UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-QSB
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended July 31, 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 issuer (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act 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
--- ---
State the number of shares outstanding of each of the issuer's classes
of common equity as of the latest practicable date September 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 July 31, 2006
INDEX
Page
Number
------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) 1
Item 2. Management's Discussion and Analysis or Plan of Operation 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 16
SIGNATURES
EXHIBITS
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.1 Report of Independent Registered Public Accounting Firm
SE FINANCIAL CORP.
CONSOLIDATED BALANCE SHEET
(Unaudited)
July 31, October 31,
2006 2005
------------- -------------
ASSETS
Cash and due from banks $ 917,357 $ 603,912
Interest-bearing deposits with other institutions 2,495,152 1,558,899
------------- -------------
Cash and cash equivalents 3,412,509 2,162,811
Certificates of deposit in other financial institutions 197,964 193,793
Investment securities available for sale 45,658,649 50,082,732
Investment securities held to maturity (estimated market value
of $2,187,562 and $2,149,249) 2,194,173 2,150,395
Loans receivable (net of allowance for loan losses
of $859,421 and $506,708) 108,445,490 84,602,435
Accrued interest receivable 948,435 754,403
Federal Home Loan Bank Stock 1,355,800 1,649,900
Premises and equipment, net 5,112,891 2,142,909
Real estate owned 59,034 --
Bank owned life insurance 3,049,645 2,961,261
Other assets 1,528,620 730,108
------------- -------------
TOTAL ASSETS $ 171,963,210 $ 147,430,747
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $ 130,542,880 $ 87,407,966
Short-term borrowings 5,000,000 12,800,000
Federal Home Loan Bank borrowings 11,614,121 15,134,917
Advances by borrowers for taxes and insurance 358,613 436,601
Accrued interest payable 111,215 124,243
Other liabilities 450,483 464,120
------------- -------------
TOTAL LIABILITIES 148,077,312 116,367,847
------------- -------------
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 24,907,828 24,873,013
Retained earnings - substantially restricted 8,657,301 8,968,526
Stock Compensation Trust 215,000 shares (3,021,300) -
Unallocated shares held by Employee Stock Ownership Plan ("ESOP") (1,731,535) (1,842,058)
Treasury stock at cost, 292,500 shares and 42,500 shares respectively (4,113,325) (581,125)
Accumulated other comprehensive loss (1,070,959) (613,344)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 23,885,898 31,062,900
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 171,963,210 $ 147,430,747
============= =============
See accompanying notes to the unaudited consolidated financial statements.
1
SE FINANCIAL CORP
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
Three Months Ended July 31, Nine Months Ended July 31,
--------------------------- --------------------------
2006 2005 2006 2005
----------- ----------- ----------- -----------
INTEREST AND DIVIDEND INCOME
Loans receivable $ 1,921,280 $ 1,293,867 $ 5,065,166 $ 3,634,069
Investment securities
Taxable 492,819 455,171 1,477,599 1,321,145
Exempt from federal income tax 60,091 54,459 182,510 126,482
Interest-bearing deposits with other institutions 38,732 9,592 97,486 43,999
Other dividend income 24,225 9,916 49,038 25,208
----------- ----------- ----------- -----------
Total interest and dividend income 2,537,147 1,823,005 6,871,799 5,150,903
----------- ----------- ----------- -----------
INTEREST EXPENSE
Deposits 1,185,084 518,509 2,829,949 1,498,676
Short-term borrowings 89,712 50,664 304,412 117,834
Federal Home Loan Bank borrowings 115,233 163,782 437,713 352,658
----------- ----------- ----------- -----------
Total interest expense 1,390,028 732,955 3,572,074 1,969,168
----------- ----------- ----------- -----------
NET INTEREST INCOME 1,147,119 1,090,050 3,299,725 3,181,735
Provision for loan losses 116,065 45,393 368,183 96,393
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,031,054 1,044,657 2,931,542 3,085,342
----------- ----------- ----------- -----------
NONINTEREST INCOME
Service fees on deposit accounts 76,282 72,886 208,826 210,451
Earnings on bank-owned life insurance 29,385 21,595 88,384 63,263
Net gain (loss) on sale of investment securities -- 21,760 (23,667) 32,206
Other 15,931 12,210 39,293 35,097
----------- ----------- ----------- -----------
