UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

x

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

 

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________ to _______________

 

Commission File No.: 000-54246

 

ALLIANCE BANCORP, INC. OF PENNSYLVANIA

(Exact name of registrant as specified in its charter)

 

Pennsylvania		56-2637804
(State or other jurisdiction		(I.R.S. Employer
of incorporation or organization)		Identification Number)
541 Lawrence Road
Broomall, Pennsylvania		19008
(Address)		(Zip Code)

 

(610) 353-2900

(Registrant's telephone number, including area code)

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such a shorter period that the registrant was required to submit and post such files). Yes x No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer, or a smaller reporting company. See the definition of "accelerated filer” and “smaller reporting company" in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨	Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)	Smaller Reporting Company x

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

 

The number of shares outstanding of Common Stock, par value $0.01 per share, of the Registrant as of May 1, 2015, was 4,026,699.

 

 

ALLIANCE BANCORP, INC. OF PENNSYLVANIA

 

Index

  

		PAGE
Part I – Financial Information
Item 1.	Financial Statements	3
	Unaudited Consolidated Statements of Financial Condition as of March 31, 2015 and December 31, 2014	3
	Unaudited Consolidated Statements of Income For the Three Months Ended March 31, 2015 and 2014	4
	Unaudited Consolidated Statements of Comprehensive Income For the Three Months Ended March 31, 2015 and 2014	5
	Unaudited Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2015 and 2014	6
	Unaudited Consolidated Statements of Cash Flows For the Three Months Ended March 31, 2015 and 2014	7
	Notes to Unaudited Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	40
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	47
Item 4.	Controls and Procedures	47
Part II – Other Information
Item 1.	Legal Proceedings	48
Item 1A.	Risk Factors	48
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	48
Item 3.	Defaults Upon Senior Securities	48
Item 4.	Mine Safety Disclosures	49
Item 5.	Other Information	49
Item 6.	Exhibits	49
	Signatures	50

 

 

Part I – Item 1.

 

Alliance Bancorp, Inc. of Pennsylvania and Subsidiaries

Consolidated Statements of Financial Condition (Unaudited)

(Dollar amounts in thousands, except per share data)

 

		March 31,				December 31,
		2015				2014
Assets
Cash and cash due from depository institutions		$	1,150			$	1,361
Interest bearing deposits with depository institutions			47,436				45,272
Total cash and cash equivalents			48,586				46,633
Investment securities available for sale			13,007				15,995
Mortgage-backed securities available for sale			2,944				3,178
Investment securities held to maturity (fair value - 2015, $25,577; 2014, $25,588)			24,922				24,927
Loans receivable - net of allowance for loan losses - 2015, $4,587; 2014, $4,465			310,110				305,779
Accrued interest receivable			1,501				1,455
Premises and equipment – net			1,797				1,914
Other real estate owned (OREO)			1,275				1,275
Federal Home Loan Bank (FHLB) stock-at cost			203				203
Bank owned life insurance			12,797				12,731
Deferred tax asset – net			5,406				5,301
Prepaid and other assets			1,182				1,438
Total Assets		$	423,730			$	420,829
Liabilities and Stockholders’ Equity
Liabilities
Non-interest bearing deposits		$	24,450			$	18,357
Interest bearing deposits			323,416				326,423
Total deposits			347,866				344,780
Other borrowings			2,402				2,918
Accrued expenses and other liabilities			6,784				6,681
Total Liabilities			357,052				354,379
Commitments and Contingencies
Stockholders’ Equity
Common stock, $.01 par value; shares authorized – 50,000,000; shares issued - 5,474,437; shares outstanding - 2015, 4,026,699; 2014, 4,026,699			55				55
Additional paid-in capital			57,000				56,939
Retained earnings			34,341				34,318
Common stock acquired by benefit plans			(2,103	)			(2,249	)
Accumulated other comprehensive loss			(1,459	)			(1,457	)
Treasury stock, at cost: 2015, 1,447,738 shares; 2014, 1,447,738 shares			(21,156	)			(21,156	)
Total Stockholders’ Equity			66,678				66,450
Total Liabilities and Stockholders’ Equity		$	423,730			$	420,829

 

See notes to unaudited consolidated financial statements.

 

 

Alliance Bancorp, Inc. of Pennsylvania and Subsidiaries

Consolidated Statements of Income (Unaudited)

(Dollar amounts in thousands, except per share data)

 

		For the Three Months
		Ended March 31,
		2015				2014
Interest and Dividend Income
Loans, including fees		$	3,843			$	3,850
Mortgage-backed securities			26				40
Investment securities:
Taxable			54				77
Tax - exempt			181				206
Dividends			17				4
Balances due from depository institutions			26				23
Total interest and dividend income			4,147				4,200
Interest Expense
Deposits			541				543
Other borrowings			1				1
Total interest expense			542				544
Net Interest Income			3,605				3,656
Provision for Loan Losses			120				150
Net Interest Income After Provision for Loan Losses			3,485				3,506
Other Income
Service charges on deposit accounts			52				62
Gain on the sale of premises and equipment			—				11
Gain on the sale of OREO			—				4
Other fee income			48				42
Increase in cash surrender value of bank owned life insurance			66				71
Total other income			166				190
Other Expenses
Salaries and employee benefits			1,594				1,825
Occupancy and equipment			481				463
FDIC deposit insurance premiums			54				75
Advertising and marketing			45				62
Professional fees			193				171
Merger related costs			466				—
Loan and OREO expense			13				28
Directors’ fees			74				56
Other			248				292
Total other expenses			3,168				2,972
Income Before Income Tax Expense			483				724
Income Tax Expense			219				179
Net Income		$	264			$	545
Basic Earnings per Share		$	0.07			$	0.13
Diluted Earnings per Share		$	0.07			$	0.13

 

See notes to unaudited consolidated financial statements.

 

 

Alliance Bancorp, Inc. of Pennsylvania and Subsidiaries

Consolidated Statements of Comprehensive Income (Unaudited)

(Dollar amounts in thousands)

 

		For the Three Months Ended March 31,
		2015				2014
Net Income		$	264			$	545
Other Comprehensive Income (Loss)
Unrealized (loss) gain on available for sale securities net of tax (benefit) expense 2015, $(1); 2014, $97			(2	)			190
Total Other Comprehensive Income (Loss)			(2	)			190
Comprehensive Income		$	262			$	735

 

See notes to unaudited consolidated financial statements.

 

 

Alliance Bancorp, Inc. of Pennsylvania and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

(Dollar amounts in thousands, except per share data)

 

		Common Stock				Additional Paid-in Capital				Retained Earnings				Common Stock Acquired by Benefit Plans				Accumulated Other Comprehensive Loss				Treasury Stock				Total Stockholders’ Equity
Balance, January 1, 2014		$	55			$	56,585			$	32,673			$	(2,957	)		$	(1,875	)		$	(14,312	)		$	70,169
ESOP shares committed to be released															38												38
Net income											545																545
Dividends declared ($0.05 per share)											(217	)															(217	)
Stock-based compensation (stock options)							79																				79
Stock-based compensation (restricted stock)															215												215
Acquisition of treasury stock (280,869 shares)																							(4,325	)			(4,325	)
Other comprehensive income																			190								190
Balance, March 31, 2014		$	55			$	56,664			$	33,001			$	(2,704	)		$	(1,685	)		$	(18,637	)		$	66,694
Balance, January 1, 2015		$	55			$	56,939			$	34,318			$	(2,249	)		$	(1,457	)		$	(21,156	)		$	66,450
Tax adjustment for benefit plans							17																				17
ESOP shares committed to be released															40												40
Net income											264																264
Dividends declared ($0.06 per share)											(241	)															(241	)
Stock-based compensation (stock options)							44																				44
Stock-based compensation (restricted stock)															106												106
Other comprehensive loss																			(2	)							(2	)
Balance, March 31, 2015		$	55			$	57,000			$	34,341			$	(2,103	)		$	(1,459	)		$	(21,156	)		$	66,678

 

See notes to unaudited consolidated financial statements.

 

 

Alliance Bancorp, Inc. of Pennsylvania and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

(Dollar amounts in thousands)

 

		For the Three Months
		Ended March 31,
		2015				2014
Cash Flow From Operating Activities
Net income		$	264			$	545
Adjustments to reconcile net income to cash provided by operating activities:
Provision for:
Loan losses			120				150
Depreciation and amortization			123				112
Stock-based compensation expense			207				332
Deferred tax benefit			(104	)			(58	)
Gain on the sale of OREO			—				(4	)
Gain on the sale of premises and equipment			—				(11	)
Increase in cash surrender value of bank owned life insurance			(66	)			(71	)
Changes in assets and liabilities which provided (used) cash:
Accrued expenses and other liabilities			103				(251	)
Prepaid expenses and other assets			256				89
Accrued interest receivable			(46	)			(56	)
Net cash provided by operating activities			857				777
Cash Flow From Investing Activities
Purchase of investment securities-available for sale			(3,000	)			(3,000	)
Loans originated and acquired			(10,779	)			(9,933	)
Proceeds from maturities and calls of investment securities			5,983				4,010
Principal repayments of:
Loans			6,328				6,576
Mortgage-backed securities			241				460
Purchase of premises and equipment			(6	)			(90	)
Proceeds from the sale of premises and equipment			—				21
Proceeds from the sale of OREO			—				112
Net cash used in investing activities			(1,233	)			(1,844	)
Cash Flow From Financing Activities
Dividends paid			(241	)			(217	)
Increase in deposits			3,086				9,524
Purchase of treasury stock			—				(4,325	)
Decrease in other borrowings			(516	)			(724	)
Net cash provided by financing activities			2,329				4,258
Increase in Cash and Cash Equivalents			1,953				3,191
Cash and Cash Equivalents, Beginning of Year			46,633				45,224
Cash and Cash Equivalents, End of Period		$	48,586			$	48,415
Supplemental Disclosures of Cash Flow Information-
Cash paid during the period for:
Interest		$	543			$	545
Income taxes		$	200			$	—
Supplemental Schedule of Noncash Financing and Investing Activities:
Other real estate acquired in settlement of loans		$	—			$	63

 

See notes to unaudited consolidated financial statements.

 

 

ALLIANCE BANCORP, INC. OF PENNSYLVANIA AND SUBSIDIARIES

 

Notes to Unaudited Consolidated Financial Statements

 

(1) Organization and Basis of Presentation

On January 18, 2011, Alliance Mutual Holding Company and Alliance Bancorp, Inc. of Pennsylvania, the federally chartered mid-tier holding company for Alliance Bank (the “Bank”) completed a reorganization and conversion (the “second step conversion”), pursuant to which Alliance Bancorp, Inc. of Pennsylvania, a new Pennsylvania corporation (“Alliance Bancorp” or the “Company”), acquired all the issued and outstanding shares of the Bank’s common stock. In connection with the second step conversion, 3,258,475 shares of common stock, par value $0.01 per share, of Alliance Bancorp were sold in subscription, community and syndicated community offerings to certain depositors of the Bank and other investors for $10 per share, or $32.6 million in the aggregate (the “Offering”), and 2,215,962 shares of common stock were issued in exchange for the outstanding shares of common stock of the mid-tier holding company, which also was known as Alliance Bancorp, Inc. of Pennsylvania, held by the “public” shareholders of the mid-tier holding company. Each share of common stock of the mid-tier holding company was converted into the right to receive 0.8200 shares of common stock of Alliance Bancorp in the second step conversion. As a result of the second step conversion, the former mutual holding company and the mid-tier company were merged into Alliance Bancorp and 548,524 (pre-conversion) treasury shares were canceled. Additionally, the Bank’s Employee Stock Ownership Plan (“ESOP”) was issued a line of credit for up to $1.9 million, which it used to purchase 50,991 shares of common stock in the Offering and 100,000 additional shares of common stock in the open market following the Offering.

