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PBCP > SEC Filings for PBCP > Form 10-Q on 15-May-2013All Recent SEC Filings

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Form 10-Q for POLONIA BANCORP INC


15-May-2013

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, 2012 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 seven full-service locations, including our main office in Huntingdon Valley, Pennsylvania and our branch offices in the city of Philadelphia and Bucks County.

Critical Accounting Policies

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

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

Allowance for loan losses. The allowance for loan losses is increased by 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 March 31, 2013 and December 31, 2012

Total assets at March 31, 2013 were $262.2 million, a decrease of $5.3 million, from total assets of $267.5 million at December 31, 2012. The decrease in assets resulted primarily from a decrease in investments of $5.0 million, primarily due to repayments on securities. Total liabilities at March 31, 2013 were $221.0 million compared to $226.3 million at December 31, 2012, a decrease of $5.3 million. The decrease in liabilities was primarily due to a $3.5 million decrease in FHLB advances - long-term as a result of two maturities during the quarter and a $1.5 million decrease in deposits. Total stockholders' equity at March 31, 2013 remained unchanged at $41.2 million from December 31, 2012.

Cash and cash equivalents decreased to $24.7 million from $25.1 million during the three months ended March 31, 2013, a decrease of $400,000, or 1.6%.

Investment securities available-for-sale decreased to $15.5 million from $16.1 million during the three months ended March 31, 2013, a decrease of $600,000, or 3.7%. The decrease in investment securities available for sale was attributable to principal payments and maturities.

Investment securities held to maturity decreased to $54.2 million from $58.6 million during the three months ended March 31, 2013, a decrease of $4.4, or 7.5%. The decrease in investment securities held to maturity was attributable to principal payments and maturities.

Loans held for sale decreased to $11.5 million from $12.1 million during the three months ended March 31, 2013, a decrease of $600,000, or 5.0%. The decrease in loans held for sale is the result of the normal fluctuation in loan activity associated with this type of business.

Loans receivable increased $1.2 million, or 0.9%, to $140.0 million at March 31, 2013, compared to $138.8 million at December 31, 2012. The increase in loans receivable is the result of increased emphasis on originating loans for our loan portfolio.

Total deposits decreased to $195.2 million from $196.7 million during the three months ended March 31, 2013, a decrease of $1.5 million, or 0.8%. 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 $3.5 million decrease in FHLB advances long-term was due to two maturities.

Comparison of Operating Results For The Three Months Ended March 31, 2013 and 2012

General.We recorded a net loss of $66,000 during the three months ended March 31, 2013, compared to net income of $76,000 during the three months ended March 31, 2012. The lower net income for the three month period ended March 31, 2013 was primarily related to an increase in noninterest expense of $1.3 million, partially offset by a $942,000 increase in noninterest income, a $99,000 increase in net interest income and an $80,000 decrease in income tax expense.

Net Interest Income. The following table summarizes changes in interest income and expense for the three months ended March 31, 2013 and 2012.

                                                          Three Months Ended
                                                               March 31,
                                                          2013             2012
                                                        (Dollars in thousands)
     Interest and dividend income:
     Loans receivable                                 $       2,051       $ 1,997
     Investment securities                                      496           589
     Other interest and dividend income                           5             2
     Total interest and dividend income                       2,552         2,588
     Interest Expense:
     Deposits                                                   421           527
     FHLB advances - long-term                                  161           187
     Advances by borrow ers for taxes and insurance               3             6
     Total interest expense                                     585           720
     Net interest income                              $       1,967       $ 1,868

The following table summarizes average balances and average yields and costs for the three months ended March 31, 2013 and 2012.

                                                        Three Months Ended
                                                             March 31,
                                                2013                          2012
                                       Average         Yield/        Average         Yield/
                                       Balance          Cost         Balance          Cost
                                                      (Dollars in thousands)
Assets:
Interest-earning assets:
 Loans                                $  147,949           5.55 %   $  151,240           5.22 %
 Investment securities                    72,529           2.74         72,805           3.20
 Other interest-earning assets            25,614           0.08         17,273           0.05
Total interest-earning assets            246,092           4.21 %      241,318           4.30 %
Noninterest-earning assets:               17,661                        19,513
 Allow ance for Loan Losses               (1,520 )                      (1,267 )
  Total assets                        $  262,233                    $  259,564
Liabilities and equity:
Interest-bearing liabilities:
 Interest-bearing demand deposits     $   13,909           0.29 %   $   15,989           0.68 %
 Money market deposits                    39,225           0.43         43,299           0.62
 Savings accounts                         30,162           0.30         29,958           0.35
 Time deposits                           104,307           1.35        107,149           1.52
Total interest-bearing deposits          187,603           0.91 %      196,395           1.08 %
 FHLB advances - long-term                22,906           2.85         26,377           2.84
 Advances by borrow ers for taxes
and insurance                                895           1.36            947           2.54
Total interest-bearing liabilities       211,404           1.12 %      223,719           1.29 %
Noninterest-bearing liabilities:           9,516                         7,987
 Total liabilities                       220,920                       231,706
 Retained earnings                        41,313                        27,858
Total liabilities and retained
earnings                              $  262,233                    $  259,564

