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EXCEL - IDEA: XBRL DOCUMENT - Polonia Bancorp Inc | Financial_Report.xls |
EX-32 - EXHIBIT 32 - Polonia Bancorp Inc | v385590_ex32.htm |
EX-31.1 - EXHIBIT 31.1 - Polonia Bancorp Inc | v385590_ex31-1.htm |
EX-31.2 - EXHIBIT 31.2 - Polonia Bancorp Inc | v385590_ex31-2.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2014
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: 0-54850
POLONIA BANCORP, INC.
(Exact name of small business issuer as specified in its charter)
Maryland | 45-3181577 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
3993 Huntingdon Pike, 3rd Floor, Huntingdon Valley, Pennsylvania 19006
(Address of principal executive offices) (Zip Code)
(215) 938-8800 |
(Registrant’s telephone number, including area code) |
Indicate by check mark 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filed, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ¨ | Accelerated Filer | ¨ | Non-accelerated filer | ¨ |
Smaller reporting company | x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
As of August 12, 2014, there were 3,395,776 shares of the registrant’s common stock outstanding.
POLONIA BANCORP, INC.
Table of Contents
2 |
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 30, | December 31, | |||||||
2014 | 2013 | |||||||
ASSETS | ||||||||
Cash and due from banks | $ | 1,561,509 | $ | 1,792,837 | ||||
Interest-bearing deposits with other institutions | 5,946,250 | 13,971,483 | ||||||
Cash and cash equivalents | 7,507,759 | 15,764,320 | ||||||
Investment securities available for sale | 12,741,794 | 15,271,005 | ||||||
Investment securities held to maturity (fair value of $50,382,000 and $51,876,769) | 48,904,078 | 51,319,785 | ||||||
Loans held for sale | 9,662,994 | 6,142,968 | ||||||
Loans receivable | 188,185,750 | 183,428,136 | ||||||
Covered loans | 15,491,987 | 16,523,106 | ||||||
Total loans | 203,677,737 | 199,951,242 | ||||||
Less: allowance for loan losses | 1,382,192 | 1,378,013 | ||||||
Net loans | 202,295,545 | 198,573,229 | ||||||
Accrued interest receivable | 835,884 | 796,294 | ||||||
Federal Home Loan Bank stock | 3,880,500 | 3,675,500 | ||||||
Premises and equipment, net | 4,409,982 | 4,788,182 | ||||||
Bank-owned life insurance | 4,268,052 | 4,264,244 | ||||||
FDIC indemnification asset | 2,027,676 | 2,515,287 | ||||||
Other assets | 2,731,959 | 2,471,754 | ||||||
TOTAL ASSETS | $ | 299,266,223 | $ | 305,582,568 | ||||
LIABILITIES | ||||||||
Deposits | $ | 196,246,128 | $ | 201,322,339 | ||||
FHLB advances – long term | 59,000,000 | 59,000,000 | ||||||
Advances by borrowers for taxes and insurance | 1,486,049 | 1,306,823 | ||||||
Accrued interest payable | 165,530 | 145,434 | ||||||
Other liabilities | 3,006,591 | 3,507,483 | ||||||
TOTAL LIABILITIES | 259,904,298 | 265,282,079 | ||||||
Commitments and contingencies | - | - | ||||||
STOCKHOLDERS’ EQUITY | ||||||||
Preferred stock ($.01 par value; 1,000,000 shares authorized; none issued or outstanding) | - | - | ||||||
Common stock ($.01 par value; 14,000,000 shares authorized; 3,397,776 and 3,511,276 shares issued) | 33,978 | 35,113 | ||||||
Additional paid-in-capital | 25,779,192 | 26,795,498 | ||||||
Retained earnings | 14,865,744 | 14,853,884 | ||||||
Unallocated shares held by Employee Stock Ownership
Plan “ESOP” (190,977 and 200,542 shares) | (1,583,425 | ) | (1,648,366 | ) | ||||
Accumulated other comprehensive income | 266,436 | 264,360 | ||||||
TOTAL STOCKHOLDERS’ EQUITY | 39,361,925 | 40,300,489 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 299,266,223 | $ | 305,582,568 |
See accompanying notes to the unaudited consolidated financial statements.
3 |
CONSOLIDATED STATEMENTS OF INCOME (LOSS) (UNAUDITED)
Three Months | Six Months | |||||||||||||||
Ended June 30, | Ended June 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
INTEREST AND DIVIDEND INCOME | ||||||||||||||||
Loans receivable | $ | 2,346,068 | $ | 2,087,758 | $ | 4,689,669 | $ | 4,138,756 | ||||||||
Investment securities | 428,834 | 477,384 | 869,375 | 973,861 | ||||||||||||
Other interest and dividend income | 51,934 | 3,455 | 95,975 | 8,274 | ||||||||||||
Total interest and dividend income | 2,826,836 | 2,568,597 | 5,655,019 | 5,120,891 | ||||||||||||
INTEREST EXPENSE | ||||||||||||||||
Deposits | 418,886 | 412,577 | 844,361 | 833,356 | ||||||||||||
FHLB advances – long term | 371,979 | 164,376 | 739,871 | 325,814 | ||||||||||||
Advances by borrowers for taxes and insurance | 913 | 745 | 1,861 | 3,472 | ||||||||||||
Total interest expense | 791,778 | 577,698 | 1,586,093 | 1,162,642 | ||||||||||||
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES | 2,035,058 | 1,990,899 | 4,068,926 | 3,958,249 | ||||||||||||
Provision for loan losses | 34,158 | 25,000 | 49,158 | 113,817 | ||||||||||||
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES | 2,000,900 | 1,965,899 | 4,019,768 | 3,844,432 | ||||||||||||
NONINTEREST INCOME | ||||||||||||||||
Service fees on deposit accounts | 32,947 | 35,082 | 63,634 | 65,903 | ||||||||||||
Earnings on bank-owned life insurance | 1,906 | 7,984 | 3,808 | 14,179 | ||||||||||||
Gain on sale of loans, net | 1,019,753 | 1,418,250 | 1,609,916 | 2,581,243 | ||||||||||||
Rental income | 69,179 | 70,272 | 139,681 | 145,130 | ||||||||||||
Other | 3,083 | 57,510 | 146,837 | 88,998 | ||||||||||||
Total noninterest income | 1,126,868 | 1,589,098 | 1,963,876 | 2,895,453 | ||||||||||||
NONINTEREST EXPENSE | ||||||||||||||||
Compensation and employee benefits | 1,853,163 | 2,133,195 | 3,435,459 | 4,127,240 | ||||||||||||
Occupancy and equipment | 347,495 | 350,383 | 756,501 | 699,324 | ||||||||||||
Federal deposit insurance premiums | 85,608 | 78,039 | 170,716 | 155,315 | ||||||||||||
Data processing expense | 109,585 | 108,552 | 221,617 | 207,203 | ||||||||||||
Professional fees | 141,791 | 175,263 | 270,124 | 332,615 | ||||||||||||
Other | 518,460 | 642,555 | 1,096,105 | 1,254,038 | ||||||||||||
Total noninterest expense | 3,056,102 | 3,487,987 | 5,950,522 | 6,775,735 | ||||||||||||
Income (loss) before income tax expense (benefit) | 71,666 | 67,010 | 33,122 | (35,850 | ) | |||||||||||
Income tax expense (benefit) | 29,366 | 20,107 | 21,262 | (16,972 | ) | |||||||||||
NET INCOME (LOSS) | $ | 42,300 | $ | 46,903 | $ | 11,860 | $ | (18,878 | ) | |||||||
EARNINGS PER SHARE – Basic and Diluted | $ | 0.01 | $ | 0.01 | $ | 0.00 | $ | (0.01 | ) |
See accompanying notes to the unaudited consolidated financial statements.
4 |
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Net income (loss) | $ | 42,300 | $ | 46,903 | $ | 11,860 | $ | (18,878 | ) | |||||||
Changes in net unrealized gain (loss) on investment securities available for sale | 26,680 | (201,138 | ) | 3,145 | (182,380 | ) | ||||||||||
Tax effect | (9,071 | ) | 68,387 | (1,069 | ) | 62,010 | ||||||||||
Total other comprehensive income (loss) | 17,609 | (132,751 | ) | 2,076 | (120,370 | ) | ||||||||||
Total comprehensive income (loss) | $ | 59,909 | $ | (85,848 | ) | $ | 13,936 | $ | (139,248 | ) |
See accompanying notes to the unaudited consolidated financial statements.
5 |
POLONIA BANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
Accumulated | ||||||||||||||||||||||||||||
Additional | Unallocated | Other | ||||||||||||||||||||||||||
Common Stock | Paid-In- | Retained | Shared Held | Comprehensive | ||||||||||||||||||||||||
Shares | Amount | Capital | Earnings | by ESOP | Income | Total | ||||||||||||||||||||||
Balance, December 31, 2013 | 3,511,276 | $ | 35,113 | $ | 26,795,498 | $ | 14,853,884 | $ | (1,648,366 | ) | $ | 264,360 | $ | 40,300,489 | ||||||||||||||
Net income | 11,860 | 11,860 | ||||||||||||||||||||||||||
Other comprehensive income, net | 2,076 | 2,076 | ||||||||||||||||||||||||||
Stock options compensation expense | 44,296 | 44,296 | ||||||||||||||||||||||||||
Allocation of unearned ESOP shares | 12,595 | 64,941 | 77,536 | |||||||||||||||||||||||||
Allocation of unearned RSP shares | 61,833 | 61,833 | ||||||||||||||||||||||||||
Repurchase of stock | (113,500 | ) | (1,135 | ) | (1,135,030 | ) | (1,136,165 | ) | ||||||||||||||||||||
Balance, June 30, 2014 | 3,397,776 | $ | 33,978 | $ | 25,779,192 | $ | 14,865,744 | $ | (1,583,425 | ) | $ | 266,436 | $ | 39,361,925 |
See accompanying notes to the unaudited consolidated financial statements.
6 |
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended June 30, | ||||||||
2014 | 2013 | |||||||
OPERATING ACTIVITIES | ||||||||
Net income (loss) | $ | 11,860 | $ | (18,878 | ) | |||
Adjustments to reconcile net loss to net cash provided by (used for) operating activities: | ||||||||
Provision for loan losses | 49,158 | 113,817 | ||||||
Depreciation, amortization, and accretion | 622,187 | 803,530 | ||||||
Proceeds from sale of loans | 30,229,474 | 71,797,153 | ||||||
Net gain on sale of loans | (1,609,916 | ) | (2,581,243 | ) | ||||
Loans originated for sale | (32,139,584 | ) | (68,489,016 | ) | ||||
Loss (gain) on the sale of other real estate owned | 65,921 | (7,553 | ) | |||||
Earnings on bank-owned life insurance | (3,808 | ) | (14,179 | ) | ||||
Deferred federal income taxes | (10,747 | ) | (13,260 | ) | ||||
(Increase) decrease in accrued interest receivable | (39,590 | ) | 27,249 | |||||
Increase in accrued interest payable | 20,096 | 9,935 | ||||||
Decrease (increase) in accrued payroll and commissions | (476,589 | ) | 267,294 | |||||
Compensation expense for stock options, ESOP and restricted stock | 183,665 | 84,555 | ||||||
Other, net | (48,685 | ) | (13,111 | ) | ||||
Net cash (used for) provided by operating activities | (3,146,558 | ) | 1,966,293 | |||||
INVESTING ACTIVITIES | ||||||||
Investment securities available for sale: | ||||||||
Proceeds from principal repayments and maturities | 2,546,216 | 1,291,574 | ||||||
Investment securities held to maturity: | ||||||||
Proceeds from principal repayments and maturities | 3,720,432 | 8,093,106 | ||||||
Purchases | (1,383,038 | ) | (6,062,361 | ) | ||||
Increase in loans receivable, net | (5,331,511 | ) | (31,734,121 | ) | ||||
Decrease in covered loans | 1,032,116 | 3,082,243 | ||||||
Purchases of Federal Home Loan Bank stock | (220,900 | ) | (772,000 | ) | ||||
Redemptions of Federal Home Loan Bank stock | 15,900 | 290,400 | ||||||
Proceeds from the sale of other real estate owned | 469,536 | 234,351 | ||||||
Payments received from FDIC under loss share agreement | 133,990 | 590,117 | ||||||
Purchase of premises and equipment | (59,594 | ) | (210,138 | ) | ||||
Net cash provided by (used for) investing activities | 923,147 | (25,196,829 | ) | |||||
FINANCING ACTIVITIES | ||||||||
Decrease in deposits, net | (5,076,211 | ) | (3,378,179 | ) | ||||
Proceeds from Federal Home Loan Bank advances – long-term | - | 16,000,000 | ||||||
Repayment of Federal Home Loan Bank advance – long-term | - | (3,500,000 | ) | |||||
Increase in advances by borrowers for taxes and insurance, net | 179,226 | 369,706 | ||||||
Re-purchase of stock | (1,136,165 | ) | - | |||||
Net cash (used for) provided by financing activities | (6,033,150 | ) | 9,491,527 | |||||
Decrease in cash and cash equivalents | (8,256,561 | ) | (13,739,009 | ) | ||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 15,764,320 | 25,061,666 | ||||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 7,507,759 | $ | 11,322,657 | ||||
SUPPLEMENTAL CASH FLOW DISCLOSURES | ||||||||
Cash paid: | ||||||||
Interest | $ | 1,565,997 | $ | 1,152,707 | ||||
Income taxes | 425,000 | 300,000 | ||||||
Noncash items: | ||||||||
Loans transferred to other real estate owned | 525,422 | 208,759 | ||||||
Transfer from premises and equipment to other real estate owned | 213,805 | - |
See accompanying notes to the unaudited consolidated financial statements. |
7 |
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. | Summary of Significant Accounting Policies |
Basis of Presentation
Polonia Bancorp, Inc. (the “Company”), a Maryland corporation, was incorporated in August 2011 and organized by Polonia MHC, Polonia Bancorp, and Polonia Bank (the “Bank”) to facilitate the second-step conversion of the Company from the mutual holding company structure to the stock holding company structure (the “Conversion”). Upon consummation of the Conversion, which occurred on November 9, 2012, the Company became the holding company for the Bank and a 100 percent publicly owned stock holding company.
