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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
 _______________________________________________________________
FORM 10-Q
 
__________________________________________________
 
(Mark One)
 
ý                       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2014
 
OR
 
o                          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from             to            
 
Commission file number: 000-54025

_________________________________________________________________ 
Fox Chase Bancorp, Inc.
(Exact name of registrant as specified in its charter)

_________________________________________________________________
 
Maryland
 
35-2379633
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
4390 Davisville Road, Hatboro, Pennsylvania
 
19040
(Address of principal executive offices)
 
(Zip Code)
 
(215) 283-2900
(Registrant’s telephone number, including area code)
 
N/A
(Former name, former address and former fiscal year, if changed since last report)
 
_______________________________________________________________
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý     No  o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ý No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

Large Accelerated Filer [   ]
 
Accelerated Filer [X ]
Non-Accelerated Filer [  ]
 
Smaller Reporting Company [   ]
(Do not check if a smaller reporting company)
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  o    No  ý
 
As of October 31, 2014, there were 12,011,491 shares of the registrant’s common stock outstanding.




 
 
 
 
 
 
FOX CHASE BANCORP, INC.
 
 
Table of Contents
 
 
Page
No.
 
 
 
 
 
 
 
 
 
 
 
Consolidated Statements of Condition at September 30, 2014 (Unaudited) and December 31, 2013
 
 
 
 
Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2014 and 2013 (Unaudited)
 
 
 
 
Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2014 and 2013 (Unaudited)
 
 
 
 
Consolidated Statements of Changes in Equity for the Nine Months Ended September 30, 2014 and 2013 (Unaudited)
 
 
 
 
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013 (Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements
FOX CHASE BANCORP, INC.
Consolidated Statements of Condition
(In Thousands, Except Share Data)
 
 
 
September 30,
2014
 
December 31,
2013
 
 
 
(Unaudited)
 
 
ASSETS
 
 
 
 
 
Cash and due from banks
 
$
1,340

 
$
149

 
Interest-earning demand deposits in other banks
 
6,387

 
11,798

 
Total cash and cash equivalents
 
7,727

 
11,947

 
Investment securities available-for-sale
 
8,433

 
10,489

 
Mortgage related securities available-for-sale
 
130,809

 
246,068

 
Mortgage related securities held-to-maturity (fair value of $163,727 at September 30, 2014 and $67,491 at December 31, 2013)
 
165,006

 
68,397

 
Loans, net of allowance for loan losses of $11,099 at September 30, 2014 and $11,529 at December 31, 2013
 
710,220

 
720,490

 
Federal Home Loan Bank stock, at cost
 
11,152

 
9,813

 
Bank-owned life insurance
 
14,905

 
14,547

 
Premises and equipment, net
 
9,542

 
9,814

 
Assets acquired through foreclosure
 
1,889

 
6,252

 
Real estate held for investment
 
1,620

 
1,620

 
Accrued interest receivable
 
3,159

 
3,308

 
Mortgage servicing rights, net
 
126

 
152

 
Deferred tax asset, net
 
4,734

 
8,906

 
Other assets
 
5,369

 
4,819

 
Total Assets
 
$
1,074,691

 
$
1,116,622

 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 

 
 

LIABILITIES
 
 

 
 

 
Deposits
 
$
663,728

 
$
673,715

 
Short-term borrowings
 
60,000

 
80,500

 
Federal Home Loan Bank advances
 
135,000

 
150,000

 
Other borrowed funds
 
30,000

 
30,000

 
Advances from borrowers for taxes and insurance
 
1,000

 
1,525

 
Accrued interest payable
 
314

 
314

 
Accrued expenses and other liabilities
 
6,364

 
7,101

 
Total Liabilities
 
896,406

 
943,155

 
 
 
 
 
 
STOCKHOLDERS’ EQUITY
 
 

 
 

 
Preferred stock ($.01 par value; 1,000,000 shares authorized, none issued and outstanding at September 30, 2014 and December 31, 2013)
 

 

 
Common stock ($.01 par value; 60,000,000 shares authorized, 12,066,591 shares outstanding at September 30, 2014 and 12,147,803 shares outstanding at December 31, 2013)
 
147

 
146

 
Additional paid-in capital
 
138,663

 
137,593

 
Treasury stock, at cost (2,584,772 shares at September 30, 2014 and 2,468,172 shares at December 31, 2013)
 
(35,338
)
 
(33,436
)
 
Common stock acquired by benefit plans
 
(8,215
)
 
(9,272
)
 
Retained earnings
 
83,481

 
82,885

 
Accumulated other comprehensive loss, net
 
(453
)
 
(4,449
)
 
Total Stockholders’ Equity
 
178,285

 
173,467

 
Total Liabilities and Stockholders’ Equity
 
$
1,074,691

 
$
1,116,622



3


FOX CHASE BANCORP, INC.
Consolidated Statements of Operations
(In Thousands, Except Per Share Data)
(Unaudited) 
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2014
 
2013
 
2014
 
2013
INTEREST INCOME
 

 
 

 
 
 
 
 
Interest and fees on loans
$
8,375

 
$
8,241

 
$
24,615

 
$
24,319

 
Interest on mortgage related securities
1,633

 
1,807

 
5,235

 
5,296

 
Interest and dividends on investment securities
144

 
92

 
437

 
221

 
Other interest income
1

 
1

 
2

 
2

 
Total Interest Income
10,153

 
10,141

 
30,289

 
29,838

INTEREST EXPENSE
 

 
 

 
 
 
 
 
Deposits
760

 
1,055

 
2,455

 
3,373

 
Short-term borrowings
45

 
45

 
100

 
94

 
Federal Home Loan Bank advances
577

 
555

 
1,723

 
1,606

 
Other borrowed funds
253

 
254

 
751

 
753

 
Total Interest Expense
1,635

 
1,909

 
5,029

 
5,826

 
Net Interest Income
8,518

 
8,232

 
25,260

 
24,012

 
Provision for loan losses
1,493

 
675

 
1,593

 
532

 
Net Interest Income after Provision for Loan Losses
7,025

 
7,557

 
23,667

 
23,480

NONINTEREST INCOME
 

 
 

 
 
 
 
 
Service charges and other fee income
416

 
437

 
1,192

 
1,260

 
Net (loss) gain on sale of assets acquired through foreclosure
(15
)
 
303

 
(136
)
 
484

 
Income on bank-owned life insurance
121

 
118

 
358

 
351

 
Equity in earnings of affiliate
91

 
135

 
125

 
470

 
Net gain on sale of investment securities (includes $0 and $0 for the three and nine months ended September 30, 2014, respectively and $0 and $532 for the three and nine months ended September 30, 2013, respectively of accumulated other comprehensive income reclassifications for unrealized holdings gains)

 

 

 
532

 
Other
29

 
36

 
76

 
125

 
Total Noninterest Income
642

 
1,029

 
1,615

 
3,222

NONINTEREST EXPENSE
 

 
 

 
 
 
 
 
Salaries, benefits and other compensation
3,510

 
3,644

 
10,670

 
10,629

 
Occupancy expense
407

 
403

 
1,321

 
1,243

 
Furniture and equipment expense
93

 
117

 
300

 
358

 
Data processing costs
384

 
390

 
1,146

 
1,155

 
Professional fees
271

 
474

 
1,086

 
1,250

 
Marketing expense
54

 
59

 
156

 
167

 
FDIC premiums
136

 
175

 
451

 
525

 
Assets acquired through foreclosure expense
10

 
1,370

 
403

 
4,465

 
Other
333

 
370

 
1,077

 
1,192

 
Total Noninterest Expense
5,198

 
7,002

 
16,610

 
20,984

 
Income Before Income Taxes
2,469

 
1,584

 
8,672

 
5,718

 
Income tax provision (includes $0 and $0 for the three and nine months ended September 30, 2014, respectively and $0 and $186 for the three and nine months ended September 30, 2013, respectively of income tax (benefit) expense from reclassification items)
653

 
411

 
2,585

 
1,674

 
Net Income
$
1,816

 
$
1,173

 
$
6,087

 
$
4,044

Earnings per share:
 

 
 

 
 
 
 
 
Basic
$
0.16

 
$
0.10

 
$
0.54

 
$
0.36

 
Diluted
$
0.16

 
$
0.10

 
$
0.53

 
$
0.35



4


FOX CHASE BANCORP, INC.
Consolidated Statements of Comprehensive Income
(In Thousands, Unaudited)
 
 
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
 
2014
 
2013
 
2014
 
2013
Net income
 
$
1,816

 
$
1,173

 
$
6,087

 
$
4,044

Other comprehensive (loss) income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized holding (losses) gains on investment
 
(320
)
 
(175
)
 
6,160

 
(10,363
)
 
Tax Effect
 
109

 
67

 
(2,174
)
 
3,652

 
Net of Tax Amount
 
(211
)
 
(108
)
 
3,986

 
(6,711
)
 
 
 
 
 
 
 
 
 
 
 
Reclassification adjustments for net investment securities gains included in net income
 

 

 

 
(532
)
 
Tax Effect
 

 

 

 
186

 
Net of Tax Amount
 

 

 

 
(346
)
 
 
 
 
 
 
 
 
 
 
 
Accretion of unrealized loss on securities reclassified to held-to-maturity
 
16

 

 
16

 

 
Tax Effect
 
(6
)
 

 
(6
)
 

 
Net of Tax Amount
 
10

 

 
10

 

Other comprehensive (loss) income
 
(201
)
 
(108
)
 
3,996

 
(7,057
)
Comprehensive income (loss)
 
$
1,615

 
$
1,065

 
$
10,083

 
$
(3,013
)


5


FOX CHASE BANCORP, INC.
Consolidated Statements of Changes in Equity
Nine Months Ended September 30, 2014 and 2013
(In Thousands, Unaudited)
 
 
Common
Stock
 
Additional
Paid-in
Capital
 
Treasury
Stock
 
Common
Stock
Acquired by
Benefit Plans
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss), net
 
Total
Equity
BALANCE - DECEMBER 31, 2012
$
146

 
$
136,132

 
$
(29,733
)
 
$
(10,228
)
 
$
80,608

 
$
4,540

 
$
181,465

Purchase of treasury stock

 

 
(3,703
)
 

 

 

 
(3,703
)
Stock based compensation expense

 
811

 

 

 

 

 
811

Unallocated ESOP shares committed to employees

 
361

 

 
468

 

 

 
829

Issuance of stock for vested equity awards

 
(316
)
 

 
329

 
(13
)
 

 

Common stock issued for exercise of vested stock options

 
106

 

 

 

 

 
106

Tax benefit from exercise of stock options and vesting of restricted stock

 
58

 

 

 

 

 
58

Dividends paid ($0.20 per share)

 

 

 

 
(2,321
)
 

 
(2,321
)
Net income

 

 

 

 
4,044

 

 
4,044

Other comprehensive loss

 

 

 

 

 
(7,057
)
 
(7,057
)
BALANCE - SEPTEMBER 30, 2013
$
146

 
$
137,152

 
$
(33,436
)
 
$
(9,431
)
 
$
82,318

 
$
(2,517
)
 
$
174,232

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common
Stock
 
Additional
Paid-in
Capital
 
Treasury
Stock
 
Common
Stock
Acquired by
Benefit Plans
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
(Loss) Income, net
 
Total
Equity
 
 
 
 
 
 
 
BALANCE - DECEMBER 31, 2013
$
146

 
$
137,593

 
$
(33,436
)
 
$
(9,272
)
 
$
82,885

 
$
(4,449
)
 
$
173,467

Purchase of treasury stock

 

 
(1,902
)
 

 

 

 
(1,902
)
Stock based compensation expense

 
894

 

 

 

 

 
894

Unallocated ESOP shares committed to employees

 
353

 

 
468

 

 

 
821

Issuance of stock for vested equity awards

 
(651
)
 

 
589

 
62

 

 

Common stock issued for exercise of vested stock options
1

 
391

 

 

 

 

 
392

Tax benefit from exercise of stock options and vesting of restricted stock

 
83

 

 

 

 

 
83

Dividends paid ($0.48 per share)

 

 

 

 
(5,553
)
 

 
(5,553
)
Net income

 

 

 

 
6,087

 

 
6,087

Other comprehensive income

 

 

 

 

 
3,996

 
3,996

BALANCE - SEPTEMBER 30, 2014
$
147

 
$
138,663

 
$
(35,338
)
 
$
(8,215
)
 
$
83,481

 
$
(453
)
 
$
178,285

 

6


FOX CHASE BANCORP, INC.
Consolidated Statements of Cash Flows
(In Thousands, Unaudited)
 
Nine Months Ended 
 September 30,
 
2014
 
2013
Cash Flows From Operating Activities
 

 
 

Net income
$
6,087

 
$
4,044

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Provision for loan losses
1,593

 
532

Valuation adjustment for assets acquired through foreclosure
282

 
4,304

Depreciation
533

 
591

Net amortization of securities premiums and discounts
1,430

 
2,101

Proceeds from the sale of loans held for sale

 
3,157

Provision (credit) for deferred income taxes
1,992

 
(947
)
Stock compensation from benefit plans
1,715

 
1,640

Net loss (gain) on sale of assets acquired through foreclosure
136

 
(484
)
Net gain on sale of investment securities

 
(532
)
Income on bank-owned life insurance
(358
)
 
(351
)
Excess tax benefit from exercise of stock options and vesting of restricted stock
(83
)
 
(58
)
Decrease in mortgage servicing rights, net
26

 
13

Decrease (increase) in accrued interest receivable and other assets
393

 
(589
)
Decrease in accrued interest payable, accrued expenses and other liabilities
(737
)
 
(176
)
Net Cash Provided by Operating Activities
13,009

 
13,245

Cash Flows from Investing Activities
 

 
 

Investment securities available-for-sale:
 

 
 

Proceeds from maturities, calls and principal repayments
2,000

 
2,000

Mortgage related securities available-for-sale:
 

 
 

Purchases
(2,830
)
 
(49,821
)
Proceeds from sales

 
9,517

Proceeds from maturities, calls and principal repayments
26,303

 
53,192

Mortgage related securities held-to-maturity:
 

 
 

Purchases
(9,767
)
 
(51,420
)
Proceeds from maturities, calls and principal repayments
9,665

 
8,562

Net decrease (increase) in loans
16,876

 
(4,593
)
Purchases of loans and loan participations
(9,371
)
 
(20,544
)
Net increase in Federal Home Loan Bank stock
(1,339
)
 
(1,916
)
Purchases of premises and equipment
(261
)
 
(153
)
Additions to assets acquired through foreclosure
(17
)
 
(867
)
Proceeds from sales and payments on assets acquired through foreclosure
4,504

 
3,973

Net Cash Provided by (Used in) Investing Activities
35,763

 
(52,070
)
Cash Flows from Financing Activities
 

 
 

Net decrease in deposits
(9,987
)
 
(4,401
)
Decrease in advances from borrowers for taxes and insurance
(525
)
 
(689
)
Proceeds from Federal Home Loan Bank advances

 
40,000

Principal payments on Federal Home Loan Bank advances
(15,000
)
 

Net decrease in short-term borrowings
(20,500
)
 
(8,900
)
Tax benefit from exercise of stock options and vesting of restricted stock
83

 
58

Common stock issued for exercise of stock options
392

 
106

Purchase of treasury stock
(1,902
)
 
(3,703
)
Cash dividends paid
(5,553
)
 
(2,321
)
Net Cash (Used in) Provided by Financing Activities
(52,992
)
 
20,150

Net Decrease in Cash and Cash Equivalents
(4,220
)
 
(18,675
)
Cash and Cash Equivalents – Beginning
11,947

 
25,090

Cash and Cash Equivalents – Ending
$
7,727

 
$
6,415

Supplemental Disclosure of Cash Flow Information
 

 
 

Interest paid
$
5,029

 
$
5,842

Income taxes paid
$
1,460

 
$
2,400

Transfers of loans to assets acquired through foreclosure
$
542

 
$
4,990

Transfers of loans to loans held for sale
$

 
$
3,157

Net charge-offs
$
2,023

 
$
574



7



FOX CHASE BANCORP, INC
Notes to the Unaudited Consolidated Financial Statements

NOTE 1 - PRINCIPLES OF CONSOLIDATION AND PRESENTATION
 
Fox Chase Bancorp, Inc. (the "Bancorp") is a Maryland corporation. The Bancorp’s primary business is holding the common stock of Fox Chase Bank (the "Bank") and making two loans to the Fox Chase Bank Employee Stock Ownership Plan (the "ESOP").  The Bancorp is authorized to pursue other business activities permissible by laws and regulations for bank holding companies.

