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EX-10.2 - EXHIBIT 10.2 - Alliance Bancorp, Inc. of Pennsylvaniav392226_ex10-2.htm
EX-32.2 - EXHIBIT 32.2 - Alliance Bancorp, Inc. of Pennsylvaniav392226_ex32-2.htm
EX-31.1 - EXHIBIT 31.1 - Alliance Bancorp, Inc. of Pennsylvaniav392226_ex31-1.htm
EX-31.2 - EXHIBIT 31.2 - Alliance Bancorp, Inc. of Pennsylvaniav392226_ex31-2.htm
EX-32.1 - EXHIBIT 32.1 - Alliance Bancorp, Inc. of Pennsylvaniav392226_ex32-1.htm
EX-10.1 - EXHIBIT 10.1 - Alliance Bancorp, Inc. of Pennsylvaniav392226_ex10-1.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2014

 

OR

 

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________ to _______________

 

Commission File No.: 000-54246

 

ALLIANCE BANCORP, INC. OF PENNSYLVANIA

(Exact name of registrant as specified in its charter)

 

Pennsylvania   56-2637804
(State or other jurisdiction   (I.R.S. Employer
of incorporation or organization)   Identification Number)

 

541 Lawrence Road    
Broomall, Pennsylvania   19008
(Address)   (Zip Code)

 

(610) 353-2900

(Registrant's telephone number, including area code)

 

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 x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such a shorter period that the registrant was required to submit and post such files). Yes x No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer, or a smaller reporting company. See the definition of "accelerated filer” and “smaller reporting company" in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨ Accelerated filer ¨
   
Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company x

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

 

The number of shares outstanding of Common Stock, par value $0.01 per share, of the Registrant as of November 7, 2014, was 4,027,159.

 

 
 

 

ALLIANCE BANCORP, INC. OF PENNSYLVANIA

 

Index

 

  PAGE
Part I – Financial Information
     
Item 1. Financial Statements  
     
  Unaudited Consolidated Statements of Financial Condition as of September 30, 2014 and December 31, 2013 3
     
  Unaudited Consolidated Statements of Income For the Three and Nine Months Ended September 30, 2014 and 2013 4
     
  Unaudited Consolidated Statements of Comprehensive Income For the Three and Nine Months Ended September 30, 2014 and 2013 5
     
  Unaudited Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2014 and 2013. 6
     
  Unaudited Consolidated Statements of Cash Flows For the Nine Months Ended September 30, 2014 and 2013 7
     
  Notes to Unaudited Consolidated Financial Statements 8
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 41
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk 51
     
Item 4. Controls and Procedures 51
     
Part II – Other Information  
     
Item 1. Legal Proceedings 51
     
Item 1A. Risk Factors 51
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 52
     
Item 3. Defaults Upon Senior Securities 52
     
Item 4. Mine Safety Disclosures 52
     
Item 5. Other Information 52
     
Item 6. Exhibits 52
     
  Signatures 54

 

2
 

 

Part I – Item 1.

 

Alliance Bancorp, Inc. of Pennsylvania and Subsidiaries

Consolidated Statements of Financial Condition (Unaudited)

(Dollar amounts in thousands, except per share data)

 

   September 30,   December 31, 
   2014   2013 
         
Assets          
Cash and cash due from depository institutions  $1,197   $1,530 
Interest bearing deposits with depository institutions   43,899    43,694 
Total cash and cash equivalents   45,096    45,224 
Investment securities available for sale   19,907    21,321 
Mortgage-backed securities available for sale   3,456    4,699 
Investment securities held to maturity (fair value - 2014, $27,850; 2013, $28,402)   27,158    28,358 
Loans receivable - net of allowance for loan losses - 2014, $4,401; 2013, $4,243   301,974    298,877 
Accrued interest receivable   1,470    1,465 
Premises and equipment – net   2,024    2,036 
Other real estate owned (OREO)   2,328    3,191 
Federal Home Loan Bank (FHLB) stock-at cost   709    647 
Bank owned life insurance   12,663    12,451 
Deferred tax asset – net   5,686    5,674 
Prepaid expenses and other assets   1,001    1,559 
           
Total Assets  $423,472   $425,502 
           
Liabilities and Stockholders’ Equity          
           
Liabilities          
Non-interest bearing deposits  $17,193   $16,409 
Interest bearing deposits   331,515    328,969 
Total deposits   348,708    345,378 
Other borrowings   2,526    3,437 
Accrued expenses and other liabilities   6,588    6,518 
Total Liabilities   357,822    355,333 
           
Commitments and Contingencies          
           
Stockholders’ Equity          
Common stock, $.01 par value; shares authorized – 50,000,000; shares issued - 5,474,437; shares outstanding - 2014, 4,027,159; 2013, 4,467,304   55    55 
Additional paid-in capital   56,755    56,585 
Retained earnings   33,940    32,673 
Common stock acquired by benefit plans   (2,413)   (2,957)
Accumulated other comprehensive loss   (1,539)   (1,875)
Treasury stock, at cost: 2014, 1,447,278 shares; 2013, 1,007,133 shares   (21,148)   (14,312)
Total Stockholders’ Equity   65,650    70,169 
           
Total Liabilities and Stockholders’ Equity  $423,472   $425,502 

 

See notes to unaudited consolidated financial statements.

 

3
 

 

Alliance Bancorp, Inc. of Pennsylvania and Subsidiaries

Consolidated Statements of Income (Unaudited)

(Dollar amounts in thousands, except per share data)

 

   For the Three
Months
   For the Nine
Months
 
   Ended September 30,   Ended September 30, 
   2014   2013   2014   2013 
Interest and Dividend Income                    
Loans, including fees  $3,922   $3,837   $11,659   $11,367 
Mortgage-backed securities   32    53    108    182 
Investment securities:                    
Taxable   65    40    211    91 
Tax – exempt   193    205    595    620 
Dividends   7    2    17    4 
Balances due from depository institutions   28    46    76    165 
Total interest and dividend income   4,247    4,183    12,666    12,429 
                     
Interest Expense                    
Deposits   575    604    1,683    1,890 
Other borrowings   1    1    4    4 
Total interest expense   576    605    1,687    1,894 
                     
Net Interest Income   3,671    3,578    10,979    10,535 
Provision for Loan Losses   100    150    350    450 
Net Interest Income After Provision for Loan Losses   3,571    3,428    10,629    10,085 
                     
Other Income                    
Service charges on deposit accounts   71    63    201    190 
Other fee income   63    44    153    144 
Gain on sale of premises and equipment           11     
(Loss) gain on sale of OREO, net       (1)   4    (2)
Rental income from OREO           28     
Increase in cash surrender value of bank owned life insurance   68    73    212    224 
Other           2     
Total other income   202    179    611    556 
                     
Other Expenses                    
Salaries and employee benefits   1,624    1,711    5,040    5,195 
Occupancy and equipment   430    471    1,322    1,401 
FDIC deposit insurance premiums   61    78    209    230 
Advertising and marketing   81    116    244    319 
Professional fees   133    186    410    579 
Loan and OREO expense   104    29    171    83 
Provision for OREO           117    106 
Directors’ fees   57    57    170    172 
Other   308    266    885    843 
Total other expenses   2,798    2,914    8,568    8,928 
                     
Income Before Income Tax Expense   975    693    2,672    1,713 
                     
Income Tax Expense   281    160    737    326 
                     
Net Income  $694   $533   $1,935   $1,387 
                     
Basic Earnings per Share  $0.18   $0.11   $0.48   $0.28 
                     
Diluted Earnings per Share  $0.18   $0.11   $0.47   $0.28 

 

See notes to unaudited consolidated financial statements.

4
 

 

Alliance Bancorp, Inc. of Pennsylvania and Subsidiaries

Consolidated Statements of Comprehensive Income (Unaudited)

(Dollar amounts in thousands)

 

   For The Three Months Ended
September 30,
   For The Nine Months Ended
September 30,
 
   2014   2013   2014   2013 
                 
                 
Net Income  $694   $533   $1,935   $1,387 
                     
Other Comprehensive Income (Loss)                    
Unrealized gain (loss) on available for sale securities net of tax (benefit) expense 2014, $(5) and $172; 2013, $(39) and $(224)   (7)   (76)   336    (435)
                     
Total Other Comprehensive Income (Loss)   (7)   (76)   336    (435)
                     
Total Comprehensive Income  $687   $457   $2,271   $952 

 

See notes to unaudited consolidated financial statements.

 

5
 

 

Alliance Bancorp, Inc. of Pennsylvania and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

(Dollar amounts in thousands, except per share data)

 

   Common
Stock
   Additional
Paid-in
Capital
   Retained
Earnings
   Common
Stock
Acquired
by Benefit
Plans
   Accumulated
Other
Comprehensive
Loss
   Treasury
Stock
   Total
Stockholders’
Equity
 
                             
Balance, January 1, 2013  $55   $56,343   $32,273   $(3,562)  $(1,675)  $(3,432)  $80,002 
ESOP shares committed to be released                  115              115 
Net income             1,387                   1,387 
Dividends declared ($0.15 per share)             (764)                  (764)
Stock-based compensation (stock options)        124                        124 
Stock-based compensation (restricted stock)                  336              336 
Acquisition of treasury stock (284,730 shares)                            (4,130)   (4,130)
Other comprehensive loss                       (435)        (435)
                                    
Balance, September 30, 2013  $55   $56,467   $32,896   $(3,111)  $(2,110)  $(7,562)  $76,635 
                                    
Balance, January 1, 2014  $55   $56,585   $32,673   $(2,957)  $(1,875)  $(14,312)  $70,169 
ESOP shares committed to be released                  115              115 
Net income             1,935                   1,935 
Dividends declared ($0.16 per share)             (668)                  (668)
Stock-based compensation (stock options)        170                        170 
Stock-based compensation (restricted stock)                  429              429 
Acquisition of treasury stock (440,145 shares)                            (6,836)   (6,836)
Other comprehensive income                       336         336 
                                    
Balance, September 30, 2014  $55   $56,755   $33,940   $(2,413)  $(1,539)  $(21,148)  $65,650 

 

See notes to unaudited consolidated financial statements.

 

6
 

 

Alliance Bancorp, Inc. of Pennsylvania and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

(Dollar amounts in thousands)

 

   For the Nine Months 
   Ended September 30, 
   2014   2013 
Cash Flow From Operating Activities          
Net income  $1,935   $1,387 
Adjustments to reconcile net income to cash provided by operating activities:          
Provision for:          
Loan losses   350    450 
Depreciation and amortization   354    437 
Write-down of OREO   117    106 
Stock-based compensation expense   714    575 
Gain on sale of premises and equipment   (11)    
(Gain) loss on the sale of OREO   (4)   2 
Deferred tax benefit   (184)   (17)
Increase in cash surrender value of bank owned life insurance   (212)   (224)
Changes in assets and liabilities which provided (used) cash:          
Accrued expenses and other liabilities   70    142 
Prepaid expenses and other assets   558    740 
Accrued interest receivable   (5)   (44)
Net cash provided by operating activities   3,682    3,554 
           
Cash Flow From Investing Activities          
Purchase of investment securities-available for sale   (9,000)   (25,000)
Purchase of investment securities-held to maturity   (530)   (4,275)
Loans originated   (38,633)   (54,742)
Proceeds from maturities and calls of investment securities   12,730    9,838 
(Purchase) redemption of FHLB stock   (62)   691 
Principal repayments of:          
Loans   34,943    44,360 
Mortgage-backed securities   1,165    2,110 
Purchase of premises and equipment   (352)   (188)
Proceeds from the sale of premises and equipment   21     
Proceeds from the sale of OREO   993    890 
Net cash provided by (used in) investing activities   1,275    (26,316)
           
Cash Flow From Financing Activities          
Dividends paid   (668)   (764)
Increase (decrease) in deposits   3,330    (21,922)
Purchase of treasury stock   (6,836)   (4,130)
(Decrease) increase in other borrowings   (911)   275 
Net cash used in financing activities   (5,085)   (26,541)
           
Decrease in Cash and Cash Equivalents   (128)   (49,303)
Cash and Cash Equivalents, Beginning of Year   45,224    112,305 
Cash and Cash Equivalents, End of Year  $45,096   $63,002 
           
Supplemental Disclosures of Cash Flow Information-          
Cash paid during the period for:          
Interest  $1,687   $1,895 
Income taxes  $400   $ 
           
Supplemental Schedule of Noncash Financing and Investing Activities:          
Other real estate acquired in settlement of loans  $243   $1,929 

 

See notes to unaudited consolidated financial statements.

