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PBCP > SEC Filings for PBCP > Form 10-Q on 14-Aug-2013All Recent SEC Filings

Show all filings for POLONIA BANCORP INC

Form 10-Q for POLONIA BANCORP INC


14-Aug-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 changes to income and decreased by change-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 June 30, 2013 and December 31, 2012

Total assets at June 30, 2013 were $277.2 million, an increase of $9.7 million, from total assets of $267.5 million at December 31, 2012. The increase in assets resulted primarily from an increase in our loan portfolio of $27.9 million, primarily due to an increased emphasis on originating one-to four-family loans, partially offset by a decrease in cash and cash equivalents of $13.8 million and $3.6 million in investment securities. Total liabilities at June 30, 2013 were $236.1 million compared to $226.3 million at December 31, 2012, an increase of $9.4 million. The increase in liabilities was primarily due to the net increase of $12.5 million in FHLB advances - long-term for the funding of our new loan originations offset by a $3.4 million decrease in deposits. Total stockholders' equity at June 30, 2013 decreased to $41.1 million as compared to $41.2 million from December 31, 2012.

Cash and cash equivalents decreased to $11.3 million from $25.1 million during the six months ended June 30, 2013, a decrease of $13.8 million, or 55.0% partially due to the emphasis on one-to-four family loan originations.

Investment securities available-for-sale decreased to $14.7 million from $16.1 million during the six months ended June 30, 2013, a decrease of $1.4 million, or 8.7%. The decrease in investment securities available-for-sale was attributable to principal payments and maturities.

Investment securities held-to-maturity decreased to $56.4 million from $58.6 million during the six months ended June 30, 2013, a decrease of $2.2, or 3.7%. The decrease in investment securities held-to-maturity was attributable to principal payments and maturities.

Loans held for sale decreased to $11.3 million from $12.1 million during the six months ended June 30, 2013, a decrease of $727,000, or 6.0%. The decrease is loans held for sale is the result of the normal fluctuation in loan activity associated with this type of business.

Loans receivable increased $27.9 million, or 20.1% to $166.7 million at June 30, 2013, compared to $138.8 million at December 31, 2012. The increase in loans receivable is the result of increased emphasis on originating one-to-four family loans for investment.

Total deposits decreased to $193.3 million from $196.7 million during the six months ended June 30, 2013, a decrease of $3.4 million, or 1.7%. 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 $12.5 million net increase in FHLB advances long-term was due to the proceeds of $16.0 million in borrowings, partially offset by repayment of $3.5 million in borrowings.

Comparison of Operating Results For The Three and Six Months Ended June 30, 2013 and 2012

General. We recorded net income of $47,000 during the three months ended June 30, 2013 compared to a net loss of $35,000 during the three months ended June 30, 2012. The increase in net income for the three month period ended June 30, 2013 was primarily related to an increase in net interest income of $194,000 and an increase in noninterest income of $1.2 million, partially offset by a $1.2 million increase in noninterest expense and an $35,000 increase in income tax expense.

We recorded a net loss of $19,000 during the six months ended June 30, 2013 compared to net income of $40,000 during the six months ended June 30, 2012. The decrease in net income for the six month period ended June 30, 2013 was primarily related to an increase in noninterest expense of $2.5 million, partially offset by a $2.1 million increase in noninterest income, a $300,000 increase in net interest income, a $77,000 decrease in provision for loan losses and a $45,000 decrease in income tax expense.

Net Interest Income. The following table summarizes changes in interest income and expense for the three and six months ended June 30, 2013 and 2012.

                                               Three Months Ended               Six Months Ended
                                                    June 30,                        June 30,
                                              2013             2012            2013            2012
                                             (Dollars in thousands)          (Dollars in thousands)
Interest and dividend income:
Loans receivable                          $       2,088     $     1,989   $        4,139    $     3,985
Investment securities                               477             578              974          1,167
Other interest and dividend income                    4               4                8              6
Total interest and dividend income                2,569           2,571            5,121          5,158
Interest Expense:
Deposits                                            413             508              833          1,035
FHLB advances - long-term                           164             185              326            372
Advances by borrowers for taxes and
insurance                                             1               5                4             11
Total interest expense                              578             698            1,163          1,418
Net interest income                       $       1,991     $     1,873   $        3,958    $     3,740

The following table summarizes average balances and average yields and costs for the three and six months ended June 30, 2013 and 2012.

