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PBCP > SEC Filings for PBCP > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for POLONIA BANCORP INC

Form 10-Q for POLONIA BANCORP INC


14-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Management's discussion and analysis of the Company's financial condition and results of operations is intended to assist in understanding the financial condition and results of operations of Polonia Bancorp. The information contained in this section should be read in conjunction with the Unaudited Consolidated Financial Statements and footnotes appearing in Part I, Item 1 of this document.

Forward-Looking Statements

This report contains forward-looking statements that are based on assumptions and may describe future plans, strategies and expectations of Polonia Bancorp and Polonia Bank. These forward-looking statements are generally identified by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project" or similar expressions. Polonia Bancorp's and Polonia Bank's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company and its subsidiary include, but are not limited to the following: changes in interest rates; national and regional economic conditions; legislative and regulatory changes; monetary and fiscal policies of the U.S. government; including policies of the U.S. Treasury and the Federal Reserve Board; the quality and composition of the loan or investment portfolios; demand for loan products; deposit flows; competition; demand for financial services in the Company's market area; changes in real estate market values in the Company's market area; and changes in relevant accounting principles and guidelines. Additionally, other risks and uncertainties are described herein and in the Company's Form 10-K for the year ended December 31, 2011 under "Item 1A: Risk Factors" filed with the Securities and Exchange Commission (the "SEC") which is available through the SEC's website at www.sec.gov . These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, the Company does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.

General

Polonia Bancorp's business activities are the ownership of the outstanding capital stock of Polonia Bank. Currently, Polonia Bancorp neither owns or leases any property, but instead uses the premises, equipment and other property of Polonia Bank and pays appropriate rental fees, as by required applicable law and regulations. In the future, Polonia Bancorp may acquire or organize other operating subsidiaries; however, there are no current plans, arrangements, or understandings, written or oral, to do so.

Polonia Bank operates as a community-oriented financial institution offering a variety of deposit products as well as providing residential real estate loans, and to a lesser degree, multi-family and nonresidential real estate loans, home equity loans and consumer loans primarily to individuals, families and small businesses located in Bucks, Philadelphia and Montgomery Counties, Pennsylvania. The Bank operates from nine full-service locations, including our main office in Huntingdon Valley, Pennsylvania and our branch offices in the city of Philadelphia and Bucks County.

On December 10, 2010, Polonia Bank assumed certain of the deposits and acquired certain assets of Earthstar Bank ("Earthstar"), a state charted bank from the Federal Deposit Insurance Corporation ("FDIC"), as receiver for Earthstar. We acquired approximately $67 million in assets, including approximately $42 million in loans (comprised primarily of single-family residential and home equity loans ("Single-Family Loans") and commercial business and commercial real estate loans ("Commercial Loans")), and approximately $8 million in investments securities. We also assumed approximately $90 million in deposits.

Critical Accounting Policies

We consider accounting policies involving significant judgments and assumptions by management that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies. We consider the following to be our critical accounting policies.

Securities. Securities are reported at fair value adjusted for premiums and discounts which are recognized in interest income using the interest method over the period to maturity. Declines in the fair value of individual securities below their amortized cost, and that are deemed to be other than temporary, will be written down to current market value and included in earnings as realized losses. Management systematically evaluates securities for other than temporary declines in fair value on a quarterly basis.

Allowance for loan losses. The allowance for loan losses is increased by charges to income and decreased by charge-offs (net of recoveries). The Company's periodic evaluation of the adequacy of the allowance for loan losses is determined by management through evaluation of the loss exposure on individual non-performing, delinquent and high-dollar loans; review of economic conditions and business trends; historical loss experience and growth and composition of the loan portfolio, as well as other relevant factors.

A quantitative analysis is utilized to support the adequacy of the allowance for loan losses. This analysis includes review of historical charge-off rates for loan categories, fluctuations and trends in the amount of classified loans and economic factors. Significant to this analysis are any changes in observable trends that may be occurring relative to loans to assess potential weaknesses within the credit. Current economic factors and trends in risk ratings are considered in the determination and allocation of the allowance for loan losses.