 

7
 

 

ALLIANCE BANCORP, INC. OF PENNSYLVANIA AND SUBSIDIARIES

 

Notes to Unaudited Consolidated Financial Statements

 

(1) Organization and Basis of Presentation

 

On January 18, 2011, Alliance Mutual Holding Company and Alliance Bancorp, Inc. of Pennsylvania, the federally chartered mid-tier holding company for Alliance Bank (the “Bank”) completed a reorganization and conversion (the “second step conversion”), pursuant to which Alliance Bancorp, Inc. of Pennsylvania, a new Pennsylvania corporation (“Alliance Bancorp” or the “Company”), acquired all the issued and outstanding shares of the Bank’s common stock. In connection with the second step conversion, 3,258,475 shares of common stock, par value $0.01 per share, of Alliance Bancorp were sold in subscription, community and syndicated community offerings to certain depositors of the Bank and other investors for $10 per share, or $32.6 million in the aggregate (the “Offering”), and 2,215,962 shares of common stock were issued in exchange for the outstanding shares of common stock of the mid-tier holding company, which also was known as Alliance Bancorp, Inc. of Pennsylvania, held by the “public” shareholders of the mid-tier holding company. Each share of common stock of the mid-tier holding company was converted into the right to receive 0.8200 shares of common stock of Alliance Bancorp in the second step conversion. As a result of the second step conversion, the former mutual holding company and the mid-tier company were merged into Alliance Bancorp and 548,524 (pre-conversion) treasury shares were canceled. Additionally, the Bank’s Employee Stock Ownership Plan (“ESOP”) was issued a line of credit for up to $1.9 million, which it used to purchase 50,991 shares of common stock in the Offering and 100,000 additional shares of common stock in the open market following the Offering.

 

The Bank is a community oriented savings bank headquartered in Broomall, Pennsylvania. The Bank operates a total of eight banking offices located in Delaware and Chester Counties, which are suburbs of Philadelphia. The Bank is primarily engaged in attracting deposits from the general public through its branch offices and using such deposits primarily to (i) originate and purchase loans secured by first liens on single-family (one-to-four units) residential and commercial real estate properties and (ii) invest in securities issued by the U.S. Government and agencies thereof, municipal and corporate debt securities and certain mutual funds. The Bank derives its income principally from interest earned on loans, mortgage-backed securities and investments and, to a lesser extent, from fees received in connection with the origination of loans and for other services. The Bank's primary expenses are interest expense on deposits and borrowings and general operating expenses.

 

The Bank is subject to regulation by the Pennsylvania Department of Banking and Securities (the "Department"), as its chartering authority and primary regulator, and by the Federal Deposit Insurance Corporation (the "FDIC"), which insures the Bank's deposits up to applicable limits. As a registered savings and loan holding company, the Company is supervised by the Board of Governors of the Federal Reserve System (“FRB”).

 

8
 

 

Basis of Presentation. The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include all information or footnotes necessary for a complete presentation of financial position, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America (US GAAP). The consolidated statement of financial condition at December 31, 2013, has been derived from audited consolidated financial statements but does not include all information and notes required by US GAAP for complete financial statements. In the opinion of management, all adjustments consisting of normal recurring adjustments or accruals, which are necessary for a fair presentation of the consolidated financial statements, have been included. The results of operations for the three and nine months ended September 30, 2014 are not necessarily indicative of the results which may be expected for the year ending December 31, 2014 or any other period. All significant intercompany accounts and transactions have been eliminated. For comparative purposes, prior periods’ consolidated financial statements have been reclassified when necessary to conform to report classifications of the current year. The reclassifications had no effect on net income. The unaudited consolidated financial statements presented herein should be read in conjunction with the audited consolidated financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

 

Subsequent Events. The Company has evaluated events and transactions occurring subsequent to September 30, 2014, for items that should potentially be recognized or disclosed in these consolidated financial statements. The evaluation was conducted through the date these consolidated financial statements were issued.

 

(2) Recent Accounting Pronouncements

 

In January 2014, the FASB issued ASU No. 2014-04, "Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure." The objective of this guidance is to clarify 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. ASU No. 2014-04 states that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, ASU No. 2014-04 requires 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 local requirements of the applicable jurisdiction. ASU No. 2014-04 is effective for interim and annual reporting periods beginning after December 15, 2014. The adoption of ASU No. 2014-04 is not expected to have a material impact on the Company's Consolidated Financial Statements.

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 660): Summary and Amendments that Create Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs—Contracts with Customers (Subtopic 340-40). The guidance in this update supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and most industry-specific guidance throughout the industry topics of the codification. For public companies, this update will be effective for interim and annual periods beginning after December 15, 2016. The Company is currently assessing the impact that this guidance will have on its consolidated financial statements, but does not expect the guidance to have a material impact on the Company's consolidated financial statements.

 

9
 

 

(3) Segment Information

The Company has one reportable segment, Community Banking. All of the Company’s activities are interrelated, and each activity is dependent and assessed based on how each of the activities of the Company supports the others. For example, lending is dependent upon the ability of the Company to fund itself with deposits and other borrowings and manage interest rate and credit risk.

 

(4) Earnings Per Share

Earnings per share (“EPS”) consist of two separate components, basic EPS and diluted EPS. Basic EPS is computed based on the weighted average number of shares of common stock outstanding for each period presented. Diluted EPS is calculated based on the weighted average number of shares of common stock outstanding plus dilutive common stock equivalents (“CSEs”) using the treasury stock method. CSEs consist of shares that are assumed to have been purchased with the proceeds from the exercise of stock options, as well as unvested common stock awards. CSEs for which the grant price exceeds the average market price over the period have an anti-dilutive effect on EPS, and, accordingly, are excluded from the calculation. There were 38,500 and 9,500 anti-dilutive stock options outstanding at September 30, 2014 and September 30, 2013, respectively.

 

The following table sets forth the composition of the weighted average shares (denominator) used in the basic and diluted earnings per share computations.

 

   For the Three Months
Ended September 30,
   For the Nine Months
Ended September 30,
 
   2014   2013   2014   2013 
                 
Net Income  $694,000   $533,000   $1,935,000   $1,387,000 
                     
Weighted average shares outstanding   4,031,900    4,995,496    4,167,629    5,112,008 
Adjusted average unearned ESOP shares   (139,951)   (153,893)   (143,437)   (157,378)
Weighted average shares outstanding – basic   3,891,949    4,841,603    4,024,192    4,954,630 
Effect of diluted common stock equivalents   69,267    33,438    60,243    16,070 
Adjusted weighted average shares outstanding-diluted   3,961,216    4,875,041    4,084,435    4,970,700 
                     
Basic earnings per share  $0.18   $0.11   $0.48   $0.28 
Diluted earnings per share  $0.18   $0.11   $0.47   $0.28 

 

(5) Employee Stock Ownership Plan

The Bank has an Employee Stock Ownership Plan (“ESOP”) for the benefit of employees who meet the eligibility requirements as defined in the ESOP. The ESOP purchased 74,073 shares of common stock in the offering completed on January 30, 2007, using proceeds of a loan from the former mid-tier holding company. The Bank makes quarterly payments of principal and interest over a term of 8 years at an interest rate of 8.25% to the Company. The ESOP has a second loan from the Company to fund the purchase of 150,991 additional shares in connection with the second step conversion completed on January 18, 2011, under which the Bank makes quarterly payments of principal and interest over a term of 20 years at an interest rate of 3.25% to the Company. The loans are secured by the shares of the stock purchased.

 

As the debt is repaid, shares are released from collateral and allocated to qualified employees. As shares are released from collateral, the Company reports compensation expense equal to the current market price of the shares, and the shares become outstanding for earnings per share computations. The compensation expense for the ESOP for the three months ended September 30, 2014 and September 30, 2013 was $38,000 and $38,000, respectively. The compensation expense for the ESOP for the nine months ended September 30, 2014 and September 30, 2013 was $115,000 and $115,000, respectively.

 

10
 

 

The following table presents the components of the ESOP shares inclusive of shares purchased prior to 2007:

 

   September 30, 2014   September 30, 2013 
Shares released for allocation   207,770    169,370 
Unearned shares   113,761    152,161 
Total ESOP shares   321,531    321,531 

 

(6) Retirement Plans

The Bank has a defined benefit pension plan which covers all full-time employees meeting certain eligibility requirements. As required under FASB ASC Topic 715, Compensation – Retirement Benefits, the net pension costs included the following components:

 

   For the Three Months
Ended September 30,
   For the Nine Months
Ended September 30,
 
   2014   2013   2014   2013 
                 
Net Periodic Benefit Cost                    
Service Cost  $72,529   $72,065   $217,587   $216,195 
Interest Cost   80,421    59,165    241,263    177,495 
Expected Return on Plan Assets   (143,702)   (85,962)   (431,106)   (296,886)
Amortization of Prior Service Cost   3,171    3,171    9,513    9,513 
Amortization of Loss   27,397    34,811    82,191    104,433 
Net Periodic Benefit Cost  $39,816   $83,250   $119,448   $210,750 

 

The Bank has a Nonqualified Retirement and Death Benefit Agreement (the “Agreement”) with certain officers of the Bank. The purpose of the Agreement is to provide the officers with supplemental retirement benefits and a pre-retirement death benefit if the officer does not attain the specific age requirement. A summary of the interim information required under FASB ASC Topic 715, Compensation – Retirement Benefits, for the Agreement is as follows:

 

   For the Three Months
Ended September 30,
   For the Nine Months
Ended September 30,
 
   2014   2013   2014   2013 
                 
Net Periodic Benefit Cost                    
Service Cost  $   $13,705   $   $41,115 
Interest Cost   50,287    49,611    150,861    148,833 
Amortization of Loss   6,263    8,684    18,789    26,052 
Net Periodic Benefit Cost  $56,550   $72,000   $169,650   $216,000 

 

11
 

(7) Fair Value Accounting

 

FASB ASC Topic 820, Fair Value Measurement, establishes a fair value hierarchy that prioritizes the inputs to validation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of fair value hierarchy under FASB ASC Topic 820 are as follows:

 

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

 

Level 2: Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.

 

Level 3: Prices or valuation techniques that require inputs that are both significant to fair value measurement and unobservable (i.e. support with little or no market value activity).

 

An asset or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

 

The following methods and assumptions were used to estimate the fair value of certain Company assets and liabilities.

 

Cash and Cash Equivalents (Carried at Cost). The carrying amounts reported in the consolidated statements of financial condition for cash and short-term instruments approximate those assets’ fair values.

 

Investment and Mortgage-Backed Securities. The fair value of securities available for sale (carried at fair value) and held to maturity (carried at amortized cost) are determined by obtaining quoted market prices for identical securities on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices.

 

Loans Receivable (Carried at Cost). The fair values of loans are estimated using discounted cash flow analyses, using market rates at the balance sheet date that reflect the credit and interest rate-risk inherent in the loans (Level 3). Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal. Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values.

 

Impaired Loans (Generally Carried at Fair Value). Impaired loans are those in which the Bank has measured impairment generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds. Appraised values may be discounted based upon management’s historical knowledge and changes in the market conditions from the time of the appraisal. Because of the high degree of judgment required in estimating the fair value of collateral underlying impaired loans, and because of the relationship between fair value and general economic conditions, the Company considers fair values of impaired loans to be highly sensitive to market conditions. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements. The fair value consists of the loan balances, net of any valuation allowance. At September 30, 2014 and December 31, 2013, the fair value consists of loan balances of $4.1 million and $5.3 million, respectively, net of valuation allowances of $438,000 and $544,000, respectively, and loan balances of $-0- and $728,000, respectively, net of partial charge-offs of $-0- and $428,000, respectively.

 

12
 

 

Other Real Estate Owned (“OREO”). OREO assets are originally recorded at fair value upon transfer of the loans to OREO, net of estimated cost to dispose of the assets. Subsequently, OREO assets are carried at the lower of carrying value or fair value. The fair value of OREO is based on independent appraisals less selling costs. Appraised values may be discounted based upon management’s historical knowledge and changes in the market conditions from the time of the appraisal. Because of the high degree of judgment required in estimating the fair value of OREO and because of the relationship between fair value and general economic conditions, the Company considers fair values of OREO to be highly sensitive to market conditions. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements. At September 30, 2014 and December 31, 2013 the fair value consists of OREO balances of $2.2 million and $1.1 million, respectively, net of valuation allowances of $248,000 and $155,000, respectively. These amounts differ from the balances disclosed on the Statement of Financial Condition due to certain OREO assets being carried at carrying value, as they have not required additional write-downs subsequent to transfer.

 

FHLB Stock (Carried at Cost). The carrying amount of FHLB stock approximates fair value and considers the limited marketability of such securities.

 

Accrued Interest Receivable and Payable (Carried at Cost). The carrying amount of accrued interest receivable and accrued interest payable approximates their fair values.