                                         Three Months Ended                                 Six Months Ended
                                              June 30,                                          June 30,
                                         2013                   2012                   2013                   2012
                                   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                             $ 159,471     5.18 %   $ 141,008     5.58 %   $ 153,741     5.35 %   $ 146,230     5.42 %
Investment securities                69,309     2.72        72,159     3.17        70,910     2.73        72,485     3.20
Other interest-earning assets        18,015     0.09        26,913     0.06        21,794     0.07        22,091     0.05
Total interest earning-assets       246,795     4.18 %     240,080     4.30 %     246,445     4.19 %     240,806     4.32 %
Noninterest-earning assets:          17,467                 19,528                 17,564                 19,516
Allowance for Loan Losses           (1,461)                (1,204)                (1,490)                (1,236)
Total assets                      $ 262,801              $ 258,404              $ 262,519              $ 259,086

Liabilities and equity:
Interest-bearing liabilities:
Interest-bearing demand
deposits                          $  14,230     0.25 %   $  15,629     0.49 %   $  14,070     0.26 %   $  15,809     0.59 %
Money Market Deposits                38,569     0.42        42,261     0.60        38,896     0.43        42,780     0.61
Savings accounts                     30,378     0.28        29,668     0.32        30,271     0.29        29,813     0.34
Time deposits                       104,005     1.32       108,649     1.48       104,155     1.34       107,899     1.51
Total interest-bearing deposits     187,182     0.88 %     196,207     1.04 %     187,392     0.90 %     196,301     1.06 %
FHLB advances - long-term            23,406     2.81        25,891     2.87        23,158     2.84        26,134     2.87
Advances by borrowers for taxes
and insurance                           960     0.42           750     2.67           927     0.87           848     2.62
Total interest-bearing
liabilities                         211,548     1.10 %     222,848     1.26 %     211,477     1.11 %     223,283     1.28 %
Noninterest-bearing
liabilities:                          9,942                  7,648                  9,730                  7,814
Total liabilities                   221,490                230,496                221,207                231,097
Retained earnings                    41,311                 27,908                 41,312                 27,989
Total liabilities and retained
earnings                          $ 262,801              $ 258,404              $ 262,519              $ 259,086

Interest rate spread                            3.08 %                 3.04 %                 3.08 %                 3.04 %
Net yield on interest-bearing
assets                                          3.24 %                 3.13 %                 3.24 %                 3.13 %
Ratio of average
interest-earning assets to
average interest-bearing
  liabilities                                 116.66 %               107.73 %               116.54 %               107.85 %

Net Interest Income. Net interest income for the three months ended June 30, 2013 increased $118,000, or 6.3% 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 June 30, 2013 from 3.04% 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 loans, a lower average balance of interest bearing deposits and a lower average balance of FHLB advances, partially offset by a lower average balance of other interest earning assets and investment securities. Also contributing to the higher net interest income was a lower average rate paid on deposits and FHLB advances, partially offset by a lower average rate earned on loans and investment securities. The average balance of loans increased during the three months ended June 30, 2013 due to increased loan originations. Lower interest expense on deposits for the three months ended June 30, 2013 was due to lower rates offered on deposit products.

Net interest income for the six months ended June 30, 2013 increased $218,000, or 5.8% to $4.0 million, from $3.7 million during the same period last year. Our net interest rate spread increased to 3.08% for the six months ended June 30, 2013 from 3.04% for the same period last year. The primary reasons for the increase in net interest income for the six month period are a higher average balance of loans, a lower average balance of interest bearing deposits and a lower average balance of FHLB advances, partially offset by a lower average balance of investment securities and other interest earning assets. Also contributing to the higher net interest income was a lower average rate paid on deposits and FHLB advances, partially offset by a lower average rate earned on loans and investment securities. The average balance of loans increased during the six months ended June 30, 2013 due to increased loan originations. Lower interest expense on deposits for the six months ended June 30, 2013 was due to lower rates offered on deposit products.

Provision for Loan Losses. For the three months ended June 30, 2013 we recorded a provision for loan losses of $25,000 as compared to a provision for loan losses of $101,000 for the three months ended June 30, 2012. The provisions reflect management's assessment of lending activities, decreased non-performing loans, levels of current delinquencies and current economic conditions.