 

The Bank is a community oriented savings bank headquartered in Broomall, Pennsylvania. The Bank operates a total of eight banking offices located in Delaware and Chester Counties, which are suburbs of Philadelphia. The Bank is primarily engaged in attracting deposits from the general public through its branch offices and using such deposits primarily to (i) originate and purchase loans secured by first liens on single-family (one-to-four units) residential and commercial real estate properties and (ii) invest in securities issued by the U.S. Government and agencies thereof, municipal and corporate debt securities and certain mutual funds. The Bank derives its income principally from interest earned on loans, mortgage-backed securities and investments and, to a lesser extent, from fees received in connection with the origination of loans and for other services. The Bank's primary expenses are interest expense on deposits and borrowings and general operating expenses.

 

The Bank is subject to regulation by the Pennsylvania Department of Banking and Securities (the "Department"), as its chartering authority and primary regulator, and by the Federal Deposit Insurance Corporation (the "FDIC"), which insures the Bank's deposits up to applicable limits. As a registered savings and loan holding company, the Company is supervised by the Board of Governors of the Federal Reserve System (“FRB”).

 

On March 2, 2015, the Company entered into an Agreement and Plan of Reorganization (the “Merger Agreement”) with WSFS Financial Corporation (“WSFS”) providing for, among other things, the merger of the Company with and into WSFS (the “Merger”) and the merger of the Bank with and into Wilmington Savings Fund Society, FSB, a federal savings bank and wholly owned subsidiary of WSFS. Under the terms of the Merger Agreement, each stockholder of the Company will be able to elect to receive, for each share of common stock of the Company, either 0.28955 shares of WSFS common stock or $22.00 in cash, subject to adjustment on a pro rata basis so that approximately 30% of the aggregate consideration paid to shareholders of the Company will be paid in cash and the remaining 70% will be paid in WSFS stock. The Merger is subject to customary closing conditions, including regulatory approvals and approval from the shareholders of the Company.

 

 

Basis of Presentation. The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include all information or footnotes necessary for a complete presentation of financial position, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America (“US GAAP”). The consolidated statement of financial condition at December 31, 2014, has been derived from audited consolidated financial statements but does not include all information and notes required by US GAAP for complete financial statements. In the opinion of management, all adjustments consisting of normal recurring adjustments or accruals, which are necessary for a fair presentation of the consolidated financial statements, have been included. The results of operations for the three months ended March 31, 2015 are not necessarily indicative of the results which may be expected for the year ending December 31, 2015 or any other period. All significant intercompany accounts and transactions have been eliminated. For comparative purposes, prior periods’ consolidated financial statements have been reclassified when necessary to conform to report classifications of the current year. The reclassifications had no effect on net income. The unaudited consolidated financial statements presented herein should be read in conjunction with the audited consolidated financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

 

Subsequent Events. The Company has evaluated events and transactions occurring subsequent to March 31, 2015, for items that should potentially be recognized or disclosed in these consolidated financial statements. The evaluation was conducted through the date these consolidated financial statements were issued.

 

(2) Recent Accounting Pronouncements

 

In January 2014, the FASB issued ASU No. 2014-04, "Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure." The objective of this guidance is to clarify when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. ASU No. 2014-04 states that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either: (1) The creditor obtaining legal title to the residential real estate property upon completion of a foreclosure; or (2) The borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, ASU No. 2014-04 requires interim and annual disclosure of both: (1) The amount of foreclosed residential real estate property held by the creditor; and (2) The recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The Company adopted ASU No. 2014-04 effective January 1, 2015. The adoption of ASU No. 2014-04 did not have a material impact on the Company's Consolidated Financial Statements.

 

 

In May 2014, the FASB and the International Accounting Standards Board (the "IASB") jointly issued a comprehensive new revenue recognition standard that will supersede nearly all existing revenue recognition guidance under GAAP and International Financial Reporting Standards ("IFRS"). Previous revenue recognition guidance in GAAP comprised broad revenue recognition concepts together with numerous revenue requirements for particular industries or transactions, which sometimes resulted in different accounting for economically similar transactions. In contrast, IFRS provided limited revenue recognition guidance and, consequently, could be difficult to apply to complex transactions. Accordingly, the FASB and the IASB initiated a joint project to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and IFRS that would: (1) Remove inconsistencies and weaknesses in revenue requirements; (2) Provide a more robust framework for addressing revenue issues; (3) Improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets; (4) Provide more useful information to users of financial statements through improved disclosure requirements; and (5) Simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer. To meet those objectives, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers." The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies generally will be required to use more judgment and make more estimates than under current guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The standard is effective for public entities for interim and annual reporting periods beginning after December 15, 2016; early adoption is not permitted. For financial reporting purposes, the standard allows for either full retrospective adoption, meaning the standard is applied to all of the periods presented, or modified retrospective adoption, meaning the standard is applied only to the most current period presented in the financial statements with the cumulative effect of initially applying the standard recognized at the date of initial application. The Company is currently evaluating the provisions of ASU No. 2014-09 and will be closely monitoring developments and additional guidance to determine the potential impact the new standard will have on the Company's Consolidated Financial Statements.

 

In February 2015, the FASB issued ASU No. 2015-02, “Amendments to the Consolidation Analysis.” This ASU affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. 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; and (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. ASU No. 2015-02 is effective for interim and annual reporting periods beginning after December 15, 2015. The Company is currently evaluating the provisions of ASU No. 2015-02 to determine the potential impact the new standard will have on the Company's Consolidated Financial Statements.

 

 

In April 2015, the FASB issued ASU No. 2015-05, “Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.” This ASU provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The new guidance does not change the accounting for a customer’s accounting for service contracts. ASU No. 2015-05 is effective for interim and annual reporting periods beginning after December 15, 2015. The Company is currently evaluating the provisions of ASU No. 2015-05 to determine the potential impact the new standard will have on the Company's Consolidated Financial Statements.

 

(3) Segment Information

The Company has one reportable segment, Community Banking. All of the Company’s activities are interrelated, and each activity is dependent and assessed based on how each of the activities of the Company supports the others. For example, lending is dependent upon the ability of the Company to fund itself with deposits and other borrowings and manage interest rate and credit risk.

 

(4) Earnings Per Share

Earnings per share (“EPS”) consist of two separate components, basic EPS and diluted EPS. Basic EPS is computed based on the weighted average number of shares of common stock outstanding for each period presented. Diluted EPS is calculated based on the weighted average number of shares of common stock outstanding plus dilutive common stock equivalents (“CSEs”) using the treasury stock method. CSEs consist of shares that are assumed to have been purchased with the proceeds from the exercise of stock options, as well as unvested common stock awards. CSEs for which the exercise price exceeds the average market price over the period have an anti-dilutive effect on EPS, and, accordingly, are excluded from the calculation. There were -0- and 38,500 anti-dilutive stock options outstanding at March 31, 2015 and March 31, 2014, respectively.

 

The following table sets forth the composition of the weighted average shares (denominator) used in the basic and diluted earnings per share computations.

 

		For the Three Months Ended March 31,
		2015				2014
Net Income		$	264,000			$	545,000
Weighted average shares outstanding			4,026,699				4,316,795
Adjusted average unearned ESOP shares			(132,981	)			(146,922	)
Weighted average shares outstanding – basic			3,893,718				4,169,873
Effect of dilutive common stock equivalents			104,426				52,545
Adjusted weighted average shares outstanding-dilutive			3,998,144				4,222,418
Basic earnings per share		$	0.07			$	0.13
Diluted earnings per share		$	0.07			$	0.13

 

 

(5) Employee Stock Ownership Plan

The Bank has an Employee Stock Ownership Plan (“ESOP”) for the benefit of employees who meet the eligibility requirements as defined in the ESOP. The ESOP purchased 74,073 shares of common stock in the offering completed on January 30, 2007, using proceeds of a loan from the former mid-tier holding company, which was assumed by the Company following the reorganization. The Bank makes quarterly payments of principal and interest over a term of 15 years at an interest rate of 8.25% to the Company. The ESOP has a second loan from the Company to fund the purchase of 150,991 additional shares in connection with the second step conversion completed on January 18, 2011, under which the Bank makes quarterly payments of principal and interest over a term of 20 years at an interest rate of 3.25% to the Company. The loans are secured by the shares of the stock purchased.

 

As the debt is repaid, shares are released from collateral and allocated to qualified employees. As shares are released from collateral, the Company reports compensation expense equal to the current fair value of the shares, and the shares become outstanding for earnings per share computations. The compensation expense for shares released under the ESOP for the three months ended March 31, 2015 and March 31, 2014 was $65,000 and $38,000, respectively.

 

The following table presents the components of the ESOP shares inclusive of shares purchased prior to 2007:

 

		March 31, 2015				March 31, 2014
Shares released for allocation			181,810				176,341
Unearned shares			131,249				145,190
Total ESOP shares			313,059				321,531

 

(6) Retirement Plans

The Bank has a defined benefit pension plan which covers all full-time employees meeting certain eligibility requirements. At December 31, 2014 the defined benefit pension plan was curtailed and as a result the participants will no longer accrue benefits. The Company is responsible for the future payments to the participants.

 

As required under FASB ASC Topic 715, Compensation – Retirement Benefits, the net pension costs included the following components:

 

		For the Three Months Ended March 31,
		2015				2014
Net Periodic Benefit Cost
Service Cost		$	—			$	72,529
Interest Cost			80,000				80,421
Expected Return on Plan Assets			(107,000	)			(143,702	)
Amortization of Prior Service Cost			—				3,171
Amortization of Loss			27,000				27,397
Net Periodic Benefit Cost		$	—			$	39,816

  

 

The Bank has a Nonqualified Retirement and Death Benefit Agreement (the “Agreement”) with certain officers of the Bank. The purpose of the Agreement is to provide the officers with supplemental retirement benefits equal to a specified percentage of final compensation and a pre-retirement death benefit if the officer does not attain the specific age requirement. A summary of the interim information required under FASB ASC Topic 715, Compensation – Retirement Benefits, for the Agreement is as follows:

 

		For the Three Months Ended March 31,
		2015				2014
Net Periodic Benefit Cost
Service Cost		$	—			$	—
Interest Cost			44,302				50,287
Amortization of loss			10,898				6,263
Net Periodic Benefit Cost		$	55,200			$	56,550

 

(7) Fair Value Accounting

FASB ASC Topic 820, Fair Value Measurement, establishes a fair value hierarchy that prioritizes the inputs to validation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of fair value hierarchy under FASB ASC Topic 820 are as follows:

 

Level 1:

Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2:

Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.

Level 3:

Prices or valuation techniques that require inputs that are both significant to fair value measurement and unobservable (i.e. support with little or no market value activity). Management uses inputs it believes that market participants would use in determining fair value.

 

An asset or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

 

The following methods and assumptions were used to estimate the fair value of certain Company assets and liabilities.

 

Cash and Cash Equivalents (Carried at Cost). The carrying amounts reported in the consolidated statements of financial condition for cash and short-term instruments approximate those assets’ fair values.

