Fox Chase Bancorp Inc - FORM 10-Q - May 5, 2015

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
 _______________________________________________________________
FORM 10-Q
 
__________________________________________________
 
(Mark One)
 
ý                       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2015
 
OR
 
o                          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: 000-54025

_________________________________________________________________ 
Fox Chase Bancorp, Inc.
(Exact name of registrant as specified in its charter)

_________________________________________________________________
 
Maryland
 
35-2379633
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
4390 Davisville Road, Hatboro, Pennsylvania
 
19040
(Address of principal executive offices)
 
(Zip Code)
 
(215) 283-2900
(Registrant’s telephone number, including area code)
 
N/A
(Former name, former address and former fiscal year, if changed since last report)
 
_______________________________________________________________
 
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  ý     No  o
 
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 (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ý No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definition of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.  (Check one):

Large Accelerated Filer [   ]
 
Accelerated Filer [X ]
Non-Accelerated Filer [  ]
 
Smaller Reporting Company [   ]
(Do not check if a smaller reporting company)
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  o    No  ý
 
As of April 30, 2015, there were 11,673,991 shares of the registrant’s common stock outstanding.



 
 
 
 
 
 
 
FOX CHASE BANCORP, INC.
 
 
Table of Contents
 
 
Page
No.
 
 
 
 
 
 
 
 
 
 
 
Consolidated Statements of Condition at March 31, 2015 (Unaudited) and December 31, 2014
 
 
 
 
Consolidated Statements of Operations for the Three Months Ended March 31, 2015 and 2014 (Unaudited)
 
 
 
 
Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2015 and 2014 (Unaudited)
 
 
 
 
Consolidated Statements of Changes in Equity for the Three Months Ended March 31, 2015 and 2014 (Unaudited)
 
 
 
 
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2015 and 2014 (Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements
FOX CHASE BANCORP, INC.
Consolidated Statements of Condition
(In Thousands, Except Share Data)
 
 
 
March 31,
2015
 
December 31,
2014
 
 
 
(Unaudited)
 
 
ASSETS
 
 
 
 
 
Cash and due from banks
 
$
1,000

 
$
2,763

 
Interest-earning demand deposits in other banks
 
19,067

 
14,450

 
Total cash and cash equivalents
 
20,067

 
17,213

 
Investment securities available-for-sale
 
13,957

 
8,388

 
Investment securities held-to-maturity (fair value of $1,785 at March 31, 2015 and $0 at December 31, 2014)
 
1,775

 
—

 
Mortgage related securities available-for-sale
 
120,778

 
125,649

 
Mortgage related securities held-to-maturity (fair value of $170,307 at March 31, 2015 and $170,854 at December 31, 2014)
 
168,225

 
170,172

 
Loans, net of allowance for loan losses of $11,178 at March 31, 2015 and $10,730 at December 31, 2014
 
753,743

 
724,326

 
Federal Home Loan Bank stock, at cost
 
5,015

 
6,015

 
Bank-owned life insurance
 
15,147

 
15,027

 
Premises and equipment, net
 
9,292

 
9,418

 
Assets acquired through foreclosure
 
2,804

 
2,814

 
Real estate held for investment
 
1,620

 
1,620

 
Accrued interest receivable
 
3,286

 
3,147

 
Mortgage servicing rights, net
 
106

 
111

 
Deferred tax asset, net
 
4,286

 
4,561

 
Other assets
 
4,055

 
6,155

 
Total Assets
 
$
1,124,156

 
$
1,094,616

 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 

 
 

LIABILITIES
 
 

 
 

 
Deposits
 
$
803,029

 
$
711,909

 
Short-term borrowings
 
—

 
50,000

 
Federal Home Loan Bank advances
 
110,000

 
120,000

 
Other borrowed funds
 
30,000

 
30,000

 
Advances from borrowers for taxes and insurance
 
1,255

 
1,447

 
Accrued interest payable
 
268

 
311

 
Accrued expenses and other liabilities
 
4,365

 
5,038

 
Total Liabilities
 
948,917

 
918,705

 
 
 
 
 
 
STOCKHOLDERS’ EQUITY
 
 

 
 

 
Preferred stock ($.01 par value; 1,000,000 shares authorized, none issued and outstanding at March 31, 2015 and December 31, 2014)
 
—

 
—

 
Common stock ($.01 par value; 60,000,000 shares authorized, 11,732,991 shares outstanding at March 31, 2015 and 11,802,791 shares outstanding at December 31, 2014)
 
147

 
147

 
Additional paid-in capital
 
139,264

 
139,177

 
Treasury stock, at cost (2,922,372 shares at March 31, 2015 and 2,852,572 shares at December 31, 2014)
 
(40,835
)
 
(39,698
)
 
Common stock acquired by benefit plans
 
(7,646
)
 
(8,056
)
 
Retained earnings
 
83,643

 
84,225

 
Accumulated other comprehensive income, net
 
666

 
116

 
Total Stockholders’ Equity
 
175,239

 
175,911

 
Total Liabilities and Stockholders’ Equity
 
$
1,124,156

 
$
1,094,616



3

FOX CHASE BANCORP, INC.
Consolidated Statements of Operations
(In Thousands, Except Per Share Data)
(Unaudited)
 
 
 
Three Months Ended 
 March 31,
 
 
2015
 
2014
INTEREST INCOME
 
 
 
 
Interest and fees on loans
$
8,139

 
$
8,110

 
Interest on mortgage related securities
1,603

 
1,828

 
Interest and dividends on investment securities
379

 
120

 
Other interest income
3

 
—

 
Total Interest Income
10,124

 
10,058

INTEREST EXPENSE
 
 
 
 
Deposits
715

 
898

 
Short-term borrowings
32

 
25

 
Federal Home Loan Bank advances
539

 
570

 
Other borrowed funds
166

 
248

 
Total Interest Expense
1,452

 
1,741

 
Net Interest Income
8,672

 
8,317

 
Provision for loan losses
472

 
—

 
Net Interest Income after Provision for Loan Losses
8,200

 
8,317

NONINTEREST INCOME
 
 
 
 
Service charges and other fee income
384

 
352

 
Income on bank-owned life insurance
120

 
117

 
Equity in earnings of affiliate
40

 
(33
)
 
Other
27

 
23

 
Total Noninterest Income
571

 
459

NONINTEREST EXPENSE
 
 
 
 
Salaries, benefits and other compensation
3,719

 
3,641

 
Occupancy expense
477

 
496

 
Furniture and equipment expense
83

 
111

 
Data processing costs
573

 
385

 
Professional fees
363

 
478

 
Marketing expense
41

 
41

 
FDIC premiums
119

 
165

 
Assets acquired through foreclosure expense
30

 
321

 
Other
360

 
355

 
Total Noninterest Expense
5,765

 
5,993

 
Income Before Income Taxes
3,006

 
2,783

 
Income tax provision
727

 
827

 
Net Income
$
2,279

 
$
1,956

Earnings per share:
 
 
 
 
Basic
$
0.21

 
$
0.17

 
Diluted
$
0.20

 
$
0.17



4

FOX CHASE BANCORP, INC.
Consolidated Statements of Comprehensive Income
(In Thousands, Unaudited)
 
 
 
 
Three Months Ended 
 March 31,
 
 
 
2015
 
2014
Net income
 
$
2,279

 
$
1,956

Other comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
Unrealized holding gains on investment
 
800

 
2,705

 
Tax effect
 
(276
)
 
(954
)
 
Net of tax amount
 
524

 
1,751

 
 
 
 
 
 
 
Accretion of unrealized loss on securities reclassified to held-to-maturity
 
41

 
—

 
Tax effect
 
(15
)
 
—

 
Net of tax amount
 
26

 
—

 
 
 
 
 
 
Other comprehensive income
 
550

 
1,751

Comprehensive income
 
$
2,829

 
$
3,707



5

FOX CHASE BANCORP, INC.
Consolidated Statements of Changes in Equity
Three Months Ended March 31, 2015 and 2014
(In Thousands, Unaudited)
 
 
Common
Stock
 
Additional
Paid-in
Capital
 
Treasury
Stock
 
Common
Stock
Acquired by
Benefit Plans
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
(Loss) Income, net
 
Total
Equity
BALANCE - DECEMBER 31, 2013
$
146

 
$
137,593

 
$
(33,436
)
 
$
(9,272
)
 
$
82,885

 
$
(4,449
)
 
$
173,467

Purchase of treasury stock
—

 
—

 
—

 
—

 
—

 
—

 
—

Stock based compensation expense
—

 
297

 
—

 
—

 
—

 
—

 
297

ESOP shares allocated to employees
—

 
123

 
—

 
157

 
—

 
—

 
280

Issuance of stock for vested equity awards
—

 
(331
)
 
—

 
263

 
68

 
—

 
—

Common stock issued for exercise of vested stock options
—

 
6

 
—

 
—

 
—

 
—

 
6

Excess tax benefit from exercise of stock options and vesting of restricted stock
—

 
10

 
—

 
—

 
—

 
—

 
10

Dividends paid ($0.26 per share)
—

 
—

 
—

 
—

 
(3,015
)
 
—

 
(3,015
)
Net income
—

 
—

 
—

 
—

 
1,956

 
—

 
1,956

Other comprehensive income
—

 
—

 
—

 
—

 
—

 
1,751

 
1,751

BALANCE - MARCH 31, 2014
$
146

 
$
137,698

 
$
(33,436
)
 
$
(8,852
)
 
$
81,894

 
$
(2,698
)
 
$
174,752

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common
Stock
 
Additional
Paid-in
Capital
 
Treasury
Stock
 
Common
Stock
Acquired by
Benefit Plans
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income, net
 
Total
Equity
 
 
 
 
 
 
 
BALANCE - DECEMBER 31, 2014
$
147

 
$
139,177

 
$
(39,698
)
 
$
(8,056
)
 
$
84,225

 
$
116

 
$
175,911

Purchase of treasury stock
—

 
—

 
(1,137
)
 
—

 
—

 
—

 
(1,137
)
Stock based compensation expense
—

 
310

 
—

 
—

 
—

 
—

 
310

ESOP shares allocated to employees
—

 
113

 
—

 
156

 
—

 
—

 
269

Issuance of stock for vested equity awards
—

 
(333
)
 
—

 
254

 
79

 
—

 
—

Common stock issued for exercise of vested stock options
—

 
—

 
—

 
—

 
—

 
—

 
—

Excess tax expense from exercise of stock options and vesting of restricted stock
—

 
(3
)
 
—

 
—

 
—

 
—

 
(3
)
Dividends paid ($0.26 per share)
—

 
—

 
—

 
—

 
(2,940
)
 
—

 
(2,940
)
Net income
—

 
—

 
—

 
—

 
2,279

 
—

 
2,279

Other comprehensive income
—

 
—

 
—

 
—

 
—

 
550

 
550

BALANCE - MARCH 31, 2015
$
147

 
$
139,264

 
$
(40,835
)
 
$
(7,646
)
 
$
83,643

 
$
666

 
$
175,239

 

6

FOX CHASE BANCORP, INC.
Consolidated Statements of Cash Flows
(In Thousands, Unaudited)
 
Three Months Ended 
 March 31,
 
2015
 
2014
Cash Flows From Operating Activities
 

 
 

Net income
$
2,279

 
$
1,956

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Provision for loan losses
472

 
—

Valuation adjustment for assets acquired through foreclosure
15

 
282

Depreciation
163

 
189

Net amortization of securities premiums and discounts
423

 
465

Deferred income tax (expense) benefit
(16
)
 
1,613

Stock compensation from benefit plans
579

 
577

Income on bank-owned life insurance
(120
)
 
(117
)
Excess tax expense (benefit) from exercise of stock options and vesting of restricted stock
3

 
(10
)
Decrease in mortgage servicing rights, net
5

 
14

Decrease in accrued interest receivable and other assets
2,675

 
144

Decrease in accrued interest payable, accrued expenses and other liabilities
(716
)
 
(958
)
Net Cash Provided by Operating Activities
5,762

 
4,155

Cash Flows from Investing Activities
 

 
 

Investment securities available-for-sale:
 

 
 

Purchases
(8,056
)
 
—

Proceeds from maturities, calls and principal repayments
2,500

 
2,000

Investment securities held-to-maturity:
 
 
 
Purchases
(1,775
)
 
—

Mortgage related securities available-for-sale:
 

 
 

Purchases
—

 
(2,830
)
Proceeds from maturities, calls and principal repayments
5,467

 
9,636

Mortgage related securities held-to-maturity:
 

 
 

Purchases
(4,048
)
 
(9,767
)
Proceeds from maturities, calls and principal repayments
5,817

 
2,456

Net (increase) decrease in loans
(9,651
)
 
27,410

Purchases of loans and loan participations
(20,968
)
 