The Bancorp is a bank holding company and is regulated by the Board of Governors of the Federal Reserve System. The Bank is a Pennsylvania state-chartered savings bank and is regulated by the Pennsylvania Department of Banking and Securities and the Federal Deposit Insurance Corporation (the "FDIC").

The Bancorp and the Bank (collectively referred to as the "Company") provide a wide variety of financial products and services to individuals and businesses through the Bank’s ten branches in Philadelphia, Richboro, Willow Grove, Warminster, Lahaska, Hatboro, and West Chester, Pennsylvania, and Ocean City, Marmora and Egg Harbor Township, New Jersey.  The operations of the Company are managed as a single business segment.  The Bank also owns approximately 45% of Philadelphia Mortgage Advisors ("PMA"), a mortgage banker located in Plymouth Meeting, Pennsylvania and Ocean City, New Jersey.
 
The Company is subject to the regulations of certain federal and state banking agencies.  These regulations can and do change significantly from period to period.  The Company also undergoes periodic examinations by regulatory agencies which may subject it to further changes with respect to asset valuations, amounts of required loan loss allowances and operating restrictions resulting from the regulators’ judgments based on information available to them at the time of their examinations. 
 
The consolidated financial statements include the accounts of the Bancorp and the Bank.  The Bank’s operations include the accounts of its wholly owned subsidiaries, Fox Chase Financial, Inc., Fox Chase Service Corporation, 104 S. Oakland Ave., LLC and Davisville Associates, LLC.  Fox Chase Financial, Inc. is a Delaware-chartered investment holding company and its sole purpose is to manage and hold investment securities.  Fox Chase Service Corporation is a Pennsylvania-chartered company and its purpose is to facilitate the Bank’s investment in PMA. 104 S. Oakland Ave., LLC is a New Jersey-chartered limited liability company formed to secure, manage and hold foreclosed real estate.  Davisville Associates, LLC is a Pennsylvania-chartered limited liability company formed to secure, manage and hold foreclosed real estate.  All material inter-company transactions and balances have been eliminated in consolidation.  Prior period amounts are reclassified, when necessary, to conform with the current year’s presentation.
 
The Company follows accounting principles and reporting practices that are in compliance with U.S. generally accepted accounting principles (“GAAP”).  The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclose contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.  Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation and realizability of deferred tax assets, the evaluation of other-than-temporary impairment and the valuation of investment securities and the valuation of assets acquired through foreclosure.

These interim financial statements do not contain all necessary disclosures required by GAAP for complete financial statements and therefore should be read in conjunction with the audited financial statements and the notes thereto included in Fox Chase Bancorp, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the Securities and Exchange Commission on March 7, 2014.  These financial statements include all normal and recurring adjustments which management believes were necessary in order to conform to GAAP.  The results for the nine months ended September 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014 or any other period.
 


8


NOTE 1 - PRINCIPLES OF CONSOLIDATION AND PRESENTATION (CONTINUED)

Per Share Information
 
Basic earnings per share excludes dilution and is computed by dividing income available to common stockholders by the weighted-average common shares outstanding during the period.  Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock.  Unallocated shares in the ESOP and shares purchased to fund the Bancorp’s equity incentive plans are not included in either basic or diluted earnings per share.
 
The following table presents the reconciliation of the numerators and denominators of the basic and diluted earnings per share computations.
 
 
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
 
2014
 
2013
 
2014
 
2013
 
 
 
(Unaudited)
Net income
 
 
$
1,816,000

 
$
1,173,000

 
$
6,087,000

 
$
4,044,000

 
 
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding (1)
 
12,075,448

 
12,143,880

 
12,110,185

 
12,217,289

Average common stock acquired by stock benefit plans:
 
 

 
 

 
 
 
 
ESOP shares unallocated
 
(513,441
)
 
(578,494
)
 
(529,544
)
 
(594,597
)
Shares purchased by trust
 
(274,123
)
 
(317,645
)
 
(289,261
)
 
(327,849
)
Weighted-average common shares used to calculate basic earnings per share
 
11,287,884

 
11,247,741

 
11,291,380

 
11,294,843

Dilutive effect of:
 
 

 
 

 
 
 
 
Restricted stock awards
 
42,294

 
43,087

 
50,477

 
34,586

Stock option awards
 
193,739

 
203,692

 
199,215

 
193,932

Weighted-average common shares used to calculate diluted earnings per share
 
11,523,917

 
11,494,520

 
11,541,072

 
11,523,361

 
 
 
 
 
 
 
 
 
 
Earnings per share - basic
 
$
0.16

 
$
0.10

 
$
0.54

 
$
0.36

Earnings per share - diluted
 
$
0.16

 
$
0.10

 
$
0.53

 
$
0.35

 
 
 
 
 
 
 
 
 
 
Outstanding common stock equivalents having no dilutive effect
 
1,052,408

 
1,102,810

 
1,038,749

 
1,121,071

 
 
 
 
 
 
 
 
 
 
(1) Excludes treasury stock.
 
 
 

 
 

 
 
 
 

9


NOTE 2 - INVESTMENT AND MORTGAGE RELATED SECURITIES
 
The amortized cost and fair value of securities available-for-sale and held-to-maturity as of September 30, 2014 and December 31, 2013 are summarized as follows: 

 
September 30, 2014
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(In thousands, Unaudited)
Available-for-Sale Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Obligations of U.S. government agencies
$
300

 
$
4

 
$

 
$
304

Corporate securities
8,077

 
52

 

 
8,129

 
8,377

 
56

 

 
8,433

Private label commercial mortgage related securities

 

 

 

Agency residential mortgage related securities
129,937

 
2,418

 
(1,546
)
 
130,809

Total mortgage related securities
129,937

 
2,418

 
(1,546
)
 
130,809

Total available-for-sale securities
$
138,314

 
$
2,474

 
$
(1,546
)
 
$
139,242

 
 
 
 
 
 
 
 
Held-to-Maturity Securities:
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
Agency residential mortgage related securities
$
165,006

 
$
714

 
$
(1,993
)
 
$
163,727

Total mortgage related securities
165,006

 
714

 
(1,993
)
 
163,727

Total held-to-maturity securities
$
165,006

 
$
714

 
$
(1,993
)
 
$
163,727

 
 
 
December 31, 2013
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(In thousands)
Available-for-Sale Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Obligations of U.S. government agencies
$
300

 
$
8

 
$

 
$
308

Corporate securities
10,145

 
54

 
(18
)
 
10,181

 
10,445

 
62

 
(18
)
 
10,489

Private label commercial mortgage related securities
2,118

 
2

 

 
2,120

Agency residential mortgage related securities
250,851

 
2,655

 
(9,558
)
 
243,948

Total mortgage related securities
252,969

 
2,657

 
(9,558
)
 
246,068

Total available-for-sale securities
$
263,414

 
$
2,719

 
$
(9,576
)
 
$
256,557

 
 
 
 
 
 
 
 
Held-to-Maturity Securities:
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
Agency residential mortgage related securities
$
68,397

 
$
514

 
$
(1,420
)
 
$
67,491

Total mortgage related securities
68,397

 
514

 
(1,420
)
 
67,491

Total held-to-maturity securities
$
68,397

 
$
514

 
$
(1,420
)
 
$
67,491


Obligations of U.S. government agencies represents debt issued by the Federal Home Loan Bank (the "FHLB") and are not backed by the full faith and credit of the United States government.





10


NOTE 2 - INVESTMENT AND MORTGAGE RELATED SECURITIES (CONTINUED)

The following tables show gross unrealized losses and fair value of securities, aggregated by security category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2014 and December 31, 2013.
 
September 30, 2014
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
 
 
 
 
 
 
(In thousands, Unaudited)
Available-for-Sale Securities:
 
 
 
 
 
 
 
 
 
 
 
Obligations of U.S. government agencies
$

 
$

 
$

 
$

 
$

 
$

Corporate securities

 

 

 

 

 

 

 

 

 

 

 

Private label commercial mortgage related securities

 

 

 

 

 

Agency residential mortgage related securities
6,714

 
(20
)
 
87,700

 
(1,526
)
 
94,414

 
(1,546
)
Total mortgage related securities
6,714

 
(20
)
 
87,700

 
(1,526
)
 
94,414

 
(1,546
)
Total available-for-sale securities
$
6,714

 
$
(20
)
 
$
87,700

 
$
(1,526
)
 
$
94,414

 
$
(1,546
)
Held-to-Maturity Securities:
 

 
 

 
 

 
 

 
 

 
 

Agency residential mortgage related securities
$
61,446

 
$
(574
)
 
$
71,624

 
$
(1,419
)
 
$
133,070

 
$
(1,993
)
Total mortgage related securities
61,446

 
(574
)
 
71,624

 
(1,419
)
 
133,070

 
(1,993
)
Total held-to-maturity securities
$
61,446

 
$
(574
)
 
$
71,624

 
$
(1,419
)
 
$
133,070

 
$
(1,993
)
Total temporarily impaired securities
$
68,160

 
$
(594
)
 
$
159,324

 
$
(2,945
)
 
$
227,484

 
$
(3,539
)
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
 
 
 
 
 
 
(In thousands)
Available-for-Sale Securities:
 
 
 
 
 
 
 
 
 
 
 
Obligations of U.S. government agencies
$

 
$

 
$

 
$

 
$

 
$

Corporate securities

 

 
2,982

 
(18
)
 
2,982

 
(18
)
 

 

 
2,982

 
(18
)
 
2,982

 
(18
)
Private label commercial mortgage related securities

 

 

 

 

 

Agency residential mortgage related securities
180,448

 
(7,251
)
 
24,841

 
(2,307
)
 
205,289

 
(9,558
)
Total mortgage related securities
180,448

 
(7,251
)
 
24,841

 
(2,307
)
 
205,289

 
(9,558
)
Total available-for-sale securities
$
180,448

 
$
(7,251
)
 
$
27,823

 
$
(2,325
)
 
$
208,271

 
$
(9,576
)
Held-to-Maturity Securities:
 

 
 

 
 

 
 

 
 

 
 

Agency residential mortgage related securities
$
40,615

 
$
(1,420
)
 
$

 
$

 
$
40,615

 
$
(1,420
)
Total mortgage related securities
40,615

 
(1,420
)
 

 

 
40,615

 
(1,420
)
Total held-to-maturity securities
$
40,615

 
$
(1,420
)
 
$

 
$

 
$
40,615

 
$
(1,420
)
Total temporarily impaired securities
$
221,063

 
$
(8,671
)
 
$
27,823

 
$
(2,325
)
 
$
248,886

 
$
(10,996
)




11


NOTE 2 - INVESTMENT AND MORTGAGE RELATED SECURITIES (CONTINUED)

During the three and nine month periods ended September 30, 2014, no securities were sold. There were no net investment securities gains (losses) in the consolidated statement of operations for the three and nine month periods ended September 30, 2014. During the three months ended September 30, 2013, no securities were sold. During the nine months ended September 30, 2013, the Company sold seven mortgage related securities with an amortized cost of $9.0 million and recognized gross gains of $532,000.

The Company evaluates a variety of factors when concluding whether a security is other-than-temporarily impaired.  These factors include, but are not limited to, the type and purpose of the security, the underlying rating of the issuer, the presence of credit enhancements, the length of time a security has been in a loss position and the severity of the loss.
 
At September 30, 2014, gross unrealized losses totaled $3.5 million64 agency residential mortgage related securities, with a fair value of $159.3 million and an unrealized loss position of $2.9 million, had an unrealized loss position for twelve months or longer as of September 30, 2014.  Additionally, 33 agency residential mortgage related securities, with a fair value of $68.2 million and an unrealized loss position of $594,000, had an unrealized loss position for less than twelve months as of September 30, 2014. The fair value of these 97 agency residential mortgage related securities primarily fluctuates with changes in market conditions for the underlying securities and changes in the interest rate environment. The Company does not intend to sell the securities in an unrealized loss position and it is not more likely than not that it will be required to sell these securities before a recovery of fair value, which may be maturity.  Upon review of the attributes of the individual securities, the Company concluded these securities were not other-than-temporarily impaired.

During the three months ended September 30, 2014, 38 residential mortgage related securities with a fair value of $96.9 million were transferred from available-for-sale securities to held-to-maturity. The reclassification was permitted as the Company has appropriately determined the ability and intent to hold these securities as an investment until maturity. The securities transferred had an unrealized net loss of $1.6 million at the time of transfer which continues to be reflected in accumulated other comprehensive loss on the consolidated balance sheet, net of subsequent amortization, which is being recognized over the life of the securities.