 

Investment and Mortgage-Backed Securities. The fair value of securities available for sale (carried at fair value) and held to maturity (carried at amortized cost) are determined by obtaining quoted market prices for identical securities on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices.

 

 

Loans Receivable (Carried at Cost). The fair values of loans are estimated using discounted cash flow analyses, using market rates at the balance sheet date that reflect the credit and interest rate-risk inherent in the loans (Level 3). Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal. Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values.

 

Impaired Loans (Generally Carried at Fair Value). Impaired loans are those in which the Bank has measured impairment generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds. Appraised values may be discounted based upon management’s historical knowledge and changes in the market conditions from the time of the appraisal. Because of the high degree of judgment required in estimating the fair value of collateral underlying impaired loans, and because of the relationship between fair value and general economic conditions, the Company considers fair values of impaired loans to be highly sensitive to market conditions. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements. The fair value consists of the loan balances, net of any valuation allowance. At March 31, 2015 and December 31, 2014, the fair value consists of loan balances of $3.9 million and $3.9 million, respectively, net of valuation allowances of $486,000 and $436,000, respectively.

 

Other Real Estate Owned. OREO assets are originally recorded at fair value upon transfer of the loans to OREO, net of estimated cost to dispose of the asset. Subsequently, OREO assets are carried at the lower of carrying value or fair value. The fair value of OREO is based on independent appraisals less selling costs. Appraised values may be discounted based upon management’s historical knowledge and changes in the market conditions from the time of the appraisal. Because of the high degree of judgment required in estimating the fair value of OREO and because of the relationship between fair value and general economic conditions, the Company considers fair values of OREO to be highly sensitive to market conditions. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements. At March 31, 2015 and December 31, 2014 the fair value consists of OREO balances of $1.0 million and $1.0 million, respectively, net of valuation allowances of $131,000 and $131,000, respectively. These amounts differ from the balances disclosed on the Statement of Financial Condition due to certain OREO assets being carried at carrying value, as they have not required additional write-downs subsequent to transfer.

 

FHLB Stock (Carried at Cost). The carrying amount of FHLB stock approximates fair value and considers the limited marketability of such securities.

 

Accrued Interest Receivable and Payable (Carried at Cost). The carrying amount of accrued interest receivable and accrued interest payable approximates their fair values.

 

Deposits (Carried at Cost). The fair values disclosed for demand deposits (e.g., interest and noninterest checking, passbook savings and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits.

 

 

Other Borrowings (Carried at Cost). The carrying amount of overnight sweep accounts generally approximate fair value.

 

Off-Balance Sheet Financial Instruments. Fair values for the Company’s off-balance sheet financial instruments (lending commitments and letters of credit) are based on fees currently charged in the market to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing.

 

The following table summarizes investment assets measured at fair value on a recurring basis as of March 31, 2015, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):

 

Description		Total				(Level 1) Prices in Active Markets for Identical Assets				(Level 2) Significant Other Observable Inputs				(Level 3) Significant Unobservable Inputs
Securities Available For Sale:
Investment security obligations of FHLB		$	10,004			$	—			$	10,004			$	—
Investment security obligations of Fannie Mae			1,001				—				1,001				—
Investment security obligations of Freddie Mac			2,002				—				2,002				—
Mortgaged backed security obligations of GNMA			1,004				—				1,004				—
Mortgaged backed security obligations of FHLMC			758				—				758				—
Mortgaged backed security obligations of FNMA			1,182				—				1,182				—
Total		$	15,951			$	—			$	15,951			$	—

 

The following table summarizes investment assets measured at fair value on a recurring basis as of December 31, 2014, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):

 

Description		Total				(Level 1) Prices in Active Markets for Identical Assets				(Level 2) Significant Other Observable Inputs				(Level 3) Significant Unobservable Inputs
Securities Available for Sale:
Investment security obligations of FHLB		$	9,993			$	—			$	9,993			$	—
Investment security obligations of Fannie Mae			4,007				—				4,007				—
Investment security obligations of Freddie Mac			1,995				—				1,995				—
Mortgaged backed security obligations of GNMA			1,044				—				1,044				—
Mortgaged backed security obligations of FHLMC			829				—				829				—
Mortgaged backed security obligations of FNMA			1,305				—				1,305				—
Total		$	19,173			$	—			$	19,173			$	—

 

 

For assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at March 31, 2015 are as follows (in thousands):

 

Description		Total				(Level 1) Quoted Prices in Active Markets for Identical Assets				(Level 2) Significant Other Observable Inputs				(Level 3) Significant Unobservable Inputs
Impaired loans		$	3,394			$	—			$	—			$	3,394
Other real estate			870				—				—				870
Total		$	4,264			$	—			$	—			$	4,264

 

The following table presents quantitative information with regards to Level 3 fair value measurements at March 31, 2015 (in thousands);

 

Description		Fair Value at March 31, 2015				Valuation Technique		Unobservable Input		Range (Weighted Average)
Impaired loans		$	3,394			Appraisal of collateral		Appraisal adjustments (1)		0%-30% (19%)
Other real estate owned			870			Appraisal of collateral		Appraisal adjustments (1)		0%-10%   (4%)
Total		$	4,264

 

 

(1)

Appraisals may be adjusted by management for qualitative factors, including estimated liquidation expenses. The range and weighted average adjustments are presented as a percentage of the appraisal.

 

For assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at December 31, 2014 are as follows (in thousands):

 

Description		Total				(Level 1) Quoted Prices in Active Markets for Identical Assets				(Level 2) Significant Other Observable Inputs				(Level 3) Significant Unobservable Inputs
Impaired loans		$	3,460			$	—			$	—			$	3,460
Other real estate owned			870				—				—				870
Total		$	4,330			$	—			$	—			$	4,330

 

 

The following table presents quantitative information with regards to Level 3 fair value measurements at December 31, 2014 (in thousands):

 

Description		Fair Value at December 31, 2014				Valuation Technique		Unobservable Input		Range (Weighted Average)
Impaired loans		$	3,460			Appraisal of collateral		Appraisal adjustments (1)		5%-30% (20%)
Other real estate owned			870			Appraisal of collateral		Appraisal adjustments (1)		5%-10% (4%)
Total		$	4,330

 

 

(1)

Appraisals may be adjusted by management for qualitative factors, including estimated liquidation expenses. The range and weighted average adjustments are presented as a percentage of the appraisal.

 

The carrying amount and estimated fair values of the Company’s assets and liabilities were as follows.

 

		At March 31, 2014
		Carrying				Level 1				Level 2				Level 3
		Amount				Fair Value				Fair Value				Fair Value
		(In thousands)
Assets:
Cash and due from banks		$	1,150			$	1,150			$	—			$	—
Interest bearing deposits at banks			47,436				—				47,736				—
Investment securities			37,929				—				38,584				—
Mortgage-backed securities			2,944				—				2,944				—
Loans receivable, net, including impaired loans			310,110				—				—				309,921
FHLB stock			203				—				203				—
Accrued interest receivable			1,501				—				1,501				—
Liabilities:
NOW and MMDA deposits (1)		$	102,308				—			$	102,308			$	—
Other savings deposits			51,538				—				51,538				—
Certificate accounts			194,020				—				189,567				—
Other borrowings			2,402				—				2,402				—
Accrued interest payable			9				—				9				—
Off balance sheet instruments			—				—				—				—

 

(1) Includes non-interest bearing accounts, totaling $24,450.

 

 

		At December 31, 2014
		Carrying				Level 1				Level 2				Level 3
		Amount				Fair Value				Fair Value				Fair Value
		(In thousands)
Assets:
Cash and due from banks		$	1,361			$	1,361			$	—			$	—
Interest bearing deposits at banks			45,272				—				45,272				—
Investment securities			40,922				—				41,583				—
Mortgage-backed securities			3,178				—				3,178				—
Loans receivable, net, including, impaired loans			305,779				—				—				305,849
FHLB stock			203				—				203				—
Accrued interest receivable			1,455				—				1,455				—
Liabilities:
NOW and MMDA deposits (1)		$	99,222			$	—			$	99,222			$	—
Other savings deposits			51,538				—				51,538				—
Certificate accounts			194,020				—				194,305				—
Borrowings			2,918				—				2,918				—
Accrued interest payable			9				—				9				—
Off balance sheet instruments			—				—				—				—

 

(1)

Includes non-interest bearing accounts totaling $18,357.

 

(8) Investment and Mortgage Backed Securities

The Company classifies and accounts for debt and equity securities as follows:

 

·

Securities Held to Maturity - Securities held to maturity are stated at cost, adjusted for unamortized purchase premiums and discounts, based on the positive intent and the ability to hold these securities to maturity considering all reasonably foreseeable conditions and events.

 

·

Securities Available for Sale - Securities available for sale, carried at fair value, are those securities management might sell in response to changes in market interest rates, increases in loan demand, changes in liquidity needs and other conditions. Unrealized gains and losses, net of tax, are reported as a net amount in other comprehensive income (loss) until realized.

 

Purchase premiums and discounts are amortized to income over the life of the related security using the interest method. The adjusted cost of a specific security sold is the basis for determining the gain or loss on the sale.

 

 

Securities Available for Sale and Held to Maturity

 

The amortized cost, gross unrealized gains and losses, and the fair values of securities available for sale and held to maturity are shown below. Where applicable, the maturity distribution and the fair value of securities, by contractual maturity, are shown. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

		March 31, 2015
Dollars in Thousands		Amortized				Gross Unrealized								Fair
Available for Sale:		Cost				Gains				Losses				Value
Obligations of the Federal Home Loan Bank:
Due after 1 years through 5 years		$	3,000			$	2			$	(2	)		$	3,000
Due after 5 years through 10 years			4,000				3				—				4,003
Due after 10 years			3,000				1				—				3,001
Total		$	10,000			$	6			$	(2	)		$	10,004

 

		March 31, 2015
		Amortized				Gross Unrealized								Fair
		Cost				Gains				Losses				Value
Obligations of Fannie Mae:
Due after 1 year through 5 years		$	1,000			$	1			$	—			$	1,001
Total		$	1,000			$	1			$	—			$	1,001

 

		March 31, 2015
		Amortized				Gross Unrealized								Fair
		Cost				Gains				Losses				Value
Obligations of Freddie Mac:
Due after 1 years through 5 years		$	2,000			$	2			$	—			$	2,002
Total		$	2,000			$	2			$	—			$	2,002
Total Investment Securities Available for Sale		$	13,000			$	9			$	(2	)		$	13,007

 

 

		March 31, 2015
		Amortized				Gross Unrealized								Fair
Held to Maturity		Cost				Gains				Losses				Value
Municipal Obligations:
Due in 1 year or less		$	200			$	—			$	—			$	200
Due after 1 years through 5 years			5,005				19				(7	)			5,017
Due after 5 years through 10 years			6,675				39				(18	)			6,696
Due after 10 years			13,042				622				—				13,664
Total		$	24,922			$	680			$	(25	)		$	25,577

 

		December 31, 2014
		Amortized				Gross Unrealized								Fair
Available for Sale:		Cost				Gains				Losses				Value
Obligations of the Federal Home Loan Bank:
Due after 1 years through 5 years		$	3,000			$	2			$	(7	)		$	2,995
Due after 5 years through 10 years			3,000				—				(6	)			2,994
Due after 10 years			4,000				5				(1	)			4,004
Total		$	10,000			$	7			$	(14	)		$	9,993

 

		December 31, 2014
		Amortized				Gross Unrealized								Fair
		Cost				Gains				Losses				Value
Obligations of FHLMC:
Due after 1 year through 5 years		$	2,000			$	—			$	(5	)		$	1,995
Total		$	2,000			$	—			$	(5	)		$	1,995

 

		December 31, 2014
		Amortized				Gross Unrealized								Fair
		Cost				Gains				Losses				Value
Obligations of the Fannie Mae:
Due after 1 years through 5 years		$	1,000			$	—			$	—			$	1,000
Due after 10 years			3,000				7				—				3,007
Total		$	4,000			$	7			$	—			$	4,007
Total Investment Securities Available for Sale		$	16,000			$	14			$	(19	)		$	15,995

 

 

		December 31, 2014
		Amortized				Gross Unrealized								Fair
Held to Maturity		Cost				Gains				Losses				Value
Municipal Obligations:
Due in 1 year or less		$	200			$	1			$	—			$	201
Due after 1 year through 5 years			7,798				13				(38	)			7,773
Due after 5 years through 10 years			5,011				41				(8	)			5,044
Due after 10 years			11,918				653			$	(1	)			12,570
Total		$	24,927			$	708			$	(47	)		$	25,588

 

Included in obligations of U.S. Government agencies at March 31, 2015 and December 31, 2014, were $11.0 million and $16.0 million of structured notes, respectively. These structured notes were comprised of step-up bonds that provide the U.S. Government agency with the right, but not the obligation, to call the bonds on certain dates. There were no sales of investment securities during the three months ended March 31, 2015 or 2014.

