UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
_______________________________________________________________
FORM 10-K
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(Mark One)
ý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission file number: 000-54025
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Fox Chase Bancorp, Inc.
(Exact name of registrant as specified in its charter)
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Maryland | 35-2379633 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
4390 Davisville Road, Hatboro, Pennsylvania | 19040 | |
(Address of principal executive offices) | (Zip Code) | |
(215) 283-2900
(Registrant’s telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
Common Stock, par value $0.01 per share | Nasdaq Stock Market | |
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer [ ] | Accelerated Filer [X ] | |
Non-Accelerated Filer [ ] | Smaller Reporting Company [ ] | |
(Do not check if a smaller reporting company) | ||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No ý
The aggregate market value of the voting and non-voting common equity held by nonaffiliates as of June 30, 2015 was approximately $179.9 million. Solely for purposes of this calculation, the shares held by directors and officers of the registrant are deemed to be held by affiliates.
The number of shares outstanding of the registrant's common stock as of February 29, 2016 was 11,767,590.
DOCUMENTS INCORPORATED BY REFERENCE
Not applicable.
FOX CHASE BANCORP, INC. | ||
Table of Contents | ||
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This annual report contains forward-looking statements that are based on assumptions and may describe future plans, strategies and expectations of Fox Chase Bancorp, Inc. These forward-looking statements are generally identified by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project" or similar expressions. Fox Chase Bancorp, Inc.'s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. This includes statements regarding the planned merger of Fox Chase Bancorp, Inc. ("Fox Chase") with and into Univest Corporation of Pennsylvania (“Univest”), with Univest surviving the merger as the surviving corporation (the “Merger"). Factors which could have a material adverse effect on the operations of Fox Chase and its subsidiary include, but are not limited to, the inability to obtain requisite approvals and/or meet the other closing conditions required to close the Merger in a timely manner, changes in interest rates, national and regional economic conditions, legislative and regulatory changes, monetary and fiscal policies of the U.S. government, including policies of the U.S. Treasury and the Federal Reserve Board, the credit quality and composition of the loan and investment portfolios, valuation of assets acquired through foreclosure, deposit flows, competition, demand for loan products and for financial services in Fox Chase's market area, changes in real estate market values in Fox Chase's market area, changes in relevant accounting principles and guidelines and inability of third party service providers to perform as required. Additional factors that may affect our results are discussed in Item 1A to this annual report titled "Risk Factors."
These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, Fox Chase does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.
Unless the context indicates otherwise, all references in this annual report to "Company," "we," "us" and "our" refer to Fox Chase Bancorp, Inc. and its subsidiary.
In connection with the Merger, Univest has filed with the SEC a Registration Statement on Form S-4 that includes a Proxy Statement of Univest and a Prospectus of Univest (the “Proxy Statement/Prospectus”), as well as other relevant documents concerning the proposed transaction. The S-4 has not yet been declared effective. SHAREHOLDERS OF FOX CHASE ARE URGED TO READ THE REGISTRATION STATEMENT AND THE PROXY STATEMENT/PROSPECTUS REGARDING THE MERGER AND ANY OTHER RELEVANT DOCUMENTS FILED WITH THE SEC, AS WELL AS ANY AMENDMENTS OR SUPPLEMENTS TO THOSE DOCUMENTS, BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION.
A free copy of the Proxy Statement/Prospectus, as well as other filings containing information about Univest and Fox Chase, may be obtained at the SEC’s Internet site (http://www.sec.gov). You may also obtain these documents, free of charge, from Univest at www.univest.net under the heading “Investor Relations" and then under "SEC Filings" and then under "SEC Documents" or from Fox Chase by accessing Fox Chase's website at www.foxchasebank.com under the heading “Investor Relations” and then under “SEC Filings.” Copies of the Proxy Statement/Prospectus can also be obtained, free of charge, by directing a request to Univest Corporation of Pennsylvania, 14 North Main Street, Souderton, Pennsylvania 18964, Attention: Megan Duryea Santana, Esq., Telephone: (877) 723-5571 or to Fox Chase Bancorp, Inc. 4390 Davisville Road Hatboro, PA 19040, Attention: Jerry Holbrook, Telephone: (215) 682-4107.
Fox Chase Bancorp, Inc. and certain of its directors and executive officers may be deemed to be participants in the solicitation of proxies from the shareholders of Fox Chase in connection with the proposed merger. Information about the directors and executive officers of Fox Chase and their ownership of Fox Chase common stock is set forth in the proxy statement for Fox Chase’s 2015 annual meeting of shareholders, as filed with the SEC on Schedule 14A on April 10, 2015. Additional information regarding the interests of those participants and other persons who may be deemed participants in the transaction may be obtained by reading the Proxy Statement/Prospectus regarding the Merger. Free copies of this document may be obtained as described in the preceding paragraph.
ITEM 1. BUSINESS
General
Fox Chase Bancorp, Inc. (the "Bancorp," the "Company" or "Fox Chase") is a Maryland corporation. Bancorp's business activities consist of the ownership of common stock of Fox Chase Bank (the "Bank") and making two loans to the Fox Chase Bank Employee Stock Ownership Plan (the "ESOP"). Bancorp does not own or lease any property. Instead, it uses the premises, equipment and other property of the Bank. Accordingly, the information set forth in this annual report, including the consolidated financial statements and related financial data, relates primarily to the Bank. As a bank holding company, Bancorp is subject to the regulation of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board").
The Bank operates as a community-oriented financial institution offering traditional financial services to businesses and consumers in its market areas. The Bank attracts deposits from the general public and uses those funds to originate one- to four-family real estate, multi-family and commercial real estate, construction, commercial and consumer loans, which the Bank generally holds for investment. Fox Chase Bank also maintains an investment portfolio. The Bank is regulated by the Pennsylvania Department of Banking and
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Securities (the "Department") and the Federal Deposit Insurance Corporation (the "FDIC") and its deposits are insured up to applicable legal limits under the Deposit Insurance Fund administered by the FDIC. The Bank is also a member of the Federal Home Loan Bank (the "FHLB") of Pittsburgh.
The Bank's website address is www.foxchasebank.com. Information on our website should not be considered a part of this annual report.
Proposed Merger with Univest Corporation of Pennsylvania
On December 8, 2015, Univest and Fox Chase entered into a merger agreement (the "Merger Agreement") that provides that Fox Chase will merge with and into Univest, with Univest remaining as the surviving entity.
At the effective time of the Merger, Fox Chase shareholders will be entitled to elect to receive, for each share of Fox Chase common stock, subject to the election and adjustment procedures described in the joint proxy statement/prospectus, either 0.9731 shares of Univest common stock or $21.00 in cash; provided, however that 60% of the total number of outstanding shares of Fox Chase common stock will be converted into Univest common stock, and the remaining outstanding shares of Fox Chase common stock will be converted into cash. As a result, if more Fox Chase shareholders make valid elections to receive either Univest common stock or cash than is available as merger consideration under the merger agreement, those Fox Chase shareholders electing the over-subscribed form of consideration may have the over-subscribed consideration proportionately reduced and substituted with consideration in the alternative form.
The Merger Agreement also provides that following completion of the merger, Univest will appoint Thomas M. Petro, President and Chief Executive Officer of Fox Chase, and two other individuals serving on Fox Chase’s board of directors to Univest’s board of directors.
The completion of the Merger is subject to customary conditions, including approval by the Univest and Fox Chase shareholders and the receipt of regulatory approvals from the Federal Reserve Board and the Pennsylvania Department of Banking and Securities.
Market Area
We are headquartered in Hatboro, Pennsylvania, which is approximately fifteen miles north of Center City, Philadelphia. We maintain two offices in Montgomery County, Pennsylvania, one office in each of Philadelphia and Chester Counties, Pennsylvania and three offices in Bucks County, Pennsylvania. All seven of these branch offices are in the Philadelphia-Camden-Wilmington metropolitan statistical area. We also maintain three offices in southern New Jersey; one in Atlantic County and two in Cape May County.
Philadelphia Market Area. The economy of our Philadelphia market area is primarily dominated by the service sector. According to published statistics, the population of the five-county area served by our branches totaled approximately 4.1 million in 2014. The Philadelphia market area is comprised of a highly-educated workforce and benefits from a diverse local economy as traditional employers in the manufacturing and financial services industry have been bolstered by growth in the life sciences and health care industries as well as the information technology and communication sectors. The median household and per capita income in Bucks, Chester, Delaware and Montgomery Counties significantly exceeds the comparable figures for Pennsylvania as a whole, while the median household and per capita income in Philadelphia County trails the comparable figures for Pennsylvania.
New Jersey Market Area. The economy of Atlantic County is largely dependent upon the gaming industry in nearby Atlantic City, New Jersey. According to published statistics, Atlantic County's population in 2014 was approximately 275,000. The economy in Atlantic County has deteriorated as gaming revenues have declined significantly in recent years and several gaming establishments closed during 2014 and 2015 due to increased gaming competition from other states. The economy in Cape May County relies on the tourism and hospitality industries. According to published statistics, Cape May County's population in 2014 was approximately 95,000. Additionally, median household and per capita income in Atlantic and Cape May Counties are lower than the comparable figures for New Jersey as a whole.
Competition
We face significant competition for the attraction of deposits and origination of loans. Our most direct competition for deposits has historically come from the numerous financial institutions and credit unions operating in our market areas and, to a lesser extent, from other financial service companies such as brokerage firms and insurance companies. Credit unions generally do not pay federal income tax and, accordingly, are frequently able to offer customers higher rates on deposits and lower rates on loans and achieve similar levels of profitability as financial institutions that are required to pay federal income tax. We also face competition for investors' funds from money market funds, mutual funds and other corporate and government securities. At June 30, 2015, which is the most recent date for which data is available from the FDIC, we held less than 1% of total deposits in counties where our offices are located. In addition, larger banks such as Bank of America, Wells Fargo, Santander Bank, Citizens Bank of PA, PNC Bank, and TD Bank also operate in our market areas. These institutions are significantly larger than us and, therefore, have greater resources.
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Our competition for loans comes primarily from financial institutions in our market areas, and, to a lesser extent, from other financial service providers such as mortgage companies, mortgage brokers and credit unions. Competition for loans also comes from non-depository financial service companies entering the mortgage and commercial lending markets such as insurance companies, securities companies and specialty finance companies. Competition for commercial loans increased during 2015, and we believe that it will continue to increase in 2016 as a result of relatively low economic growth in the region in which we operate, which has caused increased pressure on loan pricing and structure as numerous financial institutions compete for reduced loan demand.
We expect competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Technological advances, for example, have lowered the barriers to market entry, allowed banks and other lenders to expand their geographic reach by providing services over the internet and made it possible for non-depository institutions to offer products and services that traditionally have been provided by banks. Changes in federal law permit affiliation among banks, securities firms and insurance companies, which promotes a competitive environment in the financial services industry. Competition for deposits and loans could limit our future growth.
Lending Activities
General. We generally originate loans for investment. Our loan portfolio consists of multi-family and commercial real estate loans, commercial and industrial loans, one- to four-family residential real estate loans, and to a lesser extent, construction loans and consumer loans. We have added personnel to assist us in increasing our commercial loan portfolio, including hiring experienced commercial lenders and commercial credit and risk management professionals over the last several years. Our continued emphasis on increasing the commercial segment of our portfolio has resulted in additional originations and servicing of multi-family and commercial real estate, commercial and industrial loans and construction loans to individuals and businesses in our primary market areas.
Multi-Family and Commercial Real Estate Loans. The largest segment of our portfolio is multi-family and commercial real estate loans. We offer fixed-rate and adjustable-rate mortgage loans secured by multi-family and commercial real estate to individuals and small businesses in our primary market areas. Our multi-family and commercial real estate loans are generally secured by condominiums, apartment buildings and mixed-use properties with residential units, as well as office and retail space. While we have focused on increasing this segment of our loan portfolio over the last several years, we continue to be selective in the types of properties and projects securing such loans.
We originate multi-family and commercial real estate loans with amortization terms generally up to 25 years, but commonly have a rate reset after 5 years and a principal maturity within 10 years. These loans are typically repaid or the term is extended before maturity, in which case a new rate is negotiated to meet market conditions and an extension of the loan is executed for a new principal maturity and on occasion, with a new amortization term. Interest rates and payments on our adjustable-rate loans generally are based on LIBOR, the Prime Interest Rate, Constant Maturity Treasury Index, or the Bank's cost of funds. Loans are secured by first mortgages that generally do not exceed 80% of the property's appraised value. We require all properties securing multi-family and commercial real estate loans to be appraised by a Bank-approved independent licensed appraiser and appraisals greater than $3.0 million receive an independent third party review. Many multi-family and commercial real estate loans also are supported by personal guarantees.
At December 31, 2015, our largest commercial real estate loan was a warehouse line of credit to Philadelphia Mortgage Advisors, a mortgage banker located in Plymouth Meeting, Pennsylvania, to which Fox Chase Bank has committed $18.0 million, of which $7.6 million was outstanding. Fox Chase Bank owns 46.15% of Philadelphia Mortgage Advisors. The loan was performing in accordance with its contractual terms at December 31, 2015.
At December 31, 2015, our second largest commercial real estate loan relationship was a $14.3 million loan secured by various office buildings. The loan was performing in accordance with its contractual terms at December 31, 2015.
Commercial and Industrial Loans. The second largest segment of our loan portfolio is commercial and industrial loans generally to businesses, professionals and sole proprietorships in our market area. We offer secured and unsecured commercial term loans, which have a maturity of greater than one year and the payment of which is dependent on future earnings and cash flows. The term for repayment of the loan will normally be limited to the lesser of the expected useful life of the asset being financed or a fixed amount of time, generally five to ten years. The unsecured term loan will generally have a term no longer than five years. We also offer revolving lines of credit, letters of credit and demand loans secured by business assets other than real estate, such as business equipment, inventory and accounts receivable. We originate these loans on both a fixed-rate and adjustable-rate basis. Adjustable-rate loans are generally based on LIBOR or the Prime Interest Rate, although our policies permit interest rates to be based on the Constant Maturity Treasury Index or the federal funds rate and adjust on various periodic intervals. Where the borrower is a corporation, partnership or other entity, significant equity holders may be a co-borrower or they may offer their personal guarantee.
When making commercial and industrial loans, we consider the financial statements and/or tax returns of the borrower, the borrower's payment history of corporate debt, the debt service capabilities of the borrower, the projected cash flows of the business, the viability of the industry in which the borrower operates, the value of the collateral, our assessment of management's ability and, when offered a personal guarantee, the guarantor's personal cash flows. Commercial and industrial loans are generally secured by a
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variety of collateral, primarily accounts receivable, inventory and equipment, and may be supported by personal guarantees. Commercial and industrial loans that are secured are generally made in amounts up to 80% of the value of the collateral securing the loan.
At December 31, 2015, our largest commercial and industrial loan relationship was a $15.3 million commitment to a firm which provides customer contact solutions, of which $12.6 million was outstanding. This loan was performing in accordance with its contractual terms at December 31, 2015.
At December 31, 2015, our second largest commercial and industrial loan relationship was a $15.0 million commitment to a private investment firm, of which $6.8 million was outstanding. This loan was performing in accordance with its contractual terms at December 31, 2015.
One- to Four-Family Residential Real Estate Loans. We also offer residential mortgage loans, which enable borrowers to purchase or refinance existing homes, most of which are owner occupied. We offer fixed-rate and adjustable-rate loans with terms up to 30 years. Borrower demand for fixed-rate loans versus adjustable-rate loans is a function of current and expected future levels of interest rates and the difference between the interest rates and loan fees offered for fixed-rate mortgage loans and the initial period interest rates and loan fees for adjustable-rate loans. Loan fees, interest rates and other provisions of mortgage loans are determined by us on the basis of our own pricing criteria and competitive market conditions. The majority of our new mortgage loans are purchased from Philadelphia Mortgage Advisors. The ability to acquire loans through this investment allows Fox Chase Bank to continue to offer one- to four-family mortgage loans to a growing and diverse set of customers through additional distribution channels in a cost-effective manner.
While one- to four-family residential real estate loans are normally originated with terms of up to 30 years, such loans typically remain outstanding for substantially shorter periods because borrowers often prepay their loans in full upon the sale of the property pledged as security or upon refinancing the original loan. Therefore, average loan maturity is a function of, among other factors, the level of purchase and sale activity in the real estate market, prevailing interest rates and the interest rates payable on outstanding loans. In general, as interest rates decline, prepayments accelerate and the average life of the loans decrease.
Interest rates and payments on our adjustable-rate mortgage loans generally adjust annually after an initial fixed period of one, three or five years. Interest rates and payments on these adjustable-rate loans generally are based on the one-year Constant Maturity Treasury Index. The maximum amount by which the interest rate may be increased is generally two percentage points per adjustment period with a lifetime interest rate cap of six percentage points over the initial interest rate of the loan.
Because of our branch locations in southern New Jersey, a portion of the properties securing our residential mortgages are second homes or rental properties. At December 31, 2015, approximately 22.0% of our one- to four-family mortgage loans were secured by second homes and approximately 9.1% were secured by rental properties. If the property is a second home, our underwriting emphasizes the borrower's ability to repay the loan out of current income. If the property is a rental property, we focus on the anticipated income from the property. Interest rates on loans secured by rental properties are typically higher than comparable loans secured by primary or secondary residences. Generally, mortgage loans secured by rental properties or second homes have a higher risk of default than mortgage loans secured by the borrower's primary residence.
Historically, we generally did not make conventional loans with loan-to-value ratios exceeding 95% at the time the loan was originated. During 2008, we began lowering our loan-to-value limits on certain loans due to deteriorating economic conditions and declining real estate values. Private mortgage insurance is generally required for all first mortgage loans with loan-to-value ratios in excess of 80%. We require properties securing mortgage loans to be appraised by a Bank-approved independent licensed appraiser. We generally require title insurance on all first mortgage loans. Borrowers must obtain hazard insurance, and flood insurance for loans on properties located in a flood zone, before closing the loan.
At December 31, 2015, our largest outstanding one- to four-family residential real estate loan had an outstanding balance of $925,000 and was secured by a single family home in Montgomery County, Pennsylvania. The loan was performing in accordance with its contractual terms at December 31, 2015.
Construction Loans. We originate adjustable-rate and fixed-rate loans to individuals, builders and developers to finance the construction of residential dwellings. We also make construction loans for commercial development projects, including apartment buildings, restaurants, shopping centers, schools, investment properties and other owner-occupied properties used for businesses. Our construction loans generally provide for the payment or reserving of interest only during the construction phase, which is usually six to twelve months for residential properties and eighteen months or more for commercial properties. At the end of the construction phase, the loan is typically repaid with the proceeds from sales of individual units or is converted to a permanent mortgage loan. Loans generally can be made with a maximum loan-to-value ratio of 80% at the time the loan is originated. Before making a commitment to fund a construction loan, we require an appraisal of the property by a Bank-approved independent licensed appraiser. We also generally require an inspection of the property before disbursement of funds during the construction phase of the loan.
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The terms and rates of our land loans are the same as our multi-family and commercial real estate loans. Loans secured by undeveloped land or improved lots generally involve greater risks than residential mortgage lending because land loans are more difficult to evaluate. If the estimate of value proves to be inaccurate, in the event of default and foreclosure, we may be confronted with a property value which is insufficient to assure full repayment. Loan amounts generally do not exceed 75% of the lesser of the appraised value or the purchase price. We did not make any loans secured by undeveloped or developed land in 2015.
At December 31, 2015, our largest construction loan was a multi-family project to which the Bank has committed $9.9 million, of which $5.7 million was outstanding. The loan was performing in accordance with its contractual terms at December 31, 2015.
At December 31, 2015, our second largest construction loan was a residential home development project to which the Bank has committed $8.8 million, of which $4.9 million was outstanding. The loan was performing in accordance with its contractual terms at December 31, 2015.
Consumer Loans. We offer a variety of consumer loans, including home equity loans and home equity lines of credit.
The procedures for underwriting consumer loans include an assessment of the applicant's payment history on other debts and ability to meet existing obligations and payments on the proposed loan. Although the applicant's creditworthiness is a primary consideration, the underwriting process also includes a comparison of the value of the collateral, if any, to the proposed loan amount.
We offer fixed-rate and adjustable-rate home equity loans and lines of credit. Home equity loans have terms that range from one to fifteen years. We hold a first or second mortgage position on most of the homes that secure our home equity loans and home equity lines of credit. We generally offer fixed-rate home equity loans with a maximum combined loan-to-value ratio of 90% and adjustable-rate lines of credit with a maximum combined loan-to-value ratio of 80%. Home equity lines of credit have adjustable-rates of interest that are based on the Prime Interest Rate. Home equity lines of credit generally require interest and principal to be paid on a monthly basis and have terms up to 20 years. Interest rates on these lines typically adjust monthly.
Loan Underwriting Risks
Adjustable-Rate Loans. While we anticipate that adjustable-rate loans will better offset the adverse effects of an increase in interest rates as compared to fixed-rate mortgages, the increased mortgage payments required of adjustable-rate loan borrowers in a rising interest rate environment could cause an increase in delinquencies and defaults. The marketability and collateral value of the underlying property also may be adversely affected in a higher interest rate environment. In addition, although adjustable-rate mortgage loans help make our loan portfolio more responsive to changes in interest rates, the extent of this interest sensitivity is limited by the annual and lifetime interest rate adjustment limits.
Multi-Family and Commercial Real Estate Loans. Loans secured by multi-family and commercial real estate generally have larger balances and involve a greater degree of risk than one- to four-family residential mortgage loans. The primary concern in multi-family and commercial real estate lending is the borrower's creditworthiness and the feasibility and cash flows of the project. Payments on loans secured by income properties often depend on successful operation and management of the properties. As a result, repayment of such loans may be subject to a greater extent than residential real estate loans to adverse conditions in the real estate market or the economy. To monitor cash flows on income properties, we generally require borrowers and loan guarantors to provide annual financial statements and/or tax returns. In reaching a decision on whether to make a multi-family or commercial real estate loan, we consider the net operating income of the property, the borrower's expertise, credit history and profitability and the value of the underlying property. We have generally required that the properties securing these real estate loans have debt service coverage ratios (the ratio of earnings before debt service to debt service) of at least 1.20x. Environmental screens, surveys and inspections are obtained when circumstances suggest the possibility of the presence of hazardous materials. Further, in connection with our ongoing monitoring of the loan, we typically review the loan, cash flows of the underlying property and guarantors annually.
Commercial and Industrial Loans. Unlike commercial real estate loans, which generally are made on the basis of the cash flows of the underlying real estate, and which are secured by real property, the value of which tends to be more easily ascertainable, commercial and industrial loans are typically made on the basis of the borrower's ability to make repayment from the cash flows of the borrower's underlying business. As a result, the availability of funds for the repayment of commercial and industrial loans may depend substantially on the success of the business itself. Further, any collateral securing such loans may depreciate over time, may be difficult to appraise and may fluctuate in value, or in the case of accounts receivable, may be difficult to collect.
One- to Four-Family Residential Real Estate Loans. One- to four-family residential real estate loans are secured by first mortgages on residential real estate properties. Repayment of these loans is generally dependent on the earnings and cash flows of the borrowers, however, ultimate repayment is secured by the underlying collateral. In circumstances where real estate values decline, the risk of loss on one- to four-family residential real estate loans increases as the repossessed collateral may not provide an adequate source of repayment.
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Construction Loans. Construction financing is generally considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the property's value at completion of construction, the estimated cost (including interest) of construction and the ability of the project to be sold or refinanced upon completion. During the construction phase, a number of factors could result in delays and cost overruns. If the estimate of construction costs proves to be inaccurate, we may be required to advance funds beyond the amount originally committed to permit completion of the building. If the estimate of value proves to be inaccurate, we may be confronted, at or before the maturity of the loan, with a project having a value that is insufficient to assure full repayment. If we are forced to foreclose on a project before or at completion due to a borrower default, we may not be able to recover all of the unpaid balance of, and accrued interest on, the loan as well as related foreclosure and holding costs. In general, due to the increased risk associated with construction loans, the risk of loss is higher if a borrower defaults than other types of commercial loans.
Consumer Loans. Consumer loans are comprised primarily of home equity loans and lines of credit, which may entail greater risk than residential mortgage loans, as they are generally secured by second or third mortgages on real estate. In circumstances where real estate values decline, the risk of loss on a home equity loan or line of credit increases, as the repossessed collateral may not provide an adequate source of repayment. Additionally, the Company has small segments of consumer loans that are unsecured. Consumer loan collections depend on the borrower's continuing financial stability, and therefore are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans.
Loan Originations, Sales and Participations. Loan originations come from a number of sources. The primary source of loan originations is existing customers, walk-in traffic, advertising, referrals from customers, professionals, including attorneys and accountants, and loans originated by our commercial relationship managers. We advertise in newspapers that are widely circulated throughout our market areas. Fox Chase Bank also purchases loans from Philadelphia Mortgage Advisors.
At December 31, 2015, we were a participating lender in fourteen loan relationships totaling $40.8 million, which were secured by commercial and residential real estate, lease payments and the assets of businesses. These loans are being serviced by the lead lender. We expect to continue to purchase participation interests, primarily in commercial loans and commercial real estate loans, when such opportunities meet our investment return and risk parameters. On these participation interests, we generally perform our own underwriting analysis before purchasing such loans and, therefore, believe there should not be a greater risk of default on these obligations. However, in a purchased participation loan, we do not service the loan and thus are subject to the policies and practices of the lead lender with regard to monitoring delinquencies, pursuing collections and instituting foreclosure proceedings. In assessing whether to participate, we require a review of all of the documentation relating to any loan in which we participate, including any annual financial statements provided by a borrower. Additionally, we require periodic updates on the loan from the lead lender.
Additionally, we purchase participations in large syndicated loans known as shared national credits. We held $54.6 million of such loans in our portfolio at December 31, 2015, which represented fourteen different loan relationships.
From time to time we also sell participation interests in loans where we are the lead lender and servicer. At December 31, 2015, we were the lead lender on eight loan relationships totaling $124.2 million of which we owned $55.7 million and serviced $68.5 million for other banks. We anticipate that we will continue to sell participation interests to local financial institutions, primarily with respect to commercial real estate and commercial and industrial loans that approach or exceed certain lending thresholds.
Loan Approval Procedures and Authority. Our lending activities follow written, non-discriminatory, underwriting standards and loan origination procedures established by our Board of Directors and management. The Board has granted authority to approve residential and consumer loans up to $300,000 to the Assistant Manager of the Consumer Lending Department. The Board has granted authority to approve new commercial loans up to $1.5 million to the President and Chief Executive Officer, the Chief Operating Officer, the Chief Lending Officer and certain other senior lenders. All such loans are approved under dual authority. Commercial loans between $1.5 million and $2.75 million can be approved based on dual authority from the President and Chief Executive Officer, the Chief Operating Officer, the Chief Lending Officer and the Chief Financial Officer. Loans between $2.75 million and $4.5 million require the approval of the Officers Loan Committee, which consists of the President and Chief Executive Officer, the Chief Operating Officer, the Chief Lending Officer and other experienced lenders and officers as appointed by the Chief Executive Officer from time to time. Loans or groups of loans above $4.5 million require an approval by the Executive Officers Loan Committee, which consists of the President and Chief Executive Officer, the Chief Operating Officer, the Chief Lending Officer, the Chief Financial Officer and other senior lending officers of Fox Chase Bank.
Loan Reviews. Annual loan reviews of loan relationships less than $500,000 are approved by the commercial credit manager along with the assigned lending officer. Annual loan reviews of loan relationships greater than $500,000 up to and including $5.0 million are approved by two of the following, Chief Lending Officer, Chief Credit Officer or Chief Operating Officer. Annual loan reviews of loan relationships greater than $5.0 million are approved by the Officers Loan Committee. All loans greater than $10.0 million are reviewed by the Risk Management Committee of the Board of Directors.
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Loans to One Borrower. The maximum amount we may lend to one borrower and the borrower's related entities generally is limited, by regulation, to 15% of our stated capital and reserves. At December 31, 2015, our general regulatory limit on loans to one borrower was approximately $24.3 million. At that date, our largest lending relationship was a $18.0 million warehouse line of credit commitment to Philadelphia Mortgage Advisors, of which $7.6 million was outstanding. Our second largest lending relationship at December 31, 2015 was a $17.0 million commitment to a funeral home and cemetery operation, of which $14.1 million was outstanding. Both of these loans were performing in accordance with their contractual terms at December 31, 2015.
Loan Commitments. We issue commitments for commercial loans conditioned upon the occurrence of certain events. Commitments to originate commercial loans are legally binding agreements to lend to our customers. Generally, our commercial loan commitments expire within 90 days.
Investment Activities
The Board of Directors reviews and approves our investment policy annually. The Risk Management Committee of the Board of Directors is responsible for establishing policies for conducting investment activities, including the establishment of risk limits. The Risk Management Committee of the Board of Directors reviews investment transactions on a monthly basis and monitors the composition and performance of the investment portfolio on a quarterly basis. The Board has directed the Chief Financial Officer to implement the investment policy.
The investment portfolio is primarily viewed as a source of liquidity. The investment portfolio management policy is designed to:
1. absorb funds when loan demand and deposit outflows are low and infuse funds into loans when loan demand is high and to fund deposit outflows;
2. generate a favorable return on investments within established risk parameters;
3. provide income consistent with our liquidity and safety requirements, while providing a suitable balance of quality and diversification to our balance sheet;
4. have collateral available for pledging requirements; and
5. implement certain interest rate risk management measures intended to establish and maintain an appropriate level of sensitivity to changes in interest rates.
We have authority to invest in various types of liquid assets, including U.S. Treasury obligations, securities of various federal and state agencies and municipal governments, mortgage and asset-backed securities, corporate debt instruments and certificates of deposit of federally insured institutions. Within certain regulatory and policy limits, we also may invest a percentage of our capital in mutual funds. We also are required to maintain an investment in FHLB of Pittsburgh stock.
At December 31, 2015, our investment portfolio totaled $290.0 million and consisted primarily of mortgage-backed securities issued by Fannie Mae, Freddie Mac, Ginnie Mae and, to a lesser extent, mortgage related securities issued by private issuers and corporate debt. Of this amount, $139.8 million was classified as available-for-sale and $150.2 million was classified as held-to-maturity. Additionally, we held FHLB stock totaling $6.7 million.
Deposit Activities and Other Sources of Funds
General. Deposits, borrowings, repayments on loans and investment securities are the major sources of our funds for lending and other investment purposes. Loan and investment security repayments are a relatively stable source of funds, while deposit flows and loan and mortgage related investment security prepayments are significantly influenced by general interest rates and economic conditions.
Deposit Accounts. Substantially all of our depositors are residents or businesses in Pennsylvania or New Jersey. We attract deposits in our market areas through advertising and by offering a broad selection of deposit instruments, including noninterest-bearing demand accounts (such as checking accounts), interest-bearing accounts (such as NOW and money market accounts), regular savings accounts and certificates of deposit. Deposit account terms vary according to the minimum balance required, the time periods the funds must remain on deposit and the interest rate, among other factors. In determining the terms of our deposit accounts, we consider the rates offered by our competition, our liquidity needs, profitability, matching deposit and loan products and customer preferences and concerns. We generally review our deposit mix and pricing bi-weekly. Our current strategy is to offer competitive rates and to be in the middle of the market for rates on a variety of retail and business deposit products. We utilize brokered deposits as a funding source and had $78.5 million of such deposits at December 31, 2015.
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Cash Management Services. We offer a variety of deposit accounts and services designed for businesses operating in our market area. Our business banking deposit products include a variety of commercial checking, savings, and money market accounts for small businesses and middle market companies. We also offer cash management products including remote deposit capture, investment and borrowing sweep services, electronic payment initiation, and fraud mitigation products.
Borrowings. We utilize term borrowings from the FHLB of Pittsburgh and other commercial banks to provide additional liquidity, aside from deposits, to fund our loans and investments. As of December 31, 2015, Fox Chase Bank had outstanding term borrowings of $110.0 million with the FHLB of Pittsburgh and $30.0 million with a commercial bank. Additionally, we have short term borrowing facilities with the FHLB of Pittsburgh and the Federal Reserve Bank of Philadelphia as well as short term lines of credit with three other commercial banks. As of December 31, 2015, we had $38.5 million of FHLB short-term borrowings.
The FHLB functions as a central reserve bank providing credit for its member financial institutions. As a member, we are required to own capital stock in the FHLB and are authorized to apply for advances on the security of such stock and certain of our whole first mortgage loans and other assets (principally mortgage related securities), provided certain standards related to creditworthiness have been met. Advances are made under several different programs, each having its own interest rate and range of maturities. Depending on the program, limitations on the amount of advances are based either on a fixed percentage of an institution's net worth or on the FHLB's assessment of the institution's creditworthiness.
Personnel
As of December 31, 2015, we had 126 full-time employees and 16 part-time employees. We believe our relationship with our employees is good.
Subsidiaries
Fox Chase Bank established Fox Chase Financial, Inc. in 1999. As a Delaware-chartered investment holding company, Fox Chase Financial, Inc. manages and holds investment securities.
In 2009, Fox Chase Bank established Fox Chase Service Corporation as a wholly-owned subsidiary. Fox Chase Service Corporation, a Pennsylvania-chartered corporation, maintains an investment in Philadelphia Mortgage Advisors. Philadelphia Mortgage Advisors is a licensed mortgage banker in Pennsylvania, New Jersey, Delaware and Florida that originates first and second mortgages for resale into the secondary market and to third party investors. The majority of Philadelphia Mortgage Advisors' customers are located in the Philadelphia metropolitan area, Delaware and New Jersey. Fox Chase Service Corporation currently owns 46.15% of Philadelphia Mortgage Advisors.
In 2011, Fox Chase Bank established Davisville Associates, LLC and 104 S. Oakland Ave., LLC as wholly-owned subsidiaries. Davisville Associates, LLC is a Pennsylvania-chartered limited liability company and 104 S. Oakland Ave., LLC is a New Jersey-chartered limited liability company. Each was formed to secure, manage and hold foreclosed assets.
Regulation and Supervision
General
During 2013, Fox Chase Bank converted from a federally-chartered savings bank to a Pennsylvania state-chartered savings bank. As part of the charter conversion, Fox Chase transitioned from a savings and loan holding company to a bank holding company.
As a bank holding company, Fox Chase is required by federal law to report to, and otherwise comply with the rules and regulations of, the Federal Reserve Board. Fox Chase Bank, an insured Pennsylvania state-chartered savings bank, is subject to extensive regulation, examination and supervision by the Department and by the FDIC.
Fox Chase Bank is a member of the FHLB System and its deposit accounts are insured up to applicable limits by the Deposit Insurance Fund managed by the FDIC. Fox Chase Bank must file reports with the Department and the FDIC concerning its activities and financial condition in addition to obtaining regulatory approvals before entering into certain transactions such as mergers with, or acquisitions of, other financial institutions. The Department and the FDIC periodically examine Fox Chase Bank to evaluate its safety and soundness and compliance with various regulatory requirements. This regulatory structure is intended primarily for the protection of the insurance fund, depositors and Bank customers. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of an adequate allowance for loan losses. Any change in such policies, whether by the Department, the FDIC or Congress, could have a material adverse impact on Fox Chase Bancorp and Fox Chase Bank and their operations.
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The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act") made extensive changes in the regulation of financial institutions and their holding companies. Under the Dodd-Frank Act, on July 21, 2011, responsibility for the regulation and supervision of savings and loan holding companies was transferred from the Office of Thrift Supervision to the Board of Governors of the Federal Reserve System. Additionally, the Dodd-Frank Act created a new Consumer Financial Protection Bureau as an independent bureau of the Federal Reserve Board. The Consumer Financial Protection Bureau assumed responsibility for the implementation of the federal financial consumer protection and fair lending laws and regulations and has authority to impose new requirements. However, institutions of less than $10.0 billion in assets, such as Fox Chase Bank, continue to be examined for compliance with consumer protection and fair lending laws and regulations by, and be subject to the enforcement authority of, their prudential regulators.
Certain of the regulatory requirements that are applicable to Fox Chase Bank and Fox Chase are described below. This description of statutes and regulations is not intended to be a complete explanation of such statutes and regulations and their effects on Fox Chase Bank and Fox Chase and is qualified in its entirety by reference to the actual statutes and regulations.
Bank Regulation
Pennsylvania Savings Bank Law. The Pennsylvania Banking Code of 1965, as amended (the "1965 Code"), and the Pennsylvania Department of Banking Code, as amended (the "Department Code," and collectively, the "Codes"), contain detailed provisions governing the organization, location of offices, rights and responsibilities of directors, officers and employees, as well as corporate powers, savings and investment operations and other aspects of the Bank and its affairs. The Codes delegate extensive rule-making power and administrative discretion to the Department so that the supervision and regulation of state-chartered savings banks may be flexible and readily responsive to changes in economic conditions and in savings and lending practices. Specifically, under the Department Code, the Department is given the authority to exercise such supervision over state-chartered savings banks as to afford the greatest safety to creditors, shareholders and depositors, ensure business safety and soundness, conserve assets, protect the public interest and maintain public confidence in such institutions.
The 1965 Code provides, among other powers, that state-chartered savings banks may engage in any activity permissible for a national banking association or federal savings association, subject to regulation by the Department (which shall not be more restrictive than the regulation imposed upon a national banking association or federal savings association, respectively). Before it engages in such an activity allowable for a national banking association or federal savings association, a state-chartered savings bank must either obtain prior approval from the Department or provide at least 30 days’ prior written notice to the Department. The authority of the Bank under Pennsylvania law, however, may be constrained by federal law and regulation. See "Investments and Activities" below.
Capital Requirements. Federal regulations require federally insured depository institutions to meet several minimum capital standards: a common equity Tier 1 capital to risk-based assets ratio of 4.5%, a Tier 1 capital to risk-based assets ratio of 6.0%, a total capital to risk-based assets of 8.0%, and a Tier 1 capital to total assets leverage ratio of 4.0%. These capital requirements were effective January 1, 2015 and are the result of a final rule implementing recommendations of the Basel Committee on Banking Supervision and certain requirements of the Dodd-Frank Act.
In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, all assets, including certain off-balance sheet assets (e.g., recourse obligations, direct credit substitutes, residual interests) are multiplied by a risk weight factor assigned by the regulations based on the risks believed inherent in the type of asset. Higher levels of capital are required for asset categories believed to present greater risk. Common equity Tier 1 capital is generally defined as common stockholders’ equity and retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and additional Tier 1 capital. Additional Tier 1 capital includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus, meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt. Also included in Tier 2 capital is the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and, for institutions that have exercised an opt-out election regarding the treatment of Accumulated Other Comprehensive Income, up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations. In assessing an institution’s capital adequacy, the FDIC takes into consideration, not only these numeric factors, but qualitative factors as well, and has the authority to establish higher capital requirements for individual institutions where deemed necessary.
In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted asset above the amount necessary to meet its minimum risk-based capital requirements. The capital conservation buffer requirement is being phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and increasing each year until fully implemented at 2.5% on January 1, 2019.
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Prompt Corrective Regulatory Action. Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. These categories were revised effective January 1, 2015 to incorporate the new capital standards effective the same date. If not well capitalized, regulatory approval is required to accept broker deposits. The FDIC is required to take certain supervisory actions against undercapitalized institutions, the severity of which depends upon the institution’s degree of undercapitalization. In addition, numerous mandatory supervisory actions become immediately applicable to an undercapitalized institution, including, but not limited to, increased monitoring by regulators and restrictions on growth, capital distributions and expansion. The FDIC could also take any one of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors. Significantly and critically undercapitalized institutions are subject to additional mandatory and discretionary measures.
Insurance of Deposit Accounts. Fox Chase Bank’s deposits are insured up to applicable limits by the Deposit Insurance Fund of the FDIC. Deposit insurance per account owner is currently $250,000. Under the FDIC’s risk-based assessment system, insured institutions are assigned a risk category based on supervisory evaluations, regulatory capital levels and certain other factors. An institution’s assessment rate depends upon the category to which it is assigned, and certain adjustments specified by FDIC regulations. Institutions deemed less risky pay lower assessments. The FDIC may adjust the scale uniformly, except that no adjustment can deviate more than two basis points from the base scale without notice and comment. No institution may pay a dividend if in default of the federal deposit insurance assessment.
The Dodd-Frank Act required the FDIC to revise its procedures to base its assessments upon each insured institution’s total assets less tangible equity instead of deposits. The FDIC finalized a rule, effective April 1, 2011, that set the assessment range at 2.5 to 45 basis points of total assets less tangible equity.
The FDIC has authority to increase insurance assessments. A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of Fox Chase Bank. Management cannot predict what insurance assessment rates will be in the future.
Loans to One Borrower. Pennsylvania law provides that savings banks are subject to a limit on loans to one borrower. Generally, subject to certain exceptions, a savings bank may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of its capital accounts. See "—Loan Underwriting Risks—Loans to One Borrower."
Restrictions on Dividends. The Company’s ability to declare and pay dividends may depend in part on dividends received from the Bank. The 1965 Code regulates the distribution of dividends by savings banks and provides that dividends may be declared and paid only out of accumulated net earnings and may be paid in cash or property other than its own shares. Dividends may not be declared or paid unless stockholders’ equity is at least equal to contributed capital.