At September 30, 2014, the amortized cost of held-to-maturity investments consisted of the following (in thousands):

 
Original Cost
 
Unrealized Loss at Transfer
 
Post-transfer Accretion
 
Amortized Cost
Transferred securities
$
97,469

 
$
(1,625
)
 
$
16

 
$
95,860

Other held-to-maturity securities
69,146

 

 

 
69,146

Total
$
166,615

 
$
(1,625
)
 
$
16

 
$
165,006

 
 
 
 
 
 
 
 
 
As of December 31, 2013, the Company held two private label commercial mortgage related securities ("CMBS") with an amortized cost of $2.1 million. These securities were paid off at amortized cost during the nine months ended September 30, 2014.
 



















12


NOTE 2 - INVESTMENT AND MORTGAGE RELATED SECURITIES (CONTINUED)

The amortized cost and estimated fair value of investment securities available-for-sale and held-to-maturity at September 30, 2014 and December 31, 2013 by contractual maturity are as follows:
 
 
Available-for-Sale
 
Held-to-Maturity
 
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
 
 
 
 
 
 
(In thousands)
September 30, 2014 (Unaudited)
 

 
 

 
 

 
 

Due in one year or less
$
5,819

 
$
5,845

 
$

 
$

Due after one year through five years
2,558

 
2,588

 

 

Due after five years through ten years

 

 

 

Due after ten years

 

 

 

Total mortgage related securities
129,937

 
130,809

 
165,006

 
163,727

 
 
$
138,314

 
$
139,242

 
$
165,006

 
$
163,727

 
 
 
 
 
 
 
 
 
December 31, 2013
 

 
 

 
 

 
 

Due in one year or less
$
1,999

 
$
2,000

 
$

 
$

Due after one year through five years
8,446

 
8,489

 

 

Due after five years through ten years

 

 

 

Due after ten years

 

 

 

Total mortgage related securities
252,969

 
246,068

 
68,397

 
67,491

 
 
$
263,414

 
$
256,557

 
$
68,397

 
$
67,491

 
Securities with a fair value of $37.9 million and $9.7 million at September 30, 2014 and December 31, 2013, respectively, were pledged to secure public deposits.
 
Securities with a fair value of $173.0 million and $197.6 million at September 30, 2014 and December 31, 2013, respectively, were used to secure FHLB advances, short-term borrowings, other borrowed funds and related unused borrowing capacities.  See Note 7.

Securities with a fair value of $626,000 and $702,000 at September 30, 2014 and December 31, 2013, respectively, were used to secure derivative transactions.

NOTE 3 - LOANS

The composition of net loans at September 30, 2014 and December 31, 2013 is provided below:
 
September 30,
2014
 
December 31,
2013
 
(In thousands)
 
(Unaudited)
 
 
Real estate loans:
 

 
 

One- to four-family
$
112,227

 
$
127,501

Multi-family and commercial
418,456

 
408,365

Construction
31,341

 
5,904

 
562,024

 
541,770

Consumer loans
19,456

 
22,478

Commercial and industrial loans
140,113

 
168,013

Total loans
721,593

 
732,261

Deferred loan origination fees, net
(274
)
 
(242
)
Allowance for loan losses
(11,099
)
 
(11,529
)
Net loans
$
710,220

 
$
720,490



13


NOTE 3 - LOANS (CONTINUED)

The following tables present changes in the allowance for loan losses by loan segment for the nine months ended September 30, 2014 and the nine months ended September 30, 2013.

 
Nine Months Ended September 30, 2014
 
One- to
Four-Family
 
Multi-family
and
Commercial
 
Construction
 
Consumer
 
Commercial
and
Industrial
 
Unallocated
 
Total
 
(In thousands, Unaudited)
Balance, beginning
$
403

 
$
7,141

 
$
324

 
$
153

 
$
3,051

 
$
457

 
$
11,529

(Credit) provision for loan losses
(209
)
 
(76
)
 
284

 
(21
)
 
1,590

 
25

 
1,593

Loans charged off
(3
)
 
(102
)
 

 
(6
)
 
(1,986
)
 

 
(2,097
)
Recoveries
29

 
12

 

 
33

 

 

 
74

Balance, ending
$
220

 
$
6,975

 
$
608

 
$
159

 
$
2,655

 
$
482

 
$
11,099

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2013
 
One- to
Four-Family
 
Multi-family
and
Commercial
 
Construction
 
Consumer
 
Commercial
and
Industrial
 
Unallocated
 
Total
 
(In thousands)
Balance, beginning
$
642

 
$
6,327

 
$
873

 
$
232

 
$
2,630

 
$
466

 
$
11,170

(Credit) provision for loan losses
(139
)
 
1,256

 
(487
)
 
(7
)
 
(45
)
 
(46
)
 
532

Loans charged off
(115
)
 
(463
)
 

 
(69
)
 

 

 
(647
)
Recoveries
35

 
12

 

 
26

 

 

 
73

Balance, ending
$
423

 
$
7,132

 
$
386

 
$
182

 
$
2,585

 
$
420

 
$
11,128


The following tables set forth the breakdown of impaired loans by loan segment as of September 30, 2014 and December 31, 2013.
September 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
Nonaccrual
Loans
 
Accruing
TDRs
 
Other
Impaired
Loans
 
Total
Impaired
Loans
 
Impaired
Loans
with
Allowance
 
Impaired
Loans
without
Allowance
 
(In thousands, Unaudited)
Real estate loans:
 

 
 

 
 

 
 

 
 

 
 

One- to four-family
$
1,684

 
$
733

 
$

 
$
2,417

 
$
770

 
$
1,647

Multi-family and commercial
1,772

 
1,523

 
4,479

 
7,774

 
7,770

 
4

Construction

 
3,235

 

 
3,235

 
3,235

 

Consumer loans
185

 
13

 

 
198

 
94

 
104

Commercial and industrial

 

 

 

 

 

Total
$
3,641

 
$
5,504

 
$
4,479

 
$
13,624

 
$
11,869

 
$
1,755

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
Nonaccrual
Loans
 
Accruing
TDRs
 
Other
Impaired
Loans
 
Total
Impaired
Loans
 
Impaired
Loans
with
Allowance
 
Impaired
Loans
without
Allowance
 
(In thousands)
Real estate loans:
 

 
 

 
 

 
 

 
 

 
 

One- to four-family
$
2,390

 
$
582

 
$

 
$
2,972

 
$
2,972

 
$

Multi-family and commercial
3,031

 
6,191

 

 
9,222

 
8,866

 
356

Construction
3,231

 

 

 
3,231

 
3,231

 

Consumer loans
128

 
13

 

 
141

 
141

 

Commercial and industrial

 

 

 

 

 

Total
$
8,780

 
$
6,786

 
$

 
$
15,566

 
$
15,210

 
$
356



14


NOTE 3 - LOANS (CONTINUED)

There were no loans past due 90 days or more and still accruing interest at September 30, 2014 or December 31, 2013.

For the nine months ended September 30, 2014 and 2013, the average recorded investment in impaired loans was $13.5 million and $17.4 million, respectively.  The interest income recognized on these impaired loans was $384,000 and $296,000 for the nine months ended September 30, 2014 and 2013, respectively.
 
At September 30, 2014, two troubled debt restructurings (“TDRs”) totaling $277,000 are excluded from the accruing TDR column above as they are included in nonaccrual loans.  At December 31, 2013, four TDRs totaling $3.5 million are excluded from the accruing TDR column as they are included in nonaccrual loans.
 
During the nine months ended September 30, 2014, one multi-family and commercial loan totaling $4.5 million was reclassified from an accruing TDR to an other impaired loan.  This reclassification was due to our annual assessment where TDRs that have performed in accordance with the new terms for six consecutive months, are in a current status, reflected a market rate of interest at the time of the restructuring and cross over a year end are considered cured and are no longer classified as TDRs.

The following tables set forth the allowance for loan loss for impaired loans and general allowance by loan segment as of September 30, 2014 and December 31, 2013.
 
September 30, 2014
Allowance for Loan Losses
 
Impaired Loans
 
 
 
 
 
 
 
Nonaccrual Loans
 
Accruing TDRs
 
Other Impaired Loans
 
Total Impaired Loans
 
 
 
 
 
 
 
 
 
General
 
Total
 
(In thousands, Unaudited)
Real estate loans:
 

 
 

 
 

 
 

 
 

 
 

One- to four-family
$
2

 
$
1

 
$

 
$
3

 
$
217

 
$
220

Multi-family and commercial
414

 
204

 
395

 
1,013

 
5,962

 
6,975

Construction

 
74

 

 
74

 
534

 
608

Consumer loans
26

 

 

 
26

 
133

 
159

Commercial and industrial

 

 

 

 
2,655

 
2,655

Unallocated

 

 

 

 
482

 
482

Total allowance for loan losses
$
442

 
$
279

 
$
395

 
$
1,116

 
$
9,983

 
$
11,099

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
Allowance for Loan Losses
 
Impaired Loans
 
 
 
 
 
 
 
Nonaccrual Loans
 
Accruing TDRs
 
Other Impaired Loans
 
Total Impaired Loans
 
 
 
 
 
 
 
 
 
General
 
Total
 
(In thousands)
Real estate loans:
 

 
 

 
 

 
 

 
 

 
 

One- to four-family
$
163

 
$
1

 
$

 
$
164

 
$
239

 
$
403

Multi-family and commercial
600

 
687

 

 
1,287

 
5,854

 
7,141

Construction
263

 

 

 
263

 
61

 
324

Consumer loans
6

 

 

 
6

 
147

 
153

Commercial and industrial

 

 

 

 
3,051

 
3,051

Unallocated

 

 

 

 
457

 
457

Total allowance for loan losses
$
1,032

 
$
688

 
$

 
$
1,720

 
$
9,809

 
$
11,529

 





15


NOTE 3 - LOANS (CONTINUED)

The Company may, under certain circumstances, restructure loans as a concession to borrowers who have experienced financial difficulty, which results in a TDR.  TDRs are impaired loans.  TDRs typically result from the Company’s loss mitigation activities, which, among other activities, could include extension of maturity, rate reductions, payment extension, and/or principal forgiveness.
The following table sets forth a summary of the TDR activity for the three and nine month periods ended September 30, 2014 and 2013
 
Three Months Ended September 30, 2014
 
Nine Months Ended September 30, 2014
 
Restructured Current Period
 
Restructured Current Period
 
Number
of Loans
 
Pre-Modification
Outstanding
Recorded
Investment
 
Post-Modification
Outstanding
Recorded
Investment
 
Type of Modification
 
Number
of Loans
 
Pre-Modification
Outstanding
Recorded
Investment
 
Post-Modification
Outstanding
Recorded
Investment
 
Type of Modification
 
(Dollars in thousands, Unaudited)
 
(Dollars in thousands, Unaudited)
Real estate loans:
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
One- to four-family

 
$

 
$

 
 
 
1

 
$
245

 
$
245

 
Principal forgiveness
Multi-family and commercial

 

 

 
 
 
1

 
1,640

 
1,540

 
Principal forgiveness
Construction

 

 

 
 
 

 

 

 
 
Consumer loans

 

 

 
 
 

 

 

 
 
Commercial and industrial

 

 

 
 
 

 

 

 
 
Total

 
$

 
$

 
 
 
2

 
$
1,885

 
$
1,785

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2013
 
Nine Months Ended September 30, 2013
 
Restructured Current Period
 
Restructured Current Period
 
Number
of Loans
 
Pre-Modification
Outstanding
Recorded
Investment
 
Post-Modification
Outstanding
Recorded
Investment
 
Type of Modification
 
Number
of Loans
 
Pre-Modification
Outstanding
Recorded
Investment
 
Post-Modification
Outstanding
Recorded
Investment
 
Type of Modification
 
(Dollars in thousands, Unaudited)
 
(Dollars in thousands, Unaudited)
Real estate loans:
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
One- to four-family
1

 
$
141

 
$
141

 
Delayed repayment
 
2

 
$
622

 
$
622

 
Delayed repayment
Multi-family and commercial

 

 

 
 
 

 

 

 
 
Construction

 

 

 
 
 

 

 

 
 
Consumer loans

 

 

 
 
 

 

 

 
 
Commercial and industrial

 

 

 
 
 

 

 

 
 
Total
1

 
$
141

 
$
141

 
 
 
2

 
$
622

 
$
622

 
 
During the three and nine months ended September 30, 2014, no TDRs defaulted that were restructured in the prior twelve months. During the three and nine months ended September 30, 2013, a $1.6 million multi-family and commercial real estate TDR which was restructured in the prior twelve months defaulted. This defaulted loan was current as to monetary payments, but was 90 days or more past maturity. Subsequent to the default, the loan was extended.










16


NOTE 3 - LOANS (CONTINUED)

The following table sets forth past due loans by segment as of September 30, 2014 and December 31, 2013.
 
 
September 30, 2014
 
December 31, 2013
 
30-59
Days
Past Due
 
60-89
Days
Past Due
 
30-59
Days
Past Due
 
60-89
Days
Past Due
 
(In thousands)
 
(Unaudited)
 
 
 
 
One- to four-family real estate
$
747

 
$
100

 
$
172

 
$

Multi-family and commercial real estate

 

 

 

Construction

 

 

 

Consumer
99

 
24

 
241

 
5

Commercial and industrial
93

 

 

 

Total
$
939

 
$
124

 
$
413

 
$
5



We use six primary classifications for loans: pass, pass watch, special mention, substandard, doubtful and loss, of which three classifications are for problem loans: substandard, doubtful and loss. “Substandard loans” must have one or more well defined weaknesses and are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. “Doubtful loans” have the weaknesses of substandard loans with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss.  A loan classified “loss” is considered uncollectible and of such little value that continuance as a loan of the institution is not warranted.  We also maintain a “special mention” category, described as loans which do not currently expose us to a sufficient degree of risk to warrant classification but do possess credit deficiencies or potential weaknesses deserving our close attention.  If we classify an asset as loss, it is recorded as a loan charged off in the current period.