Total noninterest income 121,598 128,451 312,836 341,017
----------- ----------- ----------- -----------
NONINTEREST EXPENSE
Compensation and employee benefits 683,758 442,896 1,897,814 1,321,659
Occupancy and equipment 156,710 61,952 401,942 163,730
Federal deposit insurance premiums 15,913 16,467 45,333 38,726
Data processing expense 60,607 68,573 213,702 227,231
Professional fees 68,784 248,017 310,393 413,685
Other 199,106 221,278 610,003 444,776
----------- ----------- ----------- -----------
Total noninterest expense 1,184,878 1,059,183 3,479,187 2,609,807
----------- ----------- ----------- -----------
(LOSS) INCOME BEFORE TAXES (32,226) 113,925 (234,809) 816,552
INCOME TAX (BENEFIT) EXPENSE (8,819) 24,717 (120,941) 252,020
----------- ----------- ----------- -----------
NET (LOSS) INCOME $ (23,407) $ 89,208 $ (113,868) $ 564,532
=========== =========== =========== ===========
PER SHARE DATA:
Earnings (loss) per share - basic and diluted $ (0.01) $ 0.04 $ (0.06) $ 0.24
Weighted average number of shares outstanding - basic and diluted 1,896,994 2,386,086 2,027,592 2,384,036
Dividends per share 0.03 0.03 0.09 0.07
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 - - (197,357) - - - - (197,357)
ESOP shares committed
to be released - 34,815 - - 110,523 - - 145,338
Stock Compensation
Trust purchases - - - (3,021,300) - - - (3,021,300)
Treasury Stock
purchases - - - - - (3,532,200) - (3,532,200)
Net loss - - (113,868) - - - - (113,868) $(113,868)
Other comprehensive loss:
Unrealized loss
on available for sale
securities, net of
reclassification
adjustment, net of
tax benefit of
$235,715 - - - - - - (457,615) (457,615) $(457,615)
---------
Comprehensive loss - - - - - - $(571,483)
-------- ----------- ---------- ----------- ----------- ----------- ----------- ----------- =========
Balance,
July 31, 2006 $257,888 $24,907,828 $8,657,301 $(3,021,300) $(1,731,535) $(4,113,325) $(1,070,959) $23,885,898
======== =========== ========== =========== =========== =========== =========== ===========
Components of other comprehensive loss: July 31, 2006
Change in net unrealized loss on -------------
investment securities available for sale $ (473,300)
Realized losses included in net loss net of tax benefit of $8,047 15,620
----------
Total $ (457,680)
===========
See accompanying notes to the unaudited consolidated financial statements.
3
SE FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
For the Nine Months Ended July 31,
2006 2005
------------ ------------
OPERATING ACTIVITIES
Net income (loss) $ (113,868) $ 564,532
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Provision for loan losses 368,183 96,393
Depreciation, amortization, and accretion 136,680 161,984
Earnings on bank-owned life insurance (88,384) (63,263)
Decrease in principal and interest on loans sold payable (30,734) 157,265
Increase in accrued interest receivable (194,032) (31,363)
Increase (decrease) in accrued interest payable (13,028) 46,788
Net loss (gain) on sale of investment securities 23,667 (32,206)
Other, net (545,700) (221,441)
------------ ------------
Net cash provided by (used for) operating activities (457,216) 678,689
------------ ------------
INVESTING ACTIVITIES
Investment securities available for sale:
Proceeds from principal repayments and maturities 4,549,486 5,274,180
Purchases (2,991,602) (12,548,509)
Proceeds from the sale of investment securities 2,141,519 8,757,326
Investment securities held to maturity:
Purchases - (2,126,156)
Increase in loans receivable, net (24,136,026) (12,626,601)
Proceeds from sales of real estate acquired through
foreclosure - 80,000
Purchase of Federal Home Loan Bank stock (132,700) (556,600)
Redemption of Federal Home Loan Bank stock 426,800 255,400
Purchase of bank-owned life insurance - (1,000,000)
Purchase of premises and equipment (3,135,836) (137,372)
------------ ------------
Net cash used for investing activities (23,278,359) (14,628,332)
------------ ------------
FINANCING ACTIVITIES
Increase in deposits, net 43,134,914 5,678,144
Net decrease in short-term borrowings (7,800,000) (2,400,000)
Proceeds from Federal Home Loan Bank borrowings - 7,400,000
Repayment of Federal Home Loan Bank borrowings (3,520,796) (1,658,323)
Decrease in advances by borrowers
for taxes and insurance, net (77,988) (68,769)
Purchase of stock for Stock Compensation Trust (3,021,300) -
Purchase of treasury stock (3,532,200) -
Cash dividends (197,357) (166,595)
------------ ------------
Net cash provided by financing activities 24,985,273 8,784,457
------------ ------------