 

Deposits (Carried at Cost). The fair values disclosed for demand deposits (e.g., interest and noninterest checking, passbook savings and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts) (Level 2). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits (Level 2).

 

Other Borrowings (Carried at Cost). The carrying amount of overnight sweep accounts generally approximate fair value.

 

Off-Balance Sheet Financial Instruments. Fair values for the Company’s off-balance sheet financial instruments (lending commitments and letters of credit) are based on fees currently charged in the market to enter into similar agreements, taking into account, the remaining terms of the agreements and the counterparties’ credit standing.

 

13
 

 

Assets Recorded at Fair Value on a Recurring Basis. The following table summarizes investment assets measured at fair value on a recurring basis as of September 30, 2014, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):

 

Description  Total   (Level 1)
Prices in
Active
Markets for
Identical
Assets
   (Level 2)
Significant
Other
Observable
Inputs
   (Level 3)
Significant
Unobservable
Inputs
 
Securities Available for Sale:                    
                     
Investment security obligations of FHLB  $14,938   $   $14,938   $ 
Investment security obligations of Fannie Mae   1,002        1,002     
Investment security obligations of Freddie Mac   3,967        3,967     
Mortgaged backed security obligations of GNMA   1,072        1,072     
Mortgaged backed security obligations of FHLMC   930        930     
Mortgaged backed security obligations of FNMA   1,454        1,454     
Total  $23,363   $   $23,363   $ 

 

The following table summarizes investment assets measured at fair value on a recurring basis as of December 31, 2013, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):

 

Description  Total   (Level 1)
Prices in
Active
Markets for
Identical
Assets
   (Level 2)
Significant
Other
Observable
Inputs
   (Level 3)
Significant
Unobservable
Inputs
 
Securities Available for Sale:                    
                     
Investment security obligations of FHLB  $11,537   $   $11,537   $ 
Investment security obligations of Fannie Mae   7,789        7,789     
Investment security obligations of Freddie Mac   1,995        1,995     
Mortgaged backed security obligations of GNMA   1,189        1,189     
Mortgaged backed security obligations of FHLMC   1,282        1,282     
Mortgaged backed security obligations of FNMA   2,228        2,228     
Total  $26,020   $   $26,020   $ 

 

14
 

 

Assets Recorded at Fair Value on a Nonrecurring Basis. For assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at September 30, 2014 are as follows (in thousands):

 

Description  Total   (Level 1)
Quoted Prices in
Active Markets
for Identical
Assets
   (Level 2)
Significant
Other
Observable
Inputs
   (Level 3)
Significant
Unobservable
Inputs
 
                 
Impaired loans  $3,695   $   $   $3,695 
Other real estate owned   1,923            1,923 
Total  $5,618   $   $   $5,618 

 

The following table presents quantitative information with regards to Level 3 fair value measurements at September 30, 2014 (in thousands);

 

Description  Fair Value at
September 30, 2014
   Valuation
Technique
  Unobservable
Input
  Range
(Weighted
Average)
              
Impaired loans  $3,695   Appraisal of collateral  Appraisal adjustments (1)  0%-30%
(19%)
               
Other real estate owned   1,923   Appraisal of collateral  Appraisal adjustments (1)  0%-10% 
(8%)
Total  $5,618          

________________

 

(1)Appraisals are adjusted by management for qualitative factors, including estimated liquidation expenses. The range and weighted average adjustments are presented as a percentage of the appraisal.

 

For assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at December 31, 2013 are as follows (in thousands):

 

Description  Total   (Level 1)
Quoted Prices in
Active Markets
for Identical
Assets
   (Level 2)
Significant
Other
Observable
Inputs
   (Level 3)
Significant
Unobservable
Inputs
 
                 
Impaired loans  $5,008   $   $   $5,008 
Other real estate owned   978            978 
Total  $5,986   $   $   $5,986 

 

15
 

 

The following table presents quantitative information with regards to Level 3 fair value measurements at December 31, 2013 (in thousands):

 

Description  Fair Value at
December 31,
2013
   Valuation
Technique
  Unobservable
Input
  Range
(Weighted
Average)
     
Impaired loans  $5,008   Appraisal of  collateral  Appraisal adjustments (1)  5%-30%
(17%)
               
Other real estate owned   978   Appraisal of  collateral  Appraisal adjustments (1)  5%-10%
  (4%)
Total  $5,986          

________________

 

(1)Appraisals are adjusted by management for qualitative factors, including estimated liquidation expenses. The range and weighted average adjustments are presented as a percentage of the appraisal.

 

There were no transfers between levels for the three and nine months ended September 30, 2014. The Company’s policy is to recognize transfers between levels as of the end of the reporting period.

 

The carrying amount and estimated fair values of the Company’s financial assets and liabilities were as follows.

 

   At September 30, 2014 
   Carrying   Level 1   Level 2   Level 3 
   Amount   Fair Value   Fair Value   Fair Value 
   (In thousands) 
                 
Assets:                    
Cash and due from banks  $1,197   $1,197   $   $ 
Interest bearing deposits at banks   43,899    43,899         
Investment securities   47,065        47,767     
Mortgage-backed securities   3,456        3,456     
Loans receivable, net, including impaired loans   301,974            302,631 
FHLB stock   709        709     
Accrued interest receivable   1,470        1,470     
                     
Liabilities:                    
NOW and MMDA deposits (1)  $97,134       $97,134   $ 
Other savings deposits   52,307        52,307     
Certificate accounts   199,267        199,107     
Other borrowings   2,526        2,526     
Accrued interest payable   9        9     
Off balance sheet instruments                

_______________________

(1) Includes non-interest bearing accounts, totaling $17,193.

 

16
 

 

   At December 31, 2013 
   Carrying   Level 1   Level 2   Level 3 
   Amount   Fair Value   Fair Value   Fair Value 
   (In thousands) 
                 
Assets:                    
Cash and due from banks  $1,530   $1,530   $   $ 
Interest bearing deposits at banks   43,694    43,694         
Investment securities   49,679        49,724     
Mortgage-backed securities   4,698        4,698     
Loans receivable, net, including, impaired loans   298,877            300,029 
FHLB stock   647        647     
Accrued interest receivable   1,465        1,465     
                     
Liabilities:                    
NOW and MMDA deposits (1)  $96,094   $   $96,094   $ 
Other savings deposits   52,197        52,197     
Certificate accounts   197,087        196,901     
Borrowings   3,437        3,437     
Accrued interest payable   9        9     
Off balance sheet instruments                

_______________________

(1) Includes non-interest bearing accounts, totaling $16,409.

 

(8) Investment and Mortgage Backed Securities

 

The Bank classifies and accounts for debt and equity securities as follows:

 

·Securities Held to Maturity - Securities held to maturity are stated at cost, adjusted for unamortized purchase premiums and discounts, based on the positive intent and the ability to hold these securities to maturity considering all reasonably foreseeable conditions and events.

 

·Securities Available for Sale - Securities available for sale, carried at fair value, are those securities management might sell in response to changes in market interest rates, increases in loan demand, changes in liquidity needs and other conditions. Unrealized gains and losses, net of tax, are reported as a net amount in accumulated other comprehensive income (loss) until realized.

 

Purchase premiums and discounts are amortized to income over the life of the related security using the interest method. The adjusted cost of a specific security sold is the basis for determining the gain or loss on the sale.

 

Securities Available for Sale and Held to Maturity

 

The amortized cost, gross unrealized gains and losses, and the fair values of securities available for sale and held to maturity are shown below. Where applicable, the maturity distribution and the fair value of securities, by contractual maturity, are shown. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

17
 

 

   September 30, 2014 
Dollars in Thousands  Amortized   Gross Unrealized   Fair 
Available for Sale:  Cost   Gains   Losses   Value 
                 
Obligations of the Federal Home Loan Bank:                    
Due after 1 years through 5 years  $6,000   $1   $(18)  $5,983 
Due after 5 years through 10 years   5,000        (27)   4,973 
Due after 10 years   4,000        (18)   3,982 
                     
Total  $15,000   $1   $(63)  $14,938 

 

   September 30, 2014 
   Amortized   Gross Unrealized   Fair 
   Cost   Gains   Losses   Value 
                 
Obligations of Fannie Mae:                    
Due after 1 year through 5 years  $1,000   $2   $   $1,002 
                     
Total  $1,000   $2   $   $1,002 

 

   September 30, 2014 
   Amortized   Gross Unrealized   Fair 
   Cost   Gains   Losses   Value 
                 
Obligations of Freddie Mac:                    
Due after 1 years through 5 years  $1,000   $   $   $1,000 
Due after 5 years through 10 years   3,000        (33)   2,967 
                     
Total  $4,000   $   $(33)  $3,967 
                     
Total Investment Securities Available for Sale  $20,000   $3   $(96)  $19,907 

 

   September 30, 2014 
   Amortized   Gross Unrealized   Fair 
Held to Maturity  Cost   Gains   Losses   Value 
                 
Municipal Obligations:                    
Due in 1 year or less  $1,427   $1   $(1)  $1,427 
Due after 1 years through 5 years   6,014    27    (4)   6,037 
Due after 5 years through 10 years   7,801    45    (26)   7,820 
Due after 10 years   11,916    657    (7)   12,566 
                     
Total  $27,158   $730   $(38)  $27,850 

 

   December 31, 2013 
   Amortized   Gross Unrealized   Fair 
Available for Sale:  Cost   Gains   Losses   Value 
                 
Obligations of the Federal Home Loan Bank:                    
Due after 1 years through 5 years  $3,000   $   $(39)  $2,961 
Due after 5 years through 10 years   5,000        (248)   4,752 
Due after 10 years   4,000        (176)   3,824 
                     
Total  $12,000   $   $(463)  $11,537 

 

18
 

 

   December 31, 2013 
   Amortized   Gross Unrealized   Fair 
   Cost   Gains   Losses   Value 
Dollars in Thousands                   
Obligations of FHLMC:                    
Due after 1 year through 5 years  $2,000   $2   $(7)  $1,995 
                     
Total  $2,000   $2   $(7)  $1,995 

 

   December 31, 2013 
   Amortized   Gross Unrealized   Fair 
   Cost   Gains   Losses   Value 
                 
Obligations of the Fannie Mae:                    
Due after 1 years through 5 years  $5,000   $1   $(21)  $4,980 
Due after 10 years   3,000        (191)   2,809 
                     
Total  $8,000   $1   $(212)  $7,789 
                     
Total Investment Securities Available for Sale  $22,000   $3   $(682)  $21,321 

 

   December 31, 2013 
   Amortized   Gross Unrealized   Fair 
Held to Maturity  Cost   Gains   Losses   Value 
                 
Municipal Obligations:                    
Due in 1 year or less  $1,435   $2   $   $1,437 
Due after 1 year through 5 years   6,228    32    (12)   6,248 
Due after 5 years through 10 years   6,152    23    (183)   5,992 
Due after 10 years   14,543    273   $(90)   14,726 
                     
Total  $28,358   $330   $(285)  $28,403 

 

Included in obligations of U.S. Government agencies at September 30, 2014 and December 31, 2013, were $19.9 million and $20.3 million of structured notes, respectively. These structured notes were comprised of step-up bonds that provide the U.S. Government agency with the right, but not the obligation, to call the bonds on certain dates. There were no sales of investment securities during the three or nine months ended September 30, 2014 or 2013.

 

Mortgage-Backed Securities Available for Sale

 

The amortized cost, gross unrealized gains and losses, and the fair values of mortgage-backed securities available for sale are as follows:

 

   September 30, 2014 
Dollars in Thousands  Amortized   Gross Unrealized   Fair 
   Cost   Gains   Losses   Value 
GNMA pass-through certificates  $1,013   $62   $(3)  $1,072 
FHLMC pass-through certificates   843    87        930 
FNMA pass-through certificates   1,381    73        1,454 
                     
Total  $3,237   $222   $(3)  $3,456 

 

19
 

 

   December 31, 2013 
Dollars in Thousands  Amortized   Gross Unrealized   Fair 
   Cost   Gains   Losses   Value 
GNMA pass-through certificates  $1,109   $80   $   $1,189 
FHLMC pass-through certificates   1,180    102        1,282 
FNMA pass-through certificates   2,113    115        2,228 
                     
Total  $4,402   $297   $   $4,699 

 

There were no sales of mortgage-backed securities during the three or nine months ended September 30, 2014 or 2013.

 

The following table shows the fair value and unrealized losses on investments, aggregated by investment category and the length of time that individual securities have been in a continuous unrealized loss position.

