UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2012
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________ to _______________
Commission File No.: 000-54246
ALLIANCE BANCORP, INC. OF PENNSYLVANIA
(Exact name of registrant as specified in its charter)
Pennsylvania | 56-2637804 | |
(State or other jurisdiction | (I.R.S. Employer | |
of incorporation or organization) | Identification Number) | |
541 Lawrence Road | ||
Broomall, Pennsylvania | 19008 | |
(Address) | (Zip Code) |
Registrant's telephone number, including area code: (610) 353-2900
Securities registered pursuant to Section 12(b) of the Act:
Common Stock (par value $0.01 per share) | Nasdaq Global Market | |
Title of Class | Name of Each Exchange on Which Registered |
Securities registered pursuant to Section 12(g) of the Act: Not Applicable
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
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 ¨ No x
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
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. x
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 "accelerated filer”, “large accelerated filer", and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Non-accelerated filer ¨ Smaller Reporting Company x Large accelerated filer ¨ Accelerated filer ¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of June 30, 2012, the aggregate value of the 4,770,617 shares of Common Stock of Alliance Bancorp, Inc. of Pennsylvania, which excludes 431,117 shares held by all directors and officers of the Registrant and the Registrant's Employee Stock Ownership Plan ("ESOP") as a group, was approximately $58.2 million. This figure is based on the last trade price of $12.20 per share of the Registrant's Common Stock on June 30, 2012. Although directors and officers and the ESOP were assumed to be "affiliates" of the Registrant for purposes of this calculation, the classification is not to be interpreted as an admission of such status.
The number of shares outstanding of Common Stock of the Registrant as of March 4, 2013, was 5,201,734.
DOCUMENTS INCORPORATED BY REFERENCE
(1) | Portions of the definitive proxy statement for the Annual Meeting of Stockholders to be held April 24, 2013 are incorporated into Part III of this Form 10-K. |
TABLE OF CONTENTS
PAGE | ||||
PART I: | Item 1 | Business | 3 | |
Item 1A | Risk Factors | 34 | ||
Item 1B | Unresolved Staff Comments | 34 | ||
Item 2 | Properties | 34 | ||
Item 3 | Legal Proceedings | 35 | ||
Item 4 | Mine Safety Disclosures | 35 | ||
PART II: | Item 5 | Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 36 | |
Item 6 | Selected Financial Data | 38 | ||
Item 7 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 40 | ||
Item 7A. | Qualitative and Quantitative Disclosures About Market Risk | 51 | ||
Item 8 | Financial Statements and Supplementary Data | 52 | ||
Item 9 | Changes In and Disagreements with Accountants on Accounting and Financial Disclosure | 94 | ||
Item 9A | Controls and Procedures | 94 | ||
Item 9B | Other Information | 94 | ||
PART III: | Item 10 | Directors, Executive Officers and Corporate Governance | 95 | |
Item 11 | Executive Compensation | 95 | ||
Item 12 | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 95 | ||
Item 13 | Certain Relationships and Related Transactions and Director Independence | 95 | ||
Item 14 | Principal Accountant Fees and Services | 95 | ||
PART IV: | Item 15 | Exhibits, Financial Statements and Schedules | 96 | |
SIGNATURES | 97 |
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PART I
Item 1. Business
General
Alliance Bancorp, Inc. of Pennsylvania (“Alliance Bancorp” or the “Company”) is a Pennsylvania corporation and a savings and loan holding company which owns 100% of the capital stock of Alliance Bank (“Bank”), which is a Pennsylvania chartered community oriented savings bank headquartered in Broomall, Pennsylvania.
On January 18, 2011, Alliance Mutual Holding Company and Alliance Bancorp, Inc. of Pennsylvania, the federally chartered former mid-tier holding company for the Bank (the “Mid-Tier Holding Company”) completed a reorganization and conversion (the “second step conversion”), pursuant to which the Company (a new Pennsylvania corporation) acquired all the issued and outstanding shares of the Bank’s common stock. In connection with the second step conversion, 3,258,475 shares of common stock, par value $0.01 per share, of the Company were sold in subscription, community and syndicated community offerings to certain depositors of the Bank and other investors for $10 per share, or $32.6 million in the aggregate (the “Offering), and 2,215,962 shares of common stock were issued in exchange for the outstanding shares of common stock of the Mid-Tier Holding Company held by the “public” shareholders of the Mid-Tier Holding Company. Each share of common stock of the Mid-Tier Holding company was converted into the right to receive 0.8200 shares of common stock of the Company in the second step conversion. As a result of the second step conversion, the former mutual holding company and the Mid-Tier Company were merged into Alliance Bancorp and 548,524 (pre-conversion) treasury shares were canceled. Additionally, the Bank’s Employee Stock Ownership Plan (“ESOP”) was issued a line of credit for up to $1.9 million, which it used to purchase 50,991 shares of common stock in the Offering and 100,000 additional shares of common stock in the open market following the Offering.
Alliance Bancorp is the successor to the Mid-Tier Holding Company and references to Alliance Bancorp or the Company include reference to the former Mid-Tier Holding Company where applicable.
Alliance Bank operates a total of nine banking offices located in Delaware and Chester Counties, which are suburbs of Philadelphia. Our primary business consists of attracting deposits from the general public and using those funds, together with funds we borrow, to originate loans to our customers and invest in securities such as U.S. Government and agency securities, mortgage-backed securities and municipal obligations. At December 31, 2012, the Company had $460.9 million of total assets, $371.0 million of total deposits and stockholders’ equity of $80.0 million.
The Company is subject to supervision and regulation by the Board of Governors of the Federal Reserve Board System (the “FRB”). The Bank is subject to regulation by the Pennsylvania Department of Banking and Securities (the "Department"), as its chartering authority and primary regulator, and by the Federal Deposit Insurance Corporation (the "FDIC"), which insures the Bank's deposits up to applicable limits.
Market Area and Competition
Alliance Bank is headquartered in Broomall, Pennsylvania and conducts its business through eight branches located in Delaware County, Pennsylvania, and one office in Chester County, Pennsylvania. The primary market areas served by Alliance Bank are Delaware and Chester Counties, Philadelphia, and the suburban areas to the west and south of Philadelphia, including southern New Jersey.
Delaware and Chester Counties have a large, well-educated, and skilled labor force, with nearly one quarter of the counties’ population having earned a four-year college degree. In addition, Philadelphia’s central location in the Northeast corridor, infrastructure, and other factors have made the Bank’s primary market area attractive to many large corporate employers, including Comcast, Boeing, State Farm Insurance, Main Line Health Systems, Janseen Pharmaceuticals, United Parcel Service, PECO Energy, SAP America, Inc. and Wawa.
The Philadelphia area economy is typical of many large northeastern cities where the traditional manufacturing-based economy has declined and been replaced by the service sector, including the health care market. Crozer/Keystone Health System, Main Line Health, Jefferson Health System, Mercy Health Corp., and Astra-Zeneca are among the larger health care employers within the Bank’s market area. According to the Delaware County Chamber of Commerce, there are more than 65 degree-granting institutions in the Delaware Valley region, representing a higher density of colleges and universities than any other area in the United States.
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The population of Delaware County is reported at over half a million residents and is the fifth most populated county in the Commonwealth of Pennsylvania. Much of the growth and development continues to be in the western part of the county and in adjacent Chester County. Chester County’s growth rate is expected to increase even further in the next decade, and some of the communities in Chester County that are experiencing the most rapid growth — East Whitland Township, New Garden Township and East Goshen — surround the Bank’s Chester County branch. We face strong competition, both in attracting deposits and making real estate and commercial loans. Our most direct competition for deposits has historically come from other savings banks, credit unions, and commercial banks located in our market area. This includes many large regional financial institutions and internet banks which have even greater financial and marketing resources available to them. The ability of the Bank to attract and retain core deposits depends on its ability to provide a competitive rate of return, liquidity, and service convenience comparable to those offered by competing investment opportunities. The Bank’s management remains focused on attracting core deposits through its branch network, business development efforts, and commercial business relationships.
Lending Activities
General. At December 31, 2012, the Company's total portfolio of loans receivable amounted to $284.8 million, or 61.8%, of the Company's $460.9 million of total assets at such time. Over the past 15 years, the Company has placed an emphasis on loans secured by commercial real estate properties. Consistent with such approach, commercial real estate loans amounted to $111.3 million or 39.1% of the total loan portfolio at December 31, 2012 while single family residential mortgage loans amounted to $126.7 million or 44.5% of the total loan portfolio. To a lesser extent, the Company also originates multi-family loans, land and construction loans, consumer loans and commercial business loans. At December 31, 2012, such loan categories amounted to $20.9 million, $10.7 million, $5.3 million and $9.9 million, respectively, or 7.4%, 3.7%, 1.9% and 3.5% of the total loan portfolio, respectively.
The Company intends to continue the origination of single-family residential mortgage loans as well as the origination of commercial real estate loans. For the year ended December 31, 2012, the Company’s single-family mortgage loans increased by $8.6 million or 7.3% to $126.7 million. For the year ended December 31, 2012, the Company’s commercial real estate loans decreased by $18.9 million or 14.5% to $111.3 million. The decrease in commercial real estate loans was primarily due to $15.0 million of loans reclassified to multi-family and single-family loans during 2012.
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Loan Portfolio Composition. The following table sets forth the composition of the Company's loan portfolio by type of loan at the dates indicated.
December 31, | ||||||||||||||||||||||||||||||||||||||||
2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||||||||||||||||||||||||||||
Amount | % | Amount | % | Amount | % | Amount | % | Amount | % | |||||||||||||||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||||||||||||||||||
Real estate loans: | ||||||||||||||||||||||||||||||||||||||||
Single-family (1) | $ | 126,676 | 44.48 | % | $ | 118,059 | 40.76 | % | $ | 114,985 | 39.44 | % | $ | 114,953 | 39.82 | % | $ | 116,683 | 41.43 | % | ||||||||||||||||||||
Multi-family (2) | 20,935 | 7.35 | 10,757 | 3.71 | 6,293 | 2.16 | 1,231 | 0.43 | 1,282 | 0.46 | ||||||||||||||||||||||||||||||
Commercial | 111,309 | 39.09 | 130,191 | 44.95 | 131,509 | 45.11 | 131,874 | 45.68 | 123,465 | 43.84 | ||||||||||||||||||||||||||||||
Land and construction: (3) | ||||||||||||||||||||||||||||||||||||||||
Residential | 2,198 | 0.77 | 7,369 | 2.54 | 8,881 | 3.05 | 12,284 | 4.25 | 16,372 | 5.81 | ||||||||||||||||||||||||||||||
Commercial | 8,456 | 2.97 | 7,226 | 2.49 | 14,876 | 5.10 | 12,297 | 4.26 | 8,889 | 3.16 | ||||||||||||||||||||||||||||||
Total real estate loans | 269,574 | 94.66 | 273,602 | 94.45 | 276,544 | 94.86 | 272,639 | 94.44 | 266,691 | 94.70 | ||||||||||||||||||||||||||||||
Consumer: | ||||||||||||||||||||||||||||||||||||||||
Student | 5,021 | 1.77 | 6,178 | 2.13 | 6,747 | 2.31 | 7,077 | 2.45 | 5,455 | 1.94 | ||||||||||||||||||||||||||||||
Savings account | 297 | 0.10 | 398 | 0.14 | 362 | 0.13 | 482 | 0.17 | 430 | 0.15 | ||||||||||||||||||||||||||||||
Other | 30 | 0.01 | 40 | 0.01 | 43 | 0.02 | 55 | 0.01 | 51 | 0.02 | ||||||||||||||||||||||||||||||
Total consumer loans | 5,348 | 1.88 | 6,616 | 2.28 | 7,152 | 2.46 | 7,614 | 2.63 | 5,936 | 2.11 | ||||||||||||||||||||||||||||||
Commercial business loans | 9,852 | 3.46 | 9,481 | 3.27 | 7,822 | 2.68 | 8,458 | 2.93 | 8,985 | 3.19 | ||||||||||||||||||||||||||||||
Total loans receivable | 284,774 | 100.00 | % | 289,699 | 100.00 | % | 291,518 | 100.00 | % | 288,711 | 100.00 | % | 281,612 | 100.00 | % | |||||||||||||||||||||||||
Less: | ||||||||||||||||||||||||||||||||||||||||
Deferred fees (costs) | 979 | 402 | 372 | 165 | 6 | |||||||||||||||||||||||||||||||||||
Allowance for loan losses | 4,919 | 4,000 | 5,090 | 3,538 | 3,169 | |||||||||||||||||||||||||||||||||||
Loans receivable, net | $ | 278,876 | $ | 285,297 | $ | 286,056 | $ | 258,008 | $ | 278,437 |
______________________________
(1) At December 31, 2012, 2011, 2010, 2009, and 2008, includes $13.9 million, $17.1 million, $18.6 million, $21.4 million, and $25.6 million, respectively, of home equity loans and lines.
(2) At December 31, 2012, 2011, 2010, 2009, and 2008, includes $4.3 million, $4.5 million, $5.1 million, $-0-, and $-0-, respectively, of loans reclassified from commercial real estate loans and land and construction loans to multi-family loans.
(3) At December 31, 2012, 2011, 2010, 2009, and 2008, excludes $8.8 million, $4.2 million, $5.9 million, $10.7 million, and $15.3 million, respectively, of undisbursed funds on land and construction loans.
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Contractual Maturities. The following table sets forth the scheduled contractual maturities of the Company's loans receivable at December 31, 2012. Demand loans, loans having no stated schedule of repayments and no stated maturity and overdraft loans are reported as due in one year or less. Adjustable-rate loans are reported on a contractual basis rather than on a repricing basis. The amounts shown for each period do not take into account loan prepayments and normal amortization of the Company's loan portfolio.
Real Estate Loans | ||||||||||||||||||||||||||||
Single-family | Multi-family | Commercial | Land and Construction | Consumer Loans | Commercial Business Loans | Total | ||||||||||||||||||||||
(In Thousands) | ||||||||||||||||||||||||||||
Amounts due in: | ||||||||||||||||||||||||||||
One year or less | $ | 5,757 | $ | 3,982 | $ | 9,079 | $ | 7,209 | $ | 202 | $ | 2,757 | $ | 28,986 | ||||||||||||||
After one year through three years | 7,437 | 4,495 | 19,048 | 3,062 | 132 | 3,373 | 37,547 | |||||||||||||||||||||
After three years through five years | 6,151 | 367 | 10,173 | 383 | 189 | 3,529 | 20,792 | |||||||||||||||||||||
After five years through fifteen years | 63,649 | 10,582 | 63,289 | — | 4,687 | 193 | 142,400 | |||||||||||||||||||||
Over fifteen years | 43,682 | 1,509 | 9,720 | — | 138 | — | 55,049 | |||||||||||||||||||||
Total (1) | $ | 126,676 | $ | 20,935 | $ | 111,309 | $ | 10,654 | $ | 5,348 | $ | 9,852 | $ | 284,774 | ||||||||||||||
Interest rate terms on amounts due after one year: | ||||||||||||||||||||||||||||
Fixed | $ | 87,203 | $ | 8,716 | $ | 72,258 | $ | 3,445 | 2 | $ | 7,095 | $ | 178,719 | |||||||||||||||
Adjustable | $ | 33,716 | $ | 8,237 | $ | 29,972 | — | $ | 5,144 | — | $ | 77,069 |
_____________________________
(1) Does not include the effects relating to the allowance for loan losses and unearned income.
Scheduled contractual amortization of loans does not reflect the expected term of the Company's loan portfolio. The average life of loans is substantially less than their contractual terms because of prepayments and due-on-sale clauses, which gives the Company the right to declare a conventional loan immediately due and payable in the event, among other things, that the borrower sells the real property subject to the mortgage and the loan is not repaid. The average life of mortgage loans tends to increase when current mortgage loan rates are higher than rates on existing mortgage loans and, conversely, decrease when rates on existing mortgage loans are lower than current mortgage loan rates (due to refinancings of adjustable-rate and fixed-rate loans at lower rates). Under the latter circumstance, the weighted average yield on the loan portfolio decreases as higher-yielding loans are repaid or refinanced at lower rates.
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The following table shows origination, purchase and sale activity of the Company with respect to its loans during the periods indicated.
Year Ended December 31, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
(In Thousands) | ||||||||||||
Real estate loan originations: | ||||||||||||
Single-family (1) | $ | 13,894 | $ | 17,645 | $ | 15,836 | ||||||
Multi-family | — | — | — | |||||||||
Commercial | 27,998 | 15,503 | 21,148 | |||||||||
Land and construction: | ||||||||||||
Residential | 13,476 | 5,236 | 4,339 | |||||||||
Commercial | 10,037 | 3,148 | 7,073 | |||||||||
Total real estate loan originations | 65,405 | 41,532 | 48,396 | |||||||||
Consumer originations: | ||||||||||||
Student | — | — | — | |||||||||
Savings account | 104 | 198 | 169 | |||||||||
Other | — | 3 | 18 | |||||||||
Total consumer loan originations | 104 | 201 | 187 | |||||||||
Commercial business originations | 1,945 | 2,746 | 1,550 | |||||||||
Total loan originations | 67,454 | 44,479 | 50,133 | |||||||||
Purchase of real estate loans: | — | — | — | |||||||||
Single-family Multi-family | — | — | — | |||||||||
Residential construction | — | — | — | |||||||||
Commercial | 128 | 105 | 44 | |||||||||
Commercial construction | — | — | — | |||||||||
Total real estate loan purchases | 128 | 105 | 44 | |||||||||
Total loan originations and purchases | 67,582 | 44,584 | 50,177 | |||||||||
Less: | ||||||||||||
Principal loan repayments | (68,536 | ) | (39,351 | ) | (46,340 | ) | ||||||
Transfers to OREO | (4,442 | ) | (2,742 | ) | (669 | ) | ||||||
Loans and participations sold | — | — | — | |||||||||
Other, net (2) | (1,025 | ) | (3,250 | ) | (2,120 | ) | ||||||
Net (decrease) increase | $ | (6,421 | ) | $ | (759 | ) | $ | 1,048 |
_____________________________
(1) | Includes $719,000, $3.0 million and $2.9 million of home equity loans and lines of credit originated during the years ended December 31, 2012, 2011 and 2010, respectively. |
(2) | Includes provision for loan losses. |
Origination, Purchase and Sale of Loans. The lending activities of the Company are subject to the written, non-discriminatory, underwriting standards and loan origination procedures established by the Company's Board of Directors and management. Loan originations are obtained by a variety of sources, including referrals from real estate brokers, builders, existing customers, advertising, walk-in customers and, to a significant extent, mortgage brokers who obtain credit reports, appraisals and other documentation involved with a loan. In most cases, property valuations are performed by independent outside appraisers. Title and hazard insurance are generally required on all security property other than property securing a home equity loan, in which case the Company obtains a title opinion. The majority of the Company's loans are secured by property located in its primary lending area.
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The following matrices detail our lending authorities for commercial and residential lending.
Commercial Lending Authority Matrix
Collateral Type | ||||||||
Approval Authority | Real Estate | Non-Real Estate (a) | Unsecured | Reporting / Ratification | ||||
Board of Directors (BOD) | $3,000,001 - Bank Internal Lending Limit | $1,000,001 - Bank Internal Lending Limit | $500,001 - Bank Internal Lending Limit | Monthly Reporting | ||||
Senior Loan Committee (SLC) | $1,000,001 - $3,000,000 | $250,001 - $1,000,000 | $100,001 - $500,000 | Monthly Reporting to the BOD / Senior Mgmt. | ||||
Chief Executive Officer (CEO) and one member of SLC | Up to $1,000,000 | Up to $250,000 | Up to $100,000 | Monthly Reporting to the BOD / Senior Mgmt. | ||||
Chief Lending Officer (CLO) and one Loan Officer | Up to $500,000 | Up to $100,000 | Up to $50,000 | Monthly Reporting to the BOD / Senior Mgmt. |
(a) | Non-Real Estate Secured Loans include categories such as business assets, equipment, stocks/bonds, intangible assets, etc. |
Residential & Consumer Lending Authority Matrix
Collateral Type | ||||||||
Approval Authority | Residential RE (a) | Home Equity (b) (c) | Other Consumer (d) | Reporting / Ratification | ||||
BOD | $3,000,000 - Bank Internal Lending Limit | N/A | N/A | Monthly Reporting | ||||
SLC | $1,000,001 - $3,000,000 | N/A | N/A | Monthly Reporting to the BOD / Senior Mgmt. | ||||
CLO and one Officer | Up to $1,000,000 | Up to $750,000 | Up to $100,000 | Monthly Reporting to the BOD / Senior Mgmt. | ||||
Senior Vice President and one loan Officer or Underwriter | Up to $500,000 | Up to $250,000 | N/A | Monthly Reporting to the BOD / Senior Mgmt. | ||||
Assistant Vice President or Vice President and Underwriter | Up to $250,000 | Up to $100,000 | N/A | Monthly Reporting to the BOD / Senior Mgmt. |
(a) | Residential Loans include 1-4 Family Owner-Occupied mortgages for Primary & Secondary homes held for the Bank's portfolio |
(b) | Home Equity includes Home Equity Loans and Home Equity Lines of Credit for Primary & Secondary 1-4 Family Owner-Occupied Home Equity Loans and Home Equity Lines currently limited to $750,000 by Policy |
(c) | Subject to review and consideration of all existing senior liens. |
(d) | Other Consumer Loans are currently limited to $100,000 by Policy and include - Auto, Passbook, Overdraft Protection, Personal Lines of Credit, etc. |
The Company’s single-family loan originations amounted to $13.9 million and $17.6 million during 2012 and 2011, respectively. When possible, we emphasize the origination of single-family residential adjustable-rate mortgage loans (“ARMs”). Originations of such loans amounted to $1.3 million and $1.4 million during 2012 and 2011, respectively. We also originate fixed-rate single-family residential real estate loans with terms of five, ten, 15, 20, 25 and 30 years. Generally, as part of our asset/liability strategies, fixed rate residential mortgage loans with terms greater than 15 years have been originated pursuant to commitments to sell such loans to correspondent mortgage-banking institutions in order to reduce the proportion of the loan portfolio comprised of such assets and reduce our interest rate risk. Loans are sold without any recourse to the Company by the purchaser in the event of default on the loan by the borrower and are sold with servicing released. We had no sales of residential mortgage loans for the years ended December 31, 2012 and December 31, 2011.
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In accordance with the Company’s increased emphasis on commercial real estate loan originations in recent years, such originations amounted to $28.0 million and $15.5 million during 2012 and 2011, respectively. In addition, land and construction loan originations amounted to $23.5 million and $8.4 million during 2012 and 2011, respectively.
Since 1999, the Company has originated some single-family residential loan products to borrowers that did not meet the underwriting criteria of the Federal Home Loan Mortgage Corporation (‘FHLMC”) and the Federal National Mortgage Association (“FNMA”) and where the borrower’s credit score is below 660. The Company recognizes that these loans, which are considered subprime loans, have additional risk factors as compared to typical single-family residential lending. These loans are generally not saleable in the secondary market due to the credit risk characteristics of the borrower, the underlying documentation, the loan-to-value ratio, or the size of the loan, among other factors. At December 31, 2012 and 2011, the Company’s single-family loan portfolio included $17.0 million or 13.4% and $19.6 million or 16.6%, respectively, of such subprime loans. The Company reported $1.4 million or 8.3% and $1.9 million or 9.9% of these loans as nonperforming at December 31, 2012 and December 31, 2011, respectively. The Company recognizes the additional risk factors associated with subprime lending and utilizes a higher risk-weighting factor in maintaining its allowance for loan losses with respect to these loans. In addition, management calculates and reports the delinquency ratio of its subprime loan portfolio to the Board of Directors on a monthly basis.
Historically, we have not been an active purchaser of loans. However, we purchased $128,000 in loans during the year ended December 31, 2012 and $105,000 during the year ended December 31, 2011. Substantially all of our purchased loans were secured by properties located in Pennsylvania. As of December 31, 2012, the outstanding balance of our purchased loans amounted to $8.0 million and included $3.8 million of multifamily real estate loans, $209,000 of single-family residential real estate loans, and $4.0 million of commercial real estate loans.
As a Pennsylvania-chartered savings bank, Alliance Bank is not subject to any specific regulatory limits on the size of the loans that it may originate. However, we generally have adhered to an “in-house” policy limit that no loans to any one borrower and such borrower’s affiliates will not exceed 15% of the Bank’s capital.
Single-Family Residential Real Estate Loans. The Company has historically concentrated its lending activities on the origination of loans secured primarily by first mortgage liens on existing single-family residences and intends to continue to originate permanent loans secured by first mortgage liens on single-family residential properties in the future. At December 31, 2012, $126.7 million or 44.5% of the Company's total loan portfolio consisted of single-family residential real estate loans. Of the $126.7 million of such loans at December 31, 2012, $33.8 million or 26.6% had adjustable rates of interest and $92.9 million or 73.4% had fixed rates of interest.
The Company’s ARMs typically provide for an interest rate which adjusts every year after an initial period of three, five, seven or ten years in accordance with a designated index (the national monthly median cost of funds or the weekly average yield on U.S. Treasury securities adjusted to a constant comparable maturity of one year) plus a margin. Such loans are typically based on a 30-year amortization schedule. The amount of any increase or decrease in the interest rate is presently limited to 200 basis points per year, with a limit of 600 basis points over the life of the loan. The Company has not engaged in the practice of using a cap on the payments that could allow the loan balance to increase rather than decrease, resulting in negative amortization. The adjustable-rate loans offered by the Company, like many other financial institutions, provide for initial rates of interest below the rates which would prevail when the index used for repricing is applied. However, the Company underwrites loans on the basis of the borrower's ability to pay at the initial rate which would be in effect without the discount. Although the Company continues to emphasize ARMs, such loan products have not been as attractive due to the lower interest rate environment which has recently prevailed resulting in a decrease in the spread between the rates offered on fixed and adjustable rate loans.
Adjustable-rate loans decrease the risks to the Company that are associated with changes in interest rates but involve other risks, primarily because as interest rates rise, the payment by the borrower rises to the extent permitted by the terms of the loan, thereby increasing the potential for default. The Company believes that these risks, which have not had a material adverse effect on the Company to date, generally are less than the risks associated with holding fixed-rate loans in an increasing interest rate environment.
The Company has continued to originate a limited amount of fixed-rate mortgage loans with terms up to 30 years. Generally, the Company's emphasizes the origination of fixed-rate loans with terms of 15 years or less for portfolio. In addition, while the Company offers balloon loans with five, seven, ten, and 15 year terms based on a 20 to 30 year amortization schedule, the Company has only originated a small amount of such loans.
9 |
The Company also offers home equity loans with fixed rates of interest and terms of 15 years or less. The Company does not require that it hold the first mortgage on the secured property; however, the balance on all mortgages on the secured property cannot exceed 90% of the value of the secured property. At December 31, 2012, the Company held a first lien on a majority of the properties securing home equity loans from the Company. At December 31, 2012, home equity loans and lines amounted to $13.9 million or 4.9% of the total loan portfolio, which are included in single family loans.
The Company is permitted to lend up to 100% of the appraised value of the real property securing a residential loan; however, if the amount of a residential loan originated or refinanced exceeds 90% of the appraised value, the Company is required by federal regulations to obtain private mortgage insurance on the portion of the principal amount that exceeds 80% of the appraised value of the security property. Pursuant to underwriting guidelines adopted by the Board of Directors, the Company may lend up to an 80% loan-to-value ratio without private mortgage insurance unless it is determined that additional collateral in the form of private mortgage insurance or other acceptable collateral is needed. The Company may lend up to a 90% loan-to-value ratio on a one or two family owner-occupied residential property as long as additional collateral in the form of private mortgage insurance or other acceptable collateral enhancements are obtained. Exceptions to this policy may be made to assist in the Company's community outreach efforts if deemed prudent by the Company's management and with additional collateral enhancements to reduce the risk inherent in the loan(s).
Multi-Family Residential and Commercial Real Estate Loans. The Company originates and, to a lesser extent, purchases mortgage loans for the acquisition and refinancing of existing multi-family residential and commercial real estate properties. At December 31, 2012, $20.9 million or 7.4% of the Company's total loan portfolio consisted of loans secured by existing multi-family residential real estate. At December 31, 2012, $111.3 million or 39.1% of the Company's total loan portfolio consisted of loans secured by commercial real estate.
The majority of the Company's multi-family residential loans are secured primarily by multi-unit apartment buildings, while the Company’s commercial real estate loans are primarily secured by office buildings, hotels, small retail establishments, restaurants and other facilities. These types of properties constitute the majority of the Company's commercial real estate loan portfolio. The majority of the multi-family residential and commercial real estate loan portfolio at December 31, 2012 was secured by properties located in the Company’s primary market area. The five largest multi-family residential and commercial real estate loan relationships at December 31, 2012 amounted to $7.3 million, $6.5 million, $6.0 million, $4.7 million and $4.7 million, respectively, all of which were performing in accordance with their terms and were current at such date.
Multi-family residential and commercial real estate loans are made on terms up to 30 years, some of which include call or balloon provisions ranging from five to 15 years. The Company will originate and purchase these loans either with fixed interest rates or with interest rates which adjust in accordance with a designated index. Loan to value ratios on the Company's multi-family residential and commercial real estate loans are typically limited to 80% of appraised value at the time the loan is granted. As part of the criteria for underwriting multi-family residential and commercial real estate loans, the Company generally imposes a debt coverage ratio (the ratio of net cash from operations before payment of debt service to debt service) of not less than 1.15. It is also the Company's general policy to obtain corporate or personal guarantees, as applicable, on its multi-family residential and commercial real estate loans from the principals of the borrower.
Multi-family residential and commercial real estate lending entails significant additional risks as compared with single-family residential property lending. Such loans typically involve large loan balances to single borrowers or groups of related borrowers. The payment experience on such loans is typically dependent on the successful operation of the real estate project. The success of such projects is sensitive to changes in supply and demand conditions in the market for multi-family and commercial real estate as well as economic conditions generally. At December 31, 2012, the Company had no nonperforming multi-family residential loans and 9 nonperforming commercial real estate loans with balances of $2.9 million. At December 31, 2012, the Company had 2 multi-family loans in the amount of $3.8 million and 11 commercial real estate loans in the amount of $5.3 million that were considered troubled debt restructurings.
Construction Loans. The Company also originates residential and commercial construction loans, and to a limited degree, land acquisition and development loans. Construction loans are classified as either residential construction loans or commercial real estate construction loans at the time of origination, depending on the nature of the property securing the loan. The Company's construction lending activities generally are limited to the Company's primary market area. At December 31, 2012, construction loans amounted to $10.7 million or 3.7% of the Company's total loan portfolio, which consisted of $2.2 million of residential and $8.5 million of commercial real estate construction loans.
10 |
The Company's residential construction loans are primarily made to local real estate builders and developers for the purpose of constructing single-family homes and single-family residential developments. Upon successful application, credit review and analysis of personal and corporate financial statements, the Company will grant local builders construction loans, construction to permanent loans, and/or lines of credit up to designated amounts. These loans may be used for the purpose of constructing model homes, including a limited number for inventory. In some instances, lines of credit will also be granted for purposes of acquiring improved lots or the purchase of construction in process and developing of speculative properties thereon. Once approved for a construction loan or credit line, a developer submits a progress report and a request for payment. Generally, the Company makes payments under the stage of completion method. Prior to making payment, the Company inspects all construction sites and verifies that the work being submitted for payments has been performed.
The Company’s commercial construction loans are generally made to local developers and others for the purpose of developing commercial real estate properties such as small office buildings and hotels, storage facilities and commercial building renovations. The application, credit review and disbursement process are similar to those mentioned above for the Company’s residential construction loans. The five largest real estate construction loans had outstanding balances of $1.8 million, $1.7 million, $1.6 million, $1.5 million, and $893,000 as of December 31, 2012.
The Company's construction loans generally have maturities of 12 to 36 months, with payments being made monthly on an interest-only basis. These interest payments are generally paid out of an interest reserve, which is established in connection with the origination of the loan. Generally, such loans adjust monthly based on the prime rate plus a margin of up to 2.0%. Residential and commercial real estate construction loans are generally made with maximum loan to value ratios of 80% and 75%, respectively, on an as completed basis. The Company utilizes interest rate floors on commercial loans and lines of credit whenever possible.
Construction lending is generally considered to involve a higher level of risk as compared to single-family residential lending, due to the concentration of principal in a limited number of loans and borrowers and the effects of general economic conditions on developers and builders. Moreover, a construction loan can involve additional risks because of the inherent difficulty in estimating both a property's value at completion of the project and the estimated cost (including interest) of the project. The nature of these loans is such that they are generally more difficult to evaluate and monitor. In addition, construction loans may include speculative construction loans to a builder where the homes are not necessarily pre-sold and thus pose a greater potential risk to the Company than construction loans to individuals on their personal residences.
The Company has attempted to minimize the foregoing risks by, among other things, limiting the number of units built to one or two sample units plus any units under agreement of sale and limiting the extent of its construction lending. The Company’s underwriting guidelines impose stringent loan-to-value, debt service and other requirements for loans which are believed to involve higher elements of credit risk, by limiting the geographic area in which the Company will do business and by working with builders with whom it has established relationships. At December 31, 2012, the Company had no nonperforming construction loans.
Consumer Loans. The Company offers consumer loans in order to provide a full range of financial services to its customers and because such loans generally have shorter terms and higher interest rates than mortgage loans. The consumer loans presently offered by the Company include deposit account secured loans and lines of credit. The Company withdrew from providing student loans in 2010. Consumer loans amounted to $5.3 million or 1.9% of the total loan portfolio at December 31, 2012. Student loans amounted to $5.0 million or 1.8% of the total loan portfolio at December 31, 2012. Such loans were made to local students for a term of ten years, presently with adjustable interest rates. The interest rate is determined by the U.S. Department of Education. Loan repayment obligations do not begin until the student has completed his or her education. The principal and interest on such loans is guaranteed by the U.S. Government. Loans secured by deposit accounts amounted to $297,000 or 0.1% of the total loan portfolio at December 31, 2012. Such loans are originated for up to 90% of the account balance, with a hold placed on the account restricting the withdrawal of the account balance.
Consumer loans generally have shorter terms and higher interest rates than mortgage loans but generally involve more credit risk than mortgage loans because of the type and nature of the collateral and, in certain cases, the absence of collateral. In addition, consumer lending collections are dependent on the borrower's continuing financial stability, and thus are more likely to be adversely effected by job loss, divorce, illness and personal bankruptcy. In most cases, any repossessed collateral for a defaulted consumer loan will not provide an adequate source of repayment of the outstanding loan balance because of improper repair and maintenance of the underlying collateral. The remaining deficiency often does not warrant further substantial collection efforts against the borrower. The Company believes that the generally higher yields earned on consumer loans compensate for the increased credit risk associated with such loans and that consumer loans are important to its efforts to provide a full range of services to its customers. At December 31, 2012, there were 93 nonperforming student loans which amounted to $324,000, compared to 164 nonperforming student loans which amounted to $561,000 at December 31, 2011. All of these nonperforming student loans are fully guaranteed by the U.S. Government.
11 |
Commercial Business Loans. The Company has a commercial loan department, which provides a full range of commercial loan products to small business customers in its primary marketing area. These loans generally have shorter terms and higher interest rates as compared to mortgage loans. Such loans amounted to $9.9 million or 3.5% of the total loan portfolio at December 31, 2012 and were primarily secured by inventories and other business assets.
Although commercial business loans generally are considered to involve greater credit risk than other certain types of loans, management intends to continue to offer commercial business loans to small businesses located in its primary market area. At December 31, 2012, the Company had no nonperforming commercial business loans.
Loan Fee Income. In addition to interest earned on loans, the Company receives income from fees in connection with loan originations, loan modifications, late payments, prepayments and for miscellaneous services related to its loans. Income from these activities varies from period to period with the volume and type of loans made and competitive conditions. The Company charges loan origination fees which are calculated as a percentage of the amount borrowed. Loan origination and commitment fees and all incremental direct loan origination costs are deferred and recognized over the contractual remaining lives of the related loans on a level yield basis. Discounts and premiums on loans purchased are amortized in the same manner.
Asset Quality
Loans are placed on non-accrual status when, in the judgment of management, the probability of collection of principal and interest is deemed to be insufficient to warrant further accrual. Generally, when a loan is placed on nonaccrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against the allowance for loan losses. The Company does not accrue interest on real estate loans past due 90 days or more unless, in the opinion of management, the value of the property securing the loan exceeds the outstanding balance of the loan (principal, interest and escrows) and collection is in process. The Company provides an allowance for accrued interest deemed uncollectible. Such allowance amounted to approximately $373,000 at December 31, 2012 compared to $734,000 at December 31, 2011. Accrued interest receivable is reported net of the allowance for uncollected interest. Loans may be reinstated to accrual status when all payments are brought current and, in the opinion of management, collection of the remaining balance of principal and interest can be reasonably expected.
Real estate acquired by the Company as a result of foreclosure or by deed-in-lieu of foreclosure is classified as other real estate owned (“OREO”) until sold and is initially recorded at the fair value less cost to sell at the date of acquisition establishing a new cost basis. After the date of acquisition, all costs incurred in maintaining the property are expensed and costs incurred for the improvement or development of such property are capitalized up to the extent of their fair value. As of December 31, 2012, the Company had $2.1 million in OREO. The $2.1 million consists of one commercial real estate property in the amount of $180,000, three improved building lots totaling $870,000, and six single family properties totaling $1.0 million. All of the properties are located within the Company’s market area.
Under accounting principles generally accepted in the United States of America ("GAAP"), the Company is required to account for certain loan modifications or restructurings as "troubled debt restructurings." In general, the modification or restructuring of a debt constitutes a troubled debt restructuring if the Company, for economic or legal reasons related to the borrower's financial difficulties, grants a concession to the borrower that the Company would not otherwise consider. Debt restructurings or loan modifications for a borrower do not necessarily always constitute troubled debt restructurings, however, and troubled debt restructurings do not necessarily result in non-accrual loans. At December 31, 2012, the Company had thirteen loans classified as performing troubled debt restructurings consisting of two multi-family loans which amounted to $3.8 million and eleven commercial real estate loans which amounted to $5.3 million. All such loans have been performing in accordance with their restructured terms and conditions. At December 31, 2012, the Company had one single family real estate nonperforming loan classified as a troubled debt restructuring in the amount of $191,000.
12 |
Delinquent Loans. The following table sets forth information concerning delinquent loans at December 31, 2012, in dollar amounts and as a percentage of each category of the Company's loan portfolio. The amounts presented represent the total outstanding principal balances of the related loans, rather than the actual payment amounts which are past due.