The following tables set forth criticized and classified loans by segment as of September 30, 2014 and December 31, 2013
 
September 30, 2014
 
One- to
Four-Family
 
Multi-family
and
Commercial
 
Construction
 
Consumer
 
Commercial
and
Industrial
 
Total
 
(In thousands, Unaudited)
Pass and Pass watch
$
110,543

 
$
403,772

 
$
28,106

 
$
19,271

 
$
134,330

 
$
696,022

Special mention

 
10,004

 
3,235

 

 
5,025

 
18,264

Substandard
1,684

 
4,680

 

 
185

 
758

 
7,307

Doubtful

 

 

 

 

 

Total loans
$
112,227

 
$
418,456

 
$
31,341

 
$
19,456

 
$
140,113

 
$
721,593

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
 
One- to
Four-Family
 
Multi-family
and
Commercial
 
Construction
 
Consumer
 
Commercial
and
Industrial
 
Total
 
(In thousands)
Pass and Pass watch
$
125,111

 
$
390,908

 
$
2,673

 
$
22,350

 
$
165,336

 
$
706,378

Special mention

 
12,414

 

 

 
2,677

 
15,091

Substandard
2,390

 
5,043

 
3,231

 
128

 

 
10,792

Doubtful

 

 

 

 

 

Total loans
$
127,501

 
$
408,365

 
$
5,904

 
$
22,478

 
$
168,013

 
$
732,261



17


NOTE 4 - DERIVATIVES AND HEDGING
 
Interest Rate Swaps
 
On November 3, 2006, the Company entered into an interest rate swap with a current notional amount of $819,000, which is used to hedge a 15-year fixed rate loan that is earning interest at 7.43%.  The Company is receiving variable rate payments of one-month LIBOR plus 224 basis points and is paying fixed rate payments of 7.43%.  The swap matures in April 2022 and had a fair value loss position of $116,000 and $132,000 at September 30, 2014 and December 31, 2013, respectively.  The interest rate swap is carried at fair value in accordance with FASB ASC 815 “Derivatives and Hedging.”  The loan is carried at fair value under the fair value option as permitted by FASB ASC 825 “Financial Instruments.”
 
On October 12, 2011, the Company entered into an interest rate swap with a current notional amount of $1.5 million, which is used to hedge a 10-year fixed rate loan that is earning interest at 5.83%.  The Company is receiving variable rate payments of one-month LIBOR plus 350 basis points and is paying fixed rate payments of 5.83%.  The Company designated this relationship as a fair value hedge.  The swap matures in October 2021 and had a fair value (loss) gain position of ($22,000) and $12,000 at September 30, 2014 and December 31, 2013, respectively.  The difference between changes in the fair values of the interest rate swap agreement and the hedged loan represents hedge ineffectiveness and is recorded in other non-interest income in the consolidated statements of operations. Hedge ineffectiveness resulted in (expense) income of ($2,000) and $1,000 for the three months ended September 30, 2014 and September 30, 2013, respectively.  Hedge ineffectiveness resulted in (expense) income of ($12,000) and $15,000 for the nine months ended September 30, 2014 and September 30, 2013, respectively.

Credit Derivatives
 
We have entered into agreements with a third-party financial institution whereby the financial institution enters into interest rate derivative contracts and foreign currency swap contracts with customers referred to them by us.  By the terms of the agreements, the financial institution has recourse to the Company for any exposure created under each swap contract in the event the customer defaults on the swap agreement and the agreement is in a paying position to the third-party financial institution.  These transactions represent credit derivatives and are a customary arrangement that allows financial institutions like ours to provide access to interest rate and foreign currency swap transactions for our customers without creating the swap ourselves.  The Company records the fair value of credit derivatives in other liabilities on the consolidated statement of condition.  The Company recognizes changes in the fair value of credit derivatives, net of any fees received, as service charges and other fee income in the consolidated statements of operations.

At September 30, 2014, there were five variable-rate to fixed-rate interest rate swap transactions between the third-party financial institution and our customers with a notional amount of $19.2 million, and remaining maturities ranging from five to eight years.  At December 31, 2013, there were five variable-rate to fixed-rate interest swap transactions between the third-party financial institution and our customers with a notional amount of $19.5 million, and remaining maturities ranging from six to nine years.  The fair value of the swaps to the customers was an asset of $534,000 and $969,000 as of September 30, 2014 and December 31, 2013, respectively, and all swaps were in receiving positions from the third-party financial institution at September 30, 2014.  As of September 30, 2014 and December 31, 2013, the fair value of the Company’s interest rate swap credit derivatives was a liability of $4,000 and $3,000, respectively.  During the three months ended September 30, 2014 and 2013, the Company recognized (expense) income of ($1,000) and $1,000, respectively, from interest rate swap credit derivatives. During the nine months ended September 30, 2014 and 2013, the Company recognized (expense) income of ($2,000) and $7,000, respectively, from interest rate swap credit derivatives.
 
At September 30, 2014, there were fourteen foreign currency swap transactions between the third-party financial institution and our customers with a notional amount aggregating approximately $1.9 million, and remaining maturities ranging from one to eight months.  The aggregate fair value of these swaps to the customers was a liability of $155,000 as of September 30, 2014.  At September 30, 2014, the fair value of the Company’s credit derivatives was $10,000.  At December 31, 2013, there were seven foreign currency swap transactions between the third-party financial institution and our customers with a notional amount of $517,000 and remaining maturities ranging from one to eleven months.  The aggregate fair value of these swaps to the customers was $0 as of December 31, 2013. At December 31, 2013, the fair value of the Company's credit derivative was a liability of $1,000. During the three months ended September 30, 2014 and 2013, the Company recognized income of $2,000 and $0, respectively, from foreign currency swap credit derivatives. During the nine months ended September 30, 2014 and 2013, the Company recognized income of $4,000 and $2,000, respectively, from foreign currency swap credit derivatives.
 
The maximum potential payments by the Company to the financial institution under these credit derivatives are not estimable as they are contingent on future interest rates and exchange rates, and the agreement does not provide for a limitation of the maximum potential payment amount.
 

18


NOTE 5 - MORTGAGE SERVICING ACTIVITY
 
Loans serviced for others are not included in the accompanying consolidated statements of condition.  The unpaid principal balances of these loans were $24.2 million, $27.7 million and $28.5 million at September 30, 2014, December 31, 2013 and September 30, 2013, respectively.  The Company received fees, net of amortization, from the servicing of loans of $18,000 and ($4,000) during the nine months ended September 30, 2014 and 2013, respectively.
 
The following table summarizes mortgage servicing rights activity for the nine months ended September 30, 2014 and 2013.
 
 
 
Servicing
Rights
 
Valuation
Allowance
 
Net
Carrying
Value
 
 
(In thousands, Unaudited)
Balance at December 31, 2013
$
255

 
$
(103
)
 
$
152

Reductions

 
6

 
6

Amortization
(32
)
 

 
(32
)
Balance at September 30, 2014
$
223

 
$
(97
)
 
$
126

 
 
 
 
 
 
 
Balance at December 31, 2012
$
325

 
$
(155
)
 
$
170

Reductions

 
50

 
50

Amortization
(63
)
 

 
(63
)
Balance at September 30, 2013
$
262

 
$
(105
)
 
$
157


At September 30, 2014, December 31, 2013 and September 30, 2013, the fair value of the mortgage servicing rights (“MSRs”) was $126,000, $152,000 and $157,000, respectively.  The fair value at these dates was determined using a third-party valuation model that calculates the present value of estimated future servicing income.  The model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment speeds and discount rates.  Mortgage loan prepayment speed is the annual rate at which borrowers are forecasted to repay their mortgage loan principal and is based on historical experience and current interest rates.  The discount rate used to determine the present value of future net servicing income is the required rate of return the market would expect for an asset with similar risk.  Both assumptions can, and generally will, change quarterly valuations as market conditions and interest rates change.

NOTE 6 - DEPOSITS
 
Deposits and their respective weighted average interest rate at September 30, 2014 and December 31, 2013 consist of the following:
 
 
September 30, 2014
 
December 31, 2013
 
Weighted
Average
Interest Rate
 
Amount
 
Weighted
Average
Interest Rate
 
Amount
 
(Dollars in thousands)
 
(Unaudited)
 
 
 
 
Noninterest-bearing demand accounts
%
 
$
119,853

 
%
 
$
100,748

NOW accounts
0.21

 
82,868

 
0.21

 
84,569

Money market accounts
0.21

 
90,152

 
0.20

 
85,017

Savings and club accounts
0.27

 
112,821

 
0.22

 
108,183

Brokered deposits
0.81

 
64,280

 
0.56

 
71,334

Certificates of deposit
0.94

 
193,754

 
1.26

 
223,864

 
0.45
%
 
$
663,728

 
0.56
%
 
$
673,715

 

19


NOTE 7 - BORROWINGS

FHLB Advances
 
Pursuant to collateral agreements with the FHLB of Pittsburgh, advances are secured by qualifying first mortgage loans, qualifying fixed-income securities, FHLB stock and an interest-bearing demand deposit account with the FHLB. 
Maturity Date
 
Amount
 
Coupon Rate
 
Call Date
 
Rate if Called
 
 
(In thousands, Unaudited)
 
 
 
 
 
 
December 2014
 
$
15,000

 
0.43
%
 
Not Applicable
 
Not Applicable
March 2015
 
10,000

 
0.49

 
Not Applicable
 
Not Applicable
April 2015
 
10,000

 
0.45

 
Not Applicable
 
Not Applicable
August 2015
 
10,000

 
0.68

 
Not Applicable
 
Not Applicable
March 2016
 
10,000

 
0.60

 
Not Applicable
 
Not Applicable
March 2016
 
10,000

 
0.62

 
Not Applicable
 
Not Applicable
September 2016
 
5,000

 
0.75

 
Not Applicable
 
Not Applicable
September 2016
 
10,000

 
1.04

 
Not Applicable
 
Not Applicable
June 2017
 
5,000

 
0.94

 
Not Applicable
 
Not Applicable
November 2017
 
15,000

 
3.62

 
November 2014
 
LIBOR + 0.10%
November 2017
 
15,000

 
3.87

 
November 2014
 
LIBOR + 0.10%
December 2017
 
20,000

 
2.83

 
December 2014
 
LIBOR + 0.11%
 
 
$
135,000

 
1.65
%
 
 
 
 

For the borrowings which have a “Call Date” disclosed in the above table, if the borrowing is called, the Bank has the option to either pay off the borrowing without penalty or the borrowing’s fixed rate resets to a variable LIBOR based rate, as noted in the above table.  Subsequent to the call date, the borrowings are callable by the FHLB quarterly.  Accordingly, the contractual maturities above may differ from actual maturities.
 
The Bank had a maximum borrowing capacity with the FHLB of Pittsburgh of approximately $411.8 million at September 30, 2014.  As of September 30, 2014, the Bank had qualifying collateral pledged against its advances consisting of loans in the amount of $468.6 million and securities in the amount of $77.8 million. Additionally, as of September 30, 2014, the Bank had a maximum borrowing capacity of $61.1 million with the Federal Reserve Bank of Philadelphia through the Discount Window. This borrowing capacity was generated by pledged securities with a fair value of $61.2 million.

As a member of the FHLB of Pittsburgh, the Bank is required to acquire and hold shares of capital stock in the FHLB of Pittsburgh in an amount equal to at least 4.00% of its advances plus 0.35% of the Bank’s “eligible assets,” as such term is defined by the FHLB; and a maximum amount of 6.00% of its advances plus 1.00% of the Bank’s “eligible assets.”  As of September 30, 2014, the Company had a minimum stock obligation of $8.9 million and a maximum stock obligation of $15.1 million.  The Company held $11.2 million in FHLB stock at that date.
 
Other Borrowed Funds
 
Other borrowed funds obtained from large commercial banks under security repurchase agreements totaled $30.0 million at September 30, 2014.  These borrowings contractually mature with dates ranging from September 2018 through November 2018. As disclosed in the table below, one of the borrowings may be called by the lender based on the underlying agreement.  Accordingly, the contractual maturity below may differ from actual maturity.











20


NOTE 7 - BORROWINGS (CONTINUED)
 
 
 
 
 
 
Next Call Date
 
Subsequent Call Frequency
Maturity Date
 
Amount
 
Coupon Rate
 
 
 
 
(In thousands, Unaudited)
 
 
 
 
 
 
September 2018
 
$
10,000

 
3.40
%
 
Not Applicable
 
Not Applicable
September 2018
 
5,000

 
3.20

 
Not Applicable
 
Not Applicable
October 2018
 
5,000

 
3.15

 
October 2014
 
Quarterly
October 2018
 
5,000

 
3.27

 
Not Applicable
 
Not Applicable
November 2018
 
5,000

 
3.37

 
Not Applicable
 
Not Applicable
 
 
$
30,000

 
3.30
%
 
 
 
 
 
Mortgage backed securities with a fair value of $34.0 million at September 30, 2014 were used to secure these other borrowed funds.
 
Short-term Borrowings
 
Short-term borrowings consist of overnight borrowings plus term borrowings with an original maturity less than one year. Short-term borrowings are obtained from commercial banks, participants in the Federal Funds market and the FHLB. As of September 30, 2014, the Company had $60.0 million of short-term borrowings consisting of $45.0 million of overnight borrowings and $15.0 million of short-term borrowings with weighted average rates of 0.31% and 0.33%, respectively.  As of December 31, 2013, the Company had $80.5 million of short term borrowings consisting solely of overnight borrowings with a weighted average rate of 0.32%.

NOTE 8 - STOCK BASED COMPENSATION
 
During the nine months ended September 30, 2014, the Company recorded $894,000 of stock based compensation expense comprised of stock option expense of $328,000 and restricted stock expense of $566,000. This compares to $811,000 of stock based compensation expense comprised of stock option expense of $315,000 and restricted stock expense of $496,000 during the nine months ended September 30, 2013.
The following is a summary of the Bancorp’s stock option activity and related information for the nine months ended September 30, 2014
 
 
Number of
Stock
Options
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Life
 
Aggregate
Intrinsic
Value
 
 
(Unaudited)
Outstanding at December 31, 2013
1,123,408

 
$
12.81

 
6.2 years
 
$
5,013,000

     Granted
36,300

 
16.97

 
 
 
 

     Exercised
(35,388
)
 
11.07

 
 
 
 

     Forfeited/Cancelled
(23,100
)
 
15.52

 
 
 
 

Outstanding at September 30, 2014
1,101,220

 
$
12.95

 
5.5 years
 
$
3,895,000

Exercisable at September 30, 2014
733,648

 
$
11.73

 
4.3 years
 
$
3,395,000


The fair value of the options granted during the nine months ended September 30, 2014 was estimated to be $3.66.  The fair value was based on the following assumptions:
 
Expected Dividend Yield
 
 
 
3.53
%
Expected Volatility
30.85
%
-
31.04
%
Risk-Free Interest Rate
1.86
%
-
1.90
%
Expected Option Life in Years
 
 
 
6.5
 

Stock options vest over a five-year service period and expire ten years after grant date. The Company recognizes compensation expense for the fair values of stock options using the straight-line method over the requisite service period for the entire award.


21


NOTE 8 - STOCK BASED COMPENSATION (CONTINUED)

The following is a summary of the Bancorp’s unvested options as of September 30, 2014 and the changes therein during the nine months then ended. 
 
 
Number of
Stock
Options
 
Weighted
Average
Grant Date
Fair Value
 
 
(Unaudited)
Unvested at December 31, 2013
475,524

 
$
3.85

Granted
36,300

 
3.66

Vested
(124,152
)
 
3.66

Forfeited / Cancelled
(20,100
)
 
3.91

Unvested at September 30, 2014
367,572

 
$
3.90

 
Expected future expense relating to the 367,572 non-vested options outstanding as of September 30, 2014 is $1.2 million over a weighted average period of 3.1 years.
 
The following is a summary of the status of the Bancorp’s restricted stock as of September 30, 2014 and changes therein during the nine months then ended.
 
 
Number of
Restricted
Shares
 
Weighted
Average
Grant Date
Fair Value
 
 
(Unaudited)
Unvested at December 31, 2013
225,932

 
$
14.98

Granted
17,215

 
15.84

Vested
(47,276
)
 
13.78

Forfeited / Cancelled
(8,650
)
 
15.32

Unvested at September 30, 2014
187,221

 
$
15.34


Expected future compensation expense relating to the 187,221 restricted shares at September 30, 2014 is $2.3 million over a weighted average period of 3.2 years

Non-performance based restricted shares vest over a five-year service period. The Company recognizes compensation expense for the fair value of non-performance based restricted shares on a straight-line basis over the requisite service period for the entire award.

Performance-based restricted shares vest over a five-year period based on service and achievement of performance metrics. The performance metrics to be evaluated during the performance period are (1) return on assets compared to peer group and (2) earnings per share growth rate compared to peer group. On the third anniversary of the grant date, the Company's level of performance relative to the performance metrics are evaluated and, if such performance metrics have been achieved, an amount of shares that will vest at that time and over the following two years will be determined. The number of shares eligible to vest can range from 0% to 150% of the shares identified on grant date (the "target shares"). Of the shares that will vest, 50% of the shares vest on the third anniversary of the date of grant and 25% vest on each of the fourth and fifth anniversaries of the date of grant.

During August 2011, the Company granted 10,668 shares (the "target shares") of performance-based restricted stock. During August 2014, the Company awarded an additional 4,265 shares of performance-based restricted stock, which represented additional shares owed to participants under the August 2011 grant as the Company exceeded the performance targets under the 2011 award. This represented a total grant of 140% of the "target shares."  The 14,933 shares had a grant date fair value of $12.39

During 2013 and 2012, the Company granted 39,250 and 22,500 shares, respectively, of performance-based restricted stock to certain executive officers of the Company. For the purposes of the above table, the Company is assuming 100% of the "target shares" will be awarded. However, more or less shares may actually be awarded based on the performance of the Company at the applicable measurement date.


22


NOTE 9 - FAIR VALUE
 
Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique.  Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction on the dates indicated.  The estimated fair value amounts have been measured as of the respective quarter ends, and have not been reevaluated or updated for purposes of these consolidated financial statements subsequent to those respective dates.  As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each reporting date.
 
The Company determines the fair value of financial instruments using three levels of input:
 
Level 1—Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that are accessible at the measurement date.
 
Level 2—Inputs are other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
 
Level 3—Valuations are observed from unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities.  Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful.  The following methods and assumptions were used to estimate the fair values of the Company’s financial instruments at September 30, 2014 and December 31, 2013:
 
Cash and Cash Equivalents
 
The carrying amounts of cash and cash equivalents approximate their fair value.

Investment and Mortgage Related Securities—Available-for-Sale and Held-to-Maturity
 
Fair values for investment securities and mortgage related securities are obtained from one external pricing service (“primary pricing service”) as the provider of pricing on the investment portfolio on a quarterly basis.  We generally obtain one quote per investment security.  If quoted market prices are not available, fair values are based on quoted market prices of comparable securities.  If quoted market prices are not available for comparable securities, fair value is based on quoted bids for the security or comparable securities.  We review the estimates of fair value provided by the primary pricing service to determine if they are representative of fair value based upon our general knowledge of market conditions and relative changes in interest rates and the credit environment.  The Company made no adjustments to the values obtained from the primary pricing service.

Loans Receivable, Net
 
To determine the fair values of loans that are not impaired, we employ discounted cash flow analyses that use interest rates and terms similar to those currently being offered to borrowers.  We do not record loans at fair value on a recurring basis.  We record fair value adjustments to loans on a nonrecurring basis to reflect full and partial charge-offs due to impairment.  For impaired loans, we use a variety of techniques to measure fair value, such as using the current appraised value of the collateral, agreements of sale, discounting the contractual cash flows, and analyzing market data that we may adjust due to specific characteristics of the loan or collateral.
 
FHLB Stock
 
The fair value of the FHLB stock is assumed to equal its cost, since the stock is nonmarketable but redeemable at its par value.

Mortgage Servicing Rights 

The fair value of the MSRs was determined using a third-party valuation model that calculates the present value of estimated future servicing income.  The model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment speeds and discount rates.
 



23


NOTE 9 - FAIR VALUE (CONTINUED)

Financial Assets Acquired from Debtors
 
The fair value of financial assets acquired from debtors are determined using sales prices from executed sale agreements.
 
Accrued Interest Receivable and Accrued Interest Payable
 
The carrying amount of accrued interest receivable and accrued interest payable approximates fair value.
 
Deposit Liabilities
 
Fair values for demand deposits (including NOW accounts), savings and club accounts and money market deposits are, by definition, equal to the amount payable on demand at the reporting date.  Fair values of fixed-maturity certificates of deposit, including brokered deposits, are estimated using a discounted cash flow calculation that applies interest rates currently being offered on similar instruments with similar maturities.
 
Short-term Borrowings, FHLB Advances and Other Borrowed Funds
 
Fair values of short-term borrowings, FHLB advances and other borrowed funds are estimated using discounted cash flow analyses, based on rates currently available to the Bank for advances with similar terms and remaining maturities.
 
Derivative Contracts
 
The fair values of derivative contracts are based upon the estimated amount the Company would receive or pay to terminate the contracts or agreements, taking into account underlying interest rates, creditworthiness of underlying customers for credit derivatives and, when appropriate, the creditworthiness of the counterparties.

The estimated fair values of the Company’s financial instruments at September 30, 2014 and December 31, 2013 were as follows: 
 
 
 
September 30, 2014
 
December 31, 2013
 
Fair Value
Hierarchy
Level
 
Carrying
Amount
 
Estimated
Fair
Value
 
Carrying
Amount
 
Estimated
Fair
Value
 
 
 
(In thousands)
Financial assets:
 
 
(Unaudited)
 
 
 
 
Cash and cash equivalents
Level 1
 
$
7,727

 
$
7,727

 
$
11,947

 
$
11,947

Available-for-sale securities:
 
 
 

 
 

 
 

 
 

Investment securities available-for-sale
Level 2
 
8,433

 
8,433

 
10,489

 
10,489

Private label commercial mortgage related securities
Level 3
 

 

 
2,120

 
2,120

Agency residential mortgage related securities
Level 2
 
130,809

 
130,809

 
243,948

 
243,948

Held-to-maturity securities:
 
 
 

 
 

 
 

 
 

Agency mortgage related securities
Level 2
 
165,006

 
163,727

 
68,397

 
67,491

Loans receivable, net
Level 3
 
710,220

 
713,357

 
720,490

 
721,417

FHLB stock
Level 3
 
11,152

 
11,152

 
9,813

 
9,813

Accrued interest receivable
Level 2, 3
 
3,159

 
3,159

 
3,308

 
3,308

Mortgage servicing rights
Level 3
 
126

 
126

 
152

 
152

Financial assets acquired from debtors
Level 3
 

 

 
1,938

 
1,938

Financial liabilities:
 
 
 

 
 

 
 

 
 

Savings and club accounts
Level 2
 
112,821

 
112,821

 
108,183

 
108,183

Demand, NOW and money market deposits
Level 2
 
292,873

 
292,873

 
270,334

 
270,334

Brokered deposits
Level 2
 
64,280

 
63,958

 
71,334

 
71,020

Certificates of deposit
Level 2
 
193,754

 
193,974

 
223,864

 
225,357

Short-term borrowings
Level 2
 
60,000

 
60,001

 
80,500

 
80,500

FHLB advances
Level 2
 
135,000

 
138,292

 
150,000

 
154,069

Other borrowed funds
Level 2
 
30,000

 
31,922

 
30,000

 
32,178

Accrued interest payable
Level 2
 
314

 
314

 
314

 
314

Derivative contracts
Level 2, 3
 
152

 
152

 
124

 
124



24


NOTE 9 - FAIR VALUE (CONTINUED)

The following financial instruments were classified as Level 3 and carried at fair value on a recurring basis as of September 30, 2014:

Two commercial loans, since lending credit risk is not an observable input for these loans (see interest rate swap discussion in Note 4).  The unrealized gain on the two loans was $133,000 at September 30, 2014 compared to $125,000 at December 31, 2013.

Credit derivatives are valued based on creditworthiness of the underlying borrower which is a significant unobservable input.  The liability resulting from credit derivatives was $14,000 and $4,000 at September 30, 2014 and December 31, 2013, respectively.

The following measures were made on a recurring basis as of September 30, 2014 and December 31, 2013.
 
 
 
 
 
Fair Value Measurements at Reporting Date Using
 
 
 
 
Quoted Prices in Active Markets
for Identical
Assets
 
Significant Other
Observable
Inputs
 
Significant Other
Unobservable
Inputs
 
 
As of
 
 
 
Description
 
September 30, 2014
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
 
(In thousands, Unaudited)
Available-for-Sale Securities:
 
 

 
 

 
 

 
 

Obligations of U.S. government agencies
 
$
304

 
$

 
$
304

 
$

Corporate securities
 
8,129

 

 
8,129

 

Agency residential mortgage related securities
 
130,809

 

 
130,809

 

Loans (1)
 
2,459

 

 

 
2,459

Derivative contracts (1)
 
(152
)
 

 
(138
)
 
(14
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Fair Value Measurements at Reporting Date Using
 
 
 
 
Quoted Prices in Active Markets
for Identical
Assets
 
Significant Other
Observable
Inputs
 
Significant Other
Unobservable
Inputs
 
 
As of
 
 
 
Description
 
December 31, 2013
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
 
(In thousands)
Available-for-Sale Securities:
 
 

 
 

 
 

 
 

Obligations of U.S. government agencies
 
$
308

 
$

 
$
308

 
$

Corporate securities
 
10,181

 

 
10,181

 

Private label commercial mortgage related securities
 
2,120

 

 

 
2,120

Agency residential mortgage related securities
 
243,948

 

 
243,948

 

Loans (1)
 
2,535

 

 

 
2,535

Financial assets acquired from debtors
 
1,938

 

 

 
1,938

Derivative contracts (1)
 
(124
)
 

 
(120
)
 
(4
)
(1)          Such financial instruments are recorded at fair value as further described in Note 4.

The following measures were made on a non-recurring basis as of September 30, 2014 and December 31, 2013:
 
Loans, which were partially charged off at September 30, 2014 and December 31, 2013.  The loans’ fair values are based on Level 3 inputs, which are either an appraised value or a sales agreement, less costs to sell.  These amounts do not include fully charged-off loans, because we carry fully charged-off loans at zero on our balance sheet.
 
MSRs, the fair value of which was determined using a third-party valuation model that calculates the present value of estimated future servicing income.  The model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment speeds and discount rates.

25


NOTE 9 - FAIR VALUE (CONTINUED)
 
Other real estate owned, for which we used Level 3 inputs, which consist of appraisals or agreements of sale. 
 
 
 
 
Fair Value Measurements at Reporting Date Using
 
 
 
 
Quoted Prices in Active Markets
for Identical
Assets
 
Significant Other
Observable
Inputs
 
Significant Other
Unobservable
Inputs
 
 
 
 
 
 
 
 
Balance
 
(Level 1)
 
(Level 2)
 
(Level 3)
September 30, 2014 (Unaudited)
 

 
(In thousands)
 
 

Loans
$
240

 
$

 
$

 
$
240

Mortgage servicing rights
126

 

 

 
126

Other real estate owned
1,889

 

 

 
1,889

Total
$
2,255

 
$

 
$

 
$
2,255

 
 
 
 
 
 
 
 
December 31, 2013
 

 
 

 
 

 
 

Loans
$
912

 
$

 
$

 
$
912

Mortgage servicing rights
152

 

 

 
152

Other real estate owned
4,314

 

 

 
4,314

Total
$
5,378

 
$

 
$

 
$
5,378


The following tables include a roll forward of the financial instruments which fair value is determined on a recurring basis using Significant Other Unobservable Inputs (Level 3) for the periods from December 31, 2013 to September 30, 2014 and December 31, 2012 to September 30, 2013
Nine Months Ended September 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
Private Label
Commercial
Mortgage
Related
Securities
 
Derivative
Contracts
 
Financial
Assets
Acquired
from Debtors
 
Loans
 
Total
 
 
(In thousands, Unaudited)
Beginning balance, December 31, 2013
 
$
2,120

 
$
(4
)
 
$
1,938

 
$
2,535

 
$
6,589

Purchases/additions
 

 
(12
)
 

 

 
(12
)
Sales
 

 

 
(1,938
)
 

 
(1,938
)
Payments received
 
(2,118
)
 

 

 
(82
)
 
(2,200
)
Premium amortization, net
 

 

 

 

 

(Decrease)/increase in value
 
(2
)
 
2

 

 
6

 
6

Ending balance, September 30, 2014
 
$

 
$
(14
)
 
$

 
$
2,459

 
$
2,445

 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2013
 
 
 
 
 
 
 
 
 
 
 
 
Private Label
Commercial
Mortgage
Related
Securities
 
Derivative
Contracts
 
Financial
Assets
Acquired
from Debtors
 
Loans
 
Total
 
 
(In thousands, Unaudited)
Beginning balance, December 31, 2012
 
$
6,197

 
$
(12
)
 
$
3,714

 
$
2,806

 
$
12,705

Purchases/additions
 

 

 
1,994

 

 
1,994

Sales
 

 

 

 

 

Payments (received) made
 
(3,959
)
 

 
830

 
(77
)
 
(3,206
)
Premium amortization, net
 
(3
)
 

 

 

 
(3
)
(Decrease)/increase in value
 
(69
)
 
7

 
(4,480
)
 
(130
)
 
(4,672
)
Ending balance, September 30, 2013
 
$
2,166

 
$
(5
)
 
$
2,058

 
$
2,599

 
$
6,818


There were no transfers made between levels during the nine months ended September 30, 2014 or 2013.

