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PBCP > SEC Filings for PBCP > Form 10-Q on 12-Aug-2014All Recent SEC Filings

Show all filings for POLONIA BANCORP INC

Form 10-Q for POLONIA BANCORP INC


12-Aug-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 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 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 June 30, 2014 and December 31, 2013

Total assets at June 30, 2014 were $299.3 million, a decrease of $6.3 million, from total assets of $305.6 million at December 31, 2013. The decrease in assets resulted primarily from a decrease in cash and cash equivalents of $8.3 million, partially offset by $3.5 million increase in loans held for sale. Total liabilities at June 30, 2014 were $259.9 million compared to $265.3 million at December 31, 2013, a decrease of $5.4 million. The decrease in liabilities was primarily due to a $5.1 million decrease in deposits. Total stockholders' equity at June 30, 2014 decreased to $39.4 million as compared to $40.3 million from December 31, 2013. The decrease of $938,000 was primarily due to the repurchase of $1.1 million in common stock.

Cash and cash equivalents decreased to $7.5 million from $15.8 million during the six months ended June 30, 2014, a decrease of $8.3 million, or 52.4%, primarily due to a decrease in deposits of $5.1 million, an increase in loans held for sale of $3.6 million and an increase in total loans of $3.7 million, partially offset by a decrease of $5.0 million in investment securities during the period.

Investment securities available-for-sale decreased to $12.7 million from $15.3 million during the six months ended June 30, 2014, a decrease of $2.6 million, or 17.0%. The decrease in investment securities available-for-sale was attributable to $2.0 million in maturities of corporate securities and $546,000 in principal payments.

Investment securities held-to-maturity decreased to $48.9 million from $51.3 million during the six months ended June 30, 2014, a decrease of $2.4 million, or 4.7%. The decrease in investment securities held-to-maturity was attributable to $3.7 million in principal payments, partially offset by $1.4 million in purchases.

Loans-held-for sale increased to $9.7 million from $6.1 million during the six months ended June 30, 2014, an increase of $3.5 million, or 57.4%. The increase in loans held-for-sale is the result of the normal fluctuation in loan activity associated with this type of business.

Loans receivable increased $3.7 million, or 1.9% to $203.7 million at June 30, 2014, compared to $200.0 million at December 31, 2013. The increase in loans receivable is the result of increased emphasis on loan origination.

Total deposits decreased to $196.2 million from $201.3 million during the six months ended June 30, 2014, a decrease of $5.1 million, or 2.5%. The decrease in deposits was primarily due to a decrease of $2.6 million in money market accounts and $2.8 million in time deposits as a result of lower rates offered on these products.

Total FHLB advances remained unchanged at $59.0 million at June 30, 2014.

Total stockholders' equity decreased $938,000, or 2.3% to $39.4 million at June 30, 2014, compared to $40.3 million at December 31, 2013. The decrease in stockholders' equity is mainly due to the repurchase of 113,500 shares of common stock at a total cost of $1.1 million.

Comparison of Operating Results For the Three and Six Months Ended June 30, 2014 and 2013

General. We recorded net income of $42,000 during the three months ended June 30, 2014 compared to net income of $47,000 during the three months ended June 30, 2013. The decrease in net income for the three month period ended June 30, 2014 was primarily related to a decrease in noninterest income, an increase in provision for loan losses and an increase in income tax expense, offset by a decrease in noninterest expense and an increase in net interest income.

We recorded net income of $12,000 during the six months ended June 30, 2014 compared to a net loss of $19,000 during the six months ended June 30, 2013. The increase in net income for the six month period ended June 30, 2014 was primarily related to a decrease in noninterest expense, an increase in net interest income and a decrease in provision for loan losses, offset by a decrease in noninterest income and an increase 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, 2014 and 2013.

                                              Three Months Ended                  Six Months Ended
                                                   June 30,                           June 30,
                                            2014               2013            2014               2013
                                            (Dollars in thousands)             (Dollars in thousands)
Interest and dividend income:
Loans receivable                        $       2,346       $    2,088     $       4,690       $    4,139
Investment securities                             429              477               869              974
Other interest and dividend income                 52                4                96                8
Total interest and dividend income              2,827            2,569             5,655            5,121
Interest Expense:
Deposits                                          419              413               844              833
FHLB advances - long-term                         372              164               740              326
Advances by borrowers for taxes and
insurance                                           1                1                 2                4
Total interest expense                            792              578             1,586            1,163
Net interest income                     $       2,035       $    1,991     $       4,069       $    3,958

The following table summarizes average balances and average yields and costs for the three and six months ended June 30, 2014 and 2013.