30– 59 Days | 60 – 89 Days | 90 or More Days | ||||||||||||||||||||||
Percent | Percent | Percent | ||||||||||||||||||||||
of Loan | of Loan | of Loan | ||||||||||||||||||||||
Amount | Category | Amount | Category | Amount | Category | |||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||
Real estate: | ||||||||||||||||||||||||
Single-family | $ | 1,723 | 1.36 | % | $ | 496 | 0.39 | % | $ | 2,406 | 1.90 | % | ||||||||||||
Multi-family | — | — | — | — | — | — | ||||||||||||||||||
Commercial | 2,155 | 1.94 | 276 | 0.25 | 2,873 | 2.58 | ||||||||||||||||||
Land and construction | — | — | — | — | — | — | ||||||||||||||||||
Commercial business | — | — | — | — | — | — | ||||||||||||||||||
Consumer | 148 | 2.77 | 124 | 2.32 | 324 | 6.06 | ||||||||||||||||||
Total | $ | 4,026 | $ | 896 | $ | 5,603 |
13 |
The following table sets forth the amounts and categories of the Company's nonperforming loans and assets at the dates indicated.
December 31, | ||||||||||||||||||||
2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||
Non-accruing loans: | ||||||||||||||||||||
Real estate: | ||||||||||||||||||||
Single-family | $ | 664 | $ | 1,055 | $ | 74 | $ | 479 | $ | 762 | ||||||||||
Multi-family | — | — | — | — | — | |||||||||||||||
Commercial | 2,873 | 3,016 | 2,128 | 1,778 | 3,551 | |||||||||||||||
Land and construction | — | 7,707 | 11,423 | 3,728 | 896 | |||||||||||||||
Commercial business | — | 81 | 74 | 472 | — | |||||||||||||||
Consumer | — | — | — | — | — | |||||||||||||||
Total non-accruing loans | 3,537 | 11,859 | 13,699 | 6,457 | 5,209 | |||||||||||||||
Accruing loans 90 days or more delinquent: | ||||||||||||||||||||
Real estate: | ||||||||||||||||||||
Single-family | 1,742 | 2,018 | 2,308 | 1,227 | 1,712 | |||||||||||||||
Multi-family | — | — | — | — | — | |||||||||||||||
Commercial | — | — | — | — | — | |||||||||||||||
Land and construction | — | — | — | — | — | |||||||||||||||
Commercial business | — | — | — | — | — | |||||||||||||||
Consumer | 324 | 561 | 284 | 153 | 75 | |||||||||||||||
Total accruing loans 90 days or more delinquent | 2,066 | 2,579 | 2,592 | 1,380 | 1,787 | |||||||||||||||
Total non-performing loans | 5,603 | 14,438 | 16,291 | 7,837 | 6,996 | |||||||||||||||
Other real estate owned: | ||||||||||||||||||||
Real estate acquired through, or in lieu of, foreclosure | 2,092 | 2,587 | 2,675 | 2,968 | — | |||||||||||||||
Total other real estate owned | 2,092 | 2,587 | 2,675 | 2,968 | — | |||||||||||||||
Total non-performing assets | 7,695 | 17,025 | 18,966 | 10,805 | 6,996 | |||||||||||||||
Total performing troubled debt restructurings | 9,106 | 4,114 | 2,895 | — | — | |||||||||||||||
Total non-performing assets and total performing troubled debt restructurings | $ | 16,801 | $ | 21,139 | $ | 21,861 | $ | 10,805 | $ | 6,996 | ||||||||||
Total non-performing assets and total performing troubled debt restructurings as a percentage of total assets | 3.65 | % | 4.50 | % | 4.81 | % | 2.33 | % | 1.65 | % | ||||||||||
Total non-performing assets as a percentage of total assets | 1.67 | % | 3.63 | % | 4.17 | % | 2.33 | % | 1.65 | % |
If the Company’s $3.5 million of non-accruing loans at December 31, 2012 had been current in accordance with their terms during 2012, the gross income on such loans would have been approximately $148,000 during 2012. The Company actually recorded $46,000 in interest income on such loans during 2012. If the Company’s $11.9 million of non-accruing loans at December 31, 2011 had been current in accordance with their terms during 2011, the gross income on such loans would have been approximately $655,000 during 2011. The Company actually recorded $104,000 in interest income on such loans during 2011. Loans are generally placed on non-accrual when interest past due exceeds 90 days, unless the loan is well secured and in the process of collection. The Company generally does not place student loans on non-accrual as the principal and interest on such loans is guaranteed by the U.S. Government.
14 |
Nonperforming assets decreased $9.3 million to $7.7 million or 1.67% of total assets at December 31, 2012 as compared to $17.0 million or 3.63% of total assets at December 31, 2011. The nonperforming assets at December 31, 2012 included $5.6 million in nonperforming loans and $2.1 million in OREO. The decrease in nonperforming assets was primarily due to an $8.8 million decrease in nonperforming loans that primarily resulted from the cash sale of a $3.2 million nonperforming construction loan and the transfer of a $4.4 million of former nonperforming real estate loans to OREO during the year ended December 31, 2012. Regarding the $4.4 million in loans transferred to OREO, the Company completed a $2.7 million sale of a previously owned multi-family OREO property that had a carrying value of $2.7 million in the fourth quarter of 2012. As of December 31, 2012, nonperforming loans included $2.4 million in single-family OREO residential real estate loans, $2.9 million in commercial real estate loans and $324,000 in student loans, which are fully guaranteed by the U.S. Government. The allowance for loan losses amounted to $4.9 million or 87.8% of nonperforming loans at December 31, 2012 as compared to $4.0 million or 27.7% at December 31, 2011.
Classified and Criticized Assets. Under applicable banking regulations and policies, each insured savings bank’s assets are subject to classification on a regular basis. In addition, in connection with examinations of insured institutions, federal examiners have authority to identify problem assets and, if appropriate, classify them. There are three regulatory classifications for problem assets: “substandard,” “doubtful” and “loss.” Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Doubtful assets have the weaknesses of substandard assets 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. An asset classified loss is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. Another category designated “special mention” also must be established and maintained for assets which have a weakness but do not currently expose an insured institution to a sufficient degree of risk to warrant classification as substandard, doubtful or loss.
At December 31, 2012, the Company had $17.1 million of classified and criticized loans, of which $4.1 million consisted of loans designated as special mention, $13.0 million classified substandard loans and no assets classified as doubtful or loss. The $4.1 million of loans designated as special mention consisted of $2.7 million in commercial real estate loans and $1.4 million in single family real estate loans. The $13.0 million of loans designated as substandard consisted of $2.5 million in single family real estate loans, $6.7 million in commercial real estate loans, and $3.8 million in multi-family real estate loans. All of these loans are located in the Company’s primary market area. In addition, the Company had $2.1 million in OREO properties classified as substandard, all of which are located in the Company’s primary market area.
Allowance for Loan Losses. The allowance for loan losses is increased by charges to income and decreased by chargeoffs (net of recoveries). Allowances are provided for specific loans when losses are probable and can be estimated. When this occurs, management considers the remaining principal balance, fair value and estimated net realizable value of the property collateralizing the loan. Current and future operating and/or sales conditions are also considered. These estimates are susceptible to changes that could result in material adjustments to results of operations. Recovery of the carrying value of such loans is dependent to a great extent on economic, operating and other conditions that may be beyond management’s control.
General loan loss reserves are established as an allowance for losses based on inherent probable risk of loss in the loan portfolio. In assessing risk, management considers historical experience, volume and composition of lending conducted by the Company, industry standards, status of nonperforming loans, general economic conditions as they relate to the market area and other factors related to the collectibility of the Company’s loan portfolio.
Impaired loans are predominantly measured based on the fair value of the collateral. The provision for loan losses charged to expense is based upon past loan loss experience and an evaluation of probable losses and impairment existing in the current loan portfolio. A loan is considered to be impaired when, based upon current information and events, it is probable that the Company will be unable to collect all amounts due according to the original contractual terms of the loan. An insignificant delay or insignificant shortfall in amounts of payments does not necessarily result in the loan being identified as impaired. For this purpose, delays less than 90 days are considered to be insignificant. Large groups of smaller balance homogeneous loans, including residential real estate and consumer loans, are collectively evaluated for impairment, except for loans restructured under a troubled debt restructuring.
Although management uses the best information available to make determinations with respect to the provisions for loan losses, additional provisions for loan losses may be required to be established in the future should economic or other conditions change substantially. In addition, the Department and the FDIC, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to such allowance based on their judgments about information available to them at the time of their examination.
15 |
The following table summarizes changes in the allowance for loan losses and other selected statistics for the periods presented.
Year Ended December 31, | ||||||||||||||||||||
2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||
Average loans receivable, net (1) | $ | 283,597 | $ | 291,719 | $ | 288,192 | $ | 283,736 | $ | 271,849 | ||||||||||
Allowance for loan losses, beginning of year | $ | 4,000 | $ | 5,090 | $ | 3,538 | $ | 3,169 | $ | 2,831 | ||||||||||
Provision for loan losses | 1,025 | 3,250 | 2,120 | 528 | 585 | |||||||||||||||
Charge-offs: | ||||||||||||||||||||
Single-family residential | (42 | ) | (75 | ) | (81 | ) | — | (3 | ) | |||||||||||
Multi-family residential | — | — | — | (6 | ) | — | ||||||||||||||
Commercial real estate | (59 | ) | (306 | ) | (137 | ) | (153 | ) | (350 | ) | ||||||||||
Land and construction | (440 | ) | (3,898 | ) | — | — | — | |||||||||||||
Consumer | (9 | ) | (7 | ) | (16 | ) | (1 | ) | (13 | ) | ||||||||||
Commercial business | — | (123 | ) | (365 | ) | — | — | |||||||||||||
Total charge-offs | (550 | ) | (4,409 | ) | (599 | ) | (160 | ) | (366 | ) | ||||||||||
Recoveries: | ||||||||||||||||||||
Single-family residential | 10 | — | — | — | — | |||||||||||||||
Multi-family residential | — | — | — | — | — | |||||||||||||||
Commercial real estate | 12 | 18 | — | — | 114 | |||||||||||||||
Land and construction | 420 | 51 | — | — | — | |||||||||||||||
Consumer | 2 | — | 1 | 1 | 5 | |||||||||||||||
Commercial business | — | — | 30 | — | — | |||||||||||||||
Total recoveries | 444 | 69 | 31 | 1 | 119 | |||||||||||||||
Allowance for loan losses, end of year | $ | 4,919 | $ | 4,000 | $ | 5,090 | $ | 3,538 | $ | 3,169 | ||||||||||
Net charge-offs to average loans receivable, net | 0.04 | % | 1.49 | % | 0.20 | % | 0.06 | % | 0.09 | % | ||||||||||
Allowance for loan losses to total loans receivable | 1.73 | % | 1.38 | % | 1.75 | % | 1.23 | % | 1.13 | % | ||||||||||
Allowance for loan losses to total non-performing loans | 87.79 | % | 27.70 | % | 31.24 | % | 45.14 | % | 45.30 | % | ||||||||||
Net charge-offs to allowance for loan losses | 2.15 | % | 108.50 | % | 11.16 | % | 4.49 | % | 7.79 | % |
_______________________________
(1) Includes loans held for sale, if any.
16 |
The following table presents the allocation of the allowance for loan losses to the total amount of loans in each category listed at the dates indicated.
December 31, | ||||||||||||||||||||||||||||||||||||||||
2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||||||||||||||||||||||||||||
Amount | % of Loans in Each Category to Total Loans | Amount | % of Loans in Each Category to Total Loans | Amount | % of Loans in Each Category to Total Loans | Amount | % of Loans in Each Category to Total Loans | Amount | % of Loans in Each Category to Total Loans | |||||||||||||||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||||||||||||||||||
Single-family residential | $ | 1,027 | 44.48 | % | $ | 693 | 40.76 | % | $ | 411 | 39.44 | % | $ | 588 | 39.82 | % | $ | 322 | 41.43 | % | ||||||||||||||||||||
Multi-family residential | 623 | 7.35 | 234 | 3.71 | 247 | 2.16 | 16 | 0.43 | 16 | 0.46 | ||||||||||||||||||||||||||||||
Commercial real estate | 2,674 | 39.09 | 2,289 | 44.95 | 2,072 | 45.11 | 1,985 | 45.68 | 1,786 | 43.84 | ||||||||||||||||||||||||||||||
Land and construction | 352 | 3.74 | 525 | 5.03 | 2,151 | 8.15 | 735 | 8.51 | 856 | 8.97 | ||||||||||||||||||||||||||||||
Consumer | 18 | 1.88 | 20 | 2.28 | 19 | 2.46 | 27 | 2.63 | 16 | 2.11 | ||||||||||||||||||||||||||||||
Commercial business | 225 | 3.46 | 239 | 3.27 | 190 | 2.68 | 187 | 2.93 | 173 | 3.19 | ||||||||||||||||||||||||||||||
Total | $ | 4,919 | 100.00 | % | $ | 4,000 | 100.00 | % | $ | 5,090 | 100.00 | % | $ | 3,538 | 100.00 | % | $ | 3,169 | 100.00 | % |
17 |
Investment Activities
Mortgage-Backed Securities. Mortgage-backed securities (which also are known as mortgage participation certificates or pass-through certificates) represent a participation interest in a pool of single-family or multi-family mortgages, the principal and interest payments on which are passed from the mortgage originators, through intermediaries (generally U.S. Government agencies and government sponsored enterprises) that pool and repackage the participation interests in the form of securities, to investors such as the Company. Such U.S. Government agencies and government sponsored enterprises, which guarantee the payment of principal and interest to investors, primarily include the FHLMC, the FNMA and the Government National Mortgage Association ("GNMA").
The FHLMC is a public corporation chartered by the U.S. Government. The FHLMC issues participation certificates backed principally by conventional mortgage loans. The FHLMC guarantees the timely payment of interest and the ultimate return of principal within one year. The FNMA is a private corporation chartered by the U.S. Congress with a mandate to establish a secondary market for conventional mortgage loans. Because the FHLMC, the FNMA and the GNMA were established to provide support for low- and middle-income housing, there are limits to the maximum size of loans that qualify for these programs. To accommodate larger-sized loans, and loans that, for other reasons, do not conform to the agency programs, a number of private institutions have established their own home-loan origination and securitization programs.
Mortgage-backed securities typically are issued with stated principal amounts, and the securities are backed by pools of mortgages that have loans with interest rates that are within a range and have varying maturities. The cash flow associated with the underlying pool of mortgages, i.e., fixed rate or adjustable rate, as well as prepayment risk, are passed on to the certificate holder. The life of a mortgage-backed pass-through security thus approximates the life of the underlying mortgages.
The following table sets forth the fair value of the Company's mortgage-backed securities portfolio designated as available for sale at the dates indicated.
December 31, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
(In Thousands) | ||||||||||||
Mortgage-backed securities: | ||||||||||||
FNMA pass-through certificates | $ | 3,887 | $ | 5,958 | $ | 8,585 | ||||||
FHLMC pass-through certificates | 2,247 | 3,800 | 5,813 | |||||||||
GNMA pass-through certificates | 1,390 | 1,545 | 1,748 | |||||||||
Total mortgage-backed securities | $ | 7,524 | (1) | $ | 11,303 | (2) | $ | 16,146 | (3) |
_______________________________
(1) | At December 31, 2012, gross unrealized gains on such securities amounted to $511,000 and gross unrealized losses amounted to $13. |
(2) | At December 31, 2011, gross unrealized gains on such securities amounted to $705,000 and gross unrealized losses amounted to $2,000. |
(3) | At December 31, 2010, gross unrealized gains on such securities amounted to $831,000 and gross unrealized losses amounted to $16,000. |
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The following table sets forth the purchases, sales and principal repayments of the Company's mortgage-backed securities for the periods indicated.
Year Ended December 31, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
(In Thousands) | ||||||||||||
Mortgage-backed securities purchased | $ | — | $ | — | $ | — | ||||||
Mortgage-backed securities sold | — | — | — | |||||||||
Principal repayments | (3,587 | ) | (4,731 | ) | (7,132 | ) | ||||||
Change in net unrealized gain | (192 | ) | (112 | ) | (77 | ) | ||||||
Net decrease | $ | (3,779 | ) | $ | (4,843 | ) | $ | (7,209 | ) |
Mortgage-backed securities generally increase the quality of the Company's assets by virtue of the insurance or guarantees that back them, they are more liquid than individual mortgage loans and may be used to collateralize borrowings or other obligations of the Company. At December 31, 2012, $3.0 million of the Company's mortgage-backed securities were pledged to secure various obligations of the Company. See Note 4 to the Consolidated Financial Statements in Item 8.
Information regarding the contractual maturities, at amortized cost, and weighted average yield of the Company's mortgage-backed securities portfolio at December 31, 2012 is presented below.
December 31, 2012 | ||||||||||||||||||||
One Year or Less | After One to Five Years | After Five to 15 Years | Over 15 Years | Total | ||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||
FHLMC pass-through certificates | $ | 42 | $ | 673 | $ | 360 | $ | 1,011 | $ | 2,086 | ||||||||||
FNMA pass-through certificates | 19 | 1,363 | 1,326 | 932 | 3,640 | |||||||||||||||
GNMA pass-through certificates | — | — | — | 1,287 | 1,287 | |||||||||||||||
Total | $ | 61 | $ | 2,036 | $ | 1,686 | $ | 3,230 | $ | 7,013 | (1) | |||||||||
Weighted average yield | 6.32 | % | 4.79 | % | 4.71 | % | 3.71 | % | 4.29 | % |
____________________
(1) All mortgage-backed securities are designated as available for sale.
The actual maturity of a mortgage-backed security is typically less than its stated maturity due to prepayments of the underlying mortgages. Prepayments that are faster than anticipated may shorten the life of the security and increase or decrease its yield to maturity if the security was purchased at a discount or premium, respectively. The yield is based upon the interest income and the amortization of any premium or discount related to the mortgage-backed security. In accordance with GAAP, premiums and discounts are amortized over the estimated lives of the loans, which decrease and increase interest income, respectively. The prepayment assumptions used to determine the amortization period for premiums and discounts can significantly affect the yield of the mortgage-backed security, when premiums or discounts are involved, and these assumptions are reviewed periodically to reflect actual prepayments. Although prepayments of underlying mortgages depend on many factors, including the type of mortgages, the coupon rate, the age of mortgages, the geographical location of the underlying real estate collateralizing the mortgages and general levels of market interest rates, the difference between the interest rates on the underlying mortgages and the prevailing mortgage interest rates generally is the most significant determinant of the rate of prepayments. During periods of falling mortgage interest rates, if the coupon rate of the underlying mortgages exceeds the prevailing market interest rates offered for mortgage loans, refinancing generally increases and accelerates the prepayment of the underlying mortgages and the related security. Under such circumstances, the Company may be subject to reinvestment risk because to the extent that the Company's mortgage-backed securities amortize or prepay faster than anticipated, the Company may not be able to reinvest the proceeds of such repayments and prepayments at a comparable rate. During periods of rising interest rates, prepayment of the underlying mortgages generally slow down when the coupon rate of such mortgages is less than the prevailing market rate. The Company may be subject to extension risk when this occurs.
19 |
Investment Securities. The investment policy of the Company, as established by the Board of Directors, is designed primarily to provide and maintain liquidity and to maximize return on investments without incurring undue interest rate risk, credit risk, and investment portfolio asset concentrations. The Company's investment policy takes into account the Company's business plan, interest rate management, the current economic environment, the types of securities to be held and other safety and soundness considerations. The Company's investment policy is currently implemented by the Chief Executive Officer and reviewed and evaluated by the Asset Liability Committee of the Board of Directors. The Asset Liability Committee is required to issue a written compliance report to the Board of Directors at least quarterly.
The Company is authorized to invest in obligations issued or fully guaranteed by the U.S. Government, certain federal agency obligations, insured municipal obligations, certain mutual funds, investment grade corporate debt securities and other specified investments. At December 31, 2012, our investment securities amounted to $34.3 million, of which $9.0 million was designated as available for sale and $25.3 million was designated as held to maturity. The securities designated as held to maturity represent municipal obligations which are guaranteed by the issuer and further guaranteed and supported by private insurance companies. They consist of $24.3 million in general obligation bonds and $1.0 million in revenue bonds. Municipal bond investments are not backed by the U.S. Government or related agencies and therefore carry a higher degree of risk than investments in U.S. Government or related agencies.
The following table sets forth certain information relating to the Company's investment securities portfolio at the dates indicated.
December 31, | ||||||||||||||||||||||||
2012 | 2011 | 2010 | ||||||||||||||||||||||
Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||||||||||||
(In Thousands) | ||||||||||||||||||||||||
U.S. Government and agency securities | $ | 9,000 | $ | 9,000 | $ | 22,994 | $ | 23,070 | $ | 36,991 | $ | 36,784 | ||||||||||||
Municipal obligations | 25,325 | 26,525 | 22,175 | 23,200 | 24,644 | 24,519 | ||||||||||||||||||
Total | $ | 34,325 | (1) | $ | 35,525 | (1) | $ | 45,169 | $ | 46,270 | $ | 61,635 | $ | 61,303 |
_______________________
(1) | At December 31, 2012, investment securities with an amortized cost totaling $9.0 million were designated as available for sale. At December 31, 2012, gross unrealized losses amounted to $4,000 and there were $4,000 in gross unrealized gains. At December 31, 2012, $4.0 million of the Company’s investment securities were pledged to secure various obligations of the Company. See Note 3 to the Consolidated Financial Statements in Item 8. |
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Information regarding the contractual maturities and weighted average yield of the Company's investment securities portfolio at December 31, 2012 is presented below. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
At December 31, 2012 | ||||||||||||||||||||
One Year or Less | After One to Five Years | After Five to 10 Years | Over 10 Years | Total | ||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||
U.S. Government and agency securities | $ | — | $ | 3,000 | $ | 4,000 | $ | 2,000 | $ | 9,000 | (1) | |||||||||
Municipal obligations | 191 | 2,994 | 4,894 | 17,246 | 25,325 | (2) | ||||||||||||||
Total | $ | 191 | $ | 5,994 | $ | 8,894 | $ | 19,246 | $ | 34,325 | ||||||||||
Weighted average yield | 1.0 | % | 1.27 | % | 1.67 | % | 3.62 | % | 2.69 | % |
__________________
(1) The $9.0 million of U.S. Government agency securities are designated as available for sale.
(2) The $25.3 million of municipal obligations are designated as held to maturity and are tax exempt.
FHLB stock is a restricted investment security, carried at cost. The purchase of FHLB stock provides banks with the right to be a member of the FHLB and to receive the products and services that the FHLB provides to member banking institutions. Unlike other types of stock, FHLB stock is acquired primarily for the right to receive advances from the FHLB, rather than the for the purpose of earning dividends or price appreciation. FHLB stock is an activity based stock directly proportional to the volume of advances taken by a member institution. During the fourth quarter of 2008, the FHLB announced a decision to suspend the dividend on, and restrict the repurchase of, FHLB stock. In 2010, the FHLB began partial redemptions of excess stock. The FHLB redeemed $549,000 and $430,000 of the Company’s FHLB stock during 2012 and 2011, respectively. In 2012, the FHLB resumed paying dividends and paid a $3,000 dividend on the Company’s FHLB stock.
Sources of Funds
General. Deposits are the primary source of the Company's funds for lending and other investment purposes. In addition to deposits, the Company derives funds from loan principal repayments, prepayments and advances from the Federal Home Loan Bank (“FHLB”) of Pittsburgh and proceeds from sales of investment securities. Loan repayments are a relatively stable source of funds, while deposit inflows and outflows are significantly influenced by general interest rates and money market conditions. Borrowings may be used on a short-term basis to compensate for reductions in the availability of funds from other sources. They may also be used on a longer term basis for general business purposes.
Deposits. The Company's deposit products include a broad selection of deposit instruments, including NOW accounts, money market accounts, regular savings accounts and term certificate accounts. Deposit account terms vary, with the principal difference being the minimum balance required, the time periods the funds must remain on deposit and the interest rate.
The primary market areas served by the Company are Delaware and Chester Counties, Philadelphia, and the suburban areas to the west and south of Philadelphia, including southern New Jersey. The Company attracts deposit accounts by offering a wide variety of accounts, competitive interest rates, and convenient office locations and service hours. In addition, the Company maintains automated teller machines at its Broomall, Concordville, Havertown, Springfield, Lansdowne, Frazer, and Secane offices. The Company utilizes traditional marketing methods to attract new customers and savings deposits, including print media advertising and direct mailings. The Company does not advertise for deposits outside of its primary market area or utilize the services of deposit brokers, and management believes that an insignificant number of deposit accounts were held by non-residents of Pennsylvania at December 31, 2012.
The Company has been competitive in the types of accounts and in interest rates it has offered on its deposit products but does not necessarily seek to match the highest rates paid by competing institutions. Although market demand generally dictates which deposit maturities and rates will be accepted by the public, the Company intends to continue to promote longer term deposits to the extent possible and consistent with its asset and liability management goals.
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The following table shows the distribution of, and certain other information relating to, the Company's deposits by type of deposit as of the dates indicated.
December 31, | ||||||||||||||||||||||||
2012 | 2011 | 2010 | ||||||||||||||||||||||
Amount | Percent | Amount | Percent | Amount | Percent | |||||||||||||||||||
(In Thousands) | ||||||||||||||||||||||||
Passbook and statement savings accounts | $ | 50,284 | 13.5 | % | $ | 47,157 | 12.5 | % | $ | 42,847 | 11.1 | % | ||||||||||||
Money market accounts | 28,057 | 7.6 | 30,072 | 8.0 | 24,458 | 6.4 | ||||||||||||||||||
Certificates of deposit | 222,060 | 59.8 | 233,206 | 62.0 | 254,684 | 66.2 | ||||||||||||||||||
NOW and Super NOW accounts | 54,393 | 14.7 | 53,754 | 14.3 | 50,410 | 13.1 | ||||||||||||||||||
Non-interest bearing accounts | 16,243 | 4.4 | 11,859 | 3.2 | 12,196 | 3.2 | ||||||||||||||||||
Total deposits at end of year | $ | 371,037 | 100.0 | % | $ | 376,048 | 100.0 | % | $ | 384,595 | 100.0 | % |
The following table sets forth the net deposit flows of the Company during the periods indicated.
Year Ended December 31, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
(In Thousands) | ||||||||||||
(Decrease) increase before interest credited | $ | (8,213 | ) | $ | (12,634 | ) | $ | 3,774 | ||||
Interest credited | 3,202 | 4,087 | 5,567 | |||||||||
Net deposit (decrease) increase | $ | (5,011 | ) | $ | (8,547 | ) | $ | 9,341 |
The following table sets forth maturities of the Company's certificates of deposit of $100,000 or more by time remaining to maturity as of the date indicated.
December 31, 2012 | ||||
(In Thousands) | ||||
Three months or less | $ | 6,780 | ||
Over three months through six months | 10,444 | |||
Over six months through twelve months | 14,297 | |||
Over twelve months | 26,980 | |||
Total | $ | 58,501 |
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The following table presents the average balance of each deposit type and the average rate paid on each deposit type for the periods indicated.
Year ended December 31, | ||||||||||||||||||||||||
2012 | 2011 | 2010 | ||||||||||||||||||||||
Average Balance | Average Rate Paid | Average Balance | Average Rate Paid | Average Balance | Average Rate Paid | |||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||
Passbook and statement Savings accounts | $ | 48,668 | 0.23 | % | $ | 45,600 | 0.44 | % | $ | 42,269 | 0.50 | % | ||||||||||||
Money market accounts | 30,419 | 0.29 | 27,600 | 0.59 | 23,243 | 0.71 | ||||||||||||||||||
Certificates of deposit | 234,743 | 1.23 | 235,928 | 1.48 | 254,972 | 1.94 | ||||||||||||||||||
NOW and Super NOW | 52,551 | 0.22 | 51,881 | 0.45 | 48,278 | 0.50 | ||||||||||||||||||
Non-interest bearing accounts | 15,087 | — | 12,239 | — | 14,067 | — | ||||||||||||||||||
Total average deposits | $ | 381,468 | 0.87 | %(1) | $ | 373,248 | 1.13 | %(1) | $ | 382,829 | 1.51 | %(1) |
______________________________
(1) Reflects average rate paid on total interest bearing deposits.
The following table presents, by various interest rate categories, the amount of certificates of deposit at December 31, 2012 and 2011 and the amounts at December 31, 2012, which mature during the periods indicated.
December 31, | Amounts at December 31, 2012 Maturing Within | |||||||||||||||||||||||
Certificates of Deposit | 2012 | 2011 | One Year | Two Years | Three Years | Thereafter | ||||||||||||||||||
(In Thousands) | ||||||||||||||||||||||||
1.0% or less | $ | 127,507 | $ | 105,840 | $ | 109,188 | $ | 15,429 | $ | 2,883 | $ | 7 | ||||||||||||
1.01% to 2.0% | 71,251 | 101,631 | 27,858 | 21,476 | 12,582 | 9,335 | ||||||||||||||||||
2.01% to 3.0% | 21,791 | 22,443 | 7,530 | 997 | 2,128 | 11,136 | ||||||||||||||||||
3.01% to 5.5% | 1,511 | 3,292 | 817 | 499 | 51 | 144 | ||||||||||||||||||
Total certificates of deposit | $ | 222,060 | $ | 233,206 | $ | 145,393 | $ | 38,401 | $ | 17,644 | $ | 20,622 |
Borrowings. The Company may obtain advances from the FHLB of Pittsburgh upon the security of the common stock it owns in that bank and certain of its loans, provided certain standards related to creditworthiness have been met. Such advances are made pursuant to several credit programs, each of which has its own interest rate and range of maturities. Such advances are generally available to meet seasonal and other withdrawals of deposit accounts and to permit increased lending. At December 31, 2012, the Company had no advances from the FHLB of Pittsburgh. The Company continually reviews utilization of advances from the FHLB as a source of funding. Additional FHLB stock may be required to be held when advances from the FHLB are taken. At December 31, 2012, the Company had $1.3 million of FHLB stock.
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The following table sets forth certain information regarding borrowed funds at or for the dates indicated:
At or for the Year Ended December 31, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
(Dollars in Thousands) | ||||||||||||
FHLB of Pittsburgh advances: | ||||||||||||
Average balance outstanding | — | — | $ | 13,148 | ||||||||
Maximum amount outstanding at any month-end during the year | — | — | 32,000 | |||||||||
Balance outstanding at end of year | — | — | — | |||||||||
Weighted average interest rate during the year | — | — | 6.41 | % | ||||||||
Weighted average interest rate at end of year | — | — | — | |||||||||
Total borrowings: | ||||||||||||
Average balance outstanding | $ | 3,027 | $ | 3,762 | $ | 17,096 | ||||||
Maximum amount outstanding at any month-end during the year | 3,982 | 3,878 | 35,238 | |||||||||
Balance outstanding at end of year | 3,261 | 3,878 | 7,384 | |||||||||
Weighted average interest rate during the year | 0.26 | % | 0.45 | % | 5.07 | % | ||||||
Weighted average interest rate at end of year | 0.23 | % | 0.38 | % | 0.82 | % |
Employees
The Company had 86 full-time employees and 19 part-time employees at December 31, 2012. None of these employees is represented by a collective bargaining agreement.
Subsidiaries
Presently, the Bank has three wholly-owned subsidiaries, Alliance Delaware Corp., Alliance Financial and Investment Services LLC, and 908 Hyatt Street LLC. Alliance Delaware Corp., which holds and manages certain investment securities, was formed in 1999 to accommodate the transfer of certain assets that are legal investments for the Bank and to provide for a greater degree of protection to claims of creditors. The laws of the State of Delaware and the court system create a more favorable environment for the business affairs of the subsidiary. Alliance Delaware Corp. currently manages certain investments for the Bank, which, as of December 31, 2012 and 2011, amounted to $60.7 million and $60.2 million, respectively. Alliance Financial and Investment Services LLC, which is currently inactive, was formed to participate in commission fees from non-insured investment products. 908 Hyatt Street LLC was formed to own and manage certain real estate properties. As of December 31, 2012 there were no properties held by 908 Hyatt Street LLC.
Competition
The Company faces strong competition both in attracting deposits and making real estate loans. Its most direct competition for deposits has historically come from other savings associations, credit unions and commercial banks located in eastern Pennsylvania, including many large financial institutions, which have greater financial and marketing resources available to them. In addition, during times of high interest rates, the Company has faced additional significant competition for investors' funds from short-term money market securities, mutual funds and other corporate and government securities. The ability of the Company to attract and retain savings deposits depends on its customer service product mix and its ability to provide a rate of return, liquidity and risk comparable to that offered by competing investment opportunities.
The Company experiences strong competition for real estate loans principally from other savings associations, commercial banks and mortgage banking companies. The Company competes for loans principally through the interest rates and loan fees it charges and the efficiency and quality of services it provides borrowers.
24 |
REGULATION
REGULATION
General
Alliance Bancorp as a savings and loan holding company, is required to file certain reports with, and is subject to examination by, and otherwise must comply with the rules and regulations of the FRB. Alliance Bancorp is also subject to the rules and regulations of the SEC under the federal securities laws.
Alliance Bank is a Pennsylvania-chartered savings bank and is subject to extensive regulation and examination by the Department and by the FDIC, and is also subject to certain requirements established by the FRB. The federal and state laws and regulations which are applicable to banks regulate, among other things, the scope of their business, their investments, their reserves against deposits, the payment of dividends, the timing of the availability of deposited funds and the nature and amount of and collateral for certain loans. There are periodic examinations by the Department and the FDIC to test Alliance Bank’s compliance with various regulatory requirements. This regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of the insurance fund and depositors. 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 adequate loan loss reserves for regulatory purposes. Any change in such regulation, whether by the Department, the FDIC or the Congress could have a material adverse impact on Alliance Bancorp and Alliance Bank and their operations.
Certain of the regulatory requirements that are or will be applicable to Alliance Bank and Alliance Bancorp 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 Alliance Bank and Alliance Bancorp and is qualified in its entirety by reference to the actual statutes and regulations.
Recently Enacted Regulatory Reform
On July 21, 2010, the President signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act. The financial reform and consumer protection act imposes new restrictions and an expanded framework of regulatory oversight for financial institutions, including depository institutions. In addition, the law changed the jurisdictions of existing bank regulatory agencies and in particular transfers the regulation of federal savings associations from the Office of Thrift Supervision (the “OTS”) to the Office of Comptroller of the Currency (the “OCC”), which became effective on July 21, 2011. Savings and loan holding companies are regulated by the FRB. The law also established an independent federal consumer protection bureau within the FRB. The following discussion summarizes significant aspects of the law that may affect Alliance Bank and Alliance Bancorp. All of the regulations implementing these changes have not been promulgated, so we cannot determine the full impact on our business and operations at this time.
The following aspects of the financial reform and consumer protection act are related to the operations of Alliance Bank:
· | A new independent consumer financial protection bureau has been established within the FRB, empowered to exercise broad regulatory, supervisory and enforcement authority with respect to both new and existing consumer financial protection laws. However, smaller financial institutions, like Alliance Bank, continue to be subject to the supervision and enforcement of their primary federal banking regulator with respect to the federal consumer financial protection laws. |
· | Tier 1 capital treatment for “hybrid” capital items like trust preferred securities is eliminated subject to various grandfathering and transition rules. |
· | The prohibition on payment of interest on demand deposits was repealed, effective July 21, 2011. |
· | Deposit insurance is permanently increased to $250,000. |
· | The deposit insurance assessment base calculation is now equal to the depository institution’s total assets minus the sum of its average tangible equity during the assessment period. |
25 |
· | The minimum reserve ratio of the Deposit Insurance Fund increased to 1.35 percent of estimated annual insured deposits or assessment base; however, the FDIC is directed to “offset the effect” of the increased reserve ratio for insured depository institutions with total consolidated assets of less than $10 billion. |
The following aspects of the financial reform and consumer protection act are related to the operations of Alliance Bancorp:
· | Authority over savings and loan holding companies was transferred to the FRB. |
· | Leverage capital requirements and risk based capital requirements applicable to depository institutions and bank holding companies have been extended to thrift holding companies. The FRB has not issued regulations that address the levels of these capital requirements and when they will apply to Alliance Bancorp. |
· | The Federal Deposit Insurance Act was amended to direct federal regulators to require depository institution holding companies to serve as a source of strength for their depository institution subsidiaries. |
· | The Securities and Exchange Commission is authorized to adopt rules requiring public companies to make their proxy materials available to shareholders for nomination of their own candidates for election to the board of directors. |
· | Public companies are required to provide their shareholders with a non-binding vote: (i) at least once every three years on the compensation paid to executive officers, and (ii) at least once every six years on whether they should have a “say on pay” vote every one, two or three years. |
· | A separate, non-binding shareholder vote is required regarding golden parachutes for named executive officers when a shareholder vote takes place on mergers, acquisitions, dispositions or other transactions that would trigger the parachute payments. |
· | Securities exchanges are required to prohibit brokers from using their own discretion to vote shares not beneficially owned by them for certain “significant” matters, which include votes on the election of directors, executive compensation matters, and any other matter determined to be significant. |
· | Stock exchanges will be prohibited from listing the securities of any issuer that does not have a policy providing for (i) disclosure of its policy on incentive compensation payable on the basis of financial information reportable under the securities laws, and (ii) the recovery from current or former executive officers, following an accounting restatement triggered by material noncompliance with securities law reporting requirements, of any incentive compensation paid erroneously during the three-year period preceding the date on which the restatement was required that exceeds the amount that would have been paid on the basis of the restated financial information. |
· | Disclosure in annual proxy materials will be required concerning the relationship between the executive compensation paid and the financial performance of the issuer. |
· | Item 402 of Regulation S-K will be amended to require companies to disclose the ratio of the Chief Executive Officer’s annual total compensation to the median annual total compensation of all other employees. |
· | Smaller reporting companies are exempt from complying with the internal control auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act. |
Regulation of Alliance Bank Pennsylvania Banking Law. The Pennsylvania Banking Code of 1965 (the “Banking Code”) contains detailed provisions governing the organization, location of offices, rights and responsibilities of directors, officers, employees and members, as well as corporate powers, savings and investment operations and other aspects of Alliance Bank and its affairs. The Banking Code delegates extensive rulemaking 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.
26 |
One of the purposes of the Banking Code is to provide savings banks with the opportunity to be competitive with each other and with other financial institutions existing under other Pennsylvania laws and other state, federal and foreign laws. A Pennsylvania savings bank may locate or change the location of its principal place of business and establish an office anywhere in the Commonwealth, with the prior approval of the Department.