26


NOTE 10 – ACCOUNTING PRONOUNCEMENTS
 
ASU No. 2013-11-Income Taxes (Topic 740) - Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Task Force). As a result of applying this ASU, an unrecognized tax benefit should be presented as a reduction of a deferred tax asset for a net operating loss ("NOL") or other tax credit carryforward when settlement in this manner is available under the tax law. The assessment of whether settlement is available under the tax law would be based on facts and circumstances as of the balance sheet reporting date and would not consider future events (e.g., upcoming expiration of related NOL carryforwards). This classification should not affect an entity's analysis of the realization of its deferred tax assets. Gross presentation in the roll forward of unrecognized tax positions in the notes to the financial statements will still be required. For the Company, the update was effective prospectively for annual reporting periods beginning on or after January 1, 2014, and interim periods within those annual periods. Retrospective application is permitted. Adoption of this ASU did not have a material impact on the Company's consolidated financial statements.

ASU No. 2014-04 - Troubled Debt Restructuring by Creditors (Subtopic 310-40) - Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task Force). The amendments in this update apply to all creditors who obtain physical possession (resulting from an in substance repossession or foreclosure) of residential real estate property collateralizing a consumer mortgage loan in satisfaction of a receivable.  The objective of the amendments in this update is to reduce diversity by clarifying when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to requirements of the applicable jurisdiction.  The amendments in this update are effective for the Company for annual reporting periods beginning on or after January 1, 2015, and interim periods within those annual periods. Adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements.

ASU No. 2014-09 - Revenue from Contracts with Customers (Topic 660). This update requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for the Company on January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

ASU No. 2014-11 - Transfers and Servicing (Topic 860) - Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. The amendments in this update change the accounting for repurchase-to-maturity transactions and enhances the required disclosures for repurchase agreements and other similar transactions. Repurchase-to-maturity transactions will be accounted for as secured borrowings rather than sales of assets with separate forward repurchase or resale commitments. Transactions which include the initial transfer of financial assets and a repurchase financing involving the same or substantially the same asset with the same counterparty that are entered into contemporaneously with, or in contemplation of, one another will be accounted for as two separate transactions. This will result in the initial transfer being accounted for as a sale (if derecognition criteria are met) and a purchase by the counterparty and both parties accounting for the repurchase financing as a secured borrowing. The update also requires new disclosures for transactions similar to repurchases in which the transferor retains substantially all of the exposure to the economic return on the transferred financial assets. It also requires additional disclosures about the nature of collateral pledged in repurchases that are accounted for as secured borrowings. The accounting changes in the standard and the disclosures for transactions accounted for as sales are effective for the Company for interim and annual periods beginning on or after January 1, 2015. The disclosures for repurchases, securities lending transactions, and repurchases-to-maturity accounted for as secured borrowings are required for the Company for annual periods beginning on or after January 1, 2015, and interim periods beginning on or after April 1, 2015. Early application is prohibited. Adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements, but is expected to result in additional disclosures related to the Company's secured borrowings.

ASU No. 2014-12 - Compensation-Stock Compensation (Topic 718) - Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period a consensus of the FASB Emerging Issues Task Force. The amendments in this update require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the

27


NOTE 10 – ACCOUNTING PRONOUNCEMENTS (CONTINUED)

remaining requisite service period. The amendments in this update are effective for the Company for annual periods and interim periods beginning on or after January 1, 2016. Earlier adoption is permitted. Adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements.

ASU No. 2014-13 - Consolidation (Topic 810) - Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity. This update clarifies the measurement of the financial assets and the financial liabilities of a consolidated collateralized financing entity, such as a collateralized debt obligation (CDO) or collateralized loan obligation (CLO) entity. The amendments in this update are effective for the Company for annual periods and interim periods beginning on or after January 1, 2016. Earlier adoption is permitted. Adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements as the Company does not have consolidated collateralized financing entities.

ASU No. 2014-14 - Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40) - Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure a Consensus of the FASB Emerging Issues Task Force. The objective of this update is to reduce the diversity in classification of government-guaranteed mortgage loans, including FHA or VA guaranteed loans, upon foreclosure. The amendments in this update are effective for the Company for annual periods and interim periods beginning on or after January 1, 2016. Earlier adoption is permitted. Adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements as the Company does not hold any government-guaranteed mortgage loans.

ASU No. 2014-15 - Presentation of Financial Statements - Going Concern (Subtopic 205-40) - Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The amendments in this update require management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term substantial doubt, (2) require an evaluation every reporting period including interim periods, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). The amendments in this update are effective for the Company for the annual period ending December 31, 2016 and annual and interim periods thereafter. Earlier application is permitted. Application of this ASU is not expected to have a material impact on the Company's consolidated financial statements.

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Forward-Looking Statements
This quarterly report contains forward-looking statements that are based on assumptions and may describe future plans, strategies and expectations of the Company.  These forward-looking statements are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions.  The Company’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 subsidiaries include, but are not limited to, 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 credit quality and composition of the loan and investment portfolios, valuation of assets acquired through foreclosure, deposit flows, competition, demand for loan products and for financial services in the Company's market area, changes in real estate market values in the Company's market area, changes in relevant accounting principles and guidelines and inability of third party service providers to perform as required. Additional factors that may affect our results are discussed in the sections titled “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the Securities and Exchange Commission on March 7, 2014, and its other Securities and Exchange Commission reports.

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.

Unless the context indicates otherwise, all references in this Form 10-Q to "Company," "we," "us" and "our" refer to Fox Chase Bancorp, Inc. and its subsidiary.


28


Critical Accounting Policies
 The discussion and analysis of the financial condition and results of operations are based on our consolidated financial statements, which are prepared in conformity with generally accepted accounting principles in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of income and expenses. The estimates and assumptions that we use are based on historical experience and various other factors and are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, resulting in a change that could have a material impact on the carrying value of our assets and liabilities and our results of operations.

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
Valuation and Other-Than-Temporary Impairment of Investment Securities
Valuation of Assets Acquired Through Foreclosure
A discussion of these critical accounting policies is located in the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operation—Critical Accounting Policies" in the Company's Annual Report on 10-K. There have been no material changes in the Company’s critical accounting policies, judgments and estimates, including assumptions or estimation techniques utilized, as compared to the Company's most recent Annual Report on Form 10-K. 

Comparison of Financial Condition at September 30, 2014 and December 31, 2013
 
Total assets were $1.07 billion at September 30, 2014 compared to $1.12 billion at December 31, 2013.  Total loans were $710.2 million at September 30, 2014, a decrease of $10.3 million, or 1.4%, from $720.5 million at December 31, 2013.  Total commercial loans increased $7.6 million, or 1.3%, comprised of increases of $25.4 million in commercial construction loans and $10.1 million in multi-family and commercial real estate loans, partially offset by a decrease of $27.9 million in commercial and industrial loans. The increase in commercial construction loans was a result of the Bank increasing this type of lending activity as the economy recovers. The increase in multi-family and commercial real estate loans was driven by originations and fundings exceeding normal amortization and paydowns. The decrease in commercial and industrial loans was primarily due to seasonal utilization of lines of credit at December 31, 2013, which paid down during the first nine months of 2014.  During the nine months ended September 30, 2014, one- to four-family residential mortgage loans decreased $15.3 million and consumer loans decreased $3.0 million due to normal amortization exceeding new loans originated.
 
During the nine months ended September 30, 2014, mortgage related securities available-for-sale decreased $115.3 million from $246.1 million at December 31, 2013 to $130.8 million at September 30, 2014 and mortgage related securities held-to-maturity increased $96.6 million from $68.4 million at December 31, 2013 to $165.0 million at September 30, 2014. These changes are largely driven by the transfer of 38 residential mortgage related securities with a fair value of $96.9 million from available-for-sale securities to held-to-maturity during the three months ended September 30, 2014.

Deposits decreased $10.0 million, or 1.5%, from $673.7 million at December 31, 2013 to $663.7 million at September 30, 2014.  During the nine months ended September 30, 2014, non-brokered certificates of deposit decreased $30.1 million, brokered deposits decreased $7.1 million and NOW accounts decreased $1.7 million. Offsetting these decreases were increases in noninterest-bearing demand accounts of $19.1 million, money market accounts of $5.1 million and savings and club accounts of $4.6 million.  The decreases in non-brokered certificates of deposit and brokered deposits were due to maturities during the period exceeding new issuances. The increase in noninterest-bearing demand accounts was primarily due to deposits obtained from commercial borrowing relationships. The increase in money market accounts was primarily due to a large deposit from a municipal customer. The increase in savings and club accounts was primarily due to promotional offerings within the Advantage Savings product line. Short-term borrowings decreased $20.5 million, or 25.5%, from $80.5 million at December 31, 2013 to $60.0 million at September 30, 2014. Federal Home Loan Bank advances decreased $15.0 million, or 10.0%, from $150.0 million at December 31, 2013 to $135.0 million at September 30, 2014.
 
Stockholders’ equity increased $4.8 million to $178.3 million at September 30, 2014 compared to $173.5 million at December 31, 2013 primarily due to net income of $6.1 million, other comprehensive income of $4.0 million and stock based compensation activity (which includes proceeds received from the exercise of stock options) of $2.2 million, offset by dividends paid of $5.6 million and $1.9 million of common stock repurchased during the nine months ended September 30, 2014.


29


Comparison of Operating Results for the Three and Nine Months Ended September 30, 2014 and 2013
 
General. Net income increased $643,000, or 54.8%, to $1.8 million for the three months ended September 30, 2014, compared to $1.2 million for the three months ended September 30, 2013.  The increase in net income was due to an increase in net interest income of $286,000 and a decrease in noninterest expenses of $1.8 million, offset by an increase in the provision for loan losses of $818,000, a decrease in noninterest income of $387,000 and an increase in income tax provision of $242,000.

Net income increased $2.0 million, or 50.5%, to $6.1 million for the nine months ended September 30, 2014, compared to $4.0 million for the nine months ended September 30, 2013.  The increase in net income was due to an increase in net interest income of $1.2 million, a decrease in noninterest expenses of $4.4 million, offset by an increase in the provision for loan losses of $1.1 million, a decrease in noninterest income of $1.6 million and an increase in income tax provision of $911,000.

Net Interest Income Net interest income increased $286,000, or 3.5%, to $8.5 million for the three months ended September 30, 2014 compared to $8.2 million for the same period in 2013, due to an increase in total interest income of $12,000 and a decrease in total interest expense of $274,000. The increase in total interest income was driven by increased yields on interest-earning assets from 3.81% to 3.85%, offset by an $11.0 million reduction in the average balance of interest-earning assets. The yield on investment securities increased from 1.74% to 2.93% due to an increased dividend from the FHLB. The yield on total loans decreased from 4.63% to 4.56%, primarily due to lower yields on commercial loan originations. The yield on mortgage related securities was 2.16% for both periods. The decrease in the average balance of interest-earning assets was primarily due to a decrease in mortgage related securities of $32.3 million, offset by a $22.2 million increase in total loans. The decrease in total interest expense was due to a decrease in the cost of interest-bearing liabilities from 0.94% to 0.83%, and a $20.7 million decrease in average interest-bearing liabilities.  The decrease in the average cost of interest-bearing liabilities was due to a decrease in the average cost of interest-bearing deposits from 0.74% to 0.55%, offset by an increase in the average cost of borrowings from 1.44% to 1.52%.  The decrease in the average cost of interest-bearing deposits reflects the continued low interest rate environment combined with maturities of higher rate certificates of deposit. The increase in the average cost of borrowings was primarily due to reduced average short-term borrowings which have a lower cost. 

Net interest income increased $1.2 million, or 5.2%, to $25.3 million for the nine months ended September 30, 2014 compared to $24.0 million for the same period in 2013, primarily due to an increase in total interest income of $451,000 and a decrease in total interest expense of $797,000. The increase in total interest income was primarily due to a $4.8 million increase in the average balance of interest-earning assets and increased yields on interest-earning assets from 3.79% to 3.87%. The increase in the average balance of interest-earning assets was primarily due to a $24.2 million increase in total loans, offset by a decrease in mortgage related securities of $18.6 million.  The yield on mortgage-related securities increased from 2.14% to 2.24%, primarily due to slower security prepayments resulting in reduced premium amortization. The yield on investment securities increased from 1.41% to 3.06% due to an increased dividend from the FHLB. The yield on total loans decreased from 4.67% to 4.57%, primarily due to lower yields on commercial loan originations. The decrease in total interest expense was primarily due to a decrease in the cost of interest-bearing liabilities from 0.99% to 0.86%.  The decrease in the average cost of interest-bearing liabilities was due to decreases in the average cost of interest-bearing deposits from 0.78% to 0.58% and borrowings from 1.58% to 1.55%.  The decrease in the average cost of interest-bearing deposits reflects the continued low interest rate environment combined with maturities of higher rate certificates of deposit. The decrease in the average cost of borrowings was primarily due to the continued low interest rate environment.