(1,346
)
Net decrease in Federal Home Loan Bank stock
1,000

 
92

Purchases of premises and equipment
(37
)
 
(18
)
Additions to assets acquired through foreclosure
(5
)
 
—

Proceeds from sales and payments on assets acquired through foreclosure
—

 
1,938

Net Cash (Used in) Provided by Investing Activities
(29,756
)
 
29,571

Cash Flows from Financing Activities
 

 
 

Net increase in deposits
91,120

 
19,778

Decrease in advances from borrowers for taxes and insurance
(192
)
 
(143
)
Principal payments on Federal Home Loan Bank advances
(10,000
)
 
—

Net decrease in short-term borrowings
(50,000
)
 
(53,400
)
Excess tax (expense) benefit from exercise of stock options and vesting of restricted stock
(3
)
 
10

Common stock issued for exercise of stock options
—

 
6

Purchase of treasury stock
(1,137
)
 
—

Cash dividends paid
(2,940
)
 
(3,015
)
Net Cash Provided by (Used in) Financing Activities
26,848

 
(36,764
)
Net Increase (Decrease) in Cash and Cash Equivalents
2,854

 
(3,038
)
Cash and Cash Equivalents – Beginning
17,213

 
11,947

Cash and Cash Equivalents – Ending
$
20,067

 
$
8,909

Supplemental Disclosure of Cash Flow Information
 

 
 

Interest paid
$
1,495

 
$
1,755

Income taxes paid
$
—

 
$
360

Transfers of loans to assets acquired through foreclosure
$
—

 
$
542

Net charge-offs
$
24

 
$
93



7


FOX CHASE BANCORP, INC
Notes to the Unaudited Consolidated Financial Statements

NOTE 1 - PRINCIPLES OF CONSOLIDATION AND PRESENTATION
 
Fox Chase Bancorp, Inc. (the "Bancorp") is a Maryland corporation. The Bancorp’s primary business is holding the common stock of Fox Chase Bank (the "Bank") and making two loans to the Fox Chase Bank Employee Stock Ownership Plan (the "ESOP").  The Bancorp is authorized to pursue other business activities permissible by laws and regulations for bank holding companies.

The Bancorp is a bank holding company and is regulated by the Board of Governors of the Federal Reserve System. The Bank is a Pennsylvania state-chartered savings bank and is regulated by the Pennsylvania Department of Banking and Securities and the Federal Deposit Insurance Corporation (the "FDIC").

The Bancorp and the Bank (collectively referred to as the "Company") provide a wide variety of financial products and services to individuals and businesses through the Bank’s ten branches in Philadelphia, Richboro, Willow Grove, Warminster, Lahaska, Hatboro, and West Chester, Pennsylvania, and Ocean City, Marmora and Egg Harbor Township, New Jersey.  The operations of the Company are managed as a single business segment.  The Bank also owns 46.15% of Philadelphia Mortgage Advisors ("PMA"), a mortgage banker located in Plymouth Meeting, Pennsylvania and Ocean City, New Jersey.
 
The Company is subject to the regulations of certain federal and state banking agencies.  These regulations can and do change significantly from period to period.  The Company also undergoes periodic examinations by regulatory agencies which may subject it to further changes with respect to asset valuations, amounts of required loan loss allowances and operating restrictions resulting from the regulators’ judgments based on information available to them at the time of their examinations. 
 
The consolidated financial statements include the accounts of the Bancorp and the Bank.  The Bank’s operations include the accounts of its wholly owned subsidiaries, Fox Chase Financial, Inc., Fox Chase Service Corporation, 104 S. Oakland Ave., LLC and Davisville Associates, LLC.  Fox Chase Financial, Inc. is a Delaware-chartered investment holding company and its sole purpose is to manage and hold investment securities.  Fox Chase Service Corporation is a Pennsylvania-chartered company and its purpose is to facilitate the Bank’s investment in PMA. 104 S. Oakland Ave., LLC is a New Jersey-chartered limited liability company formed to secure, manage and hold foreclosed real estate.  Davisville Associates, LLC is a Pennsylvania-chartered limited liability company formed to secure, manage and hold foreclosed real estate.  All material inter-company transactions and balances have been eliminated in consolidation.  Prior period amounts are reclassified, when necessary, to conform with the current year’s presentation.
 
The Company follows accounting principles and reporting practices that are in compliance with U.S. generally accepted accounting principles ("GAAP").  The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclose contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.  Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation and realizability of deferred tax assets, the evaluation of other-than-temporary impairment and the valuation of investment securities and the valuation of assets acquired through foreclosure.

These interim financial statements do not contain all necessary disclosures required by GAAP for complete financial statements and therefore should be read in conjunction with the audited financial statements and the notes thereto included in Fox Chase Bancorp, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2014, as filed with the Securities and Exchange Commission on March 6, 2015.  These financial statements include all normal and recurring adjustments which management believes were necessary in order to conform to GAAP.  The results for the three months ended March 31, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015 or any other period.

8

NOTE 1 - PRINCIPLES OF CONSOLIDATION AND PRESENTATION (CONTINUED)

Per Share Information
 
Basic earnings per share excludes dilution and is computed by dividing income available to common stockholders by the weighted-average common shares outstanding during the period.  Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock.  Unallocated shares in the ESOP and shares purchased to fund the Bancorp’s equity incentive plans are not included in either basic or diluted earnings per share.
 
The following table presents the reconciliation of the numerators and denominators of the basic and diluted earnings per share computations.
 
 
 
 
Three Months Ended 
 March 31,
 
 
 
2015
 
2014
 
 
 
(Unaudited)
Net income
 
 
$
2,279,000

 
$
1,956,000

 
 
 
 
 
 
Weighted-average common shares outstanding (1)
 
11,768,571

 
12,147,959

Average common stock acquired by stock benefit plans:
 
 
 
 
ESOP shares unallocated
 
(480,852
)
 
(545,904
)
Shares purchased by trust
 
(260,153
)
 
(307,172
)
Weighted-average common shares used to calculate basic earnings per share
 
11,027,566

 
11,294,883

Dilutive effect of:
 
 
 
 
Restricted stock awards
 
46,597

 
54,057

Stock option awards
 
193,503

 
206,164

Weighted-average common shares used to calculate diluted earnings per share
 
11,267,666

 
11,555,104

 
 
 
 
 
 
Earnings per share - basic
 
$
0.21

 
$
0.17

Earnings per share - diluted
 
$
0.20

 
$
0.17

 
 
 
 
 
 
Outstanding common stock equivalents having no dilutive effect
 
1,197,994

 
1,109,246

 
 
 
 
 
 
(1) Excludes treasury stock.
 
 
 
 
 

9

NOTE 2 - INVESTMENT AND MORTGAGE RELATED SECURITIES
 
The amortized cost and fair value of securities available-for-sale and held-to-maturity as of March 31, 2015 and December 31, 2014 are summarized as follows: 

 
March 31, 2015
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(In thousands, Unaudited)
Available-for-Sale Securities:
 
 
 
 
 
 
 
Obligations of U.S. government agencies
$
300

 
$
1

 
$
—

 
$
301

Corporate securities
13,597

 
59

 
—

 
13,656

 
13,897

 
60

 
—

 
13,957

Agency residential mortgage related securities
118,283

 
2,658

 
(163
)
 
120,778

Total mortgage related securities
118,283

 
2,658

 
(163
)
 
120,778

Total available-for-sale securities
$
132,180

 
$
2,718

 
$
(163
)
 
$
134,735

 
 
 
 
 
 
 
 
Held-to-Maturity Securities:
 

 
 

 
 

 
 

Corporate securities
$
1,775

 
$
10

 
$
—

 
$
1,785

 
1,775

 
10

 
—

 
1,785

Private label residential mortgage related securities
2,868

 
19

 
—

 
2,887

Agency residential mortgage related securities
165,357

 
2,257

 
(194
)
 
167,420

Total mortgage related securities
168,225

 
2,276

 
(194
)
 
170,307

Total held-to-maturity securities
$
170,000

 
$
2,286

 
$
(194
)
 
$
172,092

 
 
 
December 31, 2014
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(In thousands)
Available-for-Sale Securities:
 
 
 
 
 
 
 
Obligations of U.S. government agencies
$
300

 
$
2

 
$
—

 
$
302

Corporate securities
8,053

 
33

 
—

 
8,086

 
8,353

 
35

 
—

 
8,388

Agency residential mortgage related securities
123,929

 
2,392

 
(672
)
 
125,649

Total mortgage related securities
123,929

 
2,392

 
(672
)
 
125,649

Total available-for-sale securities
$
132,282

 
$
2,427

 
$
(672
)
 
$
134,037

 
 
 
 
 
 
 
 
Held-to-Maturity Securities:
 

 
 

 
 

 
 

Private label residential mortgage related securities
$
2,979

 
$
6

 
$
—

 
$
2,985

Agency residential mortgage related securities
167,193

 
1,239

 
(563
)
 
167,869

Total mortgage related securities
170,172

 
1,245

 
(563
)
 
170,854

Total held-to-maturity securities
$
170,172

 
$
1,245

 
$
(563
)
 
$
170,854


Obligations of U.S. government agencies represents debt issued by the Federal Home Loan Bank (the "FHLB") and are not backed by the full faith and credit of the United States government.

10

NOTE 2 - INVESTMENT AND MORTGAGE RELATED SECURITIES (CONTINUED)

The following tables show gross unrealized losses and fair value of securities, aggregated by security category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2015 and December 31, 2014.
 
March 31, 2015
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
 
 
 
 
 
 
(In thousands, Unaudited)
Available-for-Sale Securities:
 
 
 
 
 
 
 
 
 
 
 
Agency residential mortgage related securities
$
16,961

 
$
(74
)
 
$
9,057

 
$
(89
)
 
$
26,018

 
$
(163
)
Total mortgage related securities
16,961

 
(74
)
 
9,057

 
(89
)
 
26,018

 
(163
)
Total available-for-sale securities
$
16,961

 
$
(74
)
 
$
9,057

 
$
(89
)
 
$
26,018

 
$
(163
)
Held-to-Maturity Securities:
 

 
 

 
 

 
 

 
 

 
 

Agency residential mortgage related securities
$
4,986

 
$
(22
)
 
$
11,157

 
$
(172
)
 
$
16,143

 
$
(194
)
Total mortgage related securities
4,986

 
(22
)
 
11,157

 
(172
)
 
16,143

 
(194
)
Total held-to-maturity securities
$
4,986

 
$
(22
)
 
$
11,157

 
$
(172
)
 
$
16,143

 
$
(194
)
Total temporarily impaired securities
$
21,947

 
$
(96
)
 
$
20,214

 
$
(261
)
 
$
42,161

 
$
(357
)
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
 
 
 
 
 
 
(In thousands)
Available-for-Sale Securities:
 
 
 
 
 
 
 
 
 
 
 
Agency residential mortgage related securities
$
8,229

 
$
(15
)
 
$
64,502

 
$
(657
)
 
$
72,731

 
$
(672
)
Total mortgage related securities
8,229

 
(15
)
 
64,502

 
(657
)
 
72,731

 
(672
)
Total available-for-sale securities
$
8,229

 
$
(15
)
 
$
64,502

 
$
(657
)
 
$
72,731

 
$
(672
)
Held-to-Maturity Securities:
 

 
 

 
 

 
 

 
 

 
 

Agency residential mortgage related securities
$
25,660

 
$
(110
)
 
$
27,182

 
$
(453
)
 
$
52,842

 
$
(563
)
Total mortgage related securities
25,660

 
(110
)
 
27,182

 
(453
)
 
52,842

 
(563
)
Total held-to-maturity securities
$
25,660

 
$
(110
)
 
$
27,182

 
$
(453
)
 
$
52,842

 
$
(563
)
Total temporarily impaired securities
$
33,889

 
$
(125
)
 
$
91,684

 
$
(1,110
)
 
$
125,573

 
$
(1,235
)

During the three month periods ended March 31, 2015 and 2014, no securities were sold. There were no net investment securities gains or losses in the consolidated statement of operations for the three month periods ended March 31, 2015 or 2014.

The Company evaluates a variety of factors when concluding whether a security is other-than-temporarily impaired.  These factors include, but are not limited to, the type and purpose of the security, the underlying rating of the issuer, the presence of credit enhancements, the length of time a security has been in a loss position and the severity of the loss.
 