The Department generally examines each savings bank not less frequently than once every two years. The Department may accept the examinations and reports of the FDIC in lieu of its own examination, the present practice is for the Department to alternate with the FDIC. The Department may order any savings bank to discontinue any violation of law or unsafe or unsound business practice and may direct any director, trustee, officer, attorney or employee of a savings bank engaged in an objectionable activity, after the Department has ordered the activity to be terminated, to show cause at a hearing before the Department why such person should not be removed.
Insurance of Accounts. The deposits of Alliance Bank are insured to the maximum extent permitted by the Deposit Insurance Fund and are backed by the full faith and credit of the U.S. Government. As insurer, the FDIC is authorized to conduct examinations of, and to require reporting by, insured institutions. It also may prohibit any insured institution from engaging in any activity determined by regulation or order to pose a serious threat to the FDIC. The FDIC also has the authority to initiate enforcement actions against savings institutions.
The recently enacted financial institution reform legislation permanently increased deposit insurance on most accounts to $250,000. In addition, pursuant to Section 13(c)(4)(G) of the Federal Deposit Insurance Act, the FDIC has implemented two temporary programs to provide deposit insurance for the full amount of most non-interest bearing transaction deposit accounts and to guarantee certain unsecured debt of financial institutions and their holding companies. Under the unsecured debt program, the FDIC’s guarantee expired on on December 31, 2012. The unlimited deposit insurance for noninterest-bearing transaction accounts was extended by the Dodd-Frank Act through the end of 2012 for all insured institutions without a separate insurance assessment (but the cost of the additional insurance coverage will be considered under the risk-based assessment system).
The FDIC’s risk-based premium system provides for quarterly assessments. Each insured institution is placed in one of four risk categories depending on supervisory and capital considerations. Within its risk category, an institution is assigned to an initial base assessment rate which is then adjusted to determine its final assessment rate based on its brokered deposits, secured liabilities and unsecured debt. The FDIC recently amended its deposit insurance regulations (1) to change the assessment base from domestic deposits to average assets minus tangible equity and (2) to lower overall assessment rates. The revised rates are between 2.5 to 9 basis points for banks in the lowest risk category and between 30 to 45 basis points for banks in the highest risk category. The amendments became effective for the quarter beginning April 1, 2011 with the new assessment methodology being reflected in the premium invoices due September 30, 2011.
In 2009, the FDIC also required insured deposit institutions on December 30, 2009 to prepay 13 quarters of estimated insurance assessments. Our prepayment totaled approximately $2.3 million. Unlike a special assessment, this prepayment did not immediately affect bank earnings. Banks will book the prepaid assessment as a non-earning asset and record the actual risk-based premium payments at the end of each quarter.
In addition, all institutions with deposits insured by the FDIC are required to pay assessments to fund interest payments on bonds issued by the Financing Corporation, a mixed ownership government corporation established to recapitalize the predecessor to the Deposit Insurance Fund. These assessments will continue until the Financing Corporation bonds mature in 2019.
The FDIC may terminate the deposit insurance of any insured depository institution, including the Bank, if it determines after a hearing that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, order or any condition imposed by an agreement with the FDIC. It also may suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance, if the institution has no tangible capital. If insurance of accounts is terminated, the accounts at the institution at the time of the termination, less subsequent withdrawals, shall continue to be insured for a period of six months to two years, as determined by the FDIC. Management is not aware of any existing circumstances which could result in termination of the Bank’s deposit insurance.
Capital Requirements. The FDIC has promulgated regulations and adopted a statement of policy regarding the capital adequacy of state-chartered banks which, like Alliance Bank, are not members of the Federal Reserve System. These requirements are substantially similar to those adopted by the FRB regarding bank holding companies.
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The FDIC’s capital regulations establish a minimum 3.0% Tier I leverage capital requirement for the most highly-rated state-chartered, non-member banks. An additional cushion of at least 100 basis points is required for all other state-chartered, non-member banks, which effectively increases their minimum Tier I leverage ratio to 4.0% or more. Under the FDIC’s regulation, the most highly-rated banks are those that the FDIC determines are not anticipating or experiencing significant growth and have well diversified risk, including no undue interest rate risk exposure, excellent asset quality, high liquidity, good earnings and, in general, which are considered a strong banking organization and are rated composite 1 under the Uniform Financial Institutions Rating System. Leverage or core capital is defined as the sum of common stockholders’ equity (including retained earnings), noncumulative perpetual preferred stock and related surplus, and minority interests in consolidated subsidiaries, minus all intangible assets other than certain qualifying supervisory goodwill and certain purchased mortgage servicing rights.
The FDIC also requires that savings banks meet a risk-based capital standard. The risk-based capital standard for savings banks requires the maintenance of total capital (which is defined as Tier I capital and supplementary (Tier 2) capital) to risk weighted assets of 8%. In determining the amount of risk-weighted assets, all assets, plus certain off balance sheet assets, are multiplied by a risk-weight of 0% to 100%, based on the risks the FDIC believes are inherent in the type of asset or item. The components of Tier I capital are equivalent to those discussed above under the 3% leverage capital standard. The components of supplementary capital include certain perpetual preferred stock, certain mandatory convertible securities, certain subordinated debt and intermediate preferred stock and general allowances for loan and lease losses. Allowance for loan and lease losses includable in supplementary capital is limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of capital counted toward supplementary capital cannot exceed 100% of core capital.
Alliance Bank is also subject to more stringent Department capital guidelines. Although not adopted in regulation form, the Department utilizes capital standards requiring a minimum of 6% leverage capital and 10% risk-based capital. The components of leverage and risk-based capital are substantially the same as those defined by the FDIC. At December 31, 2012, Alliance Bank’s capital ratios exceeded each of its capital requirements and is considered well capitalized.
Prompt Corrective Action. The following table shows the amount of capital associated with the different
capital categories set forth in the prompt corrective action regulations.
Total | Tier 1 | Tier 1 | ||||
Capital Category | Risk-based Capital | Risk-based Capital | Leverage Capital | |||
Well capitalized | 10% or more | 6% or more | 5% or more | |||
Adequately capitalized | 8% or more | 4% or more | 4% or more | |||
Undercapitalized | Less than 8% | Less than 4% | Less than 4% | |||
Significantly undercapitalized Less than 6% | Less than 3% | Less than 3% |
In addition, an institution is “critically undercapitalized” if it has a ratio of tangible equity to total assets that is equal to or less than 2.0%. Under specified circumstances, a federal banking agency may reclassify a well capitalized institution as adequately capitalized and may require an adequately capitalized institution or an undercapitalized institution to comply with supervisory actions as if it were in the next lower category (except that the FDIC may not reclassify a significantly undercapitalized institution as critically undercapitalized).
An institution generally must file a written capital restoration plan which meets specified requirements within 45 days of the date that the institution receives notice or is deemed to have notice that it is undercapitalized, significantly undercapitalized or critically undercapitalized. A federal banking agency must provide the institution with written notice of approval or disapproval within 60 days after receiving a capital restoration plan, subject to extensions by the agency. An institution which is required to submit a capital restoration plan must concurrently submit a performance guaranty by each company that controls the institution. In addition, undercapitalized institutions are subject to various regulatory restrictions, and the appropriate federal banking agency also may take any number of discretionary supervisory actions. At December 31, 2012, Alliance Bank was deemed a well capitalized institution for purposes of the prompt corrective action regulations and as such is not subject to the above mentioned restrictions.
Recent Regulatory Capital Proposals. The FRB and the FDIC were part of a joint proposal in June 2012 seeking comment on three notices of proposed rulemaking (“NPR”) that would revise and replace the agencies’ current capital rules in connection with the Basel accords. The two NPRs discussed below concern capital issues of significant importance to Alliance Bank and Alliance Bancorp. The third NPR, relates to advanced approaches and market risk capital rules, is not applicable to the organization’s current operations.
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The first NPR relates to Basel III and proposes to revise risk-based and leverage capital requirements, including the implementation of new common equity Tier 1 capital requirements and a higher minimum Tier 1 capital requirement. Also included in the NPR are proposed limitations on capital distributions and certain discretionary bonus payments for any banking organization not holding a specified buffer of common equity Tier 1 capital in excess of its minimum risk-based capital requirement. Revisions to the prompt correction action framework and the tangible common equity definition are also included in the NPR. The other NPR applicable to the organization’s operations proposes a standardized approach for risk-weighted assets to enhance risk sensitivity and to address certain weaknesses identified over recent years, including methods for determining risk-weighted assets for residential mortgages, securitization exposures and counterparty credit risk. The proposed changes in the two NPRs would be applicable to Alliance Bank and Alliance Bancorp.
The comment period for these NPRs ended on October 22, 2012. Since Basel III was intended to be implemented beginning January 1, 2013, the regulators intended to finalize the rules by that date. However, on November 9, 2012, the federal agencies, including the FRB and the FDIC, that proposed the NPRs announced that they did not expect that any of the proposed rules would become effective on January 1, 2013. Moreover, the announcement did not indicate the likely new effective date.
Activities and Investments of Insured State-Chartered Banks. The activities and equity investments of FDIC-insured, state-chartered banks are generally limited to those that are permissible for national banks. Under regulations dealing with equity investments, an insured state bank generally may not directly or indirectly acquire or retain any equity investment of a type, or in an amount, that is not permissible for a national bank. An insured state bank is not prohibited from, among other things:
· | acquiring or retaining a majority interest in a subsidiary; |
· | investing as a limited partner in a partnership the sole purpose of which is direct or indirect investment in the acquisition, rehabilitation or new construction of a qualified housing project, provided that such limited partnership investments may not exceed 2% of the bank’s total assets; |
· | acquiring up to 10% of the voting stock of a company that solely provides or reinsures directors’, trustees’ and officers’ liability insurance coverage or bankers’ blanket bond group insurance coverage for insured depository institutions; and |
· | acquiring or retaining the voting shares of a depository institution if certain requirements are met. |
The FDIC has adopted regulations pertaining to the other activity restrictions imposed upon insured state banks and their subsidiaries. Pursuant to such regulations, insured state banks engaging in impermissible activities may seek approval from the FDIC to continue such activities. State banks not engaging in such activities but that desire to engage in otherwise impermissible activities either directly or through a subsidiary may apply for approval from the FDIC to do so; however, if such bank fails to meet the minimum capital requirements or the activities present a significant risk to the FDIC insurance funds, such application will not be approved by the FDIC. Pursuant to this authority, the FDIC has determined that investments in certain majority-owned subsidiaries of insured state banks do not represent a significant risk to the deposit insurance funds. Investments permitted under that authority include real estate activities and securities activities.
Restrictions on Capital Distributions. FRB and FDIC regulations govern capital distributions by savings institutions, which include cash dividends, stock repurchases and other transactions charged to the capital account of a savings institution to make capital distributions. Under applicable regulations, a savings institution must file an application for FDIC approval of the capital distribution if:
· | the total capital distributions for the applicable calendar year exceed the sum of the institution’s net income for that year to date plus the institution’s retained net income for the preceding two years; |
· | the institution would not be at least adequately capitalized following the distribution; |
· | the distribution would violate any applicable statute, regulation, agreement or FDIC imposed condition; or |
· | the institution is not eligible for expedited treatment of its filings with the FDIC. |
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If an application is not required to be filed, a savings institution such as Alliance Bank must still file a notice with the FDIC at least 30 days before the board of directors declares a dividend or approves a capital distribution if:
· | the institution would not be well-capitalized following the distribution; or |
· | the proposed distribution would reduce the amount or retire any part of our common or preferred stock or retire any part of a debt instrument included in our regulatory capital. |
In addition, a savings institution, such as Alliance Bank, that is the subsidiary of a stock savings and loan holding company, must also file notice with the appropriate Federal Reserve Bank at least 30 days before the proposed declaration of a dividend by its board of directors.
An institution that either before or after a proposed capital distribution fails to meet its then applicable minimum capital requirement or that has been notified that it needs more than normal supervision may not make any capital distributions without the prior written approval of the FDIC. In addition, the FDIC may prohibit a proposed capital distribution, which would otherwise be permitted by FDIC regulations, if the FDIC determines that such distribution would constitute an unsafe or unsound practice.
Under federal rules, an insured depository institution may not pay any dividend if payment would cause it to become undercapitalized or if it is already undercapitalized. In addition, federal regulators have the authority to restrict or prohibit the payment of dividends for safety and soundness reasons. The FDIC also prohibits an insured depository institution from paying dividends on its capital stock or interest on its capital notes or debentures (if such interest is required to be paid only out of net profits) or distributing any of its capital assets while it remains in default in the payment of any assessment due the FDIC. Alliance Bank is currently not in default in any assessment payment to the FDIC. Pennsylvania law also restricts the payment and amount of dividends, including the requirement that dividends be paid only out of accumulated net earnings.
Privacy Requirements of the Gramm-Leach-Bliley Act. Federal law places limitations on financial institutions like Alliance Bank regarding the sharing of consumer financial information with unaffiliated third parties. Specifically, these provisions require all financial institutions offering financial products or services to retail customers to provide such customers with the financial institution’s privacy policy and provide such customers the opportunity to “opt out” of the sharing of personal financial information with unaffiliated third parties. Alliance Bank currently has a privacy protection policy in place and believes such policy is in compliance with the regulations.
Anti-Money Laundering. Federal anti-money laundering rules impose various requirements on financial institutions intended to prevent the use of the U.S. financial system to fund terrorist activities. These provision include a requirement that financial institutions operating in the United States have anti-money laundering compliance programs, due diligence policies and controls to ensure the detection and reporting of money laundering. Such compliance programs supplement existing compliance requirements, also applicable to financial institutions, under the Bank Secrecy Act and the Office of Foreign Assets Control Regulations. Alliance Bank has established policies and procedures to ensure compliance with the federal anti-laundering provisions.
Regulatory Enforcement Authority. Applicable banking laws include substantial enforcement powers available to federal banking regulators. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease-and-desist or removal orders and to initiate injunctive actions against banking organizations and institution-affiliated parties, as defined. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with regulatory authorities.
Community Reinvestment Act. All insured depository institutions 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. Alliance Bank received a “satisfactory” Community Reinvestment Act rating in its most recently completed examination.
Federal Home Loan Bank System. Alliance Bank is a member of the FHLB of Pittsburgh, which is one of 12 regional FHLB’s. Each FHLB serves as a reserve or central bank for its members within its assigned region. It is funded primarily from proceeds from the sale of consolidated obligations of the FHLB System. It makes loans to members (i.e., advances) in accordance with policies and procedures established by the board of directors of the FHLB.
As a member, Alliance Bank is required to purchase and maintain stock in the FHLB of Pittsburgh in an amount in accordance with the FHLB’s capital plan and sufficient to ensure that the FHLB remains in compliance with its minimum capital requirements. At December 31, 2012, Alliance Bank was in compliance with this requirement.
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Federal Reserve Board System. The FRB requires all depository institutions to maintain non-interest bearing reserves at specified levels against their transaction accounts, which are primarily checking and NOW accounts, and non-personal time deposits. The balances maintained to meet the reserve requirements imposed by the FRB may be used to satisfy the liquidity requirements that are imposed by the Department. At December 31, 2012, Alliance Bank was in compliance with these reserve requirements.
Regulation of Alliance Bancorp
General. Alliance Bancorp is subject to regulation as a savings and loan holding company under the Home Owners’ Loan Act, as amended, instead of being subject to regulation as a bank holding company under the Bank Holding Company Act of 1956 because Alliance Bank has made an election under Section 10(l) of the Home Owners’ Loan Act to be treated as a “savings association” for purposes of Section 10 of the Home Owners’ Loan Act. As a result, Alliance Bancorp registered with the FRB and is subject to FRB regulations, examinations, supervision and reporting requirements relating to savings and loan holding companies. As a subsidiary of a savings and loan holding company, Alliance Bank is subject to certain restrictions in its dealings with Alliance Bancorp and affiliates thereof.
Federal Securities Laws. Alliance Bancorp’s common stock is registered with the Securities and Exchange Commission under Section 12(b) of the Securities Exchange Act of 1934. Alliance Bancorp is subject to the proxy and tender offer rules, insider trading reporting requirements and restrictions, and certain other requirements under the Securities Exchange Act of 1934.
The Sarbanes-Oxley Act. As a public company, Alliance Bancorp is subject to the Sarbanes-Oxley Act of 2002 which addresses, among other issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. As directed by the Sarbanes- Oxley Act, our principal executive officer and principal financial officer are required to certify that our quarterly and annual reports do not contain any untrue statement of a material fact. The rules adopted by the Securities and Exchange Commission under the Sarbanes-Oxley Act have several requirements, including having these officers certify that: they are responsible for establishing, maintaining and regularly evaluating the effectiveness of our internal control over financial reporting; they have made certain disclosures to our auditors and the audit committee of the Board of Directors about our internal control over financial reporting; and they have included information in our quarterly and annual reports about their evaluation and whether there have been changes in our internal control over financial reporting or in other factors that could materially affect internal control over financial reporting.
Holding Company Activities. Alliance Bancorp is a unitary savings and loan holding company and is permitted to engage only in the activities permitted for financial holding companies under FRB regulations or for multiple savings and loan holding companies. Multiple savings and loan holding companies are permitted to engage in the following activities: (i) activities permitted for a bank holding company under section 4(c) of the Bank Holding Company Act (unless the FRB prohibits or limits such 4(c) activities); (ii) furnishing or performing management services for a subsidiary savings association; (iii) conducting any insurance agency or escrow business; (iv) holding, managing or liquidating assets owned by or acquired from a subsidiary savings association; (v) holding or managing properties used or occupied by a subsidiary savings association; (vi) acting as trustee under deeds of trust; or (vii) activities authorized by regulation as of March 5, 1987, to be engaged in by multiple savings and loan holding companies. Although savings and loan holding companies are not currently subject to specific capital requirements, recent legislation authorized the FRB to establish capital requirements for savings and loan holding companies. That legislation also authorized federal regulators to require depository institution holding companies to serve as a source of strength to their depository institution subsidiaries. In addition, the financial impact of a holding company on its subsidiary institution is a matter that is evaluated by the Federal Reserve and the agency has authority to order cessation of activities or divestiture of subsidiaries deemed to pose a threat to the safety and soundness of the institution.
All savings association subsidiaries of savings and loan holding companies are required to meet a qualified thrift lender, or QTL, test to avoid certain restrictions on their operations. If the subsidiary savings institution fails to meet the QTL, as discussed below, then the savings and loan holding company must register with the FRB as a bank holding company, unless the savings institution re-qualifies as a QTL within one year thereafter.
Declaration of Dividends. A savings institution, such as Alliance Bank, that is part of a savings and loan holding company structure must file a notice of declaration of a dividend with the FRB not less than 30 days prior to the proposed declaration of dividend by its board of directors.
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Qualified Thrift Lender Test. A savings association can comply with the QTL test by either qualifying as a domestic building and loan association as defined in the Internal Revenue Code or meeting the FRB QTL test. A savings bank subsidiary of a savings and loan holding company that does not comply with the QTL test must comply with the following restrictions on its operations:
· | the institution may not engage in any new activity or make any new investment, directly or indirectly, unless such activity or investment is permissible for a national bank; |
· | the branching powers of the institution shall be restricted to those of a national bank; and |
· | payment of dividends by the institution shall be subject to the rules regarding payment of dividends by a national bank and the dividends must be necessary to meet obligations of the institution’s holding company. |
Upon the expiration of three years from the date the institution ceases to meet the QTL test, it must cease any activity and not retain any investment not permissible for a national bank and a savings association (subject to safety and soundness considerations).
Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, a savings institution not in compliance with the QTL test is also subject to an enforcement action for violation of the Home Owners’ Loan Act, as amended.
Alliance Bank believes that it meets the provisions of the QTL test.
Limitations on Transactions with Affiliates. Transactions between savings institutions and any affiliate are governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate of a savings institution includes any company or entity which controls the savings institution or that is controlled by a company that controls the savings institution. In a holding company context, the holding company of a savings institution (such as Alliance Bancorp) and any companies which are controlled by such holding companies are affiliates of the savings institution. Generally, Section 23A limits the extent to which the savings institution or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10% of such institution’s capital stock and surplus, and contains an aggregate limit on all such transactions with all affiliates to an amount equal to 20% of such capital stock and surplus. Section 23B applies to “covered transactions” as well as certain other transactions and requires that all transactions be on terms substantially the same, or at least as favorable, to the savings institution as those provided to a non-affiliate. The term “covered transaction” includes the making of loans to, purchase of assets from and issuance of a guarantee to an affiliate and similar transactions. Section 23B transactions also include the provision of services and the sale of assets by a savings institution to an affiliate. In addition to the restrictions imposed by Sections 23A and 23B, Section 11 of the Home Owners’ Loan Act prohibits a savings institution from (i) making a loan or other extension of credit to an affiliate, except for any affiliate which engages only in certain activities which are permissible for bank holding companies, or (ii) purchasing or investing in any stocks, bonds, debentures, notes or similar obligations of any affiliate, except for affiliates which are subsidiaries of the savings institution.
In addition, Sections 22(g) and (h) of the Federal Reserve Act place restrictions on loans to executive officers, directors and principal stockholders. Under Section 22(h), loans to a director, an executive officer and to a greater than 10% stockholder of a savings institution, and certain affiliated interests of such persons, may not exceed, together with all other outstanding loans to such persons and affiliated interests, the savings institution’s loans to one borrower limit (generally equal to 15% of the institution’s unimpaired capital and surplus). Section 22(h) also requires that loans to directors, executive officers and principal stockholders be made on terms substantially the same as offered in comparable transactions to other persons unless the loans are made pursuant to a benefit or compensation program that (i) is widely available to employees of the institution and (ii) does not give preference to any director, executive officer or principal stockholder, or certain affiliated interests of such persons, over other employees of the savings institution. Section 22(h) also requires prior board approval for certain loans. In addition, the aggregate amount of extensions of credit by a savings institution to all insiders cannot exceed the institution’s unimpaired capital and surplus. Furthermore, Section 22(g) places additional restrictions on loans to executive officers.
At December 31, 2012, Alliance Bank was in compliance with the above restrictions.
Restrictions on Acquisitions. Except under limited circumstances, savings and loan holding companies are prohibited from acquiring, without prior approval of the FRB, (i) control of any other savings institution or savings and loan holding company or substantially all the assets thereof or (ii) more than 5% of the voting shares of a savings institution or holding company thereof which is not a subsidiary. Except with the prior approval of the FRB, no director or officer of a savings and loan holding company or person owning or controlling by proxy or otherwise more than 25% of such company’s stock, may acquire control of any savings institution, other than a subsidiary savings institution, or of any other savings and loan holding company.
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The FRB may only approve acquisitions resulting in the formation of a multiple savings and loan holding company which controls savings institutions in more than one state if the multiple savings and loan holding company involved controls a savings institution which operated a home or branch office located in the state of the institution to be acquired as of March 5, 1987; (ii) the acquirer is authorized to acquire control of the savings institution pursuant to the emergency acquisition provisions of the Federal Deposit Insurance Act ; or (iii) the statutes of the state in which the institution to be acquired is located specifically permit institutions to be acquired by the state-chartered institutions or savings and loan holding companies located in the state where the acquiring entity is located (or by a holding company that controls such state-chartered savings institutions).
FEDERAL AND STATE TAXATION
General. Alliance Bancorp and Alliance Bank are subject to federal income tax provisions of the Internal Revenue Code of 1986, as amended, in the same general manner as other corporations with some exceptions listed below. For federal income tax purposes, Alliance Bancorp files a consolidated federal income tax return with its wholly owned subsidiaries on a fiscal year basis. The applicable federal income tax expense or benefit will be properly allocated to each subsidiary based upon taxable income or loss calculated on a separate company basis.
Method of Accounting. For federal income tax purposes, income and expenses are reported on the accrual method of accounting and Alliance Bancorp files its federal income tax return using a December 31 calendar year end.
Bad Debt Reserves. The Small Business Job Protection Act of 1996 eliminated the use of the reserve method of accounting for bad debt reserves by savings institutions, effective for taxable years beginning after 1995. Prior to that time, Alliance Bank was permitted to establish a reserve for bad debts and to make additions to the reserve. These additions could, within specified formula limits, be deducted in arriving at taxable income. As a result of the Small Business Job Protection Act, savings associations must use the specific chargeoff method in computing their bad debt deduction beginning with their 1996 federal tax return.
Taxable Distributions and Recapture. Prior to the Small Business Job Protection Act, bad debt reserves created prior to January 1, 1988 were subject to recapture into taxable income if Alliance Bank failed to meet certain thrift asset and definitional tests. New federal legislation eliminated these thrift related recapture rules. However, under current law, pre-1988 reserves remain subject to recapture should Alliance Bank make certain non-dividend distributions or cease to maintain a savings bank charter.
At December 31, 2012, Alliance Bank’s total federal pre-1988 reserve was approximately $7.1 million. The reserve reflects the cumulative effects of federal tax deductions for which no federal income tax provisions have been made.
Minimum Tax. The Internal Revenue Code imposes an alternative minimum tax (“AMT”) at a rate of 20% on a base of regular taxable income plus certain tax preferences (“alternative minimum taxable income” or “AMTI”). The AMT is payable to the extent such AMTI is in excess of an exemption amount. Net operating losses can offset no more than 90% of AMTI. Certain payments of alternative minimum tax may be used as credits against regular tax liabilities in future years. Alliance Bank has been subject to the AMT and as of December 31, 2012, had $1.6 million of AMT available as credit for carryover purposes.
Net Operating Loss Carryovers. Net operating losses incurred in taxable years beginning before August 6, 1997 may be carried back to the three preceding taxable years and forward to the succeeding 15 taxable years. For net operating losses in years beginning after August 5, 1997, other than 2001 and 2002, such net operating losses can be carried back to the two preceding taxable years and forward to the succeeding 20 taxable years. Net operating losses arising in 2001 or 2002 may be carried back five years and may be carried forward 20 years. At December 31, 2012, Alliance Bancorp and Alliance Bank had no net operating loss carryfowards for federal income tax purposes, and approximately $1.7 million in capital loss carryfowards expiring through 2015. The Company expects fully realize the benefit of such carryfowards based on forecasted earnings and tax strategies.
Corporate Dividends-Received Deduction. Alliance Bancorp may exclude from income 100% of dividends received from a member of the same affiliated group of corporations. The corporate dividends received deduction is 80% in the case of dividends received from corporations, which a corporate recipient owns less than 80%, but at least 20% of the distribution corporation. Corporations which own less than 20% of the stock of a corporation distributing a dividend may deduct only 70% of dividends received.
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Alliance Bank is subject to tax under the Pennsylvania Mutual Thrift Institutions Tax Act (the “MTIT”), as amended to include thrift institutions having capital stock. Pursuant to the MTIT, the tax rate is 11.5%. The MTIT exempts Alliance Bank from other taxes imposed by the Commonwealth of Pennsylvania for state income tax purposes and from all local taxation imposed by political subdivisions, except taxes on real estate and real estate transfers. The MTIT is a tax upon net earnings, determined in accordance with U.S. generally accepted accounting principles with certain adjustments. The MTIT, in computing income under U.S. generally accepted accounting principles, allows for the deduction of interest earned on state and federal obligations, while disallowing a percentage of a thrift’s interest expense deduction in the proportion of interest income on those securities to the overall interest income of Alliance Bank. Net operating losses, if any, thereafter can be carried forward three years for MTIT purposes. At December 31, 2012, the Bank had approximately $330,000 and $192,000 in NOL carryforwards expiring in 2013 and 2014, respectively, for state tax purposes. The Bank recorded a full allowance for these carryfowards as projected State income at the Bank is not anticipated to be sufficient to realize these benefits.
Item 1A. Risk Factors.
Not applicable
Item 1B. Unresolved Staff Comments.
None
Item 2. Properties.
Offices and Properties
At December 31, 2012, the Company conducted its business from its executive offices in Broomall, Pennsylvania and eight full service offices, all of which are located in southeastern Pennsylvania.
The following table sets forth certain information with respect to the office and other properties of the Company at December 31, 2012.
Net Book | ||||||||||
Value of | ||||||||||
Premises and | Amount of | |||||||||
Description/Address | Leased/Owned | Fixed Assets | Deposits | |||||||
(In Thousands) | ||||||||||
MAIN OFFICE | ||||||||||
Lawrence Park | Owned | $ | 1,281 | $ | 85,610 | |||||
541 Lawrence Road | ||||||||||
Broomall, PA 19008 | ||||||||||
BRANCH OFFICES | ||||||||||
Upper Darby | Leased (1) | 186 | 39,597 | |||||||
69th and Walnut Sts | ||||||||||
Upper Darby, PA 19082 | ||||||||||
Secane | Leased (2) | 89 | 60,933 | |||||||
925 Providence Road | ||||||||||
Secane, PA 19018 | ||||||||||
Newtown Square | Leased (3) | 25 | 29,355 | |||||||
252 & West Chester Pike | ||||||||||
Newtown Square, PA 19073 | ||||||||||
Havertown | Leased (4) | 61 | 52,984 | |||||||
500 E. Township Line Road | ||||||||||
Havertown, PA 19083 | ||||||||||
Lansdowne | ||||||||||
9 E. Baltimore Pike | Owned | 117 | 24,741 | |||||||
Lansdowne, PA 19050 | ||||||||||
Springfield | Owned (5) | 652 | 36,971 | |||||||
153 Saxer Avenue | ||||||||||
Springfield, PA 19064 | ||||||||||
Shoppes at Brinton Lake | Leased (6) | 34 | 26,813 | |||||||
979 Baltimore Pike | ||||||||||
Glen Mills, PA 19342 | ||||||||||
Westgate Plaza | Leased (7) | 243 | 14,033 | |||||||
309 Lancaster Ave. | ||||||||||
Frazer, PA 19355 |
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(1) The lease expires in February 2017 with two successive options to extend the lease for five years each.
(2) The lease expires in April 2016 with no further options to extend.
(3) The building is owned but the land is leased. The lease expires in March 2017 with no further options to extend.
(4) The lease expires in January 2016 with one successive option to extend the lease for five years each.
(5) As of December 31, 2012 this property is owned. Prior to the reorganization and conversion in 2011 this property was owned by the Company’s former mutual holding company and leased to the Bank.
(6) The lease expires in January 2021 with two successive options to extend the lease for five years each.
(7) In January of 2012, the Company signed a lease to occupy this property and relocated its Paoli office to this location. The initial lease term is ten years with two five year renewal options.
Item 3. Legal Proceedings.
The Company is involved in legal proceedings and litigation arising in the ordinary course of business. In the opinion of management, the outcome of such proceedings and litigation currently pending will not materially affect the Company consolidated financial statements. However, there can be no assurance that any of the outstanding legal proceedings and litigation to which the Company is a party will not be decided adversely to the Company’s interests and have a material adverse effect on the consolidated financial statements.
Item 4. Mine Safety Disclosures.
Not applicable
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PART II.
ITEM 5. Market for The Registrant’s Common Equity, and Related Stockholder Matters and Issuer Purchases of Equity Securities.
Corporate Information
Independent Registered Public Accounting Firm | Investor Information |
ParenteBeard LLC | Investors, analysts and others seeking |
1650 Market Street, Suite 4500 | information may contact: |
Philadelphia, PA 19103-7341 | |
Market Makers | Kathleen P. Lynch |
Stifel Nicholas & Company, Inc. | Corporate Secretary |
Sandler O’ Neill & Partners, LP | 541 Lawrence Road |
USB Financial Services, Inc. | Broomall, PA 19008-3599 |
(610) 353-2900 | |
Special Counsel | Transfer Agent |
Elias, Matz, Tiernan & Herrick LLP | Direct questions regarding dividend checks, |
734 15th Street, NW, 11th Floor | address and name changes or lost certificates to: |
Washington, D.C. 20005 | Registrar and Transfer Company |
10 Commerce Drive | |
Cranford, NJ 07016 |
Market Information
Alliance Bancorp common stock is traded on the Nasdaq Global Market and quoted under the symbol “ALLB”. The closing price on December 31, 2012 was $12.70 per share. There were 5,201,734 shares outstanding as of December 31, 2012 and the Company had approximately 1,236 shareholders of record as of March 4, 2013.
For the Quarter Ended | High | Low | Close | Cash Dividends Declared | ||||||||||||
December 31, 2012 | $ | 12.85 | $ | 11.96 | $ | 12.70 | $ | .05 | ||||||||
September 30, 2012 | 12.80 | 12.03 | 12.40 | .05 | ||||||||||||
June 30, 2012 | 12.30 | 11.35 | 12.20 | .05 | ||||||||||||
March 31, 2012 | 11.53 | 10.60 | 11.53 | .05 | ||||||||||||
December 31, 2011 | $ | 10.77 | $ | 9.72 | $ | 10.77 | $ | .05 | ||||||||
September 30, 2011 | 11.22 | 10.02 | 10.40 | .05 | ||||||||||||
June 30, 2011 | 11.24 | 10.70 | 11.15 | .04 | ||||||||||||
March 31, 2011 | 11.70 | 10.47 | 10.70 | .03 |
In January 2012, the Company approved a one year stock repurchase program of 10% of its outstanding shares or 547,433 shares of common stock. As of December 31, 2012, 272,703 shares have been repurchased under this program. In January 2013, the Company approved a one year extension to repurchase the remaining 274,730 shares under this program.
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The following table sets forth information with respect to purchases made by or on behalf of the Company of shares of common stock of the Company during the indicated periods.
Period | Total Number of Shares Purchased(1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||||||||
October 2012 | 6,400 | $ | 12.53 | 6,400 | 405,930 | |||||||||||
November 2012 | 101,200 | 12.68 | 101,200 | 304,730 | ||||||||||||
December 2012 | 30,000 | 12.70 | 30,000 | 274,730 | ||||||||||||
Totals | 137,600 | $ | 12.67 | 137,600 | 274,730 |
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Item 6. Selected Financial Data.
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The selected consolidated financial and other data of Alliance Bancorp, Inc. of Pennsylvania set forth below does not purport to be complete and should be read in conjunction with, and is qualified in its entirety by, the more detailed information, including the Consolidated Financial Statements and related Notes, appearing in Item 8 of this Annual Report.
As of or For the Year Ended December 31, | ||||||||||||||||||||
2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||||||||
(Dollars in thousands, except per share amounts) | ||||||||||||||||||||
Selected Financial Data | ||||||||||||||||||||
Total assets | $ | 460,915 | $ | 469,487 | $ | 454,476 | $ | 464,216 | $ | 424,109 | ||||||||||
Cash and cash equivalents | 112,305 | 95,852 | 61,891 | 74,936 | 28,308 | |||||||||||||||
Loans receivable, net | 278,876 | 285,297 | 286,056 | 285,008 | 278,436 | |||||||||||||||
Mortgage-backed securities | 7,524 | 11,303 | 16,146 | 23,355 | 31,921 | |||||||||||||||
Investment securities | 34,325 | 45,245 | 61,428 | 52,336 | 62,070 | |||||||||||||||
Other real estate owned | 2,092 | 2,587 | 2,675 | 2,968 | — | |||||||||||||||
Deposits | 371,037 | 376,048 | 384,595 | 375,254 | 327,267 | |||||||||||||||
Borrowings (1) | 3,261 | 3,878 | 7,384 | 35,090 | 41,632 | |||||||||||||||
Stockholders’ equity | 80,002 | 82,995 | 48,991 | 48,445 | 48,899 | |||||||||||||||
Total liabilities | 380,913 | 386,491 | 405,485 | 415,772 | 375,211 | |||||||||||||||
Allowance for loan losses | 4,919 | 4,000 | 5,090 | 3,538 | 3,169 | |||||||||||||||
Non-accrual loans | 3,537 | 11,859 | 13,699 | 6,457 | 5,209 | |||||||||||||||
Non-performing assets (2) | 7,695 | 17,025 | 18,966 | 10,805 | 6,996 | |||||||||||||||
Selected Operating Data | ||||||||||||||||||||
Interest and dividend income | $ | 17,409 | $ | 18,677 | $ | 19,797 | $ | 21,091 | $ | 22,542 | ||||||||||
Interest expense | 3,210 | 4,104 | 6,434 | 9,509 | 11,701 | |||||||||||||||
Net interest income | 14,199 | 14,573 | 13,363 | 11,582 | 10,841 | |||||||||||||||
Provision for loan losses | 1,025 | 3,250 | 2,120 | 528 | 585 | |||||||||||||||
Net interest income after provision for loan losses | 13,174 | 11,323 | 11,243 | 11,054 | 10,256 | |||||||||||||||
Other income | 1,937 | 726 | 1,084 | 1,164 | 241 | |||||||||||||||
Other expenses | 11,910 | 10,979 | 11,375 | 10,900 | 10,303 | |||||||||||||||
Income before income tax | 3,201 | 1,070 | 953 | 1,318 | 194 | |||||||||||||||
Income tax expense (benefit) | 659 | (79 | ) | (128 | ) | (41 | ) | (411 | ) | |||||||||||
Net income | $ | 2,542 | $ | 1,149 | $ | 1,080 | $ | 1,359 | $ | 605 | ||||||||||
Basic earnings per share (3) | $ | 0.48 | $ | 0.22 | $ | 0.20 | $ | 0.24 | $ | 0.11 | ||||||||||
Dilutive earnings per share (3) | $ | 0.48 | $ | 0.21 | $ | 0.20 | $ | 0.24 | $ | 0.11 |
(Notes on Following Page)
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As of or For the Year Ended December 31, | ||||||||||||||||||||
2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||||||||
Selected Operating Ratios | ||||||||||||||||||||
Average yield earned on interest-earning assets | 3.92 | % | 4.24 | % | 4.64 | % | 5.08 | % | 5.64 | % | ||||||||||
Average rate paid on interest-bearing liabilities | 0.87 | 1.12 | 1.66 | 2.57 | 3.32 | |||||||||||||||
Average interest rate spread (4) | 3.05 | 3.12 | 2.98 | 2.51 | 2.32 | |||||||||||||||
Net interest margin (4) | 3.19 | 3.31 | 3.13 | 2.79 | 2.72 | |||||||||||||||
Ratio of interest-earning assets to interest-bearing liabilities | 120.35 | 120.79 | 110.65 | 111.98 | 113.54 | |||||||||||||||
Noninterest expense as a percent of average assets | 2.51 | 2.36 | 2.50 | 2.47 | 2.44 | |||||||||||||||
Return on average assets | 0.54 | 0.25 | 0.24 | 0.30 | 0.14 | |||||||||||||||
Return on average equity | 3.08 | 1.37 | 2.21 | 2.97 | 1.21 | |||||||||||||||
Dividend payout ratio | 42.77 | 80.99 | 30.29 | 25.59 | 122.91 | |||||||||||||||
Efficiency ratio (5) | 73.81 | 71.76 | 78.74 | 85.52 | 92.97 | |||||||||||||||
Ratio of average equity to average assets | 17.43 | 18.05 | 10.74 | 11.08 | 11.79 | |||||||||||||||
Full-service offices at end of period | 9 | 9 | 9 | 9 | 9 | |||||||||||||||
Asset Quality Ratios | ||||||||||||||||||||
Non-accrual loans as a percentage of total loans receivable | 1.24 | % | 4.09 | % | 4.71 | % | 2.24 | % | 2.85 | % | ||||||||||
Nonperforming loans as a percent of total loans receivable | 1.97 | 4.98 | 5.59 | 2.71 | 2.48 | |||||||||||||||
Nonperforming assets as a percent of total assets (2) | 1.67 | 3.63 | 4.17 | 2.33 | 1.65 | |||||||||||||||
Allowance for loan losses as a percent of total loans receivable | 1.73 | 1.38 | 1.75 | 1.23 | 1.13 | |||||||||||||||
Allowance for loan losses as a percent of nonperforming loans | 87.79 | 27.70 | 31.24 | 45.14 | 45.30 | |||||||||||||||
Allowance for loan losses as a percent of non-accrual loans | 139.08 | 33.72 | 37.15 | 54.78 | 60.84 | |||||||||||||||
Net charge-offs to average loans receivable outstanding during the period | 0.04 | 1.49 | 0.20 | 0.06 | 0.09 | |||||||||||||||
Bank Capital Ratios | ||||||||||||||||||||
Tier 1 leverage capital ratio | 12.76 | % | 12.85 | % | 10.83 | % | 10.17 | % | 10.67 | % | ||||||||||
Tier 1 risk-based capital ratio | 23.43 | 21.85 | 16.13 | 15.97 | 16.33 | |||||||||||||||
Total risk-based capital ratio | 24.69 | 23.10 | 17.38 | 17.17 | 17.47 |
(1) | Borrowings consist of advances, demand notes issued to the U.S. Treasury, customer sweep accounts, and the Employee Stock Ownership Plan (“ESOP”) debt prior to conversion. |
(2) | Nonperforming assets consist of nonperforming loans, certain troubled debt restructurings and other real estate owned (“OREO”). Nonperforming loans consist of nonaccrual loans and accruing loans 90 days or more overdue, while OREO consists of real estate acquired through, or in lieu of, foreclosure. |
(3) | The calculation of earnings per share for 2008 to 2010 has been adjusted for the exchange and additional share issuance in the reorganization and offering completed on January 18, 2011 which the exchange rate was 0.8200 shares of common stock of Alliance Bancorp, Inc. of Pennsylvania, the new Pennsylvania holding company. |
(4) | Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities, and net interest margin represents net interest income as a percentage of average interest-earning assets. |
(5) | The efficiency ratio is calculated by dividing other expenses by the sum of net interest income and other income. |
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Report contains certain forward-looking statements and information relating to the Company that are based on the beliefs of management as well as assumptions made by and information currently available to management. In addition, in those and other portions of this document, the words “anticipate,” “believe,” “estimate,” “except,” “intend,” “should” and similar expressions, or the negative thereof, as they relate to the Company or the Company’s management, are intended to identify forward-looking statements. Such statements reflect the current views of the Company with respect to future looking events and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect actual results may vary materially from those described herein as anticipated, believed, estimated, expected or intended. The Company does not intend to update these forward-looking statements.