 

Mortgage-Backed Securities Available for Sale

 

The amortized cost, gross unrealized gains and losses, and the fair values of mortgage-backed securities available for sale are as follows:

 

		March 31, 2015
Dollars in Thousands		Amortized				Gross Unrealized								Fair
		Cost				Gains				Losses				Value
GNMA pass-through certificates		$	946			$	58			$	—			$	1,004
FHLMC pass-through certificates			679				79				—				758
FNMA pass-through certificates			1,123				59				—				1,182
Total		$	2,748			$	196			$	—			$	2,944

 

		December 31, 2014
		Amortized				Gross Unrealized								Fair
		Cost				Gains				Losses				Value
GNMA pass-through certificates		$	979			$	65			$	—			$	1,044
FHLMC pass-through certificates			747				82				—				829
FNMA pass-through certificates			1,241				64				—				1,305
Total		$	2,967			$	211			$	—			$	3,178

 

There were no sales of mortgage-backed securities in 2015 or 2014.

 

 

The following table shows the fair value and unrealized losses on investments, aggregated by investment category and the length of time that individual securities have been in a continuous unrealized loss position.

 

		At March 31, 2015
		Less than 12 Months								12 Months or Longer								Total
Dollars in Thousands		Fair Value				Gross Unrealized Losses				Fair Value				Gross Unrealized Losses				Fair Value				Gross Unrealized Losses
Securities Available for Sale
U.S. Government obligations		$	1,998			$	2			$	—			$	—			$	1,998			$	2
Mortgage-backed securities		$	—			$	—			$	6			$	—			$	6			$	—
Securities Held to Maturity
Municipal obligations		$	2,787			$	11			$	1,929			$	14			$	4,716			$	25

 

		At December 31, 2014
		Less than 12 Months								12 Months or Longer								Total
Dollars in Thousands		Fair Value				Gross Unrealized Losses				Fair Value				Gross Unrealized Losses				Fair Value				Gross Unrealized Losses
Securities Available for Sale
U.S. Government obligations		$	2,994			$	6			$	2,987			$	13			$	5,981			$	19
Mortgage-Backed Securities		$	14			$	—			$	—			$	—			$	14			$	—
Securities Held to Maturity
Municipal obligations		$	2,126			$	3			$	2,973			$	34			$	5,099			$	47

 

Other-than-temporary impairment, if any, is separated into (a) the amount of the total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of the total other-than-temporary impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the total other-than-temporary impairment related to all other factors is recognized in other comprehensive income.

 

As of March 31, 2015, management believes that the estimated fair value of the securities disclosed above is primarily dependent upon the movement in market interest rates particularly given the negligible inherent credit risk associated with the issuers of these securities.

 

Although the fair value will fluctuate as market interest rates move, management believes that these fair values will recover as the underlying portfolios mature. As of March 31, 2015, there were two government obligations in an unrealized loss position for less than twelve months, 1 mortgage backed securities was in an unrealized loss position for greater than twelve months, 4 municipal obligations were in an unrealized loss position for less than twelve months and 3 in an unrealized loss position for more than twelve months. The Company does not intend to sell these securities and it is not more likely than not that it will be required to sell these securities before recovery. Management does not believe any individual unrealized loss as of March 31, 2015 represents an other-than-temporary impairment.

 

 

(9) Loans Receivable - Net

Loans receivable consist of the following:

 

Dollars in Thousands		At March 31,				At December 31,
		2015				2014
Real estate loans:
Single-family		$	121,809			$	121,336
Multi-family			25,146				24,512
Commercial			124,730				121,069
Land and construction			24,933				25,902
Commercial business			15,145				14,402
Consumer			3,636				3,758
Total loans receivable			315,399				310,979
Less:
Deferred fees			(702	)			(735	)
Allowance for loan losses			(4,587	)			(4,465	)
Loans receivable - net		$	310,110			$	305,779

 

The Company originates loans to customers located primarily in Southeastern Pennsylvania. This geographic concentration of credit exposes the Company to a higher degree of risk associated with this economic region.

 

Single-family real estate loans primarily consist of first mortgage liens on existing single-family residences and home equity loans. The Company intends to continue to originate permanent loans secured by first mortgage liens and related home equity loans on single-family residential properties in the future.

 

Multi-family and commercial real estate loans are made on terms up to 30 years, some of which include call or balloon provisions ranging from five to fifteen years. The Company will originate and purchase these loans either with fixed interest rates or with interest rates that adjust in accordance with a designated index.

 

The Company also originates residential and commercial construction loans and, to a limited degree, land acquisition and development loans. Construction loans are classified as either residential construction loans or commercial real estate construction loans at the time of origination, depending on the nature of the property securing the loan.

 

The Company has a commercial loan department to provide a full range of commercial loan products to small business customers in its primary marketing area. These loans generally have shorter terms and higher interest rates as compared to mortgage loans.

 

The Company offers consumer loans in order to provide a full range of financial services to its customers and because such loans generally have shorter terms and higher interest rates than mortgage loans. The consumer loans presently offered by the Company include deposit account secured loans and lines of credit.

 

 

(10) Loan Credit Quality

For all classes of loans receivable, the accrual of interest is discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectability of principal or interest, even though the loan may be currently performing. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. Generally, when a loan is placed on nonaccrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against the allowance for loan losses. Interest received on nonaccrual loans, including impaired loans, is generally either applied against principal or reported as interest income, according to management’s judgment as to the collectability of principal. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time (generally six months) and the ultimate collectability of the total contractual principal and interest is no longer in doubt. The past due status of all classes of loans receivable is determined based on contractual due dates for loan payments.

 

The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the past due status as of March 31, 2015:

 

(Dollars in thousands)		30-59 Days Past Due				60-89 Days Past Due				90 or More Days				Total Past Due				Current				Total Loans Receivable				Loans Receivable Greater Than 90 Days Past Due and Accruing
Real estate:
Single-family		$	217			$	—			$	1,157			$	1,374			$	120,435			$	121,809			$	748
Multi-family			—				108				—				108				25,038				25,146				—
Commercial			939				500				871				2,310				122,420				124,730				98
Land and construction			—				—				—				—				24,933				24,933				—
Commercial business			—				—				—				—				15,145				15,145				—
Consumer			193				60				183				436				3,200				3,636				183
Total		$	1,349			$	668			$	2,211			$	4,228			$	311,171			$	315,399			$	1,029

 

 

The following table presents the classes of the loan portfolio summarized by the past due status as of December 31, 2014:

 

(Dollars in thousands)		30-59 Days Past Due				60-89 Days Past Due				90 or More Days				Total Past Due				Current				Total Loans Receivable				Loans Receivable Greater Than 90 Days Past Due and Accruing
Real estate:
Single-family		$	346			$	146			$	1,082			$	1,574			$	119,762			$	121,336			$	691
Multi-family			147				—				—				147				24,365				24,512				—
Commercial			832				427				347				1,606				119,463				121,069				—
Land and construction			—				—				—				—				25,902				25,902				—
Commercial business			9				—				—				9				14,393				14,402				—
Consumer			201				101				235				537				3,221				3,758				235
Total		$	1,535			$	674			$	1,664			$	3,873			$	307,106			$	310,979			$	926

 

The following table presents nonaccrual loans by classes of the loan portfolio as of March 31, 2015 and December 31, 2014:

 

		March 31, 2015				December 31, 2014
(Dollars in thousands)
Real estate:
Single-family		$	409			$	391
Multi-family			—				—
Commercial			1,272				849
Land and construction			—				—
Commercial business			—				—
Consumer			—				—
Total non-accruing loans		$	1,681			$	1,240

 

Allowance for Loan Losses

 

The allowance for loan losses is increased by charges to income and decreased by chargeoffs (net of recoveries). Allowances are provided for specific loans when losses are probable and can be estimated. When this occurs, management considers the remaining principal balance, fair value and estimated net realizable value of the property collateralizing the loan. Current and future operating and/or sales conditions are also considered. These estimates are susceptible to changes that could result in material adjustments to results of operations. Recovery of the carrying value of such loans is dependent to a great extent on economic, operating and other conditions that may be beyond management’s control.

 

The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance. The allowance is based on the Company’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available.

 

 

The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as impaired. For loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan.

 

An unallocated component, if any, is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

 

The general component covers pools of loans by loan class including commercial loans not considered impaired, as well as smaller balance homogeneous loans, such as residential real estate, home equity and other consumer loans. These pools of loans are evaluated for loss exposure based upon historical loss rates for each of these categories of loans, adjusted for qualitative factors. These qualitative risk factors include:

 

1.	Lending policies and procedures, including underwriting standards and collection, charge-off, and recovery practices.
2.	National, regional, and local economic and business conditions as well as the condition of various market segments, including the value of underlying collateral for collateral dependent loans.
3.	Nature and volume of the portfolio and terms of loans.
4.	Experience, ability, and depth of lending management and staff.
5.	Volume and severity of past due, classified and nonaccrual loans as well as and other loan modifications.
6.	Quality of the Company’s loan review system, and the degree of oversight by the Company’s Board of Directors.
7.	Existence and effect of any concentrations of credit and changes in the level of such concentrations.
8.	Effect of external factors, such as competition and legal and regulatory requirements.

 

Each factor is assigned a value to reflect improving, stable or declining conditions based on management’s best judgment using relevant information available at the time of the evaluation. Adjustments to the factors are supported through documentation of changes in conditions in a narrative accompanying the allowance for loan loss calculation.

 

Single family real estate loans involve certain risks such as interest rate risk and risk of non repayment. Adjustable-rate single family real estate loans decreases the interest rate risk to the Company that is associated with changes in interest rates but involve other risks, primarily because as interest rates rise, the payment by the borrower rises to the extent permitted by the terms of the loan, thereby increasing the potential for default. At the same time, the marketability of the underlying property may be adversely affected by higher interest rates. Repayment risk can be affected by job loss, divorce, illness and personal bankruptcy of the borrower.