 

   At September 30, 2014 
   Less than 12 Months   12 Months or Longer   Total 
Dollars in Thousands  Fair
Value
   Gross
Unrealized
Losses
   Fair
Value
   Gross
Unrealized
Losses
   Fair
Value
   Gross
Unrealized
Losses
 
     
Securities Available for Sale                              
U.S. Government obligations  $11,961   $39   $3,943   $57   $15,904   $96 
Mortgage-backed securities   250    3            250    3 
   $12,211   $42   $3,943   $57   $16,154   $99 
                               
Securities Held to Maturity                              
Municipal obligations  $3,875   $11   $2,984   $27   $6,859   $38 

 

   At December 31, 2013 
   Less than 12 Months   12 Months or Longer   Total 
Dollars in Thousands  Fair
Value
   Gross
Unrealized
Losses
   Fair
Value
   Gross
Unrealized
Losses
   Fair
Value
   Gross
Unrealized
Losses
 
     
Securities Available for Sale                              
U.S. Government obligations  $19,319   $681   $   $   $19,319   $681 
                               
Securities Held to Maturity                              
Municipal obligations  $10,210   $245   $427   $40   $10,637   $285 

 

Other-than-temporary impairment, if any, is separated into (a) the amount of the total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of the total other-than-temporary impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the total other-than-temporary impairment related to all other factors is recognized in other comprehensive income.

 

20
 

 

As of September 30, 2014, management believes that the estimated fair value of the securities disclosed above is primarily dependent upon the movement in market interest rates particularly given the negligible inherent credit risk associated with the issuers of these securities.

 

Although the fair value will fluctuate as market interest rates move, management believes that these fair values will recover as the underlying portfolios mature. As of September 30, 2014, there were seven U.S. government obligations in an unrealized loss position for less than twelve months and four in an unrealized loss position for more than twelve months, three mortgage backed securities were in an unrealized loss position for less than twelve months, and five municipal obligations were in an unrealized loss position for less than twelve months and five in an unrealized loss position for more than twelve months. The Company does not intend to sell these securities and it is not more likely than not that it will be required to sell these securities before recovery. Management does not believe any individual unrealized loss as of September 30, 2014 represents an other-than-temporary impairment.

 

(9) Loans Receivable - Net

Loans receivable consist of the following:

 

Dollars in Thousands  At September 30,   At December 31, 
   2014   2013 
Real estate loans:          
Single-family  $121,408   $124,223 
Multi-family   21,193    22,181 
Commercial   124,321    122,814 
Land and construction   23,843    19,792 
Commercial business   12,345    10,403 
Consumer   3,948    4,495 
Total loans receivable   307,058    303,908 
Less:          
Deferred fees   (683)   (788)
Allowance for loan losses   (4,401)   (4,243)
Loans receivable - net  $301,974   $298,877 

 

The Company originates loans to customers located primarily in Southeastern Pennsylvania. This geographic concentration of credit exposes the Company to a higher degree of risk associated with this economic region.

 

Single-family real estate loans primarily consist of first mortgage liens on existing single-family residences and home equity loans. The Company intends to continue to originate permanent loans secured by first mortgage liens and related home equity loans on single-family residential properties in the future.

 

Multi-family and commercial real estate loans are made on terms up to 30 years, some of which include call or balloon provisions ranging from five to fifteen years. The Company will originate and purchase these loans either with fixed interest rates or with interest rates that adjust in accordance with a designated index.

 

21
 

 

The Company also originates residential and commercial construction loans and, to a limited degree, land acquisition and development loans. Construction loans are classified as either residential construction loans or commercial real estate construction loans at the time of origination, depending on the nature of the property securing the loan.

 

The Company has a commercial loan department to provide a full range of commercial loan products to small business customers in its primary marketing area. These loans generally have shorter terms and higher interest rates as compared to mortgage loans.

 

The Company offers consumer loans in order to provide a full range of financial services to its customers and because such loans generally have shorter terms and higher interest rates than mortgage loans. The consumer loans presently offered by the Company include deposit account secured loans and lines of credit.

 

(10) Loan Credit Quality

For all classes of loans receivable, the accrual of interest is discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectability of principal or interest, even though the loan may be currently performing. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. Generally, when a loan is placed on nonaccrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against the allowance for loan losses. Interest received on nonaccrual loans, including impaired loans, generally is either applied against principal or reported as interest income, according to management’s judgment as to the collectability of principal. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time (generally six months) and the ultimate collectability of the total contractual principal and interest is no longer in doubt. The past due status of all classes of loans receivable is determined based on contractual due dates for loan payments.

 

22
 

 

 

The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the past due status as of September 30, 2014:

 

(Dollars in thousands)  30-59
Days
Past Due
   60-89
 Days
 Past
Due
   90 or
More
Days
   Total
Past Due
   Current   Total
Loans
Receivable
   Loans
Receivable
Greater Than
90 Days Past
Due and
Accruing
 
Real estate:                                   
Single-family  $555   $79   $1,078   $1,712   $119,696   $121,408   $782 
Multi-family                   21,193    21,193     
Commercial   856    689    297    1,842    122,479    124,321     
Land and construction                   23,843    23,843     
Commercial business                   12,345    12,345     
Consumer   199    56    258    513    3,435    3,948    258 
Total  $1,610   $824   $1,633   $4,067   $302,991   $307,058   $1,040 

 

The following table presents the classes of the loan portfolio summarized by the past due status as of December 31, 2013:

 

(Dollars in thousands)  30-59
Days
Past Due
   60-89
 Days
 Past
Due
   90 or
More
Days
   Total
Past Due
   Current   Total
Loans
Receivable
   Loans
Receivable
Greater Than
90 Days Past
Due and
Accruing
 
Real estate:                                   
Single-family  $532   $159   $1,390   $2,081   $122,142   $124,223   $638 
Multi-family                   22,181    22,181     
Commercial   455    198    744    1,397    121,417    122,814     
Land and construction                   19,792    19,792     
Commercial business   64            64    10,339    10,403     
Consumer   123    89    412    624    3,871    4,495    412 
Total  $1,174   $446   $2,546   $4,166   $299,742   $303,908   $1,050 

 

23
 

 

The following table presents nonaccrual loans by classes of the loan portfolio as of September 30, 2014 and December 31, 2013:

 

   September 30,
2014
   December 31,
2013
 
(Dollars in thousands)        
         
Real estate:          
Single-family  $296   $752 
Multi-family        
Commercial   810    744 
Land and construction        
Commercial business        
Consumer        
Total non-accruing loans  $1,106   $1,496 

 

Allowance for Loan Losses

 

The allowance for loan losses is increased by charges to income and decreased by chargeoffs (net of recoveries). Allowances are provided for specific loans when losses are probable and can be estimated. When this occurs, management considers the remaining principal balance, fair value and estimated net realizable value of the property collateralizing the loan. Current and future operating and/or sales conditions are also considered. These estimates are susceptible to changes that could result in material adjustments to results of operations. Recovery of the carrying value of such loans is dependent to a great extent on economic, operating and other conditions that may be beyond management’s control.

 

The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance. The allowance is based on the Company’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available.

 

The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as impaired. For loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan.

 

An unallocated component, if any, is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

 

The general component covers pools of loans by loan class including commercial loans not considered impaired, as well as smaller balance homogeneous loans, such as residential real estate, home equity and other consumer loans. These pools of loans are evaluated for loss exposure based upon historical loss rates for each of these categories of loans, adjusted for qualitative factors. These qualitative risk factors include:

 

24
 

 

1. Lending policies and procedures, including underwriting standards and collection, charge-off, and recovery practices.
2. National, regional, and local economic and business conditions as well as the condition of various market segments, including the value of underlying collateral for collateral dependent loans.
3. Nature and volume of the portfolio and terms of loans.
4. Experience, ability, and depth of lending management and staff.
5. Volume and severity of past due, classified and nonaccrual loans as well as and other loan modifications.
6. Quality of the Company’s loan review system, and the degree of oversight by the Company’s Board of Directors.
7. Existence and effect of any concentrations of credit and changes in the level of such concentrations.
8. Effect of external factors, such as competition and legal and regulatory requirements.

 

Each factor is assigned a value to reflect improving, stable or declining conditions based on management’s best judgment using relevant information available at the time of the evaluation. Adjustments to the factors are supported through documentation of changes in conditions in a narrative accompanying the allowance for loan loss calculation.

 

Single family real estate loans involve certain risks such as interest rate risk and risk of non repayment. Adjustable-rate single family real estate loans decreases the interest rate risk to the Company that is associated with changes in interest rates but involve other risks, primarily because as interest rates rise, the payment by the borrower rises to the extent permitted by the terms of the loan, thereby increasing the potential for default. At the same time, the marketability of the underlying property may be adversely affected by higher interest rates. Repayment risk can be affected by job loss, divorce, illness and personal bankruptcy or the borrower.

 

Multi-family and commercial real estate lending entails significant risks. Such loans typically involve large loan balances to single borrowers or groups of related borrowers. The payment experience on such loans is typically dependent on the successful operation of the real estate project. The success of such projects is sensitive to changes in supply and demand conditions in the market for multi-family and commercial real estate as well as economic conditions generally.

 

Construction lending is generally considered to involve a high risk due to the concentration of principal in a limited number of loans and borrowers and the effects of general economic conditions on developers and builders. Moreover, a construction loan can involve additional risks because of the inherent difficulty in estimating both a property's value at completion of the project and the estimated cost (including interest) of the project. The nature of these loans is such that they are generally difficult to evaluate and monitor. In addition, speculative construction loans to a builder are not necessarily pre-sold and thus pose a greater potential risk to the Company than construction loans to individuals on their personal residences.

 

Commercial business lending is generally considered higher risk due to the concentration of principal in a limited number of loans and borrowers and the effects of general economic conditions on the business assets. Commercial business loans are primarily secured by inventories and other business assets. In most cases, any repossessed collateral for a defaulted commercial business loans will not provide an adequate source of repayment of the outstanding loan balance.

 

25
 

 

Consumer loans generally have shorter terms and higher interest rates than other lending but generally involve high credit risk because of the type and nature of the collateral and, in certain cases, the absence of collateral. In addition, consumer lending collections are dependent on the borrower's continuing financial stability, and thus are more likely to be adversely effected by job loss, divorce, illness and personal bankruptcy. In most cases, any repossessed collateral for a defaulted consumer loan will not provide an adequate source of repayment of the outstanding loan.

 

The allowance calculation methodology includes further segregation of loan classes into risk rating categories. The borrower’s overall financial condition, repayment sources, guarantors and value of collateral, if appropriate, are evaluated annually for commercial and construction loans or when credit deficiencies arise, such as delinquent loan payments, for commercial and consumer loans. Credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful and loss.  Loans criticized special mention have potential weaknesses that deserve management’s close attention.  If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects.  Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.  They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the value of the collateral pledged, if any.  Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable.   Loans classified as a loss are considered uncollectible and are charged to the allowance for loan losses. Loans not classified are rated pass.

 

While management uses the best information available to make loan loss allowance evaluations, adjustments to the allowance may be necessary based on changes in economic and other conditions or changes in accounting guidance. Historically, our estimates of the allowance for loan losses have not required significant adjustments from management’s initial estimates. In addition, the Department and the FDIC, as an integral part of their examination processes, periodically review our allowance for loan losses. The Department and the FDIC may require the recognition of adjustments to the allowance for loan losses based on their judgment of information available to them at the time of their examinations. To the extent that actual outcomes differ from management’s estimates, additional provisions to the allowance for loan losses may be required that would adversely impact earnings in future periods.