Overview
Alliance Bancorp is a Pennsylvania corporation and the holding company which owns 100% of the capital stock of Alliance Bank, a community oriented savings bank headquartered in Broomall, Pennsylvania. We operate a total of nine banking offices, eight of which are located in Delaware County and one in Chester County. Both counties are suburbs of Philadelphia. Our primary business consists of attracting deposits from the general public and using those funds, together with funds we borrow, to originate loans to our customers and invest in securities such as U.S. Government and agency securities, mortgage-backed securities and municipal obligations. At December 31, 2012, Alliance Bancorp had $460.9 million of total assets, $371.0 million of total deposits and stockholders’ equity of $80.0 million.
Alliance Bank attracts the majority of its deposits from the general public, businesses and municipalities using a combination of its branch office network and the internet. These deposits are used primarily to originate and purchase loans secured by first liens on single-family (one-to four-family units) residential and commercial real estate properties and (ii) invest in securities issued by the United States (“U.S.”) Government and agencies thereof, municipal and corporate debt securities and certain mutual funds. Alliance Bank derives its income principally from interest earned on loans, mortgage-backed securities and investments and, to a lesser extent, from a variety of fees received such as loan fees, services charges on deposits accounts, safe deposit box rental income and ATM fees. Alliance Bank’s primary expenses are interest expense on deposits and borrowings and general operating expenses, including FDIC deposit insurance premiums. Cash flow for activities is provided primarily by new deposits, repayments, prepayments and maturities of outstanding loans, investments, mortgage-backed securities and other sources.
Alliance Bank is subject to regulation by the Department, as its chartering authority, and by the FDIC, which insures Alliance Bank’s deposits up to applicable limits.
Our results of operations depend, to a large extent, on net interest income, which is the difference between the income earned on our loan and securities portfolios and interest expense on deposits and borrowings. Our net interest income is largely determined by our net interest spread, which is the difference between the average yield earned on interest-earning assets and the average rate paid on interest-bearing liabilities, and the relative amounts of interest-earning assets and interest-bearing liabilities. Results of operations are also affected by our provisions for loan losses, fees and service charges and other non-interest income and non-interest expense. Non-interest expense principally consists of compensation and employee benefits, office occupancy and equipment expense, data processing, FDIC insurance premiums, advertising and other expense. Our results of operations are also significantly affected by general economic and competitive conditions, particularly changes in interest rates, government policies and actions of regulatory authorities. Future changes in applicable law, regulations or government policies may materially impact our financial condition and results of operations.
Our net income amounted to $2.5 million and $1.1 million for the years ended December 31, 2012 and 2011, respectively. Some of the major factors and trends which have impacted our results of operations in these periods include the following:
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· | Low Market Rates of Interest. In recent periods, our results have been impacted from the historically low market rates of interest that have prevailed. During 2008, the FRB reduced the federal funds rate seven times from 4.25% at December 31, 2007 to a range of 0% to 0.25% at December 31, 2008 and throughout 2009 and remained at 0.25% at December 31, 2012. The average rates that we pay on our interest-bearing deposits and other liabilities have fallen steadily, from 3.32% for the year ended December 31, 2008 to 0.87% during the year ended December 31, 2012. We anticipate that the continued low rate environment will put further downward pressure on short term interest rates until an economic recovery is sustainable and when the interest rate environment begins to increase, it will cause pricing pressure on our deposit accounts and may have a negative impact on our net interest income and possibly our net income. |
· | Increase in other income. Our other income increased $1.2 million or 166.7% in 2012, which was primarily due to the gain on sale of property held for future development which amounted to $806,000, and to a lesser extent, net gains from the sale of other real estate owned which amounted to $326,000. |
· | Increase in other expense. Our other expense increased $931,000 or 8.5% in 2012, which was primarily due to provisions for write-downs on certain OREO properties, increases in salaries and benefits expense and advertising and marketing costs which were partially offset by decreases in FDIC deposit insurance premiums, professional fees and other non-interest expense. The decrease in the provision for loan losses during 2012 compared to 2011 was primarily due to the prior-year charge-offs of $3.7 million recorded in September 2011 on two former real estate construction loans. |
Critical Accounting Policies
In reviewing and understanding financial information for Alliance Bancorp, you are encouraged to read and understand the significant accounting policies used in preparing our consolidated financial statements included elsewhere in this document. These policies are described in Note 2 of the notes to our consolidated financial statements. The accounting and financial reporting policies of Alliance Bancorp conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. Accordingly, the consolidated financial statements require certain estimates, judgments, and assumptions, which are believed to be reasonable, based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expenses during the periods presented. The following accounting policies comprise those that management believes are the most critical to aid in fully understanding and evaluating our reported consolidated financial results. These policies require numerous estimates or economic assumptions that may prove inaccurate or may be subject to variations which may significantly affect our reported results and financial condition for the period or in future periods.
Allowance for Loan Losses. The allowance for loan losses is established through a provision for loan losses charged to expense. Charges against the allowance for loan losses are made when management believes that the collectibility of loan principal is unlikely. Subsequent recoveries are added to the allowance. The allowance is an amount that management believes will cover known and inherent losses in the loan portfolio, based on evaluations of the collectibility of loans. The evaluations take into consideration such factors as changes in the types and amount of loans in the loan portfolio, historical loss experience, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, estimated losses relating to specifically identified loans, and current economic conditions. This evaluation is inherently subjective as it requires material estimates including, among others, exposure at default, the amount and timing of expected future cash flows on impaired loans, value of collateral, estimated losses on our commercial and residential loan portfolios and general amounts for historical loss experience. All of these estimates may be susceptible to significant change. While management uses the best information available to make loan loss allowance evaluations, adjustments to the allowance may be necessary based on changes in economic and other conditions or changes in accounting guidance. Historically, our estimates of the allowance for loan losses have not required significant adjustments from management’s initial estimates. In addition, the Department and the FDIC, as an integral part of their examination processes, periodically review our allowance for loan losses. The Department and the FDIC may require the recognition of adjustments to the allowance for loan losses based on their judgment of information available to them at the time of their examinations. To the extent that actual outcomes differ from management’s estimates, additional provisions to the allowance for loan losses may be required that would adversely impact earnings in future periods.
41 |
Income Taxes. We make estimates and judgments to calculate some of our tax liabilities and determine the recoverability of some of our deferred tax assets, which arise from temporary differences between the tax and financial statement recognition of revenues and expenses. We also estimate a deferred tax asset valuation allowance if, based on the available evidence, it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. These estimates and judgments are inherently subjective. Historically, our estimates and judgments to calculate our deferred tax accounts have not required significant revision to our initial estimates. In evaluating our ability to recover deferred tax assets, we consider all available positive and negative evidence, including our past operating results, recent cumulative losses and our forecast of future taxable income. In determining future taxable income, we make assumptions for the amount of taxable income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require us to make judgments about our future taxable income and are consistent with the plans and estimates we use to manage our business. Any reduction in estimated future taxable income may require us to record an additional valuation allowance against our deferred tax assets. An increase in the valuation allowance would result in additional income tax expense in the period and could have a significant impact on our future earnings.
Other than Temporary Impairment of Securities. Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) whether or not we intend to sell or expects that it is more likely than not that we will be required to sell the security prior to an anticipated recovery in fair value. Once a decline in value for a debt security is determined to be other-than-temporary, the other-than-temporary impairment is separated into (a) the amount of total other-than-temporary impairment related to a decrease in cash flows expected to be collected from debt security (the credit loss) and (b) the amount of other-than-temporary impairment related to all other factors. The amount of the total other-than-temporary impairment related to credit loss is recognized in earnings. The amount of other-than-temporary impairment related to other factors is recognized in other comprehensive income (loss).
FHLB Stock. FHLB stock represents required investment in the common stock of the FHLB and is carried at cost. The purchase of FHLB stock provides banks with the right to be a member of the FHLB and to receive the products and services that the FHLB provides to member banking institutions. Unlike other types of stock, FHLB stock is acquired primarily for the right to receive advances from the FHLB, rather than the for the purpose of earning dividends or stock price appreciation. FHLB stock is an activity based stock directly proportional to the volume of advances taken by a member institution. During the fourth quarter of 2008, the FHLB announced a decision to suspend the dividend on, and restrict the repurchase of, FHLB stock. In 2010, the FHLB began partial redemptions of excess stock. The FHLB redeemed $549,000 and $430,000 of the Company’s FHLB stock during 2012 and 2011, respectively. In 2012, the FHLB paid a $3,000 dividend on the Company’s FHLB stock.
Management’s evaluation and determination of whether this investment is impaired is based on its assessment of the ultimate recoverability of its cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of an investment’s cost is influenced by criteria such as (1) the significance of the decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this decline has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, and (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the FHLB.
Financial Condition
The Company’s total assets decreased $8.6 million or 1.8% to $460.9 million at December 31, 2012, compared to $469.5 million at December 31, 2011. This decrease can be attributed to a $14.1 million or 61.0% decrease in investment securities available for sale, a $3.8 million or 33.4% decrease in mortgage-backed securities, a $6.4 million or 2.3% decrease in net loans receivable, and a $1.8 million or 39.7% decrease in premises and equipment. These decreases were partially off-set by a $16.5 million or 17.2% increase in cash and cash equivalents and a $3.2 million or 14.2% increase in investment securities held to maturity.
Total liabilities decreased $5.6 million or 1.4% to $380.9 million at December 31, 2012, compared to $386.5 million at December 31, 2011. This decrease was primarily due to a $5.0 million or 1.3% decrease in total deposits and a $618,000 or 15.9% decrease in other borrowings. These decreases were partially offset by a $50,000 or 0.8% increase in accrued expenses and other liabilities.
Stockholders’ equity decreased $3.0 million to $80.0 million as of December 31, 2012 compared to $83.0 million at December 31, 2011. The decrease can be attributed to a $3.4 million increase in treasury stock, a $1.3 million or 44.5% increase in common stock acquired by benefit plans, and a $327,000 increase in accumulated other comprehensive loss. The decrease was partially off-set by a $1.5 million or 4.7% increase in retained earnings and a $612,000 or 1.1% increase in additional paid in capital.
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Nonperforming assets decreased $9.3 million to $7.7 million or 1.67% of total assets at December 31, 2012 as compared to $17.0 million or 3.63% of total assets at December 31, 2011. The nonperforming assets at December 31, 2012 included $5.6 million in nonperforming loans and $2.1 million in OREO. The decrease in nonperforming assets was primarily due to an $8.8 million decrease in nonperforming loans that primarily resulted from the cash sale of a $3.2 million nonperforming construction loan and the transfer of a $4.4 million of former nonperforming real estate loans to OREO during the year ended December 31, 2012. Regarding the $4.4 million in loans transferred to OREO, the Company completed a $2.7 million sale of a previously owned multi-family OREO property that had a carrying value of $2.7 million in the fourth quarter of 2012. As of December 31, 2012, nonperforming loans included $2.4 million in single-family residential real estate loans, $2.9 million in commercial real estate loans and $324,000 in student loans, which are fully guaranteed by the U.S. Government. The allowance for loan losses amounted to $4.9 million or 87.8% of nonperforming loans at December 31, 2012 as compared to $4.0 million or 27.7% at December 31, 2011.
Although management uses the best information available to make determinations with respect to the provisions for loan losses, additional provisions for loan losses may be required to be established in the future should economic or other conditions change substantially. In addition, the Department and the FDIC, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses. Such agencies may require the Bank to recognize additions to such allowance based on their judgments about information available to them at the time of their examination.
Results of Operations
General. The Company recorded net income of $2.5 million for the year ended December 31, 2012 as compared to net income of $1.1 million for 2011. Net income increased $1.4 million or 121.2% to $2.5 million or $0.48 per diluted share for the year ended December 31, 2012 as compared to $1.1 million or $0.21 per diluted share for the same period in 2011.
The increase in net income was primarily due to a $1.2 million or 166.7% increase in other income, an $894,000 or 21.8% decrease in interest expense, and a $2.2 million or 68.5% decrease in provision for loan losses for the year ended December 31, 2012 compared to the year ended December 31, 2011. The items above were partially offset by a $1.3 million or 6.8% decrease in interest income, a $931,000 or 8.5% increase in other expenses, and a $738,000 increase in income taxes for the year ended December 31, 2012 compared to the year ended December 31, 2011.
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Average Balances, Net Interest Income and Yields Earned and Rates Paid. The following average balance sheet table sets forth for the periods indicated, information on the Bank regarding: (i) the total dollar amounts of interest income on interest-earning assets and the resulting average yields; (ii) the total dollar amounts of interest expense on interest-bearing liabilities and the resulting average costs; (iii) net interest income; (iv) interest rate spread; (v) net interest-earning assets (interest-bearing liabilities); (vi) the net yield earned on interest-earning assets; and (vii) the ratio of total interest-earning assets to total interest-bearing liabilities. Information is based on average daily balances during the periods presented.
Year Ended December 31, | ||||||||||||||||||||||||||||||||||||
2012 | 2011 | 2010 | ||||||||||||||||||||||||||||||||||
Average | Yield/ | Average | Yield/ | Average | Yield/ | |||||||||||||||||||||||||||||||
Balance | Interest | Rate | Balance | Interest | Rate | Balance | Interest | Rate | ||||||||||||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||||||||||||||
Loans receivable (1)(3) | $ | 283,597 | $ | 15,616 | 5.51 | % | $ | 291,719 | $ | 16,431 | 5.63 | % | $ | 288,192 | $ | 16,878 | 5.86 | % | ||||||||||||||||||
Mortgage-backed securities | 9,424 | 368 | 3.90 | 13,678 | 560 | 4.09 | 19,897 | 822 | 4.13 | |||||||||||||||||||||||||||
Investment securities (3) | 44,739 | 1,174 | 2.62 | 58,152 | 1,505 | 2.59 | 51,924 | 1,863 | 3.59 | |||||||||||||||||||||||||||
Other interest-earning assets | 106,815 | 251 | 0.23 | 77,070 | 181 | 0.23 | 66,920 | 234 | 0.35 | |||||||||||||||||||||||||||
Total interest-earning assets | 444,575 | 17,409 | 3.92 | 440,619 | 18,677 | 4.24 | 426,933 | 19,797 | 4.64 | |||||||||||||||||||||||||||
Noninterest-earning assets | 29,068 | 25,466 | 28,006 | |||||||||||||||||||||||||||||||||
Total assets | $ | 473,643 | $ | 466,085 | $ | 454,939 | ||||||||||||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||||||||||||||
Deposits | $ | 366,381 | 3,202 | 0.87 | $ | 361,009 | 4,087 | 1.13 | $ | 368,762 | 5,567 | 1.51 | ||||||||||||||||||||||||
FHLB advances and other borrowings | 3,032 | 8 | 0.26 | 3,762 | 17 | 0.45 | 17,096 | 867 | 5.07 | |||||||||||||||||||||||||||
Total interest-bearing liabilities | 369,413 | 3,210 | 0.87 | 364,771 | 4,104 | 1.12 | 385,858 | 6,434 | 1.66 | |||||||||||||||||||||||||||
Noninterest-bearing liabilities | 21,681 | 17,208 | 20,224 | |||||||||||||||||||||||||||||||||
Total liabilities | 391,094 | 381,979 | 406,082 | |||||||||||||||||||||||||||||||||
Stockholders’ equity | 82,549 | 84,106 | 48,857 | |||||||||||||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 473,643 | $ | 466,085 | $ | 454,939 | ||||||||||||||||||||||||||||||
Net interest-earning assets | $ | 75,162 | $ | 75,848 | $ | 41,075 | ||||||||||||||||||||||||||||||
Net interest income/interest rate spread | $ | 14,199 | 3.05 | % | $ | 14,573 | 3.12 | % | $ | 13,363 | 2.98 | % | ||||||||||||||||||||||||
Net yield on interest-earning assets (2) (3) | 3.19 | % | 3.31 | % | 3.13 | % | ||||||||||||||||||||||||||||||
Ratio of interest-earning assets to interest-bearing liabilities | 120.35 | % | 120.79 | % | 110.65 | % |
(1) | Nonaccrual loans and loan fees have been included. |
(2) | Net interest income divided by interest-earning assets. |
(3) | The indicated yields are not reflected on a tax equivalent basis. |
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Rate/Volume analysis. The following table describes the extent to which changes in interest rates and changes in volume of interest-related assets and liabilities have affected the Company’s interest income and expense during the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (change in volume multiplied by prior year rate), (ii) changes in rate (change in rate multiplied by prior year volume), and (iii) total change in rate and volume. The combined effect of changes in both rate and volume has been allocated proportionately to the change due to rate and the change due to volume.
Year Ended December 31, | ||||||||||||
2012 vs. 2011 | ||||||||||||
Increase | ||||||||||||
(Decrease) Due To | ||||||||||||
Total | ||||||||||||
Increase | ||||||||||||
(Dollars in Thousands) | Rate | Volume | (Decrease) | |||||||||
Interest-earning assets: | ||||||||||||
Loans receivable | $ | (362 | ) | $ | (453 | ) | $ | (815 | ) | |||
Mortgage-backed securities | (19 | ) | (173 | ) | (192 | ) | ||||||
Investment securities | 16 | (347 | ) | (331 | ) | |||||||
Other interest-earning assets | — | 70 | 70 | |||||||||
Total interest-earning assets | (365 | ) | (903 | ) | (1,268 | ) | ||||||
Interest-bearing liabilities: | ||||||||||||
Deposits | (931 | ) | 46 | (885 | ) | |||||||
FHLB advances and other borrowings | (7 | ) | (2 | ) | (9 | ) | ||||||
Total interest-bearing liabilities | (938 | ) | 44 | (894 | ) | |||||||
Increase (decrease) in net interest income | $ | 573 | $ | (947 | ) | $ | (374 | ) |
Net Interest Income. Net interest income is determined by the Company’s interest rate spread (i.e., the difference between the yields earned on its interest-earning assets and the rates paid on its interest-bearing liabilities) and the relative amounts of interest-earning assets and interest-bearing liabilities. Net interest income decreased $374,000 or 2.6% during 2012 as compared to the same period in 2011. The decrease in net interest income was primarily due to a $1.3 million or 6.8% decrease in interest income on interest earning assets, partially off-set by a $894,000 or 21.8% decrease in interest expense on interest bearing liabilities. Overall, the interest rate spread decreased 7 basis points (one basis point is equal to 1/100 of a percent) from 3.12% for the year ended December 31, 2011 to 3.05% for the year ended December 31, 2012.
Interest and Dividend Income. Interest income decreased $1.3 million or 6.8% to $17.4 million for the year ended December 31, 2012, compared to the same period in 2011. The decrease was primarily due to an $815,000 or 5.0% decrease in interest income earned on loans, a $331,000 or 22.0% decrease in interest income on investment securities, and a $192,000 or 34.3% decrease in interest income earned on mortgage backed securities. The decrease in interest income was partially off-set by a $70,000 or 38.7% increase in interest income on balances due from depository institutions.
The decrease in interest income on loans was primarily due to an $8.1 million or 2.8% decrease in the average balance of loans outstanding and a 12 basis point or 2.1% decrease in the average yield earned on loans. The decrease in interest income on investment securities was primarily due to a $13.4 million or 23.1% decrease in the average balance of investment securities partially offset by a 3 basis point or 1.2% increase in the average yield earned on investment securities The decrease in interest income on mortgage backed securities was primarily due to a $4.3 million or 31.1% decrease in the average balance of mortgage backed securities and a 19 basis point or 4.6% decrease in the average yield earned on mortgage backed securities. The increase in interest due from depository institutions was due to a $29.7 million or 38.6% increase in the average balance of balances due from depository institutions.
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Interest Expense. Interest expense decreased $894,000 or 21.8% in 2012 compared to 2011. This decrease was due to a decrease of $885,000 or 21.7% in interest expense on deposits and a decrease of $9,000 or 52.9% in interest expense on other borrowings. The decrease in interest expense on deposits was due to a 26 basis point or 23.0% decrease in the average rate paid on deposits, partially offset by a $5.4 million or 1.5% increase in the average balance outstanding. The decrease in interest expense on other borrowings was due to a $730,000 or 19.4% decrease in the average balance outstanding and a 19 basis point or 42.2% decrease in the average rates paid on other borrowings.
Provision for Loan Losses. The Company establishes provisions for loan losses, which are charges to operating results, in order to maintain a level of total allowance for loan losses that management believes, to the best of its knowledge, covers all known and inherent losses that are both probable and reasonably estimable, at each reporting date. The allowance is based upon an assessment of prior loss experience, the volume and type of lending conducted by the Company, industry standards, past due loans, current economic conditions in the Company’s market area and other factors related to the collectibility of the Company’s loan portfolio. The provision for loan losses amounted to $1.0 million and $3.3 million for the years ended December 31, 2012 and 2011, respectively. The decrease in the provision for loan losses during 2012 compared to 2011 was primarily due to the receipt of updated appraisals in the prior-year for two real estate construction loans and management’s decision to reduce the carrying values of those loans in 2011 to bulk sale or liquidation values of the collateral supporting those loans.
Other Income. Total other income increased $1.2 million or 166.7% to $1.9 million for the year ended December 31, 2012, compared to 2011. The increase was primarily the result of an $806,000 gain on the sale of premises and equipment from the sale of real property held for future development. The increase in other income also included a $326,000 net gain on the sale of OREO, $39,000 in rental income on OREO properties, and a $14,000 increase in other fee income for the year ended December 31, 2012. These increases were partially offset by a $9,000 or 2.8% decrease in the cash surrender value of bank owned life insurance and a $6,000 or 2.5% decrease in service charges on deposit accounts for the year ended December 31, 2012.
Other Expenses. Total other expenses amounted to $11.9 million and $11.0 million for the years ended December 31, 2012 and 2011, respectively. The increase was primarily due to a $670,000 or 10.8% increase in salary and employee benefits, a $65,000 or 18.7% increase in advertising and marketing expense, and a $290,000 increase in provision for OREO for the year ended December 31, 2012 when compared to the same period in 2011. These increases were partially offset by a $25,000 or 4.2% decrease in professional fees, and a $34,000 or 7.9% decrease in FDIC insurance premiums.
Income Tax Expense (Benefit). Income tax expense (benefit) amounted to $659,000 and $(79,000) for the years ended December 31, 2012 and 2011, respectively, resulting in effective tax rates of 20.6% and (7.3)%, respectively. The increase in the income tax expense effective rate for the year ended December 31, 2012 was primarily due to higher pre-tax income in 2012 compared to 2011. The tax benefit in 2011 primarily resulted from tax exempt income from Bank-owned life insurance and certain tax-exempt securities purchased by the Company.
Liquidity and Capital Resources
The Company’s liquidity, represented by cash and cash equivalents, is a product of its cash flows from operations. The Company’s primary sources of funds are deposits, borrowings, amortization, prepayments and maturities of outstanding loans and mortgage-backed securities, sales of loans, maturities and calls of investment securities and other short-term investments and income from operations. Changes in the cash flows of these instruments are greatly influenced by economic conditions and competition. After the completion of its reorganization and stock offering in January of 2011, the Company’s liquidity and capital position were further strengthened resulting from $30.0 million in net proceeds from the stock offering. The Company attempts to balance supply and demand by managing the pricing of its loan and deposit products while maintaining a level of growth consistent with the conservative operating philosophy of the management and board of directors. Any excess funds are invested in overnight and other short-term interest-earning accounts. The Company generates cash flow through the retail deposit market, its traditional funding source, for use in investing activities. In addition, the Company may utilize borrowings such as FHLB advances for liquidity or profit enhancement. At December 31, 2012, the Company had no outstanding FHLB advances and $117.1 million of borrowing capacity from the FHLB of Pittsburgh. FHLB stock is required to be held when advances from the FHLB are taken. Further, the Company has access to the Federal Reserve Bank discount window. At December 31, 2012, the Company had no such funds outstanding from the Federal Reserve Bank.
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The primary use of funds is to meet ongoing loan and investment commitments, to pay maturing savings certificates and savings withdrawals and expenses related to general operations of the Company. At December 31, 2012, the total approved loan commitments outstanding amounted to $10.4 million. At the same date, commitments under unused lines of credit amounted to $25.6 million. Certificates of deposit scheduled to mature in one year or less at December 31, 2012, totaled $145.4 million. Management believes that a significant portion of maturing deposits will remain with the Company. Investment and mortgage-backed securities totaled $41.8 million at December 31, 2012, of which $252,000 are scheduled to mature or reprice in one year or less. The Company anticipates that it will continue to have sufficient cash flows to meet its current and future commitments.
Bank Regulatory Capital Requirements
The following table summarizes the Bank’s total stockholder’s equity, FDIC regulatory capital, total FDIC risk-based assets, leverage and risk-based regulatory ratios at December 31, 2012.
(Dollars in Thousands) | ||||
Total stockholder’s equity or GAAP capital (Bank) | $ | 61,643 | ||
FDIC adjustment for securities available-for-sale | (337 | ) | ||
FDIC adjustment for retirement plans | 2,012 | |||
FDIC adjustment for deferred tax assets | (4,974 | ) | ||
FDIC tier 1 capital | 58,344 | |||
Plus: FDIC tier 2 capital (1) | 3,135 | |||
Total FDIC risk-based capital | $ | 61,479 | ||
FDIC quarterly average total assets for leverage ratio | $ | 457,345 | ||
FDIC net risk-weighted assets | 249,036 | |||
FDIC leverage capital ratio | 12.76 | % | ||
Minimum requirement (2) | 4.00% to 5.00 | % | ||
FDIC risk-based capital - tier 1 | 23.43 | % | ||
Minimum requirement | 4.00 | % | ||
FDIC total risk-based capital (tier 1 & 2) | 24.69 | % | ||
Minimum requirement | 8.00 | % |
(1) | Tier 2 capital consists entirely of the allowable portion of the allowance for loan losses, which is limited to 1.25% of total risk-weighted assets as detailed under regulations of the FDIC. |
(2) | The FDIC has indicated that most highly rated institutions which meet certain criteria will be required to maintain a ratio of 3%, and all other institutions will be required to maintain an additional cushion of 100 to 200 basis points. As of December 31, 2012, the Bank had not been advised of any additional requirements in this regard. |
Payments Due Under Contractual Obligations
The following table presents information relating to the Company’s payments due under contractual obligations as of December 31, 2012.
Payments Due by Period | ||||||||||||||||||||
Less Than | One to | Three to | More Then | |||||||||||||||||
One Year | Three Years | Five Years | Five Years | Total | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Other Borrowings | $ | 3,261 | $ | — | $ | — | $ | — | $ | 3,261 | ||||||||||
Certificates of deposit | 145,394 | 56,045 | 16,253 | 4,367 | 222,059 | |||||||||||||||
Retirement plan obligations | 332 | 1,059 | 2,547 | 4,789 | 8,727 | |||||||||||||||
Operating lease obligations | 456 | 915 | 613 | 1,282 | 3,266 | |||||||||||||||
Total contractual obligations | $ | 149,443 | $ | 58,019 | $ | 19,413 | $ | 10,438 | $ | 237,313 |
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Off-Balance Sheet Arrangements
In the normal course of operations, we engage in a variety of financial transactions that, in accordance with GAAP, 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, lines of credit and letters of credit.
The contractual amounts of commitments to extend credit represent the amounts of potential accounting loss should the contract be fully drawn upon, the customer defaults and the value of any existing collateral becomes worthless. We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments. Financial instruments whose contract amounts represent credit risk at the dates indicated are as follows:
At December 31, | ||||||||
2012 | 2011 | |||||||
(Dollars in thousands) | ||||||||
Commitments to extend credit:(1) | ||||||||
Future loan commitments | $ | 10,403 | $ | 9,385 | ||||
Undisbursed construction loans | 8,764 | 4,179 | ||||||
Undisbursed home equity lines of credit | 4,550 | 4,601 | ||||||
Undisbursed commercial lines of credit | 12,055 | 13,297 | ||||||
Overdraft protection lines | 192 | 189 | ||||||
Standby letters of credit | 888 | 508 | ||||||
Total Commitments | $ | 36,852 | $ | 32,159 |
(1) | 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. Commitments may require payment of a fee and generally have fixed expiration dates or other termination clauses. |
We anticipate that we will continue to have sufficient funds and alternative funding sources to meet our current commitments.
Asset and Liability Management
The ability to maximize net interest income is largely dependent upon the achievement of a positive interest rate spread that can be sustained during fluctuations in prevailing interest rates. Interest rate sensitivity is a measure of the difference between amounts of interest-earning assets and interest-bearing liabilities which either reprice or mature within a given period of time. The difference, or the interest rate repricing “gap”, provides an indication of the extent to which a bank’s interest rate spread will be affected by changes in interest rates. A gap is considered positive when the amount of interest-rate sensitive assets exceeds the amount of interest-rate sensitive liabilities, and is considered negative when the amount of interest-rate sensitive liabilities exceeds the amount of interest-rate sensitive assets. Generally, during a period of rising interest rates, a negative gap within shorter maturities would adversely affect net interest income, while a positive gap within shorter maturities would result in an increase in net interest income, and during a period of falling interest rates, a negative gap within shorter maturities would result in an increase in net interest income while a positive gap within shorter maturities would have the opposite effect. Alliance Bank’s one year gap position at December 31, 2012 was a negative 21.5% primarily due to the $145.4 million of certificate accounts which mature during the one year period subsequent to December 31, 2012. In order to minimize the potential for adverse effects of material and prolonged changes in interest rates on Alliance Bank’s results of operations, Alliance Bank’s management has implemented and continues to monitor asset and liability management policies to better match the maturities and repricing terms of Alliance Bank’s interest-earning assets and interest-bearing liabilities. Such policies have consisted primarily of: (i) emphasizing investment in adjustable-rate mortgage loans (“ARMs”) and shorter-term (15 years or less) mortgage-backed securities; (ii) originating short-term secured commercial loans with balloon provisions or the rate on the loan tied to the prime rate; (iii) purchasing shorter-term (primarily two to ten years) investment securities of investment grade quality and U.S. Government Agency Bonds with terms of 15 years or less; (iv) selling longer-term (15 years or more) fixed-rate residential mortgage loans in the secondary market; (v) maintaining a high level of liquid assets (including investments and mortgage backed securities available for sale) that can be readily reinvested in higher yielding investments should interest rates rise; (vi) emphasizing the retention of lower-costing savings accounts and other core deposits; (vii) using interest rate floors and prepayment penalties on loan products; and (viii) lengthening liabilities and locking in lower borrowing rates with longer terms whenever possible.
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The following table summarizes the anticipated maturities or repricing of Alliance Bank’s interest-earning assets and interest-bearing liabilities as of December 31, 2012 based on the information and assumptions set forth in the footnotes below.
1 Year or Less | Over 1 Year to 3 Years | Over 3 Years to 5 Years | Over 5 Years to 15 Years |
Over 15 Years |
Total | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Interest-earning assets | ||||||||||||||||||||||||
Loans receivable(1) | $ | 41,053 | $ | 57,393 | $ | 30,732 | $ | 126,134 | $ | 24,946 | $ | 280,258 | ||||||||||||
Mortgage-backed securities(2) | 1,876 | 1,145 | 1,050 | 1,986 | 1,467 | 7,524 | ||||||||||||||||||
Investment securities(3) | 5,002 | 4,384 | 2,463 | 13,177 | 9,299 | 34,325 | ||||||||||||||||||
Other interest-earning assets | 112,305 | — | — | — | — | 112,305 | ||||||||||||||||||
Total interest-earning assets | 160,236 | 62,922 | 34,245 | 141,297 | 35,712 | 434,412 | ||||||||||||||||||
Interest-bearing liabilities | ||||||||||||||||||||||||
Savings accounts(4) | 10,057 | 10,057 | 10,057 | 10,057 | 10,056 | 50,284 | ||||||||||||||||||
NOW accounts | 54,393 | — | — | — | — | 54,393 | ||||||||||||||||||
Money market deposit accounts | 28,057 | — | — | — | — | 28,057 | ||||||||||||||||||
Certificate accounts | 145,394 | 56,045 | 16,253 | 4,367 | — | 222,059 | ||||||||||||||||||
Borrowed money | 21,124 | — | — | — | — | 21,124 | ||||||||||||||||||
Total interest-bearing liabilities | 259,025 | 66,102 | 26,310 | 14,424 | 10,056 | 375,917 | ||||||||||||||||||
Repricing GAP during the period | (98,789 | ) | (3,180 | ) | 7,935 | 126,873 | 25,656 | 58,495 | ||||||||||||||||
Cumulative GAP | $ | (98,789 | ) | $ | (101,969 | ) | $ | (94,034 | ) | $ | 32,839 | $ | 58,495 | |||||||||||
Ratio of GAP during the period to total assets | (21.4 | )% | (0.7 | )% | 1.7 | % | 27.5 | % | 5.6 | % | ||||||||||||||
Ratio of cumulative GAP to total assets | (21.4 | )% | (22.1 | )% | (20.4 | )% | 7.1 | % | 12.7 | % |
____________
(1) | Adjustable-rate loans are included in the period in which interest rates are next scheduled to adjust rather than in the period in which they are contractually due to mature. Fixed-rate loans are included in the period in which they are contractually due to mature. Balances have been reduced by $3.5 million for nonaccrual loans at December 31, 2012. |
(2) | Reflects the expected average life of the mortgage-backed security. |
(3) | Reflects repricing or contractual maturity with respect to investment securities. |
(4) | For savings accounts, which totaled $50.3 million at December 31, 2012, assumes a decay rate of 20% per period. |
Management believes that the assumptions utilized to evaluate the vulnerability of Alliance Bank’s operations to changes in interest rates approximate actual experience and considers them reasonable. However, the interest rate sensitivity of Alliance Bank’s assets and liabilities in the above table could vary substantially if different assumptions were used or actual experience differs from the historical experience on which they are based.
Although the actions taken by management of Alliance Bank have reduced the potential effects of changes in interest rates on Alliance Bank’s results of operations, significant increases in interest rates may adversely affect Alliance Bank’s net interest income because the repricing of interest-bearing liabilities relative to interest-earning assets occurs within shorter periods and because Alliance Bank’s adjustable-rate, interest-earning assets generally are not as responsive to changes in interest rates as its interest-bearing liabilities. This is primarily due to terms which generally permit only annual adjustments to loan interest rates and which generally limit the amount which interest rates thereon can adjust at such time and over the life of the related asset.
Net Portfolio Value and Net Interest Income Analysis. Our interest rate sensitivity also is monitored by management through the use of models which generate estimates of the change in its net portfolio value (“NPV”) and net interest income (“NII”) over a range of interest rate scenarios. NPV is the present value of expected cash flows from assets, liabilities, and off-balance sheet contracts. The NPV ratio, under any interest rate scenario, is defined as the NPV in that scenario divided by the market value of assets in the same scenario.
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The table below sets forth as of December 31, 2012, the estimated changes in our NPV that would result from designated instantaneous changes in the United States Treasury yield curve. Computations of prospective effects of hypothetical interest rates changes are based on numerous assumptions including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results.
As of December 31, 2012 | ||||||||||||
Change in Interest Rates (Basis Points)(1) |
Amount |
Dollar Change from Base | Percentage Change from Base | |||||||||
(Dollars in thousands) | ||||||||||||
+300 | $ | 55,891 | $ | (7,920 | ) | (12.4 | )% | |||||
+200 | 59,446 | (4,365 | ) | (6.8 | ) | |||||||
+100 | 62,483 | (1,328 | ) | (2.1 | ) | |||||||
Flat | 63,811 | — | — | |||||||||
-100 | 61,864 | (1,947 | ) | (3.1 | ) | |||||||
-200 | 62,259 | (1,552 | ) | (2.4 | ) |
____________
(1) | Assumes an instantaneous uniform change in interest rates. One basis point equals 0.01%. |
In addition to modeling changes in NPV, we also analyze potential changes to NII for a twelve-month period under rising and falling interest rate scenarios. The following table shows our NII model as of December 31, 2012.
Change in Interest Rates in Basis Points (Rate Shock) | Net Interest Income |
$ Change |
% Change | |||||||||
(Dollars in thousands) | ||||||||||||
+300 | $ | 13,939 | $ | 134 | 1.0 | % | ||||||
+200 | 13,998 | 193 | 1.4 | |||||||||
+100 | 13,998 | 193 | 1.4 | |||||||||
Flat | 13,805 | — | — | |||||||||
-100 | 14,119 | 314 | 2.3 | |||||||||
-200 | 14,101 | 296 | 2.1 |
The above table indicates that as of December 31, 2012, in the event of an immediate and sustained 200 basis point increase in interest rates, our net interest income for the 12 months ending December 31, 2013 would be expected to increase by $193,000 or 1.4% to $14.0 million.
As is the case with the GAP Table, certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in NPV and NII require the making of certain assumptions which may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the models presented assume that the composition of our interest sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities. Accordingly, although the NPV measurements and net interest income models provide an indication of interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on net interest income and will differ from actual results.
Recent Accounting Pronouncements
ASU No. 2011-11, "Balance Sheet (Topic 210) - Disclosures about Offsetting Assets and Liabilities," amends Balance Sheet (Topic 210), to require an entity to disclose both gross and net information about both financial instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. The financial instruments and transactions would include derivatives, sale and repurchase agreements and reverse sale and repurchase agreements, and securities borrowing and lending arrangements. ASU 2011-11 is effective for annual and interim periods beginning on January 1, 2013, and is not expected to have a significant impact on the Company’s financial statements.
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In February 2013, the FASB issued ASU 2013-02, Reporting of Amounts Reclassified Out of Comprehensive Income. The amendments in this ASU are intended to improve the reporting of reclassifications out of accumulated other comprehensive income by requiring an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required to be reclassified in its entirety to net income. For other amounts that are not required to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required that provide additional detail about those amounts. This would be the case when a portion of the amount reclassified out of accumulated other comprehensive income is reclassified to a balance sheet account instead of directly to income or expense in the same reporting period. The ASU is effective for public entities for reporting periods beginning after December 15, 2012. The Company is evaluating the impact of the ASU, but does not expect a material impact on the financial statements.
Impact of Inflation and Changing Prices
The consolidated financial statements and related financial data presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars, without considering changes in relative purchasing power over time due to inflation. Unlike most industrial companies, virtually all of the Company’s assets and liabilities are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution’s performance than does the effect of inflation.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The information required herein is incorporated by reference from Item 7, the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Assets and Liability Management.”
51 |
Item 8. Financial Statements and Supplementary Data.
Report of Independent Registered Public Accounting Firm
Board of Directors and
Stockholders of Alliance Bancorp, Inc. of Pennsylvania
We have audited the accompanying consolidated statements of financial condition of Alliance Bancorp, Inc. of Pennsylvania and subsidiaries (“the Company”) as of December 31, 2012 and 2011, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for the years then ended. The 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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. 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 Alliance Bancorp, Inc. of Pennsylvania and subsidiaries as of December 31, 2012 and 2011, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
/s/ParenteBeard LLC
Philadelphia,
Pennsylvania
March 22, 2013
52 |
Alliance Bancorp, Inc. of Pennsylvania and Subsidiaries
Consolidated Statements of Financial Condition
December 31, | December 31, | |||||||
2012 | 2011 | |||||||
Assets | ||||||||
Cash and cash due from depository institutions | $ | 984,043 | $ | 1,397,223 | ||||
Interest bearing deposits with depository institutions | 111,320,893 | 94,454,975 | ||||||
Total cash and cash equivalents | 112,304,936 | 95,852,198 | ||||||
Investment securities available for sale | 8,999,740 | 23,069,933 | ||||||
Mortgage-backed securities available for sale | 7,523,931 | 11,302,852 | ||||||
Investment securities held to maturity (fair value - 2012, $26,525,426; 2011, $23,199,869) | 25,325,160 | 22,174,747 | ||||||
Loans receivable - net of allowance for loan losses - 2012, $4,918,952; 2011, $3,999,542 | 278,875,991 | 285,296,790 | ||||||
Accrued interest receivable | 1,502,392 | 1,666,050 | ||||||
Premises and equipment – net | 2,688,294 | 4,461,033 | ||||||
Other real estate owned (OREO) | 2,091,780 | 2,587,150 | ||||||
Federal Home Loan Bank (FHLB) stock-at cost | 1,338,100 | 1,886,800 | ||||||
Bank owned life insurance | 12,154,683 | 11,842,364 | ||||||
Deferred tax asset – net | 6,050,717 | 5,842,558 | ||||||
Other prepaid expenses and assets | 2,059,099 | 3,504,115 | ||||||
Total Assets | $ | 460,914,823 | $ | 469,486,590 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Liabilities | ||||||||
Non-interest bearing deposits | $ | 16,243,096 | $ | 11,859,004 | ||||
Interest bearing deposits | 354,793,631 | 364,188,913 | ||||||
Total deposits | 371,036,727 | 376,047,917 | ||||||
Other borrowings | 3,260,533 | 3,878,345 | ||||||
Accrued expenses and other liabilities | 6,615,277 | 6,565,049 | ||||||
Total Liabilities | 380,912,537 | 386,491,311 | ||||||
Stockholders’ Equity | ||||||||
Common stock, $.01 par value; shares authorized – 50,000,000 shares issued - 5,474,437; shares outstanding - 2012, 5,201,734; 2011, 5,474,437 | 54,747 | 54,747 | ||||||
Additional paid-in capital | 57,008,955 | 56,396,555 | ||||||
Retained earnings | 32,273,617 | 30,818,973 | ||||||
Common stock acquired by benefit plans | (4,227,875 | ) | (2,926,840 | ) | ||||
Accumulated other comprehensive loss | (1,675,419 | ) | (1,348,156 | ) | ||||
Treasury stock, at cost: 2012, 272,703 shares; 2011, -0- shares | (3,431,739 | ) | — | |||||
Total Stockholders’ Equity | 80,002,286 | 82,995,279 | ||||||
Total Liabilities and Stockholders’ Equity | $ | 460,914,823 | $ | 469,486,590 |
See notes to consolidated financial statements.
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Alliance Bancorp, Inc. of Pennsylvania and Subsidiaries
Consolidated Statements of Income
Years Ended December 31, | ||||||||
2012 | 2011 | |||||||
Interest and Dividend Income | ||||||||
Loans, including fees | $ | 15,616,208 | $ | 16,430,298 | ||||
Mortgage-backed securities | 368,229 | 560,072 | ||||||
Investment securities: | ||||||||
Taxable | 226,204 | 472,385 | ||||||
Tax – exempt | 944,801 | 1,033,478 | ||||||
Dividends | 3,094 | — | ||||||
Balances due from depository institutions | 250,337 | 181,278 | ||||||
Total interest and dividend income | 17,408,873 | 18,677,511 | ||||||
Interest Expense | ||||||||
Deposits | 3,202,317 | 4,086,712 | ||||||
Other borrowings | 7,551 | 17,480 | ||||||
Total interest expense | 3,209,868 | 4,104,192 | ||||||
Net Interest Income | 14,199,005 | 14,573,319 | ||||||
Provision for Loan Losses | 1,025,000 | 3,250,000 | ||||||
Net Interest Income After Provision for Loan Losses | 13,174,005 | 11,323,319 | ||||||
Other Income | ||||||||
Service charges on deposit accounts | 250,176 | 256,559 | ||||||
Other fee income | 202,321 | 188,040 | ||||||
Net loss on sale of securities | — | (43,952 | ) | |||||
Gain on sale of OREO, net | 326,283 | 3,785 | ||||||
Increase in cash surrender value of bank owned life insurance | 312,319 | 321,378 | ||||||
Rental income from OREO | 39,431 | — | ||||||
Gain on sale of premises and equipment | 805,817 | — | ||||||
Other | 679 | 532 | ||||||
Total other income | 1,937,026 | 726,342 | ||||||
Other Expenses | ||||||||
Salaries and employee benefits | 6,859,668 | 6,189,506 | ||||||
Occupancy and equipment | 1,824,123 | 1,808,639 | ||||||
FDIC deposit insurance premiums | 398,241 | 432,570 | ||||||
Advertising and marketing | 413,523 | 348,385 | ||||||
Professional fees | 568,885 | 593,558 | ||||||
Loan and OREO expense | 198,117 | 187,145 | ||||||
Directors’ fees | 235,550 | 238,100 | ||||||
Provision for loss on OREO | 301,830 | 11,446 | ||||||
Other | 1,110,490 | 1,170,163 | ||||||
Total other expenses | 11,910,427 | 10,979,512 | ||||||
Income Before Income Tax Expense (Benefit) | 3,200,604 | 1,070,149 | ||||||
Income Tax Expense (Benefit) | 659,000 | (79,000 | ) | |||||
Net Income | $ | 2,541,604 | $ | 1,149,149 | ||||
Basic Earnings per Share | $ | 0.48 | $ | 0.22 | ||||
Dilutive Earnings per Share | $ | 0.48 | $ | 0.21 |
See notes to consolidated financial statements.
54 |
Alliance Bancorp, Inc. of Pennsylvania and Subsidiaries
Consolidated Statements of Comprehensive Income
Years Ended December 31, | ||||||||
2012 | 2011 | |||||||
Net Income | $ | 2,541,604 | $ | 1,149,149 | ||||
Other Comprehensive Income (Loss) | ||||||||
Additional minimum liability for Retirement Plans- net of tax benefit - 2012, $(77,546); 2011, $(517,308); | (150,529 | ) | (1,004,187 | ) | ||||
Unrealized gain (loss) on securities net of tax (benefit) expense - 2012, $(91,044); 2011, $38,719 | (176,734 | ) | 75,157 | |||||
Plus reclassification adjustment for realized loss on sale of securities (net) included in net income net of tax benefit of $19,284 | — | 37,435 | ||||||
Total Other Comprehensive Loss | (327,263 | ) | (891,595 | ) | ||||
Comprehensive Income | $ | 2,214,341 | $ | 257,554 |
See notes to consolidated financial statements.
55 |
Alliance Bancorp, Inc. of Pennsylvania and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
Years Ended December 31, 2012 and 2011
Common Stock | Additional
Paid-in Capital | Retained
Earnings | Common
Stock Acquired by Benefit Plans | Accumulated
Other Comprehensive Loss | Treasury
Stock | Total
Stockholders’ Equity | ||||||||||||||||||||||
Balance, January 1, 2011 | $ | 72,250 | $ | 23,999,125 | $ | 30,600,478 | $ | (481,789 | ) | $ | (456,561 | ) | $ | (4,742,410 | ) | $ | 48,991,093 | |||||||||||
ESOP shares committed to be released | (8,000 | ) | 150,090 | 142,090 | ||||||||||||||||||||||||
Common stock acquired by ESOP | (1,611,357 | ) | (1,611,357 | ) | ||||||||||||||||||||||||
Net income | 1,149,149 | 1,149,149 | ||||||||||||||||||||||||||
Dividends declared ($0.17 per share) | (930,654 | ) | (930,654 | ) | ||||||||||||||||||||||||
Dissolution of mutual holding company | 6,847,743 | 6,847,743 | ||||||||||||||||||||||||||
Proceeds from issuance of common stock, | ||||||||||||||||||||||||||||
net of offering costs of $2,602,657 | 54,747 | 29,927,346 | 29,982,093 | |||||||||||||||||||||||||
Stock-based compensation (stock options) | 79,642 | 79,642 | ||||||||||||||||||||||||||
Stock-based compensation (restricted stock) | 220,859 | 220,859 | ||||||||||||||||||||||||||
Common stock acquired by 2011 Trust (94,500 shares) | (983,784 | ) | (983,784 | ) | ||||||||||||||||||||||||
Cancellation of common stock and treasury stock | (72,250 | ) | (4,670,160 | ) | 4,742,410 | — | ||||||||||||||||||||||
Other comprehensive loss | (891,595 | ) | (891,595 | ) | ||||||||||||||||||||||||
Balance, December 31, 2011 | $ | 54,747 | $ | 56,396,555 | $ | 30,818,973 | $ | (2,926,840 | ) | $ | (1,348,156 | ) | $ | — | $ | 82,995,279 | ||||||||||||
ESOP shares committed to be released | 5,000 | 153,600 | 158,600 | |||||||||||||||||||||||||
Net income | 2,541,604 | 2,541,604 | ||||||||||||||||||||||||||
Dividends declared ($0.20 per share) | (1,086,960 | ) | (1,086,960 | ) | ||||||||||||||||||||||||
Stock-based compensation (stock options) | 162,092 | 162,092 | ||||||||||||||||||||||||||
Stock-based compensation (restricted stock) | 445,308 | 445,308 | ||||||||||||||||||||||||||
Common stock acquired by 2011 Trust (124,477 shares) | (1,454,635 | ) | (1,454,635 | ) | ||||||||||||||||||||||||
Acquisition of treasury stock (272,703 shares) | (3,431,739 | ) | (3,431,739 | ) | ||||||||||||||||||||||||
Other comprehensive loss | (327,263 | ) | (327,263 | ) | ||||||||||||||||||||||||
Balance, December 31, 2012 | $ | 54,747 | $ | 57,008,955 | $ | 32,273,617 | $ | (4,227,875 | ) | $ | (4,227,875 | ) | $ | (3,431,739 | ) | $ | 80,002,286 |
See notes to consolidated financial statements.
56 |
Alliance Bancorp, Inc. of Pennsylvania and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, | ||||||||
2012 | 2011 | |||||||
Cash Flow From Operating Activities | ||||||||
Net income | $ | 2,541,604 | $ | 1,149,149 | ||||
Adjustments to reconcile net income to cash provided by operating activities: | ||||||||
Provision for: | ||||||||
Loan losses | 1,025,000 | 3,250,000 | ||||||
Depreciation and amortization | 504,591 | 535,701 | ||||||
Write down of OREO | 301,830 | 11,446 | ||||||
Loss on sale of securities | — | 43,952 | ||||||
Stock-based compensation expense | 766,000 | 442,591 | ||||||
Deferred tax benefit | (39,569 | ) | (199,000 | ) | ||||
Gain on the sale of premises and equipment | (805,817 | ) | — | |||||
Gain on the sale of OREO | (326,283 | ) | (3,785 | ) | ||||
Changes in assets and liabilities which provided (used) cash: | ||||||||
Accrued expenses and other liabilities | (177,847 | ) | (554,124 | ) | ||||
Prepaid expenses and other assets | 1,445,016 | 41,333 | ||||||
Increase in cash surrender value of bank owned life insurance | (312,319 | ) | (321,378 | ) | ||||
Accrued interest receivable | 163,658 | 175,175 | ||||||
Net cash provided by operating activities | 5,085,864 | 4,571,060 | ||||||
Cash Flow From Investing Activities | ||||||||
Purchase of investment securities-available for sale | (17,000,000 | ) | (39,920,000 | ) | ||||
Purchase of investment securities-held to maturity | (6,890,000 | ) | (6,605,000 | ) | ||||
Loans originated and acquired | (67,581,828 | ) | (44,583,708 | ) | ||||
Proceeds from maturities and calls of investment securities | 34,733,626 | 62,299,752 | ||||||
Proceeds from the sale of securities available for sale and held to maturity | — | 957,771 | ||||||
Redemption of FHLB stock | 548,700 | 430,000 | ||||||
Principal repayments of: | ||||||||
Loans | 68,535,917 | 39,350,611 | ||||||
Mortgage-backed securities | 3,587,297 | 4,730,697 | ||||||
Purchase of premises and equipment | (778,589 | ) | (392,784 | ) | ||||
Investment in OREO | (486,000 | ) | — | |||||
Proceeds from the sale of premises and equipment | 2,852,554 | — | ||||||
Proceeds from the sale of OREO | 5,447,533 | 2,822,974 | ||||||
Net cash provided by investing activities | 22,969,210 | 19,090,313 | ||||||
Cash Flow From Financing Activities | ||||||||
Dividends paid | (1,086,960 | ) | (930,654 | ) | ||||
Decrease in deposits | (5,011,190 | ) | (8,546,902 | ) | ||||
Purchase of treasury stock | (3,431,739 | ) | — | |||||
Cash from mutual holding company reorganization | — | 3,804,517 | ||||||
Subscriptions payable | — | (7,908,463 | ) | |||||
Proceeds from stock issuance, net | — | 29,982,093 | ||||||
Acquisition of stock by benefit plans | (1,454,635 | ) | (2,595,141 | ) | ||||
Decrease in other borrowings | (617,812 | ) | (3,505,413 | ) | ||||
Net cash (used in) provided by financing activities | (11,602,336 | ) | 10,300,037 | |||||
Increase in Cash and Cash Equivalents | 16,452,738 | 33,961,410 | ||||||
Cash and Cash Equivalents, Beginning of Year | 95,852,198 | 61,890,788 | ||||||
Cash and Cash Equivalents, End of Year | $ | 112,304,936 | $ | 95,852,198 | ||||
Supplemental Disclosures of Cash Flow Information- | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | 3,209,873 | $ | 4,098,513 | ||||
Income taxes | $ | — | $ | 770,000 | ||||
Supplemental Schedule of Noncash Financing and Investing Activities: | ||||||||
Other real estate acquired in settlement of loans | $ | 4,441,710 | $ | 2,742,350 | ||||
Premises and equipment-net acquired from mutual holding company reorganization | $ | — | $ | 2,057,259 | ||||
Investments acquired from mutual holding company reorganization | $ | — | $ | 310,069 | ||||
Other prepaid expenses and assets (liabilities) acquired (assumed) from mutual holding company reorganization | $ | — | $ | (23,102 | ) | |||
Deferred tax asset-net acquired from mutual holding company reorganization | $ | — | $ | 699,000 |
See notes to consolidated financial statements.
57 |
Alliance Bancorp, Inc. of Pennsylvania and Subsidiaries
Notes to Consolidated Financial Statements
1. | Organizational Structure and Nature of Operations |
On January 18, 2011, Alliance Mutual Holding Company and Alliance Bancorp, Inc. of Pennsylvania, the federally chartered mid-tier holding company for Alliance Bank (the “Bank”) completed a reorganization and conversion (the “second step conversion”), pursuant to which Alliance Bancorp, Inc. of Pennsylvania, a new Pennsylvania corporation (“Alliance Bancorp” or the “Company”), acquired all the issued and outstanding shares of the Bank’s common stock. In connection with the second step conversion, 3,258,475 shares of common stock, par value $0.01 per share, of Alliance Bancorp were sold in subscription, community and syndicated community offerings to certain depositors of the Bank and other investors for $10 per share, or $32.6 million in the aggregate (the “Offering”), and 2,215,962 shares of common stock were issued in exchange for the outstanding shares of common stock of the mid-tier holding company, which also was known as Alliance Bancorp, Inc. of Pennsylvania, held by the “public” shareholders of the mid-tier holding company. Each share of common stock of the mid-tier holding company was converted into the right to receive 0.8200 shares of common stock of Alliance Bancorp in the second step conversion. As a result of the second step conversion, the former mutual holding company and the mid-tier company were merged into Alliance Bancorp and 548,524 (pre-conversion) treasury shares were canceled. Additionally, the Bank’s Employee Stock Ownership Plan (“ESOP”) was issued a line of credit for up to $1.9 million, which it used to purchase 50,991 shares of common stock in the Offering and 100,000 additional shares of common stock in the open market following the Offering.
The Bank is a community oriented savings bank headquartered in Broomall, Pennsylvania. The Bank operates a total of nine banking offices located in Delaware and Chester Counties, which are suburbs of Philadelphia. The Bank is primarily engaged in attracting deposits from the general public through its branch offices and using such deposits primarily to (i) originate and purchase loans secured by first liens on single-family (one-to-four units) residential and commercial real estate properties and (ii) invest in securities issued by the U.S. Government and agencies thereof, municipal and corporate debt securities and certain mutual funds. The Bank derives its income principally from interest earned on loans, mortgage-backed securities and investments and, to a lesser extent, from fees received in connection with the origination of loans and for other services. The Bank's primary expenses are interest expense on deposits and borrowings and general operating expenses.
The Bank is subject to regulation by the Pennsylvania Department of Banking and Securities (the "Department"), as its chartering authority and primary regulator, and by the Federal Deposit Insurance Corporation (the "FDIC"), which insures the Bank's deposits up to applicable limits. The Company is supervised by the Board of Governors of the Federal Reserve System (“FRB”).
The Company has evaluated events and transactions occurring subsequent to December 31, 2012, for items that should potentially be recognized or disclosed in these consolidated financial statements. The evaluation was conducted through the date these consolidated financial statements were issued.
2. | Summary of Significant Accounting Policies |
Basis of Presentation and Consolidation - The consolidated financial statements of the Company include the accounts of the Bank and its three wholly-owned subsidiaries, Alliance Delaware Corp., Alliance Financial and Investment Services LLC, and 908 Hyatt Street LLC. Alliance Delaware Corp. holds and manages certain investment securities. Alliance Financial and Investment Services LLC, which is currently inactive, was formed to participate in commission fees from non-insured investment products. 908 Hyatt Street LLC was formed to own and manage certain real estate properties. As of December 31, 2012 and 2011, there were no properties held by 908 Hyatt Street LLC.
Use of Estimates in the Preparation of Financial Statements - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities. It also requires the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of income 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 potential impairment of FHLB stock, the valuation of deferred tax assets, liability and expense of employee benefit obligations, and evaluation of securities for other than temporary impairment.
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Segment Information – The Company has no reportable segments. All of the Company’s activities are interrelated, and each activity is dependent and assessed based on how each of the activities of the Company supports the others. For example, lending is dependent upon the ability of the Company to fund itself with deposits and other borrowings and manage interest rate and credit risk.
The Company operates only in the U.S. domestic market, primarily in Pennsylvania’s Delaware and Chester Counties. For the years ended December 31, 2012 and 2011, there was no one customer that accounted for more than 10% of the Company’s revenue.
Cash and Cash Equivalents – For purposes of reporting cash flows, cash and cash equivalents include cash and amounts due from depository institutions and interest-bearing deposits with depository institutions. As of December 31, 2012 and 2011, the Bank’s minimum required reserve balance with the Federal Reserve Bank was approximately $511,000 and $887,000, respectively.
Investment and Mortgage-Backed Securities - The Company classifies and accounts for debt and equity securities as follows:
· | Securities Held to Maturity - Securities held to maturity are stated at cost, adjusted for unamortized purchase premiums and discounts, based on the positive intent and the ability to hold these securities to maturity considering all reasonably foreseeable conditions and events. |
· | Securities Available for Sale - Securities available for sale, carried at fair value, are those securities management might sell in response to changes in market interest rates, increases in loan demand, changes in liquidity needs and other conditions. Unrealized gains and losses, net of tax, are reported as a net amount in other comprehensive income (loss) until realized. |
Purchase premiums and discounts are amortized to income over the life of the related security using the interest method. The adjusted cost of a specific security sold is the basis for determining the gain or loss on the sale.
The following table shows the fair value and unrealized losses on investments, aggregated by investment category and the length of time that individual securities have been in a continuous unrealized loss position.
December 31, 2012 | ||||||||||||||||||||||||
Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | |||||||||||||||||||
(In Thousands) | ||||||||||||||||||||||||
Securities Available for Sale | ||||||||||||||||||||||||
U.S. Government obligations | $ | 1,996 | $ | 4 | $ | — | $ | — | $ | 1,996 | $ | 4 | ||||||||||||
Mortgage-backed securities | 3 | — | — | — | 3 | — | ||||||||||||||||||
Total securities available for sale | $ | 1,999 | $ | 4 | $ | — | $ | — | $ | 1,999 | $ | 4 | ||||||||||||
Securities Held to Maturity | ||||||||||||||||||||||||
Municipal obligations | $ | 1,719 | $ | 5 | $ | — | $ | — | $ | 1,719 | $ | 5 |
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December 31, 2011 | ||||||||||||||||||||||||
Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | |||||||||||||||||||
(In Thousands) | ||||||||||||||||||||||||
Securities Available for Sale | ||||||||||||||||||||||||
U.S. Government obligations | $ | 2,995 | $ | 5 | $ | — | $ | — | $ | 2,995 | $ | 5 | ||||||||||||
Mortgage-backed securities | 119 | 2 | — | — | 119 | 2 | ||||||||||||||||||
Total securities available for sale | $ | 3,114 | $ | 7 | $ | — | $ | — | $ | 3,114 | $ | 7 | ||||||||||||
Securities Held to Maturity | ||||||||||||||||||||||||
Municipal obligations | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — |
Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) whether or not the Company intends to sell or expects that it is more likely than not that it will be required to sell the security prior to an anticipated recovery in fair value. Once a decline in value for a debt security is determined to be other-than-temporary, the other-than-temporary impairment is separated into (a) the amount of total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of other-than-temporary impairment related to all other factors. The amount of the total other-than-temporary impairment related to credit loss is recognized in earnings. The amount of other-than-temporary impairment related to other factors is recognized in other comprehensive income (loss).
As of December 31, 2012, management believes that the estimated fair values of the securities disclosed above are primarily dependent upon the movement in market interest rates particularly given the negligible inherent credit risk associated with these securities. These investment securities are comprised of securities that are rated investment grade by at least one bond credit rating service. Although the fair value will fluctuate as the market interest rates move, management believes that these fair values will recover as the underlying portfolios mature. As of December 31, 2012, there was 1 U.S. government obligation, 1 mortgage-backed security, and 3 municipal securities in an unrealized loss position. Of the securities in an unrealized loss position at December 31, 2012, there were none in an unrealized loss position for twelve months or longer. The Company does not intend to sell and it is not more likely than not that the Company will be required to sell these securities until such time as the value recovers or the securities mature. Management does not believe any individual unrealized loss as of December 31, 2012 represents an other-than-temporary impairment.
Federal Home Loan Bank Stock- FHLB Stock, which represents the required investment in the common stock of a correspondent bank, is carried at cost. Management evaluates its FHLB stock for impairment.
Management’s determination of whether this investment is impaired is based on their assessment of the ultimate recoverability of its cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of its cost is influenced by criteria such as (1) the significance of the decline in net assets of the FHLB as compared to the capital stock amount and the length of time this decline has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, and (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the FHLB. Management believes no impairment charge was necessary related to the FHLB stock in 2012 or 2011.
Loans Receivable-Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at their outstanding unpaid principal balances, net of an allowance for loan losses and any deferred fees or costs. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the yield (interest income) of the related loans. The Company is generally amortizing these amounts over the contractual life of the loan. Premiums and discounts on purchased loans are amortized as adjustments to interest income using the effective yield method. The loans receivable portfolio consists of single family real estate loans, multi family real estate loans, commercial real estate loans, land and construction real estate loans, commercial business loans, and consumer loans.
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For all classes of loans receivable, 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 90 days or more past due may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. Generally, when a loan is placed on nonaccrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against the allowance for loan losses. Interest received on nonaccrual loans, including impaired loans, generally is either applied against principal or reported as interest income, according to management’s judgment as to the collectability of principal. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time (generally six months) and the ultimate collectability of the total contractual principal and interest is no longer in doubt. The past due status of all classes of loans receivable is determined based on contractual due dates for loan payments.
The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the past due status as of December 31, 2012:
(Dollars in thousands) | 30-59 Days Past Due | 60-89 Days Past Due | 90 or More Days | Total Past Due | Current | Total Loans Receivable | Loans Receivable Greater Than 90 Days Past Due and Accruing | |||||||||||||||||||||
Real estate: | ||||||||||||||||||||||||||||
Single-family | $ | 1,723 | $ | 496 | $ | 2,406 | $ | 4,625 | $ | 122,051 | $ | 126,676 | $ | 1,742 | ||||||||||||||
Multi-family | — | — | — | — | 20,935 | 20,935 | — | |||||||||||||||||||||
Commercial | 2,155 | 276 | 2,873 | 5,304 | 106,005 | 111,309 | — | |||||||||||||||||||||
Land and construction | — | — | — | — | 10,654 | 10,654 | — | |||||||||||||||||||||
Commercial business | — | — | — | — | 9,852 | 9,852 | — | |||||||||||||||||||||
Consumer | 148 | 124 | 324 | 596 | 4,752 | 5,348 | 324 | |||||||||||||||||||||
Total | $ | 4,026 | $ | 896 | $ | 5,603 | $ | 10,525 | $ | 274,249 | $ | 284,774 | $ | 2,066 |
The following table presents the classes of the loan portfolio summarized by the past due status as of December 31, 2011:
(Dollars in thousands) | 30-59 Days Past Due | 60-89 Days Past Due | 90 or More Days | Total Past Due | Current | Total Loans Receivable | Loans Receivable Greater Than 90 Days Past Due and Accruing | |||||||||||||||||||||
Real estate: | ||||||||||||||||||||||||||||
Single-family | $ | 1,509 | $ | 252 | $ | 3,073 | $ | 4,834 | $ | 113,225 | $ | 118,059 | $ | 2,018 | ||||||||||||||
Multi-family | — | — | — | — | 10,757 | 10,757 | — | |||||||||||||||||||||
Commercial | 3,420 | 56 | 3,016 | 6,492 | 123,699 | 130,191 | — | |||||||||||||||||||||
Land and construction | — | — | 7,707 | 7,707 | 6,888 | 14,595 | — | |||||||||||||||||||||
Commercial business | — | — | 81 | 81 | 9,400 | 9,481 | — | |||||||||||||||||||||
Consumer | 207 | 119 | 561 | 887 | 5,729 | 6,615 | 561 | |||||||||||||||||||||
Total | $ | 5,136 | $ | 427 | $ | 14,438 | $ | 20,001 | $ | 269,698 | $ | 289,699 | $ | 2,579 |
61 |
The following table presents nonaccrual loans by classes of the loan portfolio.
December 31, | ||||||||
2012 | 2011 | |||||||
(Dollars in thousands) | ||||||||
Real estate: | ||||||||
Single-family | $ | 664 | $ | 1,055 | ||||
Multi-family | — | — | ||||||
Commercial | 2,873 | 3,016 | ||||||
Land and construction | — | 7,707 | ||||||
Commercial business | — | 81 | ||||||
Consumer | — | — | ||||||
Total non-accruing loans | $ | 3,537 | $ | 11,859 |
Allowance for Loan Losses-The allowance for loan losses is increased by charges to income and decreased by chargeoffs (net of recoveries). Allowances are provided for specific loans when losses are probable and can be estimated. When this occurs, management considers the remaining principal balance, fair value and estimated net realizable value of the property collateralizing the loan. Current and future operating and/or sales conditions are also considered. These estimates are susceptible to changes that could result in material adjustments to results of operations. Recovery of the carrying value of such loans is dependent to a great extent on economic, operating and other conditions that may be beyond management’s control.
The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance. The allowance is based on the Company’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available.
In addition, Federal regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses and may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination, which may not be currently available to management. Based on management’s comprehensive analysis of the loan portfolio, management believes the current level of the allowance for loan losses is adequate.
The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as impaired. For loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.
The general component covers pools of loans by loan class including commercial loans not considered impaired, as well as smaller balance homogeneous loans, such as residential real estate, home equity and other consumer loans. These pools of loans are evaluated for loss exposure based upon historical loss rates for each of these categories of loans, adjusted for qualitative factors. These qualitative risk factors include:
1. | Lending policies and procedures, including underwriting standards and collection, charge-off, and recovery practices. |
2. | National, regional, and local economic and business conditions as well as the condition of various market segments, including the value of underlying collateral for collateral dependent loans. |
3. | Nature and volume of the portfolio and terms of loans. |
4. | Experience, ability, and depth of lending management and staff. |
5. | Volume and severity of past due, classified and nonaccrual loans as well as and other loan modifications. |
62 |
6. | Quality of the Company’s loan review system, and the degree of oversight by the Company’s Board of Directors. |
7. | Existence and effect of any concentrations of credit and changes in the level of such concentrations. |
8. | Effect of external factors, such as competition and legal and regulatory requirements. |
Each factor is assigned a value to reflect improving, stable or declining conditions based on management’s best judgment using relevant information available at the time of the evaluation. Adjustments to the factors are supported through documentation of changes in conditions in a narrative accompanying the allowance for loan loss calculation.
Single family real estate loans involve certain risks such as interest rate risk and risk of non repayment. Adjustable-rate single family real estate loans decreases the interest rate risk to the Company that is associated with changes in interest rates but involve other risks, primarily because as interest rates rise, the payment by the borrower rises to the extent permitted by the terms of the loan, thereby increasing the potential for default. At the same time, the marketability of the underlying property may be adversely affected by higher interest rates. Repayment risk can be affected by job loss, divorce, illness and personal bankruptcy or the borrower.
Multi-family and commercial real estate lending entails significant risks. Such loans typically involve large loan balances to single borrowers or groups of related borrowers. The payment experience on such loans is typically dependent on the successful operation of the real estate project. The success of such projects is sensitive to changes in supply and demand conditions in the market for multi-family and commercial real estate as well as economic conditions generally.
Construction lending is generally considered to involve a high risk due to the concentration of principal in a limited number of loans and borrowers and the effects of general economic conditions on developers and builders. Moreover, a construction loan can involve additional risks because of the inherent difficulty in estimating both a property's value at completion of the project and the estimated cost (including interest) of the project. The nature of these loans is such that they are generally difficult to evaluate and monitor. In addition, speculative construction loans to a builder are not necessarily pre-sold and thus pose a greater potential risk to the Company than construction loans to individuals on their personal residences.
Commercial business lending is generally considered higher risk due to the concentration of principal in a limited number of loans and borrowers and the effects of general economic conditions on the business. Commercial business loans are primarily secured by inventories and other business. In most cases, any repossessed collateral for a defaulted commercial business loans will not provide an adequate source of repayment of the outstanding loan balance.
Consumer loans generally have shorter terms and higher interest rates than other lending but generally involve more credit risk because of the type and nature of the collateral and, in certain cases, the absence of collateral. In addition, consumer lending collections are dependent on the borrower's continuing financial stability, and thus are more likely to be adversely effected by job loss, divorce, illness and personal bankruptcy. In most cases, any repossessed collateral for a defaulted consumer loan will not provide an adequate source of repayment of the outstanding loan.
The allowance calculation methodology includes further segregation of loan classes into risk rating categories. The borrower’s overall financial condition, repayment sources, guarantors and value of collateral, if appropriate, are evaluated annually for commercial loans or when credit deficiencies arise, such as delinquent loan payments, for commercial and consumer loans. Credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful and loss. Loans criticized special mention have potential weaknesses that deserve management’s close attention. If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects. Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans classified as a loss are considered uncollectible and are charged to the allowance for loan losses. Loans not classified are rated pass.
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The following table presents the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company's internal risk rating system as of December 31, 2012:
Pass | Special Mention | Substandard | Doubtful | Total | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Real estate: | ||||||||||||||||||||
Single-family | $ | 122,821 | $ | 1,409 | $ | 2,446 | $ | — | $ | 126,676 | ||||||||||
Multi-family | 17,120 | — | 3,815 | — | 20,935 | |||||||||||||||
Commercial | 101,911 | 2,680 | 6,718 | — | 111,309 | |||||||||||||||
Land and construction | 10,654 | — | — | — | 10,654 | |||||||||||||||
Commercial business | 9,852 | — | — | — | 9,852 | |||||||||||||||
Consumer | 5,348 | — | — | — | 5,348 | |||||||||||||||
Total | $ | 267,706 | $ | 4,089 | $ | 12,979 | $ | — | $ | 284,774 |
The following table presents the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company's internal risk rating system as of December 31, 2011:
Pass | Special Mention | Substandard | Doubtful | Total | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Real estate: | ||||||||||||||||||||
Single-family | $ | 114,486 | $ | — | $ | 3,573 | $ | — | $ | 118,059 | ||||||||||
Multi-family | 7,923 | — | 2,834 | — | 10,757 | |||||||||||||||
Commercial | 121,980 | 3,220 | 4,991 | — | 130,191 | |||||||||||||||
Land and construction | 6,888 | — | 7,707 | — | 14,595 | |||||||||||||||
Commercial business | 9,375 | 25 | 81 | — | 9,481 | |||||||||||||||
Consumer | 6,616 | — | — | — | 6,616 | |||||||||||||||
Total | $ | 267,268 | $ | 3,245 | $ | 19,186 | $ | — | $ | 289,699 |
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The following table presents the activity in the allowance for loan losses and related recorded investment in loans receivable by classes of the loans individually and collectively evaluated for impairment as of and for the year ended December 31, 2012:
(Dollars in thousands) | Single Family Real Estate | Multi Family Real Estate | Commercial Real Estate | Land and Construction | Consumer | Commercial Business | Total | |||||||||||||||||||||
Allowance for loan losses for the year ended December 31, 2012: | ||||||||||||||||||||||||||||
Beginning balance | $ | 693 | $ | 234 | $ | 2,289 | $ | 525 | $ | 20 | $ | 239 | $ | 4,000 | ||||||||||||||
Charge-offs | (42 | ) | — | (59 | ) | (440 | ) | (9 | ) | — | (550 | ) | ||||||||||||||||
Recoveries | 10 | — | 12 | 420 | 2 | — | 444 | |||||||||||||||||||||
Provisions | 366 | 389 | 432 | (153 | ) | 5 | (14 | ) | 1,025 | |||||||||||||||||||
Ending balance | $ | 1,027 | $ | 623 | $ | 2,674 | $ | 352 | $ | 18 | $ | 225 | $ | 4,919 | ||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||
Ending balance | $ | 1,027 | $ | 623 | $ | 2,674 | $ | 352 | $ | 18 | $ | 225 | $ | 4,919 | ||||||||||||||
Ending balance: | ||||||||||||||||||||||||||||
individually evaluated for impairment | $ | 8 | $ | 436 | $ | 866 | $ | — | $ | — | $ | — | $ | 1,310 | ||||||||||||||
Ending balance: | ||||||||||||||||||||||||||||
collectively evaluated for impairment | $ | 1,019 | $ | 187 | $ | 1,808 | $ | 352 | $ | 18 | $ | 225 | $ | 3,609 | ||||||||||||||
Ending balance: | ||||||||||||||||||||||||||||
loans acquired with deteriorated credit quality | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||
Loans receivable: | ||||||||||||||||||||||||||||
Ending balance | $ | 126,676 | $ | 20,935 | $ | 111,309 | $ | 10,654 | $ | 5,348 | $ | 9,852 | $ | 284,774 | ||||||||||||||
Ending balance: | ||||||||||||||||||||||||||||
individually evaluated for impairment | $ | 191 | $ | 3,815 | $ | 8,940 | $ | — | $ | — | $ | — | $ | 12,946 | ||||||||||||||
Ending balance: | ||||||||||||||||||||||||||||
collectively evaluated for impairment | $ | 126,485 | $ | 17,120 | $ | 102,369 | $ | 10,654 | $ | 5,348 | $ | 9,852 | $ | 271,828 | ||||||||||||||
Ending balance: | ||||||||||||||||||||||||||||
loans acquired with deteriorated credit quality | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — |
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The following table presents the activity in the allowance for loan losses and related recorded investment in loans receivable by classes of the loans individually and collectively evaluated for impairment as of and for the year ended December 31, 2011:
(Dollars in thousands) | Single Family Real Estate | Multi Family Real Estate | Commercial Real Estate | Land and Construction | Consumer | Commercial Business | Total | |||||||||||||||||||||
Allowance for loan losses for the year ended December 31, 2011: | ||||||||||||||||||||||||||||
Beginning balance | $ | 411 | $ | 247 | $ | 2,072 | $ | 2,151 | $ | 19 | $ | 190 | $ | 5,090 | ||||||||||||||
Charge-offs | (75 | ) | — | (306 | ) | (3,898 | ) | (7 | ) | (123 | ) | (4,409 | ) | |||||||||||||||
Recoveries | — | — | 18 | 51 | — | — | 69 | |||||||||||||||||||||
Provisions | 357 | (13 | ) | 505 | 2,221 | 8 | 172 | 3,250 | ||||||||||||||||||||
Ending balance | $ | 693 | $ | 234 | $ | 2,289 | $ | 525 | $ | 20 | $ | 239 | $ | 4,000 | ||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||
Ending balance | $ | 693 | $ | 234 | $ | 2,289 | $ | 525 | $ | 20 | $ | 239 | $ | 4,000 | ||||||||||||||
Ending balance: | ||||||||||||||||||||||||||||
individually evaluated for impairment | $ | — | $ | 157 | $ | 205 | $ | 305 | $ | — | $ | — | $ | 667 | ||||||||||||||
Ending balance: | ||||||||||||||||||||||||||||
collectively evaluated for impairment | $ | 693 | $ | 77 | $ | 2,084 | $ | 220 | $ | 20 | $ | 239 | $ | 3,333 | ||||||||||||||
Ending balance: | ||||||||||||||||||||||||||||
loans acquired with deteriorated credit quality | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||
Loans receivable: | ||||||||||||||||||||||||||||
Ending balance | $ | 118,059 | $ | 10,757 | $ | 130,191 | $ | 14,595 | $ | 6,616 | $ | 9,481 | $ | 289,699 | ||||||||||||||
Ending balance: | ||||||||||||||||||||||||||||
individually evaluated for impairment | $ | — | $ | 2,834 | $ | 4,991 | $ | 7,707 | $ | — | $ | 81 | $ | 15,613 | ||||||||||||||
Ending balance: | ||||||||||||||||||||||||||||
collectively evaluated for impairment | $ | 118,059 | $ | 7,923 | $ | 125,200 | $ | 6,888 | $ | 6,616 | $ | 9,400 | $ | 274,086 | ||||||||||||||
Ending balance: | ||||||||||||||||||||||||||||
loans acquired with deteriorated credit quality | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — |
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Loan Impairment-A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and industrial loans, commercial real estate loans and commercial construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.
An allowance for loan losses is established for an impaired loan if its carrying value exceeds its estimated fair value. The estimated fair values of substantially all of the Company’s impaired loans are measured based on the estimated fair value of the loan’s collateral.
The Company does not separately identify individual single-family loans secured by real estate unless such loans are the subject of a troubled debt restructuring agreement. Large groups of these smaller balance homogeneous loans are collectively evaluated for impairment.
For multi-family, commercial, and land and construction loans secured by real estate, estimated fair values are determined primarily through third-party appraisals. When a real estate secured loan becomes impaired, a decision is made regarding whether an updated certified appraisal of the real estate is necessary. This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value ratio based on the original appraisal and the condition of the property. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property.
For commercial business loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower’s financial statements, inventory reports, accounts receivable agings or equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets.
The Company does not separately identify consumer and other loans unless such loans are the subject of a troubled debt restructuring agreement. Large groups of these smaller balance homogeneous loans are collectively evaluated for impairment.
Loans whose terms are modified are classified as troubled debt restructurings if the Company grants such borrowers concessions and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a troubled debt restructuring generally involve a temporary below market rate reduction in interest rate or an extension of a loan’s stated maturity date. Non-accrual troubled debt restructurings are restored to accrual status if principal and interest payments, under the modified terms, are current for six consecutive months after modification. Loans classified as troubled debt restructurings are designated as impaired.
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The following table summarizes information in regards to impaired loans by loan portfolio class as of and for the year ended December 31, 2012:
(Dollars in Thousands) | Recorded Investment | Unpaid Principal Balance | Related Allowance | Average Recorded Investment | Interest Income Recognized While Impaired | |||||||||||||||
With no related allowance recorded: | ||||||||||||||||||||
Real estate: | ||||||||||||||||||||
Single-family | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
Multi-family | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
Commercial | $ | 898 | $ | 898 | $ | — | $ | 811 | $ | 46 | ||||||||||
With an allowance recorded: | ||||||||||||||||||||
Real estate: | ||||||||||||||||||||
Single-family | $ | 191 | $ | 191 | $ | 8 | $ | 48 | $ | 1 | ||||||||||
Multi-family | $ | 3,815 | $ | 3,815 | $ | 436 | $ | 3,351 | $ | 111 | ||||||||||
Commercial | $ | 8,042 | $ | 8,042 | $ | 866 | $ | 7,435 | $ | 337 | ||||||||||
Total: | ||||||||||||||||||||
Real estate: | ||||||||||||||||||||
Single-family | $ | 191 | $ | 191 | $ | 8 | $ | 48 | $ | 1 | ||||||||||
Multi-family | $ | 3,815 | $ | 3,815 | $ | 436 | $ | 3,351 | $ | 111 | ||||||||||
Commercial | $ | 8,940 | $ | 8,940 | $ | 866 | $ | 8,246 | $ | 383 |
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The following table summarizes information in regards to impaired loans by loan portfolio class as of and for the year ended December 31, 2011:
(Dollars in Thousands) | Recorded Investment | Unpaid Principal Balance | Related Allowance | Average Recorded Investment | Interest Income Recognized While Impaired | |||||||||||||||
With no related allowance recorded: | ||||||||||||||||||||
Real estate: | ||||||||||||||||||||
Multi-family | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
Commercial | $ | 2,507 | $ | 2,507 | $ | — | $ | 1,537 | $ | 46 | ||||||||||
Land and construction | $ | 5,861 | $ | 10,289 | $ | — | $ | 5,861 | $ | 145 | ||||||||||
Commercial business | $ | 81 | $ | 81 | $ | — | $ | 25 | $ | 1 | ||||||||||
With an allowance recorded: | ||||||||||||||||||||
Real estate: | ||||||||||||||||||||
Multi-family | $ | 2,834 | $ | 2,834 | $ | 157 | $ | 944 | $ | 29 | ||||||||||
Commercial | $ | 2,484 | $ | 2,484 | $ | 205 | $ | 679 | $ | 34 | ||||||||||
Land and construction | $ | 1,846 | $ | 1,846 | $ | 305 | $ | 526 | $ | — | ||||||||||
Commercial business | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
Total: | ||||||||||||||||||||
Real estate: | ||||||||||||||||||||
Multi-family | $ | 2,834 | $ | 2,834 | $ | 157 | $ | 944 | $ | 29 | ||||||||||
Commercial | $ | 4,991 | $ | 4,991 | $ | 205 | $ | 2,216 | $ | 80 | ||||||||||
Land and construction | $ | 7,707 | $ | 12,135 | $ | 305 | $ | 6,387 | $ | 145 | ||||||||||
Commercial business | $ | 81 | $ | 81 | $ | — | $ | 25 | $ | 1 |
The following table summarizes information in regards to loans classified as troubled debt restructurings during the year ended December 31, 2012:
(Dollars in Thousands) | Number of Contracts | Pre-Modification Outstanding Recorded Investments | Post-Modification Outstanding Recorded Investments | |||||||||
Real estate: | ||||||||||||
Single-family | 1 | $ | 191 | $ | 191 | |||||||
Multi-family | — | — | — | |||||||||
Commercial | 8 | $ | 4,016 | $ | 4,016 | |||||||
Land and construction | — | — | — | |||||||||
Commercial business | — | — | — | |||||||||
Consumer | — | — | — |
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There were no troubled debt restructurings with a payment default, with the payment default occurring within 12 months of restructure, and payment default occurring during the year ended December 31, 2012.
At December 31, 2012, the Company had one single-family loan with a carrying value of $191,000, two multi-family loans with a carrying value of $3.8 million, and eleven commercial real estate loans with a carrying value of $5.3 million classified as troubled debt restructurings. The one single-family loan was classified as substandard in the Company’s allowance for loan losses and had an $8,000 allowance against it. The two multi-family loans are to one borrower, were classified as substandard in the Company’s allowance for loan losses, and have $436,000 of allowances against them. The eleven commercial real estate loans are to four borrowers and have $557,000 of allowances against them. Eight of the eleven commercial real estate loans are to two borrowers and are classified as special mention in the Company’s allowance for loan losses. Three of the eleven commercial real estate loans and are classified as substandard in the Company’s allowance for loan losses. All of the troubled debt restructurings consisted of changes in interest rates and no principal was forgiven.
The following table summarizes information in regards to troubled debt restructurings for the year ended December 31, 2011:
(Dollars in Thousands) | Number of Contracts | Pre-Modification Outstanding Recorded Investments | Post-Modification Outstanding Recorded Investments | |||||||||
Real estate: | ||||||||||||
Single-family | — | — | — | |||||||||
Multi-family | — | — | — | |||||||||
Commercial | 3 | $ | 1,280 | $ | 1,280 | |||||||
Land and construction | — | — | — | |||||||||
Commercial business | — | — | — | |||||||||
Consumer | — | — | — |
Number of Contracts | Recorded Investment | |||||||||||
That Subsequently Defaulted | ||||||||||||
Real estate: | ||||||||||||
Single-family | — | — | ||||||||||
Multi-family | — | — | ||||||||||
Commercial | — | — | ||||||||||
Land and construction | 2 | $ | 5,861 | |||||||||
Commercial business | — | — | ||||||||||
Consumer | — | — |
At December 31, 2011, the Company had two multi-family, three commercial real estate, and two land and construction loans classified as troubled debt restructurings. The two multi-family loans are to one borrower, were classified as substandard in the Company’s allowance for loan losses, and have a $157,000 allowance against them. The three commercial real estate loans are to one borrower, are classified as special mention in the Company’s allowance for loan losses, and had no reserves against them. The two land and construction loans are to two borrowers, were classified as substandard in the Company’s allowance for loan losses and had been written down by $3.7 million in charge-offs as of December 31, 2011, and had no allowance against them. All of the troubled debt restructurings consisted of changes in interest rates and no principal was forgiven.
Accrued Interest Receivable - Interest on loans is recognized as earned. Accrual of loan interest is discontinued and a reserve established on existing accruals if management believes that after considering collateral value, economic and business conditions and collection efforts, the borrower’s financial condition is such that collection of interest is doubtful.
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Purchase Discounts and Premiums – Purchase discounts and premiums on loans and investment and mortgage-backed securities purchased are amortized over the expected average life of the loans and securities using the interest method.
Other Real Estate Owned - Other real estate acquired through, or in lieu of, foreclosure is initially recorded at fair value less cost to sell at the date of acquisition, establishing a new cost basis through a charge to the allowance for loan losses, if necessary. Revenues and expenses from operations are included in other income and other expense. Additions to the valuation allowance are included in other expense. Subsequent to foreclosure, valuations are periodically performed by management and an allowance for losses is established, if necessary, by a charge to operations if the carrying value of a property exceeds its estimated fair value less estimated costs to sell.
Bank-Owned Life Insurance - The Bank is the beneficiary of insurance policies on the lives of certain officers of the Bank. The Bank has recognized the amount that could be realized under the insurance policies as an asset in the consolidated statements of financial condition.
Premises and Equipment – Land is carried at cost. Premises and equipment are recorded at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the expected useful lives of the related assets which range from two to 40 years. Amortization of leasehold improvements is computed using the straight-line method over the shorter of the useful lives of the improvements or the remaining lease term. The costs of maintenance and repairs are expensed as they are incurred, and renewals and betterment’s are capitalized.
Income Taxes - The Company accounts for income taxes in accordance with the guidance set forth in FASB ASC Topic 740, Income Taxes. The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur. Deferred income tax expense (benefit) results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are reduced by a valuation allowance if, based on the weight of the evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized. The Company evaluates the likelihood of realizing its deferred tax assets by estimating sources of future taxable income and the impact of tax planning strategies.
The Bank accounts for uncertain tax positions if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment.
The Company recognizes interest and penalties on income taxes as a component of income tax expense. The Company’s federal income and state tax returns for taxable years through December 31, 2008 have been closed for purposes of examination by the Internal Revenue Service and Pennsylvania Department of Revenue.
The Bank has entered into a tax sharing agreement (under the Internal Revenue Section 1552) with the Company and Alliance Delaware Corporation. The agreement provides that the tax liability shall be apportioned among the members of the group in accordance with the ratio which that portion of the consolidated taxable income attributed to each member of the group having taxable income bears to the consolidated taxable income.
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 their maturity.
Employee Benefit Plans- The Company’s 401(k) plan allows eligible participants to set aside a certain percentage of their salaries before taxes. The Company may elect to match employee contributions, as a profit sharing payment, up to a specified percentage of their respective salaries in an amount determined annually by the Board of Directors. The Company’s profit sharing contribution related to the plan resulted in expenses of $120,000 and $110,000 for 2012, and 2011, respectively.
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The Company also maintains a Supplemental Executive Retirement Plan and a Retirement Income Plan (the “Plans”). The accrued amount for the Plans included in other liabilities was $3.9 million and $3.8 million at December 31, 2012 and 2011, respectively. The expense associated with the Plans for the years ended December 31, 2012, and 2011 was $243,000, and $255,000, respectively.
Advertising Costs- The Company follows the policy of charging the costs of advertising to expense as incurred. Advertising costs were approximately $414,000 and $348,000 for the years ended December 31, 2012 and December 31, 2011, respectively.
Earnings per Share – Earnings per share (“EPS”) consists of two separate components, basic EPS and diluted EPS. Basic EPS is computed based on the weighted average number of shares of common stock outstanding for each period presented. Diluted EPS is calculated based on the weighted average number of shares of common stock outstanding plus dilutive common stock equivalents (“CSEs”) using the treasury stock method. CSEs consist of shares that are assumed to have been purchased with the proceeds from the exercise of stock options, as well as unvested common stock awards. CSE’s for which the grant price exceeds the average market price over the period have an anti-dilutive effect on EPS, and, accordingly, are excluded from the calculation. There were 290,250 and 277,750 anti-dilutive stock options outstanding at December 31, 2012 and December 31, 2011, respectively.
The following table sets forth the composition of the weighted average shares (denominator) used in the basic and dilutive earnings per share computation.
For the Years | ||||||||
Ended December 31, | ||||||||
2012 | 2011 | |||||||
Net Income | $ | 2,541,604 | $ | 1,149,149 | ||||
Weighted average shares outstanding | 5,413,892 | 5,474,437 | ||||||
Adjusted average unearned ESOP shares | (164,348 | ) | (133,522 | ) | ||||
Weighted average shares outstanding – basic | 5,249,544 | 5,340,915 | ||||||
Effect of dilutive common stock equivalents | 35,327 | 159,647 | ||||||
Adjusted weighted average shares outstanding-dilutive | 5,284,871 | 5,500,562 | ||||||
Basic earnings per share | $ | 0.48 | $ | 0.22 | ||||
Dilutive earnings per share | $ | 0.48 | $ | 0.21 |
Other Comprehensive Income (Loss) – The Company is required to present, as a component of comprehensive income, the amounts from transactions and other events which currently are excluded from the statement of income and are recorded directly to stockholders’ equity.
The components of accumulated other comprehensive loss are as follows:
December 31, | December 31, | |||||||
2012 | 2011 | |||||||
Net unrealized gain on available for sale securities | $ | 336,973 | $ | 513,707 | ||||
Net unrealized loss on retirement plans | (2,012,392 | ) | (1,861,863 | ) | ||||
Total accumulated other comprehensive loss | $ | (1,675,419 | ) | $ | (1,348,156 | ) |
Recent Accounting Pronouncements – ASU No. 2011-11, "Balance Sheet (Topic 210) - Disclosures about Offsetting Assets and Liabilities," amends Balance Sheet (Topic 210), to require an entity to disclose both gross and net information about both financial instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. The financial instruments and transactions would include derivatives, sale and repurchase agreements and reverse sale and repurchase agreements, and securities borrowing and lending arrangements. ASU 2011-11 is effective for annual and interim periods beginning on January 1, 2013, and is not expected to have a significant impact on the Company’s financial statements.
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In February 2013, the FASB issued ASU 2013-02, Reporting of Amounts Reclassified Out of Comprehensive Income. The amendments in this ASU are intended to improve the reporting of reclassifications out of accumulated other comprehensive income by requiring an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required to be reclassified in its entirety to net income. For other amounts that are not required to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required that provide additional detail about those amounts. This would be the case when a portion of the amount reclassified out of accumulated other comprehensive income is reclassified to a balance sheet account instead of directly to income or expense in the same reporting period. The ASU is effective for public entities for reporting periods beginning after December 15, 2012. The Company is evaluating the impact of the ASU, but does not expect a material impact on the financial statements.
3. Investment Securities Available for Sale and Held to Maturity
The amortized cost, gross unrealized gains and losses, and the fair values of investment securities available for sale and held to maturity are shown below at the dates indicated. Where applicable, the maturity distribution and the fair value of investment securities, by contractual maturity, are shown. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
December 31, 2012 | ||||||||||||||||
Amortized | Gross Unrealized | Fair | ||||||||||||||
Available for Sale: | Cost | Gains | Losses | Value | ||||||||||||
Obligations of the Federal Home Loan Bank: | ||||||||||||||||
Due after 5 years through 10 years | $ | 4,000,000 | $ | 920 | $ | (3,900 | ) | $ | 3,997,020 | |||||||
Total | $ | 4,000,000 | $ | 920 | $ | (3,900 | ) | $ | 3,997,020 |
December 31, 2012 | ||||||||||||||||
Amortized | Gross Unrealized | Fair | ||||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
Obligations of Fannie Mae: | ||||||||||||||||
Due after 1 year through 5 years | $ | 3,000,000 | $ | 2,060 | $ | — | $ | 3,002,060 | ||||||||
Due after 10 years | 2,000,000 | 660 | — | 2,000,660 | ||||||||||||
Total | $ | 5,000,000 | $ | 2,720 | $ | — | $ | 5,002,720 |
December 31, 2012 | ||||||||||||||||
Amortized | Gross Unrealized | Fair | ||||||||||||||
Held to Maturity | Cost | Gains | Losses | Value | ||||||||||||
Municipal Obligations: | ||||||||||||||||
Due in 1 year or less | $ | 190,555 | $ | — | (14 | ) | $ | 190,541 | ||||||||
Due after 1 years through 5 years | 2,994,234 | 52,797 | (2,173 | ) | 3,044,858 | |||||||||||
Due after 5 years through 10 years | 4,893,853 | 108,123 | — | 5,001,976 | ||||||||||||
Due after 10 years | 17,246,518 | 1,044,136 | (2,603 | ) | 18,288,051 | |||||||||||
Total | $ | 25,325,160 | $ | 1,205,056 | $ | (4,790 | ) | $ | 26,525,426 |
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December 31, 2011 | ||||||||||||||||
Amortized | Gross Unrealized | Fair | ||||||||||||||
Available for Sale: | Cost | Gains | Losses | Value | ||||||||||||
Obligations of the Federal Home Loan Bank: | ||||||||||||||||
Due after 1 year through 5 years | $ | 5,996,989 | $ | 36,511 | — | $ | 6,033,500 | |||||||||
Due after 5 years through 10 years | 2,000,000 | 500 | — | 2,000,500 | ||||||||||||
Total | $ | 7,996,989 | $ | 37,011 | $ | — | $ | 8,034,000 |
December 31, 2011 | ||||||||||||||||
Amortized | Gross Unrealized | Fair | ||||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
Obligations of Freddie Mac: | ||||||||||||||||
Due after 1 year through 5 years | $ | 2,000,000 | $ | — | $ | (3,210 | ) | $ | 1,996,790 | |||||||
Due after 10 years | 5,000,000 | 29,790 | — | 5,029,790 | ||||||||||||
Total | $ | 7,000,000 | $ | 29,790 | $ | (3,210 | ) | $ | 7,026,580 |
December 31, 2011 | ||||||||||||||||
Amortized | Gross Unrealized | Fair | ||||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
Obligations of Fannie Mae: | ||||||||||||||||
Due after 1 year through 5 years | $ | 3,000,000 | $ | 1,823 | $ | (1,300 | ) | $ | 3,000,523 | |||||||
Due after 5 years through 10 years | 4,997,050 | 11,780 | — | 5,008,830 | ||||||||||||
Total | $ | 7,997,050 | $ | 13,603 | $ | (1,300 | ) | $ | 8,009,353 |
December 31, 2011 | ||||||||||||||||
Amortized | Gross Unrealized | Fair | ||||||||||||||
Held to Maturity | Cost | Gains | Losses | Value | ||||||||||||
Municipal Obligations: | ||||||||||||||||
Due after 1 years through 5 years | $ | 1,000,000 | $ | 74,470 | — | $ | 1,074,470 | |||||||||
Due after 5 years through 10 years | 1,765,871 | 61,457 | $ | (138 | ) | 1,827,190 | ||||||||||
Due after 10 years | 19,408,876 | 889,333 | — | 20,298,209 | ||||||||||||
Total | $ | 22,174,747 | $ | 1,025,260 | $ | (138 | ) | $ | 23,199,869 |
Included in obligations of U.S. Government agencies at December 31, 2012 and December 31, 2011, were $9.0 million and $23.1 million, respectively, of structured notes. These structured notes were comprised of step-up bonds that provide the U.S. Government agencies with the right, but not the obligation, to call the bonds on certain dates.
During the year ended December 31, 2012, there were no investment securities sold by the Company. In September of 2011, the Company identified a held-to-maturity security whose issuer had shown evidence of a significant deterioration of its credit worthiness, a permissible change per FASB ASC Topic 320-10, and sold the security which had an amortized cost of $688,000. As a result of the sale, the Company recorded a gain on the sale of the investment of $13,000. In addition, during 2011, the Company recorded a $57,000 loss on the sale of $268,000 of equity securities, which previously were owned by the mutual holding company. Investment securities with an aggregate carrying value of $4.0 million and $2.0 million were pledged as collateral for certain deposits at December 31, 2012 and 2011, respectively.
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4. Mortgage-Backed Securities Available for Sale
The amortized cost, gross unrealized gains and losses, and the fair values of mortgage-backed securities available for sale are as follows:
December 31, 2012 | ||||||||||||||||
Amortized | Gross Unrealized | Fair | ||||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
GNMA pass-through certificates | $ | 1,287,235 | $ | 102,862 | — | $ | 1,390,097 | |||||||||
FHLMC pass-through certificates | 2,085,814 | 161,082 | — | 2,246,896 | ||||||||||||
FNMA pass-through certificates | 3,640,056 | 246,895 | $ | (13 | ) | 3,886,938 | ||||||||||
Total | $ | 7,013,105 | $ | 510,839 | $ | (13 | ) | $ | 7,523,931 |
December 31, 2011 | ||||||||||||||||
Amortized | Gross Unrealized | Fair | ||||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
GNMA pass-through certificates | $ | 1,449,270 | $ | 95,464 | — | $ | 1,544,734 | |||||||||
FHLMC pass-through certificates | 3,527,880 | 272,105 | — | 3,799,985 | ||||||||||||
FNMA pass-through certificates | 5,623,252 | 337,125 | $ | (2,244 | ) | 5,958,133 | ||||||||||
Total | $ | 10,600,402 | $ | 704,694 | $ | (2,244 | ) | $ | 11,302,852 |
At December 31, 2012 and 2011, the Company had $3.0 million and $2.2 million, respectively, in mortgage-backed securities pledged for certain customer deposits of the Company. There were no sales of mortgage-backed securities in 2012 or 2011.
5. Loans Receivable - Net
Loans receivable consist of the following:
December 31, | ||||||||
2012 | 2011 | |||||||
Real estate loans: | ||||||||
Single-family | $ | 126,675,556 | $ | 118,058,873 | ||||
Multi-family | 20,934,801 | 10,756,564 | ||||||
Commercial | 111,309,465 | 130,190,806 | ||||||
Land and construction | 10,654,394 | 14,594,645 | ||||||
Commercial business | 9,851,651 | 9,481,485 | ||||||
Consumer | 5,348,187 | 6,615,648 | ||||||
Total loans receivable | 284,774,054 | 289,698,021 | ||||||
Less: | ||||||||
Deferred fees | (979,111 | ) | (401,689 | ) | ||||
Allowance for loan losses | (4,918,952 | ) | (3,999,542 | ) | ||||
Loans receivable - net | $ | 278,875,991 | $ | 285,296,790 |
The Company originates loans to customers located primarily in Southeastern Pennsylvania. This geographic concentration of credit exposes the Company to a higher degree of risk associated with this economic region.
If the Company’s $3.5 million of non-accruing loans at December 31, 2012 had been current in accordance with their terms during 2012, the gross income on such loans would have been approximately $148,000 for 2012. The Company actually recorded $46,000 in interest income on such loans for 2012. If the Company’s $11.9 million of non-accruing loans at December 31, 2011 had been current in accordance with their terms during 2011, the gross income on such loans would have been approximately $655,000 for 2011. The Company actually recorded $104,000 in interest income on such loans for 2011.
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Loans are generally placed on non-accrual when interest past due exceeds 90 days, unless the loan is well secured and in the process of collection. The Company generally does not place student loans on non-accrual as the principal and interest on such loans is guaranteed by the U.S. Government.
From time to time the Company will grant loans to directors and executive officers of the Bank and Company. These loans are made under the same terms and underwriting standards as to any other customer. There were outstanding balances of $428,000 and $539,000 of these loans at December 31, 2012 and December 31, 2011, respectively. During 2012, there were no new loans and lines of credit issued to directors and executive officers, $111,000 in principal repayments, and no advances on existing lines of credit. Unused lines of credit to directors and executive officers at December 31, 2012 and December 31, 2011, was $303,000 and $240,000, respectively.
6. Premises and Equipment
Premises and equipment are summarized by major classifications as follows:
Estimated Useful | December 31, | |||||||||
Life in Years | 2012 | 2011 | ||||||||
Land and buildings | Indefinite/40 | $ | 5,402,310 | $ | 6,807,117 | |||||
Furniture and fixtures | 2-7 | 6,153,699 | 6,103,754 | |||||||
Total | 11,556,009 | 12,910,871 | ||||||||
Accumulated depreciation | (8,867,715 | ) | (8,449,838 | ) | ||||||
Net | $ | 2,688,294 | $ | 4,461,033 |
Depreciation and amortization expense for the years ended December 31, 2012 and 2011 amounted to $505,000 and $536,000, respectively.
7. Deposits
Deposits consist of the following major classifications:
December 31, | ||||||||||||||||
2012 | 2011 | |||||||||||||||
Amount | Percent | Amount | Percent | |||||||||||||
Money market deposit accounts | $ | 28,056,688 | 7.5 | % | $ | 30,072,321 | 8.0 | % | ||||||||
Passbook and statement savings accounts | 50,283,805 | 13.5 | 47,156,551 | 12.5 | ||||||||||||
Certificates of less than $100,000 | 163,558,327 | 44.1 | 174,454,697 | 46.4 | ||||||||||||
Certificates of $100,000 or more | 58,501,459 | 15.8 | 58,751,323 | 15.6 | ||||||||||||
NOW accounts | 54,393,352 | 14.7 | 53,754,021 | 14.3 | ||||||||||||
Non-interest bearing accounts | 16,243,096 | 4.4 | 11,859,004 | 3.2 | ||||||||||||
Total | $ | 371,036,727 | 100.0 | % | $ | 376,047,917 | 100.0 | % |
The weighted average cost of interest bearing deposits was 0.87% and 1.13% at December 31, 2012 and 2011, respectively.
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A summary of certificates by scheduled maturity was as follows:
December 31, 2012 | ||||||||
Amount | Percent | |||||||
2013 | $ | 145,393,888 | 65.5 | % | ||||
2014 | 38,401,312 | 17.3 | % | |||||
2015 | 17,644,052 | 7.9 | % | |||||
2016 | 9,953,926 | 4.5 | % | |||||
2017 | 6,299,486 | 2.8 | % | |||||
Thereafter | 4,367,122 | 2.0 | % | |||||
Total | $ | 222,059,786 | 100.0 | % |
A summary of interest expense on deposits was as follows:
Year Ended December 31, | ||||||||
2012 | 2011 | |||||||
Money market deposit accounts | $ | 87,643 | $ | 164,177 | ||||
Other savings deposits | 111,073 | 202,058 | ||||||
Certificates of less than $100,000 | 2,113,557 | 2,700,474 | ||||||
Certificates of $100,000 or more | 772,196 | 789,223 | ||||||
NOW accounts | 117,848 | 230,780 | ||||||
Total | $ | 3,202,317 | $ | 4,086,712 |
8. | Borrowings |
At December 31, 2012 and 2011, the Company had other borrowings of $3.3 million and $3.9 million, respectively. Other borrowings consists primarily of non-FDIC insured customer sweep investments.
The FHLB offers an alternative to regular repurchase agreements. The terms are variable from overnight to one year and utilizes mortgage loans as collateral in lieu of liquidity items such as government securities for collateral. The Company’s unused credit line with the FHLB amounted to approximately $20.0 million at both December 31, 2012 and 2011, respectively. In addition to the $20.0 million credit line with the FHLB, the Company had the ability to borrow an additional $97.1 million at December 31, 2012.
9. | Income Taxes |
The Company uses the experience method in computing reserves for bad debts. The bad debt deduction allowable under this method is available to small banks with assets less than $500 million. Generally, this method allows the Company to deduct an annual addition to the reserve for bad debts equal to the increase in the balance of the Company’s reserve for bad debts at the end of the year to an amount equal to the percentage of total loans at the end of the year, computed using the ratio of the previous six years’ net chargeoffs divided by the sum of the previous six years’ total outstanding loans at year end.
Retained earnings at both December 31, 2012 and 2011 included approximately $7.1 million, representing bad debt deductions, for which no deferred income taxes have been provided.
The Company has no liability recorded related to unrecognized tax positions. No expense has been recorded or accrued for interest or penalties.
The Company files income tax returns in the U.S. Federal jurisdiction and in Pennsylvania. With limited exception, the Company is no longer subject to U.S. Federal and Pennsylvania examinations by tax authorities before 2008.
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The tax effect of temporary differences that give rise to significant portions of the deferred tax accounts, calculated at 34%, is as follows:
December 31, | ||||||||
2012 | 2011 | |||||||
Deferred tax assets: | ||||||||
Depreciation and amortization | $ | 215,560 | $ | 176,460 | ||||
Allowance for loan losses | 1,672,460 | 1,359,660 | ||||||
Additional minimum liability for retirement plans | 1,036,689 | 959,143 | ||||||
Supplemental retirement benefits | 1,311,040 | 1,282,140 | ||||||
Capital loss carryforwards | 594,660 | 859,372 | ||||||
Alternative minimum tax | 1,568,000 | 1,218,000 | ||||||
State tax loss carryfowards | 345,000 | 416,125 | ||||||
Federal tax loss carryfowards | — | 443,000 | ||||||
Other | 450,141 | 309,560 | ||||||
Total deferred tax assets | 7,193,550 | 7,023,460 | ||||||
Valuation allowance | (345,000 | ) | (416,125 | ) | ||||
Deferred tax liabilities: | ||||||||
Deferred loan fees | (61,880 | ) | (70,380 | ) | ||||
Pension Plan | (562,360 | ) | (429,760 | ) | ||||
Net unrealized gain on securities available for sale | (173,593 | ) | (264,637 | ) | ||||
Total deferred tax liabilities | (797,833 | ) | (764,777 | ) | ||||
Net deferred tax asset | $ | 6,050,717 | $ | 5,842,558 |
The Company has considered future market growth, forecasted earnings, future taxable income, and prudent, feasible and permissible tax planning strategies in determining the realizability of deferred tax assets. If the Company were to determine that it would not be able to realize a portion of its net deferred tax assets in the future, an adjustment to the net deferred tax assets would be charged to earnings in the period such determination was made.
As of December 31, 2012, the Company has approximately $267,000, $864,000, $575,000, and $44,000 of capital loss carryforwards, which result in a deferred tax asset of $595,000 thousand, expiring in 2013, 2014, 2015, and 2016, respectively. The Company expects to fully realize the benefit of such carryforwards through tax planning and sales/leaseback of capital assets.
As of December 31, 2012, the Company had approximately $522,000 of State net operating loss carryforwards expiring in 2013 and 2014, and $4.6 million of State net operating loss carryforwards, transferred from the MHC, expiring from 2019 through 2030. The Company has recorded a full valuation allowance for these carryforwards as projected State income at the Company is not anticipated to be sufficient to realize these benefits.
The consolidated expense (benefit) for income taxes consisted of the following for the years ended December 31:
2012 | 2011 | |||||||
Current, federal | $ | 698,569 | $ | 120,000 | ||||
Deferred, federal | (39,569 | ) | (199,000 | ) | ||||
Total | $ | 659,000 | $ | (79,000 | ) |
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The Company’s federal income tax expense (benefit) differs from that computed at the statutory tax rate as follows:
Year Ended December 31, | ||||||||||||||||
2012 | 2011 | |||||||||||||||
Percentage | Percentage | |||||||||||||||
of Pretax | of Pretax | |||||||||||||||
Amount | Income | Amount | Income | |||||||||||||
Expense at statutory rate | $ | 1,088,205 | 34.0 | % | $ | 363,851 | 34.0 | % | ||||||||
Adjustments resulting from: | ||||||||||||||||
Tax-exempt income | (321,232 | ) | (10.0 | ) | (351,383 | ) | (32.8 | ) | ||||||||
Increase in cash surrender value of life insurance | (106,189 | ) | (3.3 | ) | (109,269 | ) | (10.2 | ) | ||||||||
Other | (1,784 | ) | (0.1 | ) | 17,801 | 1.7 | ||||||||||
Income tax expense (benefit) per consolidated statements of income | $ | 659,000 | 20.6 | % | $ | (79,000 | ) | (7.3 | )% |
10. | Commitments and Contingencies |
The lending activities of the Company are subject to the written, non-discriminatory, underwriting standards and loan origination procedures established by the Company's Board of Directors and management. Loan originations are obtained by a variety of sources, including referrals from real estate brokers, builders, existing customers, advertising, walk-in customers and, to a significant extent, mortgage brokers who obtain credit reports, appraisals and other documentation involved with a loan. In most cases, property valuations are performed by independent outside appraisers. Title and hazard insurance are generally required on all security property other than property securing a home equity loan, in which case the Company obtains a title opinion. The majority of the Company's loans are secured by property located in its primary lending area. The Company had approximately $10.4 million and $9.4 million in outstanding loan commitments, excluding unused lines of credit and the undisbursed portion of loans in process, at December 31, 2012 and 2011, respectively, which were expected to fund within the next three months. Unused commitments under unused lines of credit amounted to $25.6 million and $22.3 million at December 31, 2012 and December 31, 2011, respectively. In addition, the Company had $888,000 and $508,000 in standby letters of credit at December 31, 2012 and 2011, respectively, which were secured by cash, marketable securities and real estate. All commitments are issued using the Company’s current loan policies and underwriting guidelines and the breakdown between fixed-rate and adjustable-rate loans is as follows:
December 31, | ||||||||
2012 | 2011 | |||||||
Fixed-rate (ranging from 4.50% to 6.00%) | $ | 2,714,832 | $ | 8,072,000 | ||||
Adjustable-rate | 7,688,350 | 1,312,500 | ||||||
Total | $ | 10,403,182 | $ | 9,384,500 |
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The contractual amounts of commitments to extend credit represent the amounts of potential accounting loss should the contract be fully drawn upon, the customer defaults and the value of any existing collateral becomes worthless. We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments. Financial instruments whose contract amounts represent credit risk at the dates indicated are as follows:
At December 31, | ||||||||
2012 | 2011 | |||||||
(Dollars in thousands) | ||||||||
Future loan commitments | $ | 10,403 | $ | 9,385 | ||||
Undisbursed construction loans | 8,764 | 4,179 | ||||||
Undisbursed home equity lines of credit | 4,550 | 4,601 | ||||||
Undisbursed commercial lines of credit | 12,055 | 13,297 | ||||||
Overdraft protection lines | 192 | 189 | ||||||
Standby letters of credit | 888 | 508 | ||||||
Total | $ | 36,852 | $ | 32,159 |
Depending on cash flow, interest rate risk, risk management and other considerations, longer term fixed-rate residential loans may be sold in the secondary market. There were no outstanding commitments to sell loans at December 31, 2012.
The Company is involved in legal proceedings and litigation arising in the ordinary course of business. In the opinion of management, the outcome of such proceedings and litigation currently pending will not materially affect the Company consolidated financial statements. However, there can be no assurance that any of the outstanding legal proceedings and litigation to which the Company is a party will not be decided adversely to the Company’s interests and have a material adverse effect on the consolidated financial statements.
Expenses related to rent for office buildings for 2012 and 2011 were $431,000 and $382,000, respectively. The Company maintains offices at nine locations, including seven bank offices which it rents under leases expiring over the next 10 years. The following is a summary of future minimum rental payments required under all operating leases as of December 31, 2012:
Year Ending December 31, | ||||
2013 | $ | 456,148 | ||
2014 | 457,197 | |||
2015 | 458,266 | |||
2016 | 344,822 | |||
2017 | 268,203 | |||
Thereafter | 1,281,229 | |||
Total minimum rental payments | $ | 3,265,865 |
11. | Retirement Plans |
The Company has a defined benefit pension plan, a profit-sharing plan and a defined contribution plan under Section 401(k) of the Internal Revenue Code, all of which cover all full-time employees meeting certain eligibility requirements. The plans may be terminated at any time at the discretion of the Company’s Board of Directors.
Pension expense was $260,000 and $215,000, in 2012 and 2011, respectively. The contribution for the profit-sharing plan was $120,000 and $110,000 in 2012 and 2011, respectively.
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The net pension costs for the years ended December 31, 2012 and 2011 included the following components:
2012 | 2011 | |||||||
Net Periodic Benefit Cost | ||||||||
Service Cost | $ | 288,261 | $ | 272,103 | ||||
Interest Cost | 236,661 | 275,228 | ||||||
Expected Return on Plan Assets | (417,009 | ) | (394,916 | ) | ||||
Amortization of Prior Service Cost | 12,685 | 12,685 | ||||||
Amortization of Loss | 139,243 | 49,797 | ||||||
Net Periodic Benefit Cost | $ | 259,841 | $ | 214,897 | ||||
Other changes in plan assets and benefit obligations recognized in other comprehensive loss | ||||||||
Net loss | $ | 104,401 | $ | 1,083,492 | ||||
Amortization of net loss | (139,243 | ) | (49,797 | ) | ||||
Amortization of prior service cost | (12,685 | ) | (12,685 | ) | ||||
Total recognized in other comprehensive income (loss) | $ | (47,527 | ) | $ | 1,021,010 | |||
Total recognized in net periodic benefit cost and other comprehensive loss | $ | 212,314 | $ | 1,235,907 |
The estimated net loss and prior service cost for the defined benefit pension plan that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost over the next fiscal year are $135,037 and $12,685, respectively.
2012 | 2011 | |||||||
Key Assumptions | ||||||||
Discount Rate for Net Periodic Benefit Cost | 4.00 | % | 5.50 | % | ||||
Salary Scale for Net Periodic Benefit Cost | 3.00 | % | 4.00 | % | ||||
Expected Return on Plan Assets | 8.00 | % | 8.00 | % | ||||
Discount Rate for Plan Obligations | 3.50 | % | 4.00 | % | ||||
Salary Scale for Plan Obligations | 2.50 | % | 3.00 | % |
A summary of reconciliation and disclosure information required under FASB ASC Topic 715, Compensation-Retirement Benefits, for the defined benefit pension plan is as follows:
2012 | 2011 | |||||||
Change in Projected Benefit Obligation | ||||||||
Projected Benefit Obligation at Beginning of Year | $ | 6,011,546 | $ | 5,020,531 | ||||
Service Cost | 288,261 | 272,103 | ||||||
Interest Cost | 236,661 | 275,228 | ||||||
Benefits paid | (129,037 | ) | (71,945 | ) | ||||
Actuarial Loss | 248,891 | 515,629 | ||||||
Projected Benefit Obligation at End of Year | 6,656,322 | 6,011,546 | ||||||
Change in Plan Assets During Year | ||||||||
Fair Value of Plan Assets at Beginning of Year | 4,922,617 | 4,817,509 | ||||||
Actual Return on Plan Assets | 561,499 | (172,947 | ) | |||||
Employer Contributions | 650,000 | 350,000 | ||||||
Benefits Paid | (129,037 | ) | (71,945 | ) | ||||
Fair Value of Plan Assets at End of Year | 6,005,079 | 4,922,617 | ||||||
Funded Status at End of Year, included in other liabilities | $ | (651,243 | ) | $ | (1,088,929 | ) | ||
Benefit Obligations at End of Year | ||||||||
Accumulated Benefit Obligation | $ | 5,742,230 | $ | 4,969,181 | ||||
Amounts Recognized in Accumulated Other Comprehensive Loss | ||||||||
Net loss | $ | 1,963,342 | $ | 1,998,184 | ||||
Prior service cost | 76,112 | 88,797 | ||||||
Total | $ | 2,039,454 | $ | 2,086,981 |
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Expected Contributions to the Trust
The Company plans to contribute $300,000 to the pension plan in 2013.
Expected Benefit Payments From the Trust
2013 | $ | 153,049 | ||
2014 | 454,353 | |||
2015 | 93,394 | |||
2016 | 1,470,425 | |||
2017 | 316,225 | |||
2018-2022 | 2,888,379 |
Target asset allocation for the pension plan includes equity securities ranging from 55% to 75%, debt securities ranging from 25% to 45% and cash and cash equivalents ranging from 0% to 10%. The following table shows the asset allocation as of December 31, 2012.
Percentage | ||||||||
Investment Class | of Assets | |||||||
Fixed Income Investments-mutual funds | $ | 1,844,441 | 30.7 | % | ||||
Equity Investments-mutual funds | 3,665,487 | 61.0 | % | |||||
Cash and Cash Equivalents | 495,151 | 8.3 | % | |||||
Fair Value as of December 31, 2012 | $ | 6,005,079 | 100.0 | % |
Fixed income investments are 53.2% invested in a total return bond fund and 46.8% invested in a short term investment grade fund. The equity investments consist of 11.0% small-cap mutual funds, 11.2% mid-cap mutual funds, 63.6% large-cap mutual funds, and 14.2% international mutual funds.
The following table summarizes assets measured at fair value on a recurring basis as of December 31, 2012, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value.
Description | Total | (Level
1) Quoted Prices in Active Markets for Identical Assets | (Level
2) Significant Other Observable Inputs | (Level
3) Significant Unobservable Inputs | ||||||||||||
Cash and Cash Equivalents | $ | 495,151 | $ | 495,151 | $ | — | $ | — | ||||||||
Mutual Funds | 5,509,928 | 5,509,928 | — | — | ||||||||||||
Total | $ | 6,005,079 | $ | 6,005,079 | $ | — | $ | — |
82 |
The following table summarizes assets measured at fair value on a recurring basis as of December 31, 2011, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value.
Description | Total | (Level
1) Quoted Prices in Active Markets for Identical Assets | (Level
2) Significant Other Observable Inputs | (Level
3) Significant Unobservable Inputs | ||||||||||||
Cash and Cash Equivalents | $ | 437,943 | $ | 437,943 | $ | — | $ | — | ||||||||
Mutual Funds | 4,484,674 | 4,484,674 | — | — | ||||||||||||
Total | $ | 4,922,617 | $ | 4,922,617 | $ | — | $ | — |
The Company has a Nonqualified Retirement and Death Benefit Agreement (the “Agreement”) with certain officers of the Company. The purpose of the Agreement is to provide the officers with supplemental retirement benefits equal to a specified percentage of final composition and a pre-retirement death benefit if the officer does not attain the specific age requirement. A summary of the reconciliation and disclosure information required under FASB Topic ASC 715, Compensation-Retirement Benefits, for the Agreement is as follows:
Year Ended | ||||||||
December 31, | ||||||||
2012 | 2011 | |||||||
Change in benefit obligation during year | ||||||||
Benefit obligation at beginning of year | $ | 4,504,798 | $ | 3,908,177 | ||||
Service cost | 48,238 | 44,343 | ||||||
Interest cost | 177,016 | 210,583 | ||||||
Benefit payments | (158,792 | ) | (158,792 | ) | ||||
Actuarial loss | 294,505 | 500,487 | ||||||
Benefit obligation at end of year | 4,865,765 | 4,504,798 | ||||||
Change in plan assets during year | ||||||||
Fair value of plan assets at beginning of year | — | — | ||||||
Employer contributions | 158,792 | 158,792 | ||||||
Benefit payments | (158,792 | ) | (158,792 | ) | ||||
Fair value of plan assets at end of year | — | — | ||||||
Funded status | ||||||||
Funded status (included in other liabilities) | (4,865,765 | ) | (4,504,798 | ) | ||||
Unrecognized net loss | 1,009,627 | 734,025 | ||||||
Unrecognized prior service cost | — | — | ||||||
Net liability recognized | $ | (3,856,138 | ) | $ | (3,770,773 | ) | ||
Change in accumulated other comprehensive loss | ||||||||
Accumulated other comprehensive loss at beginning of year | $ | 734,025 | $ | 233,538 | ||||
Amortization of net loss | 18,902 | — | ||||||
Actuarial loss | 294,505 | 500,487 | ||||||
Amortization of prior service cost | — | — | ||||||
Net change in other comprehensive loss | 275,603 | 500,487 | ||||||
Accumulated other comprehensive loss at end of year | $ | 1,009,627 | $ | 734,025 | ||||
Expected cash-flow information for years after current fiscal year | ||||||||
2013 | $ | 179,240 | ||||||
2014 | 229,798 | |||||||
2015 | 280,973 | |||||||
2016 | 380,212 | |||||||
2017 | 380,212 | |||||||
2018-2022 | 1,901,060 |
83 |
2012 | 2011 | |||||||
Net periodic benefit cost | ||||||||
Service cost | $ | 48,238 | $ | 44,343 | ||||
Interest cost | 177,016 | 210,583 | ||||||
Amortization of prior service cost | — | — | ||||||
Amortization of net loss | 18,902 | — | ||||||
Net periodic benefit cost | $ | 244,156 | $ | 254,926 | ||||
Key Assumptions | ||||||||
Discount rate during the year | 4.00 | % | 5.50 | % | ||||
Discount rate at end of year | 4.00 | % | 4.00 | % |
Employee Stock Ownership Plan
The Bank has an Employee Stock Ownership Plan (“ESOP”) for the benefit of employees who meet the eligibility requirements as defined in the ESOP. The ESOP purchased 74,073 shares of common stock in the offering completed on January 30, 2007 using proceeds of a loan from the former mid-tier holding company. The Bank makes quarterly payments of principal and interest over a term of 8 years at a rate of 8.25% to the Company. The ESOP has a second loan from the Company to fund the purchase of 150,991 additional shares in connection with the second step conversion completed on January 18, 2011 under which the Bank makes quarterly payments of principal and interest over a term of 20 years at a rate of 3.25% to the Company. The loans are secured by the shares of the stock purchased.
As the debt is repaid, shares are released from collateral and allocated to qualified employees. As shares are released from collateral, the Company reports compensation expense equal to the current market price of the shares, and the shares become outstanding for earnings per share computations. The compensation expense for the ESOP for the twelve months ended December 31, 2012 and December 31, 2011 was $161,000 and $138,000, respectively.
The following table presents the components of the ESOP shares inclusive of shares purchased prior to 2007:
December 31, | ||||||||
2012 | 2011 | |||||||
Shares released for allocation | 158,915 | 144,810 | ||||||
Unearned shares | 162,616 | 176,557 | ||||||
Total ESOP shares | 321,531 | 321,367 |
12. | Regulatory Capital Requirements |
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. 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 Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Qualitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table) of Total and Tier 1 capital (as defined in the regulations) to risk weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 2012, that the Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 2012, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank’s category.
84 |
The Bank’s actual capital amounts and ratios are presented in the table below:
To Be Well | ||||||||||||||||||||||||
Capitalized Under | ||||||||||||||||||||||||
For Capital Adequacy | Prompt Corrective | |||||||||||||||||||||||
Actual | Purposes | Action Provisions | ||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
As of December 31, 2012: | ||||||||||||||||||||||||
Tier 1 Capital (to average assets) | $ | 58,344 | 12.76 | % | $ | 18,294 | 4.00 | % | $ | 22,867 | 5.00 | % | ||||||||||||
Tier 1 Capital (to risk-weighted assets) | 58,344 | 23.43 | 9,961 | 4.00 | 14,942 | 6.00 | ||||||||||||||||||
Total Capital (to risk-weighted assets) | 61,479 | 24.69 | 19,923 | 8.00 | 24,904 | 10.00 |
(Dollars in thousands) | ||||||||||||||||||||||||
As of December 31, 2011: | ||||||||||||||||||||||||
Tier 1 Capital (to average assets) | $ | 58,937 | 12.85 | % | $ | 18,347 | 4.00 | % | $ | 22,934 | 5.00 | % | ||||||||||||
Tier 1 Capital (to risk-weighted assets) | 58,937 | 21.85 | 10,790 | 4.00 | 16,185 | 6.00 | ||||||||||||||||||
Total Capital (to risk-weighted assets) | 62,317 | 23.10 | 21,580 | 8.00 | 26,975 | 10.00 |
The Bank’s capital at December 31, 2012 and 2011 for financial statement purposes differs from regulatory Tier 1 capital amounts by $337,000 and $513,000, respectively, representing the exclusion for regulatory purposes of unrealized gains and losses on securities available for sale and by $2.0 million and $1.9 million, respectively, representing the exclusion of amounts in accumulated other comprehensive loss from the application of FASB ASC Topic 715 (Compensation-Retirement Benefits), and $5.0 million and $3.1 million, respectively representing the exclusion for regulatory purposes of certain deferred tax assets.
13. Stock-Based Compensation
Recognition and Retention Plan and Trust
In July of 2011, the shareholders of the Company approved the adoption of the 2011 Recognition and Retention Plan and Trust (the “2011 RRP”). Pursuant to the terms of the 2011 RRP, awards of up to 218,977 shares of restricted common stock may be granted to employees and directors. In order to fund the 2011 RRP, the 2011 RRP acquired 218,977 shares of the Company’s common stock in the open market for approximately $2.4 million at an average price of $11.14 per share. During 2012 and 2011, the Company made sufficient contributions to the 2011 RRP to fund the purchase of these shares. Pursuant to the terms of the 2011 RRP, no additional shares will need to be acquired. On July 20, 2011, a total of 208,200 2011 RRP awards were granted. On July 20, 2012, a total of 3,000 2011 RRP awards were granted. The 2011 RRP shares generally vest at the rate of 20% per year over five years.
A summary of the status of the shares under the 2011 RRP as of December 31, 2012 and December 31, 2011 and changes during the years ended December 31, 2012 and December 31, 2011 are presented below:
Year Ended December 31, 2012 | ||||||||
Weighted | ||||||||
Number of | average grant | |||||||
shares | date fair value | |||||||
Restricted at the beginning of period | 208,200 | $ | 11.05 | |||||
Granted | 3,000 | $ | 12.47 | |||||
Vested | (41,640 | ) | $ | 11.05 | ||||
Forfeited | — | — | ||||||
Restricted at the end of period | 169,560 | $ | 11.08 |
85 |
Year Ended December 31, 2011 | ||||||||
Weighted | ||||||||
Number of | average grant | |||||||
shares | date fair value | |||||||
Restricted at the beginning of the year | — | — | ||||||
Granted | 208,200 | $ | 11.05 | |||||
Vested | — | — | ||||||
Forfeited | — | — | ||||||
Restricted at the end of the period | 208,200 | $ | 11.05 |
Compensation expense on the 2011 RRP shares granted is recognized ratably over the five year vesting period in an amount which totals the market price of the common stock at the date of grant. During the year ended December 31, 2012, approximately 41,940 shares were amortized to expense, based on the proportional vesting of the awarded shares, resulting in recognition of approximately $445,000 in compensation expense. As of December 31, 2012, approximately $1.8 million in additional compensation expense is scheduled to be recognized over the remaining vesting period of 4.5 years. During the year ended December 31, 2011, approximately 20,820 shares were amortized to expense, based on the proportional vesting of the awarded shares, resulting in recognition of approximately $221,000 in compensation expense. As of December 31, 2011, approximately $2.0 million in additional compensation expense was scheduled to be recognized over the remaining vesting period of 4.5 years. Under the terms of the 2011 RRP, any unvested awards will become fully vested upon a change in control of the Company resulting in the full recognition of any unrecognized expense.
Stock Options
In July 2011, the shareholders of the Company also approved the adoption of the 2011 Stock Option Plan (the “2011 Option Plan”). Pursuant to the 2011 Option Plan, options to acquire 325,842 shares of common stock may be granted to employees and directors. Under the 2011 Option Plan, options generally become vested and exercisable at the rate of 20% per year over five years and are generally exercisable for a period of ten years after the grant date. On July 20, 2011, options to purchase 277,750 shares of common stock were awarded. On July 20, 2012, options to purchase 9,500 shares of common stock were awarded. As of December 31, 2012, a total of 38,592 shares of common stock have been reserved for future grant pursuant to the 2011 Option Plan.
A summary of the status of the Company’s stock options under the 2011 Option Plan as of December 31, 2012 and December 31, 2011, and changes during the years ended December 31, 2012 and December 31, 2011, are presented below:
Year Ended December 31, 2012 | ||||||||
Weighted | ||||||||
Number of | average | |||||||
shares | exercise price | |||||||
Options outstanding at the beginning of period | 277,750 | $ | 11.05 | |||||
Granted | 9,500 | $ | 12.47 | |||||
Exercised | — | — | ||||||
Forfeited | — | — | ||||||
Options outstanding at the end of period | 287,250 | $ | 11.10 | |||||
Exercisable at end of the period | 55,500 | $ | 11.05 |
86 |
Year Ended December 31, 2011 | ||||||||
Weighted | ||||||||
Number of | average | |||||||
Shares | exercise price | |||||||
Options outstanding at the beginning of the year | — | — | ||||||
Granted | 277,750 | $ | 11.05 | |||||
Exercised | — | — | ||||||
Vested | — | — | ||||||
Forfeited | — | — | ||||||
Options outstanding at the end of the period | 277,750 | $ | 11.05 | |||||
Exercisable at the end of the period | — | — |
The fair value of each option grant is estimated using the Black-Scholes pricing model with the following weighted average assumptions for the options granted in 2011: dividend yield of 2.0%, risk-free interest rate of 1.58%, expected life of 7.0 years, and volatility of 30.34%. The calculated fair value of options granted in 2011 was $2.99. The fair value of each option grant is estimated using the Black-Scholes pricing model with the following weighted average assumptions for the options granted in 2012: dividend yield of 2.0%, risk-free interest rate of 0.71%, expected life of 7.0 years, and volatility of 28.87%. The calculated fair value of options granted in 2012 was $3.08. The weighted average contractual term of the options outstanding was 8.6 years and 9.5 years at December 31, 2012 and December 31, 2011, respectively.
During the years ended December 31, 2012 and December 31, 2011, respectively, approximately $162,000 and $80,000 was recognized in compensation expense for the 2011 Option Plan. At December 31, 2012 and December 31, 2011, respectively, approximately $583,000 and $717,000 in additional compensation expense for awarded options remained unrecognized. The weighted average period over which this expense will be recognized is approximately 4.5 years and 4.5 years at December 31, 2012 and December 31, 2011, respectively.
14. Fair Value Measurements and Fair Values of Financial Instruments
Management uses its best judgment in estimating the fair value of the Company 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 their respective year-ends and have not been re-evaluated or updated for purposes of these 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.
FASB ASC Topic 820, Fair Value Measurement establishes a fair value hierarchy that prioritizes the inputs to validation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of fair value hierarchy under FASB ASC Topic 820 are as follows:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2: Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.
Level 3: Prices or valuation techniques that require inputs that are both significant to fair value measurement and unobservable (i.e. support with little or no market value activity).
An asset or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
87 |
The following methods and assumptions were used to estimate the fair value of certain Company assets and liabilities:
Cash and Cash Equivalents (Carried at Cost), The carrying amounts reported in the consolidated statements of financial condition for cash and short-term instruments approximate those assets’ fair values.
Investment and Mortgage-Backed Securities, The fair value of securities available for sale (carried at fair value) and held to maturity (carried at amortized cost) are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices.
Loans Receivable (Carried at Cost), The fair values of loans are estimated using discounted cash flow analyses, using market rates at the balance sheet date that reflect the credit and interest rate-risk inherent in the loans. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal. Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values.
Impaired Loans (Generally Carried at Fair Value). Impaired loans are those in which the Bank has measured impairment generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds. Appraised values may be discounted based upon management’s historical knowledge and changes in the market conditions from the time of the appraisal. Because of the high degree of judgment required in estimating the fair value of collateral underlying impaired loans and because of the relationship between fair value and general economic conditions we consider fair values of impaired loans to be highly sensitive to market conditions. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements. The fair value consists of the loan balances, net of any valuation allowance. At December 31, 2012 and December 31, 2011, the fair value consists of loan balances of $12.0 million and $7.2 million, respectively, net of valuation allowances of $1.3 million and $667,000, respectively; and loan balances of $-0- and $9.7 million, respectively, net of partial charge-offs of $-0- and $3.7 million, respectively.
Other Real Estate Owned. OREO assets are originally recorded at fair value upon transfer of the loans to OREO. Subsequently, OREO assets are carried at the lower of carrying value or fair value. The fair value of OREO is based on independent appraisals less selling costs. Appraised values may be discounted based upon management’s historical knowledge and changes in the market conditions from the time of the appraisal. Because of the high degree of judgment required in estimating the fair value of OREO and because of the relationship between fair value and general economic conditions the Company considers fair values of OREO to be highly sensitive to market conditions. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements. At December 31, 2012 and December 31, 2011, the fair value consists of OREO balances of $2.2 million and $1.0 million, respectively, net of valuation allowances of $313,000, and $11,000, respectively.
FHLB Stock (Carried at Cost). The carrying amount of FHLB stock approximates fair value, and considers the limited marketability of such securities.
Accrued Interest Receivable and Payable (Carried at Cost). The carrying amount of accrued interest receivable and accrued interest payable approximates its fair value.
Deposits (Carried at Cost). The fair values disclosed for demand deposits (e.g., interest and noninterest checking, passbook savings and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits.
Borrowings (Carried at Cost). The carrying amount of overnight sweep accounts generally approximate fair value.
88 |
Off-Balance Sheet Financial Instruments, Fair values for the Company’s off-balance sheet financial instruments (lending commitments and letters of credit) are based on fees currently charged in the market to enter into similar agreements, taking into account, the remaining terms of the agreements and the counterparties’ credit standing.
The following table summarizes assets measured at fair value on a recurring basis as of December 31, 2012, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):
Description | Total | (Level 1) Prices in Active Markets for Identical Assets | (Level 2) Significant Other Observable Inputs | (Level 3) Significant Unobservable Inputs | ||||||||||||
Obligations of FHLB | $ | 3,997 | $ | — | $ | 3,997 | $ | — | ||||||||
Obligations of Fannie Mae | 5,003 | — | 5,003 | — | ||||||||||||
Obligations of GNMA | 1,390 | — | 1,390 | — | ||||||||||||
Obligations of FHLMC | 2,247 | — | 2,247 | — | ||||||||||||
Obligations of FNMA | 3,887 | — | 3,887 | — | ||||||||||||
Total | $ | 16,524 | $ | — | $ | 16,524 | $ | — |
For assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at December 31, 2012 (in thousands) are as follows:
Description | Total | (Level 1) Prices in Active Markets for Identical Assets | (Level 2) Significant Other Observable Inputs | (Level 3) Significant Unobservable Inputs | ||||||||||||
Impaired loans | $ | 10,738 | $ | — | $ | — | $ | 10,738 | ||||||||
Other real estate owned | 1,851 | — | — | 1,851 | ||||||||||||
Total | $ | 12,589 | $ | — | $ | — | $ | 12,589 |
The following table presents quantitative information with regards to Level 3 fair value measurements at December 31, 2012.
Description | Fair Value at December 31, 2012 | Valuation Technique | Unobservable Input | Range (Weighted Average) | ||||||||
Impaired loans | $ | 10,738 | Appraisal of collateral | Appraisal adjustments (1) | 3%-30% (14%) | |||||||
Other real estate owned | 1,851 | Appraisal of collateral | Appraisal adjustments (1) | 7%-20% (9%) | ||||||||
Total | $ | 12,589 |
(1) | Appraisals may be adjusted by management for qualitative factors, including estimated liquidation expenses. The range and weighted average adjustments are presented as a percentage of the appraisal. |
89 |
The following table summarizes assets measured at fair value on a recurring basis as of December 31, 2011, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):
Description | Total | (Level 1) Prices in Active Markets for Identical Assets | (Level 2) Significant Other Observable Inputs | (Level 3) Significant Unobservable Inputs | ||||||||||||
Obligations of FHLB | $ | 8,034 | $ | — | $ | 8,034 | $ | — | ||||||||
Obligations of Freddie Mac | 7,027 | — | 7,027 | — | ||||||||||||
Obligations of Fannie Mae | 8,009 | — | 8,009 | — | ||||||||||||
Obligations of GNMA | 1,545 | — | 1,545 | — | ||||||||||||
Obligations of FHLMC | 3,800 | — | 3,800 | — | ||||||||||||
Obligations of FNMA | 5,958 | — | 5,958 | — | ||||||||||||
Total | $ | 34,373 | $ | — | $ | 34,373 | $ | — |
For assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at December 31, 2011 (in thousands) are as follows:
Description | Total | (Level 1) Prices in Active Markets for Identical Assets | (Level 2) Significant Other Observable Inputs | (Level 3) Significant Unobservable Inputs | ||||||||||||
Impaired loans | $ | 12,358 | $ | — | $ | — | $ | 12,358 | ||||||||
Other real estate owned | 989 | — | — | 989 | ||||||||||||
Total | $ | 13,347 | $ | — | $ | — | $ | 13,347 |
The carrying amount and estimated fair values of the Company’s assets and liabilities were as follows as of the dates indicated.
At December 31, 2012 | ||||||||||||||||
Carrying | Level 1 | Level 2 | Level 3 | |||||||||||||
Amount | Fair Value | Fair Value | Fair Value | |||||||||||||
(In thousands) | ||||||||||||||||
Assets: | ||||||||||||||||
Cash and due from banks | $ | 984 | $ | 984 | $ | — | $ | — | ||||||||
Interest bearing deposits at banks | 111,321 | 111,321 | — | — | ||||||||||||
Investment securities | 34,325 | — | 35,525 | — | ||||||||||||
Mortgage-backed securities | 7,524 | — | 7,524 | — | ||||||||||||
Loans receivable | 278,876 | — | — | 281,111 | ||||||||||||
FHLB stock | 1,338 | — | 1,338 | — | ||||||||||||
Accrued interest receivable | 1,502 | — | 1,502 | — | ||||||||||||
Liabilities: | ||||||||||||||||
NOW and MMDA deposits (1) | $ | 98,693 | $ | 98,693 | $ | — | $ | — | ||||||||
Other savings deposits | 50,284 | 50,284 | — | — | ||||||||||||
Certificate accounts | 222,060 | — | — | 223,400 | ||||||||||||
Borrowings | 3,261 | 3,261 | — | — | ||||||||||||
Accrued interest payable | 9 | — | 9 | — | ||||||||||||
Off balance sheet instruments | — | — | — | — |
(1) | Includes non-interest bearing accounts, totaling $16,243. |
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At December 31, 2011 | ||||||||||||||||
Carrying | Level 1 | Level 2 | Level 3 | |||||||||||||
Amount | Fair Value | Fair Value | Fair Value | |||||||||||||
(In thousands) | ||||||||||||||||
Assets: | ||||||||||||||||
Cash and due from banks | $ | 1,397 | $ | 1,397 | $ | — | $ | — | ||||||||
Interest bearing deposits at banks | 94,455 | 94,455 | — | — | ||||||||||||
Investment securities | 45,245 | — | 46,270 | — | ||||||||||||
Mortgage-backed securities | 11,303 | — | 11,303 | — | ||||||||||||
Loans receivable | 285,297 | — | — | 283,708 | ||||||||||||
FHLB stock | 1,887 | — | 1,887 | — | ||||||||||||
Accrued interest receivable | 1,666 | — | 1,666 | — | ||||||||||||
Liabilities: | ||||||||||||||||
NOW and MMDA deposits (1) | $ | 95,685 | $ | 95,685 | $ | — | $ | — | ||||||||
Other savings deposits | 47,157 | 47,157 | — | — | ||||||||||||
Certificate accounts | 233,206 | — | — | 235,255 | ||||||||||||
Borrowings | 3,878 | 3,878 | — | — | ||||||||||||
Accrued interest payable | 14 | — | 14 | — | ||||||||||||
Off balance sheet instruments | — | — | — | — |
(1) Includes non-interest bearing accounts, totaling $11,859.
15. Condensed Financial Information – Parent Corporation Only
CONDENSED BALANCE SHEETS-PARENT CORPORATION ONLY
December 31, | ||||||||
2012 | 2011 | |||||||
ASSETS: | ||||||||
Cash and cash equivalents | $ | 15,994,773 | $ | 17,268,698 | ||||
Loan receivable – ESOP | 1,870,159 | 2,001,492 | ||||||
Other assets | 832,648 | 3,149,703 | ||||||
Investment in Alliance Bank | 61,643,037 | 60,648,317 | ||||||
Total assets | $ | 80,340,617 | $ | 83,068,210 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
LIABILITIES: | ||||||||
Total liabilities | $ | 338,331 | $ | 72,931 | ||||
STOCKHOLDERS’ EQUITY | ||||||||
Total stockholders' equity | 80,002,286 | 82,995,279 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 80,340,617 | $ | 83,068,210 |
91 |
CONDENSED INCOME STATEMENTS-PARENT CORPORATION ONLY
Years Ended December 31, | ||||||||
2012 | 2011 | |||||||
INCOME: | ||||||||
Interest income | $ | 102,980 | $ | 84,558 | ||||
Rental income | 42,000 | 42,000 | ||||||
Gain on sale of premises and equipment | 805,817 | — | ||||||
Net loss on sale of securities | — | (56,720 | ) | |||||
Total income | 950,797 | 69,838 | ||||||
EXPENSES: | ||||||||
Directors retirement plan | 10,800 | 11,250 | ||||||
Real estate tax | 1,985 | 10,883 | ||||||
Depreciation | 13,342 | 13,341 | ||||||
Supervisory expense | — | 19,071 | ||||||
Legal fees | 60,000 | — | ||||||
Stock related expense | 48,000 | 8,107 | ||||||
Capital stock tax | 3,984 | — | ||||||
Other | 7,700 | 7,700 | ||||||
Total expenses | 145,811 | 70,352 | ||||||
INCOME (LOSS) BEFORE INCOME TAX EXPENSE AND EQUITY IN UNDISTRUBUTED NET INCOME OF SUBSIDIARY | 804,986 | (514 | ) | |||||
EQUITY IN UNDISTRUBUTED NET INCOME OF SUBSIDIARY | 2,010,618 | 1,149,663 | ||||||
Income Tax Expense | 274,000 | — | ||||||
NET INCOME | $ | 2,541,604 | $ | 1,149,149 |
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME-PARENT CORPORATION ONLY
Years Ended December 31, | ||||||||
2012 | 2011 | |||||||
Net Income | $ | 2,541,604 | $ | 1,149,149 | ||||
Other Comprehensive Income | ||||||||
Unrealized loss on securities net of tax benefit of $19,284 | — | (37,435 | ) | |||||
Plus reclassification adjustment for realized loss on sale of securities (net) included in net income net of tax benefit of $19,284 | — | 37,435 | ||||||
Total Other Comprehensive Income | — | — | ||||||
Comprehensive Income | $ | 2,541,604 | $ | 1,149,149 |
92 |
CONDENSED STATEMENTS OF CASH FLOWS-PARENT CORPORATION ONLY
Years Ended December 31, | ||||||||
2012 | 2011 | |||||||
OPERATING ACTIVITIES: | ||||||||
Net income | $ | 2,541,604 | $ | 1,149,149 | ||||
Adjustments to reconcile net income to cash provided by (used in) operations: | ||||||||
Undistributed net income of subsidiary | (2,010,618 | ) | (1,149,663 | ) | ||||
Decrease (increase) in other assets | 2,317,055 | (3,149,703 | ) | |||||
Increase in other liabilities | 265,400 | 60,731 | ||||||
Net cash provided by (used in) operating activities | 3,113,441 | (3,089,486 | ) | |||||
INVESTING ACTIVITIES: | ||||||||
Principal repayments on ESOP loan | 131,333 | 113,263 | ||||||
Net cash provided by investing activities | 131,333 | 113,263 | ||||||
FINANCING ACTIVITIES: | ||||||||
Proceeds from stock issuance | — | 29,982,093 | ||||||
Purchase of treasury stock | (3,431,739 | ) | — | |||||
Capital contribution paid to the Bank | — | (15,000,000 | ) | |||||
Acquisition of stock by ESOP | — | (1,611,357 | ) | |||||
Dissolution of Mutual Holding Company | — | 6,847,743 | ||||||
Dividends paid | (1,086,960 | ) | (930,654 | ) | ||||
Net cash (used in) provided by financing activities | (4,518,699 | ) | 19,287,825 | |||||
Net (decrease) increase in cash and cash equivalents | (1,273,925 | ) | 16,311,602 | |||||
Cash and cash equivalents – beginning of period | 17,268,698 | 957,096 | ||||||
Cash and cash equivalents – end of period | $ | 15,994,773 | $ | 17,268,698 |
93 |
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not Applicable.
Item 9A. Controls and Procedures.
a) | Under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2012. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that these controls and procedures are designed to ensure that the information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and regulations and are operating in an effective manner. |
b) | Management’s Report on Internal Control Over Financial Reporting |
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) 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 (iii) 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.
Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements prepared for external purposes in accordance with generally accepted accounting principles. 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.
Under the supervision and with the participation of management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control—Integrated Framework, management concluded that our internal control over financial reporting was effective as of December 31, 2012.
c) | No change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fourth fiscal quarter of fiscal 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. |
Item 9B. Other Information.
Not applicable.
94 |
PART III.
Item 10. Directors, Executive Officers and Corporate Governance.
The information required herein is incorporated by reference to the Company's definitive proxy statement for the annual meeting of stockholders to be held April 24, 2013. ("Definitive Proxy Statement").
Item 11. Executive Compensation.
The information required herein is incorporated by reference to the Definitive Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required herein is incorporated by reference to the Definitive Proxy Statement.
Equity Compensation Plan Information. The following table provides information as of December 31, 2012 with respect to shares of common stock that may be issued under our existing equity compensation plans, which consist of the 2011 Stock Option Plan and the 2011 Recognition and Retention Plan, which were approved by our shareholders.
Plan Category | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (a) | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights (b) | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) (c) | |||||||||
Equity compensation plans approved by security holders | 456,810 | (1) | $ | 11.10 | (1) | 46,369 | ||||||
Equity compensation plans not approved by security holders | — | — | — | |||||||||
Total | 456,810 | $ | 11.10 | 46,369 |
(1) | Includes 169,560 shares subject to restricted stock grants which were not vested as of December 31, 2012. The weighted-average exercise price excludes such restricted stock. |
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required herein is incorporated by reference to the Definitive Proxy Statement
Item 14. Principal Accounting Fees and Services.
The information required herein is incorporated by reference to the Definitive Proxy Statement
95 |
PART IV.
Item 15. Exhibits and Financial Statement Schedules.
(1) The following financial statements are incorporated by reference from Item 8 hereof:
Report of Independent Registered Public Accounting Firm. |
Consolidated Statements of Financial Condition at December 31, 2012 and 2011. |
Consolidated Statements of Income for the years ended December 31, 2012 and 2011. |
Consolidated Statements of Comprehensive Income for the years ended December 31, 2012 and 2011. |
Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2012 and 2011. |
Consolidated Statements of Cash Flows for the years ended December 31, 2012 and 2011. |
Notes to Consolidated Financial Statements. |
(2) All schedules are omitted because of the absence of conditions under which they are required or because the required information is included in the financial statements and related notes thereto.
(3) The following exhibits are filed as part of this Form 10-K and this list includes the Exhibit Index.
No | Description | |
3.1 | Articles of Incorporation of Alliance Bancorp, Inc. of Pennsylvania (1) | |
3.2 | Bylaws of Alliance Bancorp, Inc. of Pennsylvania (1) | |
4.1 | Form of Stock Certificate of Alliance Bancorp, Inc. of Pennsylvania (1) | |
10.1 | Alliance Bancorp, Inc. of Pennsylvania Amended and Restated Directors Retirement Plan *(2) | |
10.2 | Alliance Bank Amended and Restated Supplemental Executive Retirement Plan and Participation Agreement 409A Restatement *(2) | |
10.3 | Greater Delaware Valley Savings d/b/a Alliance Bank Endorsement Split Dollar Insurance Agreement*(3) | |
10.4 | Amended and Restated Employment Agreement, dated September 19, 2012, between Alliance Bank and Dennis D. Cirucci *(4) | |
10.5 | Amended and Restated Employment Agreement, dated September 19, 2012, between Alliance Bank and Peter J. Meier *(4) | |
10.6 | Employment Agreement, dated September 19, 2012, between Alliance Bank and William T. McGrath *(4) | |
10.7 | Amended and Restated Employment Agreement, dated September 19, 2012, between Alliance Bank and Suzanne J. Ricci *(4) | |
10.8 | Alliance Bancorp, Inc. of Pennsylvania 2011 Stock Option Plan *(5) | |
10.9 | Alliance Bancorp, Inc. of Pennsylvania 2011 Recognition and Retention Plan and Trust Agreement *(5) | |
16.1 | Subsidiaries – Referenced is made to Item 1. Business – Subsidiaries. | |
23.1 | Consent of ParenteBeard LLC | |
31.1 | Section 302 Certification of the Chief Executive Officer | |
31.2 | Section 302 Certification of the Chief Financial Officer | |
32.1 | Section 906 Certification of the Chief Executive Officer | |
32.2 | Section 906 Certification of the Chief Financial Officer | |
101.1.INS | XBRL Instance Document* | |
101.2.SCH | XBRL Taxonomy Extension Schema Document** | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document** | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document** | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document** | |
101.DEF | XBRL Taxonomy Extension Definitions Linkbase Document** |
** These interactive files shall not be deemed filed for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under those sections.
* | Denotes management compensation plan or arrangement. |
(1) | Incorporated herein by reference from the Registration Statement on Form S-1 of Alliance Bancorp, Inc. of Pennsylvania (File No. 333-169363) filed with the Securities and Exchange Commission on September 14, 2010, as amended. |
(2) | Incorporated herein by reference from the Current Report on Form 8-K of Alliance Bancorp, Inc. of Pennsylvania, a federal corporation (File No. 001-33189), filed with the Securities and Exchange Commission on December 18, 2008. |
(3) | Incorporated herein by reference from the Registration Statement on Form S-1 of Alliance Bancorp, Inc. of Pennsylvania, a federal corporation (File No. 333-136853), filed with the Securities and Exchange Commission on August 23, 2006, as amended. |
(4) | Incorporated herein by reference from the Current Report on Form 8-K of Alliance Bancorp, Inc. of Pennsylvania, (File No. 000-54246), filed with the Securities and Exchange Commission on September 21, 2012. |
(5) | Incorporated by reference to the definitive proxy statement filed by Alliance Bancorp, Inc. of Pennsylvania with the Securities and Exchange Commission on June 13, 2011 (File No. 000-54246) |
96 |
SIGNATURES
Pursuant to the requirements of Section 13 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.
ALLIANCE BANCORP, INC, OF PENNSYLVANIA | |||
Dated: March 22, 2013 | By: | /s/ Dennis D. Cirucci | |
Dennis D. Cirucci | |||
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.
/s/Dennis D. Cirucci | ||
Dennis D. Cirucci | March 22, 2013 | |
President | ||
and Chief Executive Officer | ||
(Principal Executive Officer) | ||
/s/Peter J. Meier | ||
Peter J. Meier | March 22, 2013 | |
Executive Vice President | ||
and Chief Financial Officer | ||
(Principal Financial and Accounting Officer) | ||
/s/William E. Hecht | ||
William E. Hecht | March 22, 2013 | |
Chairman of the Board | ||
/s/J. William Cotter, Jr. | ||
J. William Cotter, Jr. | March 22, 2013 | |
Director | ||
/s/Philip K. Stonier | ||
Philip K. Stonier | March 22, 2013 | |
Director | ||
/s/G. Bradley Rainer | ||
G. Bradley Rainer | March 22, 2013 | |
Director | ||
/s/R. Cheston Woolard | ||
R. Cheston Woolard | March 22, 2013 | |
Director | ||
/s/Timothy E. Flatley | ||
Timothy E. Flatley | March 22, 2013 | |
Director |
97 |
Consent of Independent Registered Public Accounting Firm
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 No. 333-171935 and No. 333-177407 of Alliance Bancorp, Inc. of Pennsylvania of our report dated March 22, 2013, relating to the consolidated financial statements, which appears in this Form 10-K.
/s/ ParenteBeard LLC
Philadelphia, Pennsylvania
March 22, 2013
EXHIBIT 31.1
PURSUANT TO RULES 13a-14 AND 15d-14
OF THE SECURITIES EXCHANGE ACT OF 1934 AND
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER
I, Dennis D. Cirucci, certify that:
1. | I have reviewed this annual report on Form 10-K of Alliance Bancorp, Inc, of Pennsylvania (the “Registrant”); |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report; |
4. | The Registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; |
(c) | Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and |
5. | The Registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of Registrant’s board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting. |
Date: March 22, 2013 | /s/ Dennis D. Cirucci |
Dennis D. Cirucci | |
President and | |
Chief Executive Officer |
EXHIBIT 31.2
PURSUANT TO RULES 13a-14 AND 15d-14
OF THE SECURITIES EXCHANGE ACT OF 1934 AND
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION OF THE CHIEF FINANCIAL OFFICER
I, Peter J. Meier, certify that:
1. | I have reviewed this annual report on Form 10-K of Alliance Bancorp, Inc, of Pennsylvania (the “Registrant”); |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report; |
4. | The Registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; |
(c) | Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and |
5. | The Registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of Registrant’s board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting. |
Date: March 22, 2013 | /s/Peter J. Meier |
Peter J. Meier | |
Executive Vice President and | |
Chief Financial Officer |
EXHIBIT 32.1
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)
The undersigned executive officer of Alliance Bancorp, Inc, of Pennsylvania (the “Registrant”), hereby certifies that the Registrant’s Form 10-K for the year ended December 31, 2012 fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information contained therein fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
Date: March 22, 2013 | /s/ Dennis D. Cirucci |
Dennis D. Cirucci | |
President and | |
Chief Executive Officer |
Note: | A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act has been provided to Alliance Bancorp, Inc. of Pennsylvania and furnished to the Securities and Exchange Commission or its staff upon request. |
EXHIBIT 32.2
CERTIFICATION OF THE CHIEF FINANCIAL OFFICER
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)
The undersigned executive officer of Alliance Bancorp, Inc, of Pennsylvania (the “Registrant”), hereby certifies that the Registrant’s Form 10-K for the year ended December 31, 2012 fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information contained therein fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
Date: March 22, 2013 | /s/Peter J. Meier |
Peter J. Meier | |
Executive Vice President and | |
Chief Financial Officer |
Note: | A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act has been provided to Alliance Bancorp, Inc. of Pennsylvania and furnished to the Securities and Exchange Commission or its staff upon request. |
Loans Receivable - Net (Details) (USD $)
|
Dec. 31, 2012
|
Dec. 31, 2011
|
---|---|---|
Total loans receivable | $ 284,774,054 | $ 289,698,021 |
Deferred fees | (979,111) | (401,689) |
Allowance for loan losses | (4,918,952) | (3,999,542) |
Loans Receivable, Net | 278,875,991 | 285,296,790 |
Single Family [Member]
|
||
Total loans receivable | 126,676,000 | 118,059,000 |
Multi Family [Member]
|
||
Total loans receivable | 20,935,000 | 10,757,000 |
Commercial Real Estate [Member]
|
||
Total loans receivable | 111,309,465 | 130,190,806 |
Land and Construction [Member]
|
||
Total loans receivable | 10,654,000 | 14,595,000 |
Commercial Business [Member]
|
||
Total loans receivable | 9,852,000 | 9,481,000 |
Consumer [Member]
|
||
Total loans receivable | $ 5,348,000 | $ 6,615,000 |
Summary of Significant Accounting Policies (Details 8) (USD $)
|
12 Months Ended | |
---|---|---|
Dec. 31, 2012
|
Dec. 31, 2011
|
|
Net unrealized gain on available for sale securities | $ 336,973 | $ 513,707 |
Net unrealized loss on retirement plans | (2,012,392) | (1,861,863) |
Total accumulated other comprehensive loss | $ (1,675,419) | $ (1,348,156) |
Commitments and Contingencies (Details Textual) (USD $)
|
12 Months Ended | |
---|---|---|
Dec. 31, 2012
|
Dec. 31, 2011
|
|
Outstanding Loan Commitments Excluding Unused Lines Of Credit and Undisbursed Portion Of Loans | $ 10,400,000 | $ 9,400,000 |
Line Of Credit Facility, Unused Capacity, Commitments | 25,600,000 | 22,300,000 |
Secured Standby Line Of Credit | 888,000 | 508,000 |
Minimum [Member]
|
||
Fixed Rate, Commitments Issued Using Current Loan Policies and Underwriting Guidelines | 4.50% | |
Maximum [Member]
|
||
Fixed Rate, Commitments Issued Using Current Loan Policies and Underwriting Guidelines | 6.00% | |
Office Buildings [Member]
|
||
Operating Leases, Rent Expense, Net | $ 431,000 | $ 382,000 |
Loans Receivable - Net (Details Textual) (USD $)
|
12 Months Ended | |
---|---|---|
Dec. 31, 2012
|
Dec. 31, 2011
|
|
Total non-accruing loans | $ 3,537,000 | $ 11,859,000 |
Income On Non Accruing Loans | 148,000 | 655,000 |
Interest Income Received | 46,000 | 104,000 |
Description Of Non Accrual Loans | Loans are generally placed on non-accrual when interest past due exceeds 90 days, unless the loan is well secured and in the process of collection. | |
Line of Credit Facility, Amount Outstanding | 428,000 | 539,000 |
Director and Executive Officers [Member]
|
||
Line of Credit Facility, Periodic Payment, Principal | 111,000 | |
Line Of Credit, Unused Line Of Credit | $ 303,000 | $ 240,000 |
Commitments and Contingencies (Tables)
|
12 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2012
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commitments and Contingencies Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule Of Fixed Rate and Adjusted Rate [Table Text Block] | All commitments are issued using the Company’s current loan policies and underwriting guidelines and the breakdown between fixed-rate and adjustable-rate loans is as follows:
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule Of Financial Instruments Credit Risk [Table Text Block] | We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments. Financial instruments whose contract amounts represent credit risk at the dates indicated are as follows:
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Operating Leases Of Lessee Disclosure [Text Block] | The following is a summary of future minimum rental payments required under all operating leases as of December 31, 2012:
|
Retirement Plans (Details 8)
|
Dec. 31, 2012
|
Dec. 31, 2011
|
---|---|---|
Shares released for allocation | 158,915 | 144,810 |
Unearned shares | 162,616 | 176,557 |
Total ESOP shares | 321,531 | 321,367 |
Retirement Plans (Details 2)
|
12 Months Ended | |
---|---|---|
Dec. 31, 2012
|
Dec. 31, 2011
|
|
Discount Rate for Net Periodic Benefit Cost | 4.00% | 5.50% |
Salary Scale for Net Periodic Benefit Cost | 3.00% | 4.00% |
Expected Return on Plan Assets | 8.00% | 8.00% |
Discount Rate for Plan Obligations | 3.50% | 4.00% |
Salary Scale for Plan Obligations | 2.50% | 3.00% |
Premises and Equipment (Details Textual) (USD $)
|
12 Months Ended | |
---|---|---|
Dec. 31, 2012
|
Dec. 31, 2011
|
|
Depreciation and amortization | $ 504,591 | $ 535,701 |
Retirement Plans (Details 5) (USD $)
In Thousands, unless otherwise specified |
Dec. 31, 2012
|
---|---|
Fixed Income Investments-mutual funds | $ 1,844,441 |
Equity Investments-mutual funds | 3,665,487 |
Cash and Cash Equivalents | 495,151 |
Fair Value as of December 31, 2012 | $ 6,005,079 |
Fixed Income Investments-mutual funds - Percentage of Assets | 30.70% |
Equity Investments-mutual funds - Percentage of Assets | 61.00% |
Cash and Cash Equivalents - Percentage of Assets | 8.30% |
Fair Value as of December 31, 2012 - Percentage of Assets | 100.00% |
Fair Value Measurements and Fair Values of Financial Instruments (Details) (USD $)
In Thousands, unless otherwise specified |
Dec. 31, 2012
|
Dec. 31, 2011
|
---|---|---|
Assets, Fair Value Disclosure, Recurring | $ 16,524 | $ 34,373 |
Obligations of FHLB [Member]
|
||
Assets, Fair Value Disclosure, Recurring | 3,997 | 8,034 |
Obligations of Freddie Mac [Member]
|
||
Assets, Fair Value Disclosure, Recurring | 7,027 | |
Obligations of Fannie Mae [Member]
|
||
Assets, Fair Value Disclosure, Recurring | 5,003 | 8,009 |
Obligations of GNMA [Member]
|
||
Assets, Fair Value Disclosure, Recurring | 1,390 | 1,545 |
Obligations of FHLMC [Member]
|
||
Assets, Fair Value Disclosure, Recurring | 2,247 | 3,800 |
Obligations of FNMA [Member]
|
||
Assets, Fair Value Disclosure, Recurring | 3,887 | 5,958 |
Fair Value, Inputs, Level 1 [Member]
|
||
Assets, Fair Value Disclosure, Recurring | 0 | 0 |
Fair Value, Inputs, Level 1 [Member] | Obligations of FHLB [Member]
|
||
Assets, Fair Value Disclosure, Recurring | 0 | 0 |
Fair Value, Inputs, Level 1 [Member] | Obligations of Freddie Mac [Member]
|
||
Assets, Fair Value Disclosure, Recurring | 0 | |
Fair Value, Inputs, Level 1 [Member] | Obligations of Fannie Mae [Member]
|
||
Assets, Fair Value Disclosure, Recurring | 0 | 0 |
Fair Value, Inputs, Level 1 [Member] | Obligations of GNMA [Member]
|
||
Assets, Fair Value Disclosure, Recurring | 0 | 0 |
Fair Value, Inputs, Level 1 [Member] | Obligations of FHLMC [Member]
|
||
Assets, Fair Value Disclosure, Recurring | 0 | 0 |
Fair Value, Inputs, Level 1 [Member] | Obligations of FNMA [Member]
|
||
Assets, Fair Value Disclosure, Recurring | 0 | 0 |
Fair Value, Inputs, Level 2 [Member]
|
||
Assets, Fair Value Disclosure, Recurring | 16,524 | 34,373 |
Fair Value, Inputs, Level 2 [Member] | Obligations of FHLB [Member]
|
||
Assets, Fair Value Disclosure, Recurring | 3,997 | 8,034 |
Fair Value, Inputs, Level 2 [Member] | Obligations of Freddie Mac [Member]
|
||
Assets, Fair Value Disclosure, Recurring | 7,027 | |
Fair Value, Inputs, Level 2 [Member] | Obligations of Fannie Mae [Member]
|
||
Assets, Fair Value Disclosure, Recurring | 5,003 | 8,009 |
Fair Value, Inputs, Level 2 [Member] | Obligations of GNMA [Member]
|
||
Assets, Fair Value Disclosure, Recurring | 1,390 | 1,545 |
Fair Value, Inputs, Level 2 [Member] | Obligations of FHLMC [Member]
|
||
Assets, Fair Value Disclosure, Recurring | 2,247 | 3,800 |
Fair Value, Inputs, Level 2 [Member] | Obligations of FNMA [Member]
|
||
Assets, Fair Value Disclosure, Recurring | 3,887 | 5,958 |
Fair Value, Inputs, Level 3 [Member]
|
||
Assets, Fair Value Disclosure, Recurring | 0 | 0 |
Fair Value, Inputs, Level 3 [Member] | Obligations of FHLB [Member]
|
||
Assets, Fair Value Disclosure, Recurring | 0 | 0 |
Fair Value, Inputs, Level 3 [Member] | Obligations of Freddie Mac [Member]
|
||
Assets, Fair Value Disclosure, Recurring | 0 | |
Fair Value, Inputs, Level 3 [Member] | Obligations of Fannie Mae [Member]
|
||
Assets, Fair Value Disclosure, Recurring | 0 | 0 |
Fair Value, Inputs, Level 3 [Member] | Obligations of GNMA [Member]
|
||
Assets, Fair Value Disclosure, Recurring | 0 | 0 |
Fair Value, Inputs, Level 3 [Member] | Obligations of FHLMC [Member]
|
||
Assets, Fair Value Disclosure, Recurring | 0 | 0 |
Fair Value, Inputs, Level 3 [Member] | Obligations of FNMA [Member]
|
||
Assets, Fair Value Disclosure, Recurring | $ 0 | $ 0 |
Regulatory Capital Requirements (Details) (USD $)
In Thousands, unless otherwise specified |
Dec. 31, 2012
|
Dec. 31, 2011
|
---|---|---|
Tier One Leverage Capital | $ 58,344 | $ 58,937 |
Tier One Risk Based Capital | 58,344 | 58,937 |
Capital | 61,479 | 62,317 |
Tier One Leverage Capital Required for Capital Adequacy | 18,294 | 18,347 |
Tier One Risk Based Capital Required for Capital Adequacy | 9,961 | 10,790 |
Capital Required for Capital Adequacy | 19,923 | 21,580 |
Tier One Leverage Capital Required to be Well Capitalized | 22,867 | 22,934 |
Tier One Risk Based Capital Required to be Well Capitalized | 14,942 | 16,185 |
Capital Required to be Well Capitalized | $ 24,904 | $ 26,975 |
Tier One Leverage Capital to Average Assets | 12.76% | 12.85% |
Tier One Risk Based Capital to Risk Weighted Assets | 23.43% | 21.85% |
Capital to Risk Weighted Assets | 24.69% | 23.10% |
Tier One Leverage Capital Required for Capital Adequacy to Average Assets | 4.00% | 4.00% |
Tier One Risk Based Capital Required for Capital Adequacy to Risk Weighted Assets | 4.00% | 4.00% |
Capital Required for Capital Adequacy to Risk Weighted Assets | 8.00% | 8.00% |
Tier One Leverage Capital Required to be Well Capitalized to Average Assets | 5.00% | 5.00% |
Tier One Risk Based Capital Required to be Well Capitalized to Risk Weighted Assets | 6.00% | 6.00% |
Capital Required to be Well Capitalized to Risk Weighted Assets | 10.00% | 10.00% |
Fair Value Measurements and Fair Values of Financial Instruments (Details 1) (USD $)
|
Dec. 31, 2012
|
Dec. 31, 2011
|
---|---|---|
Fair Value, Measurements, Nonrecurring [Member]
|
||
Impaired loans | $ 10,738,000 | $ 12,358,000 |
Other real estate owned | 1,851,000 | 989,000 |
Total | 12,589,000 | 13,347,000 |
Fair Value, Inputs, Level 1 [Member] | Fair Value, Measurements, Nonrecurring [Member]
|
||
Impaired loans | 0 | 0 |
Other real estate owned | 0 | 0 |
Total | 0 | 0 |
Fair Value, Inputs, Level 2 [Member] | Fair Value, Measurements, Nonrecurring [Member]
|
||
Impaired loans | 0 | 0 |
Other real estate owned | 0 | 0 |
Total | 0 | 0 |
Fair Value, Inputs, Level 3 [Member]
|
||
Total | 12,589 | |
Fair Value, Inputs, Level 3 [Member] | Fair Value, Measurements, Nonrecurring [Member]
|
||
Impaired loans | 10,738,000 | 12,358,000 |
Other real estate owned | 1,851,000 | 989,000 |
Total | $ 12,589,000 | $ 13,347,000 |
Retirement Plans (Details 6) (USD $)
|
Dec. 31, 2012
|
Dec. 31, 2011
|
Dec. 31, 2010
|
---|---|---|---|
Cash and Cash Equivalents | $ 495,151 | $ 437,943 | |
Mutual Funds | 5,509,928 | 4,484,674 | |
Total | 6,005,079 | 4,922,617 | 4,817,509 |
Fair Value, Inputs, Level 1 [Member]
|
|||
Cash and Cash Equivalents | 495,151 | 437,943 | |
Mutual Funds | 5,509,928 | 4,484,674 | |
Total | 6,005,079 | 4,922,617 | |
Fair Value, Inputs, Level 2 [Member]
|
|||
Cash and Cash Equivalents | 0 | 0 | |
Mutual Funds | 0 | 0 | |
Total | 0 | 0 | |
Fair Value, Inputs, Level 3 [Member]
|
|||
Cash and Cash Equivalents | 0 | 0 | |
Mutual Funds | 0 | 0 | |
Total | $ 0 | $ 0 |
Retirement Plans (Details) (USD $)
|
12 Months Ended | |
---|---|---|
Dec. 31, 2012
|
Dec. 31, 2011
|
|
Net Periodic Benefit Cost | ||
Service Cost | $ 288,261 | $ 272,103 |
Interest Cost | 236,661 | 275,228 |
Expected Return on Plan Assets | (417,009) | (394,916) |
Amortization of Prior Service Cost | 12,685 | 12,685 |
Amortization of net loss | 139,243 | 49,797 |
Net Periodic Benefit Cost | $ 259,841 | $ 214,897 |
Summary of Significant Accounting Policies (Policies)
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12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Dec. 31, 2012
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Accounting Policies [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Organization, Consolidation, Basis of Presentation, Business Description and Accounting Policies [Text Block] | Basis of Presentation and Consolidation - The consolidated financial statements of the Company include the accounts of the Bank and its three wholly-owned subsidiaries, Alliance Delaware Corp., Alliance Financial and Investment Services LLC, and 908 Hyatt Street LLC. Alliance Delaware Corp. holds and manages certain investment securities. Alliance Financial and Investment Services LLC, which is currently inactive, was formed to participate in commission fees from non-insured investment products. 908 Hyatt Street LLC was formed to own and manage certain real estate properties. As of December 31, 2012 and 2011, there were no properties held by 908 Hyatt Street LLC. |
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UseOfEstimates | Use of Estimates in the Preparation of Financial Statements - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities. It also requires the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of income 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 potential impairment of FHLB stock, the valuation of deferred tax assets, liability and expense of employee benefit obligations, and evaluation of securities for other than temporary impairment. |
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Segment Reporting Policy [Policy Text Block] | Segment Information – The Company has no reportable segments. All of the Company’s activities are interrelated, and each activity is dependent and assessed based on how each of the activities of the Company supports the others. For example, lending is dependent upon the ability of the Company to fund itself with deposits and other borrowings and manage interest rate and credit risk.
The Company operates only in the U.S. domestic market, primarily in Pennsylvania’s Delaware and Chester Counties. For the years ended December 31, 2012 and 2011, there was no one customer that accounted for more than 10% of the Company’s revenue. |
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Cash And Cash Equivalents [Policy Text Block] | Cash and Cash Equivalents – For purposes of reporting cash flows, cash and cash equivalents include cash and amounts due from depository institutions and interest-bearing deposits with depository institutions. As of December 31, 2012 and 2011, the Bank’s minimum required reserve balance with the Federal Reserve Bank was approximately $511,000 and $887,000, respectively. |
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Investment And Mortgage Backed Securities [Policy Text Block] | Investment and Mortgage-Backed Securities - The Company classifies and accounts for debt and equity securities as follows:
Purchase premiums and discounts are amortized to income over the life of the related security using the interest method. The adjusted cost of a specific security sold is the basis for determining the gain or loss on the sale.
The following table shows the fair value and unrealized losses on investments, aggregated by investment category and the length of time that individual securities have been in a continuous unrealized loss position.
Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) whether or not the Company intends to sell or expects that it is more likely than not that it will be required to sell the security prior to an anticipated recovery in fair value. Once a decline in value for a debt security is determined to be other-than-temporary, the other-than-temporary impairment is separated into (a) the amount of total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of other-than-temporary impairment related to all other factors. The amount of the total other-than-temporary impairment related to credit loss is recognized in earnings. The amount of other-than-temporary impairment related to other factors is recognized in other comprehensive income (loss).
As of December 31, 2012, management believes that the estimated fair values of the securities disclosed above are primarily dependent upon the movement in market interest rates particularly given the negligible inherent credit risk associated with these securities. These investment securities are comprised of securities that are rated investment grade by at least one bond credit rating service. Although the fair value will fluctuate as the market interest rates move, management believes that these fair values will recover as the underlying portfolios mature. As of December 31, 2012, there was 1 U.S. government obligation, 1 mortgage-backed security, and 3 municipal securities in an unrealized loss position. Of the securities in an unrealized loss position at December 31, 2012, there were none in an unrealized loss position for twelve months or longer. The Company does not intend to sell and it is not more likely than not that the Company will be required to sell these securities until such time as the value recovers or the securities mature. Management does not believe any individual unrealized loss as of December 31, 2012 represents an other-than-temporary impairment. |
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Federal Home Loan Bank Stock [Policy Text Block] | Federal Home Loan Bank Stock- FHLB Stock, which represents the required investment in the common stock of a correspondent bank, is carried at cost. Management evaluates its FHLB stock for impairment.
Management’s determination of whether this investment is impaired is based on their assessment of the ultimate recoverability of its cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of its cost is influenced by criteria such as (1) the significance of the decline in net assets of the FHLB as compared to the capital stock amount and the length of time this decline has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, and (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the FHLB. Management believes no impairment charge was necessary related to the FHLB stock in 2012 or 2011. |
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Policy Loans Receivable Policy | Loans Receivable-Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at their outstanding unpaid principal balances, net of an allowance for loan losses and any deferred fees or costs. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the yield (interest income) of the related loans. The Company is generally amortizing these amounts over the contractual life of the loan. Premiums and discounts on purchased loans are amortized as adjustments to interest income using the effective yield method. The loans receivable portfolio consists of single family real estate loans, multi family real estate loans, commercial real estate loans, land and construction real estate loans, commercial business loans, and consumer loans.
For all classes of loans receivable, 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 90 days or more past due may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. Generally, when a loan is placed on nonaccrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against the allowance for loan losses. Interest received on nonaccrual loans, including impaired loans, generally is either applied against principal or reported as interest income, according to management’s judgment as to the collectability of principal. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time (generally six months) and the ultimate collectability of the total contractual principal and interest is no longer in doubt. The past due status of all classes of loans receivable is determined based on contractual due dates for loan payments.
The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the past due status as of December 31, 2012:
The following table presents the classes of the loan portfolio summarized by the past due status as of December 31, 2011:
The following table presents nonaccrual loans by classes of the loan portfolio.
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Loans And Leases Receivable Allowance For Loan Losses Policy | Allowance for Loan Losses-The allowance for loan losses is increased by charges to income and decreased by chargeoffs (net of recoveries). Allowances are provided for specific loans when losses are probable and can be estimated. When this occurs, management considers the remaining principal balance, fair value and estimated net realizable value of the property collateralizing the loan. Current and future operating and/or sales conditions are also considered. These estimates are susceptible to changes that could result in material adjustments to results of operations. Recovery of the carrying value of such loans is dependent to a great extent on economic, operating and other conditions that may be beyond management’s control.
The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance. The allowance is based on the Company’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available.
In addition, Federal regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses and may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination, which may not be currently available to management. Based on management’s comprehensive analysis of the loan portfolio, management believes the current level of the allowance for loan losses is adequate.
The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as impaired. For loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.
The general component covers pools of loans by loan class including commercial loans not considered impaired, as well as smaller balance homogeneous loans, such as residential real estate, home equity and other consumer loans. These pools of loans are evaluated for loss exposure based upon historical loss rates for each of these categories of loans, adjusted for qualitative factors. These qualitative risk factors include:
Each factor is assigned a value to reflect improving, stable or declining conditions based on management’s best judgment using relevant information available at the time of the evaluation. Adjustments to the factors are supported through documentation of changes in conditions in a narrative accompanying the allowance for loan loss calculation.
Single family real estate loans involve certain risks such as interest rate risk and risk of non repayment. Adjustable-rate single family real estate loans decreases the interest rate risk to the Company that is associated with changes in interest rates but involve other risks, primarily because as interest rates rise, the payment by the borrower rises to the extent permitted by the terms of the loan, thereby increasing the potential for default. At the same time, the marketability of the underlying property may be adversely affected by higher interest rates. Repayment risk can be affected by job loss, divorce, illness and personal bankruptcy or the borrower.
Multi-family and commercial real estate lending entails significant risks. Such loans typically involve large loan balances to single borrowers or groups of related borrowers. The payment experience on such loans is typically dependent on the successful operation of the real estate project. The success of such projects is sensitive to changes in supply and demand conditions in the market for multi-family and commercial real estate as well as economic conditions generally.
Construction lending is generally considered to involve a high risk due to the concentration of principal in a limited number of loans and borrowers and the effects of general economic conditions on developers and builders. Moreover, a construction loan can involve additional risks because of the inherent difficulty in estimating both a property's value at completion of the project and the estimated cost (including interest) of the project. The nature of these loans is such that they are generally difficult to evaluate and monitor. In addition, speculative construction loans to a builder are not necessarily pre-sold and thus pose a greater potential risk to the Company than construction loans to individuals on their personal residences.
Commercial business lending is generally considered higher risk due to the concentration of principal in a limited number of loans and borrowers and the effects of general economic conditions on the business. Commercial business loans are primarily secured by inventories and other business. In most cases, any repossessed collateral for a defaulted commercial business loans will not provide an adequate source of repayment of the outstanding loan balance.
Consumer loans generally have shorter terms and higher interest rates than other lending but generally involve more credit risk because of the type and nature of the collateral and, in certain cases, the absence of collateral. In addition, consumer lending collections are dependent on the borrower's continuing financial stability, and thus are more likely to be adversely effected by job loss, divorce, illness and personal bankruptcy. In most cases, any repossessed collateral for a defaulted consumer loan will not provide an adequate source of repayment of the outstanding loan.
The allowance calculation methodology includes further segregation of loan classes into risk rating categories. The borrower’s overall financial condition, repayment sources, guarantors and value of collateral, if appropriate, are evaluated annually for commercial loans or when credit deficiencies arise, such as delinquent loan payments, for commercial and consumer loans. Credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful and loss. Loans criticized special mention have potential weaknesses that deserve management’s close attention. If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects. Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans classified as a loss are considered uncollectible and are charged to the allowance for loan losses. Loans not classified are rated pass.
The following table presents the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company's internal risk rating system as of December 31, 2012:
The following table presents the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company's internal risk rating system as of December 31, 2011:
The following table presents the activity in the allowance for loan losses and related recorded investment in loans receivable by classes of the loans individually and collectively evaluated for impairment as of and for the year ended December 31, 2012:
The following table presents the activity in the allowance for loan losses and related recorded investment in loans receivable by classes of the loans individually and collectively evaluated for impairment as of and for the year ended December 31, 2011:
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Loan Impairment [Policy Text Block] | Loan Impairment-A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and industrial loans, commercial real estate loans and commercial construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.
An allowance for loan losses is established for an impaired loan if its carrying value exceeds its estimated fair value. The estimated fair values of substantially all of the Company’s impaired loans are measured based on the estimated fair value of the loan’s collateral.
The Company does not separately identify individual single-family loans secured by real estate unless such loans are the subject of a troubled debt restructuring agreement. Large groups of these smaller balance homogeneous loans are collectively evaluated for impairment.
For multi-family, commercial, and land and construction loans secured by real estate, estimated fair values are determined primarily through third-party appraisals. When a real estate secured loan becomes impaired, a decision is made regarding whether an updated certified appraisal of the real estate is necessary. This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value ratio based on the original appraisal and the condition of the property. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property.
For commercial business loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower’s financial statements, inventory reports, accounts receivable agings or equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets.
The Company does not separately identify consumer and other loans unless such loans are the subject of a troubled debt restructuring agreement. Large groups of these smaller balance homogeneous loans are collectively evaluated for impairment.
Loans whose terms are modified are classified as troubled debt restructurings if the Company grants such borrowers concessions and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a troubled debt restructuring generally involve a temporary below market rate reduction in interest rate or an extension of a loan’s stated maturity date. Non-accrual troubled debt restructurings are restored to accrual status if principal and interest payments, under the modified terms, are current for six consecutive months after modification. Loans classified as troubled debt restructurings are designated as impaired.
The following table summarizes information in regards to impaired loans by loan portfolio class as of and for the year ended December 31, 2012:
The following table summarizes information in regards to impaired loans by loan portfolio class as of and for the year ended December 31, 2011:
The following table summarizes information in regards to loans classified as troubled debt restructurings during the year ended December 31, 2012:
There were no troubled debt restructurings with a payment default, with the payment default occurring within 12 months of restructure, and payment default occurring during the year ended December 31, 2012.
At December 31, 2012, the Company had one single-family loan with a carrying value of $191,000, two multi-family loans with a carrying value of $3.8 million, and eleven commercial real estate loans with a carrying value of $5.3 million classified as troubled debt restructurings. The one single-family loan was classified as substandard in the Company’s allowance for loan losses and had an $8,000 allowance against it. The two multi-family loans are to one borrower, were classified as substandard in the Company’s allowance for loan losses, and have $436,000 of allowances against them. The eleven commercial real estate loans are to four borrowers and have $557,000 of allowances against them. Eight of the eleven commercial real estate loans are to two borrowers and are classified as special mention in the Company’s allowance for loan losses. Three of the eleven commercial real estate loans and are classified as substandard in the Company’s allowance for loan losses. All of the troubled debt restructurings consisted of changes in interest rates and no principal was forgiven.
The following table summarizes information in regards to troubled debt restructurings for the year ended December 31, 2011:
At December 31, 2011, the Company had two multi-family, three commercial real estate, and two land and construction loans classified as troubled debt restructurings. The two multi-family loans are to one borrower, were classified as substandard in the Company’s allowance for loan losses, and have a $157,000 allowance against them. The three commercial real estate loans are to one borrower, are classified as special mention in the Company’s allowance for loan losses, and had no reserves against them. The two land and construction loans are to two borrowers, were classified as substandard in the Company’s allowance for loan losses and had been written down by $3.7 million in charge-offs as of December 31, 2011, and had no allowance against them. All of the troubled debt restructurings consisted of changes in interest rates and no principal was forgiven. |
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Accrued Interest Receivable [Policy Text Block] | Accrued Interest Receivable - Interest on loans is recognized as earned. Accrual of loan interest is discontinued and a reserve established on existing accruals if management believes that after considering collateral value, economic and business conditions and collection efforts, the borrower’s financial condition is such that collection of interest is doubtful. |
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Loans And Leases Receivable Origination Fees Discounts Or Premiums And Direct Costs To Acquire Loans Policy | Purchase Discounts and Premiums – Purchase discounts and premiums on loans and investment and mortgage-backed securities purchased are amortized over the expected average life of the loans and securities using the interest method. |
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Real Estate [Policy Text Block] | Other Real Estate Owned - Other real estate acquired through, or in lieu of, foreclosure is initially recorded at fair value less cost to sell at the date of acquisition, establishing a new cost basis through a charge to the allowance for loan losses, if necessary. Revenues and expenses from operations are included in other income and other expense. Additions to the valuation allowance are included in other expense. Subsequent to foreclosure, valuations are periodically performed by management and an allowance for losses is established, if necessary, by a charge to operations if the carrying value of a property exceeds its estimated fair value less estimated costs to sell. |
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Bank Owned Life Insurance [Policy Text Block] | Bank-Owned Life Insurance - The Bank is the beneficiary of insurance policies on the lives of certain officers of the Bank. The Bank has recognized the amount that could be realized under the insurance policies as an asset in the consolidated statements of financial condition. |
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Property Plant And Equipment [Policy Text Block] | Premises and Equipment – Land is carried at cost. Premises and equipment are recorded at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the expected useful lives of the related assets which range from two to 40 years. Amortization of leasehold improvements is computed using the straight-line method over the shorter of the useful lives of the improvements or the remaining lease term. The costs of maintenance and repairs are expensed as they are incurred, and renewals and betterment’s are capitalized. |
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Income Tax [Policy Text Block] | Income Taxes - The Company accounts for income taxes in accordance with the guidance set forth in FASB ASC Topic 740, Income Taxes. The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur. Deferred income tax expense (benefit) results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are reduced by a valuation allowance if, based on the weight of the evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized. The Company evaluates the likelihood of realizing its deferred tax assets by estimating sources of future taxable income and the impact of tax planning strategies.
The Bank accounts for uncertain tax positions if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment.
The Company recognizes interest and penalties on income taxes as a component of income tax expense. The Company’s federal income and state tax returns for taxable years through December 31, 2008 have been closed for purposes of examination by the Internal Revenue Service and Pennsylvania Department of Revenue.
The Bank has entered into a tax sharing agreement (under the Internal Revenue Section 1552) with the Company and Alliance Delaware Corporation. The agreement provides that the tax liability shall be apportioned among the members of the group in accordance with the ratio which that portion of the consolidated taxable income attributed to each member of the group having taxable income bears to the consolidated taxable income. |
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Transfers And Servicing Of Financial Assets [Policy Text Block] | 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 their maturity. |
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Pension And Other Postretirement Plans Policy | Employee Benefit Plans- The Company’s 401(k) plan allows eligible participants to set aside a certain percentage of their salaries before taxes. The Company may elect to match employee contributions, as a profit sharing payment, up to a specified percentage of their respective salaries in an amount determined annually by the Board of Directors. The Company’s profit sharing contribution related to the plan resulted in expenses of $120,000 and $110,000 for 2012, and 2011, respectively.
The Company also maintains a Supplemental Executive Retirement Plan and a Retirement Income Plan (the “Plans”). The accrued amount for the Plans included in other liabilities was $3.9 million and $3.8 million at December 31, 2012 and 2011, respectively. The expense associated with the Plans for the years ended December 31, 2012, and 2011 was $243,000, and $255,000, respectively. |
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Advertising Costs [Policy Text Block] | Advertising Costs- The Company follows the policy of charging the costs of advertising to expense as incurred. Advertising costs were approximately $414,000 and $348,000 for the years ended December 31, 2012 and December 31, 2011, respectively. |
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Earnings Per Share [Policy Text Block] | Earnings per Share – Earnings per share (“EPS”) consists of two separate components, basic EPS and diluted EPS. Basic EPS is computed based on the weighted average number of shares of common stock outstanding for each period presented. Diluted EPS is calculated based on the weighted average number of shares of common stock outstanding plus dilutive common stock equivalents (“CSEs”) using the treasury stock method. CSEs consist of shares that are assumed to have been purchased with the proceeds from the exercise of stock options, as well as unvested common stock awards. CSE’s for which the grant price exceeds the average market price over the period have an anti-dilutive effect on EPS, and, accordingly, are excluded from the calculation. There were 290,250 and 277,750 anti-dilutive stock options outstanding at December 31, 2012 and December 31, 2011, respectively.
The following table sets forth the composition of the weighted average shares (denominator) used in the basic and dilutive earnings per share computation.
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Comprehensive Income Policy [Policy Text Block] | Other Comprehensive Income (Loss) – The Company is required to present, as a component of comprehensive income, the amounts from transactions and other events which currently are excluded from the statement of income and are recorded directly to stockholders’ equity.
The components of accumulated other comprehensive loss are as follows:
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New Accounting Pronouncements Policy [Policy Text Block] | Recent Accounting Pronouncements – ASU No. 2011-11, "Balance Sheet (Topic 210) - Disclosures about Offsetting Assets and Liabilities," amends Balance Sheet (Topic 210), to require an entity to disclose both gross and net information about both financial instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. The financial instruments and transactions would include derivatives, sale and repurchase agreements and reverse sale and repurchase agreements, and securities borrowing and lending arrangements. ASU 2011-11 is effective for annual and interim periods beginning on January 1, 2013, and is not expected to have a significant impact on the Company’s financial statements.
In February 2013, the FASB issued ASU 2013-02, Reporting of Amounts Reclassified Out of Comprehensive Income. The amendments in this ASU are intended to improve the reporting of reclassifications out of accumulated other comprehensive income by requiring an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required to be reclassified in its entirety to net income. For other amounts that are not required to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required that provide additional detail about those amounts. This would be the case when a portion of the amount reclassified out of accumulated other comprehensive income is reclassified to a balance sheet account instead of directly to income or expense in the same reporting period. The ASU is effective for public entities for reporting periods beginning after December 15, 2012. The Company is evaluating the impact of the ASU, but does not expect a material impact on the financial statements. |
Investment Securities Available for Sale and Held to Maturity (Details) (USD $)
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Dec. 31, 2012
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Dec. 31, 2011
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Total Amortized Cost | $ 7,013,105 | $ 10,600,402 |
Total-Gross Unrealized Gains | 510,839 | 704,694 |
Total-Amortized Cost | 688,000 | |
Federal Home Loan Bank Certificates and Obligations (Fhlb) [Member]
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Due after 1 year through 5 years-Amortized Cost | 5,996,989 | |
Due after 5 years through 10 years-Amortized Cost | 4,000,000 | 2,000,000 |
Total Amortized Cost | 4,000,000 | 7,996,989 |
Due after 1 year through 5 years-Gross Unrealized Gain | 36,511 | |
Due after 5 years through 10 years-Gross Unrealized Gain | 920 | 500 |
Total-Gross Unrealized Gains | 920 | 37,011 |
Due after 1 year through 5 years-Gross Unrealized Losses | 0 | |
Due after 5 years through 10 years-Gross Unrealized Losses | (3,900) | 0 |
Total-Gross Unrