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PBCP > SEC Filings for PBCP > Form 10-K on 31-Mar-2014All Recent SEC Filings

Show all filings for POLONIA BANCORP INC

Form 10-K for POLONIA BANCORP INC


31-Mar-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The objective of this section is to help potential investors understand our views on our results of operations and financial condition. You should read this discussion in conjunction with the consolidated balance sheets as of December 31, 2013 and 2012, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for the years then ended.

Overview

FDIC-Assisted Acquisition. On December 10, 2010, Polonia Bank acquired certain assets and assumed certain liabilities of Earthstar Bank from the FDIC, as receiver of Earthstar Bank. Earthstar Bank operated four community banking branches within Chester and Philadelphia counties, Pennsylvania. Polonia Bank's bid to purchase Earthstar Bank included the purchase of certain Earthstar assets at a discount of $7.0 million in exchange for assuming certain Earthstar Bank deposits and certain other liabilities. Based on the terms of this transaction, the FDIC paid Polonia Bank $30.5 million ($30.8 million less a settlement of approximately $324,000), resulting in a pre-tax gain of $4.6 million. No cash or other consideration was paid by Polonia Bank. Polonia Bank and the FDIC entered into loss sharing agreements regarding future losses incurred on loans existing at the acquisition date. Under the terms of the loss sharing agreements, the FDIC will reimburse Polonia Bank for 80 percent of net losses on covered assets during the term of the agreements.

Under the terms of the loss sharing agreements, the FDIC will reimburse the Bank for 80 percent of net losses on covered assets. The term for loss sharing on residential real estate loans is ten years, while the term for loss sharing on nonresidential real estate loans is five years in respect to losses and eight years in respect to loss recoveries. The loss sharing agreements includes clawback provisions should losses not meet the specified thresholds and other conditions not be met. As a result of the loss sharing agreements with the FDIC, Polonia Bank recorded an indemnification asset, net of estimated clawback provisions, of $5.4 million at the time of acquisition. For additional information regarding the FDIC indemnification asset See Note 1 "Summary of Significant Accounting Policies - FDIC Indemnification Asset" in the consolidated financial statements included in this prospectus.

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At December 31, 2013, covered loans were comprised of $9.8 million of one- to four-family mortgage loans, $6.6 million of multi-family and commercial real estate loans and $157,000 of commercial loans.

Income.Our primary source of pre-tax income is net interest income. Net interest income is the difference between interest income, which is the income that we earn on our loans and securities, and interest expense, which is the interest that we pay on our deposits and FHLB borrowings. Other significant sources of pre-tax income are service charges on deposit accounts and other loan fees (including loan brokerage fees and late charges). In addition, we recognize gains or losses from the sale of loans and investments in years that we have such sales.

Allowance for Loan Losses. The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and value of the portfolio, information about specific borrower situations, and estimated collateral values, economic conditions, and other factors. Allocation of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management's judgment, should be charged off.

Expenses.The non-interest expenses we incur in operating our business consist of salaries and employee benefits expenses, occupancy and equipment expenses, marketing expenses and various other miscellaneous expenses.

Salaries and employee benefits consist primarily of: salaries and wages paid to our employees; payroll taxes; and expenses for health insurance and other employee benefits.

Occupancy and equipment expenses, which are the fixed and variable costs of buildings and equipment, consist primarily of depreciation charges, furniture and equipment expenses, maintenance, real estate taxes and costs of utilities. Depreciation of premises and equipment is computed using the straight-line method based on the useful lives of the related assets, which range from three to 40 years.

Marketing expenses include expenses for advertisements, promotions, third-party marketing services and premium items.

Other expenses include expenses for supplies, telephone and postage, data processing, contributions and donations, director and committee fees, insurance and surety bond premiums and other fees and expenses.

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: allowance for loan losses, deferred income taxes and other-than-temporary impairment of securities.

Allowance for Loan Losses. The allowance for loan losses is the amount estimated by management as necessary to cover probable incurred credit losses in the loan portfolio at the statement of financial condition date. The allowance is established through the provision for loan losses, which is charged to income. Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment. Among the material estimates required to establish the allowance are: loss exposure at default; the amount and timing of future cash flows on impacted loans; the value of collateral; and the determination of loss factors to be applied to the various elements of the portfolio. All of these estimates are susceptible to significant change. Management reviews the level of the allowance on a quarterly basis and establishes the provision for loan losses based upon an evaluation of the portfolio, past loss experience, current economic conditions and other factors related to the collectibility of the loan portfolio. Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. In addition, the OCC, as an integral part of its examination process, periodically reviews our allowance for loan losses. Such agency may require us to recognize adjustments to the allowance based on its judgments about information available to it at the time of its examination. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would negatively affect earnings. For additional discussion, see note 5 of the notes to the consolidated financial statements included in this annual report on Form 10-K.

