for the three months ended April 30,
2005 as well as an increase in the average cost of funds of 80 basis points to
3.60% for the three months ended April 30, 2006 from 2.80 % for the three months
ended April 30, 2005. The average balances of deposits and FHLB advances for the
three months ended April 30, 2006 as compared to the same period of the prior
year increased $32.0 million and $8.0 million, respectively. The increase in
deposits was due mainly to an increase in certificates of deposit, money market
accounts and interest bearing demand deposits. The average balance of borrowings
increased as funds were used to support loan growth. The average cost of
deposits increased 83 basis points to 3.49% for the three months ended April 30,
2006 from 2.66% for the three months ended April 30, 2005. The average cost of
borrowings increased 72 basis points to 4.12% for the three months ended April
30, 2006 from 3.40% for the three months ended April 30, 2005.
Loan Loss Provision. The provision for loan losses was $216.0 thousand
for the three months ended April 30, 2006 compared to $34.0 thousand for the
three months ended April 30, 2005. The increase was attributable to an increase
in classified assets, as well as loan growth. The increase in classified assets
was primarily due to the downgrade to substandard of a $1.3 million loan for the
construction of four residential condominium units located in Philadelphia.
There can be no assurance that future additional provisions relating to this
loan will not be
10
necessary. 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, realizability of collateral value
and collectibility of guarantee, pending legal action for collection of loans
and related guarantees, 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 decreased $10.7 thousand
to $105.1 thousand for the three months ended April 30, 2006 compared to $115.8
thousand for the three months ended April 30, 2005 due mainly to a reduction in
service charges related to check printing charges in connection with new product
offerings targeting business and retail core deposit growth which include a free
first order of checks.
Non-interest Expense. Non-interest expense increased $256.5 thousand to
$1.1 million for the three months ended April 30, 2006 from $858.6 thousand for
the three months ended April 30, 2005. The increase in non-interest expense was
due to increases in compensation and employee benefits, occupancy and equipment
costs, and other expense of $136.6 thousand, $96.7 thousand and $88.3 thousand,
respectively, offset by a decrease in professional fees and data processing
expense of $46.2 thousand and $22.6 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
banking offices and additions to staff in the lending area as well as payroll
taxes, employee benefits expense and performance based salary increases offset
by the severance package paid to the former President in the corresponding
period in the prior year. 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. The
increase in other expense was due mainly to increased advertising and marketing
costs, telephone and information technology expense, and stationery and supplies
expense. The decrease in professional fees was due mainly to non-recurring legal
expenses and accounting fees related to work performed for implementing Section
404 of the Sarbanes Oxley Act of 2002. The decrease in data processing expense
was due to favorable contract negotiations resulting in a short term decrease in
monthly processing fees.
Income Taxes. Income tax benefit was $85.0 thousand for the three
months ended April 30, 2006 as compared to an expense of $90.3 thousand for the
same period in 2005 due mainly to a decrease in pre-tax income aggregated with
an increase in non taxable income.
Comparison of the Results of Operations for the Six Months Ended April 30, 2006
and April 30, 2005
The Company recorded a net loss of $90.5 thousand for the six months
ended April 30, 2006, versus net income of $475.3 thousand over the same period
in 2005. The decrease in net income is primarily due to an increase in
non-interest expense and the provision for loan losses.
Net Interest Income. Net interest income for the six months ended April
30, 2006 increased $60.9 thousand to $2.2 million from $2.1 million for the same
period in 2005 as a result of an increase in interest income which was offset by
an increase in interest expense. The net interest margin decreased by 44 basis
points to 3.12% for the six months ended April 30, 2006 from 3.56% for the six
months ended April 30, 2005. Interest income for the six months ended April 30,
2006 totaled $4.3 million as compared to $3.3 million for the six months ended
April 30, 2005. This increase of $1.0 million was attributable to an increase of
$24.7 million in the average balance of interest-earning assets to $144.2
million for the six months ended April 30, 2006 from $119.5 million for the six
months ended April 30, 2005. This increase was also attributable to an increase
in the average yield on interest-earning assets of 47 basis points to 6.10% for
the six months ended April 30, 2006 from 5.63% for the six months ended April
30, 2005. The average balances of loans receivable and investment securities for
the six months ended April 30, 2006 as compared to the same period of the prior
year increased $20.5 million and $3.6 million, to $89.4 million and $50.5
million respectively. Loans receivable grew due to increased loan demand and the
addition of new lending officers. The average yield on loans receivable
increased 25 basis points to 7.04% for the six months ended April 30, 2006 from
6.79% for the six months ended April 30, 2005. The average yield on investment
securities increased 47 basis points to 4.63% for the six months ended April 30,
2006 from 4.16% for the six months ended April 30, 2005.