 

Multi-family and commercial real estate lending entails significant risks. Such loans typically involve large loan balances to single borrowers or groups of related borrowers. The payment experience on such loans is typically dependent on the successful operation of the real estate project. The success of such projects is sensitive to changes in supply and demand conditions in the market for multi-family and commercial real estate as well as economic conditions generally.

 

 

Construction lending is generally considered to involve a high risk due to the concentration of principal in a limited number of loans and borrowers and the effects of general economic conditions on developers and builders. Moreover, a construction loan can involve additional risks because of the inherent difficulty in estimating both a property's value at completion of the project and the estimated cost (including interest) of the project. The nature of these loans is such that they are generally difficult to evaluate and monitor. In addition, speculative construction loans to a builder are not necessarily on pre-sold units and thus pose a greater potential risk to the Company than construction loans to individuals on their personal residences.

 

Commercial business lending is generally considered higher risk due to the concentration of principal in a limited number of loans and borrowers and the effects of general economic conditions on the business assets. Commercial business loans are primarily secured by inventories and other business assets. In most cases, any repossessed collateral for a defaulted commercial business loans will not provide an adequate source of repayment of the outstanding loan balance.

 

Consumer loans generally have shorter terms and higher interest rates than other lending but generally involve high credit risk because of the type and nature of the collateral and, in certain cases, the absence of collateral. In addition, consumer lending collections are dependent on the borrower's continuing financial stability, and thus are more likely to be adversely effected by job loss, divorce, illness and personal bankruptcy. In most cases, any repossessed collateral for a defaulted consumer loan will not provide an adequate source of repayment of the outstanding loan.

 

The allowance calculation methodology includes further segregation of loan classes into risk rating categories. The borrower’s overall financial condition, repayment sources, guarantors and value of collateral, if appropriate, are evaluated annually for commercial and construction loans or when credit deficiencies arise, such as delinquent loan payments, for commercial and consumer loans. Credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful and loss.  Loans criticized special mention have potential weaknesses that deserve management’s close attention.  If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects.  Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.  They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the value of the collateral pledged, if any.  Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable.   Loans classified as a loss are considered uncollectible and are charged to the allowance for loan losses. Loans not classified are rated pass.

 

While management uses the best information available to make loan loss allowance evaluations, adjustments to the allowance may be necessary based on changes in economic and other conditions or changes in accounting guidance. Historically, our estimates of the allowance for loan losses have not required significant adjustments from management’s initial estimates. In addition, the Department and the FDIC, as an integral part of their examination processes, periodically review our allowance for loan losses. The Department and the FDIC may require the recognition of adjustments to the allowance for loan losses based on their judgment of information available to them at the time of their examinations. To the extent that actual outcomes differ from management’s estimates, additional provisions to the allowance for loan losses may be required that would adversely impact earnings in future periods.

 

 

The following table presents the activity in the allowance for loan losses and related recorded investment in loans receivable by classes of the loans individually and collectively evaluated for impairment as of and for the three months ended March 31, 2015:

 

(Dollars in thousands)		Single Family Real Estate				Multi Family Real Estate				Commercial Real Estate				Land and Construction				Consumer				Commercial Business				Total
Allowance for loan losses for the three months ended March 31, 2015:
Beginning balance		$	881			$	302			$	2,204			$	773			$	16			$	289			$	4,465
Charge-offs			—				—				—				—				(1	)			—				(1	)
Recoveries			3				—				—				—				—				—				3
Provisions			17				8				109				(27	)			(3	)			16				120
Ending balance		$	901			$	310			$	2,313			$	746			$	12			$	305			$	4,587
Allowance for loan losses:
Ending balance		$	901			$	310			$	2,313			$	746			$	12			$	305			$	4,587
Ending balance: individually evaluated for impairment		$	25			$	—			$	461			$	—			$	—			$	—			$	486
Ending balance: collectively evaluated for impairment		$	876			$	310			$	1,852			$	746			$	12			$	305			$	4,101
Loans receivable:
Ending balance		$	121,809			$	25,146			$	124,730			$	24,933			$	3,636			$	15,145			$	315,399
Ending balance: individually evaluated for impairment		$	1,034			$	—			$	7,892			$	—			$	—			$	—			$	8,926
Ending balance: collectively evaluated for impairment		$	120,775			$	25,146			$	116,838			$	24,933			$	3,636			$	15,145			$	306,473

 

 

The following table presents the activity in the allowance for loan losses and related recorded investment in loans receivable by classes of the loans individually and collectively evaluated for impairment as of and for the three months ended March 31, 2014:

 

(Dollars in thousands)		Single Family Real Estate				Multi Family Real Estate				Commercial Real Estate				Land and Construction				Consumer				Commercial Business				Total
Allowance for loan losses for the three months ended March 31, 2014:
Beginning balance		$	833			$	304			$	2,259			$	618			$	14			$	215			$	4,243
Charge-offs			(32	)			—				—				—				—				—				(32	)
Recoveries			1				—				3				—				—				—				4
Provisions			55				3				49				34				(1	)			10				150
Ending balance		$	857			$	307			$	2,311			$	652			$	13			$	225			$	4,365
Allowance for loan losses:
Ending balance		$	857			$	307			$	2,311			$	652			$	13			$	225			$	4,365
Ending balance: individually evaluated for impairment		$	18			$	—			$	505			$	—			$	—			$	—			$	523
Ending balance: collectively evaluated for impairment		$	839			$	307			$	1,806			$	652			$	13			$	225			$	3,842
Loans receivable:
Ending balance		$	123,598			$	22,136			$	124,585			$	21,697			$	4,338			$	10,766			$	307,120
Ending balance: individually evaluated for impairment		$	550			$	—			$	8,847			$	—			$	—			$	—			$	9,397
Ending balance: collectively evaluated for impairment		$	123,048			$	22,136			$	115,738			$	21,697			$	4,338			$	10,766			$	297,723

 

 

The following table presents the allowance for loan losses and related recorded investment in loans receivable by classes of the loans individually and collectively evaluated for impairment as of December 31, 2014:

 

(Dollars in thousands)		Single Family Real Estate				Multi Family Real  Estate				Commercial Real Estate				Land and Construction				Consumer				Commercial Business				Total
Allowance for loan losses:
Ending balance		$	881			$	302			$	2,204			$	773			$	16			$	289			$	4,465
Ending balance: individually evaluated for impairment		$	22			$	—			$	414			$	—			$	—			$	—			$	436
Ending balance: collectively evaluated for impairment		$	859			$	302			$	1,790			$	773			$	16			$	289			$	4,029
Loans receivable:
Ending balance		$	121,336			$	24,512			$	121,069			$	25,902			$	3,758			$	14,402			$	310,979
Ending balance: individually evaluated for impairment		$	1,041			$	—			$	7,826			$	—			$	—			$	—			$	8,867
Ending balance: collectively evaluated for impairment		$	120,295			$	24,512			$	113,243			$	25,902			$	3,758			$	14,402			$	302,112

 

 

The following table presents the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company's internal risk rating system as of March 31, 2015:

 

		Pass				Special Mention				Substandard				Doubtful				Total
(Dollars in thousands)
Real estate:
Single-family		$	119,809			$	349			$	1,651			$	—			$	121,809
Multi-family			25,146				—				—				—				25,146
Commercial			116,838				896				6,996				—				124,730
Land and construction			24,933				—				—				—				24,933
Commercial business			15,145				—				—				—				15,145
Consumer			3,636				—				—				—				3,636
Total		$	305,507			$	1,245			$	8,647			$	—			$	315,399

 

The following table presents the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company's internal risk rating system as of December 31, 2014:

 

(Dollars in thousands)		Pass				Special Mention				Substandard				Doubtful				Total
Real estate:
Single-family		$	119,044			$	711			$	1,581			$	—			$	121,336
Multi-family			24,512				—				—				—				24,512
Commercial			113,603				541				6,925				—				121,069
Land and construction			25,902				—				—				—				25,902
Commercial business			14,402				—				—				—				14,402
Consumer			3,758				—				—				—				3,758
Total		$	301,221			$	1,252			$	8,506			$	—			$	310,979

 

Loan Impairment

 

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and industrial loans, commercial real estate loans and commercial construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.

 

 

An allowance for loan losses is established for an impaired loan if its carrying value exceeds its estimated fair value. Currently, estimated fair values of substantially all of the Company’s impaired loans are measured based on the estimated fair value of the loan’s collateral.

 

The Company does not separately identify individual single-family loans secured by real estate unless such loans are the subject of a troubled debt restructuring agreement. Large groups of these smaller balance homogeneous loans are collectively evaluated for impairment.

 

For multi-family, land and construction, and commercial loans secured by real estate, estimated fair values are determined primarily through third-party appraisals. When a real estate secured loan becomes impaired, a decision is made regarding whether an updated certified appraisal of the real estate is necessary. This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value ratio based on the original appraisal and the condition of the property. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property.

 

For commercial business loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower’s financial statements, inventory reports, accounts receivable agings or equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets.

 

The Company does not separately identify consumer and other loans unless such loans are the subject of a troubled debt restructuring agreement. Large groups of these smaller balance homogeneous loans are collectively evaluated for impairment.

 

Loans whose terms are modified are classified as troubled debt restructurings if the Company grants such borrowers concessions and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a troubled debt restructuring generally involve a temporary below market rate reduction in interest rate or an extension of a loan’s stated maturity date. Non-accrual troubled debt restructurings are restored to accrual status if principal and interest payments, under the modified terms, are current for six consecutive months after modification. Loans classified as troubled debt restructurings are designated as impaired.

 

 

The following table summarizes information in regards to impaired loans by loan portfolio class as of and for the three months ended March 31, 2015:

 

(Dollars in Thousands)		Recorded Investment				Unpaid Principal Balance				Related Allowance				Average Recorded Investment				Interest Income Recognized While Impaired
With no related allowance recorded:
Real estate:
Single-family		$	843			$	843			$	—			$	843			$	9
Commercial		$	4,203			$	4,203			$	—			$	4,137			$	48
With an allowance recorded:
Real estate:
Single-family		$	191			$	191			$	25			$	191			$	5
Commercial		$	3,689			$	3,689			$	461			$	3,689			$	25
Total:
Real estate:
Single-family		$	1,034			$	1,034			$	25			$	1,034			$	14
Commercial		$	7,892			$	7,892			$	461			$	7,826			$	73

 

The following table summarizes information in regards to impaired loans by loan portfolio class as of and for the three months ended March 31, 2014:

 

(Dollars in Thousands)		Recorded Investment				Unpaid Principal Balance				Related Allowance				Average Recorded Investment				Interest Income Recognized While Impaired
With no related allowance recorded:
Real estate:
Single-family		$	359			$	359			$	—			$	359			$	3
Commercial		$	3,820			$	3,820			$	—			$	3,622			$	42
With an allowance recorded:
Real estate:
Single-family		$	191			$	191			$	18			$	191			$	3
Commercial		$	5,027			$	5,164			$	505			$	5,027			$	34
Total:
Real estate:
Single-family		$	550			$	550			$	18			$	505			$	6
Commercial		$	8,847			$	8,984			$	505			$	8,649			$	76

 

 

The following table summarizes information in regards to impaired loans by loan portfolio class as of and for the year ended December 31, 2014:

 

(Dollars in Thousands)		Recorded Investment				Unpaid Principal Balance				Related Allowance				Average Recorded Investment				Interest Income Recognized While Impaired
With no related allowance recorded:
Real estate:
Single-family		$	850			$	850			$	—			$	517			$	51
Commercial		$	4,121			$	4,121			$	—			$	3,947			$	193
With an allowance recorded:
Real estate:
Single-family		$	191			$	191			$	22			$	191			$	9
Commercial		$	3,705			$	3,705			$	414			$	4,155			$	206
Total:
Real estate:
Single-family		$	1,041			$	1,041			$	22			$	708			$	60
Commercial		$	7,826			$	7,826			$	414			$	8,102			$	399

 

There no loans classified as troubled debt restructurings during the three months ended March 31, 2015. There were no troubled debt restructurings with a payment default, with the payment default occurring within 12 months of restructure, and payment default occurring during the three months ended March 31, 2015.