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Deferred Income Taxes. We use the asset and liability method of accounting for income taxes as prescribed by United States Generally Accepted Accounting Principles (U.S. GAAP). Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets. These judgments require us to make projections of future taxable income. The judgments and estimates we make in determining our deferred tax assets, which are inherently subjective, are reviewed on a continual basis as regulatory and business factors change. Any reduction in estimated future taxable income may require us to record a valuation allowance against our deferred tax assets. A valuation allowance would result in additional income tax expense in the period, which would negatively affect earnings.

Other-Than-Temporary Impairment of Securities. U.S. GAAP requires companies to perform periodic reviews of individual securities in their investment portfolios to determine whether a decline in the value of a security is other than temporary. Securities are periodically reviewed for other-than-temporary impairment based upon a number of factors, including, but not limited to, the length of time and extent to which the market value has been less than cost, the financial condition of the underlying issuer, the ability of the issuer to meet contractual obligations, the likelihood of the security's ability to recover any decline in its market value, management's intent and ability to hold the security for a period of time sufficient to allow for a recovery in market value and whether or not we intend to sell the security or whether it is more likely than not that we would be required to sell the security before its anticipated recovery in market value. Among the factors that are considered in determining management's intent and ability is a review of our capital adequacy, interest rate risk position, and liquidity. The assessment of a security's ability to recover any decline in market value, the ability of the issuer to meet contractual obligations, and management's intent and ability requires considerable judgment. A decline in value that is considered to be other than temporary is recorded as a loss within noninterest income.

Fair value of assets acquired and liabilities assumed pursuant to business combination transactions. Assets acquired and liabilities assumed in business combinations are recorded at estimated fair value on their purchase date. Purchased loans acquired in a business combination, including covered loans, are recorded at estimated fair value with no carryover of the related allowance for loan and lease losses. In determining the estimated fair value of purchased loans, management considers a number of factors including, among other things, the remaining life of the acquired loans, estimated prepayments, estimated loss ratios, estimated value of the underlying collateral, estimated holding periods, and net present value of cash flows expected to be received.

The estimated fair value of the FDIC indemnification asset is based on the net present value of expected future cash proceeds. See note 1 "Summary of Significant Accounting Policies - FDIC Indemnification Asset" in the consolidated financial statements included in this annual report on Form 10-K. The discount rates used are derived from current market rates and reflect the level of inherent risk in the assets. The expected cash flows are determined based on contractual terms, expected performance, default timing assumptions, property appraisals and other factors.

The fair values of investment securities acquired in business combinations are generally based on quoted market prices, broker quotes, comprehensive interest rate tables or pricing matrices or a combination thereof.

The fair value of assumed liabilities in business combinations on their date of purchase is generally the amount payable by the Company necessary to completely satisfy the assumed obligation.

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Financial Condition

Total assets at December 31, 2013 were $305.6 million, an increase of $38.1 million, or 14.2%, from total assets of $267.5 million at December 31, 2012. The increase in assets resulted primarily from a $61.1 million increase in total loans, partially offset by a $9.3 million decrease in cash and cash equivalents, an $8.2 million decrease in securities and a $5.9 million decrease in loans held for sale. Total liabilities at December 31, 2013 were $265.3 million compared to $226.3 million at December 31, 2012, an increase of $39.0 million, or 17.2%. The increase in liabilities was primarily due to a $33.5 million increase in FHLB advances long-term and a $4.6 million increase in deposits. Total stockholders' equity decreased to $40.3 million at December 31, 2013 from $41.2 million at December 31, 2012, a decrease of $885,000, or 2.2%, primarily as a result of the purchases of shares to fund restricted stock awards.

Cash and cash equivalents decreased to $15.8 million from $25.1 million during the year ended December 31, 2013, a decrease of $9.3 million, or 37.1%. The decrease in cash and cash equivalents was attributable, in part, to a $61.1 million increase in total loans, a result of our increased efforts to grow our loans held for investment in 2013, partially offset by a $33.5 million increase in FHLB advances long-term, an $8.2 million decrease in investments, a $5.9 million decrease in loans held for sale and a $4.6 million increase in deposits.

Investment securities available for sale decreased to $15.3 million from $16.1 million during the year ended December 31, 2013, a decrease of $868,000, or 5.4%. The decrease in investment securities available for sale was attributable to payments and maturities received of $2.2 million, partially offset by an increase of $1.5 million in purchases.

Investment securities held to maturity decreased to $51.3 million from $58.6 million during the year ended December 31, 2013, a decrease of $7.3 million, or 12.5%. The decrease in investment securities held to maturity was attributable, in part, to the purchase of $6.0 million in mortgaged-backed securities, partially offset by $13.1 million in payments received.

