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PBCP > SEC Filings for PBCP > Form 10-Q on 13-May-2014All Recent SEC Filings

Show all filings for POLONIA BANCORP INC

Form 10-Q for POLONIA BANCORP INC


13-May-2014

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, 2013 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 required by 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 five full-service locations, including our main office in Huntingdon Valley, Pennsylvania and our branch offices in the city of Philadelphia.

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 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, 2014 and December 31, 2013

Total assets at March 31, 2014 were $301.9 million, a decrease of $3.7 million, from total assets of $305.6 million at December 31, 2013. The decrease in assets resulted primarily from a decrease in our loan portfolio of $2.0 million and a decrease in cash and cash equivalents of $1.8 million. Total liabilities at March 31, 2014 were $262.0 million compared to $265.3 million at December 31, 2013, a decrease of $3.3 million. The decrease in liabilities was primarily due to a $2.5 million decrease in deposits and a $400,000 decrease in other liabilities. Total stockholders' equity at March 31, 2014 decreased to $39.9 million as compared to $40.3 million from December 31, 2013. The decrease of $403,000 was primarily due to the repurchase of $449,000 in common stock.

Cash and cash equivalents decreased to $14.0 million from $15.8 million during the three months ended March 31, 2014, a decrease of $1.8 million, or 11.4%, primarily due to a decrease in deposits during the period.

Investment securities available-for-sale decreased to $14.9 million from $15.3 million during the three months ended March 31, 2014, a decrease of $355,000, or 2.3%. The decrease in investment securities available-for-sale was attributable to principal payments and maturities.

Investment securities held-to-maturity decreased to $50.9 million from $51.3 million during the three months ended March 31, 2014, a decrease of $447,000, or 0.9%. The decrease in investment securities held-to-maturity was attributable to principal payments and maturities, partially offset by purchases.

Loans-held-for sale increased to $7.2 million from $6.1 million during the three months ended March 31, 2014, an increase of $1.1 million, or 18.0%. The increase is loans held-for-sale is the result of the normal fluctuation in loan activity associated with this type of business.

Loans receivable decreased $2.5 million, or 1.3% to $197.5 million at March 31, 2014, compared to $200.0 million at December 31, 2013. The decrease in loans receivable is the result of decreased loan originations during the period.

Total deposits decreased to $198.8 million from $201.3 million during the three months ended March 31, 2014, a decrease of $2.5 million, or 1.2%. The decrease in deposits was primarily due to a decrease of $1.9 million in money market accounts as a result of lower rates offered on this product.

Total FHLB advances remained unchanged at $59.0 million at March 31, 2014.

Total stockholders' equity decreased $403,000, or 1.0% to $39.9 million at March 31, 2014, compared to $40.3 million at December 31, 2013. The decrease in stockholders' equity is partially due to the repurchase of 45,000 shares of common stock at a total cost of $449,000.

Comparison of Operating Results For the Three Months Ended March 31, 2014 and 2013

General. We recorded a net loss of $30,000 during the three months ended March 31, 2014 compared to a net loss of $66,000 during the three months ended March 31, 2013. The decreased net loss for the three month period ended March 31, 2014 was primarily related to a decrease in noninterest expense of $394,000, a decrease in provision for loan losses of $74,000 and an increase of $67,000 in net interest income, partially offset by a $469,000 decrease in noninterest income and a $29,000 decrease in income tax benefit as a result of our operating loss.

Net Interest Income. The following table summarizes changes in interest income and expense for the three months ended March 31, 2014 and 2013.

                                                    Three Months Ended
                                                         March 31,
                                                    2014             2013
                                                  (Dollars in thousands)
Interest and dividend income:
Loans receivable                                $       2,344       $ 2,051
Investment securities                                     440           496
Other interest and dividend income                         44             5
Total interest and dividend income                      2,828         2,552
Interest Expense:
Deposits                                                  425           421
FHLB advances - long-term                                 368           161
Advances by borrowers for taxes and insurance               1             3
Total interest expense                                    794           585
Net interest income                             $       2,034       $ 1,967

The following table summarizes average balances and average yields and costs for the three months ended March 31, 2014 and 2013.

                                                          Three Months Ended
                                                               March 31,
                                                  2014                          2013
                                         Average         Yield/        Average         Yield/
                                         Balance          Cost         Balance          Cost
                                                        (Dollars in thousands)
Assets:
Interest-earning assets:
Loans                                   $  203,597           4.61 %   $  147,949           5.55 %
Investment securities                       65,886           2.67         72,529           2.74
Other interest-earning assets               18,932           0.94         25,614           0.08
Total interest earning-assets              288,415           3.98 %      246,092           4.21 %
Noninterest-earning assets:                 16,830                        17,661
Allowance for Loan Losses                   (1,378 )                      (1,520 )
Total assets                            $  303,867                    $  262,233