Income taxes. The Company files a consolidated federal income tax return. Deferred tax assets and liabilities are computed based on the difference between the financial statement and the income tax basis of assets and liabilities using the enacted marginal tax rates. Deferred income taxes or benefits are based on changes in the deferred tax asset or liability from period to period. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which such items are expected to be realized or settled. As changes in tax rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.

Comparison of Financial Condition at September 30, 2012 and December 31, 2011

Total assets at September 30, 2012 were $263.8 million, a decrease of $1.3 million, from total assets of $265.1 million at December 31, 2011. The decrease in assets resulted primarily from a decrease in loans receivable of $18.0 million, primarily due to loan sales and loan prepayments. Total liabilities at September 30, 2012 were $235.8 million compared to $237.4 million at December 31, 2011, a decrease of $1.6 million. The decrease in liabilities was primarily due to a reduction in FHLB advances and a decrease in deposits, partially offset by $9.6 million in subscriptions received for the Company's pending stock offering. Total stockholders' equity increased to $27.9 million at September 30, 2012 from $27.6 million at December 31, 2011, an increase of $288,000.

Loans receivable decreased $18.0 million, or 11.6%, to $136.6 million at September 30, 2012, compared to $154.6 million at December 31, 2011. The size of our loan portfolio decreased during the nine months ended September 30, 2012 due primarily to loan payoffs and re-payments, partially offset by new loans.

Non-performing non-covered loans totaled $2.6 million, or 2.1% of total non-covered loans, at September 30, 2012 compared to $2.0 million, or 1.52% of total non-covered loans, at December 31, 2011 and $1.2 million, or 0.9% of total non-covered loans, at September 30, 2011. The increase in non-performing non-covered loans as a percentage of total non-covered loans since December 31, 2011 was primarily the result of a $600,000 increase in one relationship in the multi-family and commercial real estate category as well as a $3.7 million decrease in our total non-covered loan portfolio. The increase in that same ratio from September 30, 2011 to September 30, 2012 reflects a $3.6 million decrease in total non-covered loans as well as a $1.4 million increase in non-performing non-covered loans, primarily the result of $1.3 million increase in one relationship in the multi-family and commercial real estate category.

Loans held for sale increased to $10.9 million at September 30, 2012 as the new Retail Mortgage Banking Division, which primarily originates FHA loans began to produce loans on a consistent basis during the quarter ended September 30, 2012 which was the divisions first full quarter in operation.

Historically, we have originated FHA loans on a limited basis in order to accommodate customers who may not qualify for a conventional mortgage loan. FHA loans have mortgage insurance provided by the federal government. The loans are up to 96.5% of the lesser of the appraised value or purchase price and are originated and underwritten manually according to private investor and FHA guidelines. We have recently expanded our FHA lending activities by forming a new Retail Mortgage Banking Division and hiring an experienced team of originators in an effort to increase noninterest income through gains on the sale of loans. Our FHA lending team has been expanded from two (2) to 13 employees. We originate FHA loans from within our market area with the intention of selling the loans on a flow basis to the U.S. Department of Housing and Urban Development ("HUD") and other private investors with servicing released.

Investment securities available-for-sale decreased to $15.9 million from $17.3 million during the nine months ended September 30, 2012, a decrease of $1.4 million, or 8.1%. The decrease in investment securities available for sale was attributable to $3.5 million in principal payments and maturities, partially offset by $1.8 million in purchases.

Investment securities held to maturity increased to $59.0 million from $56.6 million during the nine months ended September 30, 2012, an increase of $2.4, or 4.2%. The increase in investment securities held to maturity was attributable, in part, to $11.7 million in purchases, partially offset by $9.2 million in principal repayments.

Cash and cash equivalents increased to $23.1 million from $17.4 million during the nine months ended September 30, 2012, an increase of $5.7 million, or 32.8%. The increase in cash and cash equivalents was primarily attributable to an $18.0 million decrease in loans receivable and $9.6 million in stock subscriptions received in the Conversion, partially offset by a decrease of $5.9 million in deposits and a $5.5 million decrease in FHLB advances.