Loans held for sale decreased to $6.1 million during the year ended December 31, 2013. The decrease was attributable in part to the recent rise in mortgage rates during the second half of the year and the extreme cold weather during the fourth quarter. Loans originated for sale during the year were $116.2 million and loans sold were $122.1 million.

Loans receivable increased to $199.9 million from $138.8 million during the year ended December 31, 2013, an increase of $61.1 million or 44.0%. The increase in loans receivable was mainly due to our increased efforts to grow our loans held for investment during the period.

Total deposits increased to $201.3 million from $196.7 million during the year ended December 31, 2013, an increase of $4.6 million, or 2.3%. The increase in deposits was attributable, in part, to the inflow of $8.5 million in time deposits, as rates offered were above rates offered in the marketplace, and a $797,000 increase in interest bearing demand deposits, partially offset by a $3.0 million decrease in money market accounts and a $1.9 million decrease in noninterest bearing demand deposits.

We utilize borrowings from the FHLB of Pittsburgh to supplement our supply of funds for loans and investments. The $33.5 million increase in FHLB advances long-term was due to the funding of loans in our portfolio.

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The following table sets forth the composition of our loan portfolio at the dates indicated.

                                                                              At December 31,
                              2013                       2012                       2011                       2010                       2009
                      Amount       Percent       Amount       Percent       Amount       Percent       Amount       Percent       Amount       Percent
                                                                           (Dollars in thousands)
Real estate loans:
One-to-four-family   $ 167,233        83.69 %   $ 101,793        73.22 %   $ 111,272        71.82 %   $ 119,085        69.40 %   $ 131,571        86.84 %
Multi-family and
commercial real
estate                  10,564         5.29         8,501         6.11         9,439         6.09        10,272         5.99        10,214         6.74
Home equity loans        2,365         1.18         2,489         1.79         2,818         1.82         2,918         1.70         3,372         2.23
Home equity lines
of credit                  513         0.26         1,853         1.33         1,767         1.14         2,023         1.18         3,036         2.00
Total real estate
loans:                 180,675        90.42       114,636        82.45       125,296        80.87       134,298        78.27       148,193        97.81

Consumer:
Education                1,806         0.90         2,228         1.60         2,885         1.86         3,179         1.85         3,281         2.17
Other consumer             830         0.42           901         0.65         1,032         0.67         1,300         0.76            33         0.02
Total consumer
loans                    2,636         1.32         3,129         2.25         3,917         2.53         4,479         2.61         3,314         2.19
Total loans
excluding covered
loans                  183,311        91.74       117,765        84.70       129,213        83.40       138,777        80.88       151,507       100.00
Covered loans           16,523         8.26        21,260        15.30        25,708        16.60        32,808        19.12             -            -
Total loans            199,834       100.00 %     139,025       100.00 %     154,921       100.00 %     171,585       100.00 %     151,507       100.00 %
Net deferred loan
costs (fees)               117                       (222 )                     (290 )                     (278 )                     (215 )
Allowance for loan
losses on
non-covered loans       (1,378 )                   (1,508 )                   (1,206 )                     (834 )                   (1,115 )
Allowance for loan
losses on covered
loans                        -                          -                        (73 )                        -                          -
Loans, net           $ 198,573                  $ 137,295                  $ 153,352                  $ 170,473                  $ 150,177

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The following table sets forth certain information at December 31, 2013 regarding the dollar amount of loan principal repayments becoming due during the periods indicated. The table does not include any estimate of prepayments, which significantly shorten the average life of all loans and may cause our actual repayment experience to differ from that shown below. Demand loans having no stated schedule of repayments and no stated maturity are reported as due in one year or less.

                                                       Multi-Family
                                    One-to-Four-           and            Home Equity
                                       Family           Commercial         Loans and
                                    Real Estate        Real Estate         Lines of         Consumer      Covered        Total
                                       Loans              Loans             Credit           Loans         Loans         Loans
                                                                      (Dollars in thousands)
Amounts due in:
One year or less                   $        1,080     $        1,315     $          48     $      666     $  1,568     $   4,677
More than one to five years                 2,362              1,849               438            223        3,346         8,218
More than five years                      163,791              7,400             2,392          1,747       11,609       186,939
Total                              $      167,233     $       10,564     $       2,878     $    2,636     $ 16,523     $ 199,834

The following table sets forth the dollar amount of all loans at December 31, 2013 that are due after December 31, 2014 and that have either fixed interest rates or adjustable interest rates. The amounts shown below exclude unearned interest on consumer loans and deferred loan fees.

                                                              Adjustable
                                             Fixed Rate          Rate           Total

  Real Estate Loans:
  One-to-four-family                        $    166,153     $          -     $ 166,153
  Multi-family and commercial real estate          9,249                -         9,249
  Home equity loans and lines of credit            2,317              513         2,830
  Consumer Loans                                   1,970                -         1,970
  Covered Loans                                    7,812            7,143        14,955
  Total                                     $    187,501     $      7,656     $ 195,157

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Securities. The following table sets forth the amortized cost and fair values of our securities portfolio at the dates indicated.