Increase (decrease) in cash and cash equivalents 1,249,698 (5,165,186)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,162,811 6,180,794
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,412,509 $ 1,015,608
============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid:
Interest $ 3,585,102 $ 1,922,380
Income taxes 173,000 328,128
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 nine
months ended July 31, 2006, this activity is shown under the heading
Comprehensive Loss as presented in the Consolidated Statement of Changes in
Stockholders' Equity (Unaudited). For the nine months ended July 31, 2005
comprehensive income totaled $130,991. For the three months ended July 31, 2006
and 2005 comprehensive loss totaled $75,063 and $43,152, 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.
In June 2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"), Accounting
for Uncertainty in Income Taxes. FIN 48 is an interpretation of FAS No. 109,
Accounting for Income Taxes, and it seeks to reduce the diversity in practice
associated with certain aspects of measurement and recognition in accounting for
income taxes. In addition, FIN No. 48 requires expanded disclosure with respect
to the uncertainty in income taxes and is effective for fiscal years beginning
after December 15, 2006. The Company is currently evaluating the impact the
adoption of the standard will have on the Company's results of operations.
5
NOTE 4 - INVESTMENTS
The amortized cost and the estimated market value of investment securities held
to maturity were as follows:
July 31, 2006
-------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ----------- ----------- ------------
Municipal securities $ 2,194,173 $ 24,385 $ (30,996) $ 2,187,562
=========== =========== =========== ============
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:
July 31, 2006
---------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------------- ----------------- ----------------- -----------------
Mortgage-backed securities:
Fannie Mae $ 22,939,164 44 (784,104) $ 22,155,104
Freddie Mac 6,057,277 705 (186,169) 5,871,813
Government National Mortgage
Association securities 1,315,332 715 (14,339) 1,301,708
---------------- ---------------- ---------------- ----------------
Total mortgage-backed
securities 30,311,773 1,464 (984,612) 29,328,625
U.S. Government
agency securities 9,748,760 - (431,679) 9,317,081
Corporate securities 3,026,833 - (97,863) 2,928,970
Municipal securities 3,996,889 1,277 (107,557) 3,890,609
---------------- ---------------- ---------------- ----------------
Total debt securities 47,084,255 2,741 (1,621,711) 45,465,285
Mutual funds 197,036 - (3,672) 193,364
---------------- ---------------- ---------------- ----------------
Total $ 47,281,291 $ 2,741 $ (1,625,383) $ 45,658,649
================ ================ ================ ================
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 July 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 Amortized Estimated
Amortized Cost Market Value Cost Market Value
--------------- --------------- -------------- ---------------
Due less than one year $ - $ - $ 250,184 $ 246,600
Due after one year through five years - - 12,587,747 12,076,464
Due after five years through ten years - - 3,560,367 3,388,171
Due after ten years 2,194,173 2,187,562 30,685,957 29,754,050
-------------- -------------- ------------- --------------
$ 2,194,173 $ 2,187,562 $ 47,084,255 $ 45,465,285
============== ============== ============= ==============
7
NOTE 5 - LOANS RECEIVABLE
Loans receivable consist of the following:
July 31, 2006 October 31, 2005
------------------------------- --------------------------------
Amount Percent Amount Percent
----------------- ------------ ------------------ ------------
Type of Loans:
- ---------------------
Mortgage loans:
One-to four- family (1) $ 62,661,941 57.22% $ 52,817,766 61.95%
Multi-family 1,114,154 1.02% 707,081 0.83%
Commercial real estate 8,732,720 7.97% 5,564,591 6.53%
Construction (2) 21,473,274 19.61% 13,034,853 15.29%
Home equity loans and lines of credit 14,930,756 13.63% 12,715,963 14.91%
Loans on savings accounts 301,244 0.28% 300,955 0.35%
Other 298,432 0.27% 118,856 0.14%
---------------- ---------- ----------------- ----------
Total loans 109,512,521 100.00% 85,260,065 100.00%
========== ==========
Less:
Net deferred loan fees and unamortized
premiums 207,610 150,922
Allowance for loan losses 859,421 506,708
---------------- -----------------
Total loans, net $ 108,445,490 $ 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 $2.7 million at both July 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