                                                           Three Months Ended                                     Six Months Ended
                                                                June 30,                                              June 30,
                                                     2014                       2013                       2014                       2013
                                             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                                       $ 206,724         4.49 %   $ 159,471         5.18 %   $ 205,170         4.55 %   $ 153,741         5.35 %
Investment securities                          64,342         2.64        69,309         2.72        65,109         2.65        70,910         2.73
Other interest-earning assets                  13,202         1.58        18,015         0.09        16,051         1.21        21,794         0.07
Total interest earning-assets                 284,268         3.99 %     246,795         4.18 %     286,330         3.98 %     246,445         4.19 %
Noninterest-earning assets:                    16,687                     17,467                     16,758                     17,564
Allowance for Loan Losses                      (1,372 )                   (1,461 )                   (1,375 )                   (1,490 )
Total assets                                $ 299,583                  $ 262,801                  $ 301,713                  $ 262,519

Liabilities and equity:
Interest-bearing liabilities:
Interest-bearing demand deposits            $  15,445         0.18 %   $  14,230         0.25 %   $  15,496         0.17 %   $  14,070         0.26 %
Money Market Deposits                          34,699         0.37        38,569         0.42        34,975         0.36        38,896         0.43
Savings accounts                               31,021         0.25        30,378         0.28        30,863         0.25        30,271         0.29
Time deposits                                 110,518         1.31       104,005         1.32       111,605         1.32       104,155         1.34
Total interest-bearing deposits               191,683         0.88 %     187,182         0.88 %     192,939         0.88 %     187,392         0.90 %
FHLB advances - long-term                      59,000         2.53        23,406         2.81        59,000         2.53        23,158         2.84
Advances by borrowers for taxes and
insurance                                       1,214         0.33           960         0.42         1,232         0.33           927         0.87
Total interest-bearing liabilities            251,897         1.26 %     211,548         1.10 %     253,171         1.26 %     211,477         1.11 %
Noninterest-bearing liabilities:                8,098                      9,942                      8,578                      9,730
Total liabilities                             259,995                    221,490                    261,749                    221,207
Retained earnings                              39,588                     41,311                     39,964                     41,312
Total liabilities and retained earnings     $ 299,583                  $ 262,801                  $ 301,713                  $ 262,519

Interest rate spread                                          2.73 %                     3.08 %                     2.72 %                     3.08 %
Net yield on interest-bearing assets                          2.87 %                     3.24 %                     2.87 %                     3.24 %
Ratio of average interest-earning assets
to average interest-bearing liabilities                     112.85 %                   116.66 %                   113.10 %                   116.54 %

Net Interest Income. Net interest income for the three months ended June 30, 2014 increased $44,000 from the same period last year. Our net interest rate spread decreased to 2.73% for the three months ended June 30, 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 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, 2014 due to increased loan originations.

Net interest income for the six months ended June 30, 2014 increased $111,000 from the same period last year. Our net interest rate spread decreased to 2.72% for the six months ended June 30, 2014 from 3.08% for the same time 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, 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 on 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, 2014 due to increased loan originations.

Provision for Loan Losses. For the three months ended June 30, 2014 we recorded a provision for loan losses of $34,000 as compared to $25,000 for the three months ended June 30, 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 June 30, 2014 were $34,000 as compared to $461,000 during the three months ended June 30, 2013.

For the six months ended June 30, 2014 we recorded a provision for loan losses of $49,000 as compared to $114,000 for the six months ended June 30, 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 six months ended June 30, 2014 were $45,000 as compared to $558,000 during the six months ended June 30, 2013.

Noninterest Income. The following table shows the components of noninterest income for the three and six months ended June 30, 2014 and 2013.