Interstate Banking and Branching. Federal law permits a bank to acquire an institution by merger in a state other than Pennsylvania unless the other state has opted out of interstate banking and branching. Federal law, as amended by the Dodd-Frank Act, also authorizes de novo branching into another state if the host state allows banks chartered by that state to establish such branches within its borders. The Bank currently has full-service locations in Atlantic and Cape May Counties, New Jersey. At its interstate branches, the Bank may conduct any activity authorized under Pennsylvania law that is permissible either for a New Jersey savings bank (subject to applicable federal restrictions) or a New Jersey branch of an out-of-state national bank. The New Jersey Department of Banking and Insurance may exercise certain limited regulatory authority over the Bank’s New Jersey branches.
Investments and Activities. Under federal law, all state-chartered FDIC-insured banks have generally been limited to activities as principal and equity investments of the type and in the amount authorized for national banks, notwithstanding state law. The FDIC Improvement Act and the FDIC permit exceptions to these limitations.
Community Reinvestment Act. All state-chartered banks have a responsibility under the Community Reinvestment Act and related regulations to help meet the credit needs of their communities, including low- and moderate-income neighborhoods. An institution's failure to comply with the provisions of the Community Reinvestment Act could result in restrictions on its activities. Fox Chase Bank received a "satisfactory" Community Reinvestment Act rating in its most recently completed examination.
Transactions with Related Parties. Federal law limits Fox Chase Bank's authority to engage in transactions with "affiliates" (e.g., any entity that controls or is under common control with Fox Chase Bank, including Fox Chase Bancorp and their other subsidiaries). The aggregate amount of covered transactions with any individual affiliate is limited to 10% of the capital and surplus of the savings institution. The aggregate amount of covered transactions with all affiliates is limited to 20% of the savings institution's capital and surplus. Certain transactions with affiliates are required to be secured by collateral in an amount and of a type specified by federal law. The purchase of low quality assets from affiliates is generally prohibited. Transactions with affiliates must generally be on terms and under circumstances that are at least as favorable to the institution as those prevailing at the time for comparable transactions with non-affiliated companies.
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The Sarbanes-Oxley Act of 2002 generally prohibits loans by the Company to its executive officers and directors. However, the law contains a specific exception for loans by a depository institution to its executive officers and directors in compliance with federal banking laws. Under such laws, Fox Chase Bank's authority to extend credit to executive officers, directors and 10% shareholders ("insiders"), as well as entities such persons control, is limited. The laws limit both the individual and aggregate amount of loans that Fox Chase Bank may make to insiders based, in part, on Fox Chase Bank's capital level and requires that certain board approval procedures be followed. Such loans are required to be made on terms substantially the same as those offered to unaffiliated individuals and not involve more than the normal risk of repayment. There is an exception for loans made pursuant to a benefit or compensation program that is widely available to all employees of the institution and does not give preference to insiders over other employees. Loans to executive officers are subject to additional limitations based on the type of loan involved.
Enforcement. The Department and the FDIC have enforcement responsibility over savings institutions and have authority to bring actions against the institution and all institution-affiliated parties, including shareholders, and any attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful actions likely to have an adverse effect on an insured institution. Formal enforcement action may range from the issuance of a capital directive or cease and desist order to removal of officers and/or directors to institution of receivership, conservatorship or termination of deposit insurance. Civil penalties cover a wide range of violations and can amount to $25,000 per day, or even $1 million per day in especially egregious cases. Federal law also establishes criminal penalties for certain violations.
FHLB System. Fox Chase Bank is a member of the FHLB System, which consists of 12 regional FHLBs. The FHLB provides a central credit facility primarily for member institutions. Fox Chase Bank, as a member of the FHLB of Pittsburgh, is required to acquire and hold shares of capital stock in that FHLB. Fox Chase Bank was in compliance with this requirement with an investment in FHLB stock at December 31, 2015 of $6.7 million.
Federal Reserve System. The Federal Reserve Board regulations require banks to maintain non-interest earning reserves against their transaction accounts (primarily Negotiable Order of Withdrawal (NOW) and regular checking accounts). The regulations generally provide that, for 2016, reserves be maintained against aggregate transaction accounts as follows: a 3% reserve ratio assessed on net transaction accounts up to and including $110.2 million; a 10% reserve ratio applied above $110.2 million. The first $15.2 million of otherwise reservable balances (subject to adjustments by the Federal Reserve Board) exempted from the reserve requirements. Fox Chase Bank complies with the foregoing requirements.
Other Regulations
Fox Chase Bank's operations are also subject to federal laws applicable to credit transactions, such as the:
• | Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers; |
• | Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves; |
• | Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit; |
• | Fair Credit Reporting Act of 1978, governing the use and provision of information to credit reporting agencies; |
• | Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies; and |
• | rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws. |
The operations of Fox Chase Bank also are subject to the:
• | Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; |
• | Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and withdrawals from deposit accounts and customers' rights and liabilities arising from the use of automated teller machines and other electronic banking services; and |
• | Check Clearing for the 21st Century Act (also known as "Check 21"), which gives "substitute checks," such as digital check images and copies made from that image, the same legal standing as the original paper check. |
Holding Company Regulation
General. As a bank holding company, Fox Chase is subject to Federal Reserve Board regulations, examinations, supervision, reporting requirements and regulations concerning its activities. In addition, the Federal Reserve Board has enforcement authority over Fox Chase and its non-savings institution subsidiaries. Among other things, this authority permits the Federal Reserve Board to restrict or prohibit activities that are determined to be a serious risk to Fox Chase Bank.
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The Gramm-Leach-Bliley Act of 1999 authorizes a bank holding company that meets specified conditions, including its depository institution subsidiaries being well-capitalized and well managed, to opt to become a "financial holding company," and thereby engage in a broader array of financial activities than previously permitted. Such activities can include insurance underwriting and investment banking. The Dodd-Frank Act added the requirements that the holding company itself be well-capitalized and "well managed." The Company has not opted to become a financial holding company. The Federal Reserve Board has the power to order a holding company or its subsidiaries to terminate any activity, or to terminate its ownership or control of any subsidiary, when it has reasonable cause to believe that the continuation of such activity or such ownership or control constitutes a serious risk to the financial safety, soundness or stability of any bank subsidiary of that holding company.
Acquisitions. The Company is required to obtain the prior approval of the Federal Reserve Board to acquire all, or substantially all, of the assets of any bank or bank holding company or merge with another bank holding company. Prior Federal Reserve Board approval is also required for the Company to acquire direct or indirect ownership or control of any voting securities of any bank or bank holding company if, after giving effect to such acquisition, the Company would, directly or indirectly, own or control more than 5% of any class of voting shares of such bank or bank holding company. In evaluating such transactions, the Federal Reserve Board considers the financial and managerial resources of and future prospects of the companies involved, competitive factors and the convenience and needs of the communities to be served. Bank holding companies may acquire additional banks in any state, subject to certain restrictions such as deposit concentration limits. With certain exceptions, the Bank Holding Company Act of 1956 (the "BHCA") prohibits a bank holding company from acquiring direct or indirect ownership or control of more than 5% of the voting shares of a company that is not a bank or a bank holding company, or from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries. The principal exceptions to these prohibitions involve certain non-bank activities, which, by statute or by Federal Reserve Board regulation or order, have been identified as activities closely related to the business of banking. The activities of the Company are subject to these legal and regulatory limitations under the BHCA and the related Federal Reserve Board regulations.
Under the Change in Bank Control Act of 1978 (the "CBCA"), notice must be submitted to the Federal Reserve Board if any person (including a company), or any group acting in concert, seeks to acquire 10% of any class of the Company’s outstanding voting securities, unless the Federal Reserve Board determines that such acquisition will not result in a change of control of the Bank. Under the CBCA, the Federal Reserve Board has 60 days within which to act on such notice taking into consideration certain factors, including the financial and managerial resources of the proposed acquiror, the convenience and needs of the community served by the Bank and the antitrust effects of an acquisition.
Capital Requirements. The Federal Reserve Board maintains guidelines regarding the capital adequacy of bank holding companies, which require bank holding companies to maintain on a consolidated basis, specified minimum ratios of capital to total assets and capital to risk-weighted assets. The Dodd-Frank Act required the Federal Reserve Board to establish for all holding companies minimum capital requirements that are as stringent as those for the subsidiary insured depository institution. The previously discussed final rule regarding capital requirements implements this Dodd-Frank Act directive. Consolidated regulatory capital requirements identical to those applicable to the subsidiary institutions now generally apply to all bank holding companies with consolidated assets of $1 billion of more. As is the case with the institutions themselves, the capital conservation buffer is being phased in between 2016-2019.
Restrictions on Bank Holding Company Dividends. A fundamental principle underlying the Federal Reserve Board’s supervision and regulation is that a bank holding company should serve as a source of financial strength to its subsidiary banks. Consistent with this premise, the Federal Reserve Board expects an organization to hold capital commensurate with its overall risk profile. The Dodd-Frank Act codified the source of strength doctrine and required the issuance of implementing regulations.
The Federal Reserve Board has the power to prohibit dividends by bank holding companies if their actions constitute unsafe or unsound practices. The Federal Reserve Board has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses the Federal Reserve Board’s view that a bank holding company should pay cash dividends only to the extent that the company’s net income for the past year is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with the company’s capital needs, asset quality and overall financial condition.
Federal Securities Laws
Fox Chase common stock is registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934. As a result, Fox Chase Bancorp files quarterly and annual reports with the Securities and Exchange Commission and is subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act.
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EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers are elected by the Board of Directors and serve at the Board's discretion. The following individuals currently serve as executive officers of the Company and/or the Bank.
Name | Position | |
Thomas M. Petro | President and Chief Executive Officer of Fox Chase Bancorp, Inc. and Fox Chase Bank | |
Jerry D. Holbrook | Executive Vice President, Chief Operating Officer and Secretary of Fox Chase Bancorp, Inc. and Fox Chase Bank | |
Roger S. Deacon | Executive Vice President and Chief Financial Officer of Fox Chase Bancorp, Inc. and Fox Chase Bank | |
Michael S. Fitzgerald | Executive Vice President and Chief Lending Officer of Fox Chase Bank | |
Keiron G. Lynch | Executive Vice President and Chief Payments and Risk Officer of Fox Chase Bank | |
Below is information regarding our executive officers who are not also directors. Each executive officer has held his or her current position for at least the last five years. Ages presented are as of December 31, 2015.
Jerry D. Holbrook, CMA, has served as Executive Vice President and Chief Operating Officer since April 2008. From 2005 to March 2008, Mr. Holbrook served as Executive Vice President and Chief Financial Officer of Fox Chase. From 2003 to 2005, Mr. Holbrook was Executive Vice President, Chief Financial Officer and Corporate Secretary for Northeast Pennsylvania Financial Corp. and its principal subsidiary First Federal Bank, a public thrift institution. Previously, Mr. Holbrook served as Chief Financial Officer for E-Duction, Inc., a financial services start-up. Before that, he was Senior Vice President of Finance at First USA Bank (now part of J.P. Morgan Chase) where he managed the asset/liability management committee and was responsible for securitization planning and debt issuances for a $70 billion credit card portfolio. He began his banking career with WSFS Financial Corp. where he served as Senior Vice President and Controller. Mr. Holbrook holds a B.S. in Accounting from the University of Kentucky. Age 60.
Roger S. Deacon, CPA, has served as Executive Vice President and Chief Financial Officer since April 2008. From July 2007 to March 2008, Mr. Deacon served as Executive Vice President and Chief Accounting Officer of Fox Chase. From October 2005 to June 2007, Mr. Deacon was Senior Vice President and Chief Financial Officer for NOVA Financial Holdings, Inc., a privately held bank holding company, and its principal subsidiary NOVA Savings Bank. From January 2001 to September 2005, Mr. Deacon served as Chief Financial Officer for I4 Commerce, a privately held financial services company that provided services through its Bill Me Later product. Previously, he was Senior Vice President of Finance at First USA Bank (now part of J.P. Morgan Chase) where he was responsible for all financial planning for its credit card business, which grew from $2 billion to $70 billion in managed assets. He began his career with Price Waterhouse, where he served as an Audit Manager in their Financial Services Practice Group. Mr. Deacon holds a B.S. in Business Administration from Bucknell University, majoring in Accounting with a concentration in Finance. Age 52.
Michael S. Fitzgerald has served as Executive Vice President and Chief Lending Officer since November 2009. From June 2009 to October 2009, Mr. Fitzgerald served as Executive Vice President and Senior Lending Officer. From 1997 to May 2009, Mr. Fitzgerald worked for Sovereign Bank (now Santander Bank), with his most recent position as Senior Vice President and Regional Executive Manager. During his tenure at Sovereign Bank, Mr. Fitzgerald was responsible for both lending and credit functions. Mr. Fitzgerald began his banking career at Meridian Bank in 1985. Mr. Fitzgerald holds a B.A. in Business Administration from Lycoming College. Age 52.
Keiron G. Lynch, CTP, has served as Executive Vice President and Chief Payments Officer since April 2008. Mr. Lynch was also appointed Chief Risk Officer in October 2013. From 2005 to March 2008, Mr. Lynch served as Executive Vice President and Chief Administrative Officer. From 1999 to 2005, Mr. Lynch was Vice President of Global Visa Commerce Product Development for Visa International. Previously, he was Director of Delivery for The Source(2) Group, LLC, a joint venture between Mellon Bank and MCI Systemhouse that provided outsourced accounts payable and accounts receivables services to companies nationwide. Mr. Lynch held a number of leadership positions with Mellon Bank over 17 years culminating as Vice President and Director of New Product Development for Mellon Bank's Global Cash Management Division. Mr. Lynch serves on the American Bankers Association Payment Systems Committee. Mr. Lynch holds a B.A. in Economics from Duke University. Age 58.
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ITEM 1A. RISK FACTORS
RISK FACTORS RELATING TO THE MERGER
Fox Chase will be subject to business uncertainties and contractual restrictions while the merger is pending.
Uncertainty about the effect of the merger on employees and customers may have an adverse effect on Fox Chase and consequently on Univest. These uncertainties may impair Fox Chase’s ability to attract, retain and motivate key personnel until the merger is consummated, and could cause customers and others that deal with Fox Chase to seek to change existing business relationships with Fox Chase. Retention of certain employees may be challenging while the merger is pending, as certain employees may experience uncertainty about their future roles with Univest. If key employees depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with Univest, Univest’s business following the merger could be harmed. In addition, the merger agreement restricts Fox Chase from taking certain actions until the merger occurs without the consent of Univest. These restrictions may prevent Fox Chase from pursuing attractive business opportunities that may arise prior to the completion of the merger. See the Proxy Statement/Prospectus contained in the Registration Statement on Form S-4 filed with the SEC by Univest on February 26, 2016 (SEC File No. 333-209759) for a description of the restrictive covenants to which Fox Chase is subject.
Termination of the Merger Agreement could negatively affect Fox Chase.
If the merger agreement is terminated, there may be various consequences, including the fact that Fox Chase’s businesses may have been adversely impacted by the failure to pursue other beneficial opportunities due to the focus of management on the merger, without realizing any of the anticipated benefits of completing the merger.
If the merger agreement is terminated and Fox Chase’s board of directors seeks another merger or business combination, Fox Chase shareholders cannot be certain that Fox Chase will be able to find a party willing to offer equivalent or more attractive consideration than the consideration Univest has agreed to provide in the merger.
If the merger agreement is terminated and a different business combination is pursued, Fox Chase may be required to pay a termination fee of $10.0 million to Univest under certain circumstances.
Failure to complete the Merger could negatively impact the stock price and the future business and financial results of Fox Chase.
If the merger is not completed for any reason, Fox Chase will be subject to a number of material risks, including the following:
• | the market price of Fox Chase common stock may decline to the extent that the current market prices of its common stock already reflect a market assumption that the merger will be completed; |
• | costs relating to the merger, such as legal, accounting and financial advisory fees, and, in specified circumstances, additional reimbursement and termination fees, must be paid even if the merger is not completed; and |
• | the diversion of management’s attention from the day-to-day business operations and the potential disruption to each company’s employees and business relationships during the period before the completion of the merger may make it difficult to regain financial and market positions if the merger does not occur. |
Because the market price of Univest shares of common stock will fluctuate, Fox Chase shareholders cannot be sure of the value of the merger consideration they may receive.
Upon completion of the merger, each share of Fox Chase common stock will be converted into the right to receive merger consideration consisting of shares of Univest common stock and/or cash pursuant to the terms of the merger agreement, subject to the requirement that 60% of the outstanding shares of Fox Chase common stock be exchanged for shares of Univest common stock. The value of the stock portion of the merger consideration to be received by Fox Chase shareholders is fixed at 0.9731 shares of Univest common stock for each share of Fox Chase common stock. The sale prices for shares of Univest common stock may vary from the sale prices of Univest common stock on the date we announced the merger, on the date the joint proxy statement/prospectus was mailed to Fox Chase shareholders and on the date of the special meeting of the Fox Chase shareholders. Any change in the market price of Univest shares of common stock prior to closing the merger may affect the value of the merger consideration that Fox Chase shareholders will receive upon completion of the merger. Fox Chase is not permitted to resolicit the vote of Fox Chase shareholders solely because of changes in the market price of Univest shares of common stock. Stock price changes may result from a variety of factors, including general market and economic conditions, changes in our respective businesses, operations and prospects and regulatory considerations. Many of these factors are beyond our control.
Fox Chase shareholders may receive a form of consideration different from what they elect.
The consideration to be received by Fox Chase shareholders in the merger is subject to the requirement that 60% of the shares of Fox Chase common stock is exchanged for Univest common stock and 40% is exchanged for cash. The merger agreement contains proration and allocation procedures to achieve this desired result. If a shareholder elects all cash and the available cash is oversubscribed,
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then the shareholder will receive a portion of the merger consideration in Univest common stock. If a shareholder elects all stock and the available stock is oversubscribed, then the shareholder will receive a portion of the merger consideration in cash.
Fox Chase shareholders who make elections may be unable to sell their shares in the market pending the completion of the merger.
Fox Chase shareholders may elect to receive cash, stock or mixed consideration in the merger by completing an election form that will be sent under separate cover. Making an election will require that shareholders turn in their Fox Chase stock certificates. This means that during the time between when the election is made and the date the merger is completed, Fox Chase shareholders will be unable to sell their Fox Chase common stock. If the merger is unexpectedly delayed, this period could extend for a significant period of time. Fox Chase shareholders can shorten the period during which they cannot sell their shares by delivering their election shortly before the election deadline. However, elections received after the election deadline will not be accepted or honored.
Litigation relating to the merger could require us to incur significant costs and suffer management distraction, as well as delay and/or enjoin the merger.
Fox Chase has received a letter from attorneys representing a purported shareholder demanding that the Fox Chase board remedy alleged breaches of fiduciary duties in connection with the merger. The letter asserts that the proposed transaction undervalues Fox Chase and that Fox Chase’s directors breached their fiduciary duties by allegedly refusing to adequately shop the company and maximize shareholder value. The letter requests that Fox Chase’s board, among other things: (i) undertake all appropriate methods to maximize shareholder value; (ii) revise the merger agreement to eliminate certain deal protection devices; and (iii) refrain from completing the merger.
A negative outcome in this matter could have a material adverse effect on Fox Chase and Univest if it results in preliminary or permanent injunctive relief or rescission of the merger agreement. Such actions may also create additional uncertainty relating to the merger, and responding to such demands and defending such actions may be costly and distracting to management. Neither Fox Chase nor Univest is currently able to predict the outcome of any suit arising out of or relating to the proposed transaction that may be filed in the future. If additional letters or complaints are filed, absent new or different allegations that are material, Fox Chase and Univest will not necessarily announce such additional filings.
Fox Chase and Univest could be subject to additional demands or litigation related to the merger, whether or not the merger is consummated. Such actions may create additional uncertainty relating to the merger, and responding to such demands and defending such actions may be costly and distracting to management. Although there can be no assurance as to the ultimate outcomes of the demand or any subsequent litigation, neither Fox Chase nor Univest believes that the resolution of such demands or any subsequent litigation will have a material adverse effect on its respective financial position, results of operations or cash flows.
RISK FACTORS RELATING TO FOX CHASE'S OPERATIONS
We may be required to make increases in our provision for loan losses and to charge-off loans in the future. Further, our allowance for loan losses may prove to be insufficient to absorb losses in our loan portfolio.
For 2015, we recorded a credit to the provision for loan losses of $995,000 compared to a provision for loan losses of $1.9 million in 2014 and $982,000 in 2013. We recorded net loan recoveries of $827,000 in 2015 compared to net loan charge-offs of $2.7 million in 2014 and $623,000 in 2013. Our non-performing assets decreased to $5.2 million, or 0.46% of total assets and 3.4% of Tier 1 Bank capital, at December 31, 2015 from $6.3 million, or 0.57% of total assets and 4.2% of Tier 1 Bank capital, at December 31, 2014. Additionally, at December 31, 2015, loans that were criticized and classified as either special mention, substandard, doubtful or loss totaled $23.4 million, representing 2.1% of total assets, including nonaccruing loans of $2.5 million. If the economies we operate in and/or the real estate markets weaken, more of our criticized and classified loans may become nonperforming and we may be required to add additional reserves to our allowance for loan losses for these assets as the value of the collateral may be insufficient to pay any remaining loan balance, which could have a negative effect on our results of operations. We maintain an allowance for loan losses to provide for loans in our portfolio that may not be repaid in their entirety. We believe that our allowance for loan losses is maintained at a level adequate to absorb probable losses inherent in our loan portfolio as of the corresponding balance sheet date. However, our allowance for loan losses may not be sufficient to cover actual loan losses, and future provisions for loan losses could materially adversely affect our operating results.
In evaluating the adequacy of our allowance for loan losses, we consider numerous quantitative factors, including our historical charge-off experience, loss emergence periods, growth and seasoning of our loan portfolio, changes in the composition of our loan portfolio and the volume of and trends in our nonperforming, delinquent and criticized and classified loans. We also consider many qualitative factors, including lending policies and procedures, economic conditions and current general market collateral valuations, which are more subjective and fluid. In addition, we use information about specific borrower situations, including their financial position and estimated collateral values, to estimate the risk and amount of loss for those borrowers. Our estimates of the risk of loss and amount of loss on any loan are complicated by the significant uncertainties surrounding our borrowers' abilities to successfully
15
execute their business models through changing economic environments, competitive challenges, the effect of the current and future economic conditions on collateral values and other factors. Because of the degree of uncertainty and susceptibility of these factors to change, our actual losses may vary from our current estimates.
Our regulators, as an integral part of their examination process, periodically review our allowance for loan losses and may require us to increase our allowance for loan losses by recognizing additional provisions for loan losses charged to expense, or to decrease our allowance for loan losses by recognizing loan charge-offs. Any such additional provisions for loan losses or charge-offs, as required by our regulators, could have a material adverse effect on our financial condition and results of operations.
Our emphasis on commercial lending may expose us to increased lending risks.
At December 31, 2015, $637.7 million, or 81.9%, of our loan portfolio consisted of multi-family and commercial real estate and commercial and industrial loans. We believe these types of loans represent a greater risk of non-payment and loss and require a commensurately higher loan loss allowance than residential mortgage loans because repayment of the loans often depends on the successful operation of the business and the income stream of the borrowers. Such loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to residential mortgage or consumer loans. Also, many of our multi-family and commercial real estate and commercial business borrowers have more than one loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss compared to an adverse development with respect to a residential mortgage loan. Further, unlike residential mortgages or multi-family and commercial real estate loans, commercial and industrial loans may be secured by collateral other than real estate, such as inventory and accounts receivable, the value of which may be more difficult to appraise and may be more susceptible to fluctuation in value at default.
Assets acquired through foreclosure are carried at values which may not be realized at the ultimate disposition of the underlying assets.
We had assets acquired through foreclosure of $2.6 million and $2.8 million at December 31, 2015 and 2014, respectively. For 2015, we recorded assets acquired through foreclosure expense of $247,000 compared to $420,000 in 2014 and $5.2 million in 2013, which includes valuation adjustments of $137,000, $305,000 and $5.0 million for 2015, 2014 and 2013, respectively. At December 31, 2015, assets acquired through foreclosure consisted of other real estate owned, which is initially recorded at fair value less costs to sell. In periods subsequent to acquisition, each real estate asset is carried at the lower of the fair value of the asset, less estimated selling costs, or the amount at which the asset was initially recorded. The fair value of other real estate owned is determined using appraisals obtained from approved independent appraisers, agreements of sale or letters of intent, where applicable. We believe that our valuation of assets acquired through foreclosure is appropriate as of the corresponding balance sheet date. However, we may not recover the respective carrying values at the time of ultimate disposition of the assets, which could result in a loss on the sale of assets acquired through foreclosure, and have a material adverse effect on our financial condition and results of operations.
The unseasoned nature of our commercial loan portfolio may result in changes in estimating collectability, which may lead to additional provisions or charge-offs, which could hurt our profits.
Our multi-family and commercial real estate and commercial and industrial loan portfolios increased $444.8 million, or 230.5%, from $192.9 million at December 31, 2008 to $637.7 million at December 31, 2015. Accordingly, a large portion of our commercial loan portfolio remains unseasoned and does not provide us with a significant payment history pattern from which to judge future collectability. As a result, it may be difficult to predict the future performance of this part of our loan portfolio. These loans may have delinquency or charge-off levels above our historical experience, which could adversely affect our future performance. Further, these types of loans generally have larger balances and involve a greater risk than one- to four-family residential mortgage loans. Accordingly, if we make any errors in judgment in the collectability of our commercial loans, any resulting charge-offs may be larger on a per loan basis than those incurred historically with our residential mortgage loan or consumer loan portfolios.
Our construction loan portfolio may expose us to increased credit risk.
At December 31, 2015, our construction loan portfolio included commitments totaling $60.8 million, of which $35.8 million was outstanding. In general, construction projects provide for an interest reserve that is utilized to pay the interest for a period of time until the project is expected to produce positive cash flows. It is possible that construction loan borrowers fully utilize their interest reserve before the project is able to generate cash flows. If a borrower has insufficient liquidity to pay interest on such projects, the loan could become impaired and require an increase in the allowance for loan losses, which would adversely impact our results of operations. Our ability to work with a borrower to modify or restructure their existing loan to avoid loss lessens as the loan approaches its maturity date.
Risk of loss on a construction loan depends largely upon whether our initial estimate of the property’s value at completion of construction equals or exceeds the cost of the property construction (including interest), the availability of permanent financing and the builder’s ability to ultimately sell the property. During the construction phase, a number of factors can result in delays and cost
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overruns. If estimates of value are inaccurate or if actual construction costs exceed estimates, the value of the property securing the loan may be insufficient to ensure full repayment when completed through a permanent loan or by seizure of collateral.
Our residential mortgage loans and home equity loans expose us to risk of loss if real estate values decline.
At December 31, 2015, $90.3 million, or 11.6%, of our loan portfolio consisted of one- to four-family residential mortgage loans, and $14.7 million, or 1.9%, of our loan portfolio consisted of home equity loans, home equity lines of credit and other consumer loans. Because of our locations in southern New Jersey, many of the properties securing our residential mortgages are second homes or rental properties. At December 31, 2015, 22.0% of our one- to four-family mortgage loans were secured by second homes and 9.1% were secured by rental properties. These loans generally are considered to be more risky than loans secured by the borrower's permanent residence, as a borrower who is experiencing financial difficulty is more likely to make payments on the loan secured by the borrower's primary residence before a vacation home. Additionally, declines in real estate values, which occurred during the most recent recession, may have caused some of our mortgage and home equity loans to be inadequately collateralized, which would expose us to a greater risk of loss if we seek to recover on defaulted loans by selling the real estate collateral.
A downturn in the local economy or in local real estate values could hurt profits.
Most of the Bank’s loans are made to borrowers in the Greater Philadelphia area, Cape County and Atlantic County, New Jersey, and the surrounding areas. Tourism and gaming are significant contributors to the economy of Southern New Jersey. While we are not engaged in lending to the gaming industry, some of our borrowers are employed in the gaming industry or have businesses that benefit from the industry. As a result of this concentration, a downturn in the local economy, including declines in the tourism and gaming industries in Southern New Jersey, could cause increases in non-performing loans, which could hurt profits. A downturn in the local economy or a decline in real estate values could increase the amount of non-performing loans and cause residential and commercial mortgage loans to become inadequately collateralized, which could expose the Bank to a greater risk of loss.
Changes in interest rates could have a material adverse effect on our earnings.
Our net interest income is the interest we earn on loans and investments less the interest we pay on our deposits and borrowings. Our interest rate spread is the difference between the yield we earn on our assets and the interest rate we pay for deposits and our other sources of funding. Changes in interest rates could adversely affect our interest rate spread and, as a result, our net interest income and net interest margin. Although the yield we earn on our assets and our funding costs tend to move in the same direction in response to changes in interest rates, one can rise or fall faster than the other, causing our net interest margin to expand or contract. As of December 31, 2015, our models indicate that we are asset sensitive indicating that our assets will tend to reprice faster than our liabilities, so they may adjust faster in response to changes in interest rates. As a result, when interest rates decline, the yield we earn on assets will decrease faster than our funding costs, causing our net interest margin to contract.
Changes in the slope of the "yield curve"—or the spread between short-term and long-term interest rates—could also reduce our net interest margin. Normally, the yield curve is upward sloping, meaning short-term rates are lower than long-term rates. Because our assets tend to reprice faster than our liabilities, when the yield curve decreases or flattens, we could experience pressure on our net interest margin as our cost of funds increases relative to the yield we can earn on our assets. Changes in interest rates also can affect: (1) our ability to originate loans; (2) the value of our interest-earning assets, and our ability to realize gains from the sale of such assets; (3) our ability to obtain and retain deposits in competition with other available investment alternatives; and (4) the ability of our borrowers to repay adjustable-rate loans.
Our procedures for managing interest rate risk exposure also involve monitoring exposure of net portfolio value to interest rate increases of as much as 400 basis points and a decrease of 100 basis points. We report on an annual basis the impact on net portfolio value of an immediate and parallel increase of 400 basis points in interest rates or a 100 basis point decrease in interest rates. As of December 31, 2015, the simulations indicated an instantaneous and parallel 400 basis point increase in rates would result in approximately a 22.8% decrease in net portfolio value and an instantaneous and parallel 100 basis point decrease in rates would result in approximately a 0.6% increase in net portfolio value.
We also report on an annual basis the impact on net interest income over the next 12 months of an immediate and parallel increase of 400 basis points in interest rates or a 100 basis point decrease in interest rates. As of December 31, 2015, the simulations indicated an instantaneous and parallel 400 basis point increase in rates would result in approximately a $1.2 million, or 3.5%, increase in net interest income over the next 12 months and an instantaneous and parallel 100 basis point decrease would result in approximately a $1.5 million, or 4.4%, decrease in net interest income over the next 12 months.
Increases in mortgage interest rates could have a material adverse effect on stockholders’ equity.
At December 31, 2015, we held mortgage related securities available-for-sale with an amortized cost of $121.2 million and a fair value of $121.9 million, resulting in a net unrealized gain of $716,000. In accordance with generally accepted accounting principles, unrealized gains and temporary unrealized losses on available-for-sale securities are classified as accumulated other comprehensive income (loss), net of tax, and represent an adjustment to the Company’s stockholders’ equity. The fair value of mortgage related
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securities tends to increase or decrease based on changes in mortgage interest rates. As mortgage rates decrease, fair value tends to increase and as mortgage rates increase fair value tends to decrease. Increases in mortgage rates could adversely affect the fair value of our mortgage related securities which would reduce our stockholders’ equity.
If we conclude that the decline in value of any of our investment securities is other than temporary, we are required to write down the value of that security, which could hurt our financial conditions and results of operation.
We review individual securities in our investment portfolio quarterly to determine whether the fair value is below the current carrying value. When the fair value of any of our investment securities has declined below its carrying value, we are required to assess whether the decline is other than temporary. If the decline in the market value of a security is determined to be other-than-temporary, the credit portion of the impairment is written down through earnings and the non-credit portion is an adjustment to other comprehensive income. As of December 31, 2015, our investment portfolio included securities with an amortized cost of $289.3 million and an estimated fair value of $289.6 million. Additionally, as of December 31, 2015, $198.0 million of securities had unrealized losses of $2.0 million. Changes in the expected cash flows of these securities and/or prolonged price declines may result in our concluding in future periods that the impairment of these securities is other than temporary, which would require a charge to earnings to write down these securities to their fair value. Any charges for other-than-temporary impairment would not impact cash flows or liquidity.
Strong competition within our market areas could reduce our profits.
We face intense competition in making loans, attracting deposits and attracting and retaining key employees. This competition has made it more difficult for us to make new loans and at times has forced us to offer lower rates on loans and increase rates on deposits, which negatively impacts net interest income. It has also made it more difficult and costly to attract and hire employees with the level of expertise we require. Additional compensation expense increases noninterest expense, reducing net income. Competition also makes it more difficult to grow loans and deposits. At June 30, 2015, which is the most recent date for which data is available from the FDIC, we held less than 1% of total deposits in counties where our offices are located. Some of the institutions with which we compete have substantially greater resources and lending limits than we have and may offer services that we do not provide. Additionally, we expect competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Our profitability depends upon our continued ability to compete successfully in our market areas.
Regulatory reform may have a material impact on our operations.
In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Act") was passed, which imposes significant regulatory and compliance changes. The key effects of the Dodd-Frank Act on our business are:
• | changes to regulatory capital requirements; |
• | creation of new government regulatory agencies (such as the Financial Stability Oversight Council, which oversees systemic risk, and the Consumer Financial Protection Bureau, which develops and enforces rules for bank and non-bank providers of consumer financial products); |
• | potential limitations on federal preemption; |
• | changes to deposit insurance assessments; |
• | regulation of debit interchange fees we earn; |
• | changes in retail banking regulations, including potential limitations on certain fees we may charge; and |
• | changes in regulation of consumer mortgage loan origination and risk retention. |
In addition, the Dodd-Frank Act restricts the ability of banks to engage in certain proprietary trading or to sponsor or invest in private equity or hedge funds. The Dodd-Frank Act also contains provisions designed to limit the ability of insured depository institutions, their holding companies and their affiliates to conduct certain swaps and derivatives activities and to take certain principal positions in financial instruments.
Some provisions of the Dodd-Frank Act became effective immediately upon its enactment. Many provisions, however, require regulations to be promulgated by various federal agencies to be implemented, some but not all of which have been proposed or finalized by the applicable federal agencies. The provisions of the Dodd-Frank Act may have unintended effects, which will not be clear until after full implementation. Certain changes resulting from the Dodd-Frank Act may impact the profitability of our business activities, require changes to certain of our business practices, impose upon us more stringent capital, liquidity and leverage requirements or otherwise adversely affect our business. These changes may also require us to invest significant management attention and resources to evaluate and make any changes necessary to comply with new statutory and regulatory requirements. Failure to comply with the new requirements may negatively impact our results of operations and financial condition. While we cannot predict what effect any presently contemplated or future changes in the laws or regulations or their interpretations would have on us, these changes could be materially adverse. Further, we expect that, at a minimum, our operating and compliance costs will continue to increase as a result of new rules and regulations.
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We are subject to more stringent capital requirements, which may adversely impact our return on equity, or constrain us from paying dividends or repurchasing shares.
In July 2013, the Federal Deposit Insurance Corporation and the Federal Reserve Board approved a new rule that substantially amended the regulatory risk-based capital rules applicable to Fox Chase Bank and Fox Chase Bancorp. The final rule implemented the "Basel III" regulatory capital reforms and changes required by the Dodd-Frank Act.
The rules include new risk-based capital and leverage ratios, which were effective January 1, 2015, and revised the definition of what constitutes "capital" for purposes of calculating those ratios. The new minimum capital level requirements applicable to the Company and the Bank are: (1) a new common equity Tier 1 capital ratio of 4.5%; (2) a Tier 1 capital ratio of 6%; (3) a total capital ratio of 8%; and (4) a Tier 1 leverage ratio of 4% for all institutions. The rules eliminated the inclusion of certain instruments, such as trust preferred securities, from Tier 1 capital. Instruments issued prior to May 19, 2010 were grandfathered for companies with consolidated assets of $15 billion or less. The rules also established a "capital conservation buffer" of 2.5% above the new regulatory minimum capital requirements, which must consist entirely of common equity Tier 1 capital and result in the following minimum ratios: (1) a common equity Tier 1 capital ratio of 7.0%, (2) a Tier 1 capital ratio of 8.5%, and (3) a total capital ratio of 10.5%. The new capital conservation buffer requirement has begun to be phased in effective January 2016 at 0.625% of risk-weighted assets and will increase by that amount each year until fully implemented in January 2019. An institution is subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations would establish a maximum percentage of eligible retained income that could be utilized for such actions.
The application of more stringent capital requirements for Fox Chase Bank and Fox Chase Bancorp could, among other things, result in lower returns on equity, require the raising of additional capital, or result in regulatory actions constraining us from paying dividends or repurchasing shares if we were to be unable to comply with such requirements.
We operate in a highly regulated environment and we may be adversely affected by changes in laws and regulations.
We are subject to extensive regulation, supervision and examination by the Federal Reserve Board, the Pennsylvania Department of Banking and Securities, and the FDIC. Such regulation and supervision governs the activities in which an institution and its holding company may engage, and are intended primarily for the protection of the insurance fund and the depositors and borrowers of Fox Chase Bank rather than for holders of our common stock. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on our operations, the classification of our assets and determination of the level of our allowance for loan losses. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, legislation or supervisory action, may have a material impact on our operations.
Because of our dependence on information technology, telecommunications systems and third-party service providers, systems failures, interruptions and security breaches could have a material adverse effect on us.
Our business is dependent on the successful and uninterrupted functioning of our information technology, telecommunications systems and third-party service providers. The failure of these systems, or the termination of a third-party software license or service agreement on which any of these systems is based, could interrupt our operations. Because our information technology and telecommunications systems interface with and depend on third-party systems, we could experience service denials if demand for such services exceeds capacity or such third-party systems fail or experience interruptions. If significant, sustained or repeated, a system failure or service denial could compromise our ability to operate effectively, damage our reputation, result in a loss of customer business, and/or subject us to additional regulatory scrutiny and possible financial liability, any of which could have a material adverse effect on us.
Our third-party service providers may be vulnerable to unauthorized access, computer viruses, phishing schemes and other security breaches. We may be required to expend significant additional resources to protect against the threat of such security breaches and computer viruses, or to alleviate problems caused by such security breaches or viruses. To the extent that the activities of our third-party service providers or the activities of our customers involve the storage and transmission of confidential information, security breaches and viruses could expose us to claims, regulatory scrutiny, litigation and other possible liabilities.
Security breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and reputation to suffer.
In the ordinary course of our business, we collect and store sensitive data, including our proprietary business information and that of our customers, suppliers and business partners; and personally identifiable information of our customers and employees. The secure processing, maintenance and transmission of this information is critical to our operations and business strategy. We, our customers, and other financial institutions with which we interact, are subject to ongoing, continuous attempts to penetrate key systems by individual hackers, organized criminals, and in some cases, state-sponsored organizations. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise our networks and the information stored there could be accessed, publicly
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disclosed, lost or stolen. Any such unauthorized access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, and regulatory penalties; disrupt our operations and the services we provide to customers; damage our reputation; and cause a loss of confidence in our products and services, all of which could adversely affect our business, revenues and competitive position. We may be required to spend significant capital and other resources to protect against the threat of security breaches and computer viruses, or to alleviate problems caused by security breaches or viruses.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
We currently conduct business through our ten full-service banking offices in Hatboro, Philadelphia, Richboro, Willow Grove, Warminster, Lahaska and West Chester, Pennsylvania and Ocean City, Egg Harbor Township and Marmora, New Jersey. We also maintain an operations center in Blue Bell, Pennsylvania. We own all of our offices, except for the office in Blue Bell. The lease for our Blue Bell office expired in January 2016. We are currently under a month-to-month arrangement for this location. The net book value of the land, buildings, furniture, fixture and equipment owned by us and used in the operation of our businesses was $9.0 million at December 31, 2015.
ITEM 3. LEGAL PROCEEDINGS
Periodically, there have been various claims and lawsuits against us, such as claims to enforce liens, condemnation proceedings on properties in which we hold security interests, claims involving the making and servicing of real property loans and other issues incident to our business. We are not a party to any pending legal proceedings that we believe would have a material adverse effect on our financial condition, results of operations or cash flows.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market for Common Equity and Related Stockholder Matters
The Company's common stock is listed on the Nasdaq Stock Market ("Nasdaq") under the trading symbol "FXCB." The following table sets forth the quarterly high and low sales prices of the Company's common stock for the two most recently completed fiscal years, as reported by Nasdaq, as well as information regarding cash dividends declared by the Company for the two most recently completed fiscal years. See Item 1, "—Regulation and Supervision—Bank Regulation—Restrictions on Dividends," "—Regulation and Supervision—Holding Company Regulation—Restrictions on Bank Holding Company Dividends" and Note 13 in the notes to the consolidated financial statements for more information relating to restrictions on the Bank's ability to pay dividends to the Company and on the Company's payment of dividends. As of February 29, 2016, the Company had approximately 952 holders of record of common stock.
High | Low | Dividends Declared Per Common Share | ||||||||||
2015 | ||||||||||||
Fourth Quarter | $ | 20.78 | $ | 17.09 | $ | 0.14 | ||||||
Third Quarter | $ | 17.70 | $ | 16.58 | $ | 0.14 | ||||||
Second Quarter | $ | 17.06 | $ | 16.19 | $ | 0.14 | ||||||
First Quarter | $ | 17.03 | $ | 16.05 | $ | 0.26 | ||||||
2014 | ||||||||||||
Fourth Quarter | $ | 17.32 | $ | 16.17 | $ | 0.12 | ||||||
Third Quarter | $ | 17.33 | $ | 15.86 | $ | 0.12 | ||||||
Second Quarter | $ | 17.14 | $ | 15.68 | $ | 0.10 | ||||||
First Quarter | $ | 18.08 | $ | 16.70 | $ | 0.26 | ||||||
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Stock Performance Graph
The following graph compares the cumulative total return of the Company common stock with the cumulative total return of the SNL Mid-Atlantic Thrift Index and the Index for the Nasdaq Stock Market (U.S. Companies, all SIC). The graph assumes that $100 was invested on December 31, 2010. Cumulative total return assumes reinvestment of all dividends.