Interest expense increased to $2.2 million for the six months ended
April 30, 2006 from $1.2 million for the six months ended April 30, 2005. The
increase was primarily attributable to an increase of $33.8 million in the
average balance of interest-bearing liabilities to $121.9 million for the six
months ended April 30, 2006 from $88.1
11
million for the six months ended April 30, 2005 as well as an increase in the
average cost of funds of 77 basis points to 3.58% for the six months ended April
30, 2006 from 2.81% for the six months ended April 30, 2005. The average
balances of deposits and FHLB advances for the six months ended April 30, 2006
as compared to the same period of the prior year increased $23.4 million and
$10.5 to $96.4 million and $25.5 million, respectively. The increase in deposits
was mainly due to an increase in certificates of deposit, money market accounts
and interest bearing demand deposits. The average balance of borrowings
increased as funds were used to support loan growth. The average cost of
deposits increased 74 basis points to 3.44% for the six months ended April 30,
2006 from 2.70% for the six months ended April 30, 2005. The average cost of
borrowings increased 81 basis points to 4.21% for the six months ended April 30,
2006 from 3.40% for the six months ended April 30, 2005.
Loan Loss Provision. The provision for loan losses was $252.1 thousand
for the six months ended April 30, 2006 compared to $51 thousand for the six
months ended April 30, 2005. The increase was attributable to an increase in
classified assets, as well as loan growth. The increase in classified assets was
primarily due to the downgrade to substandard of a $1.3 million loan for the
construction of four residential condominium units located in Philadelphia.
There can be no assurance that future additional provisions relating to this
loan will not be necessary. 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, realizability of
collateral value and collectibility of guarantee, pending legal action for
collection of loans and related guarantees, 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 decreased $21.8 thousand
to $191.2 thousand for the six months ended April 30, 2006 compared to $213.0
thousand for the six months ended April 30, 2005 due mainly to a loss on the
sale of investment securities available for sale of $23.7 thousand versus a gain
on the sale of investment securities of $10.4 thousand in the same period of the
prior year offset by an increase of $17.3 thousand in earnings on bank-owned
life insurance.
Non-interest Expense. Non-interest expense increased $743.3 thousand to
$2.3 million for the six months ended April 30, 2006 from $1.6 million for the
six months ended April 30, 2005. The increase in non-interest expense was due to
increases in compensation and employee benefits, occupancy and equipment costs,
professional fees and other expense of $335.3 thousand, $143.5 thousand, $75.9
thousand and $187.0 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 banking offices and
additions to staff in the lending department as well as payroll taxes, employee
benefits expense and performance based salary increases offset by the severance
package paid to the former President in the corresponding period in the prior
year. 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. The increase in professional fees was
due mainly to costs incurred in connection with non-recurring legal expenses
related to the Company's annual meeting of stockholders that were not resolved
until the first quarter of 2006. The increase in other expense was due mainly to
increased advertising and marketing costs, telephone and information technology
expense, and stationery and supplies expense.
Income Taxes. Income tax benefit was $112.1 thousand for the six months
ended April 30, 2006 as compared to an expense of $227.3 thousand for the same
period in 2005 due mainly to a decrease in pre-tax income aggregated with an
increase in non taxable income.
Comparison of Financial Condition at April 30, 2006 and October 31, 2005
Assets and Liabilities. The Company's total assets increased by $17.6
million to $165.0 million at April 30, 2006 from $147.4 million at October 31,
2005.
Total investment securities decreased by $2.8 million, to $49.4 million
at April 30, 2006 from $52.2 million at October 31, 2005 due mainly to $5.2
million in sales, maturities and repayments offset by $3.0 million in purchases.
Net loans receivable increased $15.1 million, or 17.8%, to $99.7
million at April 30, 2006 from $84.6 million at October 31, 2005. 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), construction financing, commercial real estate loans, and home
equity loans in the amount of $8.2 million, $4.4 million, $1.5
12
million and $1.0 million, respectively. The increase in loans receivable is
attributable to the opening of two new banking offices in Roxborough and Ardmore
Pennsylvania as well as the addition of two new commercial lending officers.