                                              Three Months Ended                   Six Months Ended
                                                   June 30,                            June 30,
                                            2014               2013             2014               2013
                                            (Dollars in thousands)              (Dollars in thousands)
Service fees on deposit accounts        $          33       $        35     $          63       $        66
Earnings on bank-owned life insurance               2                 8                 4                14
Gain on sale of loans, net                      1,020             1,418             1,610             2,581
Rental Income                                      69                70               140               145
Other                                               3                58               147                89
 Total                                  $       1,127       $     1,589     $       1,964       $     2,895

The $462,000 decrease in noninterest income during the three months ended June 30, 2014 as compared to the three months ended June 30, 2013 is primarily due to a $398,000 decrease in gain on the sale of loans and a decrease of $55,000 in other noninterest income due to an increase of $66,000 in the loss on the sale of REO. 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 lingering effects on loan sales during the period due to the extreme cold weather during the first quarter as compared to the same period in the prior year.

The $931,000 decrease in noninterest income during the six months ended June 30, 2014 as compared to the six months ended June 30, 2013 is primarily due to a $971,000 decrease in gain on sale of loans and $10,000 decrease in earnings on bank-owned life insurance, partially offset by a $58,000 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 during the first quarter 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, partially offset a $49,000 increase in the loss on the sale of REO.

Noninterest Expense. The following table shows the components of noninterest expense for the three and six months ended June 30, 2014 and 2013.

                                           Three Months Ended                   Six Months Ended
                                                June 30,                            June 30,
                                         2014               2013             2014               2013
                                         (Dollars in thousands)              (Dollars in thousands)
Compensation and employee benefits   $       1,853       $     2,133     $       3,435       $     4,127
Occupancy and equipment                        347               350               757               700
Federal deposit insurance premiums              86                78               171               155
Data processing expense                        110               109               222               207
Professional fees                              142               175               270               333
Other                                          518               643             1,096             1,254
Total                                $       3,056       $     3,488     $       5,951       $     6,776

The $432,000 decrease in noninterest expense during the three months ended June 30, 2014 as compared to the three months ended June 30, 2013 is primarily due to a $280,000 decrease in compensation and employee benefits, a $125,000 decrease in other expenses and a $33,000 decrease in professional fees. The decrease in compensation and employee benefits expense is primarily related to a decrease of $308,000 related to our Retail Mortgage Banking Division partially offset by a $40,000 increase in expenses related to restricted stock and option plans. The decrease in other noninterest expense is primarily related to a decrease of $116,000 related to the amortization of the FDIC indemnification asset. The decrease in professional fees is the result of lower expenses related to the change in several service providers.

The $825,000 decrease in noninterest expense during the six months ended June 30, 2014 as compared to the six months ended June 30, 2013 is primarily due to a $692,000 decrease in compensation and employee benefits, a $158,000 decrease in other expenses and a $63,000 decrease in professional fees, partially offset by a $57,000 increase in occupancy and equipment expense and a $15,000 increase in data processing expense. The $692,000 decrease in compensation and employee benefits is primarily related to a $765,000 decrease related to our Retail Mortgage Banking Division, partially offset by a $79,000 increase in expenses related to restricted stock and options plans. The decrease in other noninterest expense is primarily related to a decrease of $185,000 related to the amortization of the FDIC indemnification asset. The decrease in professional fees is a result of lower expenses related to the change in several service providers. The increase in occupancy and equipment is related to a $33,000 increase in the cost of snow removal and the increase of other expenses related to the operation of our facilities and properties.

Income Taxes. We recorded a tax expense of $29,000 for the three months ended June 30, 2014 compared to tax expense of $20,000 during the three months ended June 30, 2013. The increase of the tax expense resulted from the increase in our taxable operating profits.

We recorded a tax expense of $21,000 for the six months ended June 30, 2014 compared to a tax benefit of $17,000 during the six months ended June 30, 2013. The increase of tax expense resulted from the increase 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, 2014, cash and cash equivalents totaled $7.5 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $12.7 million at June 30, 2014. In addition, at June 30, 2014 we had the ability to borrow a total of approximately $142.9 million from the FHLB of Pittsburgh. On June 30, 2014, we had $59.0 million of borrowings outstanding. Any growth of our loan portfolio may require us to borrow additional funds.

At June 30, 2014, we had $6.6 million in mortgage loan commitments outstanding and $4.7 million in unused lines of credit. Time deposits due within one year of June 30, 2014 totaled $38.7 million, or 34.9% 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, 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 . . .

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