 

At March 31, 2015, the Company had thirteen loans classified as performing troubled debt restructurings consisting of three single-family loans which amounted to $843,000 and ten commercial real estate loans which amounted to $6.0 million. Two of the three single-family loans, which amounted to $349,000 were classified as special mention in the Company’s allowance for loan losses and have no allowance against them. One of the three single-family loans, which amounted to $495,000 was classified as substandard in the Company’s allowance for loan losses and had no allowance against it. Four of the ten commercial real estate loans, which amounted to $896,000 are classified as special mention in the Company’s allowance for loan losses and have a $2,000 allowance against them. Six of the ten commercial real estate loans, which amounted to $5.1 million are classified as substandard in the Company’s allowance for loan losses and have a $205,000 allowance against them. All such loans have been performing in accordance with their restructured terms and conditions. At March 31, 2015, the Company had one single-family nonperforming loan classified as a troubled debt restructuring in the amount of $191,000. The single-family loan was classified as substandard in the Company’s allowance for loan losses and had a $25,000 allowance against it. All of the troubled debt restructurings consisted of changes in interest rates and no principal was forgiven.

 

 

There were no loans classified as trouble debt restructurings during the three months ended March 31, 2014. There were no troubled debt restructurings with a payment default, with the payment default occurring within 12 months of restructure, and payment default occurring during the three months ended March 31, 2014.

 

At March 31, 2014, the Company had eleven loans classified as performing troubled debt restructurings consisting of two single-family loans which amounted to $359,000 and nine commercial real estate loans which amounted to $4.4 million. The two single-family loans were classified as special mention in the Company’s allowance for loan losses and have no allowance against them. Five of the nine commercial real estate loans, which amounted to $1.5 million are classified as special mention in the Company’s allowance for loan losses and have a $52,000 allowance against them. Four of the nine commercial real estate loans, which amounted to $3.0 million are classified as substandard in the Company’s allowance for loan losses and have a $215,000 allowance against them. All such loans have been performing in accordance with their restructured terms and conditions. At March 31, 2014, the Company had one single-family nonperforming loan classified as a troubled debt restructuring in the amount of $191,000. The single-family loan was classified as substandard in the Company’s allowance for loan losses and had an $18,000 allowance against it. All of the troubled debt restructurings consisted of changes in interest rates and no principal was forgiven.

 

At December 31, 2014, the Company had thirteen loans classified as performing troubled debt restructurings consisting of three single-family real estate loans which amounted to $850,000 and ten commercial real estate loans which amounted to $6.0 million. Two of the three single-family real estate loans, which amounted to $351,000 were classified as special mention in the Company’s allowance for loan losses and have no allowance against them. One of the three single family real estate loans, in the amount of $499,000 was classified as substandard and had no allowance against it. Four of the ten commercial real estate loans, in the amount of $901,000 were classified as special mention and one of the four loans had a $3,000 allowance against it. Five of the ten commercial real estate loans, which amounted to $5.1 million are classified as substandard in the Company’s allowance for loan losses and had a $219,000 allowance against them. All such loans have been performing in accordance with their restructured terms and conditions. At December 31, 2014, the Company had one single-family real estate nonperforming loan classified as a troubled debt restructuring in the amount of $191,000. The single-family real estate loan was classified as substandard in the Company’s allowance for loan losses and had a $22,000 allowance against it. All of the troubled debt restructurings consisted of changes in interest rates or maturity extensions and no principal was forgiven.

 

Residential Real Estate Foreclosure

 

The carrying amount of foreclosed residential real estate properties held was $933,000 as of March 31, 2015. Consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure totaled $217,000 as of March 31, 2015.

 

 

(11) Stock-Based Compensation

Recognition and Retention Plan and Trust

In July of 2011, the shareholders of the Company approved the adoption of the 2011 Recognition and Retention Plan and Trust (the “2011 RRP”). Pursuant to the terms of the 2011 RRP, awards of up to 218,977 shares of restricted common stock may be granted to employees and directors. In order to fund the 2011 RRP, the 2011 RRP acquired 218,977 shares of the Company’s common stock in the open market for approximately $2.4 million at an average price of $11.14 per share. During 2012 and 2011, the Company made sufficient contributions to the 2011 RRP to fund the purchase of these shares. Pursuant to the terms of the 2011 RRP, no additional shares will need to be acquired. On July 20, 2011, July 20, 2012, and December 11, 2013, a total of 208,200, 3,000, and 7,750 shares of 2011 RRP awards were granted, respectively. The 2011 RRP shares generally vest at the rate of 20% per year over five years.

 

A summary of the status of the shares under the 2011 RRP as of March 31, 2015 and changes during the three months ended March 31, 2015 are presented below:

 

		Three Months Ended March 31, 2015
						Weighted
		Number of				average grant
		shares				date fair value
Restricted at the beginning of period			81,960			$	11.34
Granted			—				—
Vested			—				—
Forfeited			—				—
Restricted at the end of period			81,960			$	11.34

 

A summary of the status of the shares under the 2011 RRP as of March 31, 2014 and changes during the three months ended March 31, 2014 are presented below:

 

		Three Months Ended March 31, 2014
						Weighted
		Number of				average grant
		shares				date fair value
Restricted at the beginning of period			135,070			$	11.22
Granted			—				—
Vested			12,180			$	11.05
Forfeited			—				—
Restricted at the end of period			122,890			$	11.22

 

Compensation expense on 2011 RRP shares granted is recognized ratably over the five year vesting period in an amount which totals the market price of the common stock at the date of grant. During the three months ended March 31, 2015, approximately 9,858 shares were amortized to expense, based on the proportional vesting of the awarded shares, resulting in recognition of approximately $106,000 in compensation expense with a related tax benefit of $36,000. During the three months ended March 31, 2014, approximately 20,083 shares were amortized to expense, based on the proportional and accelerated vesting of the awarded shares, resulting in recognition of approximately $215,000 in compensation expense with a related tax benefit of $73,000. Of the $215,000 in compensation expense, approximately $102,000 related to the accelerated vesting of certain awarded shares.

 

 

As of March 31, 2015, approximately $582,000 in additional compensation expense is scheduled to be recognized over the remaining weighted average vesting period of 2.0 years. Under the terms of the 2011 RRP, any unvested 2011 RRP awards will become fully vested upon a change in control resulting in the full recognition of any unrecognized expense.

 

Stock Options

In July 2011, the shareholders of the Company also approved the adoption of the 2011 Stock Option Plan (the “2011 Option Plan”). Pursuant to the 2011 Option Plan, options to acquire 325,842 shares of common stock may be granted to employees and directors. Under the 2011 Option Plan, options generally become vested and exercisable at the rate of 20% per year over five years and are generally exercisable for a period of ten years after the grant date. On July 20, 2011, July 20, 2012, and December 11, 2013 options to purchase 277,750, 9,500, and 38,500 shares of common stock were awarded, respectively. As of March 31, 2015, a total of 5,792 shares of common stock have been reserved for future grant pursuant to the 2011 Option Plan. Under the 2011 Option Plan all unvested options will immediately become vested upon a change of control.

 

A summary of the status of the Company’s stock options under the 2011 Option Plan as of March 31, 2015, and changes during the three months ended March 31, 2015, is presented below:

 

		Three Months Ended March 31, 2015
						Weighted
		Number of				average
		shares				exercise price
Options outstanding at the beginning of period			320,050			$	11.53
Granted			—				—
Exercised			—				—
Forfeited			—				—
Options outstanding at the end of period			320,050			$	11.53
Exercisable at end of the period			186,150			$	11.23

 

The weighted average contractual term of the options was 7.25 years at March 31, 2015.

 

 

A summary of the status of the Company’s stock options under the 2011 Option Plan as of March 31, 2014, and changes during the three months ended March 31, 2014, is presented below:

 

		Three Months Ended March 31, 2014
						Weighted
		Number of				average
		shares				exercise price
Options outstanding at the beginning of period			325,750			$	11.60
Granted			—				—
Exercised			—				—
Forfeited			—				—
Options outstanding at the end of period			325,750			$	11.60
Exercisable at end of the period			126,710			$	11.60

 

 

During the three months ended March 31, 2015, approximately $44,000 was recognized in compensation expense, with a related $15,000 tax benefit, for the 2011 Option Plan. At March 31, 2015, approximately $291,000 in additional compensation expense for awarded options remained unrecognized. The weighted average period over which this expense will be recognized is approximately 2.00 years. During the three months ended March 31, 2014, approximately $79,000 was recognized in compensation expense, with a related $27,000 tax benefit, for the 2011 Option Plan. Of the $79,000 recognized, approximately $31,000 related to the accelerated vesting of certain awards.

 

(12) Contingent Obligations

The Company does not issue any guarantees that would require liability-recognition or disclosure, other than its standby letters of credit. The Company has issued unconditional commitments in the form of standby letters of credit to guarantee payment on behalf of a customer and guarantee the performance of a customer to a third party. Standby letters of credit generally arise in connection with lending relationships. The credit risk involved in issuing these instruments is essentially the same as that involved in extending loans to customers. Contingent obligations under standby letters of credit totaled approximately $1.1 million at March 31, 2015 and $1.4 million at December 31, 2014 and represent the maximum potential future payments the Company could be required to make. The value of the contingent obligations approximates their fair value. Typically, these instruments have terms of twelve months or less and expire unused; therefore, the total amounts do not necessarily represent future cash requirements. Each customer is evaluated individually for creditworthiness under the same underwriting standards used for commitments to extend credit for on-balance sheet instruments. Company policies governing loan collateral apply to standby letters of credit at the time of credit extension. Loan-to-value ratios are generally consistent with loan-to-value requirements for other commercial loans secured by similar types of collateral.

 

 

Litigation Relating to the Merger

Three purported shareholder derivative and class action complaints relating to the Merger have been filed. The actions were filed in the Court of Common Pleas of Delaware County, Pennsylvania. The complaints name as defendants the Company, its directors and certain of its officers, and WSFS.

 

The complaints in the Merger litigation allege that the members of the Company’s board of directors breached their fiduciary duties to the Company’s shareholders by approving the Merger for inadequate consideration, approving the transaction in order to obtain benefits for Company’s directors and officers that are not equally shared by other Company’s shareholders, entering into the Merger agreement containing preclusive deal protection devices, and failing to take steps to maximize the value to be paid to the Company’s shareholders. The complaints also allege claims against WSFS for aiding and abetting these alleged breaches of fiduciary duties. The plaintiffs in this action seeks, among other things, preliminary and permanent injunctive relief prohibiting consummation of the Merger, rescission or rescissory damages in the event the Merger is consummated, damages, attorneys’ fees and costs, and other and further relief. Each of the defendants believes the claims asserted are without merit and intends to vigorously defend against this lawsuit. However, at this time, it is not possible to predict the outcome of the proceedings or their impact on the Company, WSFS or the merger.