The performance graph is being furnished solely to accompany this report pursuant to Item 201(e) of Regulation S-K, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.
Index | 12/31/2010 | 12/31/2011 | 12/31/2012 | 12/31/2013 | 12/31/2014 | 12/31/2015 | ||||||||||||
Fox Chase Bancorp, Inc. | 100.00 | 107.25 | 143.39 | 151.18 | 151.20 | 191.65 | ||||||||||||
NASDAQ Composite | 100.00 | 99.21 | 116.82 | 163.75 | 188.03 | 201.40 | ||||||||||||
SNL Mid-Atlantic Thrift | 100.00 | 77.15 | 92.71 | 120.57 | 127.71 | 141.18 | ||||||||||||
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Purchases of Equity Securities
Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) | Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs (1) | |||||||||
October 1, 2015 through October 31, 2015 | — | $ | — | — | 817,172 | ||||||||
November 1, 2015 through November 30, 2015 | — | $ | — | — | 817,172 | ||||||||
December 1, 2015 through December 31, 2015 | — | $ | — | — | 817,172 | ||||||||
Total | — | $ | — | — | |||||||||
(1) | In prior years, the Company announced repurchase programs under which it would repurchase, in the aggregate, up to 25% of the then-outstanding shares of the Company’s common stock from time to time, depending on market conditions. On July 29, 2015, the Board of Directors approved an additional stock repurchase plan (the "July 2015 Plan") under which it would repurchase up to 5% of the then-outstanding shares of the Company’s common stock (578,377 shares). The Company does not intend to repurchase shares of its common stock during the pendency of its merger with Univest. Under all plans, through December 31, 2015, the Company has purchased 3.1 million shares at a cost of $44.5 million. |
ITEM 6. SELECTED FINANCIAL DATA
The summary financial information presented below is derived in part from our consolidated financial statements. The following is only a summary and should be read in conjunction with the consolidated financial statements and notes beginning on page F-1 of this annual report. The information at December 31, 2015 and 2014 and for the years ended December 31, 2015, 2014 and 2013 is derived in part from the audited consolidated financial statements that appear in this annual report.
Year Ended December 31, | ||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||
(Dollars in thousands, except per share data) | ||||||||||||||||||||
Financial Condition Data: | ||||||||||||||||||||
Total assets | $ | 1,125,603 | $ | 1,094,616 | $ | 1,116,622 | $ | 1,088,341 | $ | 1,015,863 | ||||||||||
Cash and cash equivalents | 7,798 | 17,213 | 11,947 | 25,090 | 7,586 | |||||||||||||||
Investment securities available-for-sale | 139,751 | 134,037 | 256,557 | 296,107 | 248,770 | |||||||||||||||
Investment securities held-to-maturity | 150,190 | 170,172 | 68,397 | 28,369 | 41,074 | |||||||||||||||
Loans receivable, net | 767,683 | 724,326 | 720,490 | 683,865 | 670,572 | |||||||||||||||
Deposits | 764,974 | 711,909 | 673,715 | 687,409 | 676,594 | |||||||||||||||
Short-term borrowings | 38,496 | 50,000 | 80,500 | 70,500 | 8,500 | |||||||||||||||
FHLB advances | 110,000 | 120,000 | 150,000 | 110,000 | 88,278 | |||||||||||||||
Other borrowed funds | 30,000 | 30,000 | 30,000 | 30,000 | 50,000 | |||||||||||||||
Total stockholders' equity | 176,914 | 175,911 | 173,467 | 181,465 | 188,192 | |||||||||||||||
Operating Data: | ||||||||||||||||||||
Interest income | $ | 40,073 | $ | 40,129 | $ | 40,129 | $ | 41,834 | $ | 45,946 | ||||||||||
Interest expense | 5,957 | 6,635 | 7,669 | 10,117 | 14,495 | |||||||||||||||
Net interest income | 34,116 | 33,494 | 32,460 | 31,717 | 31,451 | |||||||||||||||
(Credit) provision for loan losses | (995 | ) | 1,943 | 982 | 3,478 | 5,734 | ||||||||||||||
Net interest income after (credit) provision for loan losses | 35,111 | 31,551 | 31,478 | 28,239 | 25,717 | |||||||||||||||
Noninterest income | 2,733 | 2,293 | 3,790 | 6,315 | 3,343 | |||||||||||||||
Noninterest expense | 24,233 | 22,231 | 27,471 | 27,174 | 22,069 | |||||||||||||||
Income before income taxes | 13,611 | 11,613 | 7,797 | 7,380 | 6,991 | |||||||||||||||
Income tax provision | 4,065 | 3,418 | 2,263 | 2,318 | 2,212 | |||||||||||||||
Net income | $ | 9,546 | $ | 8,195 | $ | 5,534 | $ | 5,062 | $ | 4,779 | ||||||||||
Per Share Data: | ||||||||||||||||||||
Earnings per share, basic | $ | 0.87 | $ | 0.73 | $ | 0.49 | $ | 0.44 | $ | 0.36 | ||||||||||
Earnings per share, diluted | $ | 0.85 | $ | 0.71 | $ | 0.48 | $ | 0.43 | $ | 0.36 | ||||||||||
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Year Ended December 31, | |||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||
Performance Ratios: | |||||||||||||||
Return on average assets | 0.87 | % | 0.76 | % | 0.51 | % | 0.50 | % | 0.45 | % | |||||
Return on average equity | 5.43 | 4.63 | 3.13 | 2.74 | 2.36 | ||||||||||
Interest rate spread (1) | 3.00 | 3.00 | 2.84 | 2.83 | 2.52 | ||||||||||
Net interest margin (2) | 3.20 | 3.19 | 3.08 | 3.21 | 3.02 | ||||||||||
Noninterest expense to average assets | 2.20 | 2.05 | 2.52 | 2.66 | 2.07 | ||||||||||
Efficiency ratio (3) | 65.4 | 61.2 | 63.7 | 64.3 | 63.1 | ||||||||||
Average interest-earning assets to average interest-bearing liabilities | 142.4 | 134.3 | 132.5 | 134.9 | 133.7 | ||||||||||
Average equity to average assets | 15.94 | 16.33 | 16.22 | 18.12 | 19.07 | ||||||||||
Capital Ratios: | |||||||||||||||
Total equity to total assets | 15.72 | 16.07 | 15.53 | 16.67 | 18.53 | ||||||||||
Common equity tier 1 capital ratio (to risk-weighted assets) (4) | 16.69 | NA | NA | NA | NA | ||||||||||
Tier 1 capital ratio (to risk-weighted assets) (4) | 16.69 | 18.97 | 18.44 | 19.45 | 22.88 | ||||||||||
Total capital ratio (to risk-weighted assets) (4) | 17.68 | 20.02 | 19.48 | 20.48 | 23.90 | ||||||||||
Tier 1 leverage ratio (to adjusted average assets) (4) | 13.52 | 13.99 | 13.12 | 12.90 | 15.30 | ||||||||||
Asset Quality Ratios: | |||||||||||||||
Allowance for loan losses as a percent of total loans | 1.36 | 1.46 | 1.57 | 1.61 | 1.77 | ||||||||||
Allowance for loan losses as a percent of nonperforming loans | 416.81 | 310.65 | 131.31 | 65.23 | 57.63 | ||||||||||
Net (recoveries) charge-offs to average outstanding loans during the period | (0.11 | ) | 0.38 | 0.09 | 0.66 | 0.94 | |||||||||
Nonperforming loans as a percent of total loans | 0.33 | 0.47 | 1.20 | 2.46 | 3.07 | ||||||||||
Nonperforming assets as a percent of total assets | 0.46 | 0.57 | 1.35 | 2.36 | 2.30 | ||||||||||
_______________________________________________________________________________
(1) | Represents the difference between the weighted average yield on average interest-earning assets and the weighted average cost of interest-bearing liabilities. |
(2) | Represents net interest income as a percent of average interest-earning assets. |
(3) | Represents noninterest expense, excluding valuation adjustments on assets acquired through foreclosure and loss on extinguishment of debt, divided by the sum of net interest income and noninterest income, excluding gains or losses on the sale of securities, premises and equipment and assets acquired through foreclosure. |
(4) | Ratios are for Fox Chase Bank. |
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
The objective of this section is to help readers understand our views on our results of operations and financial condition. You should read this discussion in conjunction with the consolidated statements of condition as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive income (loss), changes in equity, and cash flows for each of the years in the three-year period ended December 31, 2015 that appear elsewhere in this annual report.
General Overview
We conduct community banking activities by accepting deposits and making loans in our market area. Our lending products include multi-family and commercial real estate loans, commercial and industrial loans, one- to four-family residential real estate loans, and to a lesser extent, construction loans and consumer loans. We also maintain an investment portfolio consisting primarily of mortgage-backed securities to manage our liquidity and interest rate risk. Our loan and investment portfolios are funded with deposits as well as collateralized borrowings from the FHLB of Pittsburgh and commercial banks.
Income. Our primary source of pre-tax income is net interest income. Net interest income is the difference between interest income, which is the income that we earn on our loans and investments, and interest expense, which is the interest that we pay on our deposits and borrowings. Our net interest income is affected by a variety of factors, including the mix of interest-earning assets and
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interest-bearing liabilities in our portfolio and changes in levels of interest rates. Growth in net interest income is dependent upon our ability to prudently manage the balance sheet for growth, combined with how successfully we maintain our net interest margin, which is net interest income as a percentage of average interest-earning assets.
A secondary source of income is noninterest income, which is revenue that we receive from providing products and services. The majority of our noninterest income generally comes from fee income on deposit accounts, such as cash management fee income on commercial accounts and service charge income on retail accounts, as well as loan fee income from mortgage servicing and lending relationships, such as unused line fees and warehouse line satisfaction fees. We also earn income on bank-owned life insurance and receive income from our investment in Philadelphia Mortgage Advisors. In some years, we recognize income from the sale of securities and assets acquired through foreclosure.
Provision for Loan Losses. The allowance for loan losses is maintained at a level representing management's best estimate of probable and inherent losses in the loan portfolio, based upon management's evaluation of the portfolio's collectability. The allowance is established through the provision for loan losses, which is charged against income. Charge-offs, if any, are charged to the allowance. Subsequent recoveries, if any, are credited to the allowance. Allocation of the allowance may be made for specific impaired loans, but the entire allowance is available for any loan that, in management's judgment, should be charged off.
Expenses. The noninterest expense we incur in operating our business consists of salaries, benefits and other compensation expenses, occupancy and furniture and equipment expenses, data processing costs, professional fees, marketing expenses, FDIC premiums, assets acquired through foreclosure expense (including valuation adjustments) and various other miscellaneous expenses.
Our largest noninterest expense is for salaries, benefits and other compensation, which consists primarily of salaries and wages paid to our employees, payroll taxes, expenses for health insurance, retirement plans, director and committee fees and other employee benefits, including employer 401(k) plan contributions, employee stock ownership plan allocations and equity incentive awards, such as stock options and shares of restricted stock.
Occupancy expense includes the fixed and variable costs of buildings such as depreciation charges, maintenance, real estate taxes and costs of utilities. Depreciation of premises is computed using the straight-line method based on the useful lives of the related assets, which range from 10 to 39 years for buildings and premises. Leasehold improvements are amortized over the shorter of the useful life of the asset or the term of the lease.
Furniture and equipment expenses, which are the fixed and variable costs of furniture and equipment, consist primarily of depreciation charges, furniture and equipment expenses and maintenance. Depreciation of equipment is computed using the straight-line method based on the useful lives of the related assets, which range from one to seven years for furniture, fixtures and equipment.
Data processing costs include fees paid to our third-party data processing service, software and connectivity providers.
Professional fees include fees paid to our independent auditors, co-sourced internal auditors, attorneys, compensation consultants, loan review specialists, interest rate risk management vendors and recruiter fees.
Marketing expense includes expenses for advertisements, promotions and public relations expenses.
FDIC assessments are a specified percentage of total assets less equity, depending on the risk characteristics of the institution.
Assets acquired through foreclosure expense includes declines in the carrying values of other real estate owned ("OREO") after we have acquired a property, changes in the fair value of financial assets acquired through foreclosure and holding costs related to these assets, net of any rental income received.
Other expenses include expenses for stationary, printing, supplies, telephone, postage, contributions and donations, regulatory assessments, insurance premiums, certain public company expenses and other fees and expenses.
Our Business Strategy
Our goal is to be a leading relationship-based business and consumer bank in the markets we serve by delivering a wide array of financial products and personalized customer service. We believe there is a significant opportunity for a community-focused bank to provide a full range of financial services to small and middle-market commercial and retail customers. Further, by offering quicker decision making in the delivery of banking products and services, offering customized products where appropriate and providing access to senior officers, we can distinguish ourselves from the larger banks operating in our market area. At the same time, our capital base and greater product mix enables us to effectively compete against smaller banks. The following are the key elements of our business strategy:
• | Improve earnings through our continued emphasis on business banking. Emphasizing business banking improves our profitability because commercial loans generally produce higher interest rates and the associated commercial business relationships produce higher deposit balances and fee income than consumer relationships. In this regard, we have continued |
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to add personnel to assist us in increasing our commercial business lending. We are also seeking to increase our commercial deposits, cash management services and fee income through our increase in commercial lending.
• | Maintain asset quality. We have sought to maintain our asset quality and moderate credit risk by using conservative underwriting standards. Additionally, we have strengthened our oversight of problem assets through the use of a special assets group. The special assets group, which is run by our Chief Operating Officer and consists of other loan and credit administration officers, increases the frequency with which classified and criticized credits are reviewed and aggressively acts to resolve problem assets. Although we intend to continue our efforts to originate commercial real estate and commercial business loans, we intend to manage loan exposures and concentrations through our continued conservative loan underwriting and strong credit administration standards. |
• | Improve our funding mix by focusing on core deposits. Our strategic focus is to emphasize total relationship banking with our customers to internally fund our loan growth. We believe that a continued focus on customer relationships will increase our level of core deposits (demand, savings and money market accounts). We value core deposits because they generally represent longer-term customer relationships and a lower cost of funding compared to certificates of deposit. In addition to our retail branch network, we offer on-line banking and a variety of deposit accounts designed for the businesses operating in our market area, including remote capture products, sweep accounts and other cash management products and services. |
• | Actively manage our balance sheet. Continued difficult economic conditions have underscored the importance of a strong balance sheet. We strive to achieve this through managing our interest rate risk and maintaining strong capital levels, loan loss reserves and liquidity. Diversifying our asset mix not only improves our net interest margin but also reduces the exposure of our net interest income and earnings to interest rate risk. We will continue to manage our interest rate risk by diversifying the type and maturity of our assets in our loan and investment portfolios and monitoring the type and maturity of our liabilities in our deposit portfolio and borrowing facilities. |
• | Continued expense control. Management continues to focus on the level of noninterest expense and methods to identify cost savings opportunities, such as reviewing the number of employees, renegotiating key third-party contracts and reducing certain other operating expenses. In this regard, our efficiency ratio was 65.4%, 61.2% and 63.7% for the years ended December 31, 2015, 2014 and 2013, respectively. |
• | Continue to serve as a strong community citizen. As a community bank operating for approximately 145 years, we are uniquely positioned to understand the financial needs of our local customers. Further, we believe it is the role of a community bank to operate as a good corporate citizen. Towards that end, in 2006, we established the Fox Chase Bank Charitable Foundation and funded it with 144,342 shares of Fox Chase common stock and $150,000 in cash. The foundation provides grants to non-profit organizations and programs in the communities we serve. We also provide support to organizations with which our employees and customers are involved through our participation in the Neighborhood Commitment Program. |
Pending the closing of the Merger, we intend to continue to adhere to our strategy while operating in the ordinary course of business as required by the Merger Agreement.
Critical Accounting Policies
The discussion and analysis of the financial condition and results of operations are based on our consolidated financial statements, which are prepared in conformity with generally accepted accounting principles in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of income and expenses. The estimates and assumptions that we use are based on historical experience and various other factors we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, resulting in a change that could have a material impact on the carrying value of our assets and liabilities and our results of operations.
We consider accounting policies involving significant judgments and assumptions by management that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies. We consider the following to be our critical accounting policies.
Allowance for Loan Losses. The allowance for loan losses is maintained at a level representing management’s best estimate of known risks and inherent losses in the portfolio, based upon management’s evaluation of the portfolio’s collectability. Our methodology for assessing the appropriateness of the allowance for loan losses consists of an allowance on impaired loans and a general valuation allowance on the remainder of the portfolio. Although we determine the amount of each element of the allowance separately, the entire allowance for loan losses is available for losses on the entire portfolio.
Loans are deemed impaired when, based on current information and events, it is probable that the Company will be unable to collect all proceeds due according to the contractual terms of the loan agreement or when a loan is classified as a troubled debt restructuring. Factors considered by management in determining impairment include payment status, borrower cash flows, collateral
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value and the probability of collecting scheduled principal and interest payments when due. Impairment is measured on a loan by loan basis for commercial loans by either the present value of expected future cash flows discounted at the loan’s original effective interest rate, the loan’s obtainable market price or the fair value of the collateral less costs to sell if the loan is collateral dependent. The Company establishes an allowance for loan losses in the amount of the difference between fair value of the impaired loan and the loan’s carrying amount.
We establish a general allowance for loans that are not considered impaired to recognize the inherent losses associated with lending activities. This general valuation allowance is determined by segmenting the loan portfolio and assigning reserve factors to each category. The reserve factors are calculated using the Company's historical losses and loss emergence periods, and are adjusted for significant factors that, in management's judgment, affect the collectability of the portfolio as of the evaluation date. These significant factors include:
• | Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses. |
• | Changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments. |
• | Changes in the nature and volume of the portfolio and in the terms of loans. |
• | Changes in the experience, ability, and depth of lending management and other relevant staff. |
• | Changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans. |
• | Changes in the quality of the institution’s loan review system. |
• | Changes in the value of underlying collateral for collateral-dependent loans. |
• | The existence and effect of any concentrations of credit, and changes in the level of such concentrations. |
• | The effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the institution’s existing portfolio. |
These reserve factors are subject to ongoing evaluation to ensure their relevance as compared to historical losses in the current environment. We perform this systematic analysis of the allowance on a quarterly basis. These criteria are analyzed and the allowance is developed and maintained at the segment level.
Additional risk is associated with the analysis of the allowance for loan losses as such evaluations are highly subjective, and future adjustments to the allowance may be necessary if conditions differ substantially from the assumptions used in making the evaluations. In addition, various regulatory agencies periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize adjustments to the allowance, based on their judgments at the time of their examination.
For additional discussion, see "—Risk Management—Analysis and Determination of the Allowance for Loan Losses" below and the notes to the consolidated financial statements included in this annual report.
Deferred Income Taxes. The Company accounts for income taxes under the asset/liability method. Deferred tax assets are recognized for future deductible temporary differences and deferred tax liabilities are recognized for future taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Valuation and Other-Than-Temporary Impairment of Investment Securities. Investment securities are reviewed quarterly to determine whether the fair value is below the current carrying value. When the fair value of any of our investment securities has declined below its current carrying value, management is required to assess whether the decline is other-than-temporary. A review of other-than-temporary impairment requires companies to make certain judgments regarding the nature of the decline, the probability, extent and timing of a valuation recovery and our intent to sell the security or if it is more likely than not that the security will be required to be sold before recovery of its amortized cost. Pursuant to these requirements, we assess valuation declines to determine the extent to which such changes are attributable to (1) fundamental factors specific to the issuer, such as financial condition, business prospects or other factors, or (2) market-related factors, such as required market yields, interest rates or equity market declines. If the decline in the market value of a security is determined to be other-than-temporary, the credit portion of the impairment is written down through earnings and the non-credit portion is an adjustment to other comprehensive income.
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Valuation of Assets Acquired Through Foreclosure. Assets acquired through foreclosure consist of other real estate owned and financial assets acquired from debtors. Other real estate owned is initially recorded at fair value less costs to sell. In periods subsequent to acquisition, each real estate asset is carried at the lower of the fair value of the asset, less estimated selling costs, or the amount at which the asset was initially recorded. The fair value of other real estate owned is determined using appraisals obtained from approved independent appraisers, agreements of sale or letters of intent, where applicable. Financial assets acquired from debtors are carried at fair value under the fair value option in accordance with FASB ASC 825 "Financial Instruments." The fair value of financial assets acquired from debtors is determined using sales prices from executed sale agreements. Changes in the fair value of assets acquired through foreclosure at future reporting dates or at the time of disposition will result in an adjustment in assets acquired through foreclosure expense or net gain (loss) on sale of assets acquired through foreclosure, respectively.
Balance Sheet Analysis
General. Total assets increased $31.0 million, or 2.8%, to $1.13 billion at December 31, 2015 from $1.09 billion at December 31, 2014. Net loans increased $43.4 million, or 6.0%, to $767.7 million at December 31, 2015 from $724.3 million at December 31, 2014. Total securities decreased $14.3 million, or 4.7%, to $289.9 million at December 31, 2015 from $304.2 million at December 31, 2014. Total liabilities increased $30.0 million, or 3.3%, to $948.7 million at December 31, 2015 from $918.7 million at December 31, 2014. Deposits increased $53.1 million from December 31, 2014 to December 31, 2015, offset by decreases in short-term borrowings and FHLB advances of $11.5 million and $10.0 million, respectively. Total stockholders' equity increased $1.0 million, or 0.6%, primarily due to net income of $9.5 million and stock based compensation activity (which includes proceeds received from the exercise of stock options) of $4.4 million, offset by dividends paid of $7.6 million, $4.8 million of common stock repurchased during 2015 and other comprehensive loss of $596,000.
Loans. The largest segment of our loan portfolio is multi-family and commercial real estate loans. At December 31, 2015, these loans totaled $442.6 million and represented 56.8% of total loans, compared to $388.8 million, or 52.9% of total loans, at December 31, 2014 and $408.4 million, or 55.8% of total loans, at December 31, 2013. This increase reflects the Company's continued emphasis on this type of lending.
Commercial and industrial loans totaled $195.1 million, or 25.1% of total loans, at December 31, 2015, compared to $179.2 million, or 24.4% of total loans, at December 31, 2014 and $168.0 million, or 22.9% of total loans, at December 31, 2013. The increases in 2015 and 2014 reflect the continued success of our middle market team.
One- to four-family residential loans totaled $90.3 million, or 11.6% of total loans, at December 31, 2015, compared to $108.2 million, or 14.7% of total loans, at December 31, 2014 and $127.5 million, or 17.4% of total loans, at December 31, 2013. The decreases in 2015 and 2014 were due to reduced loan originations as a result of management's reluctance to place low-rate, long-term, one- to four-family residential loans on the Company's balance sheet. Given the relatively low interest rates and increased consumer compliance costs, Fox Chase Bank does not presently emphasize this type of lending.
Consumer loans totaled $14.7 million, or 1.9% of total loans, at December 31, 2015, compared to $19.6 million, or 2.6% of total loans, at December 31, 2014 and $22.5 million, or 3.1% of total loans, at December 31, 2013. Given the relatively low interest rates and increased consumer compliance costs, Fox Chase Bank does not presently emphasize this type of lending.
Construction loans totaled $35.8 million, or 4.6% of total loans, at December 31, 2015, compared to $39.5 million, or 5.4% of total loans, at December 31, 2014 and $5.9 million, or 0.8% of total loans, at December 31, 2013. The Bank continues to provide construction financing for retail, multi-family and residential properties.
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The following table sets forth the composition of our loan portfolio at the dates indicated.
December 31, | ||||||||||||||||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||||||||||||||||
Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | |||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||||
Real estate loans: | ||||||||||||||||||||||||||||||||||
One- to four-family | $ | 90,339 | 11.6 | % | $ | 108,208 | 14.7 | % | $ | 127,501 | 17.4 | % | $ | 158,828 | 22.9 | % | $ | 198,669 | 29.1 | % | ||||||||||||||
Multi-family and commercial | 442,612 | 56.8 | 388,821 | 52.9 | 408,365 | 55.8 | 368,948 | 53.1 | 313,060 | 45.9 | ||||||||||||||||||||||||
Construction | 35,794 | 4.6 | 39,541 | 5.4 | 5,904 | 0.8 | 22,591 | 3.2 | 18,243 | 2.7 | ||||||||||||||||||||||||
Total real estate loans | 568,745 | 73.0 | 536,570 | 73.0 | 541,770 | 74.0 | 550,367 | 79.2 | 529,972 | 77.7 | ||||||||||||||||||||||||
Consumer loans | 14,711 | 1.9 | 19,599 | 2.6 | 22,478 | 3.1 | 30,585 | 4.4 | 44,667 | 6.5 | ||||||||||||||||||||||||
Commercial and industrial loans | 195,078 | 25.1 | 179,181 | 24.4 | 168,013 | 22.9 | 113,820 | 16.4 | 107,781 | 15.8 | ||||||||||||||||||||||||
Total loans | 778,534 | 100.0 | % | 735,350 | 100.0 | % | 732,261 | 100.0 | % | 694,772 | 100.0 | % | 682,420 | 100.0 | % | |||||||||||||||||||
Less: | ||||||||||||||||||||||||||||||||||
Deferred loan origination costs (fees), net | (289 | ) | (294 | ) | (242 | ) | 263 | 227 | ||||||||||||||||||||||||||
Allowance for loan losses | (10,562 | ) | (10,730 | ) | (11,529 | ) | (11,170 | ) | (12,075 | ) | ||||||||||||||||||||||||
Net loans | $ | 767,683 | $ | 724,326 | $ | 720,490 | $ | 683,865 | $ | 670,572 | ||||||||||||||||||||||||
The Company had approximately $179.8 million and $200.1 million of loans in New Jersey at December 31, 2015 and 2014, respectively. Other than the loans in New Jersey, almost all of the Company's loans are in the geographic areas near the Company's branches in Southeastern Pennsylvania.
Loan Maturity. The following tables set forth certain information at December 31, 2015 regarding scheduled contractual maturities during the periods indicated. The tables do not include any estimate of prepayments which significantly shorten the average life of all loans and may cause our actual repayment experience to differ from that shown below. Demand loans having no stated schedule of repayments and no stated maturity are reported as due in one year or less. The amounts shown below exclude deferred loan fees and costs.
December 31, 2015 | ||||||||||||||||||||||||
One- to Four-Family | Multi-family and Commercial | Construction | Consumer | Commercial and Industrial | Total | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Amounts due in: | ||||||||||||||||||||||||
One year or less | $ | 98 | $ | 31,276 | $ | 15,955 | $ | 357 | $ | 49,444 | $ | 97,130 | ||||||||||||
More than one year to two years | 611 | 28,468 | 4,084 | 363 | 8,790 | 42,316 | ||||||||||||||||||
More than two years to three years | 2,616 | 50,430 | 8,146 | 541 | 18,516 | 80,249 | ||||||||||||||||||
More than three years to five years | 2,118 | 89,322 | 3,796 | 2,140 | 56,982 | 154,358 | ||||||||||||||||||
More than five years to ten years | 11,546 | 186,496 | 3,498 | 4,802 | 30,720 | 237,062 | ||||||||||||||||||
More than ten years to fifteen years | 4,743 | 28,867 | 315 | 2,326 | — | 36,251 | ||||||||||||||||||
More than fifteen years | 68,607 | 27,753 | — | 4,182 | 30,626 | 131,168 | ||||||||||||||||||
Total | $ | 90,339 | $ | 442,612 | $ | 35,794 | $ | 14,711 | $ | 195,078 | $ | 778,534 | ||||||||||||
The following table sets forth the dollar amount of all scheduled maturities of loans at December 31, 2015 that are due after December 31, 2016 and have either fixed interest rates or adjustable interest rates. The amounts shown below exclude deferred loan fees, net.
Fixed Rates | Floating or Adjustable Rates | Total | ||||||||||
(In thousands) | ||||||||||||
Real estate loans: | ||||||||||||
One- to four-family | $ | 85,225 | $ | 5,016 | $ | 90,241 | ||||||
Multi-family and commercial | 314,052 | 97,284 | 411,336 | |||||||||
Construction | 8,605 | 11,234 | 19,839 | |||||||||
Consumer loans | 6,330 | 8,024 | 14,354 | |||||||||
Commercial and industrial loans | 15,299 | 130,335 | 145,634 | |||||||||
Total | $ | 429,511 | $ | 251,893 | $ | 681,404 | ||||||
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Securities. Our securities portfolio consists primarily of agency residential mortgage related securities, and, to a lesser extent, private label residential and commercial mortgage securities, obligations of U.S. government agencies and investment grade corporate securities. The amortized cost of total securities decreased $13.1 million, or 4.3%, during 2015. During 2015, principal repayments totaled $48.2 million, other redemptions totaled $5.8 million and amortization of net premiums totaled $1.5 million. Offsetting these decreases were purchases of $42.4 million, including agency residential mortgage related securities totaling $25.2 million, of which, $4.1 million were classified as held-to-maturity and $21.1 million were classified as available-for-sale, corporate securities totaling $16.9 million of which $1.8 million were classified as held-to-maturity and $15.1 million were classified as available-for-sale and one government agency security totaling $300,000.
The amortized cost of total securities decreased $29.4 million, or 8.8%, during 2014. Purchases in 2014 consisted of mortgage related securities totaling $23.5 million, of which, $20.6 million were classified as held-to-maturity and $2.8 million were classified as available-for-sale. These purchases were offset by principal repayments of $47.4 million, the redemption of $2.0 million in corporate securities, amortization of net premiums of $1.9 million and a $1.6 million reduction due to mortgage related securities being transferred from available-for-sale to held-to-maturity. During 2014, mortgage related securities available-for-sale decreased $129.0 million from $253.0 million at December 31, 2013 to $123.9 million at December 31, 2014 and mortgage related securities held-to-maturity increased $101.8 million from $68.4 million at December 31, 2013 to $170.2 million at December 31, 2014. These changes are largely driven by the transfer of 38 residential mortgage related securities with a fair value of $96.9 million from available-for-sale securities to held-to-maturity during the quarter ended September 30, 2014.
The following table sets forth the amortized cost and fair values of our securities portfolio at the dates indicated.
December 31, | ||||||||||||||||||||||||
2015 | 2014 | 2013 | ||||||||||||||||||||||
Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Available-for Sale: | ||||||||||||||||||||||||
Obligations of U.S. government agencies | $ | 301 | $ | 299 | $ | 300 | $ | 302 | $ | 300 | $ | 308 | ||||||||||||
Corporate securities | 17,625 | 17,541 | 8,053 | 8,086 | 10,145 | 10,181 | ||||||||||||||||||
Private label commercial mortgage related securities | — | — | — | — | 2,118 | 2,120 | ||||||||||||||||||
Agency residential mortgage related securities | 121,195 | 121,911 | 123,929 | 125,649 | 250,851 | 243,948 | ||||||||||||||||||
Total available-for-sale securities | $ | 139,121 | $ | 139,751 | $ | 132,282 | $ | 134,037 | $ | 263,414 | $ | 256,557 | ||||||||||||
Held-to-Maturity: | ||||||||||||||||||||||||
Corporate securities | $ | 1,776 | $ | 1,765 | $ | — | $ | — | $ | — | $ | — | ||||||||||||
Private label residential mortgage related securities | 2,522 | 2,497 | 2,979 | 2,985 | — | — | ||||||||||||||||||
Agency residential mortgage related securities | 145,892 | 145,588 | 167,193 | 167,869 | 68,397 | 67,491 | ||||||||||||||||||
Total held-to-maturity securities | $ | 150,190 | $ | 149,850 | $ | 170,172 | $ | 170,854 | $ | 68,397 | $ | 67,491 | ||||||||||||
Total securities | $ | 289,311 | $ | 289,601 | $ | 302,454 | $ | 304,891 | $ | 331,811 | $ | 324,048 | ||||||||||||
At December 31, 2015, we had no investments in a single issuer (other than U.S. Government-sponsored entity securities) that had an aggregate book value in excess of 10% of our equity.
See Note 3 to the consolidated financial statements for a schedule of gross unrealized losses and fair value of securities, aggregated by security category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2015 and 2014.
As a member of the FHLB of Pittsburgh, the Bank is required to acquire and hold shares of FHLB of Pittsburgh capital stock. The FHLB stock holding requirement is based on a percentage of the Bank's borrowings and a percentage of the Bank's "eligible assets" as defined by the FHLB. Percentages of borrowings and "eligible assets" used to determine the stock holding requirement are set by the FHLB from a defined range. Maximum percentages are 6.00% of its advances plus 1.00% of the Bank’s "eligible assets." Minimum percentages are 2.00% of its advances plus 0.05% of "eligible assets." Current percentages are 4.00% of advances plus 0.10% of "eligible assets." As of December 31, 2015, the Company had a minimum stock obligation of $2.5 million and a maximum stock obligation of $12.5 million. The Company held $6.7 million in FHLB stock at that date.
29
The following table sets forth the stated maturities and weighted average yields of investment securities at December 31, 2015. Weighted average yields on tax-exempt securities are not presented on a tax equivalent basis. Certain mortgage related securities have adjustable interest rates and will reprice annually within the various maturity ranges. These repricing schedules are not reflected in the table below.
One Year or Less | More Than 1 Year to 5 Years | More Than 5 Years to 10 Years | More Than 10 Years | Total | |||||||||||||||||||||||||||||||
Fair Value | Weighted Average Yield | Fair Value | Weighted Average Yield | Fair Value | Weighted Average Yield | Fair Value | Weighted Average Yield | Fair Value | Weighted Average Yield | ||||||||||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||||||||||||||
Available-for-Sale: | |||||||||||||||||||||||||||||||||||
Obligations of U.S. government agencies | $ | — | — | % | $ | 299 | 1.69 | % | $ | — | — | % | $ | — | — | % | $ | 299 | 1.69 | % | |||||||||||||||
Corporate securities | 2,526 | 1.78 | 15,015 | 2.11 | — | — | — | — | 17,541 | 2.06 | |||||||||||||||||||||||||
Agency residential mortgage related securities | 5 | 6.00 | 847 | 4.95 | 115,031 | 2.29 | 6,028 | 3.68 | 121,911 | 2.38 | |||||||||||||||||||||||||
Total available-for-sale securities | $ | 2,531 | $ | 16,161 | $ | 115,031 | $ | 6,028 | $ | 139,751 | |||||||||||||||||||||||||
Held-to-Maturity: | |||||||||||||||||||||||||||||||||||
Corporate securities | $ | — | — | % | $ | 1,765 | 2.26 | % | $ | — | — | % | $ | — | — | % | $ | 1,765 | 2.26 | % | |||||||||||||||
Private label residential mortgage related security | — | — | — | — | 2,497 | 2.04 | — | — | 2,497 | 2.04 | |||||||||||||||||||||||||
Agency residential mortgage related securities | — | — | 5,589 | 2.70 | 64,120 | 2.09 | 75,879 | 2.10 | 145,588 | 2.12 | |||||||||||||||||||||||||
Total held-to-maturity securities | $ | — | $ | 7,354 | $ | 66,617 | $ | 75,879 | $ | 149,850 | |||||||||||||||||||||||||
Total securities | $ | 2,531 | $ | 23,515 | $ | 181,648 | $ | 81,907 | $ | 289,601 | |||||||||||||||||||||||||
Real Estate Held for Investment. Fox Chase Bank had real estate held for investment of $1.6 million at December 31, 2015 and 2014, which represented undeveloped land located in Absecon, New Jersey. In accordance with regulatory guidelines, because this real estate held for investment was not sold or placed in service by June 2011 (eight years from acquisition), for regulatory reporting purposes, the full amount of this asset is recorded as a reduction of risk-based capital at December 31, 2015 and 2014.
Cash and Cash Equivalents. Our primary source of short-term liquidity is comprised of branch working cash, a reserve requirement account at the Federal Reserve, an account at the FHLB of Pittsburgh and money market accounts. Cash and cash equivalents decreased $9.4 million from $17.2 million at December 31, 2014 to $7.8 million at December 31, 2015.
Bank-owned Life Insurance. The Company has invested in bank-owned life insurance ("BOLI"). BOLI involves the purchasing of life insurance by the Company for certain employees and directors. The Company is the owner and beneficiary of the policies, however certain policies include split-dollar endorsements. Under these endorsements, beneficiaries of the insured individuals are entitled to a portion of the proceeds from the policy upon death of the insured. During 2015, the Company purchased $10.0 million of additional BOLI. At December 31, 2015, the Company owned BOLI totaling $25.7 million.
Deposits. Our primary source of funds is our deposit accounts, which are comprised of noninterest-bearing demand accounts, interest-bearing NOW accounts, money market accounts, savings accounts, brokered deposits and certificates of deposit. These deposits are provided primarily by individuals and businesses within our market areas. Deposits increased $53.1 million, or 7.5%, for 2015, primarily as a result of increases in money market accounts of $19.5 million, NOW accounts of $15.4 million, savings and club accounts of $13.1 million, brokered deposits of $7.7 million, and noninterest bearing deposits of $1.5 million, offset by a decrease in certificates of deposit of $4.2 million. The increase in money market accounts was primarily due to deposits obtained from municipalities. The increase in NOW accounts and savings and club accounts and was primarily due to growth within the Advantage checking and Advantage savings product lines. The increase in brokered deposits was driven by the Company's desire to access this type of low-cost deposit funding. The decrease in non-brokered certificates of deposit was due to maturities during the period exceeding new issuances.
Deposits increased $38.2 million, or 5.7%, for 2014, primarily as a result of increases in noninterest bearing deposits of $68.0 million and savings and club accounts of $21.7 million, offset by decreases in certificates of deposit of $37.7 million, money market accounts of $11.2 million, NOW accounts of $2.2 million and brokered deposits of $517,000. The increase in noninterest-bearing demand accounts was primarily due to deposits obtained from commercial borrowing relationships. The increase in savings and club accounts was primarily due to promotional offerings within the Advantage Savings product line during 2014. The decrease in non-brokered certificates of deposit was due to maturities during the period exceeding new issuances. The decrease in money market accounts was primarily due to the Company not offering promotional rates during 2014.
30
The following table sets forth the balances of our deposit products at the dates indicated.
December 31, | |||||||||||||||||||||
2015 | 2014 | 2013 | |||||||||||||||||||
Amount | Weighted Average Rate | Amount | Weighted Average Rate | Amount | Weighted Average Rate | ||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||
Noninterest-bearing demand accounts | $ | 170,327 | — | % | $ | 168,791 | — | % | 100,748 | — | % | ||||||||||
NOW accounts | 97,838 | 0.20 | 82,417 | 0.21 | 84,569 | 0.21 | |||||||||||||||
Money market accounts | 93,325 | 0.28 | 73,802 | 0.22 | 85,017 | 0.20 | |||||||||||||||
Savings and club accounts | 142,966 | 0.45 | 129,893 | 0.37 | 108,183 | 0.22 | |||||||||||||||
Brokered deposits | 78,481 | 0.76 | 70,817 | 0.73 | 71,334 | 0.56 | |||||||||||||||
Certificates of deposit | 182,037 | 0.88 | 186,189 | 0.87 | 223,864 | 1.26 | |||||||||||||||
Total | $ | 764,974 | 0.43 | % | $ | 711,909 | 0.42 | % | $ | 673,715 | 0.56 | % | |||||||||
The following table indicates the amount of certificates of deposit greater than or equal to $100,000 by time remaining until maturity at December 31, 2015. Brokered deposits in the amount of $78.5 million at December 31, 2015 are not included in total certificates of deposit greater than or equal to $100,000.
Maturity Period at December 31, 2015 | Certificates of Deposit ≥ $100,000 | |||
(In thousands) | ||||
Three months or less | $ | 3,437 | ||
Over three through six months | 3,950 | |||
Over six through twelve months | 8,480 | |||
Over twelve months | 30,908 | |||
Total | $ | 46,775 | ||
The following table sets forth all time deposits (including brokered deposits) classified by rates at the dates indicated.
Year Ended December 31, | ||||||||||||
2015 | 2014 | 2013 | ||||||||||
(In thousands) | ||||||||||||
0.00 - 1.00% | $ | 176,822 | $ | 194,251 | $ | 211,147 | ||||||
1.01 - 2.00% | 72,445 | 41,049 | 31,384 | |||||||||
2.01 - 3.00% | 8,600 | 15,917 | 22,098 | |||||||||
3.01 - 4.00% | 2,066 | 2,844 | 18,566 | |||||||||
4.01 - 5.00% | 585 | 2,945 | 11,855 | |||||||||
5.01 - 6.00% | — | — | 148 | |||||||||
6.01 - greater | — | — | — | |||||||||
Total | $ | 260,518 | $ | 257,006 | $ | 295,198 | ||||||
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The following table sets forth the amount and maturities of time deposits, including brokered deposits, classified by rates at December 31, 2015.