average interest rate
Maturity range interest rate range At July 31, At October 31,
Description from to from to 2006 2005
- ----------- ----------- ----------- ----------- -------- -------- ------------- -------------
Short Term Borrowings 04/11/07 04/11/07 5.44% 5.44% 5.44% 5,000,000 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 04/30/07 05/11/15 3.93% 3.30% 4.84% 7,800,000 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% 1,314,121 1,834,917
------------ ------------
Total 16,614,121 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 July 31, 2006 are summarized as follows:
Year Ending Weighted-
October 31, Amount Average Rate
- --------------------- ------------- ------------
2006 $ 5,173,390 5.40%
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 $ 16,614,121 4.73%
============
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 Nine Months Ended
July 31, July 31,
------------------------ ------------------------
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) - (217,591) -
Average unallocated shares held by ESOP (174,381) (192,789) (180,102) (194,839)
Average Stock CompensationTrust shares (215,000) - (153,590) -
---------- ---------- ---------- ----------
Weighted-average common shares and
common stock equivalents used to
calculate basic earnings per share 1,896,994 2,386,086 2,027,592 2,384,036
========= ========= ========= =========
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 July 31, 2006
and July 31, 2005
The Company recorded a net loss of $23.4 thousand for the three months
ended July 31, 2006, versus net income of $89.2 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
July 31, 2006 increased $57.0 thousand to $1.1 million as a result of an
increase in total interest income which was more than offset by an increase in
interest expense. The net interest margin decreased by 43 basis points to 3.06%
for the three months ended July 31, 2006 from 3.49% for the three months ended
July 31, 2005. Interest income for the three months ended July 31, 2006 totaled
$2.5 million as compared to $1.8 million for the three months ended July 31,
2005. This increase of $714.1 thousand was attributable to an increase of $30.4
million in the average balance of interest-earning assets to $157.7 million for
the three months ended July 31, 2006 from $127.2 million for the three months
ended July 31, 2005. This increase was also attributable to an increase in the
average yield on interest-earning assets of 69 basis points to 6.46% for the
three months ended July 31, 2006 from 5.77% for the three months ended July 31,
2005. The average balance of loans receivable for the three months ended July
31, 2006 as compared to the same period of the prior year increased $29.8
million. Loans receivable grew due to increased loan demand and the addition of
new lending officers. The average yield on loans receivable increased 42 basis
points to 7.29% for the three months ended July 31, 2006 from 6.87% for the
three months ended July 31, 2005.
Interest expense increased $657.1 thousand to $1.4 million for the
three months ended July 31, 2006 from $733.0 thousand for the three months ended
July 31, 2005. The increase was attributable to an increase of $44.7 million in
the average balance of interest-bearing liabilities to $140.9 million for the
three months ended July 31, 2006 from $96.2 million for the three months ended
July 31, 2005 as well as an increase in the average cost of funds of 89 basis
points to 3.91% for the three months ended July 31, 2006 from 3.02% for the
three months ended July 31, 2005. The average balance of deposits for the three
months ended July 31, 2006 as compared to the same period of the prior year
increased $49.3 million. The increase in deposits was due mainly to increases in
certificates of deposits, money market accounts and interest bearing demand
deposits of $23.3 million, $23.3 million and $5.4 million, respectively offset
by a decrease in savings accounts of $2.7 million. Deposit growth resulted from
the Bank's two new branch banking offices, focused marketing and market
sensitive pricing. The average cost of deposits increased 101 basis points to
3.80% for the three months ended July 31, 2006 from 2.79% for the three months
ended July 31, 2005. The average balance of borrowings for the three months
ended July 31, 2006 as compared to the same period of the prior year decreased
$4.6 million. The average cost of borrowings increased 83 basis points to 4.71%
for the three months ended July 31, 2006 from 3.88% for the three months ended
July 31, 2005.