The Bank was incorporated under Pennsylvania law in 1923. The Bank is a federally chartered savings bank located in Huntingdon Valley, Pennsylvania, whose principal sources of revenue emanate from its investment securities portfolio and its portfolio of residential real estate, commercial real estate, and consumer loans, as well as a variety of deposit services offered to its customers through five offices located in the Greater Philadelphia area. As of December 31, 2013, the Bank was subject to regulation by the Office of Comptroller of the Currency (“OCC”) and the Federal Deposit Insurance Corporation (“FDIC”).
The consolidated financial statements include the accounts of the Bank and the Bank’s wholly owned subsidiaries, PBHMC (“PBMHC”), a Delaware investment company, and Community Abstract Agency, LLC (“CAA”). CAA provides title insurance on loans secured by real estate. All significant intercompany transactions have been eliminated in consolidation. The investment in subsidiaries on the parent Company’s financial statements is carried at the parent Company’s equity in the underlying net assets.
On December 10, 2010, Polonia Bank assumed certain of the deposits and acquired certain assets of Earthstar Bank (“Earthstar”), a state charted bank from the FDIC as receiver for Earthstar.
The accompanying unaudited interim financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six month period ended June 30, 2014 are not necessarily indicative of the results that may be expected for the full year. The December 31, 2013 balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. generally accepted accounting principles (“GAAP”). For additional information, refer to the financial statements and footnotes thereto included in the Company’s Form 10-K for the year ended December 31, 2013.
Use of Estimates in the Preparation of Financial Statements. The accounting principles followed by the Company and the methods of applying these principles conform to U.S. generally accepted accounting principles and to general practice within the banking industry. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the Consolidated Balance Sheet date and reported amounts of revenues and expenses for the period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant changes in the near term relate to the determination of the allowance for loan losses, the valuation of deferred tax assets, and the fair value of financial instruments.
8 |
Recent Accounting and Regulatory Pronouncements
In June 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-08, Financial Services – Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements. The amendments in this Update affect the scope, measurement, and disclosure requirements for investment companies under U.S. GAAP. The amendments do all of the following: 1. Change the approach to the investment company assessment in Topic 946, clarify the characteristics of an investment company, and provide comprehensive guidance for assessing whether an entity is an investment Company. 2. Require an investment company to measure noncontrolling ownership interests in other investment companies at fair value rather than using the equity method of accounting. 3. Require the following additional disclosures: (a) the fact that the entity is an investment company and is applying the guidance in Topic 946, (b) information about changes, if any, in an entity’s status as an investment company, and (c) information about financial support provided or contractually required to be provided by an investment company to any of its investees. The amendments in this Update are effective for an entity’s interim and annual reporting periods in fiscal years that begin after December 15, 2013. Earlier application is prohibited. This ASU became effective for the Company on January 1, 2014 and did not have a significant impact on the Company’s financial statements.
In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. This Update applies to all entities that have unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. An unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date. The amendments in this Update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. This ASU became effective for the Company on January 1, 2014 and did not have a significant impact on the Company’s financial statements.
In January 2014, the FASB issued ASU 2014-01, Investments – Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects. The amendments in this Update permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). The amendments in this Update should be applied retrospectively to all periods presented. A reporting entity that uses the effective yield method to account for its investments in qualified affordable housing projects before the date of adoption may continue to apply the effective yield method for those preexisting investments. The amendments in this Update are effective for public business entities for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2014. Early adoption is permitted. This Update is not expected to have a significant impact on the Company’s financial statements.
9 |
In January 2014, the FASB issued ASU 2014-04, Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The amendments in this Update clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendments in this Update are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. An entity can elect to adopt the amendments in this Update using either a modified retrospective transition method or a prospective transition method. This Update is not expected to have a significant impact on the Company’s financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (a new revenue recognition standard). The Update’s core principle is that a company will recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, this update specifies the accounting for certain costs to obtain or fulfill a contract with a customer and expands disclosure requirements for revenue recognition. This Update is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The Company is evaluating the effect of adopting this new accounting Update.
In June 2014, the FASB issued ASU 2014-11, Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. The amendments in this Update change the accounting for repurchase-to-maturity transactions to secured borrowing accounting. For repurchase financing arrangements, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which will result in secured borrowing accounting for the repurchase agreement. The amendments also require enhanced disclosures. The accounting changes in this Update are effective for the first interim or annual period beginning after December 15, 2014. An entity is required to present changes in accounting for transactions outstanding on the effective date as a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. Earlier application is prohibited. The disclosure for certain transactions accounted for as a sale is required to be presented for interim and annual periods beginning after December 15, 2014, and the disclosure for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions accounted for as secured borrowings is required to be presented for annual periods beginning after December 15, 2014, and for interim periods beginning after March 15, 2015. The disclosures are not required to be presented for comparative periods before the effective date. This Update is not expected to have a significant impact on the Company’s financial statements.
In June 2014, the FASB issued ASU 2014-12, Compensation-Stock Compensation (Topic 718): Accounting for Share-Based Payments when the Terms of an Award Provide that a Performance Target Could Be Achieved After the Requisite Service Period. The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The amendments in this Update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. Entities may apply the amendments in this Update either (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. If retrospective transition is adopted, the cumulative effect of applying this Update as of the beginning of the earliest annual period presented in the financial statements should be recognized as an adjustment to the opening retained earnings balance at that date. Additionally, if retrospective transition is adopted, an entity may use hindsight in measuring and recognizing the compensation cost. This Update is not expected to have a significant impact on the Company’s financial statements.
10 |
Reclassification of Comparative Amounts
Certain items previously reported have been reclassified to conform to the current year’s reporting format. Such reclassifications did not affect consolidated net income or consolidated stockholders’ equity.
2. | Earnings Per Share |
There are no convertible securities which would affect the numerator in calculating basic and diluted earnings per share; therefore, net income (loss) as presented on the Consolidated Statement of Income will be used as the numerator.
The following table set forth the composition of the weighted-average shares (denominator) used in the basic and diluted earnings per share computation.
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Net income (loss): | $ | 42,300 | $ | 46,903 | $ | 11,860 | $ | (18,878 | ) | |||||||
Weighted average number of shares issued | 3,424,518 | 3,657,607 | 3,461,306 | 3,657,607 | ||||||||||||
Less weighted average number of unearned ESOP shares | (192,624 | ) | (212,158 | ) | (195,002 | ) | (214,414 | ) | ||||||||
Less weighted average number of nonvested restricted stock awards | (55,354 | ) | - | (56,881 | ) | - | ||||||||||
Weighted average shares outstanding basic | 3,176,540 | 3,445,449 | 3,209,423 | 3,443,193 | ||||||||||||
Dilutive effect of stock options | 27,294 | - | 26,064 | - | ||||||||||||
Weighted average shares outstanding diluted | 3,203,834 | 3,445,449 | 3,235,487 | 3,443,193 | ||||||||||||
Earnings per share: | ||||||||||||||||
Basic | $ | 0.01 | $ | 0.01 | $ | 0.00 | $ | (0.01 | ) | |||||||
Diluted | 0.01 | 0.01 | 0.00 | (0.01 | ) |
At June 30, 2014 there were 54,296 shares of restricted stock outstanding at a price of $10.25 per share and options to purchase 145,124 shares of common stock at a price of $10.25 per share that were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive. At June 30, 2013, there were options to purchase 171,386 shares of common stock at a price of $8.44 per share that were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive.
11 |
3. | Investment Securities |
The amortized cost and fair value of investment securities available for sale and held to maturity are summarized as follows:
June 30, 2014 | ||||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
Available for Sale | ||||||||||||||||
Mortgage-backed securities: | ||||||||||||||||
Fannie Mae | $ | 1,729,933 | $ | 119,736 | $ | - | $ | 1,849,669 | ||||||||
Freddie Mac | 51,568 | 3,173 | - | 54,741 | ||||||||||||
Government National Mortgage Association | 504,186 | 62,110 | - | 566,296 | ||||||||||||
Collateralized mortgage obligations-government sponsored entities | 1,287,217 | 32,951 | (5,501 | ) | 1,314,667 | |||||||||||
Total mortgage-backed securities | 3,572,904 | 217,970 | (5,501 | ) | 3,785,373 | |||||||||||
Corporate securities | 8,765,200 | 199,672 | (8,451 | ) | 8,956,421 | |||||||||||
Total | $ | 12,338,104 | $ | 417,642 | $ | (13,952 | ) | $ | 12,741,794 | |||||||
Held to Maturity | ||||||||||||||||
Mortgage-backed securities: | ||||||||||||||||
Fannie Mae | $ | 36,175,014 | $ | 1,485,166 | $ | (103,348 | ) | $ | 37,556,832 | |||||||
Freddie Mac | 12,729,064 | 272,574 | (176,470 | ) | 12,825,168 | |||||||||||
Total mortgage-backed securities | $ | 48,904,078 | $ | 1,757,740 | $ | (279,818 | ) | $ | 50,382,000 |
December 31, 2013 | ||||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
Available for Sale | ||||||||||||||||
Mortgage-backed securities: | ||||||||||||||||
Fannie Mae | $ | 2,090,446 | $ | 144,110 | $ | - | $ | 2,234,556 | ||||||||
Freddie Mac | 66,483 | 3,888 | - | 70,371 | ||||||||||||
Government National Mortgage Association | 555,967 | 62,546 | (2 | ) | 618,511 | |||||||||||
Collateralized mortgage obligations-government sponsored entities | 1,456,804 | 36,332 | (22,930 | ) | 1,470,206 | |||||||||||
Total mortgage-backed securities | 4,169,700 | 246,876 | (22,932 | ) | 4,393,644 | |||||||||||
Corporate securities | 10,700,760 | 199,172 | (22,571 | ) | 10,877,361 | |||||||||||
Total | $ | 14,870,460 | $ | 446,048 | $ | (45,503 | ) | $ | 15,271,005 | |||||||
Held to Maturity | ||||||||||||||||
Mortgage-backed securities: | ||||||||||||||||
Fannie Mae | $ | 37,615,390 | $ | 1,073,752 | $ | (314,531 | ) | $ | 38,374,611 | |||||||
Freddie Mac | 13,704,395 | 187,302 | (389,539 | ) | 13,502,158 | |||||||||||
Total mortgage-backed securities | $ | 51,319,785 | $ | 1,261,054 | $ | (704,070 | ) | $ | 51,876,769 |
12 |
The following table shows the Company’s gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position.