Amount Due | |||||||||||||||||||||||
Less Than One Year | More Than One Year to Two Years | More Than Two Years to Three Years | More Than Three Years | Total | Percent of Total Time Deposit Accounts | ||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||
0.00 - 1.00% | $ | 128,536 | $ | 31,581 | $ | 8,484 | $ | 8,221 | $ | 176,822 | 67.87 | % | |||||||||||
1.01 - 2.00% | 2,307 | 40,147 | 21,960 | 8,031 | 72,445 | 27.81 | |||||||||||||||||
2.01 - 3.00% | 4,616 | — | — | 3,984 | 8,600 | 3.30 | |||||||||||||||||
3.01 - 4.00% | 64 | 152 | 672 | 1,178 | 2,066 | 0.79 | |||||||||||||||||
4.01 - 5.00% | 111 | 474 | — | — | 585 | 0.23 | |||||||||||||||||
5.01 - 6.00% | — | — | — | — | — | — | |||||||||||||||||
6.01 - greater | — | — | — | — | — | — | |||||||||||||||||
Total | $ | 135,634 | $ | 72,354 | $ | 31,116 | $ | 21,414 | $ | 260,518 | 100.00 | % | |||||||||||
Borrowings. During 2015, three FHLB advances matured totaling $30.0 million and the Company obtained two additional term FHLB advances totaling $20.0 million. As of December 31, 2015, Fox Chase Bank had outstanding borrowings of $110.0 million with the FHLB and $30.0 million with another commercial bank. During 2014, three FHLB advances matured totaling $40.0 million and the Company obtained one additional term FHLB advance totaling $10.0 million. As of December 31, 2014, Fox Chase Bank had outstanding borrowings of $120.0 million with the FHLB and $30.0 million with another commercial bank.
Short-term borrowings consist of overnight borrowings plus term borrowings with an original maturity less than one year. Short-term borrowings are obtained from commercial banks, participants in the Federal Funds market and the FHLB. As of December 31, 2015, the Company had $38.5 million of FHLB overnight borrowings. The weighted average rates for these borrowings was 0.43%. As of December 31, 2014, the Company had $50.0 million of short-term borrowings consisting of $35.0 million of overnight borrowings and $15.0 million of short-term borrowings with an original maturity less than one year. The weighted average rates for these borrowings was 0.31% and 0.33%, respectively.
The following table summarizes the Company's borrowing activity as of and for the years ended December 31, 2015, 2014 and 2013.
Year Ended December 31, | ||||||||||||
2015 | 2014 | 2013 | ||||||||||
(Dollars in thousands) | ||||||||||||
Maximum amount of borrowings outstanding at any month end during the period | $ | 214,000 | $ | 254,900 | $ | 260,500 | ||||||
Average borrowings outstanding during the period | 168,012 | 214,980 | 213,175 | |||||||||
Weighted average interest rate during the period | 1.76 | % | 1.59 | % | 1.56 | % | ||||||
Balance outstanding at end of period | $ | 178,496 | $ | 200,000 | $ | 260,500 | ||||||
Weighted average interest rate at end of period | 1.74 | % | 1.65 | % | 1.35 | % | ||||||
During January 2015, the Bank modified the four non-callable fixed rate borrowings totaling $25.0 million. Prior to the modification, the borrowings had a weighted average fixed rate of 3.33% and a weighted average term to maturity of 3.8 years. Subsequent to the modification, the borrowings have a weighted average variable rate of one-month LIBOR plus 1.79% and a weighted average term to maturity of 5.0 years.
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Results of Operations for the Years Ended December 31, 2015, 2014 and 2013
Overview.
Year Ended December 31, | ||||||||||||
2015 | 2014 | 2013 | ||||||||||
(Dollars in thousands) | ||||||||||||
Net income | $ | 9,546 | $ | 8,195 | $ | 5,534 | ||||||
Basic earnings per share | 0.87 | 0.73 | 0.49 | |||||||||
Diluted earnings per share | 0.85 | 0.71 | 0.48 | |||||||||
Return on average assets | 0.87 | % | 0.76 | % | 0.51 | % | ||||||
Return on average equity | 5.43 | 4.63 | 3.13 | |||||||||
Average equity to average assets | 15.94 | 16.33 | 16.22 | |||||||||
2015 vs. 2014. Net income increased $1.4 million, or 16.5%, for 2015 compared to 2014. The 2015 results included an increase in net interest income of $622,000, a decrease of $2.9 million in the provision for loan losses, an increase of $440,000 in noninterest income, offset by an increase of $2.0 million in noninterest expense and an increase in tax provision of $647,000. Noninterest expense in 2015 included $1.3 million related to the core data processing systems conversion and $487,000 related to the previously announced merger with Univest.
2014 vs. 2013. Net income increased $2.7 million, or 48.1%, for 2014 compared to 2013. The 2014 results included an increase in net interest income of $1.0 million, an increase of $1.0 million in the provision for loan losses, a decrease of $1.5 million in noninterest income, a decrease of $5.2 million in noninterest expense and an increase in tax provision of $1.2 million.
Net Interest Income.
2015 vs. 2014. Net interest income increased $622,000, or 1.9%, to $34.1 million for 2015 compared to $33.5 million for 2014. The net interest margin was 3.20% for 2015 compared to 3.19% for 2014. The increase in net interest income was primarily attributable to increases in commercial loans and noninterest-bearing deposits and a decrease in the average balance and rate paid on certificates of deposit.
Total interest income was $40.1 million in 2015 which was unchanged from 2014. Interest and fees on loans increased $361,000, or 1.1%, to $33.1 million in 2015 driven primarily by a $29.5 million increase in average loan balances (due to an increase in commercial loans, offset by decreases in residential and consumer loans), offset by a 13 basis point decrease in yield, which was a result of the sustained low interest rate environment. Interest and dividends on investment securities decreased $435,000, or 5.9%, due to a $20.4 million reduction in average balances.
Total interest expense decreased $678,000, or 10.2%, to $6.0 million for 2015 compared to $6.6 million for 2014, due primarily to a $462,000 decrease in interest expense on borrowings and a $216,000 decrease in interest expense on deposits. The decrease in interest expense on borrowings was primarily the result of a $47.0 million reduction of average borrowings and the modification of four non-callable fixed rate borrowings totaling $25.0 million during January 2015. Prior to the modification, these borrowings had a weighted average fixed rate of 3.33% and a weighted average term to maturity of 3.8 years. Subsequent to the modification, the borrowings have a weighted average variable rate of one-month LIBOR plus 1.79% and a weighted average term to maturity of 5.0 years. This modification resulted in a $339,000 decrease in interest expense on other borrowed funds. The decrease in interest expense on deposits was due to a 6 basis point decrease in the average rate paid on interest-bearing deposits, offset by a $14.6 million increase in the average outstanding balances.
2014 vs. 2013. Net interest income increased $1.0 million, or 3.2%, to $33.5 million for 2014 compared to $32.5 million for 2013. The net interest margin was 3.19% for 2014 compared to 3.08% for 2013. The increase in net interest income was primarily attributable to decreases in interest-bearing liabilities and their respective costs and increases in noninterest-bearing deposits.
Total interest income was $40.1 million in 2014 which was unchanged from 2013. Interest and fees on loans increased $50,000, or 0.2%, to $32.7 million in 2014 driven primarily by a $16.8 million increase in average loan balances offset by a 10 basis point decrease in yield which is a result of the sustained low interest rate environment. Interest income on mortgage-related securities decreased $300,000, or 4.2%, due to a $20.8 million reduction in average balances, offset by a 5 basis points increase in yield driven by reduced premium amortization resulting from reduced prepayment speeds. Interest and dividends on investment securities increased $245,000, or 77.0%, due to increased dividends on FHLB stock.
Total interest expense decreased $1.0 million, or 13.5%, to $6.6 million for 2014 compared to $7.7 million for 2013, due primarily to a $1.1 million decrease in interest expense on deposits, offset by a $100,000 increase in interest expense on FHLB advances. The decrease in interest expense on deposits was due to a $15.3 million decrease in the average outstanding balance of interest-bearing deposit accounts and a 39 basis point decrease in the average rate paid on certificates of deposit, primarily due to the lower interest
33
rate environment as well as the re-pricing of certificates of deposits at maturity. Interest expense on FHLB advances increased primarily due to an increase in average borrowings of $8.2 million, offset by a 2 basis point reduction in average cost.
34
Average Balances and Yields. The following table presents information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting annualized average yields and costs. The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented. Net loan origination fees and costs are included in interest income on loans and are insignificant. Yields are not presented on a tax-equivalent basis. Any adjustments necessary to present yields on a tax-equivalent basis are insignificant.
Year Ended December 31, | |||||||||||||||||||||||||||||||||
2015 | 2014 | 2013 | |||||||||||||||||||||||||||||||
Average Balance | Interest and Dividends | Yield/ Cost | Average Balance | Interest and Dividends | Yield/ Cost | Average Balance | Interest and Dividends | Yield/ Cost | |||||||||||||||||||||||||
Assets: | (Dollars in thousands) | ||||||||||||||||||||||||||||||||
Interest-earning assets: | |||||||||||||||||||||||||||||||||
Interest-earning demand deposits | $ | 14,762 | $ | 25 | 0.17 | % | $ | 8,316 | $ | 7 | 0.08 | % | $ | 5,921 | $ | 2 | 0.04 | % | |||||||||||||||
Investment securities | |||||||||||||||||||||||||||||||||
Available-for-sale | 143,056 | 3,640 | 2.54 | % | 221,441 | 5,310 | 2.40 | % | 297,218 | 6,470 | 2.18 | % | |||||||||||||||||||||
Held-to-maturity | 162,770 | 3,347 | 2.06 | % | 104,760 | 2,112 | 2.02 | % | 51,875 | 1,007 | 1.94 | % | |||||||||||||||||||||
Total investment securities | 305,826 | 6,987 | 2.28 | % | 326,201 | 7,422 | 2.28 | % | 349,093 | 7,477 | 2.14 | % | |||||||||||||||||||||
Loans: | |||||||||||||||||||||||||||||||||
Residential loans | 100,045 | 4,634 | 4.63 | % | 119,239 | 5,595 | 4.69 | % | 142,620 | 6,691 | 4.69 | % | |||||||||||||||||||||
Commercial loans | 628,099 | 27,627 | 4.40 | % | 575,727 | 26,118 | 4.54 | % | 530,741 | 24,714 | 4.66 | % | |||||||||||||||||||||
Consumer loans | 17,010 | 800 | 4.70 | % | 20,707 | 987 | 4.77 | % | 25,499 | 1,245 | 4.88 | % | |||||||||||||||||||||
Total Loans | 745,154 | 33,061 | 4.44 | % | 715,673 | 32,700 | 4.57 | % | 698,860 | 32,650 | 4.67 | % | |||||||||||||||||||||
Allowance for loan losses | (11,008 | ) | (11,458 | ) | (11,438 | ) | |||||||||||||||||||||||||||
Net loans | 734,146 | 33,061 | 704,215 | 32,700 | 687,422 | 32,650 | |||||||||||||||||||||||||||
Total interest-earning assets | 1,054,734 | 40,073 | 3.80 | % | 1,038,732 | 40,129 | 3.86 | % | 1,042,436 | 40,129 | 3.81 | % | |||||||||||||||||||||
Noninterest-earning assets | 47,604 | 44,156 | 49,202 | ||||||||||||||||||||||||||||||
Total assets | $ | 1,102,338 | $ | 1,082,888 | $ | 1,091,638 | |||||||||||||||||||||||||||
Liabilities and equity: | |||||||||||||||||||||||||||||||||
Interest-bearing liabilities: | |||||||||||||||||||||||||||||||||
NOW and money market deposit accounts | $ | 177,335 | $ | 396 | 0.22 | % | $ | 179,578 | $ | 386 | 0.21 | % | $ | 165,931 | $ | 344 | 0.21 | % | |||||||||||||||
Savings accounts | 131,420 | 501 | 0.38 | % | 112,358 | 275 | 0.24 | % | 98,661 | 141 | 0.14 | % | |||||||||||||||||||||
Brokered deposits | 65,442 | 525 | 0.80 | % | 62,121 | 450 | 0.72 | % | 64,976 | 391 | 0.60 | % | |||||||||||||||||||||
Certificates of deposit | 198,635 | 1,578 | 0.79 | % | 204,137 | 2,105 | 1.03 | % | 243,919 | 3,468 | 1.42 | % | |||||||||||||||||||||
Total interest-bearing deposits | 572,832 | 3,000 | 0.52 | % | 558,194 | 3,216 | 0.58 | % | 573,487 | 4,344 | 0.76 | % | |||||||||||||||||||||
Short-term borrowings | 27,689 | 94 | 0.34 | % | 41,000 | 127 | 0.31 | % | 47,368 | 130 | 0.28 | % | |||||||||||||||||||||
FHLB advances | 110,323 | 2,198 | 1.99 | % | 143,980 | 2,288 | 1.59 | % | 135,807 | 2,188 | 1.61 | % | |||||||||||||||||||||
Other borrowed funds | 30,000 | 665 | 2.22 | % | 30,000 | 1,004 | 3.35 | % | 30,000 | 1,007 | 3.36 | % | |||||||||||||||||||||
Total borrowings | 168,012 | 2,957 | 1.76 | % | 214,980 | 3,419 | 1.59 | % | 213,175 | 3,325 | 1.56 | % | |||||||||||||||||||||
Total interest-bearing liabilities | 740,844 | 5,957 | 0.80 | % | 773,174 | 6,635 | 0.86 | % | 786,662 | 7,669 | 0.97 | % | |||||||||||||||||||||
Noninterest-bearing deposits | 179,920 | 125,264 | 121,101 | ||||||||||||||||||||||||||||||
Other noninterest-bearing liabilities | 5,898 | 7,569 | 6,851 | ||||||||||||||||||||||||||||||
Total liabilities | 926,662 | 906,007 | 914,614 | ||||||||||||||||||||||||||||||
Stockholders’ equity | 175,351 | 178,068 | 177,141 | ||||||||||||||||||||||||||||||
Accumulated comprehensive income | 325 | (1,187 | ) | (117 | ) | ||||||||||||||||||||||||||||
Total stockholders' equity | 175,676 | 176,881 | 177,024 | ||||||||||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 1,102,338 | $ | 1,082,888 | $ | 1,091,638 | |||||||||||||||||||||||||||
Net interest income | $ | 34,116 | $ | 33,494 | $ | 32,460 | |||||||||||||||||||||||||||
Interest rate spread | 3.00 | % | 3.00 | % | 2.84 | % | |||||||||||||||||||||||||||
Net interest margin | 3.20 | % | 3.19 | % | 3.08 | % | |||||||||||||||||||||||||||
Average interest-earning assets to average interest-bearing liabilities | 142.37 | % | 134.35 | % | 132.51 | % | |||||||||||||||||||||||||||
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Rate/Volume Analysis. The following table sets forth the effects of changing rates and volumes on our net interest income. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by current volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the prior columns.
Year Ended December 31, 2015 | Year Ended December 31, 2014 | ||||||||||||||||||||||
Compared to | Compared to | ||||||||||||||||||||||
Year Ended December 31, 2014 | Year Ended December 31, 2013 | ||||||||||||||||||||||
Increase (Decrease) | Increase (Decrease) | ||||||||||||||||||||||
Due to | Due to | ||||||||||||||||||||||
Rate | Volume | Net | Rate | Volume | Net | ||||||||||||||||||
Interest Income: | (In thousands) | ||||||||||||||||||||||
Interest-earning demand deposits | $ | 13 | $ | 5 | $ | 18 | $ | 4 | $ | 1 | $ | 5 | |||||||||||
Investment securities | |||||||||||||||||||||||
Available-for-sale | 209 | (1,879 | ) | (1,670 | ) | 511 | (1,671 | ) | (1,160 | ) | |||||||||||||
Held-to-maturity | 65 | 1,170 | 1,235 | 79 | 1,026 | 1,105 | |||||||||||||||||
Total investment securities | 274 | (709 | ) | (435 | ) | 590 | (645 | ) | (55 | ) | |||||||||||||
Loans: | |||||||||||||||||||||||
Residential loans | (60 | ) | (901 | ) | (961 | ) | 1 | (1,097 | ) | (1,096 | ) | ||||||||||||
Commercial loans | (867 | ) | 2,376 | 1,509 | (690 | ) | 2,094 | 1,404 | |||||||||||||||
Consumer loans | (11 | ) | (176 | ) | (187 | ) | (24 | ) | (234 | ) | (258 | ) | |||||||||||
Total loans | (938 | ) | 1,299 | 361 | (713 | ) | 763 | 50 | |||||||||||||||
Total interest-earning assets | (651 | ) | 595 | (56 | ) | (119 | ) | 119 | — | ||||||||||||||
Interest Expense: | |||||||||||||||||||||||
NOW and money market deposits | 15 | (5 | ) | 10 | 13 | 29 | 42 | ||||||||||||||||
Savings accounts | 180 | 46 | 226 | 114 | 20 | 134 | |||||||||||||||||
Brokered deposits | 51 | 24 | 75 | 77 | (18 | ) | 59 | ||||||||||||||||
Certificates of deposit | (471 | ) | (56 | ) | (527 | ) | (797 | ) | (566 | ) | (1,363 | ) | |||||||||||
Total interest-bearing deposits | (225 | ) | 9 | (216 | ) | (593 | ) | (535 | ) | (1,128 | ) | ||||||||||||
Short-term borrowings | 8 | (41 | ) | (33 | ) | 14 | (17 | ) | (3 | ) | |||||||||||||
FHLB advances | 445 | (535 | ) | (90 | ) | (32 | ) | 132 | 100 | ||||||||||||||
Other borrowed funds | (339 | ) | — | (339 | ) | (3 | ) | — | (3 | ) | |||||||||||||
Total borrowings | 114 | (576 | ) | (462 | ) | (21 | ) | 115 | 94 | ||||||||||||||
Total interest-bearing liabilities | (111 | ) | (567 | ) | (678 | ) | (614 | ) | (420 | ) | (1,034 | ) | |||||||||||
Net change in net interest income | $ | (540 | ) | $ | 1,162 | $ | 622 | $ | 495 | $ | 539 | $ | 1,034 | ||||||||||
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Provision for Loan Losses.
The following table presents the activity within the allowance for loan losses, including the provision for loan losses, during 2015, 2014 and 2013.
Years Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
(In thousands) | |||||||||||
Balance, beginning | $ | 10,730 | $ | 11,529 | $ | 11,170 | |||||
(Credit) provision for loan losses | (995 | ) | 1,943 | 982 | |||||||
Loans charged off | (364 | ) | (2,835 | ) | (713 | ) | |||||
Recoveries | 1,191 | 93 | 90 | ||||||||
Balance, ending | $ | 10,562 | $ | 10,730 | $ | 11,529 | |||||
2015 vs. 2014. Fox Chase Bancorp recorded a credit to the provision for loan losses of $995,000 in 2015 compared to a provision for loan losses $1.9 million in 2014. The credit to the provision in 2015 was primarily due to $1.2 million of recoveries during the year on previously charged-off loans. The Company recorded net loan recoveries of $827,000 during the year ended December 31, 2015, compared to net charge-offs of $2.7 million during the year ended December 31, 2014.
2014 vs. 2013. Fox Chase Bancorp recorded a provision for loan losses of $1.9 million in 2014 compared to $982,000 in 2013. The increase in provision for the year ended December 31, 2014 was primarily due to one commercial and industrial loan which defaulted during the year. The Company recorded a $2.0 million charge-off and the remainder of the loan was paid off during 2014.
An analysis of the changes in the allowance for loan losses is presented under "—Risk Management—Analysis and Determination of the Allowance for Loan Losses."
Noninterest Income. The following table shows the components of noninterest income and the percentage changes for 2015, 2014 and 2013.
Year Ended December 31, | $ Change | % Change | $ Change | % Change | ||||||||||||||||||||||
2015 | 2014 | 2013 | 2015/2014 | 2014/2013 | ||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||
Service charges and other fee income | $ | 1,572 | $ | 1,604 | $ | 1,694 | $ | (32 | ) | (2.0 | )% | $ | (90 | ) | (5.3 | )% | ||||||||||
Net (loss) gain on sale of assets acquired through foreclosure | (12 | ) | (68 | ) | 484 | 56 | 82.4 | (552 | ) | (114.0 | ) | |||||||||||||||
Income on bank-owned life insurance | 661 | 480 | 470 | 181 | 37.7 | 10 | 2.1 | |||||||||||||||||||
Equity in earnings of affiliate | 303 | 172 | 445 | 131 | 76.2 | (273 | ) | (61.3 | ) | |||||||||||||||||
Other | 209 | 105 | 165 | 104 | 99.0 | (60 | ) | (36.4 | ) | |||||||||||||||||
Net gains on sale of investment securities | — | — | 532 | — | — | (532 | ) | (100.0 | ) | |||||||||||||||||
Total Noninterest Income | $ | 2,733 | $ | 2,293 | $ | 3,790 | $ | 440 | 19.2 | % | $ | (1,497 | ) | (39.5 | )% | |||||||||||
2015 vs. 2014. Noninterest income increased $440,000, or 19.2%, for the year ended December 31, 2015. Income on bank-owned life insurance increased $181,000 due to the purchase of policies totaling $10.0 million during the quarter ended September 30, 2015. Equity in earnings of affiliate increased $131,000 due to increased income on the Bank’s investment in Philadelphia Mortgage Advisors as a result of increased mortgage loan volume during 2015. Other noninterest income increased $104,000 primarily due to increased merchant services revenue. Net loss on sale of assets acquired through foreclosure decreased $56,000 due to four properties being sold with a combined net loss on sale of $12,000 in 2015 compared to four sales during 2014, which resulted in a loss on sale of $68,000.
2014 vs. 2013. Noninterest income decreased $1.5 million, or 39.5%. Net gain on sale of assets acquired through foreclosure decreased $552,000 due to four properties being sold with a combined loss on sale of $68,000 in 2014 compared to eleven sales during 2013, which resulted in a gain on sale of $484,000. Equity in earnings of affiliate decreased $273,000 due to decreased income on the Bank’s investment in Philadelphia Mortgage Advisors as a result of decreased mortgage loan volume for 2014. Net gain on sale of investment securities decreased $532,000 due to the sale of $9.0 million of investment securities during 2013 compared to no sales in 2014.
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Noninterest Expense. The following table shows the components of noninterest expense and the percentage changes for 2015, 2014 and 2013.
Year Ended December 31, | $ Change | % Change | $ Change | % Change | ||||||||||||||||||||||
2015 | 2014 | 2013 | 2015/2014 | 2014/2013 | ||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||
Salaries, benefits and other compensation | $ | 15,470 | $ | 14,380 | $ | 14,338 | $ | 1,090 | 7.6 | % | $ | 42 | 0.3 | % | ||||||||||||
Occupancy expense | 1,663 | 1,709 | 1,689 | (46 | ) | (2.7 | ) | 20 | 1.2 | |||||||||||||||||
Furniture and equipment expense | 358 | 390 | 469 | (32 | ) | (8.2 | ) | (79 | ) | (16.8 | ) | |||||||||||||||
Data processing costs | 2,311 | 1,542 | 1,537 | 769 | 49.9 | 5 | 0.3 | |||||||||||||||||||
Professional fees | 1,970 | 1,417 | 1,691 | 553 | 39.0 | (274 | ) | (16.2 | ) | |||||||||||||||||
Marketing expense | 192 | 302 | 248 | (110 | ) | (36.4 | ) | 54 | 21.8 | |||||||||||||||||
FDIC premiums | 509 | 571 | 709 | (62 | ) | (10.9 | ) | (138 | ) | (19.5 | ) | |||||||||||||||
Assets acquired through foreclosure expense | 247 | 420 | 5,201 | (173 | ) | (41.2 | ) | (4,781 | ) | (91.9 | ) | |||||||||||||||
Other | 1,513 | 1,500 | 1,589 | 13 | 0.9 | (89 | ) | (5.6 | ) | |||||||||||||||||
Total Noninterest Expense | $ | 24,233 | $ | 22,231 | $ | 27,471 | $ | 2,002 | 9.0 | % | $ | (5,240 | ) | (19.1 | )% | |||||||||||
2015 vs. 2014. Noninterest expense increased $2.0 million, or 9.0%, for the year ended December 31, 2015. The increase was primarily due to the Company incurring $1.8 million of one-time costs, of which $1.3 million related to the core data processing systems conversion and $487,000 related to the previously announced merger with Univest. For the year ended December 31, 2015, systems conversion and merger related costs are captured in the following noninterest expense categories: Salary, benefits and other compensation ($149,000), data processing costs ($632,000), professional fees ($883,000) and other ($94,000). Additionally, salaries, benefits and other compensation expense also increased as a result of annual merit increases and increased staffing and benefits costs. Assets acquired through foreclosure expense decreased $173,000, primarily due to decreases in valuation adjustments of $168,000. Valuation adjustments on assets acquired through foreclosure totaled $137,000 in 2015. FDIC premiums decreased $62,000 due to reduced assessment rates.
2014 vs. 2013. Noninterest expense decreased $5.2 million, or 19.1%. Assets acquired through foreclosure expense decreased $4.8 million, primarily due to decreases in valuation adjustments of $4.7 million. Valuation adjustments on assets acquired through foreclosure totaled $305,000 in 2014. Valuation adjustments on assets acquired through foreclosure for 2013 totaled $5.0 million. Professional fees decreased $274,000, primarily due to reduced loan workout costs. FDIC premiums decreased $138,000 due to reduced assessment rates. Furniture and equipment expense decreased $79,000 as certain assets at the Bank's operations center in Blue Bell, PA became fully depreciated in 2014. Other noninterest expense decreased $89,000 primarily due to reduced supervisory assessments associated with the Bank's charter conversion at the end of 2013.
Income Taxes.
2015 vs. 2014. Income tax expense for 2015 and 2014 was $4.1 million and $3.4 million, respectively. The Company’s effective income tax rate for 2015 and 2014 was 29.9% and 29.4%, respectively. These rates reflect the Company’s levels of tax-exempt income for both periods relative to the overall level of taxable income. The income tax rate of 2015 includes the reversal of a $182,000 valuation allowance on certain state deferred tax assets, which occurred during the three months ended March 31, 2015. Excluding this reversal, the effective income tax rate for 2015 was 31.2%.
2014 vs. 2013. Income tax expense for 2014 and 2013 was $3.4 million and $2.3 million, respectively. The Company’s effective income tax rate for 2014 and 2013 was 29.4% and 29.0%, respectively. These rates reflect the Company’s levels of tax-exempt income for both periods relative to the overall level of taxable income.
Risk Management
Overview. Managing risk is an essential part of successfully managing a financial institution. In the normal course of its business, the Company encounters two significant types of risk: economic risk and regulatory risk.
There are three main components of economic risk: interest rate risk, credit risk and market risk. The Company is subject to interest rate risk to the degree that its interest-bearing liabilities mature or reprice at different speeds, or on a different basis, from its interest-earning assets. The Company's primary credit risk is the risk of defaults in the Company's loan portfolio that result from borrowers' inability or unwillingness to make contractually required payments. The Company's lending activities are concentrated in Southeastern Pennsylvania and Southern New Jersey. The ability of the Company's borrowers to repay amounts owed is dependent on several factors, including the economic conditions in the borrowers' geographic regions and the borrowers' financial conditions. The Company also has credit risk related to the risk of defaults in its investment securities portfolio. The ability of the Company to
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realize the full value of its investment securities upon sale or maturity depends on several factors, including the cash flows, credit enhancements and underlying structures of the individual investment securities. Market risk reflects changes in the value of the collateral underlying loans, the valuation of assets acquired through foreclosure, and the valuation of securities, mortgage servicing assets and other investments.
The Company is subject to the regulations of certain federal and state banking agencies. These regulations can and do change significantly from period to period. The Company also undergoes periodic examinations by regulatory agencies which may subject it to further changes with respect to asset valuations, amounts of required loan loss allowances and operating restrictions resulting from the regulators’ judgments based on information available to them at the time of their examinations.
Other risks that we face are operational risks, liquidity risks and reputation risk. Operational risks include risks related to fraud, processing errors, technology and disaster recovery. Liquidity risk is the possible inability to fund obligations to depositors, lenders or borrowers due to unforeseen circumstances. Reputation risk is the risk that negative publicity or press, whether true or not, could cause a decline in our customer base or revenue.
Credit Risk Management. Our strategy for credit risk management focuses on having well-defined credit policies and uniform underwriting criteria and providing prompt attention to potential problem loans. Our Special Assets Group, which is run by our Chief Operating Officer and other loan and credit administration officers, is responsible for the oversight of problem assets and increases the frequency with which criticized and classified credits are reviewed and aggressively acts to resolve problem loans.
When a borrower fails to make a required loan payment, we take a number of steps to have the borrower cure the delinquency and restore the loan to current status. When the loan becomes 15 days past due, a late notice is generated and sent to the borrower. A second notice is sent and phone calls are made ten days later. If payment is not received by the 30th day of delinquency, a further notification is sent to the borrower. If payment is not received by the 45th day of delinquency for a loan on a Pennsylvania property or the 60th day of delinquency for a loan on a New Jersey property, a notice is sent to the borrower advising them that they have a specified period of time to cure their default before legal action begins. If no successful workout can be achieved, after a loan becomes 90 days delinquent, we typically commence foreclosure or other legal proceedings. If a foreclosure action is instituted and the loan is not brought current, paid in full, or refinanced before the foreclosure sale, the real property securing the loan generally is sold at or subsequent to foreclosure. We also may consider loan workout arrangements with certain borrowers under certain circumstances.
Management reports to the Board of Directors or a committee of the Board monthly regarding the status of nonperforming loans, assets acquired through foreclosure, troubled debt restructurings, loans delinquent more than 30 days and any other loans requiring special attention. Additionally, the Bank monitors loan concentration by industry on a monthly basis to ensure such levels are within predetermined limits as set by the Risk Management Committee.
Analysis of Nonperforming and Classified Assets. We consider assets acquired through foreclosure, loans that are 90 days or more past due and loans that are not 90 days past due, but where collection of principal or interest is in doubt, to be nonperforming assets. Loans are generally placed on nonaccrual status when they become 90 days delinquent at which time the accrual of interest ceases and any previously recorded interest is reversed and recorded as a reduction of loan interest and fee income. Generally, payments received on a nonaccrual loan are applied to the outstanding principal at the time received, unless collection of principal and interest in full is considered probable.
Assets acquired through foreclosure consists of other real estate owned and financial assets acquired from debtors. These assets are obtained through foreclosure, by a deed-in-lieu of foreclosure, in-substance foreclosure or in exchange for satisfaction of debt. Other real estate owned is initially recorded at fair value less costs to sell. In periods subsequent to acquisition, each real estate asset is carried at the lower of the fair value of the asset, less estimated selling costs, or the amount at which the asset was initially recorded. Financial assets acquired from debtors are carried at fair value under the fair value option in accordance with FASB ASC 825 "Financial Instruments." Changes in the fair value of assets acquired through foreclosure at future reporting dates or at the time of disposition will result in an adjustment in assets acquired through foreclosure expense or net gain (loss) on sale of assets acquired through foreclosure, respectively. Holding costs are recorded as assets acquired through foreclosure expense.
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The following table provides information with respect to our nonperforming assets and impaired loans by segment at the dates indicated.
December 31, | |||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||||||
(Dollars in thousands) | |||||||||||||||||||
Nonaccruing Loans: | |||||||||||||||||||
One- to four-family real estate | $ | 583 | $ | 1,741 | $ | 2,390 | $ | 3,355 | $ | 6,885 | |||||||||
Multi-family and commercial real estate | 1,074 | 1,395 | 3,031 | 5,284 | 3,814 | ||||||||||||||
Construction | — | — | 3,231 | 6,434 | 6,372 | ||||||||||||||
Consumer | 159 | 243 | 128 | 2,051 | 7 | ||||||||||||||
Commercial and industrial | 718 | 75 | — | — | — | ||||||||||||||
Total | $ | 2,534 | $ | 3,454 | $ | 8,780 | $ | 17,124 | $ | 17,078 | |||||||||
Accruing Loans Past Due 90 Days or More: | |||||||||||||||||||
Consumer | — | — | — | — | 3,875 | ||||||||||||||
Total | $ | — | $ | — | $ | — | $ | — | $ | 3,875 | |||||||||
Nonperforming Loans | 2,534 | 3,454 | 8,780 | 17,124 | 20,953 | ||||||||||||||
Assets Acquired Through Foreclosure | 2,623 | 2,814 | 6,252 | 8,524 | 2,423 | ||||||||||||||
Total Nonperforming Assets | $ | 5,157 | $ | 6,268 | $ | 15,032 | $ | 25,648 | $ | 23,376 | |||||||||
Total nonperforming loans to total loans | 0.33 | % | 0.47 | % | 1.20 | % | 2.46 | % | 3.07 | % | |||||||||
Total nonperforming loans to total assets | 0.23 | 0.32 | 0.79 | 1.57 | 2.06 | ||||||||||||||
Total nonperforming assets to total assets | 0.46 | 0.57 | 1.35 | 2.36 | 2.30 | ||||||||||||||
Impaired Loans: | |||||||||||||||||||
Nonaccruing loans | $ | 2,534 | $ | 3,454 | $ | 8,780 | $ | 17,124 | $ | 17,078 | |||||||||
Accruing troubled debt restructurings | 6,440 | 3,624 | 6,786 | 7,388 | 7,207 | ||||||||||||||
Other impaired loans | 4,352 | 4,454 | — | — | 6,229 | ||||||||||||||
Total impaired loans | $ | 13,326 | $ | 11,532 | $ | 15,566 | $ | 24,512 | $ | 30,514 | |||||||||
At December 31, 2015, nonperforming assets were comprised of the following:
• | Two multi-family and commercial real estate loans, the largest of which is secured by rental properties located in the Greater Philadelphia Area. |
• | One commercial and industrial loan relationship secured by the assets of a professional services firm in the greater Philadelphia area. |
• | Five one- to four-family loans, the largest of which is secured by a single-family home located in Atlantic County, New Jersey. |
• | Seven consumer loan relationships which are secured by second or third lien mortgage positions. |
• | Assets acquired through foreclosure consisting of five properties with a total carrying value of $2.6 million. |
For a discussion of the allowance related to these assets, see "—Analysis and Determination of the Allowance for Loan Losses—Allowance Required for Impaired Loans."
Regulations require us to review and classify our assets on a regular basis. In addition, our regulators have the authority to identify problem assets and, if appropriate, require them to be classified. There are three classifications for problem assets: substandard, doubtful and loss. "Substandard assets" must have one or more defined weaknesses and are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. "Doubtful assets" have the weaknesses of substandard assets with
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the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. An asset classified "loss" is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. If we classify an asset as loss, it is recorded as a loan charged off in the current period. The regulations also provide for a "special mention" category, described as criticized assets which do not currently expose us to a sufficient degree of risk to warrant classification but do possess credit deficiencies or potential weaknesses deserving our close attention.
The following table shows the aggregate amounts of our criticized and classified assets at the dates indicated.
December 31, | ||||||||||||
2015 | 2014 | 2013 | ||||||||||
(In thousands) | ||||||||||||
Special mention assets | $ | 15,757 | $ | 14,141 | $ | 15,091 | ||||||
Substandard assets | 11,896 | 13,313 | 18,664 | |||||||||
Doubtful assets | — | — | — | |||||||||
Total criticized and classified assets | $ | 27,653 | $ | 27,454 | $ | 33,755 | ||||||
At December 31, 2015, substandard assets were comprised of: (1) $2.5 million in nonaccrual loans and $2.6 million of assets acquired through foreclosure identified in the nonperforming asset table; (2) $5.1 million related to two loan relationships that are current on principal and interest payments but are classified due to weaknesses in each of the borrower's underlying businesses; and (3) $1.6 million in real estate held for investment related to our Absecon, New Jersey property.
At December 31, 2015, Fox Chase Bank had six loan relationships classified as special mention, which were comprised of five multi-family and commercial real estate relationships totaling $14.0 million and one commercial and industrial relationship totaling $1.8 million.
Delinquencies. The following table provides information about delinquencies in our loan portfolio at the dates indicated.
December 31, | |||||||||||||||||||||||
2015 | 2014 | 2013 | |||||||||||||||||||||
30-59 Days Past Due | 60-89 Days Past Due | 30-59 Days Past Due | 60-89 Days Past Due | 30-59 Days Past Due | 60-89 Days Past Due | ||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
One- to four-family real estate | $ | 865 | $ | 685 | $ | — | $ | 145 | $ | 172 | $ | — | |||||||||||
Multi-family and commercial real estate | — | — | — | — | — | — | |||||||||||||||||
Construction | — | — | — | — | — | — | |||||||||||||||||
Consumer | 156 | — | 113 | — | 241 | 5 | |||||||||||||||||
Commercial and industrial | — | — | — | — | — | — | |||||||||||||||||
Total | $ | 1,021 | $ | 685 | $ | 113 | $ | 145 | $ | 413 | $ | 5 | |||||||||||
At December 31, 2015, delinquent loans were comprised of twelve one- to four-family real estate loans and three consumer loans.
Troubled Debt Restructurings. The Company may, under certain circumstances, restructure loans as a concession to borrowers who have experienced financial difficulty. Troubled debt restructurings ("TDRs") are included in impaired loans. TDRs typically result from the Company's loss mitigation activities which, among other activities, could include rate reductions, payment extension, and/or principal forgiveness.
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The following table provides the number of TDRs (accruing and nonaccruing) and their related balances as of the dates indicated.
December 31, | ||||||||||||||||||||
2015 | 2014 | 2013 | ||||||||||||||||||
# of TDRs | Recorded Investment | # of TDRs | Recorded Investment | # of TDRs | Recorded Investment | |||||||||||||||
(In thousands) | ||||||||||||||||||||
One- to four-family real estate | 4 | $ | 969 | 6 | $ | 1,224 | 5 | $ | 838 | |||||||||||
Multi-family and commercial real estate | 3 | 2,714 | 1 | 1,065 | 2 | 6,191 | ||||||||||||||
Construction | 1 | 3,867 | 1 | 2,723 | 1 | 3,231 | ||||||||||||||
Consumer | 1 | 12 | 1 | 13 | 1 | 13 | ||||||||||||||
Commercial and industrial | — | — | — | — | — | — | ||||||||||||||
Total | 9 | $ | 7,562 | 9 | $ | 5,025 | 9 | $ | 10,273 | |||||||||||
Analysis and Determination of the Allowance for Loan Losses. The allowance for loan losses is maintained at a level representing management's best estimate of known risks and inherent losses in the loan portfolio, based upon management's evaluation of the portfolio's collectability. We evaluate the need to establish allowances against losses on loans on a quarterly basis. When changes in the allowance are necessary, an adjustment is made. The adjustments to the allowance are made by management and presented to the Audit Committee of the Board of Directors.
The allowance for loan losses consists of an allowance for impaired loans and a general valuation allowance on the remainder of the loan portfolio. Although we determine the amount of each element of the allowance separately, the entire allowance for loan losses is available for losses on the entire portfolio.
Allowance Required for Impaired Loans. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect future payments of principal or interest as contractually due. The Company applies its normal loan review procedures in determining if a loan is impaired, which includes reviewing the collectability of delinquent and internally classified loans on a regular basis and at least quarterly. In determining the likelihood of collecting principal and interest, the Company considers all available and relevant information, including the borrower's actual and projected cash flows, balance sheet strength, liquidity and overall financial position. Additionally, all loans classified as a TDR are considered impaired. When a loan is classified as impaired, an impairment analysis is performed within the quarter in which a loan is identified as impaired to determine if a valuation allowance is needed. The Company reexamines each of its impaired loans on a quarterly basis to determine if any adjustment to the net carrying amount of a loan is required. The Company recognizes charge-offs associated with impaired loans when all or a portion of a loan is considered to be uncollectible.
In measuring impairment, the Company determines whether or not the loan is collateral dependent. A loan is collateral dependent if repayment is expected to be provided solely by the underlying collateral, which includes repayment from the proceeds from the sale of the collateral, cash flows from the continued operation of the collateral, or both, and there are no other available and reliable repayment sources. To determine the initial amount of impairment for a collateral dependent loan, the Company utilizes a recent appraisal, an agreement of sale or a letter of intent. If the fair value of the underlying collateral, less costs to sell, is less than the loan's carrying amount, the Company establishes a provision to the allowance for loan losses in the amount of the difference between fair value, less costs to sell, and the loan's carrying amount. In subsequent periods, the Company takes into consideration current facts and circumstances in analyzing whether the fair value of the collateral has increased or decreased significantly such that a change to the corresponding valuation allowance is required. If current facts and circumstances are insufficient to determine fair value, the Company obtains a new appraisal. Further, the Company's policy is to obtain an appraisal on each collateral dependent impaired loan greater than $250,000 annually except in instances where a management prepared discounted cash flow analysis is deemed to be an appropriate valuation method.
For loans that are not collateral dependent, we establish a specific allowance on impaired loans based on management's estimate of the discounted cash flows the Company expects to receive from the borrower. Factors considered in evaluating such cash flows include: (1) the strength of the customer's personal or business cash flows and personal guarantees; (2) the borrower's effort to cure the delinquency; (3) the availability of other sources of repayment; (4) the type and value of collateral, if applicable; and (5) the strength of our collateral position, if applicable.
At December 31, 2015, the Company had $13.3 million of impaired loans comprised of: (1) $2.5 million of nonaccrual loans (See —Analysis of Nonperforming and Classified Assets) (2) $6.4 million of accruing TDRs (See —Troubled Debt Restructurings) and (3) a $4.4 million accruing commercial real estate loan which was reclassified from an accruing TDR to an other impaired loan during 2014. This classification occurred as part of our annual assessment where TDRs that have performed in accordance with the new terms
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for six consecutive months, are in a current status, reflected a market rate of interest at the time of the restructuring and cross over a year end are considered cured and are no longer classified as TDRs.
Management has recorded an allowance for loan losses on impaired loans of $787,000 at December 31, 2015 relating to $11.1 million in impaired loans. At December 31, 2015, the Company had $2.2 million of impaired loans that had no related valuation allowance.