Loan Loss Provision. The provision for loan losses was $116.1 thousand
for the three months ended July 31, 2006 compared to $45.4 thousand for the
three months ended July 31, 2005. The increase was primarily attributable to
loan growth. 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,
10
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. Non-interest income was $121.6 thousand for the
three months ended July 31, 2006 compared to $128.5 thousand for the three
months ended July 31, 2005. Gains on the sale of investment securities were
$21.8 thousand for the three months ended July 31, 2005. There were no gains on
the sale of investment securities for the three months ended July 31, 2006.
Earnings on bank-owned life insurance increased $8.0 thousand for the three
months ended July 31, 2006 versus the same period of the prior year due to an
additional purchase of $1.0 million.
Non-interest Expense. Non-interest expense increased $125.7 thousand to
$1.2 million for the three months ended July 31, 2006 compared to $1.1 million
for the three months ended July 31, 2005. The increase in non-interest expense
was due to increases in compensation and employee benefits and occupancy and
equipment costs of $240.9 thousand and $94.8 thousand, respectively, offset by a
decrease in professional fees and other expense of $179.2 thousand and $22.2
thousand. 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 related increases in payroll taxes and employee benefits
expense. 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 decrease in professional fees was
due mainly to non-recurring legal expenses.
Income Taxes. Income tax benefit was $8.8 thousand for the three months
ended July 31, 2006 as compared to an expense of $24.7 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 Nine Months Ended July 31, 2006
and July 31, 2005
The Company recorded a net loss of $113.9 thousand for the nine months
ended July 31, 2006, versus net income of $564.5 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 nine months ended July
31, 2006 increased $118.0 thousand to $3.3 million from $3.2 million for the
same period in 2005 as a result of an increase in interest income which was
partially offset by an increase in interest expense. The net interest margin
decreased by 50 basis points to 3.04% for the nine months ended July 31, 2006
from 3.54% for the nine months ended July 31, 2005. Interest income for the nine
months ended July 31, 2006 totaled $6.9 million as compared to $5.2 million for
the nine months ended July 31, 2005. This increase of $1.7 million was
attributable to an increase of $26.5 million in the average balance of
interest-earning assets to $148.7 million for the nine months ended July 31,
2006 from $122.2 million for the nine months ended July 31, 2005. This increase
was also attributable to an increase in the average yield on interest-earning
assets of 57 basis points to 6.26% for the nine months ended July 31, 2006 from
5.69% for the nine months ended July 31, 2005. The average balance of loans
receivable for the nine months ended July 31, 2006 as compared to the same
period of the prior year increased $23.6 million to $94.5 million from $70.9
million. Loans receivable grew due to increased loan demand and the addition of
new lending officers. The average yield on loans receivable increased 34 basis
points to 7.17% for the nine months ended July 31, 2006 from 6.83% for the nine
months ended July 31, 2005.
Interest expense increased to $1.6 million for the nine months ended
July 31, 2006 to $3.6 million from $2.0 million for the same period in 2005. The
increase was primarily attributable to an increase of $37.3 million in the
average balance of interest-bearing liabilities to $128.1 million for the nine
months ended July 31, 2006 from $90.8 million for the nine months ended July 31,
2005 as well as an increase in the average cost of funds of 84 basis points to
3.73% for the nine months ended July 31, 2006 from 2.89% for the nine months
ended July 31, 2005. The average balances of deposits and FHLB advances for the
nine months ended July 31, 2006 as compared to the same period of the prior year
increased $31.9 million and $5.4 million to $105.4 million and $22.7 million,
respectively. The increase in deposits was mainly due to an increase in
certificates of deposit, money market accounts and interest bearing demand
deposits of $15.8 million, $14.0 million and $4.5 million, respectively, offset
by a decrease in savings accounts of $2.5 million. The average cost of deposits
increased 86 basis points to 3.59% for the nine months ended July 31, 2006 from
2.73% for the nine months ended July 31, 2005. The average cost of borrowings
11
increased 75 basis points to 4.36% for the nine months ended July 31, 2006 from
3.61% for the nine months ended July 31, 2005.