At March 31, 2015, gross unrealized losses totaled $357,000.  Ten agency residential mortgage related securities, with a fair value of $20.2 million and an unrealized loss position of $261,000, had an unrealized loss position for twelve months or longer as of March 31, 2015.  Additionally, 11 agency residential mortgage related securities, with a fair value of $21.9 million and an unrealized loss position of $96,000, had an unrealized loss position for less than twelve months as of March 31, 2015. The fair value of these 21 agency residential mortgage related securities primarily fluctuates with changes in market conditions for the underlying securities and changes in the interest rate environment. The Company does not intend to sell the securities in an unrealized loss position and it is not more likely than not that it will be required to sell these securities before a recovery of fair value, which may be maturity.  Upon review of the attributes of the individual securities, the Company concluded these securities were not other-than-temporarily impaired.

11

NOTE 2 - INVESTMENT AND MORTGAGE RELATED SECURITIES (CONTINUED)

At March 31, 2015, the amortized cost of held-to-maturity investments consisted of the following (in thousands):
 
Original
Cost
 
Unrealized Loss
at Transfer
 
Post-transfer
Accretion
 
Amortized
Cost
Transferred securities
$
92,188

 
$
(1,625
)
 
$
101

 
$
90,664

Other held-to-maturity securities
79,336

 
—

 
—

 
79,336

Total
$
171,524

 
$
(1,625
)
 
$
101

 
$
170,000

 
As of March 31, 2015, the Company held one private label residential mortgage related security ("PLMBS") with an amortized cost of $2.9 million. This security had an unrealized gain of $19,000 at March 31, 2015. As of December 31, 2014, the Company held one PLMBS with an amortized cost of $3.0 million. This security had an unrealized gain of $6,000 at December 31, 2014.

The amortized cost and estimated fair value of investment securities available-for-sale and held-to-maturity at March 31, 2015 and December 31, 2014 by contractual maturity are as follows:
 
 
Available-for-Sale
 
Held-to-Maturity
 
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
 
 
 
 
 
 
(In thousands)
March 31, 2015 (Unaudited)
 

 
 

 
 

 
 

Due in one year or less
$
3,300

 
$
3,307

 
$
—

 
$
—

Due after one year through five years
10,597

 
10,650

 
1,775

 
1,785

Due after five years through ten years
—

 
—

 
—

 
—

Due after ten years
—

 
—

 
—

 
—

Total mortgage related securities
118,283

 
120,778

 
168,225

 
170,307

 
 
$
132,180

 
$
134,735

 
$
170,000

 
$
172,092

 
 
 
 
 
 
 
 
 
December 31, 2014
 

 
 

 
 

 
 

Due in one year or less
$
5,803

 
$
5,818

 
$
—

 
$
—

Due after one year through five years
2,550

 
2,570

 
—

 
—

Due after five years through ten years
—

 
—

 
—

 
—

Due after ten years
—

 
—

 
—

 
—

Total mortgage related securities
123,929

 
125,649

 
170,172

 
170,854

 
 
$
132,282

 
$
134,037

 
$
170,172

 
$
170,854

 
Securities with a fair value of $76.5 million and $37.0 million at March 31, 2015 and December 31, 2014, respectively, were pledged to secure public deposits.
 
Securities with a fair value of $173.1 million and $169.7 million at March 31, 2015 and December 31, 2014, respectively, were used to secure FHLB advances, short-term borrowings, other borrowed funds and related unused borrowing capacities.  See Note 6.

Securities with a fair value of $1.0 million and $1.1 million at March 31, 2015 and December 31, 2014, respectively, were used to secure derivative transactions.

12

NOTE 3 - LOANS

The composition of net loans at March 31, 2015 and December 31, 2014 is provided below:
 
March 31,
2015
 
December 31,
2014
 
(In thousands)
 
(Unaudited)
 
 
Real estate loans:
 

 
 

One- to four-family
$
104,430

 
$
108,208

Multi-family and commercial
399,694

 
388,821

Construction
47,151

 
39,541

 
551,275

 
536,570

Consumer loans
18,315

 
19,599

Commercial and industrial loans
195,652

 
179,181

Total loans
765,242

 
735,350

Deferred loan origination fees, net
(321
)
 
(294
)
Allowance for loan losses
(11,178
)
 
(10,730
)
Net loans
$
753,743

 
$
724,326



The following tables present changes in the allowance for loan losses by loan segment for the three months ended March 31, 2015 and the three months ended March 31, 2014.

 
Three Months Ended March 31, 2015
 
One- to
Four-Family
 
Multi-family
and
Commercial
 
Construction
 
Consumer
 
Commercial
and
Industrial
 
Unallocated
 
Total
 
(In thousands, Unaudited)
Balance, beginning
$
405

 
$
5,990

 
$
1,038

 
$
184

 
$
2,753

 
$
360

 
$
10,730

Provision (credit) for loan losses
26

 
111

 
22

 
(47
)
 
349

 
11

 
472

Loans charged off
(44
)
 
—

 
—

 
—

 
—

 
—

 
(44
)
Recoveries
—

 
3

 
—

 
17

 
—

 
—

 
20

Balance, ending
$
387

 
$
6,104

 
$
1,060

 
$
154

 
$
3,102

 
$
371

 
$
11,178

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2014
 
One- to
Four-Family
 
Multi-family
and
Commercial
 
Construction
 
Consumer
 
Commercial
and
Industrial
 
Unallocated
 
Total
 
(In thousands, Unaudited)
Balance, beginning
$
403

 
$
7,141

 
$
324

 
$
153

 
$
3,051

 
$
457

 
$
11,529

(Credit) provision for loan losses
(28
)
 
(200
)
 
80

 
(4
)
 
(64
)
 
216

 
—

Loans charged off
—

 
(103
)
 
—

 
(2
)
 
—

 
—

 
(105
)
Recoveries
—

 
3

 
—

 
9

 
—

 
—

 
12

Balance, ending
$
375

 
$
6,841

 
$
404

 
$
156

 
$
2,987

 
$
673

 
$
11,436


13

NOTE 3 - LOANS (CONTINUED)

The following tables provide details of loans, and associated allowance for loan losses, which are individually or collectively evaluated for impairment as of March 31, 2015 and December 31, 2014.
 
As of March 31, 2015
 
One- to
Four-Family
 
Multi-family
and
Commercial
 
Construction
 
Consumer
 
Commercial
and
Industrial
 
Unallocated
 
Total
 
(In thousands, Unaudited)
Allowance for Loan Losses:
 
Balance, ending: individually evaluated for impairment
$
—

 
$
441

 
$
143

 
$
—

 
$
—

 
$
—

 
$
584

Balance, ending: collectively evaluated for impairment
387

 
5,663

 
917

 
154

 
3,102

 
371

 
10,594

Total
$
387

 
$
6,104

 
$
1,060

 
$
154

 
$
3,102

 
$
371

 
$
11,178

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, ending: individually evaluated for impairment
$
2,590

 
$
6,727

 
$
3,006

 
$
227

 
$
70

 
$
—

 
$
12,620

Balance, ending: collectively evaluated for impairment
101,840

 
392,967

 
44,145

 
18,088

 
195,582

 
—

 
752,622

Total
$
104,430

 
$
399,694

 
$
47,151

 
$
18,315

 
$
195,652

 
$
—

 
$
765,242

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2014
 
One- to
Four-Family
 
Multi-family
and
Commercial
 
Construction
 
Consumer
 
Commercial
and
Industrial
 
Unallocated
 
Total
 
(In thousands)
Allowance for Loan Losses:
 
Balance, ending: individually evaluated for impairment
$
11

 
$
401

 
$
114

 
$
26

 
$
—

 
$
—

 
$
552

Balance, ending: collectively evaluated for impairment
394

 
5,589

 
924

 
158

 
2,753

 
360

 
10,178

Total
$
405

 
$
5,990

 
$
1,038

 
$
184

 
$
2,753

 
$
360

 
$
10,730

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, ending: individually evaluated for impairment
$
2,629

 
$
5,849

 
$
2,723

 
$
256

 
$
75

 
$
—

 
$
11,532

Balance, ending: collectively evaluated for impairment
105,579

 
382,972

 
36,818

 
19,343

 
179,106

 
—

 
723,818

Total
$
108,208

 
$
388,821

 
$
39,541

 
$
19,599

 
$
179,181

 
$
—

 
$
735,350


14

NOTE 3 - LOANS (CONTINUED)

The following tables set forth the breakdown of impaired loans by loan segment as of March 31, 2015 and December 31, 2014.
March 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
Nonaccrual
Loans
 
Accruing
TDRs
 
Other
Impaired Loans
 
Total
Impaired Loans
 
Impaired Loans
with
Allowance
 
Impaired Loans
without
Allowance
 
(In thousands, Unaudited)
Real estate loans:
 

 
 

 
 

 
 

 
 

 
 

One- to four-family
$
1,705

 
$
885

 
$
—

 
$
2,590

 
$
—

 
$
2,590

Multi-family and commercial
1,385

 
914

 
4,428

 
6,727

 
5,389

 
1,338

Construction
—

 
3,006

 
—

 
3,006

 
3,006

 
—

Consumer loans
214

 
13

 
—

 
227

 
—

 
227

Commercial and industrial
70

 
—

 
—

 
70

 
—

 
70

Total
$
3,374

 
$
4,818

 
$
4,428

 
$
12,620

 
$
8,395

 
$
4,225

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
Nonaccrual
Loans
 
Accruing
TDRs
 
Other
Impaired Loans
 
Total
Impaired Loans
 
Impaired Loans
with
Allowance
 
Impaired Loans
without
Allowance
 
(In thousands)
Real estate loans:
 

 
 

 
 

 
 

 
 

 
 

One- to four-family
$
1,741

 
$
888

 
$
—

 
$
2,629

 
$
137

 
$
2,492

Multi-family and commercial
1,395

 
—

 
4,454

 
5,849

 
4,502

 
1,347

Construction
—

 
2,723

 
—

 
2,723

 
2,723

 
—

Consumer loans
243

 
13

 
—

 
256

 
82

 
174

Commercial and industrial
75

 
—

 
—

 
75

 
—

 
75

Total
$
3,454

 
$
3,624

 
$
4,454

 
$
11,532

 
$
7,444

 
$
4,088



There were no loans past due 90 days or more and still accruing interest at March 31, 2015 or December 31, 2014.

For the three months ended March 31, 2015 and 2014, the average recorded investment in impaired loans was $12.4 million and $14.2 million, respectively.  The interest income recognized on these impaired loans was $141,000 and $121,000 for the three months ended March 31, 2015 and 2014, respectively.
 
At March 31, 2015, three troubled debt restructurings ("TDRs") totaling $1.4 million are excluded from the accruing TDR column above as they are included in nonaccrual loans.  Of this amount, $1.1 million relates to one multi-family and commercial loan. Additionally, the Bank had two residential loan TDRs totaling $292,000, which are included in nonaccrual loans.

At December 31, 2014, four TDRs totaling $1.4 million are excluded from the accruing TDR column as they are included in nonaccrual loans. Of this amount, $1.1 million relates to one multi-family and commercial loan. Additionally, the Bank had three residential loan TDRs totaling $336,000, which are included in nonaccrual loans. 

15

NOTE 3 - LOANS (CONTINUED)

The following tables set forth the allowance for loan loss for impaired loans and general allowance by loan segment as of March 31, 2015 and December 31, 2014.
 
March 31, 2015
Allowance for Loan Losses
 
Impaired Loans
 
 
 
 
 
 
 
Nonaccrual
Loans
 
Accruing
TDRs
 
Other
Impaired Loans
 
Total
Impaired Loans
 
 
 
 
 
 
 
 
 
General
 
Total
 
(In thousands, Unaudited)
Real estate loans:
 

 
 

 
 

 
 

 
 

 
 

One- to four-family
$
—

 
$
—

 
$
—

 
$
—

 
$
387

 
$
387

Multi-family and commercial
10

 
46

 
385

 
441

 
5,663

 
6,104

Construction
—

 
143

 
—

 
143

 
917

 
1,060

Consumer loans
—

 
—

 
—

 
—

 
154

 
154

Commercial and industrial
—

 
—

 
—

 
—

 
3,102

 
3,102

Unallocated
—

 
—

 
—

 
—

 
371

 
371

Total allowance for loan losses
$
10

 
$
189

 
$
385

 
$
584

 
$
10,594

 
$
11,178

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
Allowance for Loan Losses
 
Impaired Loans
 
 
 
 
 
 
 
Nonaccrual
Loans
 
Accruing
TDRs
 
Other
Impaired Loans
 
Total
Impaired Loans
 
 
 
 
 
 
 
 
 
General
 
Total
 
(In thousands)
Real estate loans:
 

 
 

 
 

 
 

 
 

 
 

One- to four-family
$
11

 
$
—

 
$
—

 
$
11

 
$
394

 
$
405

Multi-family and commercial
10

 
—

 
391

 
401

 
5,589

 
5,990

Construction
—

 
114

 
—

 
114

 
924

 
1,038

Consumer loans
26

 
—

 
—

 
26

 
158

 
184

Commercial and industrial
—

 
—

 
—

 
—

 
2,753

 
2,753

Unallocated
—

 
—

 
—

 
—

 
360

 
360

Total allowance for loan losses
$
47

 
$
114

 
$
391

 
$
552

 
$
10,178

 
$
10,730

 

16

NOTE 3 - LOANS (CONTINUED)

The Company may, under certain circumstances, restructure loans as a concession to borrowers who have experienced financial difficulty, which results in a TDR.  TDRs are impaired loans.  TDRs typically result from the Company’s loss mitigation activities, which, among other activities, could include extension of maturity, rate reductions, delayed repayment or extension, and/or principal forgiveness.
The following table sets forth a summary of the TDR activity for the three month periods ended March 31, 2015 and 2014. 
 
Three Months Ended March 31, 2015
 
Restructured Current Period
 
Number
of Loans
 
Pre-Modification
Outstanding
Recorded Investment
 
Post-Modification
Outstanding
Recorded Investment
 
Type of
Modification
 
(Dollars in thousands, Unaudited)
Real estate loans:
 
 
 
 
 
 
 
One- to four-family
—

 
$
—

 
$
—

 
 
Multi-family and commercial
1

 
914

 
914

 
Delayed repayment
Construction
—

 
—

 
—

 
 
Consumer loans
—

 
—

 
—

 
 
Commercial and industrial
—

 
—

 
—

 
 
Total
1

 
$
914

 
$
914

 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2014
 
Restructured Current Period
 
Number
of Loans
 
Pre-Modification
Outstanding
Recorded Investment
 
Post-Modification
Outstanding
Recorded Investment
 
Type of
Modification
 
(Dollars in thousands, Unaudited)
Real estate loans:
 
 
 
 
 
 
 
One- to four-family
—

 
$
—

 
$
—

 
 
Multi-family and commercial
1

 
1,640

 
1,540

 
Principal reduction
Construction
—

 
—

 
—

 
 
Consumer loans
—

 
—

 
—

 
 
Commercial and industrial
—

 
—

 
—

 
 
Total
1

 
$
1,640

 
$
1,540

 
 
During the three months ended March 31, 2015 and 2014 no TDRs defaulted that were restructured in the prior twelve months.

At March 31, 2015, the recorded investment of residential and consumer mortgage loans secured by residential real estate properties, for which formal foreclosure proceedings are in process, totaled $942,000.  At March 31, 2015, there was one foreclosed residential real estate property, which was carried at $110,000.

17

NOTE 3 - LOANS (CONTINUED)

The following table sets forth past due loans by segment as of March 31, 2015 and December 31, 2014.
 
 
March 31, 2015
 
December 31, 2014
 
30-59
Days
Past Due
 
60-89
Days
Past Due
 
30-59
Days
Past Due
 
60-89
Days
Past Due
 
(In thousands)
 
(Unaudited)
 
 
 
 
One- to four-family real estate
$
492

 
$
83

 
$
—

 
$
145

Multi-family and commercial real estate
87

 
—

 
—

 
—

Construction
—

 
—

 
—

 
—

Consumer
74

 
44

 
113

 
—

Commercial and industrial
—

 
—

 
—

 
—

Total
$
653

 
$
127

 
$
113

 
$
145



We use six primary classifications for loans: pass, pass watch, special mention, substandard, doubtful and loss, of which three classifications are for problem loans: substandard, doubtful and loss. "Substandard loans" must have one or more well defined weaknesses and are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. "Doubtful loans" have the weaknesses of substandard loans with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss.  A loan classified "loss" is considered uncollectible and of such little value that continuance as a loan of the institution is not warranted.  We also maintain a "special mention" category, described as loans which do not currently expose us to a sufficient degree of risk to warrant classification but do possess credit deficiencies or potential weaknesses deserving our close attention.  If we classify an asset as loss, it is recorded as a loan charged off in the current period.

The following tables set forth criticized and classified loans by segment as of March 31, 2015 and December 31, 2014. 
 
March 31, 2015
 
One- to
Four-Family
 
Multi-family
and
Commercial
 
Construction
 
Consumer
 
Commercial
and
Industrial
 
Total
 
(In thousands, Unaudited)
Pass and Pass watch
$
102,725

 
$
380,151

 
$
43,714

 
$
18,101

 
$
190,642

 
$
735,333

Special mention
—

 
15,996

 
3,006

 
—

 
2,996

 
21,998

Substandard
1,705

 
3,547

 
431

 
214

 
2,014

 
7,911

Doubtful
—

 
—

 
—

 
—

 
—

 
—

Total loans
$
104,430

 
$
399,694

 
$
47,151

 
$
18,315

 
$
195,652

 
$
765,242

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
 
One- to
Four-Family
 
Multi-family
and
Commercial
 
Construction
 
Consumer
 
Commercial
and
Industrial
 
Total
 
(In thousands)
Pass and Pass watch
$
106,467

 
$
376,134

 
$
36,229

 
$
19,357

 
$
174,143

 
$
712,330

Special mention
—

 
8,406

 
2,723

 
—

 
3,012

 
14,141

Substandard
1,741

 
4,281

 
589

 
242

 
2,026

 
8,879

Doubtful
—

 
—

 
—

 
—

 
—

 
—

Total loans
$
108,208

 
$
388,821

 
$
39,541

 
$
19,599

 
$
179,181

 
$
735,350


18

NOTE 4 - DERIVATIVES AND HEDGING
 
Interest Rate Swaps
 
On November 3, 2006, the Company entered into an interest rate swap with a current notional amount of $777,000, which is used to hedge a 15-year fixed rate loan that is earning interest at 7.43%.  The Company is receiving variable rate payments of 1-month LIBOR plus 224 basis points and is paying fixed rate payments of 7.43%.  The swap matures in April 2022 and had a fair value loss position of $117,000 and $116,000 at March 31, 2015 and December 31, 2014, respectively.  The interest rate swap is carried at fair value in accordance with FASB ASC 815 "Derivatives and Hedging."  The loan is carried at fair value under the fair value option as permitted by FASB ASC 825 "Financial Instruments."
 
On October 12, 2011, the Company entered into an interest rate swap with a current notional amount of $1.5 million, which is used to hedge a 10-year fixed rate loan that is earning interest at 5.83%.  The Company is receiving variable rate payments of 1-month LIBOR plus 350 basis points and is paying fixed rate payments of 5.83%.  The Company designated this relationship as a fair value hedge.  The swap matures in October 2021 and had a fair value loss position of $69,000 and $46,000 at March 31, 2015 and December 31, 2014, respectively.  The difference between changes in the fair values of the interest rate swap agreement and the hedged loan represents hedge ineffectiveness and is recorded in other non-interest income in the consolidated statements of operations. Hedge ineffectiveness resulted in expense of $3,000 and $4,000 for the three months ended March 31, 2015 and March 31, 2014, respectively. 

Credit Derivatives
 
We have entered into agreements with a third-party financial institution whereby the financial institution enters into interest rate derivative contracts and foreign currency swap contracts with customers referred to them by us.  By the terms of the agreements, the financial institution has recourse to the Company for any exposure created under each swap contract in the event the customer defaults on the swap agreement and the agreement is in a paying position to the third-party financial institution.  These transactions represent credit derivatives and are a customary arrangement that allows financial institutions like ours to provide access to interest rate and foreign currency swap transactions for our customers without creating the swap ourselves.  The Company records the fair value of credit derivatives in other liabilities on the consolidated statement of condition.  The Company recognizes changes in the fair value of credit derivatives, net of any fees received, as service charges and other fee income in the consolidated statements of operations.

At March 31, 2015, there were four variable-rate to fixed-rate interest rate swap transactions between the third-party financial institution and our customers with a notional amount of $12.5 million, and remaining maturities ranging from four to eight years.  At December 31, 2014, there were four variable-rate to fixed-rate interest swap transactions between the third-party financial institution and our customers with a notional amount of $12.6 million, and remaining maturities ranging from five to eight years.  The fair value of the swaps to the customers was a (liability) asset of ($110,000) and $91,000 as of March 31, 2015 and December 31, 2014, respectively, and all swaps were in paying positions to the third-party financial institution at March 31, 2015.  As of March 31, 2015 and December 31, 2014, the fair value of the Company’s interest rate swap credit derivatives was a liability of $7,000 and $10,000, respectively.  During the three months ended March 31, 2015 and 2014, the Company recognized income (expense) of $3,000 and ($1,000), respectively, from interest rate swap credit derivatives.
 
At March 31, 2015, there were three foreign currency swap transactions between the third-party financial institution and our customers with a notional amount of $453,000, and remaining maturities ranging from one to six months.  At December 31, 2014, there were six foreign currency swap transactions between the third-party financial institution and our customers with a notional amount of $366,000 and remaining maturities ranging from one to four months.  The aggregate fair value of these swaps to the customers was a liability of $38,000 and $44,000 as of March 31, 2015 and December 31, 2014, respectively. At March 31, 2015 and December 31, 2014, the fair value of the Company’s credit derivatives was a liability of $1,000 and $2,000, respectively. During the three months ended March 31, 2015 and 2014, the Company recognized income of $2,000 and $0, respectively, from foreign currency swap credit derivatives.
 
The maximum potential payments by the Company to the financial institution under these credit derivatives are not estimable as they are contingent on future interest rates and exchange rates, and the agreement does not provide for a limitation of the maximum potential payment amount.

19

NOTE 5 - DEPOSITS
 
Deposits and their respective weighted average interest rate at March 31, 2015 and December 31, 2014 consist of the following: 
 
March 31, 2015
 
December 31, 2014
 
Weighted
Average
Interest Rate
 
Amount
 
Weighted
Average
Interest Rate
 
Amount
 
(Dollars in thousands)
 
(Unaudited)
 
 
 
 
Noninterest-bearing demand accounts
—
%
 
$
210,900

 
—
%
 
$
168,791

NOW accounts
0.21

 
83,518

 
0.21

 
82,417

Money market accounts
0.24

 
114,327

 
0.22

 
73,802

Savings and club accounts
0.37

 
131,276

 
0.37

 
129,893

Brokered deposits
0.79

 
63,132

 
0.73

 
70,817

Certificates of deposit
0.78

 
199,876

 
0.87

 
186,189

 
0.37
%
 
$
803,029

 
0.42
%
 
$
711,909

 
NOTE 6 - BORROWINGS

FHLB Advances
 
Pursuant to collateral agreements with the FHLB of Pittsburgh, advances are secured by qualifying first mortgage loans, qualifying fixed-income securities, FHLB stock and an interest-bearing demand deposit account with the FHLB. 

Maturity Date
 
Amount
 
Coupon Rate
 
Call Date
 
Rate if Called
 
 
(In thousands, Unaudited)
 
 
 
 
 
 
April 2015
 
$
10,000

 
0.45
%
 
Not Applicable
 
Not Applicable
August 2015
 
10,000

 
0.68

 
Not Applicable
 
Not Applicable
March 2016
 
10,000

 
0.60

 
Not Applicable
 
Not Applicable
March 2016
 
10,000

 
0.62

 
Not Applicable
 
Not Applicable
September 2016
 
5,000

 
0.75

 
Not Applicable
 
Not Applicable
September 2016
 
10,000

 
1.04

 
Not Applicable
 
Not Applicable
June 2017
 
5,000

 
0.94

 
Not Applicable
 
Not Applicable
November 2017
 
15,000

 
3.62

 
May 2015
 
3-month LIBOR + 0.10%
November 2017
 
15,000

 
3.87

 
May 2015
 
3-month LIBOR + 0.10%
December 2017
 
20,000

 
2.83

 
June 2015
 
3-month LIBOR + 0.11%
 
 
$
110,000

 


 
 
 
 

For the borrowings which have a "Call Date" disclosed in the above table, if the borrowing is called, the Bank has the option to either pay off the borrowing without penalty or the borrowing’s fixed rate resets to a variable 3-month LIBOR based rate, as noted in the above table.  Subsequent to the call date, the borrowings are callable by the FHLB quarterly.  Accordingly, the contractual maturities above may differ from actual maturities.
 
The Bank had a maximum borrowing capacity with the FHLB of Pittsburgh of approximately $485.5 million at March 31, 2015.  As of March 31, 2015, the Bank had qualifying collateral pledged against its advances consisting of loans in the amount of $602.9 million and securities in the amount of $73.6 million. Additionally, as of March 31, 2015, the Bank had a maximum borrowing capacity of $64.1 million with the Federal Reserve Bank of Philadelphia through the Discount Window. This borrowing capacity was generated by pledged securities with a fair value of $64.7 million.

20

NOTE 6 - BORROWINGS (CONTINUED)

As a member of the FHLB of Pittsburgh, the Bank is required to acquire and hold shares of FHLB of Pittsburgh capital stock. Stock holding requirement is based on a percentage of the Bank's borrowings and a percentage of the Bank's "eligible assets" as defined by the FHLB. Percentages of borrowings and "eligible assets" used to determine the stock requirement are set by the FHLB from a defined range. Maximum percentages are 6.00% of its advances plus 1.00% of the Bank’s "eligible assets." Minimum percentages are 2.00% of its advances plus 0.05% of "eligible assets."  Current percentages are 4.00% of advances plus 0.10% of "eligible assets."  As of March 31, 2015, the Company had a minimum stock obligation of $2.5 million and a maximum stock obligation of $12.5 million.  The Company held $5.0 million in FHLB stock at that date.
 
Other Borrowed Funds
 
Other borrowed funds obtained from large commercial banks under security repurchase agreements totaled $30.0 million at March 31, 2015.  These borrowings contractually mature with dates ranging from October 2018 through November 2020. As disclosed in the table below, one of the borrowings may be called by the lender based on the underlying agreement.  Accordingly, the contractual maturity below may differ from actual maturity.
 
 
 
 
 
 
Next Call Date
 
Subsequent Call Frequency
Maturity Date
 
Amount
 
Coupon Rate
 
 
 
 
(In thousands, Unaudited)
 
 
 
 
 
 
October 2018
 
$
5,000

 
3.15%
 
April 2015
 
Quarterly
December 2018
 
5,000

 
1-month LIBOR + 2.03%
 
Not Applicable
 
Not Applicable
September 2019
 
10,000

 
1-month LIBOR + 1.89%
 
Not Applicable
 
Not Applicable
September 2020
 
5,000

 
1-month LIBOR + 1.56%
 
Not Applicable
 
Not Applicable
November 2020
 
5,000

 
1-month LIBOR + 1.58%
 
Not Applicable
 
Not Applicable
 
 
$
30,000

 

 
 
 
 
 
Mortgage backed securities with a fair value of $34.9 million at March 31, 2015 were used to secure these other borrowed funds.
 
On January 5, 2015, the Bank modified the four variable rate borrowings in the above table. Prior to the modification, the borrowings had a weighted average fixed rate of 3.33% and a weighted average term to maturity of 3.8 years. Subsequent to the modification, the borrowings have a weighted average variable rate of 1-month LIBOR plus 1.79% and a weighted average term to maturity of 5.0 years.

Short-term Borrowings
 
Short-term borrowings consist of overnight borrowings plus term borrowings with an original maturity less than one year. Short-term borrowings are obtained from commercial banks, participants in the Federal Funds market and the FHLB. As of March 31, 2015, the Company had no short-term borrowings.  As of December 31, 2014, the Company had $50.0 million of short term borrowings consisting of $35.0 million of overnight borrowings and $15.0 million of short-term borrowings with weighted average rates of 0.31% and 0.33%, respectively.

21

NOTE 7 - STOCK BASED COMPENSATION
 
During the three months ended March 31, 2015, the Company recorded $310,000 of stock based compensation expense comprised of stock option expense of $112,000 and restricted stock expense of $198,000. This compares to $297,000 of stock based compensation expense comprised of stock option expense of $112,000 and restricted stock expense of $185,000 during the three months ended March 31, 2014.
The following is a summary of the Bancorp’s stock option activity and related information for the three months ended March 31, 2015.
 
 
 
Number of
Stock Options
 
Weighted Average
Exercise Price
 
Weighted Average
Remaining
Contractual Life
 
Aggregate
Intrinsic Value
 
 
(Unaudited)
Outstanding at December 31, 2014
1,100,520

 
$
12.96

 
5.3 years
 
$
4,172,000

     Granted
126,500

 
16.99

 
 
 
 

     Exercised
—

 
—

 
 
 
 

     Forfeited/Cancelled
—

 
—

 
 
 
 

Outstanding at March 31, 2015
1,227,020

 
$
13.38

 
5.6 years
 
$
4,304,000

Exercisable at March 31, 2015
789,457

 
$
12.09

 
4.1 years
 
$
3,756,000


The fair value of the options granted during the three months ended March 31, 2015 was estimated to be $3.24.  The fair value was based on the following assumptions:

 
Expected Dividend Yield
4.00
%
Expected Volatility
29.86
%
Risk-Free Interest Rate
1.74
%
Expected Option Life in Years
6.5
 


Stock options vest over a five-year service period and expire ten years after grant date. The Company recognizes compensation expense for the fair values of stock options using the straight-line method over the requisite service period for the entire award.

The following is a summary of the Bancorp’s unvested options as of March 31, 2015 and the changes therein during the three months then ended. 
 
 
Number of
Stock Options
 
Weighted Average
Grant Date
Fair Value
 
 
(Unaudited)
Unvested at December 31, 2014
369,503

 
$
3.90

Granted
126,500

 
3.24

Vested
(58,440
)
 
4.17

Forfeited / Cancelled
—

 
—

Unvested at March 31, 2015
437,563

 
$
3.67


 
Expected future expense relating to the 437,563 non-vested options outstanding as of March 31, 2015 is $1.4 million over a weighted average period of 3.3 years. 

22

NOTE 7 - STOCK BASED COMPENSATION (CONTINUED)

The following is a summary of the status of the Bancorp’s restricted stock as of March 31, 2015 and changes therein during the three months then ended.
 
 
Number of
Restricted Shares
 
Weighted Average
Grant Date
Fair Value
 
 
(Unaudited)
Unvested at December 31, 2014
188,622

 
$
15.36

Granted
42,700

 
16.99

Vested
(20,248
)
 
16.43

Forfeited / Cancelled
—

 
—

Unvested at March 31, 2015
211,074

 
$
15.59


Expected future compensation expense relating to the 211,074 restricted shares at March 31, 2015 is $2.8 million over a weighted average period of 3.2 years. 

Non-performance based restricted shares vest over a five-year service period. The Company recognizes compensation expense for the fair value of non-performance based restricted shares on a straight-line basis over the requisite service period for the entire award.

Performance-based restricted shares granted from 2011 to 2013 vest over a five-year period based on service and achievement of performance metrics. The performance metrics to be evaluated during the performance period are (1) return on assets compared to peer group and (2) earnings per share growth rate compared to peer group ("performance criteria"). On the third anniversary of the grant date ("measurement date"), the Company's level of performance relative to the performance metrics are evaluated and, if such performance metrics have been achieved, an amount of shares that will vest at that time and over the following two years will be determined. The number of shares eligible to vest can range from 0% to 150% of the shares identified on grant date (the "target shares"). Of the shares that will vest, 50% of the shares vest on the third anniversary of the date of grant and 25% vest on each of the fourth and fifth anniversaries of the date of grant.

During 2012 and 2013, the Company granted 22,500 and 39,250 shares, respectively, of performance-based restricted stock to certain executive officers of the Company. For the purposes of the above table, the Company is assuming 100% of the "target shares" will be awarded. However, more or less shares may actually be awarded based on the performance of the Company at the applicable measurement date.

During 2015, the Company granted 8,840 shares of performance-based restricted stock to certain executives of the Company. Performance-based restricted shares granted in 2015 utilize the same performance criteria and measurement date as outlined above for the 2011 to 2013 performance based grants. However, the 2015 awards vest 50% at measurement date and 50% on the fourth anniversary of the date of the grant. For the purposes of the above table, the Company is assuming 100% of the "target shares" will be awarded. However, more or less shares may actually be awarded based on the performance of the Company at the applicable measurement date.

NOTE 8 - FAIR VALUE
 
Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique.  Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction on the dates indicated.  The estimated fair value amounts have been measured as of the respective quarter ends, and have not been reevaluated or updated for purposes of these consolidated financial statements subsequent to those respective dates.  As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each reporting date.
 

23

NOTE 8 - FAIR VALUE (CONTINUED)

The Company determines the fair value of financial instruments using three levels of input:
 
Level 1—Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that are accessible at the measurement date.
 
Level 2—Inputs are other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. 

Level 3—Valuations are observed from unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities.  Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful.  The following methods and assumptions were used to estimate the fair values of the Company’s financial instruments at March 31, 2015 and December 31, 2014:
 
Cash and Cash Equivalents
 
The carrying amounts of cash and cash equivalents approximate their fair value.

Investment and Mortgage Related Securities—Available-for-Sale and Held-to-Maturity
 
Fair values for investment securities and mortgage related securities are obtained from one external pricing service ("primary pricing service") as the provider of pricing on the investment portfolio on a quarterly basis.  We generally obtain one quote per investment security.  If quoted market prices are not available, fair values are based on quoted market prices of comparable securities.  If quoted market prices are not available for comparable securities, fair value is based on quoted bids for the security or comparable securities.  We review the estimates of fair value provided by the primary pricing service to determine if they are representative of fair value based upon our general knowledge of market conditions and relative changes in interest rates and the credit environment.  The Company made no adjustments to the values obtained from the primary pricing service.

Loans Receivable, Net
 
To determine the fair values of loans that are not impaired, we employ discounted cash flow analyses that use interest rates and terms similar to those currently being offered to borrowers.  We do not record loans at fair value on a recurring basis.  We record fair value adjustments to impaired loans on a nonrecurring basis to reflect full and partial charge-offs due to impairment.  For impaired loans, we use a variety of techniques to measure fair value, such as using the current appraised value of the collateral, agreements of sale, discounting the contractual cash flows, and analyzing market data that we may adjust due to specific characteristics of the loan or collateral.
 
FHLB Stock
 
The fair value of the FHLB stock is assumed to equal its cost, since the stock is nonmarketable but redeemable at its par value.

Mortgage Servicing Rights 

The fair value of the MSRs was determined using a valuation model that calculates the present value of estimated future servicing income.  The model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment speeds and discount rates.

Accrued Interest Receivable and Accrued Interest Payable
 
The carrying amount of accrued interest receivable and accrued interest payable approximates fair value.
 
Deposit Liabilities
 
Fair values for demand deposits (including NOW accounts), savings and club accounts and money market deposits are, by definition, equal to the amount payable on demand at the reporting date.  Fair values of fixed-maturity certificates of deposit, including brokered deposits, are estimated using a discounted cash flow calculation that applies interest rates currently being offered on similar instruments with similar maturities.

24

NOTE 8 - FAIR VALUE (CONTINUED)
 
Short-term Borrowings, FHLB Advances and Other Borrowed Funds
 
Fair values of short-term borrowings, FHLB advances and other borrowed funds are estimated using discounted cash flow analyses, based on rates currently available to the Bank for advances with similar terms and remaining maturities.

Derivative Contracts
 
The fair values of derivative contracts are based upon the estimated amount the Company would receive or pay to terminate the contracts or agreements, taking into account underlying interest rates, creditworthiness of underlying customers for credit derivatives and, when appropriate, the creditworthiness of the counterparties.

The estimated fair values of the Company’s financial instruments at March 31, 2015 and December 31, 2014 were as follows: 
 
 
 
March 31, 2015
 
December 31, 2014
 
Fair Value
Hierarchy
Level
 
Carrying
Amount
 
Estimated
Fair
Value
 
Carrying
Amount
 
Estimated
Fair
Value
 
 
 
(In thousands)
Financial assets:
 
 
(Unaudited)
 
 
 
 
Cash and cash equivalents
Level 1
 
$
20,067

 
$
20,067

 
$
17,213

 
$
17,213

Available-for-sale securities:
 
 
 

 
 

 
 

 
 

Investment securities available-for-sale
Level 2
 
13,957

 
13,957

 
8,388

 
8,388

Agency residential mortgage related securities
Level 2
 
120,778

 
120,778

 
125,649

 
125,649

Held-to-maturity securities:
 
 
 

 
 

 
 

 
 

Investment securities held-to-maturity
Level 2
 
1,775

 
1,785

 
—

 
—

Private label residential mortgage related securities
Level 2
 
2,868

 
2,887

 
2,979

 
2,985

Agency mortgage related securities
Level 2
 
165,357

 
167,420

 
167,193

 
167,869

Loans receivable, net
Level 3
 
753,743

 
760,989

 
724,326

 
732,142

FHLB stock
Level 3
 
5,015

 
5,015

 
6,015

 
6,015

Accrued interest receivable
Level 2, 3
 
3,286

 
3,286

 
3,147

 
3,147

Mortgage servicing rights
Level 3
 
106

 
106

 
111

 
111

Financial liabilities:
 
 
 

 
 

 
 

 
 

Savings and club accounts
Level 2
 
131,276

 
131,276

 
129,893

 
129,893

Demand, NOW and money market deposits
Level 2
 
408,745

 
408,745

 
325,010

 
325,010

Brokered deposits
Level 2
 
63,132

 
63,103

 
70,817

 
70,600

Certificates of deposit
Level 2
 
199,876

 
199,909

 
186,189

 
186,154

Short-term borrowings
Level 2
 
—

 
—

 
50,000

 
50,000

FHLB advances
Level 2
 
110,000

 
113,266

 
120,000

 
123,189

Other borrowed funds
Level 2
 
30,000

 
32,061

 
30,000

 
32,017

Accrued interest payable
Level 2
 
268

 
268

 
311

 
311

Derivative contracts
Level 2, 3
 
194

 
194

 
174

 
174



The following financial instruments were classified as Level 3 and carried at fair value on a recurring basis as of March 31, 2015:

•
Two commercial loans, since lending credit risk is not an observable input for these loans (see interest rate swap discussion in Note 4).  The unrealized gain on the two loans was $173,000 at March 31, 2015 compared to $152,000 at December 31, 2014.

•
Credit derivatives are valued based on creditworthiness of the underlying borrower which is a significant unobservable input.  The liability resulting from credit derivatives was $8,000 and $12,000 at March 31, 2015 and December 31, 2014, respectively.

25

NOTE 8 - FAIR VALUE (CONTINUED)

The following measures were made on a recurring basis as of March 31, 2015 and December 31, 2014.
 
 
 
 
 
Fair Value Measurements at Reporting Date Using
 
 
 
 
Quoted Prices in Active Markets
for Identical Assets
 
Significant Other
Observable Inputs
 
Significant Other
Unobservable Inputs
 
 
As of
 
 
 
Description
 
March 31, 2015
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
 
(In thousands, Unaudited)
Available-for-Sale Securities:
 
 

 
 

 
 

 
 

Obligations of U.S. government agencies
 
$
301

 
$
—

 
$
301

 
$
—

Corporate securities
 
13,656

 
—

 
13,656

 
—

Agency residential mortgage related securities
 
120,778

 
—

 
120,778

 
—

Loans (1)
 
2,441

 
—

 
—

 
2,441

Derivative contracts (1)
 
(194
)
 
—

 
(186
)
 
(8
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Fair Value Measurements at Reporting Date Using
 
 
 
 
Quoted Prices in Active Markets
for Identical Assets
 
Significant Other
Observable Inputs
 
Significant Other
Unobservable Inputs
 
 
As of
 
 
 
Description
 
December 31, 2014
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
 
(In thousands)
Available-for-Sale Securities:
 
 

 
 

 
 

 
 

Obligations of U.S. government agencies
 
$
302

 
$
—

 
$
302

 
$
—

Corporate securities
 
8,086

 
—

 
8,086

 
—

Agency residential mortgage related securities
 
125,649

 
—

 
125,649

 
—

Loans (1)
 
2,451

 
—

 
—

 
2,451

Derivative contracts (1)
 
(174
)
 
—

 
(162
)
 
(12
)
(1)          Such financial instruments are recorded at fair value as further described in Note 4.

The following measures were made on a non-recurring basis as of March 31, 2015 and December 31, 2014:
 
Loans, which were partially charged off at March 31, 2015 and December 31, 2014.  The loans’ fair values are based on Level 3 inputs, which are either an appraised value or a sales agreement, less costs to sell.  These amounts do not include fully charged-off loans, because we carry fully charged-off loans at zero on our balance sheet.
 
MSRs, the fair value of which was determined using a valuation model that calculates the present value of estimated future servicing income.  The model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment speeds and discount rates.
 
Other real estate owned, for which we used Level 3 inputs, which consist of appraisals, agreements of sale or letters of intent.

26

NOTE 8 - FAIR VALUE (CONTINUED)

 
 
 
 
Fair Value Measurements at Reporting Date Using
 
 
 
 
Quoted Prices in Active Markets
for Identical Assets
 
Significant Other
Observable Inputs
 
Significant Other
Unobservable Inputs
 
 
 
 
 
 
 
 
Balance
 
(Level 1)
 
(Level 2)
 
(Level 3)
March 31, 2015 (Unaudited)
 

 
(In thousands)
 
 

Loans
$
1,496

 
$
—

 
$
—

 
$
1,496

Mortgage servicing rights
106

 
—

 
—

 
106

Other real estate owned
2,804

 
—

 
—

 
2,804

Total
$
4,406

 
$
—

 
$
—

 
$
4,406

 
 
 
 
 
 
 
 
December 31, 2014
 

 
 

 
 

 
 

Loans
$
1,654

 
$
—

 
$
—

 
$
1,654

Mortgage servicing rights
111

 
—

 
—

 
111

Other real estate owned
2,814

 
—

 
—

 
2,814

Total
$
4,579

 
$
—

 
$
—

 
$
4,579


The following tables include a roll forward of the financial instruments which fair value is determined on a recurring basis using Significant Other Unobservable Inputs (Level 3) for the periods from December 31, 2014 to March 31, 2015 and December 31, 2013 to March 31, 2014. 
Three Months Ended March 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
Private Label
Commercial Mortgage
Related Securities
 
Derivative
Contracts
 
Financial Assets
Acquired
from Debtors
 
Loans
 
Total
 
 
(In thousands, Unaudited)
Beginning balance, December 31, 2014
 
$
—

 
$
(12
)
 
$
—

 
$
2,451

 
$
2,439

Purchases/additions
 
—

 
(1
)
 
—

 
—

 
(1
)
Sales
 
—

 
—

 
—

 
—

 
—

Payments received
 
—

 
—

 
—

 
(30
)
 
(30
)
Premium amortization, net
 
—

 
—

 
—

 
—

 
—

Increase in value
 
—

 
5

 
—

 
20

 
25

Ending balance, March 31, 2015
 
$
—

 
$
(8
)
 
$
—

 
$
2,441

 
$
2,433

 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
Private Label
Commercial Mortgage
Related Securities
 
Derivative
Contracts
 
Financial Assets
Acquired
from Debtors
 
Loans
 
Total
 
 
(In thousands, Unaudited)
Beginning balance, December 31, 2013
 
$
2,120

 
$
(4
)
 
$
1,938

 
$
2,535

 
$
6,589

Purchases/additions
 
—

 
(2
)
 
—

 
—

 
(2
)
Sales
 
—

 
—

 
(1,938
)
 
—

 
(1,938
)
Payments received
 
(1,633
)
 
—

 
—

 
(28
)
 
(1,661
)
Premium amortization, net
 
—

 
—

 
—

 
—

 
—

(Decrease)/increase in value
 
(2
)
 
1

 
—

 
12

 
11

Ending balance, March 31, 2014
 
$
485

 
$
(5
)
 
$
—

 
$
2,519

 
$
2,999


There were no transfers made between levels during the three months ended March 31, 2015 or 2014.

27

NOTE 9 – NEW ACCOUNTING PRONOUNCEMENTS

  Accounting Standards Update (ASU) No. 2015-01 - Income Statement—Extraordinary and Unusual Items (Subtopic 225-20) - Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. The objective of this update is to simplify the income statement presentation requirements in Subtopic 225-20 by eliminating the concept of extraordinary items. Extraordinary items are events and transactions that are distinguished by their unusual nature and by the infrequency of their occurrence. Eliminating the extraordinary classification simplifies income statement presentation by altogether removing the concept of extraordinary items from consideration. The amendments in this update are effective for the Company for annual and interim periods beginning on or after January 1, 2016. The Company has not yet concluded whether this update will have an impact on the Company’s consolidated financial statements.

ASU No. 2015-02 - Consolidation (Topic 810) - Amendments to the Consolidation Analysis. The amendments in this update affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. Specifically, the amendments: (1) Modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities, (2) Eliminate the presumption that a general partner should consolidate a limited partnership, (3) Affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships, (4) Provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. The amendments in this update are effective for the Company for annual and interim periods beginning on or after January 1, 2016. The Company has not yet concluded whether this update will have an impact on the Company’s consolidated financial statements.

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Forward-Looking Statements
This quarterly report contains forward-looking statements that are based on assumptions and may describe future plans, strategies and expectations of the Company.  These forward-looking statements are generally identified by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project" or similar expressions.  The Company’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 subsidiaries include, but are not limited to, 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 credit quality and composition of the loan and investment portfolios, valuation of assets acquired through foreclosure, deposit flows, competition, demand for loan products and for financial services in the Company's market area, changes in real estate market values in the Company's market area, changes in relevant accounting principles and guidelines and inability of third party service providers to perform as required. Additional factors that may affect our results are discussed in the sections titled "Risk Factors" in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, as filed with the Securities and Exchange Commission on March 6, 2015, and its other Securities and Exchange Commission reports.

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.

Unless the context indicates otherwise, all references in this Form 10-Q to "Company," "we," "us" and "our" refer to Fox Chase Bancorp, Inc. and its subsidiary.

Critical Accounting Policies
 The discussion and analysis of the financial condition and results of operations are based on our consolidated financial statements, which are prepared in conformity with generally accepted accounting principles in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of income and expenses. The estimates and assumptions that we use are based on historical experience and various other factors and are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, resulting in a change that could have a material impact on the carrying value of our assets and liabilities and our results of operations.


28

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. 
•
Allowance for Loan Losses
•
Deferred Income Taxes
•
Valuation and Other-Than-Temporary Impairment of Investment Securities
•
Valuation of Assets Acquired Through Foreclosure
A discussion of these critical accounting policies is located in the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operation—Critical Accounting Policies" in the Company's Annual Report on 10-K. There have been no material changes in the Company’s critical accounting policies, judgments and estimates, including assumptions or estimation techniques utilized, as compared to the Company's most recent Annual Report on Form 10-K. 

Comparison of Financial Condition at March 31, 2015 and December 31, 2014
 
Total assets were $1.12 billion at March 31, 2015 compared to $1.09 billion at December 31, 2014.  Total loans were $753.7 million at March 31, 2015, an increase of $29.4 million, or 4.1%, from $724.3 million at December 31, 2014.  Total commercial loans increased $35.0 million, or 5.8%, comprised of increases of $16.5 million in commercial and industrial loans, $10.9 million in multi-family and commercial real estate loans and $7.6 million in commercial construction loans. The increase in commercial and industrial loans was primarily driven by purchases of syndicated loans during the three months ended March 31, 2015.  The increase in multi-family and commercial real estate loans was driven by originations and fundings exceeding normal amortization and paydowns. The increase in commercial construction loans was the result of incremental fundings associated with existing facilities and originations. During the three months ended March 31, 2015, one- to four-family residential mortgage loans decreased $3.8 million and consumer loans decreased $1.3 million due to normal amortization exceeding new loans originated.
 
During the three months ended March 31, 2015, mortgage related securities available-for-sale decreased $4.9 million from $125.6 million at December 31, 2014 to $120.8 million at March 31, 2015 and mortgage related securities held-to-maturity decreased $1.9 million from $170.2 million at December 31, 2014 to $168.2 million at March 31, 2015, primarily due to paydowns exceeding purchases in 2015. Investment securities available-for-sale increased $5.6 million from $8.4 million at December 31, 2014 to $14.0 million at March 31, 2015. There were no investment securities held-to-maturity at December 31, 2014 compared to $1.8 million at March 31, 2015 due to purchases during 2015. The increase in investment securities was due to corporate bond purchases of $9.8 million during the three months ended March 31, 2015.

Deposits increased $91.1 million, or 12.8%, from $711.9 million at December 31, 2014 to $803.0 million at March 31, 2015.  During the three months ended March 31, 2015, noninterest-bearing demand accounts increased $42.1 million, money market accounts increased $40.5 million, non-brokered certificates of deposit increased $13.7 million, savings and club accounts increased $1.4 million and NOW accounts increased $1.1 million. Offsetting these increases was a decrease in brokered deposits of $7.7 million. The increase in noninterest-bearing demand accounts was primarily due to deposits obtained from commercial borrowing relationships. The increases in money market accounts and non-brokered certificates of deposit were primarily due to deposits obtained from certain municipal customers.

There were no short-term borrowings at March 31, 2015 compared to short-term borrowings of $50.0 million at December 31, 2014. Federal Home Loan Bank advances decreased $10.0 million, or 8.3%, from $120.0 million at December 31, 2014 to $110.0 million at March 31, 2015. These decreases were primarily due to reduced liquidity needs as a result of the increase in deposits.
 
Stockholders’ equity decreased $672,000 to $175.2 million at March 31, 2015 compared to $175.9 million at December 31, 2014 primarily due to net income of $2.3 million, other comprehensive income of $550,000 and stock based compensation activity (which includes proceeds received from the exercise of stock options) of $576,000, offset by dividends paid of $2.9 million and $1.1 million of common stock repurchased during the three months ended March 31, 2015.

Comparison of Operating Results for the Three Months Ended March 31, 2015 and 2014
 
General. Net income increased $323,000, or 16.5%, to $2.3 million for the three months ended March 31, 2015, compared to $2.0 million for the three months ended March 31, 2014.  The increase in net income was due to an increase in net interest income of $355,000, an increase in noninterest income of $112,000, a decrease in noninterest expenses of $228,000 and a decrease in income tax provision of $100,000, offset by an increase in the provision for loan losses of $472,000.


29

During the three months ended March 31, 2015, the Company incurred $230,000 in costs associated with our plan to change our outsourced data processing systems, of which $165,000 is included in data processing costs and $65,000 is included in professional fees. The Company also received a special dividend totaling $254,000 from the FHLB and reversed a $182,000 valuation allowance on certain deferred state tax assets.

Net Interest Income.  Net interest income increased $355,000, or 4.3%, to $8.7 million for the three months ended March 31, 2015 compared to $8.3 million for the same period in 2014, primarily due to an increase in total interest income of $66,000 and a decrease in total interest expense of $289,000.

The increase in total interest income was primarily due to a $7.6 million increase in the average balance of interest-earning assets as the yield on interest-earning asset was 3.88% for both periods. The increase in the average balance of interest-earning assets was primarily due to a $27.0 million increase in total loans, offset by a decrease in mortgage related securities of $24.3 million.  The yield on mortgage related securities decreased from 2.31% to 2.19%, primarily due to new purchases having lower yields in comparison to existing securities which continue to amortize.  The yield on investment securities increased from 2.61% to 8.31% due to the previously identified special dividend from the FHLB. The yield on total loans decreased from 4.59% to 4.44%, primarily due to lower yields on commercial loan originations.

The decrease in total interest expense was primarily due to a $52.7 million decrease in the average balance of interest-bearing liabilities from $789.3 million to $736.6 million and a decrease in the cost of interest-bearing liabilities from 0.89% to 0.80%.  The decrease in the average balance of interest-bearing liabilities was primarily driven by a $26.9 million decrease in interest-bearing deposits and a $25.8 million decrease in borrowings. This decrease was offset by a $57.2 million increase in noninterest-bearing deposits. The decrease in the average cost of interest-bearing liabilities was due to decreases in the average cost of certificates of deposit from 1.20% to 0.82% and borrowings from 1.58% to 1.57%.  The decrease in the average cost of certificates of deposit reflects the continued low interest rate environment combined with maturities of higher rate certificates of deposit. The decrease in the average cost of borrowings was primarily due to the modification of four non-callable fixed rate borrowings totaling $25.0 million during the three months ended March 31, 2015. Prior to the modification, the borrowings had a weighted average fixed rate of 3.33%. Subsequent to the modification, the borrowings have a weighted average variable rate of 1-month LIBOR plus 1.79%.

30

Average Balances and Yields. The following table presents information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting annualized average yields and costs. The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented. Net loan origination fees and costs are included in interest income on loans and are insignificant. Yields are not presented on a tax-equivalent basis.  Any adjustments necessary to present yields on a tax-equivalent basis are insignificant. 
 
Three Months Ended March 31,
 
2015
 
2014
 
Average
Balance
 
Interest
and
Dividends
 
Yield/
Cost
 
Average
Balance
 
Interest
and
Dividends
 
Yield/
Cost
Assets:
(Dollars in thousands)
Interest-earning assets:
 

 
 

 
 

 
 

 
 

 
 

Interest-earning demand deposits
$
11,550

 
$
3

 
0.10
%
 
$
7,325

 
$
—

 
0.03
%
Mortgage related securities
 

 
 

 
 

 
 

 
 

 
 

Available-for-sale
123,769

 
722

 
2.33
%
 
244,412

 
1,454

 
2.38
%
Held-to-maturity
169,018

 
881

 
2.08
%
 
72,686

 
374

 
2.06
%
Total mortgage related securities
292,787

 
1,603

 
2.19
%
 
317,098

 
1,828

 
2.31
%
Investment securities
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale
16,716

 
370

 
8.87
%
 
18,416

 
120

 
2.61
%
Held-to-maturity
1,546

 
9

 
2.25
%
 
—

 
—

 
—
%
Total investment securities
18,262

 
379

 
8.31
%
 
18,416

 
120

 
2.61
%
Loans:
 

 
 

 
 

 
 

 
 

 
 

Residential loans
107,302

 
1,251

 
4.66
%
 
126,752

 
1,510

 
4.76
%
Commercial loans
615,474

 
6,669

 
4.39
%
 
566,150

 
6,335

 
4.54
%
Consumer loans
19,229

 
219

 
4.57
%
 
22,081

 
265

 
4.80
%
Total Loans
742,005

 
8,139

 
4.44
%
 
714,983

 
8,110

 
4.59
%
Allowance for loan losses
(10,777
)
 
 

 
 

 
(11,603
)
 
 

 
 

Net loans
731,228

 
8,139

 
 

 
703,380

 
8,110

 
 

Total interest-earning assets
1,053,827

 
10,124

 
3.88
%
 
1,046,219

 
10,058

 
3.88
%
Noninterest-earning assets
42,702

 
 

 
 

 
46,457

 
 

 
 

Total assets
$
1,096,529

 
 

 
 

 
$
1,092,676

 
 

 
 

Liabilities and equity:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
NOW and money market deposit accounts
$
164,508

 
$
90

 
0.22
%
 
$
177,050

 
$
92

 
0.21
%
Savings accounts
130,354

 
120

 
0.37
%
 
108,804

 
59

 
0.22
%
Brokered deposits
64,266

 
125

 
0.79
%
 
67,350

 
97

 
0.59
%
Certificates of deposit
187,337

 
380

 
0.82
%
 
220,142

 
650

 
1.20
%
Total interest-bearing deposits
546,465

 
715

 
0.53
%
 
573,346

 
898

 
0.64
%
Short-term borrowings
41,097

 
32

 
0.32
%
 
35,915

 
25

 
0.28
%
FHLB advances
119,032

 
539

 
1.84
%
 
150,000

 
570

 
1.54
%
Other borrowed funds
30,000

 
166

 
2.24
%
 
30,000

 
248

 
3.34
%
Total borrowings
190,129

 
737

 
1.57
%
 
215,915

 
843

 
1.58
%
Total interest-bearing liabilities
736,594

 
1,452

 
0.80
%
 
789,261

 
1,741

 
0.89
%
Noninterest-bearing deposits
176,389

 
 

 
 

 
119,207

 
 

 
 

Other noninterest-bearing liabilities
7,442

 
 

 
 

 
8,619

 
 

 
 

Total liabilities
920,425

 
 

 
 

 
917,087

 
 

 
 

Stockholders’ equity
175,552

 
 

 
 

 
178,266

 
 

 
 

Accumulated comprehensive income
552

 
 

 
 

 
(2,677
)
 
 

 
 

Total stockholders' equity
176,104

 
 

 
 

 
175,589

 
 

 
 

Total liabilities and stockholders’ equity
$
1,096,529

 
 

 
 

 
$
1,092,676

 
 

 
 

Net interest income
 

 
$
8,672

 
 

 
 

 
$
8,317

 
 

Interest rate spread
 

 
 

 
3.08
%
 
 

 
 

 
2.99
%
Net interest margin
 

 
 

 
3.29
%
 
 

 
 

 
3.17
%
Average interest-earning assets to average interest-bearing liabilities
 

 
 

 
143.07
%
 
 

 
 

 
132.56
%

31

Rate/Volume Analysis.  The following table sets forth the effects of changing rates and volumes on our net interest income.  The rate column shows the effects attributable to changes in rate (changes in rate multiplied by current volume).  The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate).  The net column represents the sum of the prior columns. 
 
 
Three Months Ended March 31, 2015
 
Compared to
 
Three Months Ended March 31, 2014
 
Increase (Decrease)
 
 
 
Due to
 
 
 
Rate
 
Volume
 
Net
Interest Income:
(In thousands)
Interest-earning demand deposits
$
2

 
$
1

 
$
3

Mortgage related securities
 

 
 

 
 

Available-for-sale
(14
)
 
(718
)
 
(732
)
Held-to-maturity
12

 
495

 
507

Total mortgage related securities
(2
)
 
(223
)
 
(225
)
Investment securities
 
 
 
 
 
Available-for-sale
261

 
(11
)
 
250

Held-to-maturity
—

 
9

 
9

Total investment securities
261

 
(2
)
 
259

Loans
 

 
 

 
 

Residential loans
(28
)
 
(231
)
 
(259
)
Commercial loans
(219
)
 
553

 
334

Consumer loans
(11
)
 
(35
)
 
(46
)
Total loans
(258
)
 
287

 
29

Total interest-earning assets
3

 
63

 
66

 
 
 
 
 
 
Interest Expense:
 

 
 

 
 

NOW and money market deposits
4

 
(6
)
 
(2
)
Savings accounts
50

 
11

 
61

Brokered deposits
32

 
(4
)
 
28

Certificates of deposit
(174
)
 
(96
)
 
(270
)
Total interest-bearing deposits
(88
)
 
(95
)
 
(183
)
 
 
 
 
 
 
Short-term borrowings
4

 
3

 
7

FHLB advances
87

 
(118
)
 
(31
)
Other borrowed funds
(82
)
 
—

 
(82
)
Total borrowings
9

 
(115
)
 
(106
)
Total interest-bearing liabilities
(79
)
 
(210
)
 
(289
)
Net change in net interest income
$
82

 
$
273

 
$
355


32

Provision for Loan Losses. The Company recorded a provision for loan losses of $472,000 for the three month period ended March 31, 2015 compared to no provision for the three months ended March 31, 2014. The provision for loan losses for the three months ended March 31, 2015 was primarily driven by growth in commercial loans and an increase in criticized and classified loans.

The following table provides information with respect to our nonperforming assets and impaired loans at the dates indicated. 
 
 
March 31, 2015
 
December 31, 2014
 
(Dollars in thousands)
 
 
 
 

Nonaccruing Loans:
 

 
 

One- to four-family real estate
$
1,705

 
$
1,741

Multi-family and commercial real estate
1,385

 
1,395

Construction
—

 
—

Consumer
214

 
243

Commercial and industrial
70

 
75

Total
3,374

 
3,454

 
 
 
 
Accruing Loans Past Due 90 Days or More:
 
 
 

Total
$
—

 
$
—

 
 
 
 
Nonperforming Loans
3,374

 
3,454

 
 
 
 
Assets Acquired Through Foreclosure
2,804

 
2,814

Total Nonperforming Assets
$
6,178

 
$
6,268

 
 
 
 
Total nonperforming loans to total loans
0.44
%
 
0.47
%
Total nonperforming assets to total assets
0.55

 
0.57

 
 
 
 
Impaired Loans:
 

 
 

Nonaccruing loans
$
3,374

 
$
3,454

Accruing troubled debt restructurings
4,818

 
3,624

Other impaired loans
4,428

 
4,454

Total impaired loans
$
12,620

 
$
11,532



At March 31, 2015, nonperforming assets were comprised of the following: 

•
Five multi-family and commercial real estate loans, the largest of which is secured by rental properties located in the Greater Philadelphia Area.
•
One commercial and industrial loan to a business located in New Castle County, Delaware.
•
Seven one- to four-family loans, the largest of which is secured by a single-family home located in Montgomery County, Pennsylvania. 
•
Five consumer loans which are secured by second or third lien mortgage positions. 
•
Assets acquired through foreclosure consisting of four properties with a total carrying value of $2.8 million.



33

Noninterest Income.  The following table summarizes noninterest income for the three months ended March 31, 2015 and 2014. 
 
 
Three Months Ended March 31,
 
$
 
%
 
 
2015
 
2014
 
Change
 
Change
 
 
(Dollars in thousands)
Service charges and other fee income
 
$
384

 
$
352

 
$
32

 
9.1
%
Income on bank-owned life insurance
 
120

 
117

 
3

 
2.6

Equity in earnings of affiliate
 
40

 
(33
)
 
73

 
221.2

Other
 
27

 
23

 
4

 
17.4

Total Noninterest Income
 
$
571

 
$
459

 
$
112

 
24.4
%
 
Noninterest income increased $112,000 from $459,000 for the three months ended March 31, 2014 to $571,000 for the same period in 2015. Equity in earnings of affiliates increased $73,000 due to increased income on the Bank’s investment in PMA due to higher mortgage loan volume for the 2015 period.  Service charges and other fee income increased $32,000, due to increases in loan-related fees and deposit-related fees.

Noninterest Expense.  The following table summarizes noninterest expense for the three months ended March 31, 2015 and 2014. 
 
 
Three Months Ended March 31,
 
$
 
%
 
 
2015
 
2014
 
Change
 
Change
 
 
(Dollars in thousands)
Salaries, benefits and other compensation
 
$
3,719

 
$
3,641

 
$
78

 
2.1
 %
Occupancy expense
 
477

 
496

 
(19
)
 
(3.8
)
Furniture and equipment expense
 
83

 
111

 
(28
)
 
(25.2
)
Data processing costs
 
573

 
385

 
188

 
48.8

Professional fees
 
363

 
478

 
(115
)
 
(24.1
)
Marketing expense
 
41

 
41

 
—

 
—

FDIC premiums
 
119

 
165

 
(46
)
 
(27.9
)
Assets acquired through foreclosure expense
 
30

 
321

 
(291
)
 
(90.7
)
Other
 
360

 
355

 
5

 
1.4

Total Noninterest Expense
 
$
5,765

 
$
5,993

 
$
(228
)
 
(3.8
)%

Noninterest expense decreased $228,000 from $6.0 million for the three months ended March 31, 2014 compared to $5.8 million for the same period in 2015. Assets acquired through foreclosure expense decreased $291,000 primarily due to decreased valuation adjustments on assets acquired through foreclosure, which totaled $15,000 for the three months ended March 31, 2015 compared to $282,000 for the three months ended March 31, 2014. Professional fees decreased $115,000 primarily due to decreased loan workout costs, offset by $65,000 in costs associated with our plan to change our outsourced data processing systems. Additionally, data processing costs increased $188,000 primarily due to this initiative. Salaries, benefits and other compensation expense increased $78,000 primarily as a result of increased staffing costs and annual merit increases. FDIC premiums decreased $46,000 due to a reduced assessment.

Income Taxes. The income tax provision for the three months ended March 31, 2015 was $727,000 to $827,000 for the three months ended March 31, 2014.  The Company’s effective income tax rate was 24.2% for the three months ended March 31, 2015 compared to 29.7% for the three months ended March 31, 2014.  The decrease in effective tax rate reflects the reversal of a $182,000 valuation allowance on certain state deferred tax assets during the three months ended March 31, 2015, as management determined it is more likely than not the deferred tax assets will be realized. The effective tax rate for the three months ended March 31, 2015, excluding this discrete event, was 30.3%.

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 and sales, security repayments, maturities and sales, and funds available from the FHLB, Federal Reserve Bank and commercial banks.  While maturities and scheduled amortization of loans and

34

securities are predictable sources of funds, deposit flows and loans and securities sales and prepayments are greatly influenced by general interest rates, economic conditions and competition.

The following table presents certain of our contractual obligations as of March 31, 2015.
 
 
 
 
 
 
Payments Due by Period
 
 
 
 
 
Less Than
One Year
 
One to
Three Years
 
Three to
Five Years
 
More Than
Five Years
Contractual Obligations
 
Total
 
 
 
 
 
 
 
(In thousands)
March 31, 2015
 
 
 

 
 

 
 

 
 

 
 

Operating lease obligations (1)
 
$
358

 
$
358

 
$
—

 
$
—

 
$
—

FHLB advances and other borrowings (2)
 
147,915

 
42,715

 
74,295

 
20,813

 
10,092

Other long-term obligations (3)
 
12,159

 
3,093

 
3,173

 
2,678

 
3,215

Total
 
 
$
160,432

 
$
46,166

 
$
77,468

 
$
23,491

 
$
13,307

 
 
 
 
 
 
 
 
 
 
 
 
                                                                                                                                                                          
(1)          Represents lease obligations for operations center and equipment.
(2)          Includes principal and projected interest payments.
(3)          Represents obligations to the Company’s third-party data processing providers and other vendors including obligations related to our plan to change our outsourced data processing systems which is anticipated to occur during the fourth quarter of 2015.
 
We regularly adjust our investments in liquid assets and our short-term borrowing position based upon our assessment of: (1) expected loan demand; (2) expected deposit flows; (3) cash flows on our loans and investments; (4) yields available on interest-earning deposits and securities; and (5) the objectives of our asset/liability management policy.  We use a variety of measures to assess our liquidity needs, which are provided to our Asset/Liability Management Committee on a regular basis.  Our policy is to maintain net liquidity of at least 50% of our funding obligations over the next month.  Additionally, our policy is to maintain an amount of cash and short-term marketable securities equal to at least 15% of net deposits and liabilities that will mature in one year or less.
 
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 March 31, 2015, cash and cash equivalents totaled $20.1 million.  Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $134.7 million at March 31, 2015.  In addition, at March 31, 2015, we had the ability to borrow a total of approximately $485.5 million from the FHLB, of which we had $110.0 million outstanding.  As of March 31, 2015, the Bank also had a maximum borrowing capacity of $64.1 million with the Federal Reserve Bank of Philadelphia, through the Discount Window.  Additionally, as of March 31, 2015, the Bank had overnight borrowing facilities with the FHLB of Pittsburgh and the Federal Reserve Bank as well as federal funds lines of credit with three other commercial banks.
 
At March 31, 2015, we had $201.9 million in unfunded commitments, which consisted of $11.0 million in home equity and consumer loan commitments, $174.2 million in commercial loan commitments, $16.4 million in standby letters of credit and $285,000 in commercial letters of credit.
 
Certificates of deposit due within one year of March 31, 2015 totaled $138.3 million, including $30.8 million of brokered deposits, representing 52.6% of certificates of deposit at March 31, 2015, a decrease from 53.6% at December 31, 2014.  We believe the large percentage of certificates of deposit that mature within one year reflect customers’ hesitancy to invest their funds for long periods in the current low interest rate environment.  If these maturing deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and borrowings.  Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before March 31, 2016.
 
Our primary investing activities are the origination of loans and the purchase and sale of securities.  Our primary financing activities consist of activity in deposit accounts and borrowed funds.  Deposit flows are affected by the overall levels 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 Bancorp is a separate entity apart from the Bank and must provide for its own liquidity.  As of March 31, 2015, the Bancorp had $25.7 million in cash and cash equivalents compared to $20.3 million as of December 31, 2014. In addition to its operating expenses, the Bancorp may utilize its cash position for the payment of dividends or to repurchase common stock, subject to applicable restrictions.  The Bancorp paid cash dividends totaling $0.26 per outstanding share of common stock and repurchased 69,800 shares of common stock during the three months ended March 31, 2015. 

35

The Bancorp can receive dividends from the Bank.  Payment of such dividends to the Bancorp by the Bank is limited under applicable law. Dividends may be declared and paid only out of accumulated net earnings and may be paid in cash or property other than its own shares. Dividends may not be declared or paid unless stockholders' equity is at least equal to contributed capital. During the three months ended March 31, 2015, the Bank paid a cash dividend of $8.5 million to the Bancorp.

Capital Management.  The Bancorp and Bank are subject to various regulatory capital requirements administered by their respective regulators, 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. In December 2010, the Basel Committee on Banking Supervision, an international forum for cooperation on banking supervisory matters, announced the "Basel III" capital standards, which substantially revised the existing capital requirements for banking organizations. In July 2013, the Federal Deposit Insurance Corporation and Federal Reserve adopted a final rule for the Basel III capital framework. The requirements in the rule began to phase in on January 1, 2015 for the Company and will be fully phased in by January 1, 2019. The rule imposes higher risk-based capital and leverage requirements than those currently in place. Specifically, the rule imposes the following minimum capital requirements: (1) a new common equity Tier 1 capital ratio of 4.5%; (2) a Tier 1 capital ratio of 6% (increased from 4%); (3) a total capital ratio of 8% (unchanged from prior rules); and (4) a Tier 1 leverage ratio of 4% for all institutions (unchanged from prior rules). At March 31, 2015, the Bancorp and Bank exceeded all applicable regulatory capital requirements under this new rule and are considered "well capitalized" under regulatory guidelines.

The following table presents the Bancorp's and the Bank’s capital ratios and the minimum capital requirements to be considered "well capitalized" under applicable regulatory guidelines as of March 31, 2015 and December 31, 2014.
 
March 31, 2015 (Basel III)
 
Ratio
 
Minimum to be
Well Capitalized
Common Equity Tier 1 Capital Ratio (to risk-weighted assets)
 
 
 
Bancorp
 
 
19.88
%
 
6.5
%
Bank
 
 
16.28

 
6.5

Tier 1 Capital Ratio (to risk-weighted assets)
 
 
 
Bancorp
 
 
19.88

 
8.0

Bank
 
 
16.28

 
8.0

Total Capital Ratio (to risk-weighted assets)
 
 
 
Bancorp
 
 
20.94

 
10.0

Bank
 
 
17.34

 
10.0

Tier 1 Leverage Ratio (to adjusted average assets)
 
 
 
Bancorp
 
 
15.95

 
5.0

Bank
 
 
13.04

 
5.0

December 31, 2014
 
 
Ratio
 
Minimum to be
Well Capitalized
Total Risk-Based Capital (to risk-weighted assets)
 
 
 
Bancorp
 
 
23.45
%
 
10.0
%
Bank
 
 
20.02

 
10.0

Tier 1 Capital (to risk-weighted assets)
 
 
 
Bancorp
 
 
22.41

 
6.0

Bank
 
 
18.97

 
6.0

Tier 1 Capital (to adjusted assets)
 
 
 
Bancorp
 
 
16.58

 
5.0

Bank
 
 
13.99

 
5.0


Total stockholders’ equity to total assets was 15.6% at March 31, 2015 and 16.1% at December 31, 2014.  As a result of the mutual-to-stock conversion completed in June 2010, the Company has significant capital.  The Company’s financial condition and results of operations have been enhanced by the capital from the offering, resulting in increased net interest-earning assets.  However, the large increase in equity resulting from the capital raised in the conversion has and will continue to have an adverse impact on our return on equity until such funds can be deployed into higher-yielding assets.  The Company may rely on capital management tools such as cash dividends and share repurchases as well as improving operating income to increase its return on equity.


36

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, letters of credit and lines of credit.
 
For the three-month period ended March 31, 2015, we did not engage in any 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 Disclosures About Market Risk 
At March 31, 2015, there has not been any material change to the market risk disclosure contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

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.  In addition, no change in the Company’s internal control over financial reporting occurred during the quarter ended March 31, 2015 that has materially affected, or is reasonably likely to materially effect, Company’s internal control over financial reporting.

1
PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings
 
Periodically, there have been various claims and lawsuits against us, such as claims to enforce liens, condemnation proceedings on properties in which we hold security interests, claims involving the making and servicing of real property loans and other issues incident to our business.  We are 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.

Item 1A.  Risk Factors
 
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, 2014, which could materially affect our business, financial condition or future results. As of March 31, 2015, the risk factors of the Company have not changed materially from those reported in the Company’s Annual Report on Form 10-K. 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 or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
 

37

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

The following table provides certain information with regard to shares repurchased by the Company in the first quarter of 2015.
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 (1)
January 1, 2015 through January 31, 2015
 
11,800

 
$
16.28

 
11,800

 
515,624

February 1, 2015 through February 28, 2015
 
48,000

 
$
16.26

 
48,000

 
467,624

March 1, 2015 through March 31, 2015
 
10,000

 
$
16.29

 
10,000

 
457,624

Total
 
69,800

 
$
16.26

 
69,800

 
 

(1) In prior years, the Company announced repurchase programs under which it would repurchase, in the aggregate, up to 25% of the then-outstanding shares of the Company’s common stock from time to time, depending on market conditions.  Under these plans, through March 31, 2015, the Company has purchased 2.9 million shares at a cost of $40.8 million.  As of March 31, 2015, there were 457,624 shares available to be purchased under the Company's repurchase plan adopted in July 2014, which will continue until it is completed or terminated by the Company's Board of Directors.

Item 3.  Defaults upon Senior Securities
 
Not applicable.

Item 4.  Mine Safety Disclosures
 
Not applicable.

Item 5.  Other Information
 
Not applicable.

Item 6.  Exhibits 
3.1
 
 
 
Articles of Incorporation of Fox Chase Bancorp, Inc. (1)
3.2
 
 
 
Bylaws of Fox Chase Bancorp, Inc. (1)
4.0
 
 
 
Stock Certificate of Fox Chase Bancorp, Inc. (1)
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 of Chief Executive Officer and Chief Financial Officer
101.0
 
 
 
The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Condition, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to the Unaudited Consolidated Financial Statements.
(1)
Incorporated by reference to this document from the exhibits to the Company’s Registration Statement on Form S-1 as initially filed with the Securities and Exchange Commission on March 12, 2010.

38

SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
FOX CHASE BANCORP, INC.
 
 
 
Dated:
May 5, 2015
By:
/s/ Thomas M. Petro
 
 
 
Thomas M. Petro
 
 
 
President and Chief Executive Officer
 
 
 
(principal executive officer)
 
 
 
Dated:
May 5, 2015
By:
/s/ Roger S. Deacon
 
 
 
Roger S. Deacon
 
 
 
Chief Financial Officer
 
 
 
(principal financial officer)

39

Fox Chase Bancorp Inc Reports