General Valuation Allowance on the Remainder of the Loan Portfolio. We establish a general allowance for loans that are not considered impaired to recognize the inherent losses associated with lending activities. This general valuation allowance is determined by segmenting the loan portfolio and assigning reserve factors to each category. The reserve factors are calculated using the Company's historical losses and loss emergence periods, and are adjusted for significant factors that, in management's judgment, affect the collectability of the portfolio as of the evaluation date. These significant factors include:
• | Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses. |
• | Changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments. |
• | Changes in the nature and volume of the portfolio and in the terms of loans. |
• | Changes in the experience, ability, and depth of lending management and other relevant staff. |
• | Changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans. |
• | Changes in the quality of the institution’s loan review system. |
• | Changes in the value of underlying collateral for collateral-dependent loans. |
• | The existence and effect of any concentrations of credit, and changes in the level of such concentrations. |
• | The effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the institution’s existing portfolio. |
These reserve factors are subject to ongoing evaluation to ensure their relevance as compared to historical losses in the current environment. We perform this systematic analysis of the allowance on a quarterly basis. These criteria are analyzed and the allowance is developed and maintained at the segment level.
For multi-family and commercial real estate and commercial and industrial loan relationships originated in the last twelve months, management reviews and provides a loss factor for each individual loan relationship. Generally, management believes the risk of default on recently underwritten loans is relatively low at the time of origination and increases with time, at some point moderating. This is supported by the concept that the fair value of the loan at inception approximates its book value. These loan relationships are reviewed on a quarterly basis, and allowance for loan loss factors adjusted commensurate with assessed changes in the loan's risk.
At December 31, 2015, our allowance for loan losses was $10.6 million, which represented 1.36% of total loans and 416.8% of nonperforming loans. At December 31, 2015, the allowance for loan losses for impaired loans was $787,000 and the general valuation allowance for the loan portfolio was $9.8 million. At December 31, 2014, our allowance for loan losses was $10.7 million, which represented 1.46% of total loans and 310.7% of nonperforming loans. At December 31, 2014, the allowance for loan losses for impaired loans was $552,000 and the general valuation allowance for the loan portfolio was $10.2 million.
The allowance for loan losses at December 31, 2015 and 2014 represent application of loan loss policies, which comply with U.S. generally accepted accounting principles and all regulatory guidance.
We identify loans that may need to be charged off as a loss by reviewing all nonperforming, delinquent, criticized and TDR loans which we have concerns about collectability. A loan is charged off when in our judgment; the loan or portion of a loan is considered uncollectible.
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The following table sets forth the breakdown of impaired loans by loan segment as of December 31, 2015.
Nonaccrual Loans | Accruing TDRs | Other Impaired Loans | Total Impaired Loans | Impaired Loans with Allowance | Impaired Loans without Allowance | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Real estate loans: | ||||||||||||||||||||||||
One- to four-family | $ | 583 | $ | 877 | $ | — | $ | 1,460 | $ | 117 | $ | 1,343 | ||||||||||||
Multi-family and commercial | 1,074 | 1,685 | 4,352 | 7,111 | 6,340 | 771 | ||||||||||||||||||
Construction | — | 3,866 | — | 3,866 | 3,866 | — | ||||||||||||||||||
Consumer loans | 159 | 12 | — | 171 | 57 | 114 | ||||||||||||||||||
Commercial and industrial | 718 | — | — | 718 | 718 | — | ||||||||||||||||||
Total | $ | 2,534 | $ | 6,440 | $ | 4,352 | $ | 13,326 | $ | 11,098 | $ | 2,228 | ||||||||||||
At December 31, 2015, two TDRs totaling $1.1 million are excluded from the accruing TDR column above as they are included in nonaccrual loans. Of this amount, $1.0 million relates to one multi-family and commercial real estate loan and $93,000 relates to one residential loan.
The following table sets forth the allowance for loan loss for impaired loans and general allowance by loan segment as of December 31, 2015.
Allowance for Loan Losses | ||||||||||||||||||||||||
Impaired Loans | ||||||||||||||||||||||||
Nonaccrual Loans | Accruing TDRs | Other Impaired Loans | Total Impaired Loans | |||||||||||||||||||||
General | Total | |||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Real estate loans: | ||||||||||||||||||||||||
One- to four-family | $ | 3 | $ | — | $ | — | $ | 3 | $ | 359 | $ | 362 | ||||||||||||
Multi-family and commercial | 119 | 46 | 374 | 539 | 5,925 | 6,464 | ||||||||||||||||||
Construction | — | 135 | — | 135 | 445 | 580 | ||||||||||||||||||
Consumer loans | 56 | — | — | 56 | 78 | 134 | ||||||||||||||||||
Commercial and industrial | 54 | — | — | 54 | 2,618 | 2,672 | ||||||||||||||||||
Unallocated | — | — | — | — | 350 | 350 | ||||||||||||||||||
Total allowance for loan losses | $ | 232 | $ | 181 | $ | 374 | $ | 787 | $ | 9,775 | $ | 10,562 | ||||||||||||
The following table sets forth the breakdown of the total allowance for loan losses by loan segment at the dates indicated.
December 31, | |||||||||||||||||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||||||||||||||||||||||
Amount | % of Loans in Category to Total Loans | Amount | % of Loans in Category to Total Loans | Amount | % of Loans in Category to Total Loans | Amount | % of Loans in Category to Total Loans | Amount | % of Loans in Category to Total Loans | ||||||||||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||||||||||||||
Real estate loans: | |||||||||||||||||||||||||||||||||||
One- to four-family real estate | $ | 362 | 11.6 | % | $ | 405 | 14.7 | % | $ | 403 | 17.4 | % | $ | 642 | 22.9 | % | $ | 1,760 | 29.1 | % | |||||||||||||||
Multi-family and commercial real estate | 6,464 | 56.8 | 5,990 | 52.9 | 7,141 | 55.8 | 6,327 | 53.1 | 6,112 | 45.9 | |||||||||||||||||||||||||
Construction | 580 | 4.6 | 1,038 | 5.4 | 324 | 0.8 | 873 | 3.2 | 869 | 2.7 | |||||||||||||||||||||||||
Consumer | 134 | 1.9 | 184 | 2.6 | 153 | 3.1 | 232 | 4.4 | 455 | 6.5 | |||||||||||||||||||||||||
Commercial and industrial | 2,672 | 25.1 | 2,753 | 24.4 | 3,051 | 22.9 | 2,630 | 16.4 | 2,657 | 15.8 | |||||||||||||||||||||||||
Unallocated | 350 | — | 360 | — | 457 | — | 466 | — | 222 | — | |||||||||||||||||||||||||
Total allowance for loan losses | $ | 10,562 | 100.0 | % | $ | 10,730 | 100.0 | % | $ | 11,529 | 100.0 | % | $ | 11,170 | 100.0 | % | $ | 12,075 | 100.0 | % | |||||||||||||||
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Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary and our results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Furthermore, while we believe we have established our allowance for loan losses in conformity with U.S. generally accepted accounting principles, our regulators, in reviewing our loan portfolio, may require us to increase our allowance for loan losses based on judgments different from ours. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, increases may be necessary should the quality of any loans deteriorate as a result of the factors previously discussed. Any material increase in the allowance for loan losses may adversely affect our financial condition and results of operations.
Analysis of Loan Loss Experience. The following table sets forth an analysis of the allowance for loan losses for the years indicated.
December 31, | ||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Allowance at beginning of period | $ | 10,730 | $ | 11,529 | $ | 11,170 | $ | 12,075 | $ | 12,443 | ||||||||||
Charge-offs: | ||||||||||||||||||||
Real estate loans: | ||||||||||||||||||||
One- to four-family real estate | 347 | 6 | 179 | 1,408 | 567 | |||||||||||||||
Multi-family and commercial real estate | 16 | 811 | 463 | 887 | 1,290 | |||||||||||||||
Construction | — | — | — | 340 | 3,445 | |||||||||||||||
Consumer | 1 | 16 | 71 | 1,892 | 433 | |||||||||||||||
Commercial and industrial | — | 2,002 | — | — | 596 | |||||||||||||||
Total charge-offs | 364 | 2,835 | 713 | 4,527 | 6,331 | |||||||||||||||
Recoveries | 1,191 | 93 | 90 | 144 | 229 | |||||||||||||||
Net (recoveries) charge-offs | (827 | ) | 2,742 | 623 | 4,383 | 6,102 | ||||||||||||||
(Credit) provision for loan losses | (995 | ) | 1,943 | 982 | 3,478 | 5,734 | ||||||||||||||
Allowance at end of period | $ | 10,562 | $ | 10,730 | $ | 11,529 | $ | 11,170 | $ | 12,075 | ||||||||||
Allowance for loan losses to nonperforming loans | 416.8 | % | 310.7 | % | 131.3 | % | 65.2 | % | 57.6 | % | ||||||||||
Allowance for loan losses to total loans at the end of the period | 1.36 | 1.46 | 1.57 | 1.61 | 1.77 | |||||||||||||||
Net (recoveries) charge-offs to average loans outstanding during the period | (0.11 | ) | 0.38 | 0.09 | 0.66 | 0.94 | ||||||||||||||
The increased recoveries during 2015, primarily related to two relationships for which charge-offs had been recognized in previous years. The increased commercial and industrial loan charge-offs during 2014 primarily related to one relationship which defaulted during the year. The Company recorded a $2.0 million charge-off and the remainder of the loan was paid off during 2014.
The following table provides a rollforward of the allowance for loan losses by loan segment from December 31, 2014 to December 31, 2015.
Year Ended December 31, 2015 | ||||||||||||||||||||||||||||
One- to Four-Family | Multi-family and Commercial | Construction | Consumer | Commercial and Industrial | Unallocated | Total | ||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||
Balance, beginning | $ | 405 | $ | 5,990 | $ | 1,038 | $ | 184 | $ | 2,753 | $ | 360 | $ | 10,730 | ||||||||||||||
Provision (credit) for loan losses | 303 | 425 | (753 | ) | (874 | ) | (86 | ) | (10 | ) | (995 | ) | ||||||||||||||||
Loans charged off | (347 | ) | (16 | ) | — | (1 | ) | — | — | (364 | ) | |||||||||||||||||
Recoveries | 1 | 65 | 295 | 825 | 5 | — | 1,191 | |||||||||||||||||||||
Balance, ending | $ | 362 | $ | 6,464 | $ | 580 | $ | 134 | $ | 2,672 | $ | 350 | $ | 10,562 | ||||||||||||||
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Interest Rate Risk Management. We manage the interest rate sensitivity of our interest-bearing liabilities and interest-earning assets in an effort to minimize the adverse effects of changes in the interest rate environment. To reduce the volatility of our earnings, we have sought to improve the match between asset and liability maturities and rates, while maintaining an acceptable interest rate spread. Our strategy for managing interest rate risk generally is to emphasize the origination of shorter-term adjustable-rate loans, and to invest in securities that have shorter-term maturities. Additionally, we have focused on increasing core deposits including non-interest bearing and money market deposit accounts, which provide greater pricing flexibility, as well as making efforts to extend maturities on certificates of deposit and wholesale borrowings to better match longer-term fixed rate assets.
We have a Risk Management Committee, which together with an Asset/Liability Management Committee, communicates, coordinates and controls all aspects involving asset/liability management. The committees establish and monitor the volume, maturities, pricing and mix of assets and funding sources with the objective of managing assets and funding sources to provide results that are consistent with liquidity, growth, risk limits and profitability goals.
Interest Rate Risk Analysis. The Corporation uses a third party vendor prepared model, which incorporates actual data and management assumptions, to review its level of interest rate risk. Such analyses measure interest rate risk by computing changes in net portfolio value and net interest income due to changes in cash flows from assets, liabilities and off-balance sheet items in the event of a range of assumed changes in market interest rates.
Net portfolio value represents the market value of portfolio equity and is equal to the market value of assets minus the market value of liabilities, with adjustments made for off-balance sheet items. This analysis assesses the risk of loss in market risk-sensitive instruments in the event of a immediate and parallel 100 to 400 basis point increase or 100 basis point decrease in market interest rates with no effect given to any steps that we might take to counter the effect of that interest rate movement. Because of the low level of market interest rates, this analysis is not performed for decreases of more than 100 basis points.
Net interest income represents the difference between interest earned on assets less interest paid on liabilities, with adjustments made for off-balance sheet items. This analysis assesses the potential change to net interest income from a immediate and parallel 100 to 400 basis point increase or 100 basis point decrease in market interest rates with no effect given to any steps that we might take to counter the effect of that interest rate movement. Because of the low level of market interest rates, this analysis is not performed for decreases of more than 100 basis points.
The following table presents the change in the Company's net portfolio value at December 31, 2015 and net interest income over the next 12 months that would occur in the event of an immediate change in interest rates, with no effect given to any steps that we might take to counteract that change.
Net Portfolio Value | Net Portfolio Value as % of Portfolio Value of Assets | Estimated Change in Net Interest Income Over Next 12 Months | ||||||||||||||||||||||
Basis Point ("bp") Change in Rates | Amount | Change | % Change | NPV Ratio | Change | Amount | % Change | |||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
400 | $ | 155,460 | $ | (45,815 | ) | (22.8 | )% | 13.8 | % | (4.1 | )% | $ | 1,188 | 3.5 | % | |||||||||
300 | 166,866 | (34,409 | ) | (17.1 | ) | 14.8 | (3.1 | ) | 1,385 | 4.1 | ||||||||||||||
200 | 178,812 | (22,463 | ) | (11.2 | ) | 15.9 | (2.0 | ) | 1,102 | 3.3 | ||||||||||||||
100 | 189,724 | (11,551 | ) | (5.7 | ) | 16.9 | (1.0 | ) | 443 | 1.3 | ||||||||||||||
— | 201,275 | — | — | 17.9 | — | — | — | |||||||||||||||||
(100) | 202,431 | 1,156 | 0.6 | 18.0 | 0.1 | (1,497 | ) | (4.4 | ) | |||||||||||||||
The decrease in our net portfolio value shown in the preceding table that would occur reflects: (1) that a substantial portion of our interest-earning assets are fixed-rate real estate loans and fixed-rate investment securities; (2) the shorter duration of deposits, which reprice more frequently in response to changes in market interest rates; and (3) the size of our mortgage related securities portfolio, which would decrease in value as interest rates increase.
As of December 31, 2015, our third party vendor prepared model indicates that we are asset sensitive indicating that our assets will likely reprice faster than our liabilities. Accordingly, as modeled, an increase in interest rates will likely result in an increase in net interest income and a decrease in interest rates will likely result in a reduction of net interest income, as shown in the table above.
The third party vendor and management use various assumptions in assessing interest rate risk. These assumptions relate to interest rates, loan prepayment rates, deposit decay rates and the market values of certain assets under differing interest rate scenarios,
46
among others. As with any method of measuring interest rate risk, certain shortcomings are inherent in the methods of analyses presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate mortgage loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, expected rates of prepayments on loans and early withdrawals from certificates could deviate significantly from those assumed in calculating the table. Prepayment rates can have a significant impact on interest income. Because of the large percentage of loans and mortgage-backed securities we hold, rising or falling interest rates have a significant impact on the prepayment speeds of our earning assets that in turn affect the rate sensitivity position. When interest rates rise, prepayments tend to slow. When interest rates fall, prepayments tend to rise. While we believe these assumptions to be reasonable, assumed prepayment rates may not approximate actual future mortgage-backed security and loan repayment activity.
Gap Analysis. The interest sensitivity, or gap analysis, identifies interest rate risk by showing repricing gaps in the Company’s balance sheet. All assets and liabilities are reflected based on behavioral sensitivity, which is usually the earliest of either: repricing, maturity, contractual amortization, prepayments or likely call dates. Non-maturity deposits, such as NOW, savings and money market accounts are spread over various time periods based on the expected sensitivity of these rates considering liquidity and the investment preferences of the Company.
Non-maturity deposits (demand deposits in particular), are recognized by the Company’s regulatory agencies to have different sensitivities to interest rate environments. Consequently, it is an accepted practice to spread non-maturity deposits over defined time periods in order to capture that sensitivity. The following table presents the Company’s gap analysis as of December 31, 2015:
Within Three Months | After Three Months to Twelve Months | After One Year to Five Years | Over Five Years | Non-Rate Sensitive | Total | ||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||
Assets: | |||||||||||||||||||||||
Cash and due from banks | $ | — | $ | — | $ | — | $ | — | $ | 3,413 | $ | 3,413 | |||||||||||
Interest-earning demand deposits in other banks | 4,385 | — | — | — | — | 4,385 | |||||||||||||||||
Investment securities | 12,370 | 40,088 | 150,494 | 93,724 | — | 296,676 | |||||||||||||||||
Loans, net of allowance for loan losses | 351,521 | 79,237 | 297,519 | 50,418 | (10,562 | ) | 768,133 | ||||||||||||||||
Other Assets | — | — | — | — | 52,996 | 52,996 | |||||||||||||||||
Total assets | $ | 368,276 | $ | 119,325 | $ | 448,013 | $ | 144,142 | $ | 45,847 | $ | 1,125,603 | |||||||||||
Liabilities and shareholders' equity: | |||||||||||||||||||||||
Non-interest bearing deposits | $ | — | $ | — | $ | — | $ | — | $ | 170,327 | $ | 170,327 | |||||||||||
Interest bearing deposits | 270,112 | 85,517 | 204,861 | 34,157 | — | 594,647 | |||||||||||||||||
Short-term borrowings | 38,496 | — | — | — | — | 38,496 | |||||||||||||||||
FHLB advances | 20,000 | 15,000 | 75,000 | — | — | 110,000 | |||||||||||||||||
Other borrowed funds | 25,000 | — | 5,000 | — | — | 30,000 | |||||||||||||||||
Other liabilities | — | — | — | — | 5,219 | 5,219 | |||||||||||||||||
Shareholders' equity | — | — | — | — | 176,914 | 176,914 | |||||||||||||||||
Total liabilities and shareholders' equity | $ | 353,608 | $ | 100,517 | $ | 284,861 | $ | 34,157 | $ | 352,460 | $ | 1,125,603 | |||||||||||
Incremental gap | $ | 14,668 | $ | 18,808 | $ | 163,152 | $ | 109,985 | $ | (306,613 | ) | ||||||||||||
Cumulative gap | $ | 14,668 | $ | 33,476 | $ | 196,628 | $ | 306,613 | |||||||||||||||
Cumulative gap as a percentage of total assets | 1.30 | % | 2.97 | % | 17.47 | % | 27.24 | % | |||||||||||||||
47
Liquidity Management. Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, loan repayments and sales, security repayments, maturities and sales and funds available from the FHLB, Federal Reserve Bank and commercial banks. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loans and securities sales and prepayments are greatly influenced by general interest rates, economic conditions and competition.
We regularly adjust our investments in liquid assets and our short-term borrowing position based upon our assessment of: (1) expected loan demand; (2) expected deposit flows; (3) cash flows on our loans and investments; (4) yields available on interest-earning deposits and securities; and (5) the objectives of our asset/liability management policy. We use a variety of measures to assess our liquidity needs, which are provided to our Asset/Liability Management Committee on a regular basis. Our policy is to maintain net liquidity of at least 50% of our funding obligations over the next month. Additionally, our policy is to maintain an amount of cash and short-term marketable securities equal to at least 15% of net deposits and liabilities that will mature in one year or less.
Our most liquid assets are cash and cash equivalents. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. At December 31, 2015, cash and cash equivalents totaled $7.8 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $139.8 million at December 31, 2015. In addition, at December 31, 2015, we had the ability to borrow a total of approximately $478.8 million from the FHLB of which we had $110.0 million outstanding. As of December 31, 2015, the Bank also had a maximum borrowing capacity of $59.9 million with the Federal Reserve Bank of Philadelphia, through the Discount Window. Additionally, as of December 31, 2015, the Bank had overnight borrowing facilities with the FHLB of Pittsburgh and the Federal Reserve Bank as well as federal funds lines of credit with three other commercial banks.
At December 31, 2015, we had $169.5 million in commitments outstanding, which consisted of $6.2 million in home equity and consumer loan commitments, $148.4 million in commercial loan commitments, $14.4 million in standby letters of credit, and $495,000 in commercial letters of credit.
Certificates of deposit due within one year of December 31, 2015 totaled $135.6 million, including $56.1 million of brokered deposits, representing 52.1% of certificates of deposit at December 31, 2015, a decrease from 53.6% at December 31, 2014. We believe the large percentage of certificates of deposit that mature within one year reflect customers’ hesitancy to invest their funds for long periods in the current low interest rate environment. If these maturing deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and borrowings. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before December 31, 2016.
The following table presents certain of our contractual obligations as of December 31, 2015.
Payments Due by Period | ||||||||||||||||||||
Less Than One Year | One to Three Years | Three to Five Years | More Than Five Years | |||||||||||||||||
Contractual Obligations | Total | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||
December 31, 2015 | ||||||||||||||||||||
Operating lease obligations (1) | $ | 36 | $ | 36 | $ | — | $ | — | $ | — | ||||||||||
FHLB advances and other borrowings (2) | 185,101 | 76,346 | 88,236 | 20,519 | — | |||||||||||||||
Other long-term obligations (3) | 8,987 | 1,734 | 2,829 | 2,409 | 2,015 | |||||||||||||||
Total | $ | 194,124 | $ | 78,116 | $ | 91,065 | $ | 22,928 | $ | 2,015 | ||||||||||
_________________________________________________________________
(1) Represents lease obligations for operations center and equipment. The term lease for our Blue Bell office expired in January 2016 and we are currently under a month-to-month arrangement for this location.
(2) Includes principal and projected interest payments.
(3) Represents obligations to the Company’s third-party data processing provider and other vendors.
Capital Management. We have managed our capital to maintain strong protection for depositors and creditors. The Bank and Bancorp are subject to various regulatory capital requirements, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At December 31, 2015, we exceeded all of our regulatory capital requirements. We are considered "well capitalized" under regulatory guidelines. See "Business—Regulation and Supervision—Bank Regulation—Capital Requirements," "Business—Regulation and Supervision—Holding Company Regulation—Capital Requirements" and the notes to the consolidated financial statements included in this Report.
48
Off-Balance Sheet Arrangements. In the normal course of operations, we engage in a variety of financial transactions that, in accordance with U.S. generally accepted accounting principles, are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers' requests for funding and take the form of loan commitments, letters of credit and lines of credit. For information about our loan commitments, letters of credit and unused lines of credit, see Note 12 of the notes to the consolidated financial statements.
Impact of Recent Accounting Pronouncements
The information required by this item is included in Note 16 to the consolidated financial statements included in this annual report.
Effect of Inflation and Changing Prices
The financial statements and related financial data presented in this annual report have been prepared in accordance with U.S. generally accepted accounting principles, which require the measurement of financial condition and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution's performance than do general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is incorporated herein by reference to Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operation—Interest Rate Risk Management."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information required by this item is included herein beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s "disclosure controls and procedures," as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the "SEC"): (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
No change in the Company's internal control over financial reporting occurred during the quarter ended December 31, 2015 that has materially affected, or is reasonably likely to affect, the Company's internal control over financial reporting.
During 2015, the Company implemented the 2013 Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
49
Management's Report on Internal Control Over Financial Reporting
The management of Fox Chase Bancorp, Inc. (the "Company") is responsible for establishing and maintaining adequate internal control over financial reporting. The internal control process has been designed under our supervision to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company's financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles.
Management conducted an assessment of the effectiveness of the Company's internal control over financial reporting as of December 31, 2015, utilizing the 2013 Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has determined that the Company's internal control over financial reporting as of December 31, 2015 is effective.
Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that accurately and fairly reflect, in reasonable detail, transactions and dispositions of assets, and provide reasonable assurances that: (1) transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles; (2) receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and (3) unauthorized acquisition, use, or disposition of the Company's assets that could have a material effect on the Company's financial statements are prevented or timely detected.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Crowe Horwath LLP, an independent registered public accounting firm, has audited the Company's consolidated financial statements as of and for the year ended December 31, 2015, and the effectiveness of the Company's internal control over financial reporting as of December 31, 2015, as stated in their reports, which are included herein.
/s/ THOMAS M. PETRO . Thomas M. Petro President and Chief Executive Officer | ||
/s/ ROGER S. DEACON . Roger S. Deacon Chief Financial Officer | ||
March 4, 2016
50
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Fox Chase Bancorp, Inc.:
We have audited Fox Chase Bancorp, Inc.’s internal control over financial reporting as of December 31, 2015, based on criteria established in the 2013 Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Fox Chase Bancorp, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Fox Chase Bancorp, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on criteria established in the 2013 Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statement of condition of Fox Chase Bancorp, Inc. as of December 31, 2015 and the related consolidated statement of operations, comprehensive income, changes in equity and cash flows for the year ended December 31, 2015, and our report dated March 4, 2016 expressed an unqualified opinion on those consolidated financial statements.
/s/ Crowe Horwath LLP
Livingston, New Jersey
March 4, 2016
51
ITEM 9B. OTHER INFORMATION
None.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors
Information relating to the directors of Fox Chase Bancorp will be included in an amendment to this Form 10-K to be filed with the Securities and Exchange Commission on or before April 30, 2016.
Executive Officers
For information concerning officers of the Company, see Part I, Item I, "Business—Executive Officers of The Registrant."
Compliance with Section 16(a) of the Exchange Act
Information regarding compliance with Section 16(a) of the Exchange Act will be included in an amendment to this Form 10-K to be filed with the Securities and Exchange Commission on or before April 30, 2016.
Disclosure of Code of Ethics
Information concerning Fox Chase Bancorp's code of ethics will be included in an amendment to this Form 10-K to be filed with the Securities and Exchange Commission on or before April 30, 2016. A copy of the Company's Code of Ethics and Business Conduct is available to stockholders on the Governance Documents portion of the Investors Relations section on Fox Chase Bancorp's website at www.foxchasebank.com.
Corporate Governance
Information regarding the audit committee and its composition and the audit committee financial expert will will be included in an amendment to this Form 10-K to be filed with the Securities and Exchange Commission on or before April 30, 2016.
ITEM 11. EXECUTIVE COMPENSATION
Executive Compensation
Information regarding executive compensation will be included in an amendment to this Form 10-K to be filed with the Securities and Exchange Commission on or before April 30, 2016.
Corporate Governance
Information regarding the compensation committee report will be included in an amendment to this Form 10-K to be filed with the Securities and Exchange Commission on or before April 30, 2016.
52
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS
(a) | Security Ownership of Certain Beneficial Owners |
Information required by this item will be included in an amendment to this Form 10-K to be filed with the Securities and Exchange Commission on or before April 30, 2016.
(b) | Security Ownership of Management |
Information required by this item will be included in an amendment to this Form 10-K to be filed with the Securities and Exchange Commission on or before April 30, 2016.
(c) | Changes in Control |
On December 8, 2015, Univest and Fox Chase entered into a merger agreement that provides for the combination of the companies. Under the merger agreement, Fox Chase will merge with and into Univest, with Univest remaining as the surviving entity, and the separate corporate existence of Fox Chase will cease.
(d) | Equity Compensation Plan Information |
The following table sets forth information about the Company common stock that may be issued upon the exercise of stock options, warrants and rights under all of the Company's equity compensation plans as of December 31, 2015.
Plan Category | (a) Number of securities to be issued upon exercise of outstanding options, warrants and rights | (b) Weighted-average exercise price of outstanding options, warrants and rights | (c) Number of securities remaining available for future issuance under equity compensation plan (excluding securities reflected in column (a)) | |||||||
Equity Compensation plans approved by security holders | 715,554 | $ | 14.45 | 137,731 | ||||||
Equity Compensation plans not approved by security holders | — | — | — | |||||||
Total | 715,554 | $ | 14.45 | 137,731 | ||||||
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Certain Relationships and Related Transactions
Information regarding certain relationships and related transactions, will be included in an amendment to this Form 10-K to be filed with the Securities and Exchange Commission on or before April 30, 2016.
Corporate Governance
Information regarding director independence, will be included in an amendment to this Form 10-K to be filed with the Securities and Exchange Commission on or before April 30, 2016.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information regarding the principal accountant fees and expenses, will be included in an amendment to this Form 10-K to be filed with the Securities and Exchange Commission on or before April 30, 2016.
53
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(1) | The financial statements required in response to this item are incorporated by reference from Item 8 of this Report. |
(2) | All financial statement schedules are omitted because they are not required or applicable, or the required information is shown in the consolidated financial statements or the notes thereto. |
(3) | Exhibits |
Exhibit No | Description | Location | |||
2.1 | Agreement and Plan of Merger, dated as of December 8, 2015, by and between Univest Corporation of Pennsylvania and Fox Chase Bancorp, Inc. | Incorporated herein by reference to Exhibit 2.1 to the Fox Chase Bancorp, Inc. Form 8-K (File No. 0-54025) as filed on December 11, 2015. | |||
3.1 | Articles of Incorporation of Fox Chase Bancorp, Inc. | Incorporated herein by reference to Exhibit 3.1 to the Fox Chase Bancorp, Inc. Registration Statement on Form S-1 (No. 333-165416) as filed on March 12, 2010. | |||
3.2 | Bylaws of Fox Chase Bancorp, Inc. | Incorporated herein by reference to Exhibit 3.2 to the Fox Chase Bancorp, Inc. Registration Statement on Form S-1 (No. 333-165416) as filed on March 12, 2010. | |||
4.1 | Stock Certificate of Fox Chase Bancorp, Inc. | Incorporated herein by reference to Exhibit 4.0 to the Fox Chase Bancorp, Inc. Registration Statement on Form S-1 (No. 333-165416) as filed on March 12, 2010. | |||
10.1 | *Employment Agreement between Thomas M. Petro, Fox Chase Bancorp, Inc. and Fox Chase Bank, as amended and restated | Filed herewith | |||
10.2 | *Employment Agreement between Jerry D. Holbrook, Fox Chase Bancorp, Inc. and Fox Chase Bank, as amended and restated | Filed herewith | |||
10.3 | *Change in Control Agreement by and between Fox Chase Bancorp, Inc., Fox Chase Bank and Randall J. McGarry and restated | Filed herewith | |||
10.4 | *Employment Agreement between Roger S. Deacon, Fox Chase Bancorp, Inc. and Fox Chase Bank, as amended and restated | Filed herewith | |||
10.5 | *Employment Agreement between Michael S. Fitzgerald, Fox Chase Bancorp, Inc. and Fox Chase Bank, as amended and restated | Filed herewith | |||
10.6 | *Settlement Agreement, dated as of December 8, 2015, by and among Thomas M. Petro, Univest Corporation of Pennsylvania, Fox Chase Bancorp, Inc. and Fox Chase Bank | Incorporated herein by reference to Exhibit 10.1 to the Fox Chase Bancorp, Inc. Form 8-K (File No. 0-54025) as filed on December 11, 2015. | |||
10.7 | *Settlement Agreement, dated as of December 8, 2015, by and among Jerry D. Holbrook, Univest Corporation of Pennsylvania, Fox Chase Bancorp, Inc. and Fox Chase Bank | Incorporated herein by reference to Exhibit 10.2 to the Fox Chase Bancorp, Inc. Form 8-K (File No. 0-54025) as filed on December 11, 2015. | |||
10.8 | *Settlement Agreement, dated as of December 8, 2015, by and among Roger S. Deacon, Univest Corporation of Pennsylvania, Fox Chase Bancorp, Inc. and Fox Chase Bank | Incorporated herein by reference to Exhibit 10.3 to the Fox Chase Bancorp, Inc. Form 8-K (File No. 0-54025) as filed on December 11, 2015. | |||
10.90 | *Settlement Agreement, dated as of December 8, 2015, by and among Michael S. Fitzgerald, Univest Corporation of Pennsylvania, Fox Chase Bancorp, Inc. and Fox Chase Bank | Incorporated herein by reference to Exhibit 10.4 to the Fox Chase Bancorp, Inc. Form 8-K (File No. 0-54025) as filed on December 11, 2015. | |||
10.10 | *Fox Chase Bank Employee Severance Compensation Plan, as amended and restated | Incorporated herein by reference to Exhibit 10.8 to the Fox Chase Bancorp, Inc. Annual Report on Form 10-K (File No. 0-54025) as filed on March 13, 2013. | |||
10.11 | *Fox Chase Bancorp, Inc. 2007 Equity Incentive Plan | Incorporated herein by reference to Appendix A to the Fox Chase Bancorp, Inc. Definitive Proxy Statement (File No. 1-132971) as filed on April 12, 2007. | |||
10.12 | *Fox Chase Bancorp, Inc. Executive Incentive Compensation Plan | Incorporated herein by reference to Exhibit 10.0 to the Fox Chase Bancorp, Inc. Form 10-Q for the quarter ended June 30, 2014 (File No. 0-54025) as filed on August 4, 2015. | |||
10.13 | *Fox Chase Bancorp, Inc. 2011 Equity Incentive Plan | Incorporated herein by reference to Appendix A to the Fox Chase Bancorp, Inc. Definitive Proxy Statement (File No. 0-54025) as filed on July 5, 2011. | |||
10.14 | *Fox Chase Bank Executive Long-Term Incentive Plan | Incorporated herein by reference to Exhibit 10.9 to the Fox Chase Bancorp, Inc. Registration Statement on Form S-1 (No. 333-134160) as filed on May 16, 2006. | |||
21.0 | List of Subsidiaries | Filed herewith | |||
23.1 | Consent of Crowe Horwath LLP | Filed herewith | |||
23.2 | Consent of KPMG LLP | Filed herewith | |||
31.1 | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer | Filed herewith | |||
31.2 | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer | Filed herewith | |||
32.0 | Section 1350 Certification of Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer | Filed herewith | |||
101.0 | The following materials from the Company's Annual Report on Form 10-K for the year ended December 31, 2015, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Condition, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income (Loss), (iv) the Consolidated Statements of Changes in Equity, (v) the Consolidated Statements of Cash Flows, and (vi) the Notes to Consolidated Financial Statements | Filed herewith | |||
54
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FOX CHASE BANCORP, INC. | ||||
Date: | March 4, 2016 | By: | /s/ THOMAS M. PETRO . Thomas M. Petro President and Chief Executive Officer . . | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name | Title | Date | ||
. /s/ THOMAS M. PETRO | ||||
Thomas M. Petro | President, Chief Executive Officer and Director (principal executive officer) | March 4, 2016 | ||
. /s/ ROGER S. DEACON | ||||
Roger S. Deacon | Chief Financial Officer (principal accounting and financial officer) | March 4, 2016 | ||
. /s/ ROGER H. BALLOU | ||||
Roger H. Ballou | Director | March 4, 2016 | ||
. /s/ TODD S. BENNING | ||||
Todd S. Benning | Director | March 4, 2016 | ||
. /s/ DONALD R. CALDWELL | ||||
Donald R. Caldwell | Director | March 4, 2016 | ||
. /s/ RICHARD M. EISENSTAEDT | ||||
Richard M. Eisenstaedt | Director | March 4, 2016 | ||
. /s/ ANTHONY A. NICHOLS, SR. | ||||
Anthony A. Nichols, Sr. | Director | March 4, 2016 | ||
. /s/ GERALD A. RONON | ||||
Gerald A. Ronon | Director | March 4, 2016 | ||
55
Index to Financial Statements of Fox Chase Bancorp, Inc.
Page | ||
Reports of Independent Registered Public Accounting Firms | ||
Consolidated Statements of Condition as of December 31, 2015 and 2014 | ||
Consolidated Statements of Operations for the Years Ended December 31, 2015, 2014 and 2013 | ||
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2015, 2014 and 2013 | ||
Consolidated Statements of Changes in Equity for the Years Ended December 31, 2015, 2014 and 2013 | ||
Consolidated Statements of Cash Flows for the Years Ended December 31, 2015, 2014 and 2013 | ||
Notes to Consolidated Financial Statements | ||
* * * *
56
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Fox Chase Bancorp, Inc.:
We have audited the accompanying consolidated statement of condition of Fox Chase Bancorp, Inc. as of December 31, 2015, and the related consolidated statements of operations, comprehensive income, changes in equity, and cash flows for the year ended December 31, 2015. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company at December 31, 2015, and the results of its operations and its cash flows for the period ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Fox Chase Bancorp, Inc.’s internal control over financial reporting as of December 31, 2015, based on criteria established in the 2013 Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 4, 2016 expressed an unqualified opinion thereon.
/s/ Crowe Horwath LLP
Livingston, New Jersey
March 4, 2016
F-1
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Fox Chase Bancorp, Inc.:
We have audited the accompanying consolidated statements of condition of Fox Chase Bancorp, Inc. and subsidiary (the Company) as of December 31, 2014, and the related consolidated statements of operations, comprehensive income (loss), changes in equity, and cash flows for each of the years in the two‑year period ended December 31, 2014. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2014, and the results of their operations and their cash flows for each of the years in the two‑year period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
March 6, 2015
F-2
FOX CHASE BANCORP, INC.
Consolidated Statements of Condition
(In Thousands, Except Share Data)
December 31, | |||||||||
2015 | 2014 | ||||||||
ASSETS | |||||||||
Cash and due from banks | $ | 3,413 | $ | 2,763 | |||||
Interest-earning demand deposits in other banks | 4,385 | 14,450 | |||||||
Total cash and cash equivalents | 7,798 | 17,213 | |||||||
Investment securities available-for-sale | 139,751 | 134,037 | |||||||
Investment securities held-to-maturity (fair value of $149,850 at December 31, 2015 and $170,854 at December 31, 2014) | 150,190 | 170,172 | |||||||
Loans, net of allowance for loan losses of $10,562 at December 31, 2015 and $10,730 at December 31, 2014 | 767,683 | 724,326 | |||||||
Federal Home Loan Bank stock, at cost | 6,734 | 6,015 | |||||||
Bank-owned life insurance | 25,687 | 15,027 | |||||||
Premises and equipment, net | 9,030 | 9,418 | |||||||
Assets acquired through foreclosure | 2,623 | 2,814 | |||||||
Real estate held for investment | 1,620 | 1,620 | |||||||
Accrued interest receivable | 3,145 | 3,147 | |||||||
Mortgage servicing rights, net | 104 | 111 | |||||||
Deferred tax asset, net | 5,142 | 4,561 | |||||||
Other assets | 6,096 | 6,155 | |||||||
Total Assets | $ | 1,125,603 | $ | 1,094,616 | |||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||
LIABILITIES | |||||||||
Deposits | $ | 764,974 | $ | 711,909 | |||||
Short-term borrowings | 38,496 | 50,000 | |||||||
Federal Home Loan Bank advances | 110,000 | 120,000 | |||||||
Other borrowed funds | 30,000 | 30,000 | |||||||
Advances from borrowers for taxes and insurance | 1,422 | 1,447 | |||||||
Accrued interest payable | 319 | 311 | |||||||
Accrued expenses and other liabilities | 3,478 | 5,038 | |||||||
Total Liabilities | 948,689 | 918,705 | |||||||
COMMITMENTS AND CONTINGENCIES (Note 12) | |||||||||
STOCKHOLDERS’ EQUITY | |||||||||
Preferred stock ($.01 par value; 1,000,000 shares authorized, none issued and outstanding at December 31, 2015 and December 31, 2014) | — | — | |||||||
Common stock ($.01 par value; 60,000,000 shares authorized, 11,767,590 shares outstanding at December 31, 2015 and 11,802,791 shares outstanding at December 31, 2014) | 149 | 147 | |||||||
Additional paid-in capital | 142,189 | 139,177 | |||||||
Treasury stock, at cost (3,141,201 shares at December 31, 2015 and 2,852,572 shares at December 31, 2014) | (44,468 | ) | (39,698 | ) | |||||
Common stock acquired by benefit plans | (6,717 | ) | (8,056 | ) | |||||
Retained earnings | 86,241 | 84,225 | |||||||
Accumulated other comprehensive income (loss), net | (480 | ) | 116 | ||||||
Total Stockholders’ Equity | 176,914 | 175,911 | |||||||
Total Liabilities and Stockholders’ Equity | $ | 1,125,603 | $ | 1,094,616 | |||||
The accompanying notes are an integral part of these consolidated financial statements.
F-3
FOX CHASE BANCORP, INC.
Consolidated Statements of Operations
(In Thousands, Except Per Share Data)
Years Ended December 31, | |||||||||||||
2015 | 2014 | 2013 | |||||||||||
INTEREST INCOME | |||||||||||||
Interest and fees on loans | $ | 33,061 | $ | 32,700 | $ | 32,650 | |||||||
Interest and dividends on investment securities | 6,987 | 7,422 | 7,477 | ||||||||||
Other interest income | 25 | 7 | 2 | ||||||||||
Total Interest Income | 40,073 | 40,129 | 40,129 | ||||||||||
INTEREST EXPENSE | |||||||||||||
Deposits | 3,000 | 3,216 | 4,344 | ||||||||||
Short-term borrowings | 94 | 127 | 130 | ||||||||||
Federal Home Loan Bank advances | 2,198 | 2,288 | 2,188 | ||||||||||
Other borrowed funds | 665 | 1,004 | 1,007 | ||||||||||
Total Interest Expense | 5,957 | 6,635 | 7,669 | ||||||||||
Net Interest Income | 34,116 | 33,494 | 32,460 | ||||||||||
(Credit) provision for loan losses | (995 | ) | 1,943 | 982 | |||||||||
Net Interest Income after (Credit) Provision for Loan Losses | 35,111 | 31,551 | 31,478 | ||||||||||
NONINTEREST INCOME | |||||||||||||
Service charges and other fee income | 1,572 | 1,604 | 1,694 | ||||||||||
Net (loss) gain on sale of assets acquired through foreclosure | (12 | ) | (68 | ) | 484 | ||||||||
Income on bank-owned life insurance | 661 | 480 | 470 | ||||||||||
Equity in earnings of affiliate | 303 | 172 | 445 | ||||||||||
Other | 209 | 105 | 165 | ||||||||||
Net gains on sale of investment securities (includes $0, $0 and $532 for the years ended December 31, 2015, 2014 and 2013, respectively, of accumulated other comprehensive income reclassifications for unrealized holdings gains) | — | — | 532 | ||||||||||
Net investment securities gains | — | — | 532 | ||||||||||
Total Noninterest Income | 2,733 | 2,293 | 3,790 | ||||||||||
NONINTEREST EXPENSE | |||||||||||||
Salaries, benefits and other compensation | 15,470 | 14,380 | 14,338 | ||||||||||
Occupancy expense | 1,663 | 1,709 | 1,689 | ||||||||||
Furniture and equipment expense | 358 | 390 | 469 | ||||||||||
Data processing costs | 2,311 | 1,542 | 1,537 | ||||||||||
Professional fees | 1,970 | 1,417 | 1,691 | ||||||||||
Marketing expense | 192 | 302 | 248 | ||||||||||
FDIC premiums | 509 | 571 | 709 | ||||||||||
Assets acquired through foreclosure expense | 247 | 420 | 5,201 | ||||||||||
Other | 1,513 | 1,500 | 1,589 | ||||||||||
Total Noninterest Expense | 24,233 | 22,231 | 27,471 | ||||||||||
Income Before Income Taxes | 13,611 | 11,613 | 7,797 | ||||||||||
Income tax provision (includes $0, $0 and $186 for the years ended December 31, 2015, 2014 and 2013, respectively, of income tax expense from reclassification items) | 4,065 | 3,418 | 2,263 | ||||||||||
Net Income | $ | 9,546 | $ | 8,195 | $ | 5,534 | |||||||
Earnings per share: | |||||||||||||
Basic | $ | 0.87 | $ | 0.73 | $ | 0.49 | |||||||
Diluted | $ | 0.85 | $ | 0.71 | $ | 0.48 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-4
FOX CHASE BANCORP, INC.
Consolidated Statements of Comprehensive Income (Loss)
(In Thousands)
Years Ended December 31, | ||||||||||||
2015 | 2014 | 2013 | ||||||||||
Net income | $ | 9,546 | $ | 8,195 | $ | 5,534 | ||||||
Other comprehensive (loss) income: | ||||||||||||
Unrealized holding (losses) gains on securities available-for-sale | (1,125 | ) | 6,986 | (13,343 | ) | |||||||
Tax Effect | 398 | (2,459 | ) | 4,700 | ||||||||
Net of Tax Amount | (727 | ) | 4,527 | (8,643 | ) | |||||||
Accretion of unrealized loss on securities reclassified to held-to-maturity | 206 | 60 | — | |||||||||
Tax Effect | (75 | ) | (22 | ) | — | |||||||
Net of Tax Amount | 131 | 38 | — | |||||||||
Reclassification adjustments for net investment securities gains included in net income | — | — | (532 | ) | ||||||||
Tax Effect | — | — | 186 | |||||||||
Net of Tax Amount | — | — | (346 | ) | ||||||||
Other comprehensive (loss) income | (596 | ) | 4,565 | (8,989 | ) | |||||||
Comprehensive income (loss) | $ | 8,950 | $ | 12,760 | $ | (3,455 | ) | |||||
The accompanying notes are an integral part of these consolidated financial statements.
F-5
FOX CHASE BANCORP, INC.
Consolidated Statements of Changes in Equity
For the Years Ended December 31, 2015, 2014 and 2013
(In Thousands)
Common Stock | Additional Paid-in Capital | Treasury Stock | Common Stock Acquired by Benefit Plans | Retained Earnings | Accumulated Other Comprehensive Income (Loss), net | Total Equity | |||||||||||||||||||||
BALANCE - DECEMBER 31, 2012 | $ | 146 | $ | 136,132 | $ | (29,733 | ) | $ | (10,228 | ) | $ | 80,608 | $ | 4,540 | $ | 181,465 | |||||||||||
Purchase of treasury stock (218,572 shares) | — | — | (3,703 | ) | — | — | — | (3,703 | ) | ||||||||||||||||||
Stock based compensation expense | — | 1,124 | — | — | — | — | 1,124 | ||||||||||||||||||||
ESOP shares allocated to employees | — | 490 | — | 624 | — | — | 1,114 | ||||||||||||||||||||
Issuance of stock for vested equity awards | — | (318 | ) | — | 332 | (14 | ) | — | — | ||||||||||||||||||
Common stock issued for exercise of vested stock options | — | 106 | — | — | — | — | 106 | ||||||||||||||||||||
Excess tax benefit from exercise of stock options and vesting of restricted stock | — | 59 | — | — | — | — | 59 | ||||||||||||||||||||
Dividends paid ($0.28 per share) | — | — | — | — | (3,243 | ) | — | (3,243 | ) | ||||||||||||||||||
Net income | — | — | — | — | 5,534 | — | 5,534 | ||||||||||||||||||||
Other comprehensive loss | — | — | — | — | — | (8,989 | ) | (8,989 | ) | ||||||||||||||||||
BALANCE - DECEMBER 31, 2013 | $ | 146 | $ | 137,593 | $ | (33,436 | ) | $ | (9,272 | ) | $ | 82,885 | $ | (4,449 | ) | $ | 173,467 | ||||||||||
Purchase of treasury stock (384,400 shares) | — | — | (6,262 | ) | — | — | — | (6,262 | ) | ||||||||||||||||||
Stock based compensation expense | — | 1,249 | — | — | — | — | 1,249 | ||||||||||||||||||||
ESOP shares allocated to employees | — | 465 | — | 624 | — | — | 1,089 | ||||||||||||||||||||
Issuance of stock for vested equity awards | — | (654 | ) | — | 592 | 62 | — | — | |||||||||||||||||||
Common stock issued for exercise of vested stock options | 1 | 438 | — | — | — | — | 439 | ||||||||||||||||||||
Excess tax benefit from exercise of stock options and vesting of restricted stock | — | 86 | — | — | — | — | 86 | ||||||||||||||||||||
Dividends paid ($0.60 per share) | — | — | — | — | (6,917 | ) | — | (6,917 | ) | ||||||||||||||||||
Net income | — | — | — | — | 8,195 | — | 8,195 | ||||||||||||||||||||
Other comprehensive income | — | — | — | — | — | 4,565 | 4,565 | ||||||||||||||||||||
BALANCE - DECEMBER 31, 2014 | $ | 147 | $ | 139,177 | $ | (39,698 | ) | $ | (8,056 | ) | $ | 84,225 | $ | 116 | $ | 175,911 | |||||||||||
Purchase of treasury stock (288,629 shares) | — | — | (4,770 | ) | — | — | — | (4,770 | ) | ||||||||||||||||||
Stock based compensation expense | — | 1,468 | — | — | — | — | 1,468 | ||||||||||||||||||||
ESOP shares allocated to employees | — | 492 | — | 624 | — | — | 1,116 | ||||||||||||||||||||
Issuance of stock for vested equity awards | — | (790 | ) | — | 715 | 75 | — | — | |||||||||||||||||||
Common stock issued for exercise of vested stock options | 2 | 1,013 | — | — | — | — | 1,015 | ||||||||||||||||||||
Excess tax benefit from exercise of stock options and vesting of restricted stock | — | 829 | — | — | — | — | 829 | ||||||||||||||||||||
Dividends paid ($0.68 per share) | — | — | — | — | (7,605 | ) | — | (7,605 | ) | ||||||||||||||||||
Net income | — | — | — | — | 9,546 | — | 9,546 | ||||||||||||||||||||
Other comprehensive loss | — | — | — | — | — | (596 | ) | (596 | ) | ||||||||||||||||||
BALANCE - DECEMBER 31, 2015 | $ | 149 | $ | 142,189 | $ | (44,468 | ) | $ | (6,717 | ) | $ | 86,241 | $ | (480 | ) | $ | 176,914 | ||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-6
FOX CHASE BANCORP, INC.
Consolidated Statements of Cash Flows
(In Thousands)
Years Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
Cash Flows From Operating Activities | |||||||||||
Net income | $ | 9,546 | $ | 8,195 | $ | 5,534 | |||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
(Credit) Provision for loan losses | (995 | ) | 1,943 | 982 | |||||||
Valuation adjustment for assets acquired through foreclosure | 137 | 305 | 5,017 | ||||||||
Depreciation | 625 | 698 | 783 | ||||||||
Net amortization of securities premiums and discounts | 1,689 | 1,884 | 2,596 | ||||||||
Proceeds from the sale of loans held for sale | — | — | 3,157 | ||||||||
Deferred income tax benefit (expense) | (260 | ) | 1,864 | (1,067 | ) | ||||||
Stock compensation from benefit plans | 2,584 | 2,338 | 2,238 | ||||||||
Net loss (gain) on sale of assets acquired through foreclosure | 12 | 68 | (484 | ) | |||||||
Net gains on sales of investment securities | — | — | (532 | ) | |||||||
Income on bank-owned life insurance | (661 | ) | (480 | ) | (470 | ) | |||||
Excess tax benefit from exercise of stock options and vesting of restricted stock | (829 | ) | (86 | ) | (59 | ) | |||||
Decrease in mortgage servicing rights, net | 7 | 41 | 18 | ||||||||
Decrease (increase) in accrued interest receivable and other assets | 204 | (1,281 | ) | (381 | ) | ||||||
(Decrease) increase in accrued interest payable, accrued expenses and other liabilities | (1,598 | ) | (2,066 | ) | 147 | ||||||
Net Cash Provided by Operating Activities | 10,461 | 13,423 | 17,479 | ||||||||
Cash Flows from Investing Activities | |||||||||||
Equity investment in unconsolidated entity | 225 | 225 | 360 | ||||||||
Investment securities – available-for-sale: | |||||||||||
Purchases | (36,531 | ) | (2,830 | ) | (49,821 | ) | |||||
Proceeds from sales | — | — | 9,517 | ||||||||
Proceeds from maturities, calls and principal repayments | 28,819 | 34,155 | 64,467 | ||||||||
Investment securities – held-to-maturity: | |||||||||||
Purchases | (5,823 | ) | (20,630 | ) | (51,420 | ) | |||||
Proceeds from maturities, calls and principal repayments | 25,140 | 15,180 | 10,992 | ||||||||
Net (increase) decrease in loans | (5,064 | ) | 26,686 | (4,217 | ) | ||||||
Purchases of loans and loan participations | (37,048 | ) | (34,372 | ) | (40,877 | ) | |||||
Net (increase) decrease in Federal Home Loan Bank stock | (719 | ) | 3,798 | (1,716 | ) | ||||||
Purchase of bank-owned life insurance | (10,000 | ) | — | — | |||||||
Purchases of premises and equipment | (237 | ) | (302 | ) | (171 | ) | |||||
Additions to assets acquired through foreclosure | (83 | ) | (25 | ) | (1,180 | ) | |||||
Proceeds from sales and payments on assets acquired through foreclosure | 440 | 4,996 | 4,093 | ||||||||
Net Cash (Used in) Provided by Investing Activities | (40,881 | ) | 26,881 | (59,973 | ) | ||||||
Cash Flows from Financing Activities | |||||||||||
Net increase (decrease) in deposits | 53,065 | 38,194 | (13,694 | ) | |||||||
Decrease in advances from borrowers for taxes and insurance | (25 | ) | (78 | ) | (174 | ) | |||||
Proceeds from Federal Home Loan Bank advances | 20,000 | 10,000 | 40,000 | ||||||||
Principal payments on Federal Home Loan Bank advances | (30,000 | ) | (40,000 | ) | — | ||||||
Net (decrease) increase in short-term borrowings | (11,504 | ) | (30,500 | ) | 10,000 | ||||||
Excess tax benefit from exercise of stock options and vesting of restricted stock | 829 | 86 | 59 | ||||||||
Common stock issued for exercise of stock options | 1,015 | 439 | 106 | ||||||||
Purchase of treasury stock | (4,770 | ) | (6,262 | ) | (3,703 | ) | |||||
Cash dividends paid | (7,605 | ) | (6,917 | ) | (3,243 | ) | |||||
Net Cash Provided by (Used in) Financing Activities | 21,005 | (35,038 | ) | 29,351 | |||||||
Net (Decrease) Increase in Cash and Cash Equivalents | (9,415 | ) | 5,266 | (13,143 | ) | ||||||
Cash and Cash Equivalents – Beginning | 17,213 | 11,947 | 25,090 | ||||||||
Cash and Cash Equivalents – Ending | $ | 7,798 | $ | 17,213 | $ | 11,947 | |||||
Supplemental Disclosure of Cash Flow Information | |||||||||||
Interest paid | $ | 5,949 | $ | 6,638 | $ | 7,685 | |||||
Income taxes paid | $ | 4,340 | $ | 1,889 | $ | 2,900 | |||||
Reclassification of securities available-for-sale to held-to-maturity | $ | — | $ | 96,868 | $ | — | |||||
Transfers of loans to assets acquired through foreclosure | $ | 315 | $ | 1,906 | $ | 5,174 | |||||
Transfer of loans to loans held for sale | $ | — | $ | — | $ | 3,157 | |||||
Net charge-offs | $ | (827 | ) | $ | 2,742 | $ | 623 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
F-7
FOX CHASE BANCORP, INC
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Fox Chase Bancorp, Inc. (the "Bancorp" or "Fox Chase") is a Maryland corporation. The Bancorp’s primary business is holding the common stock of Fox Chase Bank (the "Bank") and making two loans to the Fox Chase Bank Employee Stock Ownership Plan (the "ESOP"). The Bancorp is authorized to pursue other business activities permissible by laws and regulations for bank holding companies.
The Bancorp is a bank holding company and is regulated by the Board of Governors of the Federal Reserve System. The Bank is a Pennsylvania state-chartered savings bank and is regulated by the Pennsylvania Department of Banking and Securities and the Federal Deposit Insurance Corporation (the "FDIC").
The Bancorp and the Bank (collectively referred to as the "Company" or the "Corporation") provide a wide variety of financial products and services to individuals and businesses through the Bank’s ten branches in Philadelphia, Richboro, Willow Grove, Warminster, Lahaska, Hatboro, and West Chester, Pennsylvania, and Ocean City, Marmora and Egg Harbor Township, New Jersey. The operations of the Company are managed as a single business segment. The Bank also owns approximately 45% of Philadelphia Mortgage Advisors ("PMA"), a mortgage banker with offices in Plymouth Meeting, Pennsylvania and Ocean City, New Jersey.
Principles of Consolidation and Presentation
The consolidated financial statements include the accounts of the Bancorp and the Bank. The Bank’s operations include the accounts of its wholly owned subsidiaries, Fox Chase Financial, Inc., Fox Chase Service Corporation, 104 S. Oakland Ave., LLC and Davisville Associates, LLC. Fox Chase Financial, Inc. is a Delaware-chartered investment holding company and its sole purpose is to manage and hold investment securities. Fox Chase Service Corporation is a Pennsylvania-chartered company and its sole purpose is to facilitate the Bank’s investment in PMA. 104 S. Oakland Ave., LLC is a New Jersey-chartered limited liability company formed to secure, manage and hold foreclosed real estate. Davisville Associates, LLC is a Pennsylvania-chartered limited liability company formed to secure, manage and hold foreclosed real estate. All material inter-company transactions and balances have been eliminated in consolidation. Prior period amounts are reclassified, when necessary, to conform with the current year’s presentation.
The Company follows accounting principles and reporting practices that are in compliance with U.S. generally accepted accounting principles ("GAAP"). The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclose contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation and realizability of deferred tax assets, the evaluation of other-than-temporary impairment and the valuation of investment securities and assets acquired through foreclosure.
Risk and Uncertainties
In the normal course of its business, the Company encounters two significant types of risk: economic risk and regulatory risk. There are three main components of economic risk: interest rate risk, credit risk and market risk. The Company is subject to interest rate risk to the degree that its interest-bearing liabilities mature or reprice at different speeds, or on a different basis, from its interest-earning assets. The Company's primary credit risk is the risk of defaults in the Company's loan portfolio that result from borrowers' inability or unwillingness to make contractually required payments. The Company's lending activities are concentrated in Southeastern Pennsylvania and Southern New Jersey. The ability of the Company's borrowers to repay amounts owed is dependent on several factors, including the economic conditions in the borrowers' geographic regions and the borrowers' financial conditions. The Company also has credit risk related to the risk of defaults in its investment securities portfolio. The ability of the Company to realize the full value of its investment securities upon sale or maturity depends on several factors, including the cash flows, credit enhancements and underlying structures of the individual investment securities. Market risk reflects changes in the value of the collateral underlying loans, the valuation of assets acquired through foreclosure, and the valuation of securities, mortgage servicing assets and other investments.
The Company is subject to the regulations of certain federal and state banking agencies. These regulations can and do change significantly from period to period. The Company also undergoes periodic examinations by regulatory agencies which may subject it to further changes with respect to asset valuations, amounts of required loan loss allowances and operating restrictions resulting from the regulators’ judgments based on information available to them at the time of their examinations.
F-8
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks and interest-earning demand deposits in other banks. At times, such balances exceed the FDIC limits for insurance coverage.
Investment and Mortgage Related Securities
The Company accounts for its investment securities in accordance with standards that require, among other things, that debt and equity securities are classified into three categories and accounted for as follows:
• | Debt securities with the positive intention to hold to maturity are classified as "held-to-maturity" and reported at amortized cost. |
• | Debt and equity securities purchased with the intention of selling them in the near future are classified as "trading securities" and are reported at fair value, with unrealized gains and losses included in earnings. As of the balance sheet dates, the Company did not have any trading securities. |
• | Debt and equity securities not classified in either of the above categories are classified as "available-for-sale securities" and reported at fair value, with unrealized gains and losses excluded from earnings and reported, net of tax, as increases or decreases in accumulated other comprehensive income (loss), a separate component of stockholders' equity. Securities classified as available-for-sale are those securities that the Company intends to hold for an indefinite period of time but not necessarily to maturity. Any decision to sell a security classified as available-for-sale would be based on various factors, including interest rates, changes in the maturity or mix of the Company's assets and liabilities, liquidity needs, regulatory capital considerations and other factors. |
Management determines the appropriate classification of debt securities at the time of purchase and re-evaluates such designation as of each balance sheet date.
The Company records other-than-temporary impairment charges, through earnings, if they have the intent to sell, or will more likely than not be required to sell, an impaired debt security before a recovery of its amortized cost basis. In addition, the Company records other-than-temporary impairment charges through earnings for the amount of credit losses, regardless of the intent or requirement to sell. Credit loss is measured as the difference between the present value of an impaired debt security's cash flows and its amortized cost basis. Non-credit related write-downs to fair value are recorded as decreases to accumulated other comprehensive income as long as the Company has no intent or requirement to sell an impaired security before a recovery of amortized cost basis.
Purchase premiums and discounts are recognized in interest income using the interest method over the expected life for mortgage related securities and the contractual life for all other securities. Because of volatility of the financial markets in which securities are traded, there is the risk that any future fair value could be significantly less than that recorded or disclosed in the accompanying financial statements. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.
Federal Home Loan Bank Stock
Federal Home Loan Bank ("FHLB") stock is an equity interest in the FHLB of Pittsburgh that can be sold to the issuer or to other member banks at its par value. Because ownership is restricted, the fair value is not readily determinable. As such, FHLB stock is recorded at cost and evaluated for other-than-temporary impairment. The Corporation determined there was no other-than-temporary impairment of its investment in FHLB stock at December 31, 2015 or 2014.
Loans, Loan Origination Fees and Uncollected Interest
Loans are recorded at cost, net of unearned discounts, deferred fees and allowances. Discounts or premiums on purchased loans are amortized using the interest method over the remaining contractual life of the purchased loans, adjusted for actual prepayments. Loan origination fees and certain direct origination costs are deferred and amortized using the interest method over the contractual life as an adjustment to yield on the loans. Interest income is accrued on the unpaid principal balance. From time-to-time, the Company sells certain loans for liquidity purposes or to manage interest rate risk.
F-9
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The accrual of interest is generally 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 is currently performing. A loan that is more than 90 days past due may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan is placed on nonaccrual status, unpaid interest income is reversed and the amortization of net deferred loan fees is suspended. Interest received on nonaccrual loans generally is either applied against principal or reported as interest income, according to management's judgment as to the ultimate 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 and the ultimate collectability of the total contractual principal and interest is no longer in doubt.
Allowance for Loan Losses
The allowance for loan losses is adjusted through provisions for loan losses charged against or credited to income. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is maintained at a level representing management's best estimate of known risks and inherent losses in the portfolio, based upon management's evaluation of the portfolio's collectability. Our methodology for assessing the appropriateness of the allowance for loan losses consists of an allowance on impaired loans and a general valuation allowance on the remainder of the portfolio. Although we determine the amount of each element of the allowance separately, the entire allowance for loan losses is available for losses on the entire portfolio.
Loans are deemed impaired when, based on current information and events, it is probable that the Company will be unable to collect all proceeds due according to the contractual terms of the loan agreement or when a loan is classified as a troubled debt restructuring. Factors considered by management in determining impairment include payment status, borrower cash flow, collateral value and the probability of collecting scheduled principal and interest payments when due. Impairment is measured on a loan by loan basis for commercial loans by either the present value of expected future cash flows discounted at the loan's original effective interest rate, the loan's obtainable market price or the fair value of the collateral less costs to sell if the loan is collateral dependent. The Company establishes an allowance for loan loss in the amount of the difference between fair value of the impaired loan and the loan's carrying amount.
We establish a general allowance for loans that are not considered impaired to recognize the inherent losses associated with lending activities. This general valuation allowance is determined by segmenting the loan portfolio and assigning reserve factors to each category. The reserve factors are calculated using the Company's historical losses and loss emergence periods, and are adjusted for significant factors that, in management's judgment, affect the collectability of the portfolio as of the evaluation date. These significant factors include:
• | Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses. |
• | Changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments. |
• | Changes in the nature and volume of the portfolio and in the terms of loans. |
• | Changes in the experience, ability, and depth of lending management and other relevant staff. |
• | Changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans. |
• | Changes in the quality of the institution’s loan review system. |
• | Changes in the value of underlying collateral for collateral-dependent loans. |
• | The existence and effect of any concentrations of credit, and changes in the level of such concentrations. |
• | The effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the institution’s existing portfolio. |
These reserve factors are subject to ongoing evaluation to ensure their relevance as compared to historical losses in the current environment. We perform this systematic analysis of the allowance on a quarterly basis. These criteria are analyzed and the allowance is developed and maintained at the segment level.
F-10
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Additional risk is associated with the analysis of the allowance for loan losses as such evaluations are highly subjective, and future adjustments to the allowance may be necessary if conditions differ substantially from the assumptions used in making the evaluations. In addition, various regulatory agencies periodically review the Company's allowance for loan losses. Such agencies may require the Company to recognize adjustments to the allowance, based on their judgments at the time of their examination.
The loan segments utilized by management to develop the allowance for loan losses are (1) one- to four-family real estate, (2) multi-family and commercial real estate, (3) construction, (4) consumer and (5) commercial and industrial loans.
One- to four-family real estate lending risks generally include the borrower's ability to make repayment from his or her employment or other income, and if the borrower defaults, the ability to obtain repayment from sale of the underlying collateral securing the loan. Risk associated with one- to four-family lending would be higher during a period of increased unemployment or reduced real estate value.
Multi-family and commercial real estate lending risks generally relate to the borrower's creditworthiness and the feasibility and cash flow potential of the underlying property. Payments on loans secured by income properties often depend on successful operation and management of the properties. As a result, repayment of such loans may be subject to adverse conditions in the real estate market or the economy.
Construction lending is generally considered to have a higher degree of lending risk than long-term financing on improved, occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the property's value at completion of construction, the estimated cost (including interest) of construction and the ability of the project to be sold or refinanced upon completion.
Commercial and industrial loans are typically made on the basis of the borrower's ability to make repayment from the cash flows of the borrower's underlying business. As a result, the availability of funds for the repayment of commercial loans may depend substantially on the success of the business itself. Further, any collateral securing such loans may depreciate over time, may be difficult to appraise and may fluctuate in value.
Consumer lending includes home equity loans, home equity lines of credit, unsecured loans and loans secured by assets that depreciate rapidly. In such cases, repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan and the remaining deficiency often does not warrant further substantial collection efforts against the borrower. Consumer loan collections depend on the borrower's continuing financial stability. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans.
Troubled Debt Restructurings
Loans 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 ("TDR") generally involve a reduction in interest rate, extension of a loan's stated maturity date, temporary deferral of payments, principal forgiveness, or granting credit to a borrower who is unable to obtain credit from another financial institution. Accrual of interest continues upon modification if the borrower has demonstrated a history of making payment as contractually due and has provided evidence which supports the borrower's ability to make payments. The accrual of interest income on accruing troubled debt restructurings is generally discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about continued collectability of principal or interest, even though the loan is currently performing. Troubled debt restructurings which are subsequently reported as non-accrual remain as such until they demonstrate consistent payment performance for a minimum period of six months. TDRs that have performed in accordance with the new terms for six consecutive months, are in a current status, reflect a market rate of interest at the time of the restructuring and cross over a year end are considered cured and are no longer classified as TDRs. All loans classified as troubled debt restructurings are considered impaired.
Bank-Owned Life Insurance
The Company has invested in bank-owned life insurance ("BOLI"). BOLI involves the purchasing of life insurance by the Company for certain employees and directors. The Company is the owner and beneficiary of the policies, however certain policies include split-dollar endorsements. Under these endorsements, beneficiaries of the insured individuals are entitled to a portion of the proceeds from the policy upon death of the insured. This life insurance investment is carried at the cash surrender value of the underlying policies. Income from the increase in cash surrender value of the policies is included in noninterest income in the consolidated statements of operations. During 2015, the Company purchased $10.0 million of additional BOLI.
F-11
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Premises and Equipment
Premises and equipment are carried at cost less accumulated depreciation. Depreciation is computed on the straight-line method over the assets' estimated useful lives or, for leasehold improvements, over the life of the related lease if less than the estimated useful life of the asset. The estimated useful life is generally 10-39 years for buildings and 1-7 years for furniture and equipment. Land is carried at cost. When assets are retired, or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts. The cost of maintenance and repairs is charged to expense when incurred and renewals and improvements are capitalized. Rental concessions on leased properties are recognized over the life of the lease.
Assets Acquired through Foreclosure
Assets acquired through foreclosure consists of other real estate owned and financial assets acquired from debtors. These assets are obtained through foreclosure, by a deed-in-lieu of foreclosure, in-substance foreclosure or in exchange for satisfaction of debt.
Other real estate owned is initially recorded at fair value less costs to sell. In periods subsequent to acquisition, each real estate asset is carried at the lower of the fair value of the asset, less estimated selling costs, or the amount at which the asset was initially recorded. Costs related to the development or improvement of an acquired property are capitalized. Holding costs and declines in carrying value after acquisition are recorded as assets acquired through foreclosure expense in the consolidated statements of operations.
Real Estate Held for Investment
Real estate held for investment is carried at cost and is tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. As of December 31, 2015 and December 31, 2014, real estate held for investment represented undeveloped land located in Absecon, New Jersey. The property was acquired by the Company in 2003 to expand the Company's retail branch network in southern New Jersey.
Mortgage Servicing Rights
Upon the sale of a residential mortgage loan where the Company retains servicing rights, a mortgage servicing right is recorded at fair value. GAAP requires that mortgage servicing rights on these loans be amortized into income over the estimated life of the loans sold using the interest method. At each reporting period, such assets are subject to an impairment test. The impairment test stratifies servicing assets based on predominant risk characteristics of the underlying financial assets. The Company has stratified its mortgage servicing assets by date of sale, which approximates the date of origination.
In conjunction with the impairment test, the Company records a valuation allowance when the fair value of the stratified servicing asset is less than amortized cost. Subsequent changes in the valuation of the assets are recorded as either an increase or a reduction of the valuation allowance, however, if the fair value exceeds amortized cost, such excess will not be recognized. As of December 31, 2015, the gross value of the servicing rights was $175,000 and the valuation allowance was $71,000, providing for a net balance of $104,000.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before maturity.
Income Taxes
The Company accounts for income taxes under the asset/liability method. Deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. The Company files a consolidated federal income tax return and its subsidiaries file individual state income tax returns.
F-12
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Company recognizes a tax position if it is more likely than not that the tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. If the tax position meets the more-likely-than-not recognition threshold, the position is measured to determine the amount of the benefit to recognize and is measured at the largest amount of benefit that is greater than 50% likely of being realized upon settlement. The Company has no material tax exposure matters that were accrued as of December 31, 2015 and 2014. The Company's policy is to account for interest and penalties as components of income tax expense.
Equity Method Investments
Under the equity method, the Company recognizes its portion of net income of unconsolidated affiliates, net of eliminations, in equity in earnings of affiliate on the consolidated statements of operations. Equity method investments are included in other assets on the consolidated statements of condition.
Marketing and Advertising
The Company expenses marketing and advertising costs as incurred.
Off-Balance Sheet Financial Instruments
In the ordinary course of business, the Company has entered into off-balance sheet financial instruments consisting of commitments to extend credit. Such financial instruments are recorded in the balance sheet when they are funded. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet financial instruments.
Fair Value of Financial Instruments
Certain of the Company's financial instruments are carried at fair value. Generally, fair value is the price that a willing buyer and a willing seller would agree upon in an other than a distressed sale situation. Because of the uncertainties inherent in determining fair value, fair value estimates may not be precise. Many of the fair value estimates are based on highly subjective judgments and assumptions made about market information and economic conditions. See Note 14 for a detailed discussion of fair value measurements and methodology used to determine fair value.
Employee Stock Ownership Plan
The ESOP borrowed funds from the Bancorp to purchase shares of common stock of the Bancorp. The funds borrowed by the ESOP from Bancorp to purchase shares of common stock in 2006 are being repaid from the Bank's contributions over a period of 15 years from 2006 to 2020. The funds borrowed by the ESOP from the Bancorp to purchase shares of common stock in 2010 are being repaid from the Bank's contributions over a period of 14.5 years from 2010 to 2024. The Bancorp's common stock not yet allocated to participants is recorded as a reduction of stockholders' equity at cost. The Bancorp's loans to the ESOP and the ESOP's note payables are eliminated in consolidation in the consolidated statements of condition. Compensation expense for the ESOP is based on the average market price of the Company's stock and is recognized as shares are committed to be released to participants. The notes receivable and related interest income are included in the parent company financial statements presented in Note 17.
For purposes of computing basic and diluted earnings per share, ESOP shares that have been committed to be released are considered outstanding. ESOP shares that have not been committed to be released are not considered outstanding.
Stock Based Compensation
The Company grants equity awards to employees, consisting of stock options, performance awards and restricted stock, under its Long-Term Incentive Plan, its 2007 Equity Incentive Plan and its 2011 Equity Incentive Plan. The Company classifies share-based compensation for employees and outside directors within "Salaries, benefits and other compensation" in the consolidated statements of operations to correspond with the same line item as compensation paid. Additionally, the Company reports (1) the expense associated with the grants as an adjustment to operating cash flows and (2) any benefits of realized tax deductions in excess of previously recognized tax benefits on compensation expense as a financing cash flow. Excess tax benefits totaled $829,000, $86,000 and $59,000 in 2015, 2014 and 2013, respectively.
Stock options vest over a five-year service period and expire ten years after grant date. The Company recognizes compensation expense for the fair values of stock options using the straight-line method over the requisite service period for the entire award.
Non-performance based restricted shares vest over a five-year service period. The Company recognizes compensation expense for the fair value of restricted shares on a straight-line basis over the requisite service period for the entire award.
F-13
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Performance-based restricted shares vest over a four or five-year period based on service and achievement of performance metrics. The performance metrics to be evaluated during the performance period are (1) return on assets compared to peer group and (2) earnings per share growth rate compared to peer group. On the third anniversary of the grant date, the Company's level of performance relative to the performance metrics are evaluated and, if such performance metrics have been achieved, an amount of shares that will vest at that time and over the following two years will be determined. The number of shares eligible to vest can range from 0% to 150% of the shares identified on grant date (the "target shares"). Of the shares that will vest, 50% of the shares vest at the measurement date and 50% on the fourth anniversary of the date of grant.
Per Share Information
Basic earnings per share excludes dilution and is computed by dividing income available to common stockholders by the weighted-average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock. Average unallocated shares in the ESOP and shares purchased to fund the Bancorp’s equity incentive plans are not included in either basic or diluted earnings per share.
The following table presents the reconciliation of the numerators and denominators of the basic and diluted EPS computations.
Years Ended December 31, | |||||||||||||
2015 | 2014 | 2013 | |||||||||||
Net income | $ | 9,546,000 | $ | 8,195,000 | $ | 5,534,000 | |||||||
Weighted-average common shares outstanding (1) | 11,651,909 | 12,054,779 | 12,199,774 | ||||||||||
Average common stock acquired by stock benefit plans: | |||||||||||||
ESOP shares unallocated | (455,850 | ) | (521,371 | ) | (586,424 | ) | |||||||
Shares purchased by trust | (228,806 | ) | (283,366 | ) | (324,207 | ) | |||||||
Weighted-average common shares used to calculate basic earnings per share | 10,967,253 | 11,250,042 | 11,289,143 | ||||||||||
Dilutive effect of: | |||||||||||||
Restricted stock awards | 39,917 | 51,810 | 42,582 | ||||||||||
Stock option awards | 198,140 | 197,209 | 198,429 | ||||||||||
Weighted-average common shares used to calculate diluted earnings per share | 11,205,310 | 11,499,061 | 11,530,154 | ||||||||||
Earnings per share-basic | $ | 0.87 | $ | 0.73 | $ | 0.49 | |||||||
Earnings per share-diluted | $ | 0.85 | $ | 0.71 | $ | 0.48 | |||||||
Outstanding common stock equivalents having no dilutive effect | 452,330 | 1,040,123 | 1,108,329 | ||||||||||
(1) Excludes treasury stock. | |||||||||||||
NOTE 2 - BUSINESS COMBINATIONS
Proposed Merger with Univest Corporation of Pennsylvania
On December 8, 2015, Univest and Fox Chase entered into a merger agreement (the "Merger Agreement") that provides that the Company will merge with and into Univest, with Univest remaining as the surviving entity.
At the effective time of the Merger, Fox Chase shareholders will be entitled to elect to receive, for each share of Fox Chase common stock, subject to the election and adjustment procedures described in this joint proxy statement/prospectus, either 0.9731 shares of Univest common stock or $21.00 in cash; provided, however that, 60% of the total number of outstanding shares of Fox Chase common stock will be converted into Univest common stock, and the remaining outstanding shares of Fox Chase common stock will be converted into cash. As a result, if more Fox Chase shareholders make valid elections to receive either Univest common stock or cash than is available as merger consideration under the merger agreement, those Fox Chase shareholders electing the over-subscribed form of consideration may have the over-subscribed consideration proportionately reduced and substituted with consideration in the alternative form.
F-14
NOTE 2 - BUSINESS COMBINATIONS (Continued)
Subject to the satisfaction or waiver of the closing conditions contained in the merger agreement, including the approval of the merger agreement by the Company’s and Univest's shareholders and the receipt of required regulatory approvals, Univest and the Company expect that the merger will be completed during the third quarter of 2016. However, it is possible that factors outside the control of both companies, including whether or when the required regulatory approvals will be received, could result in the merger being completed at a different time or not at all.
NOTE 3 - INVESTMENT SECURITIES
The amortized cost and fair value of securities available-for-sale and held-to-maturity as of December 31, 2015 and 2014 are summarized as follows:
December 31, 2015 | |||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
(In thousands) | |||||||||||||||
Available-for-Sale Securities: | |||||||||||||||
Obligations of U.S. government agencies | $ | 301 | $ | — | $ | (2 | ) | $ | 299 | ||||||
Corporate securities | 17,625 | 9 | (93 | ) | 17,541 | ||||||||||
Agency residential mortgage related securities | 121,195 | 1,597 | (881 | ) | 121,911 | ||||||||||
Total available-for-sale securities | $ | 139,121 | $ | 1,606 | $ | (976 | ) | $ | 139,751 | ||||||
Held-to-Maturity Securities: | |||||||||||||||
Corporate securities | $ | 1,776 | $ | — | $ | (11 | ) | $ | 1,765 | ||||||
Private label residential mortgage related securities | 2,522 | — | (25 | ) | 2,497 | ||||||||||
Agency residential mortgage related securities | 145,892 | 663 | (967 | ) | 145,588 | ||||||||||
Total held-to-maturity securities | $ | 150,190 | $ | 663 | $ | (1,003 | ) | $ | 149,850 | ||||||
December 31, 2014 | |||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
(In thousands) | |||||||||||||||
Available-for-Sale Securities: | |||||||||||||||
Obligations of U.S. government agencies | $ | 300 | $ | 2 | $ | — | $ | 302 | |||||||
Corporate securities | 8,053 | 33 | — | 8,086 | |||||||||||
Agency residential mortgage related securities | 123,929 | 2,392 | (672 | ) | 125,649 | ||||||||||
Total available-for-sale securities | $ | 132,282 | $ | 2,427 | $ | (672 | ) | $ | 134,037 | ||||||
Held-to-Maturity Securities: | |||||||||||||||
Private label residential mortgage related securities | $ | 2,979 | $ | 6 | $ | — | $ | 2,985 | |||||||
Agency residential mortgage related securities | 167,193 | 1,239 | (563 | ) | 167,869 | ||||||||||
Total held-to-maturity securities | $ | 170,172 | $ | 1,245 | $ | (563 | ) | $ | 170,854 | ||||||
Obligations of U.S. government agencies represents debt issued by the Federal Home Loan Bank (the "FHLB") and are not backed by the full faith and credit of the United States government.
F-15
NOTE 3 - INVESTMENT SECURITIES (Continued)
The following tables show gross unrealized losses and fair value of securities, aggregated by security category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2015 and 2014.
December 31, 2015 | |||||||||||||||||||||||
Less than 12 Months | 12 Months or More | Total | |||||||||||||||||||||
Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
Available-for-Sale Securities: | |||||||||||||||||||||||
Obligations of U.S. government agencies | $ | 299 | $ | (2 | ) | $ | — | $ | — | $ | 299 | $ | (2 | ) | |||||||||
Corporate securities | 15,015 | (93 | ) | — | — | 15,015 | (93 | ) | |||||||||||||||
Agency residential mortgage related securities | 79,995 | (716 | ) | 7,927 | (165 | ) | 87,922 | (881 | ) | ||||||||||||||
Total available-for-sale securities | $ | 95,309 | $ | (811 | ) | $ | 7,927 | $ | (165 | ) | $ | 103,236 | $ | (976 | ) | ||||||||
Held-to-Maturity Securities: | |||||||||||||||||||||||
Corporate securities | $ | 1,766 | $ | (11 | ) | $ | — | $ | — | $ | 1,766 | $ | (11 | ) | |||||||||
Private label residential mortgage related securities | 2,497 | (25 | ) | — | — | 2,497 | (25 | ) | |||||||||||||||
Agency residential mortgage related securities | 80,741 | (709 | ) | 9,768 | (258 | ) | 90,509 | (967 | ) | ||||||||||||||
Total held-to-maturity securities | $ | 85,004 | $ | (745 | ) | $ | 9,768 | $ | (258 | ) | $ | 94,772 | $ | (1,003 | ) | ||||||||
Total temporarily impaired securities | $ | 180,313 | $ | (1,556 | ) | $ | 17,695 | $ | (423 | ) | $ | 198,008 | $ | (1,979 | ) | ||||||||
December 31, 2014 | |||||||||||||||||||||||
Less than 12 Months | 12 Months or More | Total | |||||||||||||||||||||
Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
Available-for-Sale Securities: | |||||||||||||||||||||||
Agency residential mortgage related securities | $ | 8,229 | $ | (15 | ) | $ | 64,502 | $ | (657 | ) | $ | 72,731 | $ | (672 | ) | ||||||||
Total available-for-sale securities | $ | 8,229 | $ | (15 | ) | $ | 64,502 | $ | (657 | ) | $ | 72,731 | $ | (672 | ) | ||||||||
Held-to-Maturity Securities: | |||||||||||||||||||||||
Agency residential mortgage related securities | $ | 25,660 | $ | (110 | ) | $ | 27,182 | $ | (453 | ) | $ | 52,842 | $ | (563 | ) | ||||||||
Total held-to-maturity securities | $ | 25,660 | $ | (110 | ) | $ | 27,182 | $ | (453 | ) | $ | 52,842 | $ | (563 | ) | ||||||||
Total temporarily impaired securities | $ | 33,889 | $ | (125 | ) | $ | 91,684 | $ | (1,110 | ) | $ | 125,573 | $ | (1,235 | ) | ||||||||
During the years ended December 31, 2015 and 2014, no securities were sold. There were no net investment securities gains or losses in the consolidated statement of operations for the years ended December 31, 2015 and 2014.
The Company evaluates a variety of factors when concluding whether a security is other-than-temporarily impaired. These factors include, but are not limited to, the type and purpose of the security, the underlying rating of the issuer, the presence of credit enhancements and the length of time a security has been in a loss position and the severity of the loss.
At December 31, 2015, gross unrealized losses totaled $2.0 million. Ten agency residential mortgage related securities, with a fair value of $17.7 million, had an unrealized loss position of $423,000 for twelve months or longer as of December 31, 2015. Additionally, 78 agency residential mortgage related securities, with a fair value of $160.7 million and an unrealized loss position of $1.4 million, seven corporate securities, with a fair value of $16.8 million and an unrealized loss position of $104,000, one agency debenture, with a fair value of $299,000 and an unrealized loss position of $2,000 and one private label residential mortgage backed securities ("PLMBS"), with a fair value of $2.5 million and an unrealized loss position of $25,000, had unrealized loss positions for less than twelve months as of December 31, 2015. The fair value of these 97 securities primarily fluctuates with changes in market conditions for the underlying securities and changes in the interest rate environment. The Company does not intend to sell the securities in an unrealized loss position and it is not more likely than not that it will be required to sell these securities before a recovery of fair
F-16
NOTE 3 - INVESTMENT SECURITIES (Continued)
value, which may be maturity. Upon review of the attributes of the individual securities, the Company concluded these securities were not other-than-temporarily impaired.
During the year ended December 31, 2014, 38 residential mortgage related securities with a fair value of $96.9 million were transferred from available-for-sale securities to held-to-maturity. The reclassification was permitted as the Company had appropriately determined the ability and intent to hold these securities as an investment until maturity. The securities transferred had an unrealized net loss of $1.6 million at the time of transfer which continues to be reflected in accumulated other comprehensive loss on the consolidated balance sheet, net of subsequent amortization, which is being recognized over the life of the securities.
At December 31, 2015, the amortized cost of held-to-maturity investments consisted of the following (in thousands):
Original Cost | Unrealized Loss at Transfer | Post-transfer Accretion | Amortized Cost | ||||||||||||
Transferred securities | $ | 83,107 | $ | (1,625 | ) | $ | (266 | ) | $ | 81,216 | |||||
Other held-to-maturity securities | 68,974 | — | — | 68,974 | |||||||||||
Total | $ | 152,081 | $ | (1,625 | ) | $ | (266 | ) | $ | 150,190 | |||||
The amortized cost and estimated fair value of investment securities available-for-sale and held-to-maturity at December 31, 2015 and 2014 by contractual maturity are as follows:
Available-for-Sale | Held-to-Maturity | |||||||||||||||
Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||||||
(In thousands) | ||||||||||||||||
December 31, 2015 | ||||||||||||||||
Due in one year or less | $ | 2,517 | $ | 2,526 | $ | — | $ | — | ||||||||
Due after one year through five years | 15,409 | 15,314 | 1,776 | 1,765 | ||||||||||||
Due after five years through ten years | — | — | — | — | ||||||||||||
Due after ten years | — | — | — | — | ||||||||||||
Total mortgage related securities | 121,195 | 121,911 | 148,414 | 148,085 | ||||||||||||
$ | 139,121 | $ | 139,751 | $ | 150,190 | $ | 149,850 | |||||||||
December 31, 2014 | ||||||||||||||||
Due in one year or less | $ | 5,803 | $ | 5,818 | $ | — | $ | — | ||||||||
Due after one year through five years | 2,550 | 2,570 | — | — | ||||||||||||
Due after five years through ten years | — | — | — | — | ||||||||||||
Due after ten years | — | — | — | — | ||||||||||||
Total mortgage related securities | 123,929 | 125,649 | 170,172 | 170,854 | ||||||||||||
$ | 132,282 | $ | 134,037 | $ | 170,172 | $ | 170,854 | |||||||||
Securities with a fair value of $48.7 million and $37.0 million at December 31, 2015 and 2014, respectively, were pledged to secure public deposits and for other purposes as required or permitted by law.
Securities with a fair value of $161.7 million and $169.7 million at December 31, 2015 and 2014, respectively, were used to secure FHLB advances, short-term borrowings, other borrowed funds and related unused borrowing capacities. See Note 8.
Securities with a fair value of $900,000 and $1.1 million at December 31, 2015 and 2014, respectively, were used to secure derivative transactions.
F-17
NOTE 4 - LOANS
The composition of net loans at December 31, 2015 and 2014 is provided below:
December 31, | |||||||
2015 | 2014 | ||||||
(In thousands) | |||||||
Real estate loans: | |||||||
One- to four-family | $ | 90,339 | $ | 108,208 | |||
Multi-family and commercial | 442,612 | 388,821 | |||||
Construction | 35,794 | 39,541 | |||||
568,745 | 536,570 | ||||||
Consumer loans | 14,711 | 19,599 | |||||
Commercial and industrial loans | 195,078 | 179,181 | |||||
Total loans | 778,534 | 735,350 | |||||
Deferred loan origination (fees) cost, net | (289 | ) | (294 | ) | |||
Allowance for loan losses | (10,562 | ) | (10,730 | ) | |||
Net loans | $ | 767,683 | $ | 724,326 | |||
The following tables present changes in the allowance for loan losses by loan segment for the years ended December 31, 2015, 2014 and 2013.
Year Ended December 31, 2015 | |||||||||||||||||||||||||||
One- to Four-Family | Multi-family and Commercial | Construction | Consumer | Commercial and Industrial | Unallocated | Total | |||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||||||
Balance, beginning | $ | 405 | $ | 5,990 | $ | 1,038 | $ | 184 | $ | 2,753 | $ | 360 | $ | 10,730 | |||||||||||||
Provision (credit) for loan losses | 303 | 425 | (753 | ) | (874 | ) | (86 | ) | (10 | ) | (995 | ) | |||||||||||||||
Loans charged off | (347 | ) | (16 | ) | — | (1 | ) | — | — | (364 | ) | ||||||||||||||||
Recoveries | 1 | 65 | 295 | 825 | 5 | — | 1,191 | ||||||||||||||||||||
Balance, ending | $ | 362 | $ | 6,464 | $ | 580 | $ | 134 | $ | 2,672 | $ | 350 | $ | 10,562 | |||||||||||||
Year Ended December 31, 2014 | |||||||||||||||||||||||||||
One- to Four-Family | Multi-family and Commercial | Construction | Consumer | Commercial and Industrial | Unallocated | Total | |||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||||||
Balance, beginning | $ | 403 | $ | 7,141 | $ | 324 | $ | 153 | $ | 3,051 | $ | 457 | $ | 11,529 | |||||||||||||
(Credit) provision for loan losses | (20 | ) | (357 | ) | 714 | (1 | ) | 1,704 | (97 | ) | 1,943 | ||||||||||||||||
Loans charged off | (6 | ) | (811 | ) | — | (16 | ) | (2,002 | ) | — | (2,835 | ) | |||||||||||||||
Recoveries | 28 | 17 | — | 48 | — | — | 93 | ||||||||||||||||||||
Balance, ending | $ | 405 | $ | 5,990 | $ | 1,038 | $ | 184 | $ | 2,753 | $ | 360 | $ | 10,730 | |||||||||||||
Year Ended December 31, 2013 | |||||||||||||||||||||||||||
One- to Four- Family | Multi-family and Commercial | Construction Loans | Consumer Loans | Commercial and Industrial | Unallocated | Total | |||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||||||
Balance, beginning | $ | 642 | $ | 6,327 | $ | 873 | $ | 232 | $ | 2,630 | $ | 466 | $ | 11,170 | |||||||||||||
(Credit) provision for loan losses | (95 | ) | 1,252 | (549 | ) | (38 | ) | 421 | (9 | ) | 982 | ||||||||||||||||
Loans charged off | (179 | ) | (463 | ) | — | (71 | ) | — | — | (713 | ) | ||||||||||||||||
Recoveries | 35 | 25 | — | 30 | — | — | 90 | ||||||||||||||||||||
Balance, ending | $ | 403 | $ | 7,141 | $ | 324 | $ | 153 | $ | 3,051 | $ | 457 | $ | 11,529 | |||||||||||||
F-18
NOTE 4 - LOANS (Continued)
The following tables provide details of loans, and associated allowance for loan losses, which are individually or collectively evaluated for impairment as of December 31, 2015 and 2014.
Year Ended December 31, 2015 | |||||||||||||||||||||||||||
One- to Four-Family | Multi-family and Commercial | Construction | Consumer | Commercial and Industrial | Unallocated | Total | |||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||||||
Allowance for Loan Losses: | |||||||||||||||||||||||||||
Balance, ending: individually evaluated for impairment | $ | 3 | $ | 539 | $ | 135 | $ | 56 | $ | 54 | $ | — | $ | 787 | |||||||||||||
Balance, ending: collectively evaluated for impairment | 359 | 5,925 | 445 | 78 | 2,618 | 350 | 9,775 | ||||||||||||||||||||
Total | $ | 362 | $ | 6,464 | $ | 580 | $ | 134 | $ | 2,672 | $ | 350 | $ | 10,562 | |||||||||||||
Total Loans: | |||||||||||||||||||||||||||
Balance, ending: individually evaluated for impairment | $ | 1,460 | $ | 7,111 | $ | 3,866 | $ | 171 | $ | 718 | $ | — | $ | 13,326 | |||||||||||||
Balance, ending: collectively evaluated for impairment | 88,879 | 435,501 | 31,928 | 14,540 | 194,360 | — | 765,208 | ||||||||||||||||||||
Total | $ | 90,339 | $ | 442,612 | $ | 35,794 | $ | 14,711 | $ | 195,078 | $ | — | $ | 778,534 | |||||||||||||
Year Ended December 31, 2014 | |||||||||||||||||||||||||||
One- to Four-Family | Multi-family and Commercial | Construction | Consumer | Commercial and Industrial | Unallocated | Total | |||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||||||
Allowance for Loan Losses: | |||||||||||||||||||||||||||
Balance, ending: individually evaluated for impairment | $ | 11 | $ | 401 | $ | 114 | $ | 26 | $ | — | $ | — | $ | 552 | |||||||||||||
Balance, ending: collectively evaluated for impairment | 394 | 5,589 | 924 | 158 | 2,753 | 360 | 10,178 | ||||||||||||||||||||
Total | $ | 405 | $ | 5,990 | $ | 1,038 | $ | 184 | $ | 2,753 | $ | 360 | $ | 10,730 | |||||||||||||
Total Loans: | |||||||||||||||||||||||||||
Balance, ending: individually evaluated for impairment | $ | 2,629 | $ | 5,849 | $ | 2,723 | $ | 256 | $ | 75 | $ | — | $ | 11,532 | |||||||||||||
Balance, ending: collectively evaluated for impairment | 105,579 | 382,972 | 36,818 | 19,343 | 179,106 | — | 723,818 | ||||||||||||||||||||
Total | $ | 108,208 | $ | 388,821 | $ | 39,541 | $ | 19,599 | $ | 179,181 | $ | — | $ | 735,350 | |||||||||||||
F-19
NOTE 4 - LOANS (Continued)
The following tables set forth the breakdown of impaired loans by loan segment as of December 31, 2015 and 2014.
December 31, 2015 | |||||||||||||||||||||||
Nonaccrual Loans | Accruing TDRs | Other Impaired Loans | Total Impaired Loans | Impaired Loans with Allowance | Impaired Loans without Allowance | ||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
Real estate loans: | |||||||||||||||||||||||
One- to four-family | $ | 583 | $ | 877 | $ | — | $ | 1,460 | $ | 117 | $ | 1,343 | |||||||||||
Multi-family and commercial | 1,074 | 1,685 | 4,352 | 7,111 | 6,340 | 771 | |||||||||||||||||
Construction | — | 3,866 | — | 3,866 | 3,866 | — | |||||||||||||||||
Consumer loans | 159 | 12 | — | 171 | 57 | 114 | |||||||||||||||||
Commercial and industrial | 718 | — | — | 718 | 718 | — | |||||||||||||||||
Total | $ | 2,534 | $ | 6,440 | $ | 4,352 | $ | 13,326 | $ | 11,098 | $ | 2,228 | |||||||||||
December 31, 2014 | |||||||||||||||||||||||
Nonaccrual Loans | Accruing TDRs | Other Impaired Loans | Total Impaired Loans | Impaired Loans with Allowance | Impaired Loans without Allowance | ||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
Real estate loans: | |||||||||||||||||||||||
One- to four-family | $ | 1,741 | $ | 888 | $ | — | $ | 2,629 | $ | 137 | $ | 2,492 | |||||||||||
Multi-family and commercial | 1,395 | — | 4,454 | 5,849 | 4,502 | 1,347 | |||||||||||||||||
Construction | — | 2,723 | — | 2,723 | 2,723 | — | |||||||||||||||||
Consumer loans | 243 | 13 | — | 256 | 82 | 174 | |||||||||||||||||
Commercial and industrial | 75 | — | — | 75 | — | 75 | |||||||||||||||||
Total | $ | 3,454 | $ | 3,624 | $ | 4,454 | $ | 11,532 | $ | 7,444 | $ | 4,088 | |||||||||||
For the years ended December 31, 2015, 2014 and 2013, the average recorded investment in the impaired loans was $13.9 million, $12.5 million, and $15.9 million, respectively. The interest income recognized on these impaired loans was $794,000, $533,000 and $359,000 for the years ended December 31, 2015, 2014 and 2013, respectively.
Loans on which the accrual of interest has been discontinued amounted to $2.5 million at December 31, 2015 and $3.5 million at December 31, 2014. If interest on such loans had been recorded in accordance with contractual terms, interest income would have increased by $120,000, $161,000 and $616,000 for the years ended December 31, 2015, 2014 and 2013, respectively. There were no loans past due 90 days or more and still accruing interest at December 31, 2015, 2014 and 2013.
At December 31, 2015, two TDRs totaling $1.1 million are excluded from the accruing TDR column above as they are included in nonaccrual loans. Of this amount, $1.0 million relates to one multi-family and commercial real estate loan and $93,000 relates to one residential loan.
At December 31, 2014, four TDRs totaling $1.4 million are excluded from the accruing TDR column as they are included in nonaccrual loans. Of this amount, $1.1 million relates to one multi-family and commercial real estate loan and $336,000 relates to three residential loans.
During the year ended December 31, 2014, one multi-family and commercial loan totaling $4.5 million was reclassified from an accruing TDR to an other impaired loan. This reclassification was due to our annual assessment where TDRs that have performed in accordance with the new terms for six consecutive months, are in a current status, reflected a market rate of interest at the time of the restructuring and cross over a year end are considered cured and are no longer classified as TDRs.
F-20
NOTE 4 - LOANS (Continued)
The following tables set forth the allowance for loan loss for impaired loans and general allowance by loan segment as of December 31, 2015 and 2014.
December 31, 2015 | |||||||||||||||||||||||
Allowance for Loan Losses | |||||||||||||||||||||||
Impaired Loans | |||||||||||||||||||||||
Nonaccrual Loans | Accruing TDRs | Other Impaired Loans | Total Impaired Loans | ||||||||||||||||||||
General | Total | ||||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
Real estate loans: | |||||||||||||||||||||||
One- to four-family | $ | 3 | $ | — | $ | — | $ | 3 | $ | 359 | $ | 362 | |||||||||||
Multi-family and commercial | 119 | 46 | 374 | 539 | 5,925 | 6,464 | |||||||||||||||||
Construction | — | 135 | — | 135 | 445 | 580 | |||||||||||||||||
Consumer loans | 56 | — | — | 56 | 78 | 134 | |||||||||||||||||
Commercial and industrial | 54 | — | — | 54 | 2,618 | 2,672 | |||||||||||||||||
Unallocated | — | — | — | — | 350 | 350 | |||||||||||||||||
Total allowance for loan losses | $ | 232 | $ | 181 | $ | 374 | $ | 787 | $ | 9,775 | $ | 10,562 | |||||||||||
December 31, 2014 | |||||||||||||||||||||||
Allowance for Loan Losses | |||||||||||||||||||||||
Impaired Loans | |||||||||||||||||||||||
Nonaccrual Loans | Accruing TDRs | Other Impaired Loans | Total Impaired Loans | ||||||||||||||||||||
General | Total | ||||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
Real estate loans: | |||||||||||||||||||||||
One- to four-family | $ | 11 | $ | — | $ | — | $ | 11 | $ | 394 | $ | 405 | |||||||||||
Multi-family and commercial | 10 | — | 391 | 401 | 5,589 | 5,990 | |||||||||||||||||
Construction | — | 114 | — | 114 | 924 | 1,038 | |||||||||||||||||
Consumer loans | 26 | — | — | 26 | 158 | 184 | |||||||||||||||||
Commercial and industrial | — | — | — | — | 2,753 | 2,753 | |||||||||||||||||
Unallocated | — | — | — | — | 360 | 360 | |||||||||||||||||
Total allowance for loan losses | $ | 47 | $ | 114 | $ | 391 | $ | 552 | $ | 10,178 | $ | 10,730 | |||||||||||
F-21
NOTE 4 - LOANS (Continued)
The Company may, under certain circumstances, restructure loans as a concession to borrowers who have experienced financial difficulty, which results in a TDR. TDRs are impaired loans. TDRs typically result from the Company’s loss mitigation activities, which, among other activities, could include extension of maturity, rate reductions, payment extension, and/or principal forgiveness.
The following tables set forth a summary of the TDR activity for the years ended December 31, 2015 and 2014.
Year Ended December 31, 2015 | |||||||||||||
Restructured Current Period | |||||||||||||
Number of Loans | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment | Type of Modification | ||||||||||
(Dollars in thousands) | |||||||||||||
Real estate loans: | |||||||||||||
One- to four-family | — | $ | — | $ | — | ||||||||
Multi-family and commercial | 2 | 1,685 | 1,685 | Delayed repayment | |||||||||
Construction | — | — | — | ||||||||||
Consumer loans | — | — | — | ||||||||||
Commercial and industrial | — | — | — | ||||||||||
Total | 2 | $ | 1,685 | $ | 1,685 | ||||||||
Year Ended December 31, 2014 | |||||||||||||
Restructured Current Period | |||||||||||||
Number of Loans | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment | Type of Modification | ||||||||||
(Dollars in thousands) | |||||||||||||
Real estate loans: | |||||||||||||
One- to four-family | 1 | $ | 245 | $ | 245 | Principal forgiveness | |||||||
Multi-family and commercial | 1 | 1,640 | 1,540 | Principal forgiveness | |||||||||
Construction | — | — | — | ||||||||||
Consumer loans | — | — | — | ||||||||||
Commercial and industrial | — | — | — | ||||||||||
Total | 2 | $ | 1,885 | $ | 1,785 | ||||||||
At December 31, 2015, the recorded investment of residential and consumer mortgage loans secured by residential real estate properties, for which formal foreclosure proceedings are in process, totaled $364,000. At December 31, 2015, there were three foreclosed residential real estate properties, which were carried at $122,000.
During the year ended December 31, 2014, a $1.6 million multi-family and commercial real estate TDR which was restructured during 2014 defaulted. During 2014, the Company recorded charge-offs of $552,000 on this loan, $100,000 of which was recorded in conjunction with the modification.
F-22
NOTE 4 - LOANS (Continued)
The following table sets forth past due loans by segment as of December 31, 2015 and 2014.
December 31, | |||||||||||||||
2015 | 2014 | ||||||||||||||
30-59 Days Past Due | 60-89 Days Past Due | 30-59 Days Past Due | 60-89 Days Past Due | ||||||||||||
(In thousands) | |||||||||||||||
One- to four-family real estate | $ | 865 | $ | 685 | $ | — | $ | 145 | |||||||
Multi-family and commercial real estate | — | — | — | — | |||||||||||
Construction | — | — | — | — | |||||||||||
Consumer | 156 | — | 113 | — | |||||||||||
Commercial and industrial | — | — | — | — | |||||||||||
Total | $ | 1,021 | $ | 685 | $ | 113 | $ | 145 | |||||||
We use six primary classifications for loans: pass, pass watch, special mention, substandard, doubtful and loss, of which three classifications are for problem loans: substandard, doubtful and loss. “Substandard loans” must have one or more well defined weaknesses and are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. “Doubtful loans” have the weaknesses of substandard loans with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. A loan classified “loss” is considered uncollectible and of such little value that continuance as a loan of the institution is not warranted. We also maintain a “special mention” category, described as loans which do not currently expose us to a sufficient degree of risk to warrant classification but do possess credit deficiencies or potential weaknesses deserving our close attention. If we classify an asset as loss, it is recorded as a loan charged off in the current period.
The following tables set forth criticized and classified loans by segment as of December 31, 2015 and 2014.
December 31, 2015 | |||||||||||||||||||||||
One- to Four-Family | Multi-family and Commercial | Construction | Consumer | Commercial and Industrial | Total | ||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
Pass and Pass watch | $ | 89,756 | $ | 427,393 | $ | 31,927 | $ | 14,552 | $ | 191,496 | $ | 755,124 | |||||||||||
Special mention | — | 13,958 | — | — | 1,799 | 15,757 | |||||||||||||||||
Substandard | 583 | 1,261 | 3,867 | 159 | 1,783 | 7,653 | |||||||||||||||||
Doubtful | — | — | — | — | — | — | |||||||||||||||||
Total loans | $ | 90,339 | $ | 442,612 | $ | 35,794 | $ | 14,711 | $ | 195,078 | $ | 778,534 | |||||||||||
December 31, 2014 | |||||||||||||||||||||||
One- to Four-Family | Multi-family and Commercial | Construction | Consumer | Commercial and Industrial | Total | ||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
Pass and Pass watch | $ | 106,467 | $ | 376,134 | $ | 36,229 | $ | 19,357 | $ | 174,143 | $ | 712,330 | |||||||||||
Special mention | — | 8,406 | 2,723 | — | 3,012 | 14,141 | |||||||||||||||||
Substandard | 1,741 | 4,281 | 589 | 242 | 2,026 | 8,879 | |||||||||||||||||
Doubtful | — | — | — | — | — | — | |||||||||||||||||
Total loans | $ | 108,208 | $ | 388,821 | $ | 39,541 | $ | 19,599 | $ | 179,181 | $ | 735,350 | |||||||||||
F-23
NOTE 5 - DERIVATIVES AND HEDGING
Interest Rate Swaps
On November 3, 2006, the Company entered into an interest rate swap with a current notional amount of $713,000, which is used to hedge a 15-year fixed rate loan that is earning interest at 7.43%. The Company is receiving variable rate payments of one-month LIBOR plus 224 basis points and is paying fixed rate payments of 7.43%. The swap matures in April 2022 and had a fair value loss position of $92,000 and $116,000 at December 31, 2015 and 2014, respectively. The interest rate swap is carried at fair value in accordance with FASB ASC 815 “Derivatives and Hedging.” The loan is carried at fair value under the fair value option as permitted by FASB ASC 825 “Financial Instruments.”
On October 12, 2011, the Company entered into an interest rate swap with a current notional amount of $1.5 million, which is used to hedge a 10-year fixed rate loan that is earning interest at 5.83%. The Company is receiving variable rate payments of one-month LIBOR plus 350 basis points and is paying fixed rate payments of 5.83%. The Company designated this relationship as a fair value hedge. The swap matures in October 2021 and had a fair value loss position of $56,000 and $46,000 at December 31, 2015 and 2014, respectively. The difference between changes in the fair values of the interest rate swap agreement and the hedged loan represents hedge ineffectiveness and is recorded in other non-interest income in the consolidated statements of operations. Hedge ineffectiveness resulted in expense of $2,000 and $16,000 for the years ended December 31, 2015 and 2014, respectively.
Credit Derivatives
We have entered into agreements with a third-party financial institution whereby the financial institution enters into interest rate derivative contracts and foreign currency swap contracts with customers referred to them by us. By the terms of the agreements, the financial institution has recourse to the Company for any exposure created under each swap contract in the event the customer defaults on the swap agreement and the agreement is in a paying position to the third-party financial institution. These transactions represent credit derivatives and are a customary arrangement that allows financial institutions like ours to provide access to interest rate and foreign currency swap transactions for our customers without creating the swap ourselves. The Company records the fair value of credit derivatives in other liabilities on the consolidated statement of condition. The Company recognizes changes in the fair value of credit derivatives, net of any fees received, as service charges and other fee income in the consolidated statements of operations.
At December 31, 2015, there were four variable-rate to fixed-rate interest rate swap transactions between the third-party financial institution and our customers with a notional amount of $12.2 million, and remaining maturities ranging from four to seven years. At December 31, 2014, there were four variable-rate to fixed-rate interest swap transactions between the third-party financial institution and our customers with a notional amount of $12.6 million, and remaining maturities ranging from five to eight years. The fair value of the swaps to the customers was a liability of $53,000 and an asset of $91,000 as of December 31, 2015 and 2014, respectively, and all swaps were in paying positions to the third-party financial institution at December 31, 2015 and 2014. As of December 31, 2015 and 2014, the fair value of the Company’s interest rate swap credit derivatives was a liability of $6,000 and $10,000, respectively. During the years ended December 31, 2015 and 2014, the Company recognized income of $5,000 and expense of $8,000, respectively, from interest rate swap credit derivatives.
At December 31, 2015, there were no foreign currency swap transactions between the third-party financial institution and our customers. At December 31, 2014, there were six foreign currency swap transactions between the third-party financial institution and our customers with a notional amount of $366,000, and remaining maturities ranging from one to four months. The aggregate fair value of these swaps to the customers was a liability of $44,000 as of December 31, 2014. At December 31, 2014, the fair value of the Company’s credit derivatives was a liability of $2,000. During the years ended December 31, 2015 and 2014, the Company recognized income of $6,000 and $12,000, respectively, from foreign currency swap credit derivatives.
The maximum potential payments by the Company to the financial institution under these credit derivatives are not estimable as they are contingent on future interest rates and exchange rates, and the agreement does not provide for a limitation of the maximum potential payment amount.
F-24
NOTE 6 - PREMISES AND EQUIPMENT
The components of premises and equipment at December 31, 2015 and 2014 were as follows:
December 31, | ||||||||
2015 | 2014 | |||||||
(In thousands) | ||||||||
Land | $ | 3,207 | $ | 3,207 | ||||
Buildings | 13,962 | 13,917 | ||||||
Leasehold improvements | 162 | 161 | ||||||
Furniture, fixtures and equipment | 3,847 | 4,845 | ||||||
21,178 | 22,130 | |||||||
Less: accumulated depreciation | (12,148 | ) | (12,712 | ) | ||||
Premises and equipment, net | $ | 9,030 | $ | 9,418 | ||||
As of December 31, 2015, the Company leased space for an operations center in Blue Bell, Pennsylvania and certain office equipment. The leases are accounted for as operating leases. The lease for our Blue Bell office expired in January 2016. We are currently under a month-to-month arrangement for this location. The following rental expenses were included in the Company's financial statements.
December 31, | ||||||||||||
2015 | 2014 | 2013 | ||||||||||
(In thousands) | ||||||||||||
Office rent | $ | 388 | $ | 399 | $ | 407 | ||||||
Equipment lease | 1 | 2 | 2 | |||||||||
Total | $ | 389 | $ | 401 | $ | 409 | ||||||
The following table shows the minimum future rental payments under non-cancelable leases for premises and equipment as of December 31, 2015.
Year | Amount | |||
(In thousands) | ||||
2015 | $ | 36 | ||
2016 | — | |||
2017 | — | |||
2018 | — | |||
2019 | — | |||
F-25
NOTE 7 - DEPOSITS
Deposits and their respective weighted average interest rate at December 31, 2015 and December 31, 2014 consist of the following:
December 31, | |||||||||||||
2015 | 2014 | ||||||||||||
Weighted Average Interest Rate | Amount | Weighted Average Interest Rate | Amount | ||||||||||
(Dollars in thousands) | |||||||||||||
Noninterest-bearing demand accounts | — | % | $ | 170,327 | — | % | $ | 168,791 | |||||
NOW accounts | 0.20 | 97,838 | 0.21 | 82,417 | |||||||||
Money market accounts | 0.28 | 93,325 | 0.22 | 73,802 | |||||||||
Savings and club accounts | 0.45 | 142,966 | 0.37 | 129,893 | |||||||||
Brokered deposits | 0.76 | 78,481 | 0.73 | 70,817 | |||||||||
Certificates of deposit | 0.88 | 182,037 | 0.87 | 186,189 | |||||||||
Total | 0.43 | % | $ | 764,974 | 0.42 | % | $ | 711,909 | |||||
The scheduled maturities of certificates of deposit and brokered deposits for periods subsequent to December 31, 2015 are as follows:
December 31, | ||||||||||||
Year | Certificates of Deposit | Brokered Deposits | Total | |||||||||
(In thousands) | ||||||||||||
2016 | $ | 79,562 | $ | 56,072 | $ | 135,634 | ||||||
2017 | 61,122 | 11,232 | 72,354 | |||||||||
2018 | 24,917 | 6,199 | 31,116 | |||||||||
2019 | 7,592 | 4,978 | 12,570 | |||||||||
2020 | 5,252 | — | 5,252 | |||||||||
Thereafter | 3,592 | — | 3,592 | |||||||||
Total | $ | 182,037 | $ | 78,481 | $ | 260,518 | ||||||
A summary of interest expense on deposits for the years ended December 31, 2015, 2014 and 2013 is as follows:
2015 | 2014 | 2013 | ||||||||||
(In thousands) | ||||||||||||
NOW accounts | $ | 190 | $ | 183 | $ | 172 | ||||||
Money market accounts | 206 | 202 | 172 | |||||||||
Savings and club accounts | 501 | 275 | 141 | |||||||||
Brokered deposits | 525 | 450 | 391 | |||||||||
Certificates of deposit | 1,578 | 2,106 | 3,468 | |||||||||
Total | $ | 3,000 | $ | 3,216 | $ | 4,344 | ||||||
The aggregate amount of certificates of deposit with a denomination greater than $250,000 was $7.5 million and $4.7 million at December 31, 2015 and 2014, respectively. Deposits in excess of $250,000 are not insured by the FDIC.
F-26
NOTE 8 - BORROWINGS
The following is a summary of borrowed funds by type:
Balance at End of Year | Weighted Average Coupon Rate | Maximum Amount Outstanding at Month End During the Year | Average Amount Outstanding During the Year | Weighted Average Interest Rate During the Year | |||||||||||||
(Dollars in thousands) | |||||||||||||||||
2015 | |||||||||||||||||
FHLB advances | $ | 110,000 | 2.02 | % | $ | 120,000 | $ | 110,323 | 1.99 | % | |||||||
Other borrowed funds | 30,000 | 2.37 | 30,000 | 30,000 | 2.22 | ||||||||||||
Short-term borrowings | 38,496 | 0.43 | 60,000 | 27,689 | 0.34 | ||||||||||||
2014 | |||||||||||||||||
FHLB advances | $ | 120,000 | 1.80 | % | $ | 150,000 | $ | 143,980 | 1.59 | % | |||||||
Other borrowed funds | 30,000 | 3.30 | 30,000 | 30,000 | 3.35 | ||||||||||||
Short-term borrowings | 50,000 | 0.32 | 84,900 | 41,000 | 0.31 | ||||||||||||
FHLB Advances
Pursuant to collateral agreements with the FHLB of Pittsburgh, advances are secured by qualifying first mortgage loans, qualifying fixed-income securities, FHLB stock and an interest-bearing demand deposit account with the FHLB.
Maturity Date | Amount | Coupon Rate | Call Date | Rate if Called | |||||||
(In thousands) | |||||||||||
March 2016 | $ | 10,000 | 0.60 | % | Not Applicable | Not Applicable | |||||
March 2016 | 10,000 | 0.62 | Not Applicable | Not Applicable | |||||||
September 2016 | 5,000 | 0.75 | Not Applicable | Not Applicable | |||||||
September 2016 | 10,000 | 1.04 | Not Applicable | Not Applicable | |||||||
June 2017 | 5,000 | 0.94 | Not Applicable | Not Applicable | |||||||
July 2017 | 10,000 | 0.92 | Not Applicable | Not Applicable | |||||||
November 2017 | 15,000 | 3.62 | February 2016 | 3-month LIBOR + 0.10% | |||||||
November 2017 | 15,000 | 3.87 | February 2016 | 3-month LIBOR + 0.10% | |||||||
December 2017 | 20,000 | 2.83 | March 2016 | 3-month LIBOR + 0.11% | |||||||
July 2018 | 10,000 | 1.32 | Not Applicable | Not Applicable | |||||||
$ | 110,000 | 2.02 | % | ||||||||
Advances from the FHLB of Pittsburgh with coupon rates ranging from 0.60% to 3.87% are due as follows.
Maturity | Amount | Weighted Average Coupon Rate | |||||
(Dollars in thousands) | |||||||
2016 | $ | 35,000 | 0.75 | % | |||
2017 | 65,000 | 2.81 | |||||
2018 | 10,000 | 1.32 | |||||
$ | 110,000 | 2.02 | % | ||||
F-27
NOTE 8 - BORROWINGS (Continued)
For the borrowings which have a "Call Date" disclosed in the above table, if the borrowing is called, the Bank has the option to either pay off the borrowing without penalty or the borrowings' fixed rate resets to a variable 3-month LIBOR based rate, as noted in the above table. Subsequent to the call date, the borrowings are callable by the FHLB quarterly. Accordingly, the contractual maturities above may differ from actual maturities.
The Bank had a maximum borrowing capacity with the FHLB of Pittsburgh of approximately $478.8 million at December 31, 2015. As of December 31, 2015, the Bank had qualifying collateral pledged against its advances consisting of loans in the amount of $606.6 million and securities in the amount of $65.3 million. Additionally, as of December 31, 2015, the Bank had a maximum borrowing capacity of $59.9 million with the Federal Reserve Bank of Philadelphia through the Discount Window. This borrowing capacity was generated by pledged securities with a fair value of $59.9 million.
As a member of the FHLB of Pittsburgh, the Bank is required to acquire and hold shares of FHLB of Pittsburgh capital stock. The FHLB stock holding requirement is based on a percentage of the Bank's borrowings and a percentage of the Bank's "eligible assets" as defined by the FHLB. Percentages of borrowings and "eligible assets" used to determine the stock holding requirement are set by the FHLB from a defined range. Maximum percentages are 6.00% of its advances plus 1.00% of the Bank’s "eligible assets." Minimum percentages are 2.00% of its advances plus 0.05% of "eligible assets." Current percentages are 4.00% of advances plus 0.10% of "eligible assets." As of December 31, 2015, the Company had a minimum stock obligation of $2.5 million and a maximum stock obligation of $12.5 million. The Company held $6.7 million in FHLB stock at that date.
Other Borrowed Funds
Other borrowed funds obtained from large commercial banks under security repurchase agreements totaled $30.0 million at December 31, 2015. These borrowings contractually mature with dates ranging from October 2018 through November 2020. As disclosed in the table below, one of the borrowings may be called by the lender based on the underlying agreements. Accordingly, the contractual maturity on that borrowing may differ from actual maturity.
Next Call Date | Subsequent Call Frequency | |||||||||
Maturity Date | Amount | Coupon Rate | ||||||||
(In thousands) | ||||||||||
October 2018 | $ | 5,000 | 3.15% | January 2016 | Quarterly | |||||
December 2018 | 5,000 | 1-month LIBOR + 2.03% | Not Applicable | Not Applicable | ||||||
September 2019 | 10,000 | 1-month LIBOR + 1.89% | Not Applicable | Not Applicable | ||||||
September 2020 | 5,000 | 1-month LIBOR + 1.56% | Not Applicable | Not Applicable | ||||||
November 2020 | 5,000 | 1-month LIBOR + 1.58% | Not Applicable | Not Applicable | ||||||
$ | 30,000 | |||||||||
Mortgage backed securities with a fair value of $34.8 million at December 31, 2015 were used to secure these other borrowed funds. Changes in the fair value of pledged collateral may require the Company to pledge additional securities.
During January 2015, the Bank modified the four non-callable fixed rate borrowings (as identified in the above table) totaling $25.0 million. Prior to the modification, the borrowings had a weighted average fixed rate of 3.33% and a weighted average term to maturity of 3.8 years. Subsequent to the modification, the borrowings have a weighted average variable rate of one-month LIBOR plus 1.79% and a weighted average term to maturity of 5.0 years.
Short-term Borrowings
Short-term borrowings consist of overnight borrowings plus term borrowings with an original maturity less than one year. Short-term borrowings are obtained from commercial banks, participants in the Federal Funds market and the FHLB. As of December 31, 2015, the Company had $38.5 million of overnight borrowings with the FHLB. The weighted average rate for this borrowing was 0.43%. As of December 31, 2014, the Company had $50.0 million of short-term borrowings consisting of $35.0 million of overnight borrowings and $15.0 million of short-term borrowings with an original maturity less than one year. The weighted average rates for these borrowings was 0.31% and 0.33%, respectively.
F-28
NOTE 9 - EMPLOYEE BENEFITS
401(k) Plan
The Bank has a 401(k) retirement plan covering employees meeting certain eligibility requirements. Employees may contribute a percentage of their salary to the Plan each year, subject to limitations set by law. The Bank matches a portion of each employee contribution and also may make discretionary contributions, based on the Bank's performance. The Bank provides a matching contribution equivalent to 33% of the first 6% of the contribution made by an employee. The Bank's contributions to the plan on behalf of its employees resulted in an expenditure of $150,000, $143,000 and $146,000 for the years ended December 31, 2015, 2014 and 2013, respectively.
Employee Stock Ownership Plan
The ESOP is a tax-qualified plan designed to invest in the Bancorp's common stock that provides employees meeting certain eligibility requirements with the opportunity to receive a funded retirement benefit, based on the value of the Bancorp's common stock. The ESOP has purchased 963,767 shares of common stock and has total loans outstanding of $4.9 million as of December 31, 2015. The ESOP purchased shares in two separate transactions as described below.
The ESOP initially purchased 615,267 shares of common stock in 2006 in conjunction with the Bancorp's initial public offering at a price of $9.35 per share with the proceeds of a loan from Bancorp to the ESOP. The outstanding loan principal balance on the initial ESOP transaction at December 31, 2015 and 2014 was $2.6 million and $3.0 million, respectively. ESOP shares from this transaction that were unallocated at December 31, 2015 totaled 205,088 and had a fair market value of $4.2 million.
The ESOP purchased an additional 348,500 shares of common stock in conjunction with the Bancorp's mutual-to-stock conversion completed on June 29, 2010 at a price of $10.00 per share with the proceeds of a second loan from the Bancorp to the ESOP. The outstanding loan principal balance at December 31, 2015 and 2014 was $2.3 million and $2.5 million, respectively. ESOP shares from this transaction that were unallocated at December 31, 2015 totaled 216,310 and had a fair market value of $4.4 million.
Shares of the Bancorp's common stock pledged as collateral for the loan are released from the pledge for allocation to Plan participants as loan payments are made. The Bank releases 65,053 shares annually based upon the ratio that the current principal and interest payment bears to the current and remaining scheduled future principal and interest payments. Dividends declared on common stock held by the ESOP and not allocated to the account of a participant are used to repay the loan. Dividends declared on common stock held by the ESOP that are allocated to the account of a participant are paid to the participant each year.
As of December 31, 2015, there were no shares committed to employees, 542,369 shares allocated to employees and 421,398 unallocated shares to be released in future periods.
Total ESOP compensation expense for the years ended December 31, 2015, 2014 and 2013 was $1.1 million, $1.1 million and $1.1 million, respectively, representing the average fair market value of shares allocated during the year.
On January 29, 2016, Fox Chase Bank submitted an application for determination to terminate the ESOP pursuant to an unanimous written consent of the Board of Directors of Fox Chase Bank on December 22, 2015. Contingent upon the merger, as discussed in Note 2, the Company plans to terminate the ESOP on the last business day preceding the closing of the merger.
Long-Term Incentive Plan
The Bank maintains the Fox Chase Bank Executive Long-Term Incentive Plan (the "Incentive Plan"). All plan assets are invested in Bancorp common stock. The Incentive Plan became effective January 1, 2006. All shares in the plan were fully vested on January 1, 2011.
NOTE 10 - STOCK BASED COMPENSATION
The Company maintains the Fox Chase Bancorp, Inc. 2007 Equity Incentive Plan (the "2007 Plan"), which provides that 769,083 shares of common stock may be issued in connection with the exercise of stock options and 307,633 shares of common stock may be issued as restricted stock. The Plan allows for the granting of non-statutory stock options ("NSOs"), incentive stock options and restricted stock. Options are granted at no less than the fair value of the Bancorp's common stock on the date of the grant. In 2007, a trust was funded which purchased 307,395 shares of Bancorp's common stock to fund restricted stock awards under the Plan. The 307,395 shares were purchased by the trust at a weighted average cost of $12.18 per share.
The Company maintains the Fox Chase Bancorp, Inc. 2011 Equity Incentive Plan (the "2011 Plan"), which provides that 685,978 shares of common stock may be issued in connection with the exercise of stock options and 274,391 shares of common stock may be issued as restricted stock, including performance based restricted stock. In August 2011, a trust was funded
F-29
NOTE 10 - STOCK BASED COMPENSATION (Continued)
that purchased 274,391 shares of Bancorp's common stock to fund restricted stock awards under the 2011 Plan. The 274,391 shares were purchased by the trust at a weighted average cost of $12.66 per share.
During the years ended December 31, 2015, 2014 and 2013, the Company recorded $1.5 million, $1.2 million and $1.1 million of stock based compensation expense, respectively, comprised of stock option expense of $465,000, $437,000 and $431,000, respectively and restricted stock expense of $1.0 million, $812,000 and $693,000, respectively.
The following is a summary of the Bancorp’s stock option activity and related information for the years ended December 31, 2015, 2014 and 2013.
Number of Stock Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life | Aggregate Intrinsic Value | ||||||||||
Outstanding at December 31, 2012 | 877,669 | $ | 11.57 | 6.3 years | $ | 4,461,000 | |||||||
Granted | 255,650 | 17.00 | |||||||||||
Exercised | (9,811 | ) | 10.82 | ||||||||||
Forfeited/Cancelled | (100 | ) | 12.94 | ||||||||||
Outstanding at December 31, 2013 | 1,123,408 | $ | 12.81 | 6.2 years | $ | 5,013,000 | |||||||
Granted | 39,600 | 16.92 | |||||||||||
Exercised | (39,388 | ) | 11.12 | ||||||||||
Forfeited/Cancelled | (23,100 | ) | 15.52 | ||||||||||
Outstanding at December 31, 2014 | 1,100,520 | $ | 12.96 | 5.3 years | $ | 4,172,000 | |||||||
Granted | 130,500 | 16.99 | |||||||||||
Exercised | (493,586 | ) | 11.76 | ||||||||||
Forfeited/Cancelled | (21,880 | ) | 15.45 | ||||||||||
Outstanding at December 31, 2015 | 715,554 | $ | 14.45 | 6.1 years | $ | 4,182,000 | |||||||
Exercisable at December 31, 2015 | 349,192 | $ | 12.63 | 4.4 years | $ | 2,677,000 | |||||||
Management estimated the fair values of all option grants using the Black-Scholes option-pricing model. Management utilized the Company's actual volatility in determining the expected volatility rate, estimated the expected life of the options using the simplified method allowed under certain accounting standards and determined the risk-free rate utilizing the Treasury yield for the expected life of the option contract.
The fair value and underlying assumptions for the years ended December 31, 2015, 2014 and 2013 are as follows:
2015 | 2014 | 2013 | ||||||||||||||||||
Fair Value | $2.24 | - | $3.24 | $3.49 | - | $3.66 | $4.20 | - | $4.45 | |||||||||||
Expected Dividend Yield | 4.00% | 3.53% | 2.22% | |||||||||||||||||
Expected Volatility | 22.45 | % | - | 29.86% | 30.71 | % | - | 31.04% | 31.11 | % | - | 31.12% | ||||||||
Risk-Free Interest Rate | 1.65 | % | - | 1.74% | 1.85 | % | - | 1.90% | 1.19 | % | - | 1.74% | ||||||||
Expected Option Life in Years | 6.5 | 6.5 | 6.5 | |||||||||||||||||
F-30
NOTE 10 - STOCK BASED COMPENSATION (Continued)
The 2007 Plan and 2011 Plan allow option holders to pay for option exercises using previously owned shares of Fox Chase Bancorp, Inc. common stock having an equivalent fair value. Options exercised using this method result in fewer shares being issued (the number of options exercised less any shares tendered to exercise the option). During 2015, 408,879 options were exercised using this method, which resulted in 168,721 shares being issued.
The following is a summary of the Bancorp’s unvested options as of December 31, 2015, 2014 and 2013 and the changes therein during the years then ended.
Number of Stock Options | Weighted Average Grant Date Fair Value | ||||||
Unvested at December 31, 2012 | 310,661 | $ | 3.36 | ||||
Granted | 255,650 | 4.20 | |||||
Vested | (90,787 | ) | 3.16 | ||||
Forfeited / Cancelled | — | — | |||||
Unvested at December 31, 2013 | 475,524 | $ | 3.85 | ||||
Granted | 39,600 | 3.65 | |||||
Vested | (125,521 | ) | 3.65 | ||||
Forfeited / Cancelled | (20,100 | ) | 3.91 | ||||
Unvested at December 31, 2014 | 369,503 | $ | 3.90 | ||||
Granted | 130,500 | 3.21 | |||||
Vested | (112,661 | ) | 3.82 | ||||
Forfeited / Cancelled | (20,980 | ) | 3.84 | ||||
Unvested at December 31, 2015 | 366,362 | $ | 3.68 | ||||
Expected future expense relating to the 366,362 non-vested options outstanding as of December 31, 2015 is $1.0 million over a weighted average period of 2.8 years.
The following is a summary of the status of the Bancorp’s restricted stock as of December 31, 2015, 2014 and 2013 and changes therein during the years then ended.
Number of Restricted Shares | Weighted Average Grant Date Fair Value | ||||||
Unvested at December 31, 2012 | 130,557 | $ | 12.41 | ||||
Granted | 122,450 | 17.00 | |||||
Vested | (27,075 | ) | 11.77 | ||||
Forfeited / Cancelled | — | — | |||||
Unvested at December 31, 2013 | 225,932 | $ | 14.98 | ||||
Granted | 18,865 | 15.89 | |||||
Vested | (47,525 | ) | 13.76 | ||||
Forfeited / Cancelled | (8,650 | ) | 15.32 | ||||
Unvested at December 31, 2014 | 188,622 | $ | 15.36 | ||||
Granted | 51,755 | 16.31 | |||||
Vested | (56,154 | ) | 14.08 | ||||
Forfeited / Cancelled | (7,150 | ) | 15.51 | ||||
Unvested at December 31, 2015 | 177,073 | $ | 16.04 | ||||
Expected future compensation expense relating to the 177,073 restricted shares at December 31, 2015 is $2.0 million over a weighted average period of 2.7 years.
F-31
NOTE 10 - STOCK BASED COMPENSATION (Continued)
Performance-based restricted shares granted in 2012 and 2013, as discussed in the following paragraph, vest over a five-year period based on continued service with the Bank and the achievement of performance metrics. The performance metrics to be evaluated during the performance period are (1) return on assets, actual and growth rate, compared to a predetermined peer group and (2) earnings per share growth rate compared to the peer group ("performance criteria"). Each performance metric has a 50% weight. On the third anniversary of the grant date ("measurement date"), the Company's level of performance relative to the performance criteria are evaluated and the number of shares that will vest at that time and over the following two years will be determined. The number of shares eligible to vest is variable and can range from 0% to 150% of the shares identified on the grant date (the "target shares"). Of the shares that will vest, 50% of the shares vest on the measurement date and 25% vest on each of the fourth and fifth anniversaries of the date of grant.
During August 2011, the Company granted 10,668 shares of performance-based restricted stock to certain executive officers of the Company. In August 2014, the Company awarded an additional 4,265 shares of performance-based restricted stock, which represented additional shares owed to participants under the August 2011 grant as the Company exceeded the performance targets under the 2011 award. This represented a total grant of 140% of the "target shares." The 14,933 shares had a grant date fair value of $12.39.
During May 2012, the Company granted performance-based restricted stock to certain executive officers of the Company, of which 21,500 remained outstanding at the measurement date. During May 2015, the Company awarded an additional 9,055 shares of performance-based restricted stock, which represented additional shares owed to participants under the May 2012 grant as the Company exceeded the performance targets under the 2012 award. This represented a total grant of 142% of the "target shares." The 30,555 shares had a grant date fair value of $13.11.
During March 2013, the Company granted 39,250 shares of performance-based restricted stock to certain executive officers of the Company. For the purposes of the above table, the Company is assuming 100% of the "target shares" will be awarded. However, more or less shares may actually be awarded based on the performance of the Company at the applicable measurement date, which is March 7, 2016.
During March 2015, the Company granted 8,840 shares of performance-based restricted stock to certain executive officers of the Company. Performance-based restricted shares granted in 2015 utilize similar performance criteria and measurement date as outlined above for the 2012 and 2013 performance based grants. However, the 2015 awards vest 50% at measurement date and 50% on the fourth anniversary of the date of the grant. For the purposes of the above table, the Company is assuming 100% of the "target shares" will be awarded. However, more or less shares may actually be awarded based on the performance of the Company at the applicable measurement date, which is March 18, 2018.
NOTE 11 - INCOME TAXES
The components of income tax expense (benefit) for the years ended December 31, 2015, 2014 and 2013 are as follows:
December 31, | ||||||||||||
2015 | 2014 | 2013 | ||||||||||
(In thousands) | ||||||||||||
Federal: | ||||||||||||
Current | $ | 4,213 | $ | 1,534 | $ | 3,330 | ||||||
Deferred | (70 | ) | 1,876 | (1,083 | ) | |||||||
4,143 | 3,410 | 2,247 | ||||||||||
State: | ||||||||||||
Current | 112 | 20 | — | |||||||||
Deferred | (190 | ) | (12 | ) | 16 | |||||||
(78 | ) | 8 | 16 | |||||||||
$ | 4,065 | $ | 3,418 | $ | 2,263 | |||||||
F-32
NOTE 11 - INCOME TAXES (Continued)
The provision for income taxes differs from the statutory federal rate of 34% due to the following:
December 31, | ||||||||||||
2015 | 2014 | 2013 | ||||||||||
(In thousands) | ||||||||||||
Federal income tax at statutory rate of 34% | $ | 4,628 | $ | 3,948 | $ | 2,651 | ||||||
Tax exempt interest, net | (280 | ) | (295 | ) | (233 | ) | ||||||
Bank-owned life insurance | (225 | ) | (163 | ) | (160 | ) | ||||||
ESOP compensation expense | 167 | 158 | 167 | |||||||||
Merger related expenses | 79 | — | — | |||||||||
Other, net | 38 | 19 | 14 | |||||||||
Dividends received from equity method investments | (61 | ) | (61 | ) | (98 | ) | ||||||
Dividends paid on benefit plans | (229 | ) | (192 | ) | (89 | ) | ||||||
State taxes, net | 123 | (140 | ) | (20 | ) | |||||||
(Decrease) increase in valuation allowance | (175 | ) | 144 | 31 | ||||||||
Total Provision | $ | 4,065 | $ | 3,418 | $ | 2,263 | ||||||
Effective tax rate | 29.87 | % | 29.44 | % | 29.03 | % | ||||||
The net deferred tax asset consisted of the following components as of December 31, 2015 and 2014:
December 31, | ||||||||
2015 | 2014 | |||||||
(In thousands) | ||||||||
Deferred tax assets: | ||||||||
Allowance for loan losses, net | $ | 3,743 | $ | 3,779 | ||||
Provision for loss on assets acquired through foreclosure | 133 | 100 | ||||||
Nonaccrual interest | 42 | 89 | ||||||
Equity incentive plans | 1,089 | 1,398 | ||||||
Accrued expenses | 572 | 508 | ||||||
Loan origination fees and costs, net | 102 | — | ||||||
Merger related expenses | 64 | — | ||||||
Deferred lease liability | 2 | 27 | ||||||
State net operating loss carryforward | 82 | 65 | ||||||
Unrealized losses on securities available-for-sale | 248 | — | ||||||
6,077 | 5,966 | |||||||
Valuation allowance | (36 | ) | (211 | ) | ||||
6,041 | 5,755 | |||||||
Deferred tax liabilities: | ||||||||
Prepaid expense deduction | 86 | 260 | ||||||
Mortgage servicing rights | 37 | 39 | ||||||
Loan origination costs | — | 25 | ||||||
Deferrable earnings on investments | 515 | 478 | ||||||
Depreciation of premises and equipment | 261 | 319 | ||||||
Unrealized gains on securities available-for-sale | — | 73 | ||||||
899 | 1,194 | |||||||
Net Deferred Tax Asset | $ | 5,142 | $ | 4,561 | ||||
Based on the Company's history of earnings and its expectation of future taxable income, management anticipates that it is more likely than not that the above deferred tax assets will be realized, except for $36,000 of net deferred tax assets related to Fox Chase Bank's state taxes. During 2015, the Company reversed a $182,000 valuation allowance on certain state deferred tax assets, as management determined it is more likely than not the deferred tax assets will be realized.
F-33
NOTE 11 - INCOME TAXES (Continued)
Retained earnings include $6.0 million at December 31, 2015, 2014 and 2013 for which no provision for federal income tax has been made. This amount represents deductions for bad debt reserves for tax purposes, which were only allowed to savings institutions that met certain criteria prescribed by the Internal Revenue Code of 1986, as amended. The Small Business Job Protection Act of 1996 (the "Act") eliminated the special bad debt deduction granted solely to thrifts. Under the terms of the Act, there would be no recapture of the pre-1988 (base year) reserves. However, these pre-1988 reserves would be subject to recapture under the rules of the Internal Revenue Code if the Company pays a cash dividend in excess of cumulative retained earnings or liquidates.
Approximately $82,000 of gross deferred tax assets were related to state tax net operating losses at December 31, 2015. Of this amount, $36,000 is related to the Bank and has a full valuation allowance due to an expectation of such net operating losses expiring before being utilized. The remaining $46,000 of gross deferred tax assets were related to state tax net operating losses on Fox Chase Service Corporation and have no valuation allowance as it is more likely than not that it will be fully utilized before it expires. The Company has $509,000 of state net operating losses remaining as of December 31, 2015 for the Bank, which will expire on December 31, 2017 . The Company has $461,000 of state net operating losses remaining as of December 31, 2015 for Fox Chase Service Corporation, which will begin to expire December 31, 2029.
As of December 31, 2015 and prior periods, the Company had no material unrecognized tax benefits or accrued interest and penalties under ASC 740-10. The Company's policy is to account for interest and penalties as a component of income tax expense. Federal and state tax years 2012 through 2014 were open for examination as of December 31, 2015.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
Lending Operations
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized on the statements of financial condition.
The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.
A summary of the Company's financial instrument commitments at December 31, 2015 and 2014 is as follows:
December 31, | ||||||||
2015 | 2014 | |||||||
(In thousands) | ||||||||
Commitments to grant loans | $ | 3,327 | $ | 43,853 | ||||
Unfunded commitments under lines of credit | 151,307 | 123,459 | ||||||
Standby letters of credit | 14,366 | 17,324 | ||||||
Commercial letters of credit | 495 | 413 | ||||||
$ | 169,495 | $ | 185,049 | |||||
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Company evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation. Collateral held varies, but includes principally residential or commercial real estate, accounts receivable or inventory. Fixed rate commitments to grant loans were $18.3 million and $6.6 million as of December 31, 2015 and December 31, 2014, respectively. The interest rates on these fixed rate loans ranged from 1.00% to 5.00% as of December 31, 2015 and 4.25% to 6.00% as of December 31, 2014.
Legal Proceedings
The Company is periodically subject to various pending and threatened legal actions, which involve claims for monetary relief. Based upon information presently available to the Company, it is the Company's opinion that any legal and financial responsibility arising from such claims will not have a material adverse effect on the Company's results of operations.
F-34
NOTE 12 - COMMITMENTS AND CONTINGENCIES (Continued)
Service Contracts
The Company has entered into contracts with third-party providers to manage the Company's network operations, data processing and other related services. The projected amount of the Company's future minimum payments contractually due after December 31, 2015 is as follows (in thousands):
Year | Amount | |||
2016 | $ | 1,734 | ||
2017 | 1,496 | |||
2018 | 1,333 | |||
2019 | 1,222 | |||
2020 | 1,187 | |||
Thereafter | 2,015 | |||
Merger-Related Litigation
The Company has received a letter from attorneys representing a purported shareholder demanding that the Company's board remedy alleged breaches of fiduciary duties in connection with the merger. The letter asserts that the proposed transaction undervalues the Company and that the Company's directors breached their fiduciary duties by allegedly refusing to adequately shop the company and maximize shareholder value. The letter requests that the Company's board, among other things: (i) undertake all appropriate methods to maximize shareholder value; (ii) revise the merger agreement to eliminate certain deal protection devices; and (iii) refrain from completing the merger.
A negative outcome in this matter could have a material adverse effect on the Company if it results in preliminary or permanent injunctive relief or rescission of the Merger Agreement. Such actions may also create additional uncertainty relating to the merger, and responding to such demands and defending such actions may be costly and distracting to management. The Company is currently not able to predict the outcome of any suit arising out of or relating to the proposed transaction that may be filed in the future.
NOTE 13 - STOCKHOLDERS' EQUITY
The Bancorp and Bank are subject to various regulatory capital requirements administered by their respective regulators, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bancorp and Bank must meet specific capital guidelines that involve quantitative measures of the assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Bancorp and Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Federal regulations require federally insured depository institutions to meet several minimum capital standards: a common equity Tier 1 capital to risk-based assets ratio of 4.5%, a Tier 1 capital to risk-based assets ratio of 6.0%, a total capital to risk-based assets of 8.0%, and a Tier 1 capital to total assets leverage ratio of 4.0%. These capital requirements ("Basel III") were effective January 1, 2015 and are the result of a final rule implementing recommendations of the Basel Committee on Banking Supervision and certain requirements of the Dodd-Frank Act. In addition to establishing the minimum regulatory capital requirements, these regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted asset above the amount necessary to meet its minimum risk-based capital requirements. The capital conservation buffer requirement is being phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and increasing each year until fully implemented at 2.5% on January 1, 2019. Management believes, as of December 31, 2015, that the Bancorp and Bank meet all capital adequacy requirements to which they were subject.
As of December 31, 2015, the Bancorp and Bank were categorized as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bancorp or Bank's category.
F-35
NOTE 13 - STOCKHOLDERS' EQUITY (Continued)
The Bancorp and Bank's actual capital amounts and ratios at December 31, 2015 and 2014 and the minimum amounts and ratios required for capital adequacy purposes and to be well capitalized under the prompt corrective action provisions are as follows:
Actual | For Capital Adequacy Purposes | To be Well Capitalized under Prompt Corrective Action Provisions | |||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||
December 31, 2015 (Basel III) | |||||||||||||||||||||
Common Equity Tier 1 Capital Ratio (to risk-weighted assets) | |||||||||||||||||||||
Bancorp | $ | 177,349 | 19.50 | % | $ | 40,925 | 4.5 | % | $ | 59,114 | 6.5 | % | |||||||||
Bank | 151,676 | 16.69 | 40,887 | 4.5 | 59,060 | 6.5 | |||||||||||||||
Tier 1 Capital Ratio (to risk-weighted assets) | |||||||||||||||||||||
Bancorp | 177,349 | 19.50 | 54,567 | 6.0 | 72,755 | 8.0 | |||||||||||||||
Bank | 151,676 | 16.69 | 54,517 | 6.0 | 72,689 | 8.0 | |||||||||||||||
Total Capital Ratio (to risk-weighted assets) | |||||||||||||||||||||
Bancorp | 186,291 | 20.48 | 72,755 | 8.0 | 90,944 | 10.0 | |||||||||||||||
Bank | 160,618 | 17.68 | 72,689 | 8.0 | 90,861 | 10.0 | |||||||||||||||
Tier 1 Leverage Ratio (to adjusted average assets) | |||||||||||||||||||||
Bancorp | 177,349 | 15.85 | 44,755 | 4.0 | 55,944 | 5.0 | |||||||||||||||
Bank | 151,676 | 13.52 | 44,875 | 4.0 | 56,094 | 5.0 | |||||||||||||||
December 31, 2014 | |||||||||||||||||||||
Tier 1 Capital (to risk-weighted assets) | |||||||||||||||||||||
Bancorp | $ | 175,795 | 22.41 | % | $ | 31,379 | 4.0 | % | $ | 47,069 | 6.0 | % | |||||||||
Bank | 148,781 | 18.97 | 31,371 | 4.0 | 47,057 | 6.0 | |||||||||||||||
Total Risk-Based Capital (to risk-weighted assets) | |||||||||||||||||||||
Bancorp | 183,993 | 23.45 | 62,758 | 8.0 | 78,448 | 10.0 | |||||||||||||||
Bank | 156,976 | 20.02 | 62,743 | 8.0 | 78,428 | 10.0 | |||||||||||||||
Tier 1 Capital (to adjusted assets) | |||||||||||||||||||||
Bancorp | 175,795 | 16.58 | 42,420 | 4.0 | 53,026 | 5.0 | |||||||||||||||
Bank | 148,781 | 13.99 | 42,551 | 4.0 | 53,188 | 5.0 | |||||||||||||||
The Bancorp's ability to pay dividends is limited by statutory and regulatory requirements. The Bancorp may not declare nor pay dividends on its stock if such declaration or payment would violate statutory or regulatory requirements. During 2015, the Bancorp paid total cash dividends of $0.68 per common share. During 2014, the Bancorp paid total cash dividends of $0.60 per common share.
During the first quarter of 2015, the Bancorp received an $8.5 million dividend from the Bank, equaling the amount of the Bank's 2014 net income. During the first quarter of 2014, the Bancorp received a $5.8 million dividend from the Bank, equaling the amount of the Bank's 2013 net income.
The Bancorp repurchased 288,629 shares of common stock during the year ended December 31, 2015 in conjunction with stock repurchase programs. There were 384,400 shares repurchased during the year ended December 31, 2014. As of December 31, 2015, the aggregate purchases recorded as treasury stock, at cost, on the Bancorp's statement of condition is $44.5 million.
NOTE 14 - FAIR VALUE
Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction on the dates indicated. The estimated fair value amounts have been measured as of the respective year ends, and have not been reevaluated or updated for purposes of these consolidated financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each year end.
F-36
NOTE 14 - FAIR VALUE (Continued)
The Company determines the fair value of financial instruments using three levels of input:
Level 1 - Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that are accessible at the measurement date.
Level 2 - Inputs are other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Valuations are derived from unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair values of the Company’s financial instruments at December 31, 2015 and 2014:
Cash and Cash Equivalents
The carrying amounts of cash and cash equivalents approximate their fair value.
Investment Securities—Available-for-Sale and Held-to-Maturity
Fair values for investment securities are obtained from one external pricing service ("primary pricing service") as the provider of pricing on the investment portfolio on a quarterly basis. We generally obtain one quote per investment security. If quoted market prices are not available, fair values are based on quoted market prices of comparable securities. If quoted market prices are not available for comparable securities, fair value is based on quoted bids for the security or comparable securities. The Company made no adjustments to the values obtained from the primary pricing service.
Loans Receivable, Net
To determine the fair values of loans that are not impaired, we employ discounted cash flow analyses that use interest rates and terms similar to those currently being offered to borrowers. We record fair value adjustments to impaired loans on a nonrecurring basis to reflect full and partial charge-offs due to impairment. For impaired loans, we use a variety of techniques to measure fair value, such as using the current appraised value of the collateral, agreements of sale, discounting the contractual cash flows, and analyzing market data that we may adjust due to specific characteristics of the loan or collateral. The methods utilized to estimate the fair value of loans
do not necessarily represent an exit price.
FHLB Stock
It is not practical to determine the fair value of FHLB stock due to restriction placed on its transferability.
Mortgage Servicing Rights
The fair value of the mortgage servicing rights ("MSRs") was determined using a valuation model that calculates the present value of estimated future servicing income. The model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment speeds and discount rates.
Accrued Interest Receivable and Accrued Interest Payable
The carrying amount of accrued interest receivable and accrued interest payable approximates fair value.
Deposit Liabilities
Fair values for demand deposits (including NOW accounts), savings and club accounts and money market deposits are, by definition, equal to the amount payable on demand at the reporting date. Fair values of fixed-maturity certificates of deposit, including brokered deposits, are estimated using a discounted cash flow calculation that applies interest rates currently being offered on similar instruments with similar maturities.
F-37
NOTE 14 - FAIR VALUE (Continued)
Short-term Borrowings, FHLB Advances and Other Borrowed Funds
Fair values of short-term borrowings, FHLB advances and other borrowed funds are estimated using discounted cash flow analyses, based on rates currently available to the Bank for advances with similar terms and remaining maturities.
Derivative Contracts
The fair values of derivative contracts are based upon the estimated amount the Company would receive or pay to terminate the contracts or agreements, taking into account underlying interest rates, creditworthiness of underlying customers for credit derivatives and, when appropriate, the creditworthiness of the counterparties.
The estimated fair values of the Company’s financial instruments at December 31, 2015 and 2014 were as follows:
December 31, | |||||||||||||||||
2015 | 2014 | ||||||||||||||||
Fair Value Hierarchy Level | Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value | |||||||||||||
(In thousands) | |||||||||||||||||
Financial assets: | |||||||||||||||||
Cash and cash equivalents | Level 1 | $ | 7,798 | $ | 7,798 | $ | 17,213 | $ | 17,213 | ||||||||
Investment securities available-for-sale | Level 2 | 139,751 | 139,751 | 134,037 | 134,037 | ||||||||||||
Investment securities held-to-maturity | Level 2 | 150,190 | 149,850 | 170,172 | 170,854 | ||||||||||||
Loans receivable, net | Level 3 | 767,683 | 768,516 | 724,326 | 732,142 | ||||||||||||
FHLB stock | NA | 6,734 | NA | 6,015 | NA | ||||||||||||
Accrued interest receivable | Level 2, 3 | 3,145 | 3,145 | 3,147 | 3,147 | ||||||||||||
Mortgage servicing rights | Level 3 | 104 | 104 | 111 | 111 | ||||||||||||
Financial liabilities: | |||||||||||||||||
Savings and club accounts | Level 2 | 142,966 | 142,966 | 129,893 | 129,893 | ||||||||||||
Demand, NOW and money market deposits | Level 2 | 361,490 | 361,490 | 325,010 | 325,010 | ||||||||||||
Brokered deposits | Level 2 | 78,481 | 78,219 | 70,817 | 70,600 | ||||||||||||
Certificates of deposit | Level 2 | 182,037 | 181,422 | 186,189 | 186,154 | ||||||||||||
Short-term borrowings | Level 2 | 38,496 | 38,496 | 50,000 | 50,000 | ||||||||||||
FHLB advances | Level 2 | 110,000 | 111,985 | 120,000 | 123,189 | ||||||||||||
Other borrowed funds | Level 2 | 30,000 | 31,692 | 30,000 | 32,017 | ||||||||||||
Accrued interest payable | Level 2 | 319 | 319 | 311 | 311 | ||||||||||||
Derivative contracts | Level 2, 3 | 154 | 154 | 174 | 174 | ||||||||||||
The following financial instruments were classified as Level 3 and carried at fair value on a recurring basis as of the dates indicated below:
• | Two commercial loans, since lending credit risk is not an observable input for these loans (see interest rate swap discussion in Note 5). The unrealized gain on the two loans was $137,000 at December 31, 2015 compared to $152,000 at December 31, 2014. |
• | Credit derivatives are valued based on creditworthiness of the underlying borrower which is a significant unobservable input. The liability resulting from credit derivatives was $6,000 and $12,000 at December 31, 2015 and 2014, respectively. |
F-38
NOTE 14 - FAIR VALUE (Continued)
The following measures were made on a recurring basis as of December 31, 2015 and 2014.
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Other Unobservable Inputs | ||||||||||||||
As of | ||||||||||||||||
Description | December 31, 2015 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
(In thousands) | ||||||||||||||||
Available-for-Sale Securities: | ||||||||||||||||
Obligations of U.S. government agencies | $ | 299 | $ | — | $ | 299 | $ | — | ||||||||
Corporate securities | 17,541 | — | 17,541 | — | ||||||||||||
Agency residential mortgage related securities | 121,911 | — | 121,911 | — | ||||||||||||
Loans (1) | 2,315 | — | — | 2,315 | ||||||||||||
Derivative contracts (1) | (154 | ) | — | (148 | ) | (6 | ) | |||||||||
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Other Unobservable Inputs | ||||||||||||||
As of | ||||||||||||||||
Description | December 31, 2014 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
(In thousands) | ||||||||||||||||
Available-for-Sale Securities: | ||||||||||||||||
Obligations of U.S. government agencies | $ | 302 | $ | — | $ | 302 | $ | — | ||||||||
Corporate securities | 8,086 | — | 8,086 | — | ||||||||||||
Agency residential mortgage related securities | 125,649 | — | 125,649 | — | ||||||||||||
Loans (1) | 2,451 | — | — | 2,451 | ||||||||||||
Derivative contracts (1) | (174 | ) | — | (162 | ) | (12 | ) | |||||||||
(1) Such financial instruments are recorded at fair value as further described in Note 5.
The following measures were made on a non-recurring basis as of December 31, 2015 and 2014:
Loans, which were partially charged off at December 31, 2015 and 2014. The loans’ fair values are based on Level 3 inputs, which are either an appraised value or a sales agreement, less costs to sell. These amounts do not include fully charged-off loans, because we carry fully charged-off loans at zero on our balance sheet.
MSRs, the fair value of which was determined using a valuation model that calculates the present value of estimated future servicing income. The model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment speeds and discount rates.
Other real estate owned, for which we used Level 3 inputs, which consist of appraisals, agreements of sale or letters of intent.
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NOTE 14 - FAIR VALUE (Continued)
Fair Value Measurements at Reporting Date Using | |||||||||||||||
Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Other Unobservable Inputs | |||||||||||||
Balance | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
December 31, 2015 | (In thousands) | ||||||||||||||
Loans | $ | 1,239 | $ | — | $ | — | $ | 1,239 | |||||||
Mortgage servicing rights | 104 | — | — | 104 | |||||||||||
Other real estate owned | 2,623 | — | — | 2,623 | |||||||||||
Total | $ | 3,966 | $ | — | $ | — | $ | 3,966 | |||||||
December 31, 2014 | |||||||||||||||
Loans | $ | 1,654 | $ | — | $ | — | $ | 1,654 | |||||||
Mortgage servicing rights | 111 | — | — | 111 | |||||||||||
Other real estate owned | 2,814 | — | — | 2,814 | |||||||||||
Total | $ | 4,579 | $ | — | $ | — | $ | 4,579 | |||||||
The following tables include a roll forward of the financial instruments which fair value is determined on a recurring basis using Significant Other Unobservable Inputs (Level 3) for the periods from December 31, 2013 to December 31, 2015.
Private Label Commercial Mortgage Related Securities | Derivative Contracts | Financial Assets Acquired from Debtors | Loans | Total | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Beginning balance, December 31, 2013 | $ | 2,120 | $ | (4 | ) | $ | 1,938 | $ | 2,535 | $ | 6,589 | |||||||||
Purchases/additions | — | (12 | ) | — | — | (12 | ) | |||||||||||||
Sales | — | — | (1,938 | ) | — | (1,938 | ) | |||||||||||||
Payments received | (2,118 | ) | — | — | (112 | ) | (2,230 | ) | ||||||||||||
(Decrease) increase in value | (2 | ) | 4 | — | 28 | 30 | ||||||||||||||
Ending balance, December 31, 2014 | $ | — | $ | (12 | ) | $ | — | $ | 2,451 | $ | 2,439 | |||||||||
Purchases/additions | — | (2 | ) | — | — | (2 | ) | |||||||||||||
Sales | — | — | — | — | — | |||||||||||||||
Payments received | — | — | — | (120 | ) | (120 | ) | |||||||||||||
Increase (decrease) in value | — | 8 | — | (16 | ) | (8 | ) | |||||||||||||
Ending balance, December 31, 2015 | $ | — | $ | (6 | ) | $ | — | $ | 2,315 | $ | 2,309 | |||||||||
There were no transfers made between levels during the years ended December 31, 2015 or 2014.
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NOTE 15 - RELATED PARTY TRANSACTIONS
Transactions with Directors and Executive Officers
The Company may from time to time enter into transactions with its directors and executive officers.
There were no loans to directors and executive officers as of December 31, 2015 and 2014.
Equity Method Investments
As of December 31, 2015, 2014 and 2013, Fox Chase Bank owned approximately 45% of PMA. During 2015, 2014 and 2013, the Company engaged in certain business activities with PMA. These activities included providing a warehouse line of credit to PMA, as well as acquiring residential mortgage loans from PMA. The Company recorded interest income from PMA on the warehouse line of $288,000, $269,000, and $307,000 for the years ended December 31, 2015, 2014 and 2013, respectively, as well as loan satisfaction fees, which are recorded in service charges and other fee income, of $39,000, $35,000 and $47,000 for the years ended December 31, 2015, 2014 and 2013, respectively. The balance outstanding on the warehouse line was $7.6 million and $11.7 million at December 31, 2015 and 2014, respectively. In addition, the Company acquired total loans from PMA of $0, $668,000 and $892,000 for the years ended December 31, 2015, 2014 and 2013, respectively, which includes the cost of the loans.
The Company's investment in PMA was $2.2 million and $2.1 million, respectively, at December 31, 2015 and 2014 and was included in other assets on the consolidated statements of condition.
NOTE 16 - ACCOUNTING PRONOUNCEMENTS
Accounting Standards Update (ASU) No. 2015-01 - Income Statement—Extraordinary and Unusual Items (Subtopic 225-20) - Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. The objective of this update is to simplify the income statement presentation requirements in Subtopic 225-20 by eliminating the concept of extraordinary items. Extraordinary items are events and transactions that are distinguished by their unusual nature and by the infrequency of their occurrence. Eliminating the extraordinary classification simplifies income statement presentation by altogether removing the concept of extraordinary items from consideration. The amendments in this update were effective for the Company for annual and interim periods beginning on or after January 1, 2016. This update did not have an impact on the Company’s consolidated financial statements.
ASU No. 2015-02 - Consolidation (Topic 810) - Amendments to the Consolidation Analysis. The amendments in this update affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. Specifically, the amendments: (1) Modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities, (2) Eliminate the presumption that a general partner should consolidate a limited partnership, (3) Affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships, (4) Provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. The amendments in this update were effective for the Company for annual and interim periods beginning on or after January 1, 2016. This update did not have an impact on the Company’s consolidated financial statements.
ASU No. 2015-05 - Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40) - Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. The amendments in this Update provide guidance to software customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The guidance does not change generally accepted accounting principles for a customer’s accounting for service contracts. The amendments in this update were effective for the Company for annual and interim periods beginning on or after January 1, 2016, however early adoption was permitted. The Company adopted this update effective with its issuance. Pursuant to the this guidance, agreements related to the change in our outsourced data processing systems during October 2015 are accounted for as service contracts.
F-41
NOTE 17 - PARENT COMPANY ONLY FINANCIAL STATEMENTS
The following condensed financial statements for Fox Chase Bancorp, Inc. (parent company only) reflect the investment in its wholly owned subsidiary, Fox Chase Bank, using the equity method of accounting.
CONDENSED BALANCE SHEET
December 31, | ||||||||
2015 | 2014 | |||||||
(In thousands) | ||||||||
ASSETS | ||||||||
Cash and due from banks | $ | 1,101 | $ | 290 | ||||
Interest-earning deposits with banks | 19,051 | 19,994 | ||||||
Total cash and cash equivalents | 20,152 | 20,284 | ||||||
Investment in subsidiary | 151,242 | 148,897 | ||||||
Due from subsidiary, net | — | 1,020 | ||||||
ESOP loans | 4,903 | 5,525 | ||||||
Deferred Tax Asset | 62 | — | ||||||
Other assets | 1,088 | 261 | ||||||
Total Assets | 177,447 | 175,987 | ||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
Due to subsidiary, net | 4 | — | ||||||
Other liabilities | 529 | 76 | ||||||
Total Liabilities | 533 | 76 | ||||||
Stockholders' Equity | 176,914 | 175,911 | ||||||
Total Liabilities and Stockholders' Equity | $ | 177,447 | $ | 175,987 | ||||
CONDENSED STATEMENTS OF OPERATIONS
Years Ended December 31, | ||||||||||||
2015 | 2014 | 2013 | ||||||||||
(In thousands) | ||||||||||||
INCOME | ||||||||||||
Interest on deposits with banks | $ | 31 | $ | 37 | $ | 37 | ||||||
Interest on ESOP loans | 327 | 365 | 400 | |||||||||
Total Income | 358 | 402 | 437 | |||||||||
EXPENSES | ||||||||||||
Other expenses | 1,456 | 906 | 996 | |||||||||
Total Expenses | 1,456 | 906 | 996 | |||||||||
Loss before income tax benefit and equity in undistributed net earnings of subsidiary | (1,098 | ) | (504 | ) | (559 | ) | ||||||
Income tax benefit | (292 | ) | (171 | ) | (280 | ) | ||||||
Loss before equity in undistributed net earnings of subsidiary | (806 | ) | (333 | ) | (279 | ) | ||||||
Equity in undistributed net earnings of subsidiary | 10,352 | 8,528 | 5,813 | |||||||||
Net Income | $ | 9,546 | $ | 8,195 | $ | 5,534 | ||||||
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NOTE 17 - PARENT COMPANY ONLY FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31, | ||||||||||||
2015 | 2014 | 2013 | ||||||||||
(In thousands) | ||||||||||||
Cash Flows From Operating Activities | ||||||||||||
Net income | $ | 9,546 | $ | 8,195 | $ | 5,534 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Equity in undistributed income of subsidiary | (10,352 | ) | (8,528 | ) | (5,813 | ) | ||||||
Increase in deferred tax asset | (62 | ) | — | — | ||||||||
Decrease (increase) in due from subsidiary, net | 1,024 | (132 | ) | (907 | ) | |||||||
Excess tax benefit from exercise of stock options and vesting of restricted stock | (829 | ) | (86 | ) | (59 | ) | ||||||
Decrease (increase) in other assets | 2 | (155 | ) | 588 | ||||||||
Increase (decrease) in other liabilities | 453 | (34 | ) | (2 | ) | |||||||
Net Cash Used in Operating Activities | (218 | ) | (740 | ) | (659 | ) | ||||||
Cash Flows from Investing Activities | ||||||||||||
Loan payment received on ESOP loans | 622 | 584 | 550 | |||||||||
Cash dividends received from subsidiary | 8,527 | 5,813 | — | |||||||||
Net Cash Provided by Investing Activities | 9,149 | 6,397 | 550 | |||||||||
Cash Flows from Financing Activities | ||||||||||||
Purchase of treasury stock | (4,770 | ) | (6,262 | ) | (3,703 | ) | ||||||
Excess tax benefit from exercise of stock options and vesting of restricted stock | 829 | 86 | 59 | |||||||||
Receipts from subsidiary related to equity compensation activity | 1,468 | 1,248 | 3,316 | |||||||||
Common stock issued for exercise of stock options | 1,015 | 439 | 106 | |||||||||
Cash dividends paid | (7,605 | ) | (6,917 | ) | (3,243 | ) | ||||||
Net Cash Used in Financing Activities | (9,063 | ) | (11,406 | ) | (3,465 | ) | ||||||
Net Decrease in Cash and Cash Equivalents | (132 | ) | (5,749 | ) | (3,574 | ) | ||||||
Cash and Cash Equivalents—Beginning | 20,284 | 26,033 | 29,607 | |||||||||
Cash and Cash Equivalents—Ending | $ | 20,152 | $ | 20,284 | $ | 26,033 | ||||||
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NOTE 18 - QUARTERLY FINANCIAL DATA (UNAUDITED)
The following represents summarized quarterly financial data of Fox Chase Bancorp, Inc. and subsidiary, which, in the opinion of management, reflects all adjustments (comprising only normal recurring accruals) necessary for a fair presentation. The Company reported net income of $1.8 million for the quarter ended December 31, 2015 and net income of $2.1 million for the quarter ended December 31, 2014.
The net income for the quarter ended December 31, 2015 included $487,000 of merger related expense and $292,000 of one-time core data processing systems conversion expense.
The net income for the quarter ended December 31, 2014 included a provision for loan losses of $350,000 and a valuation adjustment of assets acquired through foreclosure of $23,000, which was recorded in noninterest expense.
Three Months Ended | 12/31/2015 | 9/30/2015 | 6/30/2015 | 3/31/2015 | 12/31/2014 | 9/30/2014 | 6/30/2014 | 3/31/2014 | ||||||||||||||||||||||||
(Dollars in thousands, except per share data) | ||||||||||||||||||||||||||||||||
Interest income | $ | 9,953 | $ | 9,906 | $ | 10,090 | $ | 10,124 | $ | 9,840 | $ | 10,153 | $ | 10,078 | $ | 10,058 | ||||||||||||||||
Interest expense | 1,563 | 1,505 | 1,437 | 1,452 | 1,606 | 1,635 | 1,653 | 1,741 | ||||||||||||||||||||||||
Net interest income | 8,390 | 8,401 | 8,653 | 8,672 | 8,234 | 8,518 | 8,425 | 8,317 | ||||||||||||||||||||||||
Provision (Credit) for loan losses | 100 | (300 | ) | (1,267 | ) | 472 | 350 | 1,493 | 100 | — | ||||||||||||||||||||||
Net interest income after provision for loan losses | 8,290 | 8,701 | 9,920 | 8,200 | 7,884 | 7,025 | 8,325 | 8,317 | ||||||||||||||||||||||||
Noninterest income | 745 | 721 | 696 | 571 | 678 | 642 | 514 | 459 | ||||||||||||||||||||||||
Noninterest expense | 6,387 | 6,058 | 6,023 | 5,765 | 5,621 | 5,198 | 5,419 | 5,993 | ||||||||||||||||||||||||
Income before taxes | 2,648 | 3,364 | 4,593 | 3,006 | 2,941 | 2,469 | 3,420 | 2,783 | ||||||||||||||||||||||||
Income tax provision | 865 | 1,036 | 1,437 | 727 | 833 | 653 | 1,105 | 827 | ||||||||||||||||||||||||
Net Income | $ | 1,783 | $ | 2,328 | $ | 3,156 | $ | 2,279 | $ | 2,108 | $ | 1,816 | $ | 2,315 | $ | 1,956 | ||||||||||||||||
Per Common Share Data | ||||||||||||||||||||||||||||||||
Weighted average common shares—basic | 10,984,837 | 10,918,909 | 10,938,705 | 11,027,566 | 11,127,377 | 11,287,884 | 11,291,452 | 11,294,883 | ||||||||||||||||||||||||
Weighted average common shares—diluted | 11,216,635 | 11,148,260 | 11,176,780 | 11,267,666 | 11,366,427 | 11,523,917 | 11,534,163 | 11,555,104 | ||||||||||||||||||||||||
Net income per share—basic | $ | 0.16 | $ | 0.21 | $ | 0.29 | $ | 0.21 | $ | 0.19 | $ | 0.16 | $ | 0.21 | $ | 0.17 | ||||||||||||||||
Net income per share—diluted | $ | 0.16 | $ | 0.21 | $ | 0.28 | $ | 0.20 | $ | 0.19 | $ | 0.16 | $ | 0.20 | $ | 0.17 | ||||||||||||||||
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