Loan Loss Provision. The provision for loan losses was $368.2 thousand
for the nine months ended July 31, 2006 compared to $96.4 thousand for the nine
months ended July 31, 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. Non-interest income decreased $28.2 thousand to
$312.8 thousand for the nine months ended July 31, 2006 compared to $341.0
thousand for the nine months ended July 31, 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 $32.2 thousand in the same period of the
prior year offset by an increase of $25.1 thousand in earnings on bank-owned
life insurance.
Non-interest Expense. Non-interest expense increased $869.4 thousand to
$3.5 million for the nine months ended July 31, 2006 compared to $2.6 million
for the nine months ended July 31, 2005. The increase in non-interest expense
was due to increases in compensation and employee benefits, occupancy and
equipment costs, and other expense of $576.1 thousand, $238.2 thousand and
$165.2 thousand, respectively offset somewhat by a decrease in professional fees
of $103.3 thousand. 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 the lending
department, as well as related increases in payroll taxes and employee benefits
expense. 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 other expense was due
mainly to increased advertising costs and marketing costs, telephone and
information technology expense, and stationery and supplies expense. The
decrease in professional fees was due to a decrease in accounting fees related
to work performed for Sarbanes Oxley compliance and a decrease in legal fees due
to non-recurring legal expenses.
Income Taxes. Income tax benefit was $120.9 thousand for the nine
months ended July 31, 2006 as compared to an expense of $252.0 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 July 31, 2006 and October 31, 2005
Assets and Liabilities. The Company's total assets increased by $24.5
million to $172.0 million at July 31, 2006 from $147.4 million at October 31,
2005.
Total investment securities decreased by $4.4 million, to $47.9 million
at July 31, 2006 from $52.2 million at October 31, 2005 due mainly to $6.7
million in sales, maturities and repayments offset by $3.0 million in purchases.
Net loans receivable increased $23.8 million, or 28.2%, to $108.4
million at July 31, 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 $9.8 million, $8.4 million, $3.2 million and $2.2
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 $859.4 thousand at July 31,
2006 from $506.7 thousand at October 31, 2005 and represented .78% of the gross
loan portfolio at July 31, 2006. The Company had nonaccrual
12
loans of $197.2 thousand and $69.4 thousand at July 31, 2006 and October 31,
2005, respectively. Classified loans totaled $5.5 million at July 31, 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 $3.0 million to $5.1 million at
July 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 as
well as the acquisition of a future banking office site in Deptford, New Jersey.
Total deposits increased $43.1 million to $130.5 million at July 31,
2006 from $87.4 million at October 31, 2005. The increase was primarily a result
of an increase in certificates of deposit, money market and checking accounts of
$18.7 million, $21.2 million and $4.5 million, respectively, offset by a
decrease in savings accounts of $1.2 million. The increase is primarily
attributable to the opening of two new banking offices in Roxborough and Ardmore
Pennsylvania.
Stockholders' Equity. Stockholders' equity decreased $7.2 million to
$23.9 million at July 31, 2006 from $31.1 million at October 31, 2005 due mainly
to the completion of the 10% stock repurchase plan announced in July 2005 and
the 10% stock repurchase plan announced in January 2006. A total of 465,000
shares of common stock were repurchased at an average price of $14.04 excluding
brokerage commissions. The decrease was also attributable to an increase in the
accumulated other comprehensive loss of $457.7 thousand as a result of a
decrease in the market value of the Company's investment portfolio due to rising
market interest rates, the year to date net loss of $113.9 thousand and
dividends paid of $197.4 thousand.
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 July 31, 2006, cash and cash equivalents totaled
approximately $3.4 million, or 2.0% of total assets, while investment securities
classified as available for sale and certificates of deposit in other financial
institutions totaled approximately $45.9 million, or 26.7% of total assets.