 

26
 

 

The following table presents the activity in the allowance for loan losses and related recorded investment in loans receivable by classes of the loans individually and collectively evaluated for impairment as of and for the three and nine months ended September 30, 2014:

 

(Dollars in thousands)  Single
Family
Real
Estate
   Multi
Family
Real
Estate
   Commercial
Real Estate
   Land and
Construction
   Consumer   Commercial
Business
   Total 
                             
Allowance for loan losses for the three months ended September 30, 2014:          
Beginning balance  $858   $301   $2,415   $653   $12   $226   $4,465 
Charge-offs           (166)               (166)
Recoveries   2                        2 
Provisions       (6)   104    1        1    100 
Ending balance  $860   $295   $2,353   $654   $12   $227   $4,401 
                                    
Allowance for loan losses for the nine months ended September 30, 2014:          
Beginning balance  $833   $304   $2,259   $618   $14   $215   $4,243 
Charge-offs   (32)       (166)       (2)       (200)
Recoveries   4        3        1        8 
Provisions   55    (9)   257    36    (1)   12    350 
Ending balance  $860   $295   $2,353   $654   $12   $227   $4,401 
Ending balance:                                   
individually evaluated for impairment  $15   $   $423   $   $   $   $438 
Ending balance:                                   
collectively evaluated for impairment  $845   $295   $1,930   $654   $12   $227   $3,963 
                                    
Loans receivable:                                   
Ending balance  $121,408   $21,193   $124,321   $23,843   $12,345   $3,948   $307,058 
Ending balance:                                   
individually evaluated for impairment  $1,045   $   $7,818   $   $   $   $8,863 
Ending balance:                                   
collectively evaluated for impairment  $120,363   $21,193   $116,503   $23,843   $12,345   $3,948   $298,195 

 

27
 

 

The following table presents the activity in the allowance for loan losses and related recorded investment in loans receivable by classes of the loans individually and collectively evaluated for impairment as of and for the three and nine months ended September 30, 2013:

 

(Dollars in thousands)  Single
Family
Real
Estate
   Multi
Family
Real
Estate
   Commercial
Real Estate
   Land and
Construction
   Consumer   Commercial
Business
   Total 
                             
Allowance for loan losses for the three months ended September 30, 2013:          
Beginning balance  $953   $148   $2,395   $651   $10   $225   $4,382 
Charge-offs   (8)       (18)       (4)       (30)
Recoveries                   2        2 
Provisions   45    97    199    (209)   3    15    150 
Ending balance  $990   $245   $2,576   $442   $11   $240   $4,504 
                                    
Allowance for loan losses for the nine months ended September 30, 2013:          
Beginning balance  $1,027   $623   $2,674   $352   $18   $225   $4,919 
Charge-offs   (241)   (359)   (310)       (6)       (916)
Recoveries   18            30        3    51 
Provisions   186    (19)   212    60    (1)   12    450 
Ending balance  $990   $245   $2,576   $442   $11   $240   $4,504 
Ending balance:                                   
individually evaluated for impairment  $18   $   $755   $   $   $   $773 
Ending balance:                                   
collectively evaluated for impairment  $972   $245   $1,821   $442   $11   $240   $3,731 
                                    
Loans receivable:                                   
Ending balance  $124,327   $23,253   $115,768   $13,461   $4,714   $10,590   $292,113 
Ending balance:                                   
individually evaluated for impairment  $555   $   $9,969   $   $   $   $10,524 
Ending balance:                                   
collectively evaluated for impairment  $123,772   $23,253   $105,799   $13,461   $4,714   $10,590   $281,589 

 

28
 

 

The following table presents the allowance for loan losses and related recorded investment in loans receivable by classes of the loans individually and collectively evaluated for impairment as of December 31, 2013:

 

(Dollars in thousands)  Single
Family
Real
Estate
   Multi
Family
Real
Estate
   Commercial
Real Estate
   Land and
Construction
   Consumer   Commercial
Business
   Total 
Allowance for loan losses:                                   
Ending balance  $833   $304   $2,259   $618   $14   $215   $4,243 
Ending balance:                                   
individually evaluated for impairment  $18   $   $526   $   $   $   $544 
Ending balance:                                   
collectively evaluated for impairment  $815   $304   $1,733   $618   $14   $215   $3,699 
                                    
Loans receivable:                                   
Ending balance  $124,223   $22,181   $122,814   $19,792   $4,495   $10,403   $303,908 
Ending balance:                                   
individually evaluated for impairment  $552   $   $8,895   $   $   $   $9,447 
Ending balance:                                   
collectively evaluated for impairment  $123,671   $22,181   $113,919   $19,792   $4,495   $10,403   $294,461 

 

29
 

 

The following table presents the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company's internal risk rating system as of September 30, 2014:

 

   Pass   Special
Mention
   Substandard   Doubtful   Total 
(Dollars in thousands)                    
Real estate:                         
Single-family  $119,017   $715   $1,676   $   $121,408 
Multi-family   21,193                21,193 
Commercial   116,865    545    6,911        124,321 
Land and construction   23,843                23,843 
Commercial business   12,345                12,345 
Consumer   3,948                3,948 
Total  $297,211   $1,260   $8,587   $   $307,058 

 

The following table presents the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company's internal risk rating system as of December 31, 2013:

 

(Dollars in thousands)  Pass   Special
Mention
   Substandard   Doubtful   Total 
Real estate:                         
Single-family  $122,472   $361   $1,390   $   $124,223 
Multi-family   22,181                22,181 
Commercial   113,920    1,479    7,415        122,814 
Land and construction   19,792                19,792 
Commercial business   10,403                10,403 
Consumer   4,495                4,495 
Total  $293,263   $1,840   $8,805   $   $303,908 

 

Loan Impairment

 

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and industrial loans, commercial real estate loans and commercial construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.

 

30
 

 

An allowance for loan losses is established for an impaired loan if its carrying value exceeds its estimated fair value. Currently, estimated fair values of substantially all of the Company’s impaired loans are measured based on the estimated fair value of the loan’s collateral.

 

The Company does not separately identify individual single-family loans secured by real estate unless such loans are the subject of a troubled debt restructuring agreement. Large groups of these smaller balance homogeneous loans are collectively evaluated for impairment.

 

For multi-family, land and construction, and commercial loans secured by real estate, estimated fair values are determined primarily through third-party appraisals. When a real estate secured loan becomes impaired, a decision is made regarding whether an updated certified appraisal of the real estate is necessary. This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value ratio based on the original appraisal and the condition of the property. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property.

 

For commercial business loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower’s financial statements, inventory reports, accounts receivable agings or equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets.

 

The Company does not separately identify consumer and other loans unless such loans are the subject of a troubled debt restructuring agreement. Large groups of these smaller balance homogeneous loans are collectively evaluated for impairment.

 

Loans whose terms are modified are classified as troubled debt restructurings if the Company grants such borrowers concessions and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a troubled debt restructuring generally involve a temporary below market rate reduction in interest rate or an extension of a loan’s stated maturity date. Non-accrual troubled debt restructurings are restored to accrual status if principal and interest payments, under the modified terms, are current for six consecutive months after modification. Loans classified as troubled debt restructurings are designated as impaired.

 

31
 

 

The following table summarizes information in regards to impaired loans by loan portfolio class as of and for the three months ended September 30, 2014:

 

(Dollars in Thousands)  Recorded
Investment
   Unpaid
Principal
Balance
   Related
Allowance
   Average
Recorded
Investment
   Interest Income
Recognized
While Impaired
 
With no related allowance recorded:                         
Real estate:                         
Single-family  $854   $854   $   $520   $39 
Commercial  $3,876   $3,876   $   $3,876   $46 
                          
With an allowance recorded:                         
Real estate:                         
Single-family  $191   $191   $15   $191   $1 
Commercial  $3,942   $3,942   $423   $3,942   $52 
                          
Total:                         
Real estate:                         
Single-family  $1,405   $1,405   $15   $711   $40 
Commercial  $7,818   $7,818   $423   $7,818   $98 

 

The following table summarizes information in regards to impaired loans by loan portfolio class as of and for the nine months ended September 30, 2014:

 

(Dollars in Thousands)  Recorded
Investment
   Unpaid
Principal
Balance
   Related
Allowance
   Average
Recorded
Investment
   Interest Income
Recognized
While Impaired
 
With no related allowance recorded:                         
Real estate:                         
Single-family  $854   $854   $   $409   $45 
Commercial  $3,876   $3,876   $   $3,876   $155 
                          
With an allowance recorded:                         
Real estate:                         
Single-family  $191   $191   $15   $191   $7 
Commercial  $3,942   $3,942   $423   $3,876   $135 
                          
Total:                         
Real estate:                         
Single-family  $1,404   $1,405   $15   $600   $52 
Commercial  $7,818   $7,818   $423   $7,752   $290 

 

32
 

 

The following table summarizes information in regards to impaired loans by loan portfolio class as of and for the three months ended September 30, 2013:

 

(Dollars in Thousands)  Recorded
Investment
   Unpaid
Principal
Balance
   Related
Allowance
   Average
Recorded
Investment
   Interest Income
Recognized
While Impaired
 
With no related allowance recorded:                         
Real estate:                         
Single-family  $364   $364   $   $364   $4 
Commercial  $3,490   $3,490   $   $3,490   $48 
                          
With an allowance recorded:                         
Real estate:                         
Single-family  $191   $191   $18   $191   $4 
Commercial  $6,479   $6,555   $755   $6,479   $84 
                          
Total:                         
Real estate:                         
Single-family  $555   $559   $18   $555   $5 
Commercial  $9,969   $10,045   $755   $9,969   $132 

 

The following table summarizes information in regards to impaired loans by loan portfolio class as of and for the nine months ended September 30, 2013:

 

(Dollars in Thousands)  Recorded
Investment
   Unpaid
Principal
Balance
   Related
Allowance
   Average
Recorded
Investment
   Interest Income
Recognized
While Impaired
 
With no related allowance recorded:                         
Real estate:                         
Single-family  $364   $364   $   $364   $10 
Commercial  $3,490   $3,490   $   $2,904   $143 
                          
With an allowance recorded:                         
Real estate:                         
Single-family  $191   $191   $18   $191   $9 
Commercial  $6,479   $6,555   $755   $6,479   $217 
                          
Total:                         
Real estate:                         
Single-family  $555   $555   $18   $555   $19 
Commercial  $9,969   $10,045   $755   $9,383   $360 

 

33
 

 

The following table summarizes information in regards to impaired loans by loan portfolio class as of and for the year ended December 31, 2013:

 

(Dollars in Thousands)  Recorded
Investment
   Unpaid
Principal
Balance
   Related
Allowance
   Average
Recorded
Investment
   Interest
Income
Recognized
While
Impaired
 
With no related allowance recorded:                         
Real estate:                         
Single-family  $361   $361   $   $361   $13 
Commercial  $3,835   $4,263   $   $3,411   $239 
                          
With an allowance recorded:                         
Real estate:                         
Single-family  $191   $191   $18   $191   $12 
Commercial  $5,060   $5,187   $526   $4,759   $198 
                          
Total:                         
Real estate:                         
Single-family  $552   $552   $18   $552   $25 
Commercial  $8,895   $9,450   $526   $8,170   $437 

 

There were two troubled debt restructurings during the three months ended September 30, 2014 and no troubled debt restructurings during the three months ended September 30, 2013. Both of the troubled debt restructurings were an extension of the amortization period. One of the troubled debt restructurings during the three months ended September 30, 2014 was a single-family real estate loan with a pre-modification loan amount of $464,000 and a post-modification loan amount of $500,000. The other troubled debt restructuring during the three months ended September 30, 2014 was a commercial real estate loan with a pre-modification and post-modification amount of $102,000. There were no troubled debt restructurings with a payment default, with the payment default occurring within 12 months of restructure, during the three months ended September 30, 2014 or the three months ended September 30, 2013.

 

The following table summarizes information in regards to loans classified as troubled debt restructurings during the nine months ended September 30, 2014:

 

(Dollars in Thousands)  Number of
Contracts
   Pre-Modification
Outstanding Recorded
Investments
   Post-Modification
Outstanding
Recorded
Investments
 
Real estate:               
Single Family   1   $464   $500 
Commercial   1   $102   $102 

 

There were no troubled debt restructurings with a payment default, with the payment default occurring within 12 months of restructure and payment default occurring, during the nine months ended September 30, 2014.

 

34
 

 

At September 30, 2014, the Company had twelve loans classified as performing troubled debt restructurings consisting of three single-family real estate loans which amounted to $854,000 and nine commercial real estate loans which amounted to $3.9 million. Two of the three single-family real estate loans, which amounted to $354,000 were classified as special mention in the Company’s allowance for loan losses and have no allowance against them. One of the three single family real estate loans, in the amount of $500,000 was classified as substandard and had no allowance against it. Two of the nine commercial real estate loans, in the amount of $505,000 was classified as special mention and had no allowance against it. Two of the nine commercial real estate loans, which amounted to $401,000 are classified as special mention in the Company’s allowance for loan losses and have a $5,000 allowance against them. Two of the nine commercial real estate loans, which amounted to $765,000 are classified as substandard in the Company’s allowance for loan losses and have a no allowance against them. Three of the nine commercial real estate loans, which amounted to $2.2 million are classified as substandard in the Company’s allowance for loan losses and have a $208,000 allowance against them. All such loans have been performing in accordance with their restructured terms and conditions. At September 30, 2014, the Company had one single-family real estate nonperforming loan classified as a troubled debt restructuring in the amount of $191,000. The single-family real estate loan was classified as substandard in the Company’s allowance for loan losses and had a $15,000 allowance against it. Substantially all of the troubled debt restructurings consisted of changes in interest rates and no principal was forgiven.