Total deposits decreased to $197.1 million from $203.0 million during the nine months ended September 30, 2012, a decrease of $5.9 million, or 1.4%. The decrease in deposits was attributable, in part, to lower rates offered on deposit products.

We utilize borrowings from the FHLB of Pittsburgh to supplement our supply of funds for loans and investments. The $5.5 million decrease in FHLB advances long-term was due to maturities and repayments.

Comparison of Operating Results For The Three and Nine Months Ended September 30, 2012 and 2011

General.We recorded a net loss of $66,000 during the three months ended September 30, 2012, compared to net income of $117,000 during the three months ended September 30, 2011. The lower net income for the three month period ended September 30, 2012 was primarily related to an increase in noninterest expense of $949,000, partially offset by a $476,000 increase in noninterest income, a $105,000 decrease in provision for loan losses, a $100,000 decrease in income tax expense and a $85,000 increase in net interest income.

We recorded a net loss of $26,000 during the nine months ended September 30, 2012, compared to net income of $331,000 during the nine months ended September 30, 2011. The lower net income for the nine month period ended September 30, 2012 was primarily related to an increase in noninterest expense of $762,000 and lower net interest income of $200,000, partially offset by higher noninterest income of $493,000, lower income tax expense of $83,000 and a lower provision for loan losses expense of $30,000.

Net Interest Income. The following table summarizes changes in interest income and expense for the three and nine months ended September 30, 2012 and 2011.

                                         Three Months Ended                   Nine Months Ended
                                            September 30,                       September 30,
                                       2012               2011              2012              2011
                                       (Dollars in thousands)              (Dollars in thousands)
Interest and dividend income:
Loans receivable                   $       2,146       $     2,209     $        6,131      $     6,743
Investment securities                        565               631              1,732            1,863
Other interest and dividend
income                                         4                 1                 10                6
Total interest and dividend
income                                     2,715             2,841              7,873            8,612
Interest Expense:
Deposits                                     460               644              1,494            1,983
FHLB advances - short-term                     -                 -                  -               11
FHLB advances - long-term                    185               211                557              595
Advances by borrowers for taxes
and insurance                                  5                 6                 16               17
Total interest expense                       650               861              2,067            2,606
Net interest income                $       2,065       $     1,980     $        5,806      $     6,006

The following table summarizes average balances and average yields and costs for the three and nine months ended September 30, 2012 and 2011.

                                     Three Months Ended                                     Nine Months Ended
                                        September 30,                                         September 30,
                               2012                       2011                       2012                       2011
                       Average       Yield/       Average       Yield/       Average       Yield/       Average       Yield/
                       Balance        Cost        Balance        Cost        Balance        Cost        Balance        Cost
                                   (Dollars in thousands)                                (Dollars in thousands)
Assets:
Interest-earning
assets:
Loans                 $ 141,237         5.95 %   $ 162,643         5.31 %   $ 144,553         5.59 %   $ 169,632         5.24 %
Investment
securities               74,099         2.98        76,648         3.22        73,026         3.13        72,140         3.41
Other
interest-earning
assets                   25,110         0.06        16,707         0.02        23,104         0.06        16,355         0.05
Total
interest-earning
assets                  240,446         4.48 %     255,998         4.40 %     240,683         4.37 %     258,127         4.46 %
Noninterest-earning
assets:                  19,489                     19,774                     19,508                     20,159
Allowance for Loan
Losses                   (1,250 )                   (1,704 )                   (1,240 )                   (1,259
Total assets          $ 258,685                  $ 274,068                  $ 258,951                  $ 277,027