Interest rate spread                                       3.08 %                        3.01 %
Net yield on interest-bearing
assets                                                     3.24 %                        3.10 %
Ratio of average interest-earning
assets to
 average interest-bearing
liabilities                                              116.41 %                      107.87 %

Net Interest Income. Net interest income for the three months ended March 31, 2013 increased $99,000, or 5.3%, to $2.0 million, from $1.9 million during the same period last year. Our net interest rate spread increased to 3.08% for the three months ended March 31, 2013 from 3.01% for the same period last year. 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. 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 March 31, 2013 due to increased loan payoffs and sales. Lower interest expense on deposits for the three months ended March 31, 2013 was due to lower rates offered on deposit products.

Provision for Loan Losses. For the three months ended March 31, 2013 we recorded a provision for loan losses of $89,000 as compared to a provision for loan losses of $90,000 for the three months ended March 31, 2012. 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 months ended March 31, 2013 and 2012.

                                             Three Months Ended
                                                  March 31,
                                              2013             2012
                                           (Dollars in thousands)
Service fees on deposit accounts         $           31        $  33
Earnings on bank-ow ned life insurance                6           10
Gain on sale of loans, net                        1,163          142
Rental income                                        75           73
Other                                                31          106
 Total                                   $        1,306        $ 364

The $942,000 increase in noninterest income during the three months ended March 31, 2013 as compared to the three months ended March 31, 2012 was primarily due to a $1.0 million increase in gain on the sale of loans. The increase in the gain on the sale of loans is due to our expanded emphasis on this type of business.

Noninterest Expense. The following table summarizes noninterest expense for the three months ended March 31, 2013 and 2012.

                                          Three Months Ended
                                               March 31,
                                          2013              2012
                                         (Dollars in thousands)
Compensation and employee benefits   $        1,994        $ 1,163
Occupancy and equipment                         349            333
Federal deposit insurance premiums               77             74
Data processing expense                          99            100
Professional fees                               157             99
Other                                           612            254
 Total                               $        3,288        $ 2,023

The $1.3 million increase in noninterest expense during the three months ended March 31, 2013 as compared to the three months ended March 31, 2012 was primarily due to a $831,000 increase in compensation and employee benefits due mainly to the expense of $829,000 related to the hiring of 20 employees for our new Retail Mortgage Banking Division, a $358,000 increase in other expenses primarily related to the amortization of the FDIC indemnification asset of $229,000, a $61,000 increase in loan expense and a $14,000 increase in advertising expense. Professional fees increased by $58,000 related to increased costs associated with legal and audit representation.

Income Taxes.We recorded a tax benefit of $37,000 for the three months ended March 31, 2013 compared to tax expense of $43,000 during the three months ended March 31, 2012. 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 March 31, 2013, cash and cash equivalents totaled $24.7 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $15.5 million at March 31, 2013. In addition, at March 31, 2013, we had the ability to borrow a total of approximately $97.2 million from the FHLB of Pittsburgh. On March 31, 2013, we had $22.0 million of borrowings outstanding. Any growth of our loan portfolio may require us to borrow additional funds.

At March 31, 2013, we had $9.1 million in mortgage loan commitments outstanding, $4.1 million in available credit on lines of credit and $15,000 in a standby letter of credit. Time deposits due within one year of March 31, 2013 totaled $41.7 million, or 40.0% of time deposits. If these maturing deposits do not remain with us, we will be required to seek other sources of funds, including other time deposits and borrowings. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the time deposits due on or before March 31, 2014. We believe, however, based on past experience that a significant portion of our time deposits will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

Our primary investing activities are the origination of loans and the purchase of securities. Our primary financing activities consist of activity in deposit accounts and FHLB advances. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors and other factors. We generally manage the pricing of our deposits to be competitive and to increase core deposit relationships. Occasionally, we offer promotional rates on certain deposit products to attract deposits.

The Company is a separate entity and apart from the Bank and must provide for its own liquidity. In addition to its operating expenses, the Company may utilize its cash position for the payment of dividends or to repurchase common stock, subject to applicable restrictions. The Company's primary source of funds are dividends from the Bank. Payment of such dividends to the Company by the Bank is limited under federal law. The amount that can be paid in any calendar year, without prior regulatory approval, cannot exceed the retained net earnings (as defined) for the year plus the preceding two calendar years. The Company believes that such restriction will not have an impact on the Company's ability to meet its ongoing cash obligations.

Capital Management.We are subject to various regulatory capital requirements administered by the Office of the Comptroller of Currency, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At March 31, 2013, we exceeded all of our regulatory capital requirements. We are considered "well capitalized" under regulatory guidelines.

Off-Balance Sheet Arrangements. In the normal course of operations, we engage in a variety of financial transactions that, in accordance with GAAP, are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers' requests for funding and take the form of loan commitments.

For the three months ended March 31, 2013 and the year ended December 31, 2012 we engaged in no off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.

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