 

The following table summarizes information in regards to loans classified as troubled debt restructurings during the nine months ended September 30, 2013:

 

(Dollars in Thousands)  Number of
Contracts
   Pre-Modification
Outstanding Recorded
Investments
   Post-Modification
Outstanding
Recorded
Investments
 
Real estate:               
Commercial   2   $891   $921 

 

There were no troubled debt restructurings with a payment default, with the payment default occurring within 12 months of restructure, and payment default occurring during the nine months ended September 30, 2013.

 

At September 30, 2013, the Company had three single-family real estate loans with a carrying value of $555,000 and eleven commercial real estate loans with a carrying value of $5.8 million classified as troubled debt restructurings. Of the three single-family real estate loans, two were classified as special mention and one as substandard in the Company’s allowance for loan losses, are to two borrowers, and had a total allowance of $18,000 against them. Of the eleven commercial real estate loans, six were classified as special mention and five were classified as substandard in the Company’s allowance for loan losses. The six loans classified as special mention loans are to two borrowers and have a total allowance of $73,000 against them. The five loans classified as substandard are to five borrowers and have a total allowance of $514,000 against them. Substantially all of the troubled debt restructurings consisted of changes in interest rates and no principal was forgiven.

 

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The following table summarizes information in regards to troubled debt restructurings during the year ended December 31, 2013:

 

(Dollars in Thousands)  Number of
Contracts
   Pre-Modification
Outstanding Recorded
Investments
   Post-Modification
Outstanding
Recorded
Investments
 
Real estate:               
Commercial   2   $891   $891 

 

There were no troubled debt restructurings with a payment default, with the payment default occurring within 12 months of restructure, and payment default occurring during the year ended December 31, 2013.

 

At December 31, 2013, the Company had eleven loans classified as performing troubled debt restructurings consisting of two single-family real estate loans which amounted to $361,000 and nine commercial real estate loans which amounted to $4.5 million. The two single-family real estate loans were classified as special mention in the Company’s allowance for loan losses and have no allowance against them. Five of the nine commercial real estate loans, which amounted to $1.5 million are classified as special mention in the Company’s allowance for loan losses and have a $57,000 allowance against them. Four of the nine commercial real estate loans, which amounted to $3.0 million are classified as substandard in the Company’s allowance for loan losses and have a $220,000 allowance against them. All such loans have been performing in accordance with their restructured terms and conditions. At December 31, 2013, the Company had one single-family real estate nonperforming loan classified as a troubled debt restructuring in the amount of $191,000. The single-family real estate loan was classified as substandard in the Company’s allowance for loan losses and had a $18,000 allowance against it. Substantially all of the troubled debt restructurings consisted of changes in interest rates and no principal was forgiven.

 

(11) Stock-Based Compensation

Recognition and Retention Plan and Trust

In July of 2011, the shareholders of the Company approved the adoption of the 2011 Recognition and Retention Plan and Trust (the “2011 RRP”). Pursuant to the terms of the 2011 RRP, awards of up to 218,977 shares of restricted common stock may be granted to employees and directors. In order to fund the 2011 RRP, the 2011 RRP acquired 218,977 shares of the Company’s common stock in the open market for approximately $2.4 million at an average price of $11.14 per share. During 2012 and 2011, the Company made sufficient contributions to the 2011 RRP to fund the purchase of these shares. Pursuant to the terms of the 2011 RRP, no additional shares will need to be acquired. On July 20, 2011, a total of 208,200 2011 RRP awards were granted. On July 20, 2012, a total of 3,000 2011 RRP awards were granted. On December 11, 2013, a total of 7,750 2011 RRP awards were granted. The 2011 RRP shares generally vest at the rate of 20% per year over five years.

 

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A summary of the status of the shares under the 2011 RRP as of September 30, 2014 and changes during the three months ended September 30, 2014 are presented below:

 

   Three Months Ended September 30, 2014 
       Weighted 
   Number of   average grant 
   Shares   date fair value 
         
Restricted at the beginning of period   122,890   $11.22 
Granted        
Vested   38,180   $11.07 
Forfeited        
Restricted at the end of period   84,710   $11.47 

 

A summary of the status of the shares under the 2011 RRP as of September 30, 2014 and changes during the nine months ended September 30, 2014 are presented below:

 

   Nine Months Ended September 30, 2014 
       Weighted 
   Number of   average grant 
   shares   date fair value 
         
Restricted at the beginning of period   135,070   $11.22 
Granted        
Vested   50,360   $11.07 
Forfeited        
Restricted at the end of period   84,710   $11.47 

 

A summary of the status of the shares under the 2011 RRP as of September 30, 2013 and changes during the three months ended September 30, 2013 are presented below:

 

   Three Months Ended September 30, 2013 
       Weighted 
   Number of   average grant 
   Shares   date fair value 
         
Restricted at the beginning of period   169,560   $11.08 
Granted        
Vested   42,240   $11.07 
Forfeited        
Restricted at the end of period   127,320   $11.08 

 

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A summary of the status of the shares under the 2011 RRP as of September 30, 2013 and changes during the nine months ended September 30, 2013 are presented below:

 

   Nine Months Ended September 30, 2013 
       Weighted 
   Number of   average grant 
   shares   date fair value 
         
Restricted at the beginning of period   169,560   $11.08 
Granted        
Vested   42,240   $11.07 
Forfeited        
Restricted at the end of period   127,320   $11.08 

  

Compensation expense on 2011 RRP shares granted is recognized ratably over the five year vesting period in an amount which totals the market price of the common stock at the date of grant. During the three months ended September 30, 2014, approximately 9,993 shares were amortized to expense, based on the proportional vesting of the awarded shares, resulting in recognition of approximately $107,000 in compensation expense with a related tax benefit of $36,000. During the nine months ended September 30, 2014, approximately 40,008 shares were amortized to expense, based on the proportional and accelerated vesting of the awarded shares, resulting in recognition of approximately $429,000 in compensation expense with a related tax benefit of $146,000. Of the $429,000 in compensation expense, approximately $102,000 related to the accelerated vesting of certain awarded shares. During the three months ended September 30, 2013, approximately 10,560 shares were amortized to expense, based on the proportional vesting of the awarded shares, resulting in recognition of approximately $112,000 in compensation expense with a related tax benefit of $38,000. During the nine months ended September 30, 2013, approximately 31,680 shares were amortized to expense, based on the proportional vesting of the awarded shares, resulting in recognition of approximately $336,000 in compensation expense with a related tax benefit of $114,000. As of September 30, 2014, approximately $803,000 in additional compensation expense is scheduled to be recognized over the remaining vesting period of 2.5 years. Under the terms of the 2011 RRP, any unvested 2011 RRP awards will become fully vested upon a change in control of the Company resulting in the full recognition of any unrecognized expense.

 

Stock Options

In July 2011, the shareholders of the Company also approved the adoption of the 2011 Stock Option Plan (the “2011 Option Plan”). Pursuant to the 2011 Option Plan, options to acquire 325,842 shares of common stock may be granted to employees and directors. Under the 2011 Option Plan, options generally become vested and exercisable at the rate of 20% per year over five years and are generally exercisable for a period of ten years after the grant date. On July 20, 2011, July 20, 2012, and December 11, 2013 options to purchase 277,750, 9,500, and 38,500 shares of common stock were awarded, respectively. As of September 30, 2014, a total of 92 shares of common stock have been reserved for future grant pursuant to the 2011 Option Plan.

 

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A summary of the status of the Company’s stock options under the 2011 Option Plan as of September 30, 2014, and changes during the three and nine months ended September 30, 2014, is presented below:

 

   Three Months Ended September 30, 2014 
       Weighted 
   Number of   average 
   shares   exercise price 
         
Options outstanding at the beginning of period   325,750   $11.60 
Granted        
Exercised        
Vested        
Forfeited        
Options outstanding at the end of period   325,750   $11.60 
Exercisable at end of the period   184,200   $11.60 

  

   Nine Months Ended September 30, 2014 
       Weighted 
   Number of   average 
   shares   exercise price 
         
Options outstanding at the beginning of period   325,750   $11.60 
Granted        
Exercised        
Vested        
Forfeited        
Options outstanding at the end of period   325,750   $11.60 
Exercisable at end of the period   184,200   $11.60 

 

The fair value of each option grant is estimated using the Black-Scholes pricing model with the following weighted average assumptions for the options granted in 2011: dividend yield of 2.0%, risk-free interest rate of 1.58%, expected life of 7.0 years, and volatility of 30.34%. The calculated fair value of options granted in 2011 was $2.99. The fair value of each option grant is estimated using the Black-Scholes pricing model with the following weighted average assumptions for the options granted in 2012: dividend yield of 2.0%, risk-free interest rate of 0.71%, expected life of 7.0 years, and volatility of 28.87%. The calculated fair value of options granted in 2012 was $3.08. The fair value of each option grant is estimated using the Black-Scholes pricing model with the following weighted average assumptions for the options granted in 2013: dividend yield of 2.0%, risk-free interest rate of 1.53%, expected life of 7.0 years, and volatility of 28.35%. The weighted average contractual term of the options was 7.75 years at September 30, 2014.

 

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During the three months ended September 30, 2014, approximately $46,000 was recognized in compensation expense, with a related $16,000 tax benefit, for the 2011 Option Plan. During the nine months ended September 30, 2014, approximately $170,000 was recognized in compensation expense, with a related $58,000 tax benefit, for the 2011 Option Plan. Of the $169,000 recognized, approximately $31,000 related to the accelerated vesting of certain awards. At September 30, 2014, approximately $398,000 in additional compensation expense for awarded options remained unrecognized. The weighted average period over which this expense will be recognized is approximately 2.5 years. During the three months ended September 30, 2013, approximately $41,000 was recognized in compensation expense, with a related $14,000 tax benefit, for the 2011 Option Plan. During the nine months ended September 30, 2013, approximately $124,000 was recognized in compensation expense, with a related $42,000 tax benefit, for the 2011 Option Plan.

 

(12) Contingent Obligations

The Company does not issue any guarantees that would require liability-recognition or disclosure, other than its standby letters of credit. The Company has issued unconditional commitments in the form of standby letters of credit to guarantee payment on behalf of a customer and guarantee the performance of a customer to a third party. Standby letters of credit generally arise in connection with lending relationships. The credit risk involved in issuing these instruments is essentially the same as that involved in extending loans to customers. Contingent obligations under standby letters of credit totaled approximately $987,000 at September 30, 2014 and $1.5 million at December 31, 2013 and represent the maximum potential future payments the Company could be required to make. The value of the contingent obligations approximates their fair value. Typically, these instruments have terms of twelve months or less and expire unused; therefore, the total amounts do not necessarily represent future cash requirements. Each customer is evaluated individually for creditworthiness under the same underwriting standards used for commitments to extend credit for on-balance sheet instruments. Company policies governing loan collateral apply to standby letters of credit at the time of credit extension. Loan-to-value ratios are generally consistent with loan-to-value requirements for other commercial loans secured by similar types of collateral.

 

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Part I – Item 2.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Forward-Looking Statements. Alliance Bancorp, Inc. of Pennsylvania (the “Company”) may from time to time make written or oral “forward-looking statements,” including statements contained in the Company’s filings with the Securities and Exchange Commission (including this Quarterly Report on Form 10-Q and the exhibits hereto and thereto), in its reports to shareholders and in other communications by the Company, which are made in good faith by the Company pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.

 

These forward-looking statements include statements with respect to the Company’s beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions, that are subject to significant risks and uncertainties, and are subject to change based on various factors (some of which are beyond the Company’s control).  The words “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan” and similar expressions are intended to identify forward-looking statements.  The following factors, among others, could cause the Company’s financial performance to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements: the strength of the United States economy in general and the strength of the local economies in which the Company conducts operations; the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System; inflation, interest rate, market and monetary fluctuations; the timely development of and acceptance of new products and services of the Company and the perceived overall value of these products and services by users, including the features, pricing and quality compared to competitors’ products and services; the willingness of users to substitute competitors’ products and services for the Company’s products and services; the success of the Company in gaining regulatory approval of its products and services, when required; the impact of changes in financial services’ laws and regulations (including laws concerning taxes, banking, securities and insurance); technological changes; acquisitions; changes in consumer spending and saving habits; and the success of the Company at managing the risks involved in the foregoing.

 

The Company cautions that the foregoing list of important factors is not exclusive.  Readers are also cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date of this report.  The Company does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company.

 

General. The Company’s profitability is highly dependent on net interest income. The components that drive net interest income are the amounts of interest-earning assets and interest-bearing liabilities along with rates earned or paid on such rate sensitive instruments. The Company manages interest rate exposure by attempting to match asset maturities with liability maturities. In addition to managing interest rate exposure, the Company also considers the credit risk, prepayment risk and extension risk of certain assets. The Company maintains asset quality by utilizing comprehensive loan underwriting standards and collection efforts as well as originating or purchasing primarily secured or guaranteed assets.