30


Average Balances and Yields. The following table presents information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting annualized average yields and costs. The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented. Net loan origination fees and costs are included in interest income on loans and are insignificant. Yields are not presented on a tax-equivalent basis.  Any adjustments necessary to present yields on a tax-equivalent basis are insignificant. 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
Average
Balance
 
Interest and
Dividends
 
Yield/
Cost
 
Average
Balance
 
Interest and
Dividends
 
Yield/
Cost
 
Average
Balance
 
Interest and
Dividends
 
Yield/
Cost
 
Average
Balance
 
Interest and
Dividends
 
Yield/
Cost
Assets:
(Dollars in thousands)
 
(Dollars in thousands)
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 

 
 

 
 

 
 

 
 

Interest-earning demand deposits
$
6,815

 
$
1

 
0.06
%
 
$
5,652

 
$
1

 
0.03
%
 
$
6,794

 
$
2

 
0.05
%
 
$
5,540

 
$
2

 
0.04
%
Mortgage related securities
 
 
 
 
 

 
 
 
 
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Available-for-sale
198,318

 
1,140

 
2.30
%
 
264,635

 
1,472

 
2.23
%
 
227,425

 
3,989

 
2.34
%
 
283,912

 
4,642

 
2.18
%
Held-to-maturity
104,244

 
493

 
1.89
%
 
70,248

 
335

 
1.91
%
 
83,775

 
1,246

 
1.98
%
 
45,876

 
654

 
1.90
%
Total mortgage related securities
302,562

 
1,633

 
2.16
%
 
334,883

 
1,807

 
2.16
%
 
311,200

 
5,235

 
2.24
%
 
329,788

 
5,296

 
2.14
%
Investment securities
19,616

 
144

 
2.93
%
 
21,012

 
92

 
1.74
%
 
19,011

 
437

 
3.06
%
 
20,899

 
221

 
1.41
%
Loans:
 
 
 
 
 

 
 
 
 
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Residential loans
116,692

 
1,382

 
4.74
%
 
136,963

 
1,618

 
4.73
%
 
121,949

 
4,320

 
4.72
%
 
146,303

 
5,144

 
4.69
%
Commercial loans
593,847

 
6,754

 
4.51
%
 
547,250

 
6,326

 
4.59
%
 
577,010

 
19,542

 
4.53
%
 
522,996

 
18,210

 
4.66
%
Consumer loans
19,871

 
239

 
4.81
%
 
23,964

 
297

 
4.97
%
 
20,920

 
753

 
4.80
%
 
26,383

 
965

 
4.88
%
Total Loans
730,410

 
8,375

 
4.56
%
 
708,177

 
8,241

 
4.63
%
 
719,879

 
24,615

 
4.57
%
 
695,682

 
24,319

 
4.67
%
Allowance for loan losses
(11,541
)
 
 
 
 

 
(10,854
)
 
 
 
 

 
(11,566
)
 
 

 
 

 
(11,420
)
 
 

 
 

Net loans
718,869

 
8,375

 
 

 
697,323

 
8,241

 
 

 
708,313

 
24,615

 
 

 
684,262

 
24,319

 
 

Total interest-earning assets
1,047,862

 
10,153

 
3.85
%
 
1,058,870

 
10,141

 
3.81
%
 
1,045,318

 
30,289

 
3.87
%
 
1,040,489

 
29,838

 
3.79
%
Noninterest-earning assets
41,403

 
 
 
 

 
50,589

 
 
 
 

 
44,496

 
 

 
 

 
49,905

 
 

 
 

Total assets
$
1,089,265

 
 
 
 

 
$
1,109,459

 


 
 

 
$
1,089,814

 
 

 
 

 
$
1,090,394

 
 

 
 

Liabilities and equity:
 
 
 
 
 
 
 
 


 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
NOW and money market deposit accounts
$
182,448

 
$
99

 
0.21
%
 
$
167,691

 
$
88

 
0.21
%
 
$
184,542

 
$
295

 
0.21
%
 
$
165,711

 
$
258

 
0.21
%
Savings accounts
107,633

 
54

 
0.20
%
 
97,209

 
33

 
0.13
%
 
107,415

 
159

 
0.20
%
 
98,042

 
99

 
0.14
%
Brokered deposits
64,037

 
131

 
0.81
%
 
62,112

 
95

 
0.61
%
 
61,286

 
321

 
0.70
%
 
63,253

 
279

 
0.59
%
Certificates of deposit
197,954

 
476

 
0.95
%
 
239,733

 
839

 
1.39
%
 
208,757

 
1,680

 
1.08
%
 
249,048

 
2,737

 
1.47
%
Total interest-bearing deposits
552,072

 
760

 
0.55
%
 
566,745

 
1,055

 
0.74
%
 
562,000

 
2,455

 
0.58
%
 
576,054

 
3,373

 
0.78
%
Short-term borrowings
54,590

 
45

 
0.32
%
 
64,672

 
45

 
0.28
%
 
43,758

 
100

 
0.30
%
 
46,792

 
94

 
0.27
%
FHLB advances
144,147

 
577

 
1.59
%
 
140,111

 
555

 
1.57
%
 
148,048

 
1,723

 
1.56
%
 
131,076

 
1,606

 
1.64
%
Other borrowed funds
30,000

 
253

 
3.34
%
 
30,000

 
254

 
3.36
%
 
30,000

 
751

 
3.35
%
 
30,000

 
753

 
3.36
%
Total borrowings
228,737

 
875

 
1.52
%
 
234,783

 
854

 
1.44
%
 
221,806

 
2,574

 
1.55
%
 
207,868

 
2,453

 
1.58
%
Total interest-bearing liabilities
780,809

 
1,635

 
0.83
%
 
801,528

 
1,909

 
0.94
%
 
783,806

 
5,029

 
0.86
%
 
783,922

 
5,826

 
0.99
%
Noninterest-bearing deposits
123,709

 
 
 
 

 
128,437

 
 
 
 

 
121,770

 
 

 
 

 
121,778

 
 

 
 

Other noninterest-bearing liabilities
6,407

 
 
 
 

 
6,080

 


 
 

 
7,437

 
 

 
 

 
7,115

 
 

 
 

Total liabilities
910,925

 
 
 
 

 
936,045

 
 
 
 

 
913,013

 
 

 
 

 
912,815

 
 

 
 

Stockholders’ equity
178,984

 
 
 
 

 
176,915

 
 
 
 

 
178,382

 
 

 
 

 
176,893

 
 

 
 

Accumulated comprehensive income
(644
)
 
 
 
 

 
(3,501
)
 
 
 
 

 
(1,581
)
 
 

 
 

 
686

 
 

 
 

Total stockholders' equity
178,340

 
 
 
 

 
173,414

 
 
 
 

 
176,801

 
 

 
 

 
177,579

 
 

 
 

Total liabilities and stockholders’ equity
$
1,089,265

 
 
 
 

 
$
1,109,459

 
 
 
 

 
$
1,089,814

 
 

 
 

 
$
1,090,394

 
 

 
 

Net interest income
 
 
$
8,518

 
 

 
 
 
$
8,232

 
 

 
 

 
$
25,260

 
 

 
 

 
$
24,012

 
 

Interest rate spread
 
 
 
 
3.02
%
 
 
 
 
 
2.87
%
 
 

 
 

 
3.01
%
 
 

 
 

 
2.80
%
Net interest margin
 
 
 
 
3.20
%
 
 
 
 
 
3.06
%
 
 

 
 

 
3.19
%
 
 

 
 

 
3.05
%
Average interest-earning assets to average interest-bearing liabilities
 
 
 
 
134.20
%
 
 
 
 
 
132.11
%
 
 

 
 

 
133.36
%
 
 

 
 

 
132.73
%

31


Rate/Volume Analysis.  The following table sets forth the effects of changing rates and volumes on our net interest income.  The rate column shows the effects attributable to changes in rate (changes in rate multiplied by current volume).  The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate).  The net column represents the sum of the prior columns. 
 
 
Three Months Ended 
 September 30, 2014
 
Nine Months Ended 
 September 30, 2014
 
Compared to
 
Compared to
 
Three Months Ended 
 September 30, 2013
 
Nine Months Ended 
 September 30, 2013
 
Increase (Decrease)
 
 
 
Increase (Decrease)
 
 
 
Due to
 
 
 
Due to
 
 
 
Rate
 
Volume
 
Net
 
Rate
 
Volume
 
Net
Interest Income:
(In thousands)
Interest-earning demand deposits
$

 
$

 
$

 
$

 
$

 
$

Mortgage related securities
 
 
 
 
 
 
 

 
 

 
 

Available-for-sale
36

 
(368
)
 
(332
)
 
270

 
(923
)
 
(653
)
Held-to-maturity
(4
)
 
162

 
158

 
51

 
541

 
592

Total mortgage related securities
32

 
(206
)
 
(174
)
 
321

 
(382
)
 
(61
)
Investment securities
58

 
(6
)
 
52

 
236

 
(20
)
 
216

Loans:
 
 
 
 
 
 
 

 
 

 
 

Residential loans
3

 
(239
)
 
(236
)
 
31

 
(855
)
 
(824
)
Commercial loans
(111
)
 
539

 
428

 
(548
)
 
1,880

 
1,332

Consumer loans
(8
)
 
(50
)
 
(58
)
 
(13
)
 
(199
)
 
(212
)
Total loans
(116
)
 
250

 
134

 
(530
)
 
826

 
296

Total interest-earning assets
(26
)
 
38

 
12

 
27

 
424

 
451

 
 
 
 
 
 
 
 
 
 
 
 
Interest Expense:
 
 
 
 
 
 
 

 
 

 
 

NOW and money market deposits
3

 
8

 
11

 
7

 
30

 
37

Savings accounts
18

 
3

 
21

 
51

 
9

 
60

Brokered deposits
32

 
4

 
36

 
51

 
(9
)
 
42

Certificates of deposit
(217
)
 
(146
)
 
(363
)
 
(615
)
 
(442
)
 
(1,057
)
Total interest-bearing deposits
(164
)
 
(131
)
 
(295
)
 
(506
)
 
(412
)
 
(918
)
 
 
 
 
 
 
 
 
 
 
 
 
Short-term borrowings
6

 
(6
)
 

 
12

 
(6
)
 
6

FHLB advances
6

 
16

 
22

 
(91
)
 
208

 
117

Other borrowed funds
(1
)
 

 
(1
)
 
(2
)
 

 
(2
)
Total borrowings
11

 
10

 
21

 
(81
)
 
202

 
121

Total interest-bearing liabilities
(153
)
 
(121
)
 
(274
)
 
(587
)
 
(210
)
 
(797
)
Net change in net interest income
$
127

 
$
159

 
$
286

 
$
614

 
$
634

 
$
1,248




32


Provision for Loan Losses. The Company recorded a provision for loan losses of $1.5 million and $1.6 million for the three and nine month periods ended September 30, 2014, respectively, compared to $675,000 and $532,000 for the three and nine months ended September 30, 2013, respectively. The provision for loan losses for the three and nine months ended September 30, 2014 was primarily driven by one commercial and industrial loan which defaulted during the three months ended September 30, 2014. The Company recorded a $2.0 million charge-off and the remainder of the loan was paid off during the three months ended September 30, 2014.

The following table provides information with respect to our nonperforming assets and impaired loans at the dates indicated. 
 
 
September 30, 2014
 
December 31, 2013
 
(Dollars in thousands)
 
 
 
 

Nonaccruing Loans:
 

 
 

One- to four-family real estate
$
1,684

 
$
2,390

Multi-family and commercial real estate
1,772

 
3,031

Construction

 
3,231

Consumer
185

 
128

Commercial and industrial

 

Total
3,641

 
8,780

 
 
 
 
Accruing Loans Past Due 90 Days or More:
 
 
 

Total
$

 
$

 
 
 
 
Nonperforming Loans
3,641

 
8,780

 
 
 
 
Assets Acquired Through Foreclosure
1,889

 
6,252

Total Nonperforming Assets
$
5,530

 
$
15,032

 
 
 
 
Total nonperforming loans to total loans
0.50
%
 
1.20
%
Total nonperforming assets to total assets
0.51

 
1.35

 
 
 
 
Impaired Loans:
 

 
 

Nonaccruing loans
$
3,641

 
$
8,780

Accruing troubled debt restructurings
5,504

 
6,786

Other impaired loans
4,479

 

Total impaired loans
$
13,624

 
$
15,566


At September 30, 2014, nonperforming assets were comprised of the following: 

Six multi-family and commercial real estate loans, the largest of which is secured by multi-use rental properties located in Montgomery County, Pennsylvania. 
Eight one- to four-family loans, the largest of which is secured by a single-family home located in Montgomery County, Pennsylvania. 
Three consumer loans which are secured by second or third lien mortgage positions. 
Assets acquired through foreclosure consisting of two commercial properties and one residential property.



33


Noninterest Income The following table summarizes noninterest income for the three and nine months ended September 30, 2014 and 2013
 
 
Three Months Ended September 30,
 
$
 
%
 
Nine Months Ended September 30,
 
$
 
%
 
 
2014
 
2013
 
Change
 
Change
 
2014
 
2013
 
Change
 
Change
 
 
(Dollars in thousands)
 
(Dollars in thousands)
Service charges and other fee income
 
$
416

 
$
437

 
$
(21
)
 
(4.8
)%
 
$
1,192

 
$
1,260

 
$
(68
)
 
(5.4
)%
Net (loss) gain on sale of assets acquired through foreclosure
 
(15
)
 
303

 
(318
)
 
(105.0
)
 
(136
)
 
484

 
(620
)
 
128.1

Income on bank-owned life insurance
 
121

 
118

 
3

 
2.5

 
358

 
351

 
7

 
2.0

Equity in earnings of affiliate
 
91

 
135

 
(44
)
 
(32.6
)
 
125

 
470

 
(345
)
 
(73.4
)
Net gain on sale of investment securities
 

 

 

 

 

 
532

 
(532
)
 
(100.0
)
Other
 
29

 
36

 
(7
)
 
(19.4
)
 
76

 
125

 
(49
)
 
(39.2
)
Total Noninterest Income
 
$
642

 
$
1,029

 
$
(387
)
 
(37.6
)%
 
$
1,615

 
$
3,222

 
$
(1,607
)
 
(49.9
)%
 
Noninterest income decreased $387,000 from the three months ended September 30, 2013 compared to the same period in 2014. Net (loss) gain on sale of assets acquired through foreclosure decreased $318,000 due to two properties being sold with a combined loss on sale of $15,000 compared to three sales during 2013 which resulted in a gain on sale of $303,000. Equity in earnings of affiliates decreased $44,000 due to decreased income on the Bank’s investment in PMA due to lower mortgage loan volume for the 2014 period. Service charges and other fee income decreased $21,000, primarily due to decreases in deposit related fees.

Noninterest income decreased $1.6 million from the nine months ended September 30, 2013 compared to the same period in 2014. Net (loss) gain on sale of assets acquired through foreclosure decreased $620,000 due to three properties being sold with a combined loss on sale of $136,000 in 2014 compared to eleven sales during 2013 which resulted in a gain on sale of $484,000. Net gain on sale of investment securities decreased $532,000 due to the sale of investment securities with an amortized cost of $9.0 million during the nine months ended September 30, 2013. No securities were sold during the nine months ended September 30, 2014. Equity in earnings of affiliates decreased $345,000 due to decreased income on the Bank’s investment in PMA due to lower mortgage loan volume for the 2014 period.  Service charges and other fee income decreased $68,000, due to decreases in loan-related fees and deposit-related fees.