June 30, 2014 | ||||||||||||||||||||||||
Less Than Twelve Months | Twelve Months or Greater | Total | ||||||||||||||||||||||
Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | |||||||||||||||||||
Mortgage-backed securities: | ||||||||||||||||||||||||
Fannie Mae | $ | - | $ | - | $ | 7,682,913 | $ | (103,348 | ) | $ | 7,682,913 | $ | (103,348 | ) | ||||||||||
Freddie Mac | - | - | 7,555,196 | (176,470 | ) | 7,555,196 | (176,470 | ) | ||||||||||||||||
Collateralized mortgage obligations-government sponsored entities | 248,356 | (3,976 | ) | 174,455 | (1,525 | ) | 422,811 | (5,501 | ) | |||||||||||||||
Total mortgage-backed Securities | 248,356 | (3,976 | ) | 15,412,564 | (281,343 | ) | 15,660,920 | (285,319 | ) | |||||||||||||||
Corporate securities | - | - | 1,491,485 | (8,451 | ) | 1,491,485 | (8,451 | ) | ||||||||||||||||
Total | $ | 248,356 | $ | (3,976 | ) | $ | 16,904,049 | $ | (289,794 | ) | $ | 17,152,405 | $ | (293,770 | ) |
December 31, 2013 | ||||||||||||||||||||||||
Less Than Twelve Months | Twelve Months or Greater | Total | ||||||||||||||||||||||
Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | |||||||||||||||||||
Mortgage-backed securities: | ||||||||||||||||||||||||
Fannie Mae | $ | 10,051,822 | $ | (314,531 | ) | $ | - | $ | - | $ | 10,051,822 | $ | (314,531 | ) | ||||||||||
Freddie Mac | 7,797,111 | (389,539 | ) | - | - | 7,797,111 | (389,539 | ) | ||||||||||||||||
Government National Mortgage Association | 2,924 | (2 | ) | - | - | 2,924 | (2 | ) | ||||||||||||||||
Collateralized mortgage obligations-government sponsored entities | 241,892 | (9,714 | ) | 131,156 | (13,216 | ) | 373,048 | (22,930 | ) | |||||||||||||||
Total mortgage-backed Securities | 18,093,749 | (713,786 | ) | 131,156 | (13,216 | ) | 18,224,905 | (727,002 | ) | |||||||||||||||
Corporate securities | 2,484,955 | (18,866 | ) | 496,295 | (3,705 | ) | 2,981,250 | (22,571 | ) | |||||||||||||||
Total | $ | 20,578,704 | $ | (732,652 | ) | $ | 627,451 | $ | (16,921 | ) | $ | 21,206,155 | $ | (749,573 | ) |
The Company reviews its position quarterly and has determined that at June 30, 2014, the declines outlined in the above table represent temporary declines and the Company does not intend to sell these securities and does not believe they will be required to sell these securities before recovery of their cost basis, which may be at maturity. There were 19 positions that were temporarily impaired at June 30, 2014. The Company has concluded that the unrealized losses disclosed above are not other than temporary but are the result of interest rate changes that are not expected to result in the non-collection of principal and interest during the period.
The amortized cost and fair value of debt securities at June 30, 2014, by contractual maturity, are shown below. Mortgage-backed securities provide for periodic, general monthly, payments of principal and interest and have contractual maturities ranging from 3 to 30 years. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
13 |
Available for Sale | Held to Maturity | |||||||||||||||
Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||||||
Due within one year | $ | 501,443 | $ | 504,585 | $ | - | $ | - | ||||||||
Due after one year through five years | 7,859,837 | 8,038,126 | - | - | ||||||||||||
Due after five years through ten years | 2,082,300 | 2,190,624 | 9,787,968 | 10,296,826 | ||||||||||||
Due after ten years | 1,894,524 | 2,008,459 | 39,116,110 | 40,085,174 | ||||||||||||
Total | $ | 12,338,104 | $ | 12,741,794 | $ | 48,904,078 | $ | 50,382,000 |
The Company had no sales of investment securities for the three and six month periods ended June 30, 2014 and 2013.
4. | Loans Receivable |
Loans receivable consist of the following:
June 30, | December 31, | |||||||
2014 | 2013 | |||||||
Mortgage Loans: | ||||||||
One-to-four family | $ | 171,434,353 | $ | 167,233,407 | ||||
Multi-family and commercial real estate | 10,689,033 | 10,563,787 | ||||||
182,123,386 | 177,797,194 | |||||||
Home equity loans | 2,254,838 | 2,365,094 | ||||||
Home equity lines of credit (“HELOCs”) | 1,136,388 | 512,749 | ||||||
Education loans | 1,706,599 | 1,806,132 | ||||||
Other consumer loans | 847 | 771 | ||||||
Non-covered consumer loans purchased | 785,146 | 828,874 | ||||||
Covered loans | 15,491,987 | 16,523,106 | ||||||
203,499,191 | 199,833,920 | |||||||
Less: | ||||||||
Net deferred loan costs | (178,546 | ) | (117,322 | ) | ||||
Allowance for loan losses | 1,382,192 | 1,378,013 | ||||||
Total | $ | 202,295,545 | $ | 198,573,229 |
The components of covered loans by portfolio class as of June 30, 2014 and December 31, 2013 were as follows:
June 30, | December 31, | |||||||
2014 | 2013 | |||||||
Mortgage loans: | ||||||||
One-to-four family | $ | 8,719,140 | $ | 9,812,449 | ||||
Multi-family and commercial real estate | 6,601,628 | 6,553,786 | ||||||
15,320,768 | 16,366,235 | |||||||
Commercial | 171,219 | 156,871 | ||||||
Total Loans | $ | 15,491,987 | $ | 16,523,106 |
14 |
The carrying value of loans acquired and accounted for in accordance with ASC 310-30 was determined by projecting discounted contractual cash flows.
The outstanding balance, including interest, and carrying values of loans acquired were as follows:
June 30, 2014 | December 31, 2013 | |||||||||||||||
Acquired Loans | Acquired Loans | |||||||||||||||
Acquired Loans | Without Specific | Acquired Loans | Without Specific | |||||||||||||
With Specific | Evidence of | With Specific | Evidence of | |||||||||||||
Evidence of | Deterioration in | Evidence of | Deterioration in | |||||||||||||
Deterioration in | Credit Quality | Deterioration in | Credit Quality | |||||||||||||
Credit Quality | (ASC 310-30 | Credit Quality | (ASC 310-30 | |||||||||||||
(ASC 310-30) | Analogized) | (ASC 310-30) | Analogized) | |||||||||||||
Outstanding balance | $ | 1,039,159 | $ | 24,725,436 | $ | 1,284,523 | $ | 26,718,512 | ||||||||
Carrying amount, net of allowance | $ | 605,836 | $ | 15,671,297 | $ | 775,149 | $ | 16,576,831 |
During the six months ended June 30, 2014, the Company did not record a provision or charge-off for increases in the expected losses for acquired loans with specific evidence of deterioration in credit quality. During the six months ended June 30, 2013, the Company recorded a provision and charge-off of $38,817 for increases in the expected losses for acquired loans with specific evidence of deterioration in credit quality.
Changes in the accretable yield for acquired loans were as follows for the three and six months ended June 30, 2014 and 2013.
Three Months Ended June 30, 2014 | Three Months Ended June 30, 2013 | |||||||
Acquired Loans | Acquired Loans | |||||||
Without Specific | Without Specific | |||||||
Evidence of | Evidence of | |||||||
Deterioration in | Deterioration in | |||||||
Credit Quality | Credit Quality | |||||||
(ASC 310-30 | (ASC 310-30 | |||||||
Analogized) | Analogized) | |||||||
Balance at beginning of period | $ | 7,159,533 | $ | 9,927,911 | ||||
Reclassifications and other | (48,699 | ) | (368,683 | ) | ||||
Accretion | (273,157 | ) | (334,753 | ) | ||||
Balance at end of period | $ | 6,837,677 | $ | 9,224,475 |
Six Months Ended June 30, 2014 | Six Months Ended June 30, 2013 | |||||||
Acquired Loans | Acquired Loans | |||||||
Without Specific | Without Specific | |||||||
Evidence of | Evidence of | |||||||
Deterioration in | Deterioration in | |||||||
Credit Quality | Credit Quality | |||||||
(ASC 310-30 | (ASC 310-30 | |||||||
Analogized) | Analogized) | |||||||
Balance at beginning of period | $ | 7,791,222 | $ | 11,044,664 | ||||
Reclassifications and other | (400,129 | ) | (1,122,827 | ) | ||||
Accretion | (553,416 | ) | (697,362 | ) | ||||
Balance at end of period | $ | 6,837,677 | $ | 9,224,475 |
15 |
The $273,157 and $334,753 recognized as accretion represents the interest income earned on acquired loans for the three months ended June 30, 2014 and 2013, respectively and $553,416 and $697,362 for the six months ended June 30, 2014 and 2013, respectively. Included in reclassifications and other for loans acquired without specific evidence of deterioration in credit quality was $122,726 and $9,069 of reclassifications from non-accretable discounts to accretable discounts for the three months ended June 30, 2014 and 2013 and $232,207 and $146,799 for the six months ended June 30, 2014 and 2013, respectively. The remaining $(171,425) and $(377,752) change in the accretable yield represents reductions in contractual interest due to contractual principal prepayments for the three months ended June 30, 2014 and 2013 and $(632,336) and $(1,269,626) for the six months ended June 30, 2014 and 2013, respectively.
5. | Allowance for Loan Losses |
Management has an established methodology to determine the adequacy of the allowance for loan losses that assesses the risks and losses inherent in the loan portfolio. For purposes of determining the allowance for loan losses, the Company has segmented certain loans in the portfolio by product type. Loans are segmented into the following pools: one-to-four family real estate, multi-family and commercial real estate, commercial loans, home equity loans, home equity lines of credit, and education and other consumer loans. Historical loss percentages for each risk category are calculated and used as the basis for calculating allowance allocations. These historical loss percentages are calculated over a three year period for all portfolio segments. Certain qualitative factors are then added to the historical allocation percentage to get the adjusted factor to be applied to nonclassified loans. The following qualitative factors are analyzed for each portfolio segment:
· | Levels of and trends in delinquencies and classifications |
· | Trends in volume and terms |
· | Changes in collateral |
· | Changes in management and lending staff |
· | Economic trends |
· | Concentrations of credit |
· | Changes in lending policies |
· | Changes in loan review |
· | External factors |
These qualitative factors are reviewed each quarter and adjusted based upon relevant changes within the portfolio.
The total allowance reflects management’s estimate of loan losses inherent in the loan portfolio at the Consolidated Balance Sheet date. The Company considers the allowance for loan losses adequate to cover loan losses inherent in the loan portfolio, at June 30, 2014.