Liabilities and
equity:
Interest-bearing
liabilities:
Interest-bearing
demand deposits       $  14,513         0.30 %   $  13,356         0.62 %   $  15,374         0.50 %   $  13,089         0.61 %
Money market
deposits                 42,141         0.45        47,158         0.66        42,565         0.56        50,137         0.68
Savings accounts         29,895         0.29        30,288         0.45        29,840         0.32        30,081         0.44
Time deposits           107,920         1.39       115,451         1.76       107,906         1.47       115,635         1.81
Total
interest-bearing
deposits                194,469         0.94 %     206,253         1.24 %     195,685         1.02 %     208,942         1.27 %
FHLB advances -
short-term                    -            -             -            -             -            -         2,176         0.68
FHLB advances -
long-term                25,743         2.85        31,325         2.67        26,003         2.86        28,942         2.75
Advances by
borrowers for taxes
and insurance               755         2.63           927         2.14           817         2.62           957         2.38
Total
interest-bearing
liabilities             220,967         1.17 %     238,505         1.43 %     222,505         1.24 %     241,017         1.45 %
Noninterest-bearing
liabilities:              9,699                      7,751                      8,447                     10,032
Total liabilities       230,666                    246,256                    230,952                    251,049
Retained earnings        28,019                     27,812                     27,999                     25,978
Total liabilities
and retained
earnings              $ 258,685                  $ 274,068                  $ 258,951                  $ 277,027

Interest rate
spread                                  3.31 %                     2.97 %                     3.13 %                     3.02 %
Net yield on
interest-bearing
assets                                  3.41 %                     3.07 %                     3.23 %                     3.11 %
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities                           108.82 %                   107.33 %                   108.17 %                   107.10 %

Net Interest Income. Net interest income for the three months ended September 30, 2012 increased $85,000, or 4.3%, to $2.1 million, from $2.0 million during the same period last year. Our net interest rate spread increased to 3.31% for the three months ended September 30, 2012 from 2.97% for the same period in 2011. The primary reasons for the increase in net interest income for the three month period are a higher average balance of other interest earning assets, a lower average balance of interest bearing deposits and a lower average balance of FHLB advances, partially offset by a lower average balance of loans and investment securities. Also contributing to the higher net interest income was a higher average rate earned on loans, other interest earning assets and a lower average rate paid on deposits, partially offset by a lower average rate earned on investment securities. The average balance of loans decreased during the three months ended September 30, 2012 due to increased loan payoffs and sales. Lower interest expense on deposits for the three months ended September 30, 2012 was due to lower rates offered on deposit products. The decrease in the average balance of investment securities during the three month period ended September 30, 2012 was due to payments and maturities, partially offset by purchases.

Net interest income for the nine months ended September 30, 2012 decreased $200,000, or 3.3%, to $5.8 million, from $6.0 million during the same period last year. Our net interest rate spread increased to 3.13% for the nine months ended September 30, 2012 from 3.02% for the same period in 2011. The primary reasons for the decrease in net interest income for the nine month period are a lower average balance of loans, partially offset by a lower average balance of deposits and FHLB advances. Also contributing to the decrease in net interest income was a lower yield on investment securities and a higher average rate paid on FHLB advances, partially offset by a higher average yield on loans and a lower average rate paid on deposits. The average balance of loans decreased during the nine months ended September 30, 2012 due to increased loan payoffs and sales. Lower interest expense on deposits for the nine months ended September 30, 2012 was due to a lower average yield on all deposit products.

Provision for Loan Losses. For the three months ended September 30, 2012 we recorded a provision for loan losses of $124,000 as compared to a provision for loan losses of $229,000 for the three months ended September 30, 2011. For the nine months ended September 30, 2012 we recorded a provision for loan losses of $314,000 as compared to a provision for loan losses of $344,000 for the nine months ended September 30, 2011. The provisions reflect management's assessment of lending activities, increased non-performing loans, levels of current delinquencies and current economic conditions.

Noninterest Income. The following table summarizes noninterest income for the three and nine months ended September 30, 2012 and 2011.