Liabilities and equity:
Interest-bearing liabilities:
Interest-bearing demand deposits        $   15,548           0.16 %   $   13,909           0.29 %
Money Market Deposits                       35,253           0.37         39,225           0.43
Savings accounts                            30,703           0.25         30,162           0.30
Time deposits                              112,705           1.32        104,307           1.35
Total interest-bearing deposits            194,209           0.89 %      187,603           0.91 %
FHLB advances - long-term                   59,000           2.53         22,906           2.85
Advances by borrowers for taxes and
insurance                                    1,251           0.32            895           1.36
Total interest-bearing liabilities         254,460           1.27 %      211,404           1.12 %
Noninterest-bearing liabilities:             9,062                         9,516
Total liabilities                          263,522                       220,920
Retained earnings                           40,345                        41,313
Total liabilities and retained
earnings                                $  303,867                    $  262,233

Interest rate spread                                         2.71 %                        3.08 %
Net yield on interest-bearing assets                         2.86 %                        3.24 %
Ratio of average interest-earning
assets to average interest-bearing
liabilities                                                113.34 %                      116.41 %

Net Interest Income. Net interest income for the three months ended March 31, 2014 increased $67,000 from the same period last year. Our net interest rate spread decreased to 2.71% for the three months ended March 31, 2014 from 3.08% for the same period last year. The primary reasons for the slight increase in net interest income for the three month period are a higher average balance of loans, partially offset by a higher average balance of FHLB advances, a lower average balance of investment securities and a lower average balance of 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 three months ended March 31, 2014 due to increased loan originations. Lower interest expense on deposits for the three months ended March 31, 2014 was due to lower rates offered on deposit products.

Provision for Loan Losses. For the three months ended March 31, 2014 we recorded a provision for loan losses of $15,000 as compared to $89,000 for the three months ended March 31, 2013. The provisions reflect management's assessment of lending activities, growth in the loan portfolio, decreased non-performing loans, levels of current delinquencies and current economic conditions. Loan charge-offs during the three months ended March 31, 2014 were $11,000 as compared to $97,000 during the three months ended March 31, 2013.

Noninterest Income. The following table shows the components of noninterest income for the three months ended March 31, 2014 and 2013.

                                                     Three Months Ended
                                                          March 31,
                                                    2014              2013
                                                   (Dollars in thousands)
         Service fees on deposit accounts        $        31        $     31
         Earnings on bank-owned life insurance             2               6
         Gain on sale of loans, net                      590           1,163
         Rental Income                                    70              75
         Other                                           144              31
         Total                                   $       837        $  1,306

The $469,000 decrease in noninterest income during the three months ended March 31, 2014 as compared to the three months ended March 31, 2013 is primarily due to a $573,000 decrease in gain on the sale of loans, partially offset by a $113,000 increase in other noninterest income. The decrease in the gain on the sale of loans is due to an increase in rates during the period as compared to the same period last year, as well as the effects on loan sales during the period due to the extreme cold weather as compared to the same period in the prior year. The increase in other noninterest income is related to a $100,000 non-refundable forward commitment fee received during the period.

Noninterest Expense. The following table shows the components of noninterest expense for the three ended March 31, 2014 and 2013.

                                                    Three Months Ended
                                                         March 31,
                                                    2014             2013
                                                  (Dollars in thousands)
           Compensation and employee benefits   $       1,582       $ 1,994
           Occupancy and equipment                        409           349
           Federal deposit insurance premiums              85            77
           Data processing expense                        112            99
           Professional fees                              128           157
           Other                                          578           612
           Total                                $       2,894       $ 3,288

The $394,000 decrease in noninterest expense during the three months ended March 31, 2014 as compared to the three months ended March 31, 2013 is primarily due to a $412,000 decrease in compensation and employee benefits due to the decrease in expense of $473,000 related to our Retail Mortgage Banking Division, partially offset by a $39,000 increase in expenses related to restricted stock and options plans. Also, contributing to the decrease in noninterest expenses is a decrease in other expenses of $34,000 primarily related to a decrease of $68,000 related to the amortization of the FDIC indemnification asset, partially offset by a $38,000 increase in expenses primarily related to loan originations by our Retail Mortgage Banking Division. Professional fees decreased by $29,000 related to decreased costs associated with audit and legal representations. Occupancy and equipment increased $60,000, partially as a result of the cost of snow removal during the quarter of $33,000 and $18,000 related to additional expenses for the enhancement of products and services of the Bank.

Income Taxes. We recorded a tax benefit of $8,000 for the three months ended March 31, 2014 compared to a tax benefit of $37,000 during the three months ended March 31, 2013. The decrease of the tax benefit resulted from the decrease in our operating losses.

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, 2014, cash and cash equivalents totaled $14.0 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $14.9 million at March 31, 2014. In addition, at March 31, 2014 we had the ability to borrow a total of approximately $143.2 million from the FHLB of Pittsburgh. On March 31, 2014, we had $59.0 million of borrowings outstanding. Any growth of our loan portfolio may require us to borrow additional funds.

At March 31, 2014, we had $6.7 million in mortgage loan commitments outstanding and $3.8 million in unused lines of credit. Time deposits due within one year of March 31, 2014 totaled $40.4 million, or 36.0% 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 that we currently pay on the time deposits due on or before March 31, 2015. 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 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 is 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, 2014, 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 U.S. Generally Accepted Accounting Principles, 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 three months ended March 31, 2014 and the year ended December 31, 2013 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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