16 |
The following table summarizes changes in the allowance for loan losses:
Allowance
for Loan Losses For the Three and Six Months Ended June 30, 2014 and 2013 | ||||||||||||||||||||||||||||||||
One-to- Four Family Real Estate | Multi-Family and Commercial Real Estate | Commercial | Home Equity | HELOCs | Education and Other Consumer | Unallocated | Total | |||||||||||||||||||||||||
Three Months Ended June 30, 2014 | ||||||||||||||||||||||||||||||||
Allowance for Loan Losses: | ||||||||||||||||||||||||||||||||
Balance at beginning of period | $ | 841,994 | $ | 459,396 | $ | - | $ | 9,329 | $ | 7,525 | $ | 7,483 | $ | 55,979 | $ | 1,381,706 | ||||||||||||||||
Provision (credit) for loan losses | 70,125 | 20,672 | - | (685 | ) | 392 | (367 | ) | (55,979 | ) | 34,158 | |||||||||||||||||||||
Charge-offs | (33,672 | ) | - | - | - | - | - | - | (33,672 | ) | ||||||||||||||||||||||
Recoveries | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Net (charge-offs) recoveries | (33,672 | ) | - | - | - | - | - | - | (33,672 | ) | ||||||||||||||||||||||
Balance at end of period | $ | 878,447 | $ | 480,068 | $ | - | $ | 8,644 | $ | 7,917 | $ | 7,116 | $ | - | $ | 1,382,192 | ||||||||||||||||
Three Months Ended June 30, 2013 | ||||||||||||||||||||||||||||||||
Allowance for Loan Losses: | ||||||||||||||||||||||||||||||||
Balance at beginning of period | $ | 531,579 | $ | 779,608 | $ | - | $ | 12,851 | $ | 9,314 | $ | 10,527 | $ | 155,554 | $ | 1,499,433 | ||||||||||||||||
Provision (credit) for loan losses | 132,997 | (109,216 | ) | - | (3,104 | ) | 94,814 | (2,722 | ) | (87,769 | ) | 25,000 | ||||||||||||||||||||
Charge-offs | - | (359,994 | ) | - | - | (100,958 | ) | - | - | (460,952 | ) | |||||||||||||||||||||
Recoveries | 2,328 | - | - | - | - | - | - | 2,328 | ||||||||||||||||||||||||
Net (charge-offs) recoveries | 2,328 | (359,994 | ) | - | - | (100,958 | ) | - | - | (458,624 | ) | |||||||||||||||||||||
Balance at end of period | $ | 666,904 | $ | 310,398 | $ | - | $ | 9,747 | $ | 3,170 | $ | 7,805 | $ | 67,785 | $ | 1,065,809 | ||||||||||||||||
Six Months Ended June 30, 2014 | ||||||||||||||||||||||||||||||||
Allowance for Loan Losses: | ||||||||||||||||||||||||||||||||
Balance at beginning of period | $ | 908,591 | $ | 444,909 | $ | - | $ | 4,730 | $ | 2,922 | $ | 7,858 | $ | 9,003 | $ | 1,378,013 | ||||||||||||||||
Provision (credit) for loan losses | 14,835 | 35,159 | - | 3,914 | 4,995 | (742 | ) | (9,003 | ) | 49,158 | ||||||||||||||||||||||
Charge-offs | (44,979 | ) | - | - | - | - | - | - | (44,979 | ) | ||||||||||||||||||||||
Recoveries | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Net (charge-offs) recoveries | (44,979 | ) | - | - | - | - | - | - | (44,979 | ) | ||||||||||||||||||||||
Balance at end of period | $ | 878,447 | $ | 480,068 | $ | - | $ | 8,644 | $ | 7,917 | $ | 7,116 | $ | - | $ | 1,382,192 | ||||||||||||||||
Six Months ended June 30, 2013 | ||||||||||||||||||||||||||||||||
Allowance for Loan Losses: | ||||||||||||||||||||||||||||||||
Balance at beginning of period | $ | 532,572 | $ | 771,426 | $ | - | $ | 13,925 | $ | 33,392 | $ | 11,150 | $ | 145,305 | $ | 1,507,770 | ||||||||||||||||
Provision (credit) for loan losses | 229,158 | (101,034 | ) | - | (4,178 | ) | 70,736 | (3,345 | ) | (77,520 | ) | 113,817 | ||||||||||||||||||||
Charge-offs | (97,154 | ) | (359,994 | ) | - | - | (100,958 | ) | - | - | (558,106 | ) | ||||||||||||||||||||
Recoveries | 2,328 | - | - | - | - | - | - | 2,328 | ||||||||||||||||||||||||
Net (charge-offs) recoveries | (94,826 | ) | (359,994 | ) | - | - | (100,958 | ) | - | - | (555,778 | ) | ||||||||||||||||||||
Balance at end of period | $ | 666,904 | $ | 310,398 | $ | - | $ | 9,747 | $ | 3,170 | $ | 7,805 | $ | 67,785 | $ | 1,065,809 |
17 |
The following tables present the allowance for credit losses and recorded investments in loans by category:
At June 30, 2014 | ||||||||||||||||||||||||||||||||
One-to- Four Family Real Estate | Multi-family and Commercial Real Estate | Commercial | Home Equity | HELOCs | Education and Other Consumer | Unallocated | Total | |||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||||||
Ending balance | $ | 878,447 | $ | 480,068 | $ | - | $ | 8,644 | $ | 7,917 | $ | 7,116 | $ | - | $ | 1,382,192 | ||||||||||||||||
Ending balance: individually evaluated for impairment | $ | 10,870 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 10,870 | ||||||||||||||||
Ending balance: collectively evaluated for impairment | $ | 867,577 | $ | 480,068 | $ | - | $ | 8,644 | $ | 7,917 | $ | 7,116 | $ | - | $ | 1,371,322 | ||||||||||||||||
Ending balance: loans acquired with deteriorated credit quality | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||
Loans: | ||||||||||||||||||||||||||||||||
Ending balance | $ | 180,153,493 | $ | 17,290,661 | $ | 171,219 | $ | 2,254,838 | $ | 1,136,388 | $ | 2,492,592 | $ | - | $ | 203,499,191 | ||||||||||||||||
Ending balance: individually evaluated for impairment | $ | 2,109,161 | $ | 489,050 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 2,598,211 | ||||||||||||||||
Ending balance: collectively evaluated for impairment | $ | 169,325,192 | $ | 10,199,983 | $ | - | $ | 2,254,838 | $ | 1,136,388 | $ | 1,707,446 | $ | - | $ | 184,623,847 | ||||||||||||||||
Ending balance: loans acquired with deteriorated credit quality | $ | 8,719,140 | $ | 6,601,628 | $ | 171,219 | $ | - | $ | - | $ | 785,146 | $ | - | $ | 16,277,133 |
At December 31, 2013 | ||||||||||||||||||||||||||||||||
One-to- Four Family Real Estate | Multi-family
and Commercial Real Estate | Commercial | Home Equity | HELOCs | Education and Other Consumer | Unallocated | Total | |||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||||||
Ending balance | $ | 908,591 | $ | 444,909 | $ | - | $ | 4,730 | $ | 2,922 | $ | 7,858 | $ | 9,003 | $ | 1,378,013 | ||||||||||||||||
Ending balance: individually evaluated for impairment | $ | 10,870 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 10,870 | ||||||||||||||||
Ending balance: collectively evaluated for impairment | $ | 897,721 | $ | 444,909 | $ | - | $ | 4,730 | $ | 2,922 | $ | 7,858 | $ | 9,003 | $ | 1,367,143 | ||||||||||||||||
Ending balance: loans acquired with deteriorated credit quality | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||
Loans: | ||||||||||||||||||||||||||||||||
Ending balance | $ | 177,045,856 | $ | 17,117,573 | $ | 156,871 | $ | 2,365,094 | $ | 512,749 | $ | 2,635,777 | $ | - | $ | 199,833,920 | ||||||||||||||||
Ending balance: individually evaluated for impairment | $ | 2,615,630 | $ | 496,165 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 3,111,795 | ||||||||||||||||
Ending balance: collectively evaluated for impairment | $ | 164,617,777 | $ | 10,067,622 | $ | - | $ | 2,365,094 | $ | 512,749 | $ | 1,806,903 | $ | - | $ | 179,370,145 | ||||||||||||||||
Ending balance: loans acquired with deteriorated credit quality | $ | 9,812,449 | $ | 6,553,786 | $ | 156,871 | $ | - | $ | - | $ | 828,874 | $ | - | $ | 17,351,980 |
Credit Quality Information
The following tables represent credit exposures by internally assigned grades at June 30, 2014 and December 31, 2013. The grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled or at all. The Company’s internal credit risk grading system is based on experiences with similarly graded loans.
The Company’s internally assigned grades are as follows:
Pass – loans which are protected by the current net worth and paying capacity of the obligor or by the value of the underlying collateral. There are six sub-grades within the pass category to further distinguish the loan.
18 |
Special Mention – loans where a potential weakness or risk exists, which could cause a more serious problem if not corrected.
Substandard – loans that have a well-defined weakness based on objective evidence and are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.
Doubtful – loans classified as Doubtful have all the weaknesses inherent in a Substandard asset. In addition, these weaknesses make collection or liquidation in full highly questionable and improbable, based on existing circumstances.
Loss – loans classified as a Loss are considered uncollectible, or of such value that continuance as an asset is not warranted.
The following table presents classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard, Doubtful, and Loss within the internal risk rating system as of June 30, 2014 and December 31, 2013.
June 30, | December 31, | |||||||||||||||
2014 | 2013 | |||||||||||||||
Multi-Family | Multi-Family | |||||||||||||||
and | and | |||||||||||||||
Commercial | Commercial | |||||||||||||||
Real Estate | Commercial | Real Estate | Commercial | |||||||||||||
Pass | $ | 13,946,344 | $ | 171,219 | $ | 12,652,301 | $ | 156,871 | ||||||||
Special Mention | 1,893,079 | - | 2,084,231 | - | ||||||||||||
Substandard | 1,451,238 | - | 2,381,041 | - | ||||||||||||
Doubtful | - | - | - | - | ||||||||||||
Loss | - | - | - | - | ||||||||||||
Total | $ | 17,290,661 | $ | 171,219 | $ | 17,117,573 | $ | 156,871 |
Multi-family and commercial real estate and commercial loans are categorized by risk classification as of June 30, 2014 and December 31, 2013. For one-to-four family real estate, home equity, HELOCs, and education and other consumer loans, the Company evaluates credit quality based on the performance of the individual credits. Payment activity is reviewed by management on a monthly basis to determine how loans are performing. Loans are considered to be nonperforming when they become 90 days past due.
The following table presents recorded investment in the loan classes based on payment activity as of June 30, 2014 and December 31, 2013:
At June 30, 2014 | ||||||||||||||||||||
One-to- Four Family Real Estate | Home Equity | HELOCs | Education and Other Consumer | Non-covered Consumer Loans Purchased | ||||||||||||||||
Performing | $ | 178,469,708 | $ | 2,254,838 | $ | 1,136,388 | $ | 1,626,013 | $ | 785,146 | ||||||||||
Nonperforming | 1,683,785 | - | - | 81,433 | - | |||||||||||||||
Total | $ | 180,153,493 | $ | 2,254,838 | $ | 1,136,388 | $ | 1,707,446 | $ | 785,146 |
At December 31, 2013 | ||||||||||||||||||||
One-to- Four Family Real Estate | Home Equity | HELOCs | Education and Other Consumer | Non-covered Consumer Loans Purchased | ||||||||||||||||
Performing | $ | 174,403,839 | $ | 2,365,094 | $ | 512,749 | $ | 1,697,342 | $ | 828,874 | ||||||||||
Nonperforming | 2,642,017 | - | - | 109,561 | - | |||||||||||||||
Total | $ | 177,045,856 | $ | 2,365,094 | $ | 512,749 | $ | 1,806,903 | $ | 828,874 |
19 |
The following table presents an aging analysis of the recorded investment of past-due loans.
At June 30, 2014 | ||||||||||||||||||||||||||||
Recorded | ||||||||||||||||||||||||||||
Total | Investment > | |||||||||||||||||||||||||||
30-59 Days Past Due | 60-89 Days Past Due | 90 Days Or Greater | Total Past Due | Current | Loans Receivable | 90 Days and Accruing | ||||||||||||||||||||||
One-to-four family real estate | $ | 269,402 | $ | 683,137 | $ | 1,683,785 | $ | 2,636,324 | $ | 177,517,169 | $ | 180,153,493 | $ | - | ||||||||||||||
Multi-family and commercial real estate | 82,303 | - | 288,042 | 370,345 | 16,920,316 | 17,290,661 | - | |||||||||||||||||||||
Commercial | - | - | - | - | 171,219 | 171,219 | - | |||||||||||||||||||||
Home equity | - | - | - | - | 2,254,838 | 2,254,838 | - | |||||||||||||||||||||
HELOCs | - | - | - | - | 1,136,388 | 1,136,388 | - | |||||||||||||||||||||
Education and other consumer | 4,832 | 65,252 | 81,433 | 151,517 | 1,555,929 | 1,707,446 | - | |||||||||||||||||||||
Non-covered consumer loans purchased | 15,279 | - | - | 15,279 | 769,867 | 785,146 | - | |||||||||||||||||||||
Total | $ | 371,816 | $ | 748,389 | $ | 2,053,260 | $ | 3,173,465 | $ | 200,325,726 | $ | 203,499,191 | $ | - |
At December 31, 2013 | ||||||||||||||||||||||||||||
Recorded | ||||||||||||||||||||||||||||
Total | Investment > | |||||||||||||||||||||||||||
30-59 Days Past Due | 60-89 Days Past Due | 90 Days Or Greater | Total Past Due | Current | Loans Receivable | 90 Days and Accruing | ||||||||||||||||||||||
One-to-four family real estate | $ | 1,079,037 | $ | 505,505 | $ | 2,642,017 | $ | 4,226,559 | $ | 172,819,297 | $ | 177,045,856 | $ | - | ||||||||||||||
Multi-family and commercial real estate | 405,877 | - | 110,501 | 516,378 | 16,601,195 | 17,117,573 | - | |||||||||||||||||||||
Commercial | - | - | - | - | 156,871 | 156,871 | - | |||||||||||||||||||||
Home equity | - | - | - | - | 2,365,094 | 2,365,094 | - | |||||||||||||||||||||
HELOCs | - | - | - | - | 512,749 | 512,749 | - | |||||||||||||||||||||
Education and other consumer | 19,679 | 56,177 | 109,561 | 185,417 | 1,621,486 | 1,806,903 | - | |||||||||||||||||||||
Non-covered consumer loans purchased | 875 | - | - | 875 | 827,999 | 828,874 | - | |||||||||||||||||||||
Total | $ | 1,505,468 | $ | 561,682 | $ | 2,862,079 | $ | 4,929,229 | $ | 194,904,691 | $ | 199,833,920 | $ | - |
Nonaccrual Loans
Loans are generally considered for nonaccrual status upon 90 days delinquency. When a loan is placed in nonaccrual status, previously accrued but unpaid interest is deducted from interest income.
On the following table are the loans on nonaccrual status as of June 30, 2014 and December 31, 2013. The balances are presented by class of loans.
June 30, 2014 | December 31, 2013 | |||||||
One-to-four family mortgage | $ | 1,683,785 | $ | 2,642,017 | ||||
Multi-family and commercial real estate | 288,042 | 110,501 | ||||||
Education and other consumer | 81,433 | 109,561 | ||||||
Total | $ | 2,053,260 | $ | 2,862,079 |
Interest income on loans would have been increased by approximately $25,159 and $58,633 during the three months ended June 30, 2014 and 2013 and $57,050 and $108,201 during the six months ended June 30, 2014 and 2013, respectively, if these loans had performed in accordance with their original terms. Management evaluates commercial real estate loans which are 90 days or more past due for impairment.
20 |
Impaired Loans
The following table presents the recorded investment and unpaid principal balances for impaired loans and related allowance, if applicable.
June 30, 2014 | ||||||||||||
Recorded Investment | Unpaid Principal Balance | Related Allowance | ||||||||||
With no related allowance recorded: | ||||||||||||
One-to-four family real estate | $ | 1,974,303 | $ | 2,406,573 | $ | - | ||||||
Multi-family and commercial real estate | 1,054,460 | 1,411,256 | - | |||||||||
Commercial | - | 109,374 | - | |||||||||
With an allowance recorded: | ||||||||||||
One-to-four family real estate | $ | 683,735 | $ | 683,735 | $ | 10,870 | ||||||
Multi-family and commercial real estate | - | - | - | |||||||||
Commercial | - | - | - | |||||||||
Total: | ||||||||||||
One-to-four family real estate | $ | 2,658,038 | $ | 3,090,308 | $ | 10,870 | ||||||
Multi-family and commercial real estate | 1,054,460 | 1,411,256 | - | |||||||||
Commercial | - | 109,374 | - |
December 31, 2013 | ||||||||||||
Recorded Investment | Unpaid Principal Balance | Related Allowance | ||||||||||
With no related allowance recorded: | ||||||||||||
One-to-four family real estate | $ | 2,857,990 | $ | 3,331,488 | $ | - | ||||||
Multi-family and commercial real estate | 775,984 | 984,402 | - | |||||||||
Commercial | - | 134,258 | - | |||||||||
With an allowance recorded: | ||||||||||||
One-to-four family real estate | $ | 691,815 | $ | 691,815 | $ | 10,870 | ||||||
Multi-family and commercial real estate | - | - | - | |||||||||
Commercial | - | - | - | |||||||||
Total: | ||||||||||||
One-to-four family real estate | $ | 3,549,805 | $ | 4,023,303 | $ | 10,870 | ||||||
Multi-family and commercial real estate | 775,984 | 984,402 | - | |||||||||
Commercial | - | 134,258 | - |
21 |
The following table represents the average recorded investments in the impaired loans and the related amount of interest recognized during the time within the period that the impaired loans were impaired.
Three Months Ended | ||||||||||||||||
June 30, | ||||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Average Recorded Investment | Average Recorded Investment | Interest Income Recognized | Interest Income Recognized | |||||||||||||
With no related allowance recorded: | ||||||||||||||||
One-to-four family real estate | $ | 1,991,752 | $ | 900,956 | $ | 5,050 | $ | 1,057 | ||||||||
Multi-family and commercial real estate | 1,056,474 | 894,408 | 14,425 | 9,018 | ||||||||||||
Home equity | - | 10,579 | - | - | ||||||||||||
Commercial | - | - | 1,159 | - | ||||||||||||
With an allowance recorded: | ||||||||||||||||
One-to-four family real estate | $ | 684,517 | $ | 930,179 | $ | 4,451 | $ | 8,615 | ||||||||
Multi-family and commercial real estate | - | - | - | - | ||||||||||||
Home equity | - | - | - | - | ||||||||||||
Commercial | - | - | - | - | ||||||||||||
Total: | ||||||||||||||||
One-to-four family real estate | $ | 2,676,269 | $ | 1,831,135 | $ | 9,501 | $ | 9,672 | ||||||||
Multi-family and commercial real estate | 1,056,474 | 894,408 | 14,425 | 9,018 | ||||||||||||
Home equity | - | 10,579 | - | - | ||||||||||||
Commercial | - | - | 1,159 | - |
Six Months Ended | ||||||||||||||||
June 30, | ||||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Average Recorded Investment | Average Recorded Investment | Interest Income Recognized | Interest Income Recognized | |||||||||||||
With no related allowance recorded: | ||||||||||||||||
One-to-four family real estate | $ | 2,113,048 | $ | 794,846 | $ | 12,285 | $ | 690 | ||||||||
Multi-family and commercial real estate | 1,108,936 | 895,078 | 24,001 | 18,650 | ||||||||||||
Home equity | - | 1,763 | - | - | ||||||||||||
Commercial | - | - | 2,416 | - | ||||||||||||
With an allowance recorded: | ||||||||||||||||
One-to-four family real estate | $ | 686,247 | $ | 853,136 | $ | 10,264 | $ | 17,512 | ||||||||
Multi-family and commercial real estate | - | - | - | - | ||||||||||||
Home equity | - | - | - | - | ||||||||||||
Commercial | - | - | - | - | ||||||||||||
Total: | ||||||||||||||||
One-to-four family real estate | $ | 2,799,295 | $ | 1,647,982 | $ | 22,549 | $ | 18,202 | ||||||||
Multi-family and commercial real estate | 1,108,936 | 895,078 | 24,001 | 18,650 | ||||||||||||
Home equity | - | 1,763 | - | - | ||||||||||||
Commercial | - | - | 2,416 | - |
Loan Modifications and Troubled Debt Restructurings
A loan is considered to be a troubled debt restructuring loan when the Company grants a concession to the borrower because of the borrower’s financial condition that it would not otherwise consider. Such concessions include the reduction of interest rates, forgiveness of principal or interest, or other modifications of interest rates that are less than the current market rate for new obligations with similar risk.
22 |
Loan modifications that are considered troubled debt restructurings completed during the three and six months ended June 30, 2014 and 2013, respectively were as follows:
(In Thousands, Except Number of Contracts) | Three Months Ended June 30, | |||||||||||||||||||||||
2014 | 2013 | |||||||||||||||||||||||
Number of Contracts | Pre- Modification Outstanding Recorded Investment | Post- Modification Outstanding Recorded Investment | Number of Contracts | Pre- Modification Outstanding Recorded Investment | Post- Modification Outstanding Recorded Investment | |||||||||||||||||||
Troubled debt restructurings | ||||||||||||||||||||||||
One-to-four family mortgage | 1 | $ | 28,615 | $ | 28,615 | 1 | $ | 160,992 | $ | 160,992 |
(In Thousands, Except Number of Contracts) | Six Months Ended June 30, | |||||||||||||||||||||||
2014 | 2013 | |||||||||||||||||||||||
Number of Contracts | Pre- Modification Outstanding Recorded Investment | Post- Modification Outstanding Recorded Investment | Number of Contracts | Pre- Modification Outstanding Recorded Investment | Post- Modification Outstanding Recorded Investment | |||||||||||||||||||
Troubled debt restructurings | ||||||||||||||||||||||||
One-to-four family mortgage | 1 | $ | 28,615 | $ | 28,615 | 2 | $ | 283,456 | $ | 283,456 |
There were no troubled debt restructurings modified within the past year that subsequently defaulted during the three or six month periods ended June 30, 2014 and 2013.
6. | Indemnification Asset |
Changes in the FDIC indemnification asset during the three and six months ended June 30, 2014 and 2013, respectively were as follows:
2014 | 2013 | |||||||
Balance at March 31 | $ | 2,188,462 | $ | 3,793,787 | ||||
Cash payments received or receivable due from the FDIC | - | (409,528 | ) | |||||
Increase in FDIC share of estimated losses | - | - | ||||||
Net amortization | (160,786 | ) | (296,228 | ) | ||||
Balance at June 30 | $ | 2,027,676 | $ | 3,088,031 |
2014 | 2013 | |||||||
Balance at December 31 | $ | 2,515,287 | $ | 4,234,931 | ||||
Cash payments received or receivable due from the FDIC | (133,990 | ) | (590,117 | ) | ||||
Increase in FDIC share of estimated losses | - | - | ||||||
Net amortization | (353,621 | ) | (556,783 | ) | ||||
Balance at June 30 | $ | 2,027,676 | $ | 3,088,031 |
23 |
7. | Deposits |
Deposit accounts are summarized as follows for the periods ending June 30, 2014 and December 31, 2013.
June 30, 2014 | December 31, 2013 | |||||||||||||||
Amount | % | Amount | % | |||||||||||||
Non-interest bearing demand | $ | 4,536,578 | 2.31 | % | $ | 5,724,923 | 2.84 | % | ||||||||
NOW accounts | 15,459,203 | 7.88 | 14,685,650 | 7.30 | ||||||||||||
Money market deposit | 34,249,282 | 17.45 | 36,771,038 | 18.27 | ||||||||||||
Savings | 30,972,051 | 15.78 | 30,385,019 | 15.09 | ||||||||||||
Time deposits | 111,029,014 | 56.58 | 113,755,709 | 56.50 | ||||||||||||
Total | $ | 196,246,128 | 100.00 | % | $ | 201,322,339 | 100.00 | % |
8. | Life Insurance and Retirement Plan |
The Company has a Supplemental Life Insurance Plan (“Plan”) for three officers of the Bank. The Plan requires the Bank to make annual payments to the beneficiaries upon their death. In connection with the Plan, the Company funded life insurance policies with an aggregate amount of $3,085,000 on the lives of those officers that currently have a death benefit of $11,975,329. The cash surrender value of these policies totaled $4,268,052 and $4,264,244 at June 30, 2014 and December 31, 2013, respectively. The Plan provides that death benefits totaling $6.0 million at June 30, 2014, will be paid to their beneficiaries in the event the officers should die.
Additionally, the Company has a Supplemental Retirement Plan (“SRP”) for the current and former presidents as well as two senior officers of the Bank. At June 30, 2014 and December 31, 2013, $1,872,169 and $1,843,021, respectively, has been accrued under these SRPs, and this liability and the related deferred tax asset of $636,537 and $626,627, respectively, are recognized in the financial statements.
The deferred compensation for the current and former presidents is to be paid for the remainder of their lives, commencing with the first year following the termination of employment after completion of required service. The current president's payment is based on 60 percent of his final full year annual gross taxable compensation adjusted annually for the change in the consumer price index or 4 percent, whichever is higher. The former president’s payment is based on 60 percent of his final full year annual gross taxable compensation adjusted annually for the change in the consumer price index. The deferred compensation for the two senior officers is to be paid at the rate of $50,000 per year for twenty years commencing five years after retirement or age 65, whichever comes first, following the termination of employment. The Company records periodic accruals for the cost of providing such benefits by charges to income. The amount accrued was approximately $43,647 and $50,841 for the three months ended June 30, 2014 and 2013 and $89,012 and $103,237 for the six months ended June 30, 2014 and 2013, respectively.
The following table illustrates the components of the net periodic benefit cost for the supplemental retirement plan:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Components of net periodic benefit cost: | ||||||||||||||||
Service cost | $ | 14,850 | $ | 23,417 | $ | 31,417 | $ | 48,389 | ||||||||
Interest cost | 28,797 | 27,424 | 57,595 | 54,848 | ||||||||||||
Net periodic benefit cost | $ | 43,647 | $ | 50,841 | $ | 89,012 | $ | 103,237 |
24 |
9. | Fair Value Measurements |
The following disclosures show the hierarchal disclosure framework associated with the level of pricing observations utilized in measuring assets and liabilities at fair value. The three broad levels of pricing are as follows:
Level I: Quoted prices are available in active markets for identical assets or liabilities as of the reported date.
Level II: Pricing inputs are other than the quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities includes items for which quoted prices are available but traded less frequently and items that are fair-valued using other financial instruments, the parameters of which can be directly observed.
Level III: Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
This hierarchy requires the use of observable market data when available.
The following table presents the assets reported on the Consolidated Balance Sheet at their fair value as of June 30, 2014 and December 31, 2013, by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at June 30, 2014 and December 31, 2013, are as follows:
June 30, 2014 | ||||||||||||||||
Level I | Level II | Level III | Total | |||||||||||||
Assets: | ||||||||||||||||
Available for Sale | ||||||||||||||||
Mortgage-backed securities | $ | - | $ | 3,785,373 | $ | - | $ | 3,785,373 | ||||||||
Corporate Securities | - | 8,956,421 | - | 8,956,421 | ||||||||||||
Total | $ | - | $ | 12,741,794 | $ | - | $ | 12,741,794 |
December 31, 2013 | ||||||||||||||||
Level I | Level II | Level III | Total | |||||||||||||
Assets: | ||||||||||||||||
Available for Sale | ||||||||||||||||
Mortgage-backed securities | $ | - | $ | 4,393,644 | $ | - | $ | 4,393,644 | ||||||||
Corporate Securities | - | 10,877,361 | - | 10,877,361 | ||||||||||||
Total | $ | - | $ | 15,271,005 | $ | - | $ | 15,271,005 |
25 |
For financial assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at June 30, 2014 and December 31, 2013, are as follows:
June 30, 2014 | ||||||||||||||||
Level I | Level II | Level III | Total | |||||||||||||
Assets: | ||||||||||||||||
Impaired loans | $ | - | $ | - | $ | 3,701,628 | $ | 3,701,628 | ||||||||
Other real estate owned | - | - | 495,295 | 495,295 |
December 31, 2013 | ||||||||||||||||
Level I | Level II | Level III | Total | |||||||||||||
Assets: | ||||||||||||||||
Impaired loans | $ | - | $ | - | $ | 4,314,919 | $ | 4,314,919 | ||||||||
Other real estate owned | - | - | 267,789 | 267,789 | ||||||||||||
The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Company has utilized Level 3 inputs to determine fair value.