Management believes that the liquidity needs of the Company are satisfied by the
current balance of cash and cash equivalents, readily available access to
traditional funding sources, FHLB advances, and the portion of the investment
and loan portfolios that mature within one year.
Operating activities used net cash of approximately $457.2 thousand for
the nine months ended July 31, 2006 and provided net cash of $678.7 thousand for
the nine months ended July 31, 2005. Net cash used for the nine months ended
July 31, 2006 was due mainly to other operating activities and the provision for
loan losses. Net cash provided for the nine months ended July 31, 2005 was
generated from net income of $564.5 thousand.
Investing activities consist primarily of loan originations and
repayments, investment purchases, sales and maturities and purchases of premises
and equipment. For the nine months ended July 31, 2006 net cash used for
investing activities totaled $23.3 million and primarily consisted of an
increase in net loans receivable of $24.1 million, purchases of investment
securities of $3.0 million and purchases of premises and equipment of $3.1
million in connection with the opening of two new banking offices in Roxborough
and Ardmore PA. Partially offsetting the usage of investing activities was $2.1
million of proceeds from investment security sales and $4.6 million in
maturities and repayments. For the same period ended July 31, 2005, cash usages
totaled $14.6 million and primarily consisted of an increase in net loans
receivable of $12.6 million and purchases of investment securities of $14.7
million. Partially offsetting the usage of investing activities was $14.0
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 nine
months ended July 31, 2006, net cash provided by financing activities totaled
$25.0 million and was
13
principally from an increase in deposits of $43.1 million offset by a decrease
in short-term borrowings of $7.8 million, a decrease in FHLB borrowings of $3.5
million and by the repurchase of the Company's stock in the total amount of $6.5
million, $3.5 million to Treasury and $3.0 million for the Compensation Trust.
For the same period in 2005, net cash provided for financing activities totaled
$8.8 million and was principally from an increase in deposits of $5.7 million
and an increase in FHLB borrowings of $7.4 million offset by the repayment of
short-term borrowings in the amount of $2.4 million and the repayment of FHLB
borrowings of $1.7 million.
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 July 31, 2006, the Bank exceeded the minimum capital
ratio requirements.
14
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Based on their evaluation
of the Company's disclosure controls and procedures (as defined in Rule
13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")), the
Company's principal executive officer and the Company's principal financial
officer have concluded that as of the end of the period covered by this
Quarterly Report on Form 10-QSB such disclosure controls and procedures are
effective.
(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
The Registrant held its Annual Meeting of Stockholders on August 15,
2006. At the Annual Meeting, stockholders voted on the following proposals: (i)
the election of 2 directors, (ii) the ratification of the SE Financial Corp.
2006 Stock Option Plan, (iii) the ratification of the St. Edmond's Federal
Savings Bank 2006 Restricted Stock Plan, and (iv) the ratification of the
appointment of S. R. Snodgrass, A.C. as the Registrant's independent auditor for
the fiscal year ending October 31, 2006. The results of voting at the Annual
Meeting were as follows:
Election of Directors
---------------------
J. William Parker, Jr. 2,047,368 For 187,081 Withheld
Susanne Spinell Shuster 2,045,368 For 189,081 Withheld
Option Plan
-----------
963,687 For 414,306 Against 10,033 Abstain
Restricted Stock Plan
---------------------
944,037 For 423,306 Against 20,683 Abstain
Ratification of Auditors
------------------------
2,199,556 For 32,743 Against 2,150 Abstain
ITEM 5. OTHER INFORMATION
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 *
16
10.4 Form of Management Severance Agreements with Marcy C.
Panzer, Pamela M. Cyr, J. Christopher Jacobsen, and Charles
F. Miller **
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
32 Certifications pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
99.1 Report of Independent Registered Public Accounting Firm
* Incorporated by reference to the 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: September 14, 2006 /s/Pamela M. Cyr
--------------------------------------------
Pamela M. Cyr
President and CEO
(Principal Executive Officer)
Date: September 14, 2006 /s/Douglas R. Moore
--------------------------------------------
Douglas R. Moore
Chief Financial Officer
(Principal Financial and Accounting Officer)
18