 

 

Part I – Item 2.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Forward-Looking Statements. Alliance Bancorp, Inc. of Pennsylvania (the “Company”) may from time to time make written or oral “forward-looking statements,” including statements contained in the Company’s filings with the Securities and Exchange Commission (including this Quarterly Report on Form 10-Q and the exhibits hereto and thereto), in its reports to shareholders and in other communications by the Company, which are made in good faith by the Company pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.

 

These forward-looking statements include statements with respect to the Company’s beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions, that are subject to significant risks and uncertainties, and are subject to change based on various factors (some of which are beyond the Company’s control).  The words “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan” and similar expressions are intended to identify forward-looking statements.  The following factors, among others, could cause the Company’s financial performance to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements: the strength of the United States economy in general and the strength of the local economies in which the Company conducts operations; the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System; inflation, interest rate, market and monetary fluctuations; the timely development of and acceptance of new products and services of the Company and the perceived overall value of these products and services by users, including the features, pricing and quality compared to competitors’ products and services; the willingness of users to substitute competitors’ products and services for the Company’s products and services; the success of the Company in gaining regulatory approval of its products and services, when required; the impact of changes in financial services’ laws and regulations (including laws concerning taxes, banking, securities and insurance); technological changes; acquisitions; changes in consumer spending and saving habits; and the success of the Company at managing the risks involved in the foregoing.

 

The Company cautions that the foregoing list of important factors is not exclusive.  Readers are also cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date of this report.  The Company does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company.

 

General. The Company’s profitability is highly dependent on net interest income. The components that drive net interest income are the amounts of interest-earning assets and interest-bearing liabilities along with rates earned or paid on such rate sensitive instruments. The Company manages interest rate exposure by attempting to match asset maturities with liability maturities. In addition to managing interest rate exposure, the Company also considers the credit risk, prepayment risk and extension risk of certain assets. The Company maintains asset quality by utilizing comprehensive loan underwriting standards and collection efforts as well as originating or purchasing primarily secured or guaranteed assets.

 

The Company’s profitability is also affected by fee income, gain or loss on the sale of other real estate owned, general and administrative expenses, provisions for loan losses, other real estate owned expenses, and income taxes.

 

  

On March 2, 2015, the Company entered into an Agreement and Plan of Reorganization (the “Merger Agreement”) with WSFS Financial Corporation (“WSFS”) providing for, among other things, the merger of the Company with and into WSFS (the “Merger”) and the merger of the Bank with and into Wilmington Savings Fund Society, FSB, a federal savings bank and wholly owned subsidiary of WSFS. Under the terms of the Merger Agreement, each stockholder of the Company will be able to elect to receive, for each share of common stock of the Company, either 0.28955 shares of WSFS common stock or $22.00 in cash, subject to adjustment on a pro rata basis so that approximately 30% of the aggregate consideration paid to shareholders of the Company will be paid in cash and the remaining 70% will be paid in WSFS stock. The Merger is subject to customary closing conditions, including regulatory approvals and approval from the shareholders of the Company.

 

Critical Accounting Policies. In reviewing and understanding financial information for the Company, you are encouraged to read and understand the significant accounting policies used in preparing our consolidated financial statements included elsewhere herein. These policies are described in Note 2 of the notes to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. The accounting and financial reporting policies of the Company conform to accounting principles generally accepted in the United States of America (US GAAP) and to general practices within the banking industry. Accordingly, the consolidated financial statements require certain estimates, judgments, and assumptions, which are believed to be reasonable, based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expenses during the periods presented. The following accounting policies comprise those that management believes are the most critical to aid in fully understanding and evaluating our reported financial results. These policies require numerous estimates or economic assumptions that may prove inaccurate or may be subject to variations which may significantly affect our reported results and financial condition for the period or in future periods.

 

Allowance for Loan Losses. The allowance for loan losses is established through a provision for loan losses charged to expense. Charges against the allowance for loan losses are made when management believes that the collectability of loan principal is unlikely. Subsequent recoveries are added to the allowance. The allowance is an amount that management believes will cover known and inherent losses in the loan portfolio, based on evaluations of the collectability of loans. The evaluations take into consideration such factors as changes in the types and amount of loans in the loan portfolio, historical loss experience, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, estimated losses relating to specifically identified loans, and current economic conditions. This evaluation is inherently subjective as it requires material estimates including, among others, exposure at default, the amount and timing of expected future cash flows on impaired loans, value of collateral, estimated losses on our commercial and residential loan portfolios and general amounts for historical loss experience. All of these estimates may be susceptible to significant change.

 

 

While management uses the best information available to make loan loss allowance evaluations, adjustments to the allowance may be necessary based on changes in economic and other conditions or changes in accounting guidance. Historically, our estimates of the allowance for loan losses have not required significant adjustments from management’s initial estimates. In addition, the Department and the FDIC, as an integral part of their examination processes, periodically review our allowance for loan losses. The Department and the FDIC may require the recognition of adjustments to the allowance for loan losses based on their judgment of information available to them at the time of their examinations. To the extent that actual outcomes differ from management’s estimates, additional provisions to the allowance for loan losses may be required that would adversely impact earnings in future periods.

 

Income Taxes. Management makes estimates and judgments to calculate various tax liabilities and determine the recoverability of our deferred tax assets, which arise from temporary differences between the tax and financial statement recognition of revenues and expenses. As of March 31, 2015, the Company had no net operating loss carryfowards for federal income tax purposes, and approximately $619,000 in capital loss carryfowards expiring over the next two years. In December 2013, the Company recorded a full valuation allowance for such capital loss carryfowards as it is more likely than not the Company will be unable to realize these benefits. As of March 31, 2015, the Company had approximately $4.0 million of state net operating loss carryforwards expiring from 2019 through 2030. The Company recorded a full valuation allowance for these carryforwards as projected state income at the Company is not anticipated to be sufficient to realize these benefits.

 

In evaluating our ability to recover deferred tax assets, we consider all available positive and negative evidence, including our past operating results, and our forecast of future taxable income. In determining future taxable income, we make assumptions for the amount of taxable income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require us to make judgments about our future taxable income and are consistent with the plans and estimates we use to manage our business. Any reduction in estimated future taxable income may require us to record a valuation allowance against our deferred tax assets. An increase in the valuation allowance would result in additional income tax expense in the period and could have a significant impact on our future earnings.

 

Other than Temporary Impairment of Securities. The Company is required to perform periodic reviews of individual securities in its investment portfolio to determine whether a decline in the fair value of a security below its amortized cost is other than temporary. A review of other than temporary impairment requires management to make certain judgments regarding the nature of the decline, its effect on the consolidated financial statements and the probability, extent and timing of a valuation recovery. Management evaluates securities for other than temporary impairment on at least a quarterly basis, and more frequently when economic or market conditions warrant such evaluations. The other-than-temporary impairment is separated into (a) the amount of the total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of the total other-than-temporary impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the total other-than-temporary impairment related to all other factors is recognized in other comprehensive income.

 

 

Comparison of Financial Condition at March 31, 2015 and December 31, 2014

 

Total assets increased $2.9 million or 0.7% to $423.7 million at March 31, 2015 compared to $420.8 million at December 31, 2014. This increase was primarily due to a $2.0 million or 4.2% increase in total cash and cash equivalents, a $4.3 million or 1.4% increase in net loans receivable, a $46,000 or 3.2% increase in accrued interest receivable, a $66,000 or 0.5% increase in Bank owned life insurance, and a $105,000 or 2.0% increase in the net deferred tax asset. These increases were partially offset by a $3.0 million or 18.7% decrease in investment securities available for sale, a $233,000 or 7.3% decrease in mortgage-backed securities available for sale, a $117,000 or 6.1% decrease in premises and equipment, and a $256,000 or 17.8% decrease in prepaid and other assets.

 

Total liabilities increased $2.7 million or 0.8% to $357.1 million at March 31, 2015 compared to $354.4 million at December 31, 2014. This increase was primarily due to a $6.1 million or 33.2% increase in non-interest bearing deposits and a $103,000 or 1.5% increase in accrued expenses and other liabilities. These increases were partially offset by a $3.0 million or 0.9% decrease in interest bearing deposits and a $516,000 or 17.7% decrease in other borrowings.

 

Stockholders’ equity increased $228,000 to $66.7 million as of March 31, 2015 compared to $66.5 million at December 31, 2014. The increase was due to net income of $264,000 for the three months ended March 31, 2015, an increase of $61,000 in additional paid-in capital, and an increase in common stock acquired by benefit plans of $146,000, partially offset by $241,000 in dividends paid.

 

We continue to evaluate the potential impact that regulatory rules may have on our liquidity and capital management strategies, including Basel III and those required under the Dodd-Frank Act. The final rules implementing the Basel Committee on Banking Supervision's (“BCBS”) capital guidelines for U.S. banks became effective for the Company on January 1, 2015, with full compliance with all of the final rule's requirements phased in over a multi-year schedule, to be fully phased-in by January 1, 2019. As of March 31, 2015, the Company's capital levels remained characterized as "well-capitalized" under the new rules.

 

Nonperforming assets increased $543,000 to $4.0 million or 0.94% of total assets at March 31, 2015 as compared to $3.4 million or 0.82% of total assets at December 31, 2014. The nonperforming assets at March 31, 2015 included $2.7 million in nonperforming loans and $1.3 million in other real estate owned. The increase in nonperforming assets was entirely due to a $543,000 increase in nonperforming loans, with no change in other real estate owned as of March 31, 2015 when compared to December 31, 2014. Overall, nonperforming loans included $1.2 million in single-family residential real estate loans, $1.4 million in commercial real estate loans, and $183,000 in student loans, which are fully guaranteed by the U.S. Government. The Company continues to aggressively work towards the resolution of its nonperforming assets. The allowance for loan losses amounted to $4.6 million or 169.3% of nonperforming loans at March 31, 2015 as compared to $4.5 million or 206.1% of nonperforming loans at December 31, 2014.

 

Although management uses the best information available to make determinations with respect to the provisions for loan losses, additional provisions for loan losses may be required to be established in the future should economic or other conditions change substantially. In addition, the Department and the FDIC, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses. Such agencies may require the Bank to recognize additions to such allowance based on their judgments about information available to them at the time of their examination.

 

 

Comparison of Results of Operations for the Three Months Ended March 31, 2015 and March 31, 2014

 

General. Net income decreased $281,000 or 51.6% to $264,000 or $0.07 per share (diluted) for the three months ended March 31, 2015 as compared to $545,000 or $0.13 per share (diluted) for the same period in 2014. The decrease in net income was primarily due to a $51,000 or 1.4% decrease in net interest income, a $24,000 or 12.6% decrease in other income, $196,000 or 6.6% increase in other expenses, and a $40,000 or 22.4% increase in income tax expense, which was partially offset by a $30,000 or 20.0% decrease in the provision for loan losses for the three months ended March 31, 2015 when compared to the same period in 2014.