June 30, 2014 Quantitative Information About Level III Fair Value Measurements | ||||||||||||||
Fair Value Estimate | Valuation Techniques | Unobservable Input | Range | Weighted Average | ||||||||||
Impaired loans | $ | 1,631,890 | Appraisal of | Appraisal | ||||||||||
collateral (1) | adjustments (2) | 0% to 20% | 6% | |||||||||||
Liquidation | ||||||||||||||
expenses (2) | 0% to 6% | 5% | ||||||||||||
2,069,738 | Discounted | Discount Rates | 5% to 8% | 7% | ||||||||||
cash flows | ||||||||||||||
Other real estate owned | 495,295 | Appraisal of | Appraisal | |||||||||||
collateral (1), (3) | adjustments (2) | 0% to 30% | 2% | |||||||||||
Liquidation | ||||||||||||||
expenses (2) | 0% to 6% | 6% |
26 |
December 31,
2013 Quantitative Information About Level III Fair Value Measurements | ||||||||||||||
Fair Value Estimate | Valuation Techniques | Unobservable Input | Range | Weighted Average | ||||||||||
Impaired loans | $ | 2,209,136 | Appraisal of | Appraisal | ||||||||||
collateral (1) | adjustments (2) | 0% to 30% | 10% | |||||||||||
Liquidation | ||||||||||||||
expenses (2) | 0% to 6% | 5% | ||||||||||||
2,105,783 | Discounted | Discount rates | 5% to 8% | 7% | ||||||||||
cash flows | ||||||||||||||
Other real estate owned | 267,789 | Appraisal of | Appraisal | |||||||||||
collateral (1), (3) | adjustments (2) | 0% to 30% | 3% | |||||||||||
Liquidation | ||||||||||||||
expenses (2) | 0% to 6% | 6% |
(1) Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level III inputs, which are not identifiable.
(2) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.
(3) Includes qualitative adjustments by management and estimated liquidation expenses.
All of the securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quoted market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions among other things.
Impaired loans are reported at fair value utilizing level 3 inputs. For these loans, a review of the collateral is conducted and an appropriate allowance for loan losses is allocated to the loan. At June 30, 2014, and December 31, 2013 impaired loans with a carrying value of $3,712,498 and $4,325,789 were reduced by specific valuation allowances totaling $10,870 and $10,870 resulting in a net fair value of $3,701,628 and $4,314,919 based on Level 3 inputs.
Other real estate owned is reported at fair value utilizing level 3 inputs. For these assets, a review of the collateral and an analysis of the expenses related to selling these assets are conducted and a charge-offs recorded to the allowance for loan losses.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy, within which the fair value measurement in its entirety falls, has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset.
The measurement of fair value should be consistent with one of the following valuation techniques: market approach, income approach, and/or cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). For example, valuation techniques consistent with the market approach often use market multiplies derived from a set of comparables. Multiples might lie in ranges with a different multiple for each comparable. The selection of where within the range the appropriate multiple falls requires judgment, considering factors specific to the measurement (qualitative and quantitative). Valuation techniques consistent with the market approach include matrix pricing. Matrix pricing is a mathematical technique used principally to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. As of June 30, 2014 and December 31, 2013, all of the financial assets measured at fair value, on a recurring basis, utilized the market approach.
27 |
10. | Fair Value Disclosure |
The estimated fair values of the Company’s financial instruments are as follows:
Fair Value
Measurements at June 30, 2014 | ||||||||||||||||||||
Carrying Value | Fair Value | Level I | Level II | Level III | ||||||||||||||||
Financial assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 7,507,759 | $ | 7,507,759 | $ | 7,507,759 | $ | - | $ | - | ||||||||||
Investment securities | ||||||||||||||||||||
Available for sale | 12,741,794 | 12,741,794 | - | 12,741,794 | - | |||||||||||||||
Held to maturity | 48,904,078 | 50,382,000 | - | 50,382,000 | - | |||||||||||||||
Loans held for sale | 9,662,994 | 9,662,994 | 9,662,994 | - | - | |||||||||||||||
Net loans receivable | 202,295,545 | 199,580,091 | - | - | 199,580,091 | |||||||||||||||
Accrued interest receivable | 835,884 | 835,884 | 835,884 | - | - | |||||||||||||||
Federal Home Loan Bank stock | 3,880,500 | 3,880,500 | 3,880,500 | - | - | |||||||||||||||
Bank-owned life insurance | 4,268,052 | 4,268,052 | 4,268,052 | - | - | |||||||||||||||
FDIC indemnification asset | 2,027,676 | 2,027,676 | - | - | 2,027,676 | |||||||||||||||
Financial liabilities: | ||||||||||||||||||||
Deposits | 196,246,128 | 198,633,252 | 85,217,114 | - | 113,416,138 | |||||||||||||||
FHLB advance – long-term | 59,000,000 | 60,534,000 | - | - | 60,534,000 | |||||||||||||||
Advances by borrowers for taxes and insurance | 1,486,049 | 1,486,049 | 1,486,049 | - | - | |||||||||||||||
Accrued interest payable | 165,530 | 165,530 | 165,530 | - | - |
Fair Value
Measurements at December 31, 2013 | ||||||||||||||||||||
Carrying Value | Fair Value | Level I | Level II | Level III | ||||||||||||||||
Financial assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 15,764,320 | $ | 15,764,320 | $ | 15,764,320 | $ | - | $ | - | ||||||||||
Investment securities | ||||||||||||||||||||
Available for sale | 15,271,005 | 15,271,005 | - | 15,271,005 | - | |||||||||||||||
Held to maturity | 51,319,785 | 51,876,769 | - | 51,876,769 | - | |||||||||||||||
Loans held for sale | 6,142,968 | 6,142,968 | 6,142,968 | - | - | |||||||||||||||
Net loans receivable | 198,573,229 | 193,502,554 | - | - | 193,502,554 | |||||||||||||||
Accrued interest receivable | 796,294 | 796,294 | 796,294 | - | - | |||||||||||||||
Federal Home Loan Bank stock | 3,675,500 | 3,675,500 | 3,675,500 | - | - | |||||||||||||||
Bank-owned life insurance | 4,264,244 | 4,264,244 | 4,264,244 | - | - | |||||||||||||||
FDIC indemnification asset | 2,515,287 | 2,515,287 | - | - | 2,515,287 | |||||||||||||||
Financial liabilities: | ||||||||||||||||||||
Deposits | 201,322,339 | 204,450,621 | 87,566,631 | - | 116,883,990 | |||||||||||||||
FHLB advance – long-term | 59,000,000 | 60,392,400 | - | - | 60,392,400 | |||||||||||||||
Advances by borrowers for taxes and insurance | 1,306,823 | 1,306,823 | 1,306,823 | - | - | |||||||||||||||
Accrued interest payable | 145,434 | 145,434 | 145,434 | - | - |
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Financial instruments are defined as cash, evidence of ownership interest in an entity, or a contract that creates an obligation or right to receive or deliver cash or another financial instrument from/to a second entity on potentially favorable or unfavorable terms.
Fair value is defined as the amount at which a financial instrument could be exchanged in a current transaction between willing parties other than in a forced or liquidation sale. If a quoted market price is available for a financial instrument, the estimated fair value would be calculated based upon the market price per trading unit of the instrument.
If no readily available market exists, the fair value estimates for financial instruments should be based upon management’s judgment regarding current economic conditions, interest rate risk, expected cash flows, future estimated losses, and other factors as determined through various option pricing formulas or stimulation modeling. As many of these assumptions result from judgments made by management based upon estimates that are inherently uncertain, the resulting estimated fair values may not be indicative of the amount realizable in the sale of a particular financial instrument. In addition, changes in assumptions on which the estimated fair values are based may have a significant impact on the resulting estimated fair values.
As certain assets such as deferred tax assets and premises and equipment are not considered financial instruments, the estimated fair value of financial instruments would not represent the full value of the Company.
The Company employed simulation modeling in determining the estimated fair value of financial instruments for which quoted market prices were not available based upon the following assumptions.
Cash and Cash Equivalents, Accrued Interest Receivable, Federal Home Loan Bank Stock, Accrued Interest Payable and Advances by Borrowers for Taxes and Insurance
The fair value is equal to the current carrying value.
Loans Held for Sale
The fair value of mortgage loans held for sale is determined, when possible, using Level I quoted secondary-market prices. If no such quoted price exists, the fair value of a loan is determined based on sales of similar assets.
All mortgage loans held for sale are sold 100% servicing released and made in compliance with applicable loan criteria and underwriting standards established by the buyers. These loans are originated according to applicable federal and state laws and follow proper standards for servicing valid liens.
Investment Securities Available for Sale and Held to Maturity
The fair value of investment securities available for sale is equal to the available quoted market price. If no quoted market price is available, fair value is estimated using the quoted market price for similar securities.
Net Loans Receivable
The fair value is estimated by discounting future cash flows using current market inputs at which loans with similar terms and qualities would be made to borrowers of similar credit quality. Where quoted market prices were available, primarily for certain residential mortgage loans, such market rates were utilized as estimates for fair value.
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Acquired loans are recorded at fair value on the date of acquisition. The fair values of loans with evidence of credit deterioration (impaired loans) are recorded net of a nonaccretable difference and, if appropriate, an accretable yield. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is the nonaccretable difference, which is included in the carrying amount of acquired loans.
FDIC Indemnification Asset
As part of the Purchase and Assumption Agreements entered into in connection with the acquisition of Earthstar, the Bank and the FDIC entered into loss sharing agreements. These agreements cover realized losses on loans, which are more fully described in Note 6.
Under the agreement, the FDIC agreed to reimburse the Bank for 80% of realized losses. The indemnification asset was originally recorded at fair value on the acquisition date (December 10, 2010) and at June 30, 2014 and December 31, 2013, the carrying value of the FDIC indemnification asset was $2.0 million and $2.5 million, respectively.
From the date of acquisition, the agreements extend ten years for 1-4 family real estate loans and five years for the other loans. The loss sharing assets are measured separately from the loan portfolios because they are not contractually embedded in the loans and are not transferable with the loans should the Bank choose to dispose of them. Fair values on the acquisition dates were estimated using projected cash flows available for loss sharing based on the credit adjustments estimated for each loan pool and the loss sharing percentages. These cash flows were discounted to reflect the uncertainty of the timing and receipt of the loss sharing reimbursements from the FDIC. The Bank will collect the assets over the next several years. The amount ultimately collected will depend on the timing and amount of collections and charge-offs on the acquired assets covered by the loss sharing agreements. While the assets were recorded at their estimated fair values on the acquisition dates, it is not practicable to complete fair value analyses on a quarterly or annual basis. Estimating the fair value of the FDIC indemnification asset would involve preparing fair value analyses of the entire portfolios of loans and foreclosed assets covered by the loss sharing agreements from the acquisition on a quarterly or annual basis.
Deposits and FHLB Advances – Long-Term
The fair values of certificates of deposit and FHLB advances are based on the discounted value of contractual cash flows. The discount rates are estimated using rates currently offered for similar instruments with similar remaining maturities. Demand, savings, and money market deposits are valued at the amount payable on demand as of year-end.
Bank-Owned Life Insurance
The fair value is equal to the cash surrender value of the life insurance policies.
Commitments to Extend Credit
These financial instruments are generally not subject to sale, and estimated fair values are not readily available. The carrying value, represented by the net deferred fee arising from the unrecognized commitment and the fair value, determined by discounting the remaining contractual fee over the term of the commitment using fees currently charged to enter into similar agreements with similar credit risk, are not considered material for disclosure. The contractual amounts of unfunded commitments are presented in the Liquidity and Capital Management section.