Noninterest Expense The following table summarizes noninterest expense for the three and nine months ended September 30, 2014 and 2013
 
 
Three Months Ended September 30,
 
$
 
%
 
Nine Months Ended September 30,
 
$
 
%
 
 
2014
 
2013
 
Change
 
Change
 
2014
 
2013
 
Change
 
Change
 
 
(Dollars in thousands)
 
(Dollars in thousands)
Salaries, benefits and other compensation
 
$
3,510

 
$
3,644

 
$
(134
)
 
(3.7
)%
 
$
10,670

 
$
10,629

 
$
41

 
0.4
 %
Occupancy expense
 
407

 
403

 
4

 
1.0

 
1,321

 
1,243

 
78

 
6.3

Furniture and equipment expense
 
93

 
117

 
(24
)
 
(20.5
)
 
300

 
358

 
(58
)
 
(16.2
)
Data processing costs
 
384

 
390

 
(6
)
 
(1.5
)
 
1,146

 
1,155

 
(9
)
 
(0.8
)
Professional fees
 
271

 
474

 
(203
)
 
(42.8
)
 
1,086

 
1,250

 
(164
)
 
(13.1
)
Marketing expense
 
54

 
59

 
(5
)
 
(8.5
)
 
156

 
167

 
(11
)
 
(6.6
)
FDIC premiums
 
136

 
175

 
(39
)
 
(22.3
)
 
451

 
525

 
(74
)
 
(14.1
)
Assets acquired through foreclosure expense
 
10

 
1,370

 
(1,360
)
 
(99.3
)
 
403

 
4,465

 
(4,062
)
 
(91.0
)
Other
 
333

 
370

 
(37
)
 
(10.0
)
 
1,077

 
1,192

 
(115
)
 
(9.6
)
Total Noninterest Expense
 
$
5,198

 
$
7,002

 
$
(1,804
)
 
(25.8
)%
 
$
16,610

 
$
20,984

 
$
(4,374
)
 
(20.8
)%
Noninterest expense decreased $1.8 million from the three months ended September 30, 2013 compared to the same period in 2014. Assets acquired through foreclosure expense decreased $1.4 million due to decreased valuation adjustments on assets acquired through foreclosure, which totaled $1.3 million for the three months ended September 30, 2013. No valuation adjustments were recognized during the three months ended September 30, 2014. Professional fees decreased $203,000 primarily due to decreased loan workout costs. Salaries, benefits and other compensation decreased $134,000, primarily as a result of decreased benefit costs and stock based compensation expenses.  


34


Noninterest expense decreased $4.4 million from the nine months ended September 30, 2013 compared to the same period in 2014. Assets acquired through foreclosure expense decreased $4.1 million due to decreased valuation adjustments on assets acquired through foreclosure, which totaled $4.3 million for the nine months ended September 30, 2013. Valuation adjustments of $282,000 were recognized during the nine months ended September 30, 2014. Professional fees decreased $164,000 primarily due to decreased loan workout costs. FDIC premiums decreased $74,000 due to a reduced assessment. Occupancy expense increased $78,000, primarily due to increased snow removal and utilities expense. Other noninterest expense decreased $115,000 primarily due to decreased regulatory assessments.

Income Taxes. The income tax provision for the three and nine months ended September 30, 2014 was $653,000 and $2.6 million, respectively, compared to $411,000 and $1.7 million, respectively for the three and nine months ended September 30, 2013.  The Company’s effective income tax rate was 26.4% and 29.8% for the three and nine months ended September 30, 2014, respectively, compared to 25.9% and 29.3% for the three and nine months ended September 30, 2013, respectively.  These rates reflect the Company’s levels of tax-exempt income relative to the overall level of taxable income.

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 and sales, security repayments, maturities and sales, and funds available from the FHLB, Federal Reserve Bank and commercial banks.  While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loans and securities sales and prepayments are greatly influenced by general interest rates, economic conditions and competition.

The following table presents certain of our contractual obligations as of September 30, 2014.
 
 
 
 
 
 
Payments Due by Period
 
 
 
 
 
Less Than One Year
 
One to Three Years
 
Three to Five Years
 
More Than Five Years
Contractual Obligations
 
Total
 
 
 
 
 
 
 
(In thousands)
September 30, 2014
 
 
 

 
 

 
 

 
 

 
 

Operating lease obligations (1)
 
$
570

 
$
425

 
$
145

 
$

 
$

FHLB advances and other borrowings (2)
 
235,205

 
108,174

 
45,720

 
81,311

 

Other long-term obligations (3)
 
2,313

 
1,737

 
576

 

 

Total
 
 
$
238,088

 
$
110,336

 
$
46,441

 
$
81,311

 
$

                                                                                                                                                                          
(1)          Represents lease obligations for operations center and equipment.
(2)          Includes principal and projected interest payments.
(3)          Represents obligations to the Company’s third-party data processing provider and other vendors.
 
We regularly adjust our investments in liquid assets and our short-term borrowing position based upon our assessment of: (1) expected loan demand; (2) expected deposit flows; (3) cash flows on our loans and investments; (4) yields available on interest-earning deposits and securities; and (5) the objectives of our asset/liability management policy.  We use a variety of measures to assess our liquidity needs, which are provided to our Asset/Liability Management Committee on a regular basis.  Our policy is to maintain net liquidity of at least 50% of our funding obligations over the next month.  Additionally, our policy is to maintain an amount of cash and short-term marketable securities equal to at least 15% of net deposits and liabilities that will mature in one year or less.
 
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 September 30, 2014, cash and cash equivalents totaled $7.7 million.  Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $139.2 million at September 30, 2014.  In addition, at September 30, 2014, we had the ability to borrow a total of approximately $411.8 million from the FHLB, of which we had $150.0 million outstanding.  As of September 30, 2014, the Bank also had a maximum borrowing capacity of $61.1 million with the Federal Reserve Bank of Philadelphia, through the Discount Window.  Additionally, as of September 30, 2014, the Bank had overnight borrowing facilities with the FHLB of Pittsburgh and the Federal Reserve Bank as well as federal funds lines of credit with three other commercial banks.
 
At September 30, 2014, we had $195.0 million in unfunded commitments, which consisted of $13.5 million in home equity and consumer loan commitments, $166.5 million in commercial loan commitments, $14.4 million in standby letters of credit and $606,000 in commercial letters of credit.
 

35


Certificates of deposit due within one year of September 30, 2014 totaled $143.0 million, including $35.9 million of brokered deposits, representing 55.4% of certificates of deposit at September 30, 2014, a decrease from 60.6% at December 31, 2013.  We believe the large percentage of certificates of deposit that mature within one year reflect customers’ hesitancy to invest their funds for long periods in the current low interest rate environment.  If these maturing deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and borrowings.  Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before September 30, 2015.
 
Our primary investing activities are the origination of loans and the purchase and sale of securities.  Our primary financing activities consist of activity in deposit accounts and borrowed funds.  Deposit flows are affected by the overall levels 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 Bancorp is a separate entity apart from the Bank and must provide for its own liquidity.  As of September 30, 2014, the Bancorp had $24.9 million in cash and cash equivalents compared to $26.0 million as of December 31, 2013. In addition to its operating expenses, the Bancorp may utilize its cash position for the payment of dividends or to repurchase common stock, subject to applicable restrictions.  The Bancorp paid cash dividends totaling $0.48 per outstanding share of common stock and repurchased 116,600 shares of common stock during the nine months ended September 30, 2014.
 
The Bancorp can receive dividends from the Bank.  Payment of such dividends to the Bancorp by the Bank is limited under applicable law. Dividends may be declared and paid only out of accumulated net earnings and may be paid in cash or property other than its own shares. Dividends may not be declared or paid unless stockholders' equity is at least equal to contributed capital. During the nine months ended September 30, 2014, the Bank paid a cash dividend of $5.8 million to the Bancorp.

Capital Management.  The Bancorp and Bank are subject to various regulatory capital requirements administered by their respective regulators, 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 September 30, 2014, the Bancorp and Bank exceeded all applicable regulatory capital requirements. We are considered “well capitalized” under regulatory guidelines.

The following table presents the Bancorp's and the Bank’s capital ratios and the minimum capital requirements to be considered ‘‘well capitalized” under applicable regulatory guidelines as of September 30, 2014 and December 31, 2013.
 
September 30, 2014
 
Ratio
 
Minimum to be Well Capitalized
Total risk-based capital (to risk-weighted assets)
 
 
 
Bancorp
 
 
24.48
%
 
10.0
%
Bank
 
 
20.22

 
10.0

Tier 1 capital (to risk-weighted assets)
 
 
 
Bancorp
 
 
23.44

 
6.0

Bank
 
 
19.18

 
6.0

Tier 1 capital (to adjusted assets)
 
 
 
Bancorp
 
 
16.39

 
5.0

Bank
 
 
13.35

 
5.0

December 31, 2013
 
Ratio
 
Minimum to be Well Capitalized
Total risk-based capital (to risk-weighted assets)
 
 
 
Bancorp
 
 
23.67
%
 
10.0
%
Bank
 
 
19.48

 
10.0

Tier 1 capital (to risk-weighted assets)
 
 
 
Bancorp
 
 
22.63

 
6.0

Bank
 
 
18.44

 
6.0

Tier 1 capital (to adjusted assets)
 
 
 
Bancorp
 
 
16.18

 
5.0

Bank
 
 
13.12

 
5.0



36


Total stockholders’ equity to total assets was 16.6% at September 30, 2014 and 15.5% at December 31, 2013.  As a result of the mutual-to-stock conversion completed in June 2010, the Company has significant capital.  The Company’s financial condition and results of operations have been enhanced by the capital from the offering, resulting in increased net interest-earning assets.  However, the large increase in equity resulting from the capital raised in the conversion has and will continue to have an adverse impact on our return on equity until such funds can be deployed into higher-yielding assets.  The Company may rely on capital management tools such as cash dividends and share repurchases as well as improving operating income to increase its return on equity.

In December 2010, the Basel Committee on Banking Supervision, an international forum for cooperation on banking supervisory matters, announced the “Basel III” capital standards, which substantially revised the existing capital requirements for banking organizations. On July 2, 2013, the Federal Reserve adopted a final rule for the Basel III capital framework. The requirements in the rule will begin to phase in on January 1, 2015 for the Company. The requirements in the rule will be fully phased in by January 1, 2019. The rule imposes higher risk-based capital and leverage requirements than those currently in place. Specifically, the rule imposes the following minimum capital requirements: (1) a new common equity Tier 1 risk-based capital ratio of 4.5%; (2) a Tier 1 risk-based capital ratio of 6% (increased from the current 4% requirement); (3) a total risk-based capital ratio of 8% (unchanged from current requirements); and (4) a leverage ratio of 4%.

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, letters of credit and lines of credit.
 
For the nine-month period ended September 30, 2014, we did not engage in any off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.
 
Item 3.  Quantitative and Qualitative Disclosures About Market Risk 
At September 30, 2014, there has not been any material change to the market risk disclosure contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

Item 4.  Controls and Procedures 
The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”): (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.  In addition, no change in the Company’s internal control over financial reporting occurred during the quarter ended September 30, 2014 that has materially affected, or is reasonably likely to materially effect, Company’s internal control over financial reporting.

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PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings
 
Periodically, there have been various claims and lawsuits against us, such as claims to enforce liens, condemnation proceedings on properties in which we hold security interests, claims involving the making and servicing of real property loans and other issues incident to our business.  We are not a party to any pending legal proceedings that we believe would have a material adverse effect on our financial condition, results of operations or cash flows.


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Item 1A.  Risk Factors
 
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013, which could materially affect our business, financial condition or future results. As of September 30, 2014, the risk factors of the Company have not changed materially from those reported in the Company’s Annual Report on Form 10-K. The risks described in our Annual Report on Form 10-K are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
 
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

The following table provides certain information with regard to shares repurchased by the Company in the third quarter of 2014.
Period
 
Total
Number of
Shares
Purchased
 
Average
Price Paid
Per Share
 
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans or Programs 
(1)
 
Maximum
Number of Shares
that May Yet be
Purchased Under the
Plans or Programs
 (1)
July 1, 2014 through July 31, 2014
 
46,600

 
$
16.21

 
46,600

 
795,224

August 1, 2014 through August 31, 2014
 

 
$

 

 
795,224

September 1, 2014 through September 30, 2014
 

 
$

 

 
795,224

Total
 
46,600

 
$
16.21

 
46,600

 
 

(1) In prior years, the Company announced repurchase programs under which it would repurchase, in the aggregate, up to 20% of the then-outstanding shares of the Company’s common stock from time to time, depending on market conditions.  On July 30, 2014, the Board of Directors approved an additional stock repurchase plan (the “July 2014 Plan”) under which it would repurchase up to 5% of the then-outstanding shares of the Company’s common stock (603,295 shares).  Subject to market conditions and other factors, repurchases under the July 2014 Plan will begin subsequent to the completion of repurchases under the Company's existing repurchase plans. Under these plans, through September 30, 2014, the Company has purchased 2.6 million shares at a cost of $35.3 million. 

Item 3.  Defaults upon Senior Securities
 
Not applicable.

Item 4.  Mine Safety Disclosures
 
Not applicable.

Item 5.  Other Information
 
Not applicable.

Item 6.  Exhibits 
3.1
 
 
 
Articles of Incorporation of Fox Chase Bancorp, Inc. (1)
3.2
 
 
 
Bylaws of Fox Chase Bancorp, Inc. (1)
4.0
 
 
 
Stock Certificate of Fox Chase Bancorp, Inc. (1)
31.1
 
 
 
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2
 
 
 
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.0
 
 
 
Section 1350 Certification of Chief Executive Officer and Chief Financial Officer
101.0
 
 
 
The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Condition, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to the Unaudited Consolidated Financial Statements.
(1)
Incorporated by reference to this document from the exhibits to the Company’s Registration Statement on Form S-1 as initially filed with the Securities and Exchange Commission on March 12, 2010.

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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
FOX CHASE BANCORP, INC.
 
 
 
Dated:
November 4, 2014
By:
/s/ Thomas M. Petro
 
 
 
Thomas M. Petro
 
 
 
President and Chief Executive Officer
 
 
 
(principal executive officer)
 
 
 
Dated:
November 4, 2014
By:
/s/ Roger S. Deacon
 
 
 
Roger S. Deacon
 
 
 
Chief Financial Officer
 
 
 
(principal financial officer)

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