 

The Company’s profitability is also affected by fee income, gain or loss on the sale of other real estate owned, general and administrative expenses, provisions for loan losses, other real estate owned expenses, and income taxes.

 

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Critical Accounting Policies. In reviewing and understanding financial information for the Company, you are encouraged to read and understand the significant accounting policies used in preparing our consolidated financial statements included elsewhere herein. These policies are described in Note 2 of the notes to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. The accounting and financial reporting policies of the Company conform to accounting principles generally accepted in the United States of America (US GAAP) and to general practices within the banking industry. Accordingly, the consolidated financial statements require certain estimates, judgments, and assumptions, which are believed to be reasonable, based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expenses during the periods presented. The following accounting policies comprise those that management believes are the most critical to aid in fully understanding and evaluating our reported financial results. These policies require numerous estimates or economic assumptions that may prove inaccurate or may be subject to variations which may significantly affect our reported results and financial condition for the period or in future periods.

 

Allowance for Loan Losses. The allowance for loan losses is established through a provision for loan losses charged to expense. Charges against the allowance for loan losses are made when management believes that the collectability of loan principal is unlikely. Subsequent recoveries are added to the allowance. The allowance is an amount that management believes will cover known and inherent losses in the loan portfolio, based on evaluations of the collectability of loans. The evaluations take into consideration such factors as changes in the types and amount of loans in the loan portfolio, historical loss experience, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, estimated losses relating to specifically identified loans, and current economic conditions. This evaluation is inherently subjective as it requires material estimates including, among others, exposure at default, the amount and timing of expected future cash flows on impaired loans, value of collateral, estimated losses on our commercial and residential loan portfolios and general amounts for historical loss experience. All of these estimates may be susceptible to significant change.

 

While management uses the best information available to make loan loss allowance evaluations, adjustments to the allowance may be necessary based on changes in economic and other conditions or changes in accounting guidance. Historically, our estimates of the allowance for loan losses have not required significant adjustments from management’s initial estimates. In addition, the Department and the FDIC, as an integral part of their examination processes, periodically review our allowance for loan losses. The Department and the FDIC may require the recognition of adjustments to the allowance for loan losses based on their judgment of information available to them at the time of their examinations. To the extent that actual outcomes differ from management’s estimates, additional provisions to the allowance for loan losses may be required that would adversely impact earnings in future periods.

 

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Income Taxes. Management makes estimates and judgments to calculate various tax liabilities and determine the recoverability of our deferred tax assets, which arise from temporary differences between the tax and financial statement recognition of revenues and expenses. As of September 30, 2014, the Company had no net operating loss carryforwards for federal income tax purposes, and approximately $1.1 million in capital loss carryforwards expiring over the next three years. In December 2013, the Company recorded a full valuation allowance for such capital loss carryforwards as it is more likely than not the Company will be unable to realize these benefits. As of September 30, 2014, the Company had approximately $4.0 million of state net operating loss carryforwards expiring from 2019 through 2030. The Company recorded a full valuation allowance for these carryforwards as projected state income at the Company is not anticipated to be sufficient to realize these benefits.

 

In evaluating our ability to recover deferred tax assets, we consider all available positive and negative evidence, including our past operating results, and our forecast of future taxable income. In determining future taxable income, we make assumptions for the amount of taxable income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require us to make judgments about our future taxable income and are consistent with the plans and estimates we use to manage our business. Any reduction in estimated future taxable income may require us to record a valuation allowance against our deferred tax assets. An increase in the valuation allowance would result in additional income tax expense in the period and could have a significant impact on our future earnings.

 

Other than Temporary Impairment of Securities. The Company is required to perform periodic reviews of individual securities in its investment portfolio to determine whether a decline in the fair value of a security below its amortized cost is other than temporary. A review of other than temporary impairment requires management to make certain judgments regarding the nature of the decline, its effect on the consolidated financial statements and the probability, extent and timing of a valuation recovery. Management evaluates securities for other than temporary impairment on at least a quarterly basis, and more frequently when economic or market conditions warrant such evaluations. The other-than-temporary impairment is separated into (a) the amount of the total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of the total other-than-temporary impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the total other-than-temporary impairment related to all other factors is recognized in other comprehensive income.

 

Comparison of Financial Condition at September 30, 2014 and December 31, 2013

 

Total assets decreased $2.0 million or 0.5% to $423.5 million at September 30, 2014 compared to $425.5 million at December 31, 2013. This decrease was primarily due to a $1.4 million or 6.6% decrease in investment securities available for sale, a $1.2 million or 26.5% decrease in mortgage-backed securities available for sale, a $1.2 million or 4.2% decrease in investment securities held to maturity, a $128,000 or 0.3% decrease in total cash and cash equivalents, a $863,000 or 27.0% decrease in OREO, and a $558,000 or 35.8% decrease in prepaid and other assets. These decreases were partially offset by a $3.1 million or 1.0% increase in net loans receivable and a $212,000 or 1.7% increase in Bank owned life insurance.

 

Total liabilities increased $2.5 million or 0.7% to $357.8 million at September 30, 2014 compared to $355.3 million at December 31, 2013. This increase was primarily due to a $2.5 million or 0.8% increase in interest bearing deposits and a $784,000 or 4.8% increase in non-interest bearing deposits. These increases were partially offset by a $911,000 or 26.5% decrease in other borrowings.

 

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Stockholders’ equity decreased $4.5 million to $65.7 million as of September 30, 2014 compared to $70.2 million at December 31, 2013. The decrease was due to $6.8 million of treasury stock acquired combined with $668,000 in dividends paid. The decrease was partially offset by net income of $1.9 million for the nine months ended September 30, 2014.

 

Nonperforming assets decreased $1.3 million to $4.5 million or 1.06% of total assets at September 30, 2014 as compared to $5.7 million or 1.35% of total assets at December 31, 2013. The nonperforming assets at September 30, 2014 included $2.2 million in nonperforming loans and $2.3 million in other real estate owned. The decrease in nonperforming assets was primarily due to a $399,000 decrease in nonperforming loans and an $863,000 decrease in other real estate owned as of September 30, 2014. Overall, nonperforming loans included $1.1 million in single-family residential real estate loans, $810,000 in commercial real estate loans, and $258,000 in student loans, which are fully guaranteed by the U.S. Government. The Company continues to aggressively work towards the resolution of its nonperforming assets. The allowance for loan losses amounted to $4.4 million or 205.5% of nonperforming loans at September 30, 2014 as compared to $4.2 million or 166.7% of nonperforming loans at December 31, 2013.

 

Although management uses the best information available to make determinations with respect to the provisions for loan losses, additional provisions for loan losses may be required to be established in the future should economic or other conditions change substantially. In addition, the Department and the FDIC, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses. Such agencies may require the Bank to recognize additions to such allowance based on their judgments about information available to them at the time of their examination.

 

Comparison of Results of Operations for the Three and Nine Months ended September 30, 2014 and September 30, 2013

 

General. Net income increased $161,000 or 30.2% to $694,000 or $0.18 per share (diluted) for the three months ended September 30, 2014 as compared to $533,000 or $0.11 per share (diluted) for the same period in 2013. The increase in net income was primarily due to a $64,000 or 1.5% increase in total interest and dividend income, a $29,000 or 4.8% decrease in total interest expense, a $50,000 or 33.3% decrease in the provision for loan losses, a $23,000 or 12.9% increase in other income, and a $116,000 or 4.0% decrease in other expense. These increases were partially offset by a $121,000 or 75.6% increase in income tax expense.

 

Net income increased $548,000 or 39.5% to $1.9 million or $0.47 per share (diluted) for the nine months ended September 30, 2014 as compared to $1.4 million or $0.28 per share (diluted) for the same period in 2013. The increase in net income was primarily due to an $237,000 or 1.9% increase in total interest and dividend income, a $207,000 or 10.9% decrease in total interest expense, a $100,000 or 22.2% decrease in the provision for loan losses, a $55,000 or 9.9% increase in other income, and a $360,000 or 4.0% decrease in other expense. These increases were partially offset by a $411,000 or 126.1% increase in income tax expense.

 

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Net Interest Income. Net interest income is determined by the interest rate spread (i.e., the difference between the yields earned on interest-earning assets and the rates paid on its interest-bearing liabilities) and the relative amounts of interest-earning assets and interest-bearing liabilities. Net interest income increased $93,000 or 2.6% to $3.7 million during the three months ended September 30, 2014 as compared to the same period in 2013. The increase in net interest income was primarily due to a $64,000 or 1.5% increase in interest income on interest-earnings assets and a $29,000 or 4.8% decrease in interest expense on interest bearing liabilities. As a result, the interest rate spread increased 21 basis points from 3.29% for the three months ended September 30, 2013 to 3.50% for the three months ended September 30, 2014.

 

Net interest income increased $444,000 or 4.2% to $11.0 million during the nine months ended September 30, 2014 as compared to the same period in 2013. The increase in net interest income was primarily due to a $237,000 or 1.9% increase in interest income on interest-earnings assets and a $207,000 or 10.9% decrease in interest expense on interest bearing liabilities. As a result, the interest rate spread increased 35 basis points from 3.16% for the nine months ended September 30, 2013 to 3.51% for the nine months ended September 30, 2014.

 

Based on the current economic environment and market competition, management anticipates pressure on the interest rate spread for the remainder of 2014 which may negatively impact net interest income.

 

Interest Income. Interest income increased $64,000 or 1.5% to $4.2 million for the three months ended September 30, 2014, compared to the same period in 2013. The increase was due to a $85,000 or 2.2% increase in interest income on loans and a $18,000 or 7.3% increase in interest income on investment securities, partially offset by a $21,000 or 39.6% decrease in interest income on mortgage-backed securities, and a $18,000 or 39.1% decrease in interest income earned on balances due from depository institutions. The increase in interest income on loans was due to a $15.6 million or 5.4% increase in the average balance of loans outstanding, partially offset by a 16 basis point or 3.0% decrease in the average yield. The increase in interest income on investment securities was due to a $2.5 million or 5.5% increase in the average balance of investment securities and a 3 basis point or 1.4% increase in the average yield earned. The decrease in interest income on mortgage-backed securities was due to a $1.9 million or 34.4% decrease in the average balance of mortgage-backed securities and a 30 basis point or 8.0% decrease in the average yield earned. The decrease in interest income on balances due from depository institutions was due to a $28.9 million or 37.6% decrease in the average balance of balances due from depository institutions and a 1 basis point or 4.2% decrease in the average yield earned.

 

Interest income increased $237,000 or 1.9% to $12.7 million for the nine months ended September 30, 2014, compared to the same period in 2013. The increase was due to a $292,000 or 2.6% increase in interest income on loans and a $108,000 or 15.1% increase in interest income on investment securities, partially offset by a $74,000 or 40.7% decrease in interest income on mortgage-backed securities and a $89,000 or 53.9% decrease in interest income earned on balances due from depository institutions. The increase in interest income on loans was due to a $20.5 million or 7.2% increase in the average balance of loans outstanding, partially offset by a 23 basis point or 4.3% decrease in the average yield. The increase in interest income on investment securities was due to an $8.3 million or 20.2% increase in the average balance of investment securities, partially offset by a 9 basis point or 3.9% decrease in the average yield earned. The decrease in interest income on mortgage-backed securities was due to a $2.3 million or 36.2% decrease in the average balance of mortgage-backed securities and a 26 basis point or 6.9% decrease in the average yield earned. The decrease in interest income on balances due from depository institutions was due to a $48.6 million or 52.2% decrease in the average balance of balances due from depository institutions and a 1 basis point or 4.2% decrease in the average yield earned.

 

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Interest Expense. Interest expense decreased $29,000 or 4.8% to $576,000 for the three months ended September 30, 2014, compared to the same period in 2013. This decrease was primarily due to a $29,000 or 4.8% decrease in interest expense on deposits. The decrease in interest expense on deposits was due to a $6.3 million or 1.9% decrease in the average balance of deposits and a 2 basis point or 2.8% decrease in the rates paid on deposits.

 

Interest expense decreased $207,000 or 10.9% to $1.7 million for the nine months ended September 30, 2014, compared to the same period in 2013. This decrease was primarily due to a $207,000 or 10.9% decrease in interest expense on deposits. The decrease in interest expense on deposits was due to a $13.3 million or 3.9% decrease in the average balance of deposits and a 5 basis point or 6.9% decrease in the rates paid on deposits.