                                               Three Months Ended                   Nine Months Ended
                                                 September 30,                        September 30,
                                            2012                2011              2012              2011
                                             (Dollars in thousands)              (Dollars in thousands)
Service fees on deposit accounts        $          24       $         34     $          105      $       116
Earnings on bank-owned life insurance               9                 15                 30               50
Investment securities gains, net                    -                 16                  -              235
Gain on sale of loans, net                        792                250              1,133              354
Rental income                                      73                 78                218              229
Other                                              28                 57                221              230
Total                                   $         926       $        450     $        1,707      $     1,214

The $476,000 increase in noninterest income during the three months ended September 30, 2012 as compared to the three months ended September 30, 2011 was primarily due to a $516,000 increase in gain on the sale of loans. The new Retail Mortgage Banking Division contributed $609,000 to the increase in the gain on the sale of loans for the three months ended September 30, 2012.

The $493,000 increase in noninterest income during the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011 was primarily due to a $779,000 increase in gains on the sale of loans, partially offset by a $235,000 decrease in gains on the sale of investments. The new Retail Mortgage Banking Division contributed $657,000 to the increase in the gain on the sale of loans for the nine months ended September 30, 2012.

Noninterest Expense. The following table summarizes noninterest expense for the three and nine months ended September 30, 2012 and 2011.

                                           Three Months Ended                   Nine Months Ended
                                              September 30,                       September 30,
                                         2012               2011              2012              2011
                                         (Dollars in thousands)              (Dollars in thousands)
Compensation and employee benefits   $       1,717       $     1,126     $        4,133      $     3,444
Occupancy and equipment                        347               314              1,033            1,008
Federal deposit insurance premiums              69                 6                224              213
Data processing expense                         96               124                295              438
Professional fees                              118               100                327              289
Other                                          633               361              1,230            1,088
Total                                $       2,980       $     2,031     $        7,242      $     6,480

The $949,000 increase in noninterest expense during the three months ended September 30, 2012 as compared to the three months ended September 30, 2011 was primarily due to a $591,000 increase in compensation and employee benefits due mainly to the expense of $597,000 related to the new Retail Mortgage Banking Division, a $272,000 increase in other expenses primarily related to the amortization of the FDIC indemnification asset of $256,000, and a $63,000 increase in federal deposit insurance premiums expense, which is related to an over accrual of expense related to the revised FDIC insurance calculation in 2011.

Total noninterest expense increased $762,000, or 11.8%, to $7.2 million for the nine months ended September 30, 2012 from the prior year period. The increase in noninterest expense for the nine months ended September 30, 2012 as compared to the prior year period was primarily the result of a $689,000 increase in compensation and employee benefits due mainly to the expense of $639,000 related to the new Retail Mortgage Banking Division, and a $142,000 increase in other expense primarily related to the amortization of the FDIC indemnification asset of $228,000, partially offset by a $143,000 decrease in data processing expense.

Approximately $343,000 of the noninterest expense related to the new Retail Mortgage Banking Division for the three and nine months ended September 30, 2012, respectively, were one-time, non-recurring costs.

Income Taxes.We recorded a tax benefit of $46,000 for the three months ended September 30, 2012 compared to tax expense of $54,000 during the three months ended September 30, 2011. The decrease of tax expenses resulted from the decrease in our taxable operating profits.

We recorded tax expense of $18,000 for the nine months ended September 30, 2012 compared to tax expense of $65,000 during the nine months ended September 30, 2011. The decrease of tax expenses resulted from the decrease in our taxable operating profits.

Liquidity and Capital Management

Liquidity Management. Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, loan repayments, maturities and sales of securities and borrowings from the FHLB of Pittsburgh. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition.

We regularly adjust our investments in liquid assets based upon our assessment of (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities and (4) the objectives of our asset/liability management policy.

Our most liquid assets are cash and cash equivalents. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. At September 30, 2012, cash and cash equivalents totaled $23.1 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $15.9 million at September 30, 2012. In addition, at September 30, 2012, we had the ability to borrow a total of approximately $97.1 million from the FHLB of Pittsburgh. On September 30, 2012, we had $25.6 million of borrowings outstanding. Any growth of our loan portfolio may require us to borrow additional funds.

At September 30, 2012, we had $10.0 million in mortgage loan commitments outstanding, $4.8 million in available credit on lines of credit and $15,000 in . . .

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