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11. | Accumulated Other Comprehensive Income |
The activity in accumulated other comprehensive income for the three and six months ended June 30, 2014 and 2013 are as follows:
Accumulated Other Comprehensive Income (1) | ||||||||
Unrealized Gains (Losses) on Securities Available-for-Sale | Total | |||||||
Balance at December 31, 2013 | $ | 264,360 | $ | 264,360 | ||||
Other comprehensive income before reclassifications | 2,076 | 2,076 | ||||||
Balance at June 30, 2014 | $ | 266,436 | $ | 266,436 | ||||
Balance at December 31, 2012 | $ | 407,786 | $ | 407,786 | ||||
Other comprehensive loss before reclassifications | (120,370 | ) | (120,370 | ) | ||||
Balance at June 30, 2013 | $ | 287,416 | $ | 287,416 |
(1) All amounts are net of tax. Related income tax expense or benefit is calculated using a combined Federal income tax rate at 34%.
Accumulated Other Comprehensive Income (1) | ||||||||
Unrealized Gains (Losses) on Securities Available-for-Sale | Total | |||||||
Balance at March 31, 2014 | $ | 248,827 | $ | 248,827 | ||||
Other comprehensive income before reclassifications | 17,609 | 17,609 | ||||||
Balance at June 30, 2014 | $ | 266,436 | $ | 266,436 | ||||
Balance at March 31, 2013 | $ | 420,167 | $ | 420,167 | ||||
Other comprehensive loss before reclassifications | (132,751 | ) | (132,751 | ) | ||||
Balance at June 30, 2013 | $ | 287,416 | $ | 287,416 |
(1) All amounts are net of tax. Related income tax expense or benefit is calculated using a combined Federal income tax rate at 34%.
There were no amounts reclassified from accumulated other comprehensive income for the three and six month periods ended June 30, 2014 and 2013.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s discussion and analysis of the Company’s financial condition and results of operations is intended to assist in understanding the financial condition and results of operations of Polonia Bancorp. The information contained in this section should be read in conjunction with the Unaudited Consolidated Financial Statements and footnotes appearing in Part I, Item 1 of this document.
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Forward-Looking Statements
This report contains forward-looking statements that are based on assumptions and may describe future plans, strategies and expectations of Polonia Bancorp and Polonia Bank. These forward-looking statements are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions. Polonia Bancorp’s and Polonia Bank’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company and its subsidiary include, but are not limited to the following: changes in interest rates; national and regional economic conditions; legislative and regulatory changes; monetary and fiscal policies of the U.S. government; including policies of the U.S. Treasury and the Federal Reserve Board; the quality and composition of the loan or investment portfolios; demand for loan products; deposit flows; competition; demand for financial services in the Company’s market area; changes in real estate market values in the Company’s market area; and changes in relevant accounting principles and guidelines. Additionally, other risks and uncertainties are described herein and in the Company’s Form 10-K for the year ended December 31, 2013 under “Item 1A: Risk Factors” filed with the Securities and Exchange Commission (the “SEC”) which is available through the SEC’s website at www.sec.gov. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, the Company does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.
General
Polonia Bancorp’s business activities are the ownership of the outstanding capital stock of Polonia Bank. Currently, Polonia Bancorp neither owns or leases any property, but instead uses the premises, equipment and other property of Polonia Bank and pays appropriate rental fees, as required by applicable law and regulations. In the future, Polonia Bancorp may acquire or organize other operating subsidiaries; however, there are no current plans, arrangements, or understandings, written or oral, to do so.
Polonia Bank operates as a community-oriented financial institution offering a variety of deposit products as well as providing residential real estate loans, and to a lesser degree, multi-family and nonresidential real estate loans, home equity loans and consumer loans primarily to individuals, families and small businesses located in Bucks, Philadelphia and Montgomery Counties, Pennsylvania. The Bank operates from five full-service locations, including our main office in Huntingdon Valley, Pennsylvania and our branch offices in the city of Philadelphia and Bucks County.
Critical Accounting Policies
We consider accounting policies involving significant judgments and assumptions by management that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies. We consider the following to be our critical accounting policies.
Securities. Securities are reported at fair value adjusted for premiums and discounts which are recognized in interest income using the interest method over the period to maturity. Declines in the fair value of individual securities below their amortized cost, and that are deemed to be other than temporary, will be written down to current market value and included in earnings as realized losses. Management systematically evaluates securities for other than temporary declines in fair value on a quarterly basis.
Allowance for loan losses. The allowance for loan losses is increased by changes to income and decreased by charge-offs (net of recoveries). The Company’s periodic evaluation of the adequacy of the allowance for loan losses is determined by management through evaluation of the loss exposure on individual non-performing, delinquent and high-dollar loans; review of economic conditions and business trends; historical loss experience and growth and composition of the loan portfolio, as well as other relevant factors.
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A quantitative analysis is utilized to support the adequacy of the allowance for loan losses. This analysis includes review of historical charge-off rates for loan categories, fluctuations and trends in the amount of classified loans and economic factors. Significant to this analysis are any changes in observable trends that may be occurring relative to loans to assess potential weaknesses within the credit. Current economic factors and trends in risk ratings are considered in the determination and allocation of the allowance for loan losses.
Income Taxes. The Company files a consolidated federal income tax return. Deferred tax assets and liabilities are computed based on the difference between the financial statement and the income tax basis of assets and liabilities using the enacted marginal tax rates. Deferred income taxes or benefits are based on changes in the deferred tax asset or liability from period to period. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which such items are expected to be realized or settled. As changes in tax rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.
Comparison of Financial Condition at June 30, 2014 and December 31, 2013
Total assets at June 30, 2014 were $299.3 million, a decrease of $6.3 million, from total assets of $305.6 million at December 31, 2013. The decrease in assets resulted primarily from a decrease in cash and cash equivalents of $8.3 million, partially offset by $3.5 million increase in loans held for sale. Total liabilities at June 30, 2014 were $259.9 million compared to $265.3 million at December 31, 2013, a decrease of $5.4 million. The decrease in liabilities was primarily due to a $5.1 million decrease in deposits. Total stockholders’ equity at June 30, 2014 decreased to $39.4 million as compared to $40.3 million from December 31, 2013. The decrease of $938,000 was primarily due to the repurchase of $1.1 million in common stock.
Cash and cash equivalents decreased to $7.5 million from $15.8 million during the six months ended June 30, 2014, a decrease of $8.3 million, or 52.4%, primarily due to a decrease in deposits of $5.1 million, an increase in loans held for sale of $3.6 million and an increase in total loans of $3.7 million, partially offset by a decrease of $5.0 million in investment securities during the period.
Investment securities available-for-sale decreased to $12.7 million from $15.3 million during the six months ended June 30, 2014, a decrease of $2.6 million, or 17.0%. The decrease in investment securities available-for-sale was attributable to $2.0 million in maturities of corporate securities and $546,000 in principal payments.
Investment securities held-to-maturity decreased to $48.9 million from $51.3 million during the six months ended June 30, 2014, a decrease of $2.4 million, or 4.7%. The decrease in investment securities held-to-maturity was attributable to $3.7 million in principal payments, partially offset by $1.4 million in purchases.
Loans-held-for sale increased to $9.7 million from $6.1 million during the six months ended June 30, 2014, an increase of $3.5 million, or 57.4%. The increase in loans held-for-sale is the result of the normal fluctuation in loan activity associated with this type of business.
Loans receivable increased $3.7 million, or 1.9% to $203.7 million at June 30, 2014, compared to $200.0 million at December 31, 2013. The increase in loans receivable is the result of increased emphasis on loan origination.
Total deposits decreased to $196.2 million from $201.3 million during the six months ended June 30, 2014, a decrease of $5.1 million, or 2.5%. The decrease in deposits was primarily due to a decrease of $2.6 million in money market accounts and $2.8 million in time deposits as a result of lower rates offered on these products.
Total FHLB advances remained unchanged at $59.0 million at June 30, 2014.
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Total stockholders’ equity decreased $938,000, or 2.3% to $39.4 million at June 30, 2014, compared to $40.3 million at December 31, 2013. The decrease in stockholders’ equity is mainly due to the repurchase of 113,500 shares of common stock at a total cost of $1.1 million.
Comparison of Operating Results For the Three and Six Months Ended June 30, 2014 and 2013
General. We recorded net income of $42,000 during the three months ended June 30, 2014 compared to net income of $47,000 during the three months ended June 30, 2013. The decrease in net income for the three month period ended June 30, 2014 was primarily related to a decrease in noninterest income, an increase in provision for loan losses and an increase in income tax expense, offset by a decrease in noninterest expense and an increase in net interest income.
We recorded net income of $12,000 during the six months ended June 30, 2014 compared to a net loss of $19,000 during the six months ended June 30, 2013. The increase in net income for the six month period ended June 30, 2014 was primarily related to a decrease in noninterest expense, an increase in net interest income and a decrease in provision for loan losses, offset by a decrease in noninterest income and an increase in income tax expense.
Net Interest Income. The following table summarizes changes in interest income and expense for the three and six months ended June 30, 2014 and 2013.
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||
Interest and dividend income: | ||||||||||||||||
Loans receivable | $ | 2,346 | $ | 2,088 | $ | 4,690 | $ | 4,139 | ||||||||
Investment securities | 429 | 477 | 869 | 974 | ||||||||||||
Other interest and dividend income | 52 | 4 | 96 | 8 | ||||||||||||
Total interest and dividend income | 2,827 | 2,569 | 5,655 | 5,121 | ||||||||||||
Interest Expense: | ||||||||||||||||
Deposits | 419 | 413 | 844 | 833 | ||||||||||||
FHLB advances – long-term | 372 | 164 | 740 | 326 | ||||||||||||
Advances by borrowers for taxes and insurance | 1 | 1 | 2 | 4 | ||||||||||||
Total interest expense | 792 | 578 | 1,586 | 1,163 | ||||||||||||
Net interest income | $ | 2,035 | $ | 1,991 | $ | 4,069 | $ | 3,958 |
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The following table summarizes average balances and average yields and costs for the three and six months ended June 30, 2014 and 2013.
Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
June 30, | June 30, | |||||||||||||||||||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||||||||||||||||||
Average Balance | Yield/ Cost | Average Balance | Yield/ Cost | Average Balance | Yield/ Cost | Average Balance | Yield/ Cost | |||||||||||||||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||||||||||
Loans | $ | 206,724 | 4.49 | % | $ | 159,471 | 5.18 | % | $ | 205,170 | 4.55 | % | $ | 153,741 | 5.35 | % | ||||||||||||||||
Investment securities | 64,342 | 2.64 | 69,309 | 2.72 | 65,109 | 2.65 | 70,910 | 2.73 | ||||||||||||||||||||||||
Other interest-earning assets | 13,202 | 1.58 | 18,015 | 0.09 | 16,051 | 1.21 | 21,794 | 0.07 | ||||||||||||||||||||||||
Total interest earning-assets | 284,268 | 3.99 | % | 246,795 | 4.18 | % | 286,330 | 3.98 | % | 246,445 | 4.19 | % | ||||||||||||||||||||
Noninterest-earning assets: | 16,687 | 17,467 | 16,758 | 17,564 | ||||||||||||||||||||||||||||
Allowance for Loan Losses | (1,372 | ) | (1,461 | ) | (1,375 | ) | (1,490 | ) | ||||||||||||||||||||||||
Total assets | $ | 299,583 | $ | 262,801 | $ | 301,713 | $ | 262,519 | ||||||||||||||||||||||||
Liabilities and equity: | ||||||||||||||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||||||||||
Interest-bearing demand deposits | $ | 15,445 | 0.18 | % | $ | 14,230 | 0.25 | % | $ | 15,496 | 0.17 | % | $ | 14,070 | 0.26 | % | ||||||||||||||||
Money Market Deposits | 34,699 | 0.37 | 38,569 | 0.42 | 34,975 | 0.36 | 38,896 | 0.43 | ||||||||||||||||||||||||
Savings accounts | 31,021 | 0.25 | 30,378 | 0.28 | 30,863 | 0.25 | 30,271 | 0.29 | ||||||||||||||||||||||||
Time deposits | 110,518 | 1.31 | 104,005 | 1.32 | 111,605 | 1.32 | 104,155 | 1.34 | ||||||||||||||||||||||||
Total interest-bearing deposits | 191,683 | 0.88 | % | 187,182 | 0.88 | % | 192,939 | 0.88 | % | 187,392 | 0.90 | % | ||||||||||||||||||||
FHLB advances – long-term | 59,000 | 2.53 | 23,406 | 2.81 | 59,000 | 2.53 | 23,158 | 2.84 | ||||||||||||||||||||||||
Advances by borrowers for taxes and insurance | 1,214 | 0.33 | 960 | 0.42 | 1,232 | 0.33 | 927 | 0.87 | ||||||||||||||||||||||||
Total interest-bearing liabilities | 251,897 | 1.26 | % | 211,548 | 1.10 | % | 253,171 | 1.26 | % | 211,477 | 1.11 | % | ||||||||||||||||||||
Noninterest-bearing liabilities: | 8,098 | 9,942 | 8,578 | 9,730 | ||||||||||||||||||||||||||||
Total liabilities | 259,995 | 221,490 | 261,749 | 221,207 | ||||||||||||||||||||||||||||
Retained earnings | 39,588 | 41,311 | 39,964 | 41,312 | ||||||||||||||||||||||||||||
Total liabilities and retained earnings | $ | 299,583 | $ | 262,801 | $ | 301,713 | $ | 262,519 | ||||||||||||||||||||||||
Interest rate spread | 2.73 | % | 3.08 | % | 2.72 | % | 3.08 | % | ||||||||||||||||||||||||
Net yield on interest-bearing assets | 2.87 | % | 3.24 | % | 2.87 | % | 3.24 | % | ||||||||||||||||||||||||
Ratio of average interest-earning assets to average interest-bearing liabilities | 112.85 | % | 116.66 | % | 113.10 | % | 116.54 | % |
Net Interest Income. Net interest income for the three months ended June 30, 2014 increased $44,000 from the same period last year. Our net interest rate spread decreased to 2.73% for the three months ended June 30, 2014 from 3.08% for the same period last year. The primary reasons for the slight increase in net interest income for the three month period are a higher average balance of loans, partially offset by a higher average balance of FHLB advances, a lower average balance of investment securities and a lower average balance of other interest-earning assets. Also contributing to the higher net interest income was a lower average rate paid on FHLB advances, partially offset by a lower average rate earned on loans and investment securities. The average balance of loans increased during the three months ended June 30, 2014 due to increased loan originations.