The allowance for loan losses increased to $743.4 thousand at April 30,
2006 from $506.7 thousand at October 31, 2005 and represented .74% of the gross
loan portfolio at April 30, 2006. The Company had nonaccrual loans of $103.4
thousand and $69.4 thousand at April 30, 2006 and October 31, 2005,
respectively. Classified loans totaled $4.9 million at April 30, 2006 as
compared to $3.2 million at October 31, 2005. The increase was due primarily to
the downgrade to substandard of a $1.3 million loan to build four residential
condominium units located in Philadelphia.
Premises and equipment, net increased $2.9 million to $5.0 million at
April 30, 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 as
well as the acquisition of a future banking office site in Deptford, New Jersey.
Total deposits increased to $119.3 million at April 30, 2006 from $87.4
million at October 31, 2005. This was primarily a result of an increase in
certificates of deposit, money market and checking accounts of $12.9 million,
$14.9 million and $4.7 million, respectively, offset by a decrease in savings
accounts of $532.8 thousand.
Stockholders' Equity. Total stockholders' equity decreased to $24.0
million at April 30, 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. The Stock Compensation Trust, which holds
215,000 shares, was funded through these repurchase programs. In addition, there
was an increase in the overall comprehensive loss of $405.9 thousand as a result
of a decrease in the market value of the Company's investment portfolio due to
rising market interest rates.
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 investment 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 April 30, 2006, cash and cash equivalents totaled
approximately $3.7 million, or 2.3% of total assets, while investment securities
classified as available for sale and certificates of deposit in other financial
institutions totaled approximately $47.5 million, or 28.8% 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 $260.2 thousand for
the six months ended April 30, 2006 and provided net cash of $408.9 thousand for
the six months ended April 30, 2005. Net cash used for the six months ended
April 30, 2006 was due mainly to other operating activities. Net cash provided
for the six months ended April 30, 2005 was generated from net income of $475.3
thousand.
Investing activities consist primarily of loan originations and
repayments, investment purchases, sales and maturities and purchases of premises
and equipment. For the six months ended April 30, 2006 net cash used for
investing activities totaled $16.2 million and primarily consisted of an
increase in net loans receivable of $15.3 million, purchases of investment
securities of $3.0 million and purchases of premises and equipment of $3.0
million in connection with the opening of two new banking offices in Roxborough
and Ardmore PA. Partially
13
offsetting the usage of investing activities is $2.1 million of proceeds from
investment security sales and $3.0 million in maturities and repayments. For the
same period ended April 30, 2005, cash usages totaled $4.0 million and primarily
consisted of an increase in net loans receivable of $6.8 million and investment
security purchase of $4.0 million. Partially offsetting the usage of investing
activities is $6.7 million of proceeds from investment security maturities,
sales 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 six
months ended April 30, 2006, net cash provided by financing activities totaled
$18.0 million and was principally from an increase in deposits of $31.9 million
offset by a decrease in FHLB borrowings of $6.7 million and by the repurchase of
the Company's Stock in the total amount of $ 6.5 million, $3.5 million of stock
to Treasury and $3.0 million of stock for the Compensation Trust. For the same
period in 2005, net cash provided for financing activities totaled $123.7
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 $2.0 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 mutual-to-stock conversion significantly increased the
Company's capital resources.
The Bank is subject to federal regulations imposing minimum capital
requirements. Management monitors the Bank's total risk-based, Tier I
risk-based, and Tier I leverage capital ratios to assess compliance with
regulatory guidelines. At April 30, 2006, the Bank exceeded the minimum capital
ratio requirements.
14
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.
15
PART II
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
The Company's 2005 Annual Meeting of Stockholders was held June 6,
2005. The Company's 2006 Annual Meeting is currently scheduled to be
held on August 15, 2006. At the Annual Meeting, only such proposals
shall be acted upon as shall have been brought before the meeting (i)
by or at the direction of the Board of Directors or (ii) by any
stockholder of the Company who complies with all requirements set
forth in Article 11.C of the Company's Articles of Incorporation.
Pursuant to Article 11.C., for stockholder proposals to be considered
at an annual meeting of stockholders, the stockholder's notice shall
be delivered to, or mailed and received at, the principal executive
offices of the Company not less than sixty days prior to the
anniversary date of the immediately preceding annual meeting of
stockholders of the Company. Accordingly, the deadline for stockholder
proposals for the 2006 Annual Meeting was April 23, 2006, sixty days
prior to the June 6th anniversary of the immediately preceding annual
meeting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(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, J. Christopher Jacobsen, and Charles F. 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
16
* 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).
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SE FINANCIAL CORP.
Date: June 14, 2006 /s/Pamela M. Cyr
--------------------------------------------------------
Pamela M. Cyr
President and CEO
(Principal Executive and Financial & Accounting Officer)
18