For the six months ended June 30, 2013 we recorded a provision for loan losses of $114,000 as compared to a provision for loan losses of $191,000 for the six months ended June 30, 2012. The provisions reflect management's assessment of lending activities, decreased non-performing loans, levels of current delinquencies and current economic conditions

Noninterest Income. The following table summarizes noninterest income for the three and six months ended June 30, 2013 and 2012.

                                                Three Months Ended                 Six Months Ended
                                                     June 30,                          June 30,
                                               2013              2012            2013              2012
                                              (Dollars in thousands)            (Dollars in thousands)
Service fees on deposit accounts          $            35     $        48   $            66     $        81
Earnings on bank-owned life insurance                   8              10                14              21
Gain on sale of loans, net                          1,418             199             2,581             341
Rental Income                                          70              72               145             145
Other                                                  58              87                89             193
Total                                     $         1,589     $       416   $         2,895     $       781

The $1.2 million increase in noninterest income during the three months ended June 30, 2013 as compared to the three months ended June 30, 2012 was primarily due to a $1.2 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.

The $2.1 million increase in noninterest income during the six months ended June 30, 2013 as compared to the six months ended June 30, 2012 was primarily due to a $2.2 million increase in gain on the sale of loans, partially offset by a $104,000 decrease in other noninterest income. The increase in the gain on the sale of loans is due to our expanded emphasis on this type of business. The decrease in other noninterest income is partially due to a $40,000 decrease in the net gain on the sale of REO and a $32,000 decrease in payments received on charged-off loans by the former Earthstar Bank.

Noninterest Expense. The following table summarizes noninterest expense for the three and six months ended June 30, 2013 and 2012.

                                               Three Months Ended               Six Months Ended
                                                    June 30,                        June 30,
                                              2013             2012            2013            2012
                                             (Dollars in thousands)          (Dollars in thousands)
Compensation and employee benefits        $       2,133     $     1,253   $        4,127    $     2,416
Occupancy and equipment                             350             353              700            686
Federal deposit insurance premiums                   78              81              155            155
Data processing expense                             109              99              207            198
Professional fees                                   175             109              333            209
Other                                               643             344            1,254            598
Total                                     $       3,488     $     2,239   $        6,776    $     4,262

The $1.2 million increase in noninterest expense during the three months ended June 30, 2013 as compared to the three months ended June 30, 2012 was primarily due to a $880,000 increase in compensation and employee benefits due mainly to the expense of $870,000 related to the hiring of 20 employees for our Retail Mortgage Banking Division, a $299,000 increase in other expenses primarily related to the amortization of the FDIC indemnification asset of $230,000 and a $64,000 increase in loan expense. Professional fees increased by $66,000 related to increased costs associated with legal and audit representation.

The $2.5 million increase in noninterest expense during the six months ended June 30, 2013 as compared to the six months ended June 30, 2012 was primarily due to a $1.7 million increase in compensation and employee benefits due mainly to the expense of $1.7 million related to the hiring of 20 employees for our Retail Mortgage Banking Division, a $656,000 increase in other expenses primarily related to the amortization of the FDIC indemnification asset of $534,000 and a $114,000 increase in loan expense. Professional fees increased by $124,000 related to increased costs associated to legal and audit representation.

Income Taxes. We recorded tax expense of $20,000 for the three months ended June 30, 2013 compared to a tax benefit of $15,000 during the three months ended June 30, 2012. The increase in tax expenses resulted from the increase in our taxable operating profits.

We recorded a tax benefit of $17,000 for the six months ended June 30, 2013 compared to tax expense of $28,000 during the six months ended June 30, 2012. The decrease in 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 June 30, 2013, cash and cash equivalents totaled $11.3 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $14.7 million at June 30, 2013. In addition, at June 30, 2013 we had the ability to borrow a total of approximately $99.3 million from the FHLB of Pittsburgh. On June 30, 2013, we had $38.0 million of borrowings outstanding. Any growth of our loan portfolio may require us to borrow additional funds.

At June 30, 2013, we had $10.3 million in mortgage loan commitments outstanding and $3.6 million in available credit on lines of credit. Time deposits due within one year of June 30, 2013 totaled $40.0 million, or 38.2% of time deposits. If these maturing deposits do not remain with us, we will be required to seek other sources of funds, including other time deposits and borrowings. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings that we currently pay on the time deposits due on or before June 30, 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 June 30, 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 customer's requests for funding and take the form of loan commitments.

For six months ended June 30, 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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