 

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Average Balances, Net Interest Income and Yields Earned and Rates Paid. The following average balance sheet table sets forth for the periods indicated, information on the Company regarding: (i) the total dollar amounts of interest income on interest-earning assets and the resulting average yields; (ii) the total dollar amounts of interest expense on interest-bearing liabilities and the resulting average costs; (iii) net interest income; (iv) interest rate spread; (v) net interest-earning assets (interest-bearing liabilities); (vi) the net yield earned on interest-earning assets; and (vii) the ratio of total interest-earning assets to total interest-bearing liabilities. Information is based on average daily balances during the periods presented.

 

   Three Months Ended September 30, 
   2014   2013 
   Average           Average         
   Balance   Interest   Rate   Balance   Interest   Rate 
(Dollars in Thousands)                              
Interest-earning assets:                              
Loans receivable (1) (3)  $305,591   $3,922    5.13%  $289,947   $3,837    5.29%
Mortgage-backed securities (3)   3,696    32    3.46    5,631    53    3.76 
Investment securities (3)   48,083    265    2.20    45,578    247    2.17 
Due from depository institutions   47,951    28    0.23    76,861    46    0.24 
Total interest-earning assets   405,321    4,247    4.19    418,017    4,183    4.00 
Noninterest-earning assets   21,978              23,147           
Total assets  $427,299             $441,164           
                               
Interest-bearing liabilities:                              
Deposits  $332,077    575    0.69   $338,415    604    0.71 
Other borrowings   2,038    1    0.20    2,220    1    0.18 
Total interest-bearing liabilities   334,115    576    0.69    340,635    605    0.71 
Noninterest-bearing                              
Liabilities   27,667              21,976           
Total liabilities   361,782              362,611           
Stockholders’ equity   65,517              78,553           
Total liabilities and stockholders’ equity  $427,299             $441,164           
                               
Net interest-earning assets  $71,206             $77,382           
Net interest income/interest rate spread       $3,671    3.50%       $3,578    3.29%
Net yield on interest- earning assets (2)             3.62%             3.42%

 

 

 

1.Nonaccrual loans and loan fees have been included.
2.Net interest income divided by interest-earning assets.
3.The indicated yields are not reflected on a tax equivalent basis.

 

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Average Balances, Net Interest Income and Yields Earned and Rates Paid. The following average balance sheet table sets forth for the periods indicated, information on the Company regarding: (i) the total dollar amounts of interest income on interest-earning assets and the resulting average yields; (ii) the total dollar amounts of interest expense on interest-bearing liabilities and the resulting average costs; (iii) net interest income; (iv) interest rate spread; (v) net interest-earning assets (interest-bearing liabilities); (vi) the net yield earned on interest-earning assets; and (vii) the ratio of total interest-earning assets to total interest-bearing liabilities. Information is based on average daily balances during the periods presented.

 

   Nine Months Ended September 30, 
   2014   2013 
   Average           Average         
   Balance   Interest   Rate   Balance   Interest   Rate 
(Dollars in Thousands)                              
Interest-earning assets:                              
Loans receivable (1) (3)  $305,560   $11,659    5.09%  $285,022   $11,367    5.32%
Mortgage-backed securities (3)   4,103    108    3.51    6,429    182    3.77 
Investment securities (3)   49,538    823    2.22    41,215    715    2.31 
Due from depository institutions   44,631    76    0.23    93,274    165    0.24 
Total interest-earning assets   403,832    12,666    4.18    425,940    12,429    3.89 
Noninterest-earning assets   22,622              23,302           
Total assets  $426,454             $449,242           
                               
Interest-bearing liabilities:                              
Deposits  $331,639    1,683    0.68   $344,977    1,890    0.73 
Other borrowings   2,422    4    0.22    2,592    4    0.21 
Total interest-bearing liabilities   334,061    1,687    0.67    347,569    1,894    0.73 
Noninterest-bearing Liabilities   25,101              22,195           
Total liabilities   359,162              369,764           
Stockholders’ equity   67,292              79,478           
Total liabilities and stockholders’ equity  $426,454             $449,242           
                               
Net interest-earning assets  $69,771             $78,371           
Net interest income/interest rate spread       $10,979    3.51%       $10,535    3.16%
Net yield on interest- earning assets (2)             3.62%             3.30%

 

 

 

1.Nonaccrual loans and loan fees have been included.
2.Net interest income divided by interest-earning assets.
3.The indicated yields are not reflected on a tax equivalent basis.

 

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Provision for Loan Losses. The provision for loan losses amounted to $100,000 for the three months ended September 30, 2014 as compared to $150,000 for the three months ended September 30, 2013. The provision for loan losses amounted to $350,000 for the nine months ended September 30, 2014 as compared to $450,000 for the nine months ended September 30, 2013. Such provisions were primarily to maintain an allowance reserve level deemed appropriate by management in light of factors such as the level of nonperforming loans and the current economic environment.

 

Other Income. Other income was $202,000 for the three months ended September 30, 2014 as compared to $179,000 for the same period in 2013. The increase was primarily the result of an $8,000 or 12.7% increase in service charges on deposit accounts and a $19,000 or 43.2% increase in other fee income. These increases were partially offset by a $5,000 or 6.9% decrease in income from the increase in cash surrender value of bank owned life insurance.

 

Other income was $611,000 for the nine months ended September 30, 2014 as compared to $556,000 for the same period in 2013. The increase was primarily the result of $28,000 of rental income from OREO for the nine months end September 30, 2014 compared to no rental income from OREO for the nine months ended September 30, 2013, a $11,000 or 5.8% increase in service charges on deposit accounts and a $11,000 gain on the sale of premises and equipment compared to no gain for the nine months ended September 30, 2013. These increases were partially offset by a partially offset by a $12,000 or 5.4% decrease in income from the increase in cash surrender value of bank owned life insurance.

 

Other Expenses. Other expenses decreased $116,000 or 4.0% to $2.8 million for the three months ended September 30, 2014 compared to the same period in 2013. The decrease was primarily due to a $87,000 or 5.1% decrease in salary and employee benefits, a $41,000 or 8.7% decrease in occupancy and equipment expense, an $17,000 or 21.8% decrease in FDIC deposit insurance premiums, a $35,000 or 30.2% decrease in advertising and marketing expense, and a $53,000 or 28.5% decrease in professional fees. These decreases were partially offset by a $75,000 or 258.6% increase in loan and OREO expense and a $42,000 or 15.8% increase in other expense. The increase in loan and OREO expense resulted from the foreclosure and acquisition of a commercial real estate property that accumulated several years of delinquent real estate taxes.

 

Other expenses decreased $360,000 or 4.0% to $8.6 million for the nine months ended September 30, 2014 compared to the same period in 2013. The decrease was primarily due to a $155,000 or 3.0% decrease in salary and employee benefits, a $79,000 or 5.6% decrease in occupancy and equipment expense, a $21,000 or 9.1% decrease in FDIC deposit insurance premiums, a $75,000 or 23.5% decrease in advertising and marketing expense, and a $169,000 or 29.2% decrease in professional fees. These decreases were partially offset by an $88,000 or 106.0% increase in loan and OREO expense, an $11,000 or 10.4% increase in the provision for OREO and a $42,000 or 5.0% increase in other expense.

 

Income Tax Expense. Income tax expense amounted to $281,000 and $160,000 for the three months ended September 30, 2014 and 2013, respectively, resulting in effective tax rates of 28.8% and 23.1%, respectively. Income tax expense amounted to $737,000 and $326,000 for the nine months ended September 30, 2014 and 2013, respectively, resulting in effective tax rates of 27.6% and 19.0%, respectively. The increase in income tax expense was primarily due to a higher amount of income before income taxes.

 

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Liquidity and Capital Resources

 

Liquidity, represented by cash and cash equivalents, is a product of the Company’s cash flows from operations. The primary sources of funds are deposits, borrowings, amortization, prepayments and maturities of outstanding loans and mortgage-backed securities, sales of loans, maturities and calls of investment securities and other short-term investments and income from operations. Changes in the cash flows of these instruments are greatly influenced by economic conditions and competition. Management attempts to balance supply and demand by managing the pricing of its loan and deposit products while maintaining a level of growth consistent with the conservative operating philosophy of the management and board of directors. Any excess funds are invested in overnight and other short-term interest-earning accounts. Cash flows are generated through the retail deposit market, the Company’s traditional funding source, for use in investing activities. In addition, the borrowings such as Federal Home Loan Bank advances may be utilized for liquidity or profit enhancement. At September 30, 2014, the Company had no outstanding advances and approximately $181.3 million of additional borrowing capacity from the FHLB of Pittsburgh. Further, the Company has access to the Federal Reserve Bank discount window. At September 30, 2014, no such funds were outstanding.

 

The primary use of funds is to meet ongoing loan and investment commitments, to pay maturing savings certificates and savings withdrawals and expenses related to general operations of the Company. At September 30, 2014, the total approved loan commitments outstanding amounted to $3.5 million. At the same date, commitments under unused lines of credit amounted to $36.0 million. Certificates of deposit scheduled to mature in one year or less at September 30, 2014 totaled $117.8 million. Management believes that a significant portion of maturing deposits will remain with the Company. For the three and nine month periods ended September 30, 2014, there were no material changes in contractual obligations that were outside of the ordinary course of business. Management anticipates that it will continue to have sufficient cash flows to meet its current and future commitments.

 

Impact of Inflation and Changing Prices

 

The unaudited condensed consolidated financial statements and related financial data presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars, without considering changes in relative purchasing power over time due to inflation. Unlike most industrial companies, virtually all of the Company’s assets and liabilities are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution’s performance than does the effect of inflation.

 

50
 

 

Part I - Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

Not Applicable.

 

Part I - Item 4.

 

CONTROLS AND PROCEDURES

 

The Company’s management evaluated, with the participation of the Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are designed to ensure that financial information required to be disclosed by the Company in the reports that are filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and regulations and are operating in an effective manner.

 

No change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.

 

Part II - Other Information

 

Item 1. Legal Proceedings

 

The Company is involved in legal proceedings and litigation arising in the ordinary course of business. However, there can be no assurance that any of the outstanding legal proceedings and litigation to which the Company is a party will not be decided adversely to the Company’s interests and have a material adverse effect on the consolidated financial statements.

 

Item 1A. Risk Factors

 

Not Applicable as the Company is a Smaller Reporting Company

 

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Item 2.      Unregistered Sales of Equity Securities and Use of Proceeds

 

Period  Total Number
of Shares
Purchased(1)
   Average Price
Paid per Share
   Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
   Maximum
Number of Shares
that May Yet Be
Purchased Under
the Plans or
Programs(1)
 
                 
July 2014   34,732   $15.98    34,732    79,317 
August  2014               44,585 
September  2014               44,585 
                     
Totals   34,732   $15.98    34,732    44,585 

 

 

(1)All shares were repurchased under the Company’s announced repurchase program. On December 12, 2013, the Company announced a program to repurchase up to 451,730 shares, or 10% of its outstanding common stock. The program will expire on December 12, 2014, and all shares will be purchased in the open market or by privately negotiated transactions, as in the opinion of management, market conditions warrant. On July 24, 2014 the Company announced a new stock repurchase program of up to 100,000 shares of common stock upon completion of the existing program.

 

Item 3.        Defaults Upon Senior Securities

 

Not Applicable

Item 4.      Mine Safety Disclosures

 

Not Applicable

 

Item 5.       Other Information

 

None

 

Item 6.      Exhibits

 

The following exhibits are filed herewith:

 

Ex. No.     Description
       
10.1     Amendment No. 1 to the Participation Agreement between Alliance Bank and Dennis Cirucci, dated September 24, 2014, under the Alliance Bank Supplemental Executive Retirement Plan
10.2     Amendment No. 1 to the Participation Agreement between Alliance Bank and Peter Meier, dated September 24, 2014, under the Alliance Bank Supplemental Executive Retirement Plan
31.1     Section 302 Certification of Chief Executive Officer
31.2     Section 302 Certification of Chief Financial Officer
32.1     Section 906 Certification of Chief Executive Officer

 

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32.2     Section 906 Certification of Chief Financial Officer
101.1.INS     XBRL Instance Document
101.2.SCH     XBRL Taxonomy Extension Schema Document
101.CAL     XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB     XBRL Taxonomy Extension Label Linkbase Document
101.PRE     XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF     XBRL Taxonomy Extension Definitions Linkbase Document

 

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SIGNATURES

 

Under the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

ALLIANCE BANCORP, INC. OF PENNSYLVANIA

 

Date:  November 10, 2014 By: /s/ Dennis D. Cirucci
    Dennis D. Cirucci, President
    and Chief Executive Officer
     
Date:  November 10, 2014 By: /s/ Peter J. Meier
    Peter J. Meier, Executive Vice President and Chief Financial Officer

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