Net interest income for the six months ended June 30, 2014 increased $111,000 from the same period last year. Our net interest rate spread decreased to 2.72% for the six months ended June 30, 2014 from 3.08% for the same time period last year. The primary reasons for the increase in net interest income for the six month period are a higher average balance of loans, partially offset by a higher average balance of FHLB advances, a lower average balance of investment securities and a lower average balance of other interest-earning assets. Also contributing to the higher net interest income was a lower average rate paid on deposits and on FHLB advances, partially offset by a lower average rate earned on loans and investment securities. The average balance of loans increased during the six months ended June 30, 2014 due to increased loan originations.
Provision for Loan Losses. For the three months ended June 30, 2014 we recorded a provision for loan losses of $34,000 as compared to $25,000 for the three months ended June 30, 2013. The provisions reflect management’s assessment of lending activities, growth in the loan portfolio, decreased non-performing loans, levels of current delinquencies and current economic conditions. Loan charge-offs during the three months ended June 30, 2014 were $34,000 as compared to $461,000 during the three months ended June 30, 2013.
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For the six months ended June 30, 2014 we recorded a provision for loan losses of $49,000 as compared to $114,000 for the six months ended June 30, 2013. The provisions reflect management’s assessment of lending activities, growth in the loan portfolio, decreased non-performing loans, levels of current delinquencies and current economic conditions. Loan charge-offs during the six months ended June 30, 2014 were $45,000 as compared to $558,000 during the six months ended June 30, 2013.
Noninterest Income. The following table shows the components of noninterest income for the three and six months ended June 30, 2014 and 2013.
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||
Service fees on deposit accounts | $ | 33 | $ | 35 | $ | 63 | $ | 66 | ||||||||
Earnings on bank-owned life insurance | 2 | 8 | 4 | 14 | ||||||||||||
Gain on sale of loans, net | 1,020 | 1,418 | 1,610 | 2,581 | ||||||||||||
Rental Income | 69 | 70 | 140 | 145 | ||||||||||||
Other | 3 | 58 | 147 | 89 | ||||||||||||
Total | $ | 1,127 | $ | 1,589 | $ | 1,964 | $ | 2,895 |
The $462,000 decrease in noninterest income during the three months ended June 30, 2014 as compared to the three months ended June 30, 2013 is primarily due to a $398,000 decrease in gain on the sale of loans and a decrease of $55,000 in other noninterest income due to an increase of $66,000 in the loss on the sale of REO. The decrease in the gain on the sale of loans is due to an increase in rates during the period as compared to the same period last year, as well as the lingering effects on loan sales during the period due to the extreme cold weather during the first quarter as compared to the same period in the prior year.
The $931,000 decrease in noninterest income during the six months ended June 30, 2014 as compared to the six months ended June 30, 2013 is primarily due to a $971,000 decrease in gain on sale of loans and $10,000 decrease in earnings on bank-owned life insurance, partially offset by a $58,000 increase in other noninterest income. The decrease in the gain on the sale of loans is due to an increase in rates during the period as compared to the same period last year, as well as the effects on loan sales during the period due to the extreme cold weather during the first quarter as compared to the same period in the prior year. The increase in other noninterest income is related to a $100,000 non-refundable forward commitment fee received during the period, partially offset a $49,000 increase in the loss on the sale of REO.
Noninterest Expense. The following table shows the components of noninterest expense for the three and six months ended June 30, 2014 and 2013.
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||
Compensation and employee benefits | $ | 1,853 | $ | 2,133 | $ | 3,435 | $ | 4,127 | ||||||||
Occupancy and equipment | 347 | 350 | 757 | 700 | ||||||||||||
Federal deposit insurance premiums | 86 | 78 | 171 | 155 | ||||||||||||
Data processing expense | 110 | 109 | 222 | 207 | ||||||||||||
Professional fees | 142 | 175 | 270 | 333 | ||||||||||||
Other | 518 | 643 | 1,096 | 1,254 | ||||||||||||
Total | $ | 3,056 | $ | 3,488 | $ | 5,951 | $ | 6,776 |
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The $432,000 decrease in noninterest expense during the three months ended June 30, 2014 as compared to the three months ended June 30, 2013 is primarily due to a $280,000 decrease in compensation and employee benefits, a $125,000 decrease in other expenses and a $33,000 decrease in professional fees. The decrease in compensation and employee benefits expense is primarily related to a decrease of $308,000 related to our Retail Mortgage Banking Division partially offset by a $40,000 increase in expenses related to restricted stock and option plans. The decrease in other noninterest expense is primarily related to a decrease of $116,000 related to the amortization of the FDIC indemnification asset. The decrease in professional fees is the result of lower expenses related to the change in several service providers.
The $825,000 decrease in noninterest expense during the six months ended June 30, 2014 as compared to the six months ended June 30, 2013 is primarily due to a $692,000 decrease in compensation and employee benefits, a $158,000 decrease in other expenses and a $63,000 decrease in professional fees, partially offset by a $57,000 increase in occupancy and equipment expense and a $15,000 increase in data processing expense. The $692,000 decrease in compensation and employee benefits is primarily related to a $765,000 decrease related to our Retail Mortgage Banking Division, partially offset by a $79,000 increase in expenses related to restricted stock and options plans. The decrease in other noninterest expense is primarily related to a decrease of $185,000 related to the amortization of the FDIC indemnification asset. The decrease in professional fees is a result of lower expenses related to the change in several service providers. The increase in occupancy and equipment is related to a $33,000 increase in the cost of snow removal and the increase of other expenses related to the operation of our facilities and properties.
Income Taxes. We recorded a tax expense of $29,000 for the three months ended June 30, 2014 compared to tax expense of $20,000 during the three months ended June 30, 2013. The increase of the tax expense resulted from the increase in our taxable operating profits.
We recorded a tax expense of $21,000 for the six months ended June 30, 2014 compared to a tax benefit of $17,000 during the six months ended June 30, 2013. The increase of tax expense resulted from the increase in our taxable operating profits.
Liquidity and Capital Management
Liquidity Management. Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, loan repayments, maturities and sales of securities and borrowings from the FHLB of Pittsburgh. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition.
We regularly adjust our investments in liquid assets based upon our assessment of (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities and (4) the objectives of our asset/liability management policy.
Our most liquid assets are cash and cash equivalents. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. At June 30, 2014, cash and cash equivalents totaled $7.5 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $12.7 million at June 30, 2014. In addition, at June 30, 2014 we had the ability to borrow a total of approximately $142.9 million from the FHLB of Pittsburgh. On June 30, 2014, we had $59.0 million of borrowings outstanding. Any growth of our loan portfolio may require us to borrow additional funds.
At June 30, 2014, we had $6.6 million in mortgage loan commitments outstanding and $4.7 million in unused lines of credit. Time deposits due within one year of June 30, 2014 totaled $38.7 million, or 34.9% of time deposits. If these maturing deposits do not remain with us, we will be required to seek other sources of funds, including other time deposits and borrowings. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings that we currently pay on the time deposits due on or before June 30, 2015. We believe, however, based on past experience that a significant portion of our time deposits will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.
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Our primary investing activities are the origination of loans and the purchase of securities. Our primary financing activities consist of activity in deposit accounts and FHLB advances. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors and other factors. We generally manage the pricing of our deposits to be competitive and to increase core deposit relationships. Occasionally, we offer promotional rates on certain deposit products to attract deposits.
The Company is a separate entity from the Bank and must provide for its own liquidity. In addition to its operating expenses, the Company may utilize its cash position for the payment of dividends or to repurchase common stock, subject to applicable restrictions. The Company’s primary source of funds is dividends from the Bank. Payment of such dividends to the Company by the Bank is limited under federal law. The amount that can be paid in any calendar year, without prior regulatory approval, cannot exceed the retained net earnings (as defined) for the year plus the preceding two calendar years. The Company believes that such restriction will not have an impact on the Company’s ability to meet its ongoing cash obligations.
Capital Management. We are subject to various regulatory capital requirements administered by the Office of the Comptroller of Currency, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At June 30, 2014, we exceeded all of our regulatory capital requirements. We are considered “well capitalized” under regulatory guidelines.
Off-Balance Sheet Arrangements. In the normal course of operations, we engage in a variety of financial transactions that, in accordance with U.S. Generally Accepted Accounting Principles, are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments.
For six months ended June 30, 2014 and the year ended December 31, 2013 we engaged in no off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Not applicable.
Item 4. Controls and Procedures
The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
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There have been no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(e) that occurred during the Company’s last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
From time to time, we may be party to various legal proceedings incident to our business. At June 30, 2014, we were not a party to any pending legal proceedings that we believe would have a material adverse effect on our financial condition, results of operations or cash flows.
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013, which could materially affect our business, financial condition or future results. At June 30, 2014 the risk factors of the Company have not changed materially from those reported in our Annual Report on Form 10-K. However, the risks described in our Annual Report on Form 10-K are not the only risks that we face. Additional risks and uncertainties not currently known to us to that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The Company’s repurchases of equity securities for the second quarter of 2014 were as follows:
Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) | Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs | ||||||||||||
April 1 - 30, 2014 | 50,000 | $ | 10.04 | 95,000 | 80,563 | |||||||||||
May 1 - 31, 2014 | 16,000 | 10.04 | 111,000 | 64,563 | ||||||||||||
June 1 - 30, 2014 | 2,500 | 10.05 | 113,500 | 62,063 | ||||||||||||
Total | 68,500 | $ | 10.04 | 113,500 |
(1) On January 24, 2014, the Company announced that the Board of Directors had approved a stock repurchase program authorizing the company to repurchase up to 175,563 shares of the Company's common stock.
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Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosure
Not applicable.
None.
3.1 | Articles of Incorporation of Polonia Bancorp, Inc.(1) |
3.2 | Bylaws of Polonia Bancorp, Inc.(2) |
4.0 | Stock Certificate of Polonia Bancorp, Inc.(3) |
31.1 | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer |
31.2 | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer |
32.0 | Section 1350 Certification |
101 The following materials from the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2014, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income (Loss), (iii) the Consolidated Statement of Comprehensive Income (Loss), (iv) the Consolidated Statement of Changes in Stockholder’s Equity, (v) the Consolidated Statements of Cash Flows and (vi) related notes.
(1) Incorporated by reference to Exhibit 3.1 to the Company’s Form S-1 (File No. 333-176759) filed with the Commission on September 9, 2011.
(2) Incorporated by reference to Exhibit 3.2 to the Company’s Form S-1 (File No. 333-176759) filed with the Commission on September 9, 2011.
(3) Incorporated by reference to Exhibit 4.0 to the Company’s Form S-1 (File No. 333-176759) filed with the Commission on September 9, 2011.
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In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
POLONIA BANCORP, INC. | ||
Date: August 12, 2014 | By: | /s/ Anthony J. Szuszczewicz |
Anthony J. Szuszczewicz | ||
President and Chief Executive Officer | ||
(principal executive officer) | ||
Date: August 12, 2014 | By: | /s/ Paul D. Rutkowski |
Paul D. Rutkowski | ||
Chief Financial Officer and Treasurer | ||
(principal financial and accounting officer) |
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