                                                               At December 31,
                                        2013                         2012                         2011
                               Amortized        Fair        Amortized        Fair        Amortized        Fair
                                 Cost          Value          Cost          Value          Cost          Value
                                                            (Dollars in thousands)
Securities
available-for-sale:
Fannie Mae                    $     2,090     $  2,235     $     3,361     $  3,625     $     5,049     $  5,413
Freddie Mac                            66           70             128          138             226          243
Government National
Mortgage Association                  556          619             694          794             891        1,014
Collateralized mortgage
obligations - Government-
sponsored entities                  1,457        1,470           2,167        2,210           3,750        3,811
Total mortgage-backed
securities                          4,169        4,394           6,350        6,767           9,916       10,481
Corporate securities               10,701       10,877           9,171        9,372           6,972        6,867
Total                         $    14,870     $ 15,271     $    15,521     $ 16,139     $    16,888     $ 17,348




                                                                    At December 31,
                                             2013                         2012                         2011
                                    Amortized        Fair        Amortized        Fair        Amortized        Fair
                                      Cost          Value          Cost          Value          Cost          Value
                                                                 (Dollars in thousands)
Securities held-to-maturity:
Fannie Mae                         $    37,615     $ 38,375     $    44,893     $ 47,404     $    46,772     $ 48,763
Freddie Mac                             13,705       13,502          13,712       14,212           9,825       10,229
Total mortgage-backed securities   $    51,320     $ 51,877     $    58,605     $ 61,616     $    56,597     $ 58,992

At December 31, 2013, we had no investments in a single company or entity (other than U.S. Government-sponsored entity securities) that had an aggregate book value in excess of 10% of our equity at those dates.

Federal law requires a member institution of the FHLB System to hold stock of its district Federal Home Loan Bank according to a predetermined formula. This stock is carried at cost and was $3.7 million at December 31, 2013. The FHLB of Pittsburgh is permitted to increase the amount of capital stock owned by a member company to 6.0% of a member's advances, plus 1.50% of the unused borrowing capacity.

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The following table sets forth the stated maturities and weighted average yields of securities at December 31, 2013. Certain mortgage-backed securities have adjustable interest rates and will reprice annually within the various maturity ranges. These repricing schedules are not reflected in the table below. Yields are not presented on a tax-equivalent basis. Any adjustments necessary to present yields on a tax-equivalent basis are insignificant.

                                                                   More than One                  More than Five                    More than
                                  One Year or Less              Year to Five Years              Years to Ten Years                  Ten Years                        Total
                                              Weighted                        Weighted                        Weighted                       Weighted                       Weighted
                              Amortized       Average       Amortized         Average       Amortized         Average        Amortized       Average        Amortized       Average
                                 Cost          Yield           Cost            Yield           Cost            Yield           Cost           Yield           Cost           Yield
                                                                                              (Dollars in thousands)
Securities
available-for-sale:
Fannie Mae                    $        -              - %   $      553             5.12 %   $      611             5.13 %   $       926           2.96 %   $     2,090           4.17 %
Freddie Mac                            -              -             63             4.86              3             5.11               -              -              66           4.87
Government National
Mortgage Association
securities                             -              -             11             7.75             55             6.88             490           6.59             556           6.64
Collateralized mortgage
obligations - Government-
sponsored entities                     -              -             29             3.97            384             1.79           1,044           3.28           1,457           2.90
Corporate securities               2,465           3.46          7,340             1.52            896             3.71               -              -          10,701           2.15
Total                         $    2,465           3.46 %   $    7,996             1.81 %   $    1,950             3.87 %   $     2,459           3.82 %   $    14,870           2.69 %




                                                                               More than One                     More than Five                    More than
                                        One Year or Less                     Year to Five Years                Years to Ten Years                  Ten Years                        Total
                                                      Weighted                              Weighted                         Weighted                       Weighted                       Weighted
                                Amortized              Average         Amortized             Average        Amortized        Average        Amortized       Average        Amortized       Average
                                   Cost                 Yield             Cost                Yield           Cost            Yield           Cost           Yield           Cost           Yield
                                                                                                      (Dollars in thousands)
Securities held-to-maturity:
Fannie Mae                     $          -                     - %   $          -                   - %   $     9,513            2.91 %   $    28,102           2.86 %   $    37,615           2.87 %
Freddie Mac                               -                     -                -                   -           1,111            2.55          12,594           2.32          13,705           2.34
Total                          $          -                     - %   $          -                   - %   $    10,624            2.87 %   $    40,696           2.69 %   $    51,320           2.73 %

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