 

Net Interest Income. Net interest income is determined by the interest rate spread (i.e., the difference between the yields earned on interest-earning assets and the rates paid on its interest-bearing liabilities) and the relative amounts of interest-earning assets and interest-bearing liabilities. Net interest income decreased $51,000 or 1.4% during the three months ended March 31, 2015 as compared to the same period in 2014. The decrease in net interest income was primarily due to a $53,000 or 1.3% decrease in interest income on interest-earning assets, partially offset by a $2,000 or 0.4% decrease in interest expense on interest-bearing liabilities. As a result, the interest rate spread decreased 4 basis points (1 basis point is equal to 1/100^th of a percent) to 3.48% for the three months ended March 31, 2015 compared to 3.52% for the three months ended March 31, 2014. Based on the current economic environment and market competition, management anticipates pressure on the interest rate spread for 2015 which may negatively impact net interest income.

 

Interest Income. Interest income decreased $53,000 or 1.3% to $4.1 million for the three months ended March 31, 2015, compared to the same period in 2014. The decrease was primarily due to a $7,000 or 0.2% decrease on interest income on loans, a $14,000 or 35.0% decrease in interest income on mortgage-backed securities, and a $35,000 or 12.2% decrease in interest income on investment securities. These decreases were partially offset by a $3,000 or 13.0% increase in interest income earned on balances due from depository institutions. The decrease in interest income on loans was due to a 14 basis point or 2.8% decrease in the average yield earned, partially offset by a $7.9 million or 2.6% increase in the average balance of loans outstanding. The decrease in interest income on mortgage-backed securities was due to a $1.5 million or 31.8% decrease in the average balance of mortgage-backed securities and a 16 basis point or 4.6% decrease in the average yield earned. The decrease in interest income on investment securities was primarily due to a $10.9 million or 21.3% decrease in the average balance of investment securities, partially offset by a 26 basis point or 11.7% increase in the average yield earned. The increase in interest income on balances due from depository institutions was due to a $3.1 million or 7.5% increase in the average balance of balances due from depository institutions and a 1 basis point or 4.6% increase in the average yield earned.

 

Interest Expense. Interest expense decreased $2,000 or 0.4% to $542,000 for the three months ended March 31, 2015, compared to the same period in 2014. This decrease was due to a $2,000 or 0.4% decrease in interest expense on deposits. The decrease in interest expense on deposits was due to a $3.9 million or 1.2% decrease in the average balance of deposits.

 

 

Average Balances, Net Interest Income and Yields Earned and Rates Paid. The following average balance sheet table sets forth for the periods indicated, information on the Company regarding: (i) the total dollar amounts of interest income on interest-earning assets and the resulting average yields; (ii) the total dollar amounts of interest expense on interest-bearing liabilities and the resulting average costs; (iii) net interest income; (iv) interest rate spread; (v) net interest-earning assets (interest-bearing liabilities); (vi) the net yield earned on interest-earning assets; and (vii) the ratio of total interest-earning assets to total interest-bearing liabilities. Information is based on average daily balances during the periods presented.

 

		Three Months Ended March 31,
		2015												2014
		Average												Average
(Dollars in Thousands)		Balance				Interest				Rate				Balance				Interest				Rate
Interest-earning assets:
Loans receivable (1) (3)		$	312,405			$	3,843				4.92	%		$	304,497			$	3,850				5.06	%
Mortgage-backed securities (3)			3,095				26				3.36				4,541				40				3.52
Investment securities (3)			40,521				252				2.49				51,452				287				2.23
Due from depository institutions			44,826				26				0.23				41,690				23				0.22
Total interest-earning assets			400,847				4,147				4.14				402,180				4,200				4.18
Noninterest-earning assets			20,683												23,182
Total assets		$	421,530											$	425,362
Interest-bearing liabilities:
Deposits		$	325,799				541				0.66			$	329,737				543				0.66
Other borrowings			2,450				1				0.16				2,962				1				0.14
Total interest-bearing liabilities			328,249				542				0.66				332,699				544				0.66
Noninterest-bearing
Liabilities			26,493												23,276
Total liabilities			354,742												355,975
Stockholders’ equity			66,788												69,387
Total liabilities and stockholders’ equity		$	421,530											$	425,362
Net interest-earning assets		$	72,598											$	69,481
Net interest income/interest rate spread						$	3,605				3.48	%						$	3,656				3.52	%
Net yield on interest-earning assets (2)											3.60	%											3.64	%

 

_____________________________

 

1.

Nonaccrual loans and loan fees have been included.

2.

Net interest income divided by interest-earning assets.

3.

The indicated yields are not reflected on a tax equivalent basis.

 

 

Provision for Loan Losses. The provision for loan losses amounted to $120,000 for the three months ended March 31, 2015 compared to $150,000 for the same period in 2014. Such provisions were primarily to maintain a reserve level deemed appropriate by management in light of factors such as the level of nonperforming loans and the current economic environment.

 

Other Income. Other income was $166,000 for the three months ended March 31, 2015 as compared to $190,000 for the same period in 2014. The $24,000 or 12.6% decrease was primarily the result of a $10,000 or 16.1% decrease in service charges on deposit accounts and a $5,000 or 7.0% decrease in the increase in cash surrender value of bank owned life insurance for the three months ended March 31, 2015 when compared to the three months ended March 31, 2014. Also contributing to the decrease was an $11,000 gain on the sale of premises and equipment, and a $4,000 gain on the sale of OREO for the three months ended March 31, 2014 compared to no corresponding gains in 2015. These decreases were partially offset by a $6,000 or 14.3% increase in other fee income for the three months ended March 31, 2015 when compared to the same period in 2014.

 

Other Expenses. Other expenses increased $196,000 or 6.6% to $3.2 million for the three months ended March 31, 2015 compared to the same period in 2014. The increase was primarily due to $466,000 in merger related costs incurred for the three month period ended March 31, 2015 which were directly related to the merger agreement entered into with WSFS on March 2, 2015. Also contributing to the increase in other expenses for the three months ended March 31, 2015 was a $22,000 or 12.9% increase in professional fees, an $18,000 or 3.9% increase in occupancy and equipment expense, and an $18,000 or 32.1% increase in director fees, when compared to the same period in 2014. These increases were partially offset by a $231,000 or 12.7% decrease in salaries and employee benefits, a $21,000 or 28.0% decrease in FDIC deposit insurance premiums, a $17,000 or 27.4% decrease in advertising and marketing expense, and a $15,000 or 53.6% decrease in loan and OREO expense during the three months ended March 31, 2015 compared to the three months ended March 31, 2014.

 

Income Tax Expense. Income tax expense amounted to $219,000 and $179,000 for the three months ended March 31, 2015 and 2014, respectively, resulting in effective tax rates of 45.3% and 24.7%, respectively. The $40,000 or 22.4% increase in income tax expense and higher effective tax rate was primarily due to $396,000 non-deductible in merger related costs incurred during the three months ended March 31, 2015.

 

Liquidity and Capital Resources

 

Liquidity, represented by cash and cash equivalents, is a product of the Company’s cash flows from operations. The primary sources of funds are deposits, borrowings, amortization, prepayments and maturities of outstanding loans and mortgage-backed securities, sales of loans, maturities and calls of investment securities and other short-term investments and income from operations. Changes in the cash flows of these instruments are greatly influenced by economic conditions and competition. Management attempts to balance supply and demand by managing the pricing of its loan and deposit products while maintaining a level of growth consistent with the conservative operating philosophy of the management and board of directors. Any excess funds are invested in overnight and other short-term interest-earning accounts. Cash flows are generated through the retail deposit market, the Company’s traditional funding source, for use in investing activities. In addition, the borrowings such as Federal Home Loan Bank advances may be utilized for liquidity or profit enhancement. At March 31, 2015, the Company had no outstanding advances and approximately $181.1 million of additional borrowing capacity from the FHLB of Pittsburgh. Further, the Company has access to the Federal Reserve Bank discount window. At March 31, 2015, no such funds were outstanding.

 

 

The primary use of funds is to meet ongoing loan and investment commitments, to pay maturing savings certificates and savings withdrawals and expenses related to general operations of the Company. At March 31, 2015, the total approved loan commitments outstanding amounted to $5.9 million. At the same date, commitments under unused lines of credit amounted to $36.6 million. Certificates of deposit scheduled to mature in one year or less at March 31, 2015 totaled $103.3 million. Management believes that a significant portion of maturing deposits will remain with the Company. For the quarter ended March 31, 2015, there were no material changes in contractual obligations that were outside of the ordinary course of business. Management anticipates that it will continue to have sufficient cash flows to meet its current and future commitments.

 

Impact of Inflation and Changing Prices

 

The unaudited condensed consolidated financial statements and related financial data presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars, without considering changes in relative purchasing power over time due to inflation. Unlike most industrial companies, virtually all of the Company’s assets and liabilities are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution’s performance than does the effect of inflation.

 

Part I - Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

Not Applicable.

 

Part I - Item 4.

 

CONTROLS AND PROCEDURES

 

The Company’s management evaluated, with the participation of the Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are designed to ensure that financial information required to be disclosed by the Company in the reports that are filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and regulations and are operating in an effective manner.

 

No change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.

 

 

Part II - Other Information

 

Item 1.    Legal Proceedings

 

The Company is involved in legal proceedings and litigation arising in the ordinary course of business. However, there can be no assurance that any of the outstanding legal proceedings and litigation to which the Company is a party will not be decided adversely to the Company’s interests and have a material adverse effect on the consolidated financial statements.

 

Litigation Relating to the Merger

Three purported shareholder derivative and class action complaints relating to the Merger have been filed. The actions were filed in the Court of Common Pleas of Delaware County, Pennsylvania. The complaints name as defendants the Company, its directors and certain of its officers, and WSFS.

 

The complaints in the Merger litigation allege that the members of the Company’s board of directors breached their fiduciary duties to the Company’s shareholders by approving the Merger for inadequate consideration, approving the transaction in order to obtain benefits for Company’s directors and officers that are not equally shared by other Company’s shareholders, entering into the Merger agreement containing preclusive deal protection devices, and failing to take steps to maximize the value to be paid to the Company’s shareholders. The complaints also allege claims against WSFS for aiding and abetting these alleged breaches of fiduciary duties. The plaintiffs in this action seeks, among other things, preliminary and permanent injunctive relief prohibiting consummation of the Merger, rescission or rescissory damages in the event the Merger is consummated, damages, attorneys’ fees and costs, and other and further relief. Each of the defendants believes the claims asserted are without merit and intends to vigorously defend against this lawsuit. However, at this time, it is not possible to predict the outcome of the proceedings or their impact on the Company, WSFS or the merger.

 

Item 1A. Risk Factors

 

Not Applicable as the Company is a Smaller Reporting Company

 

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

 

None

 

Item 3.   Defaults Upon Senior Securities

 

Not Applicable

 

 

Item 4.   Mine Safety Disclosures

 

Not Applicable

 

Item 5.   Other Information

 

None

 

Item 6.   Exhibits

 

(a)

The following exhibits are filed herewith:

 

Ex. No.	Description
31.1	Section 302 Certification of Chief Executive Officer
31.2	Section 302 Certification of Chief Financial Officer
32.1	Section 906 Certification of Chief Executive Officer
32.2	Section 906 Certification of Chief Financial Officer
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definitions Linkbase Document

 

 

SIGNATURES

 

Under the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

	ALLIANCE BANCORP, INC. OF PENNSYLVANIA
Date:  May 12, 2015	By:	/s/ Dennis D. Cirucci
		Dennis D. Cirucci, President
		and Chief Executive Officer
Date:  May 12, 2015	By:	/s/ Peter J. Meier
		Peter J. Meier, Executive Vice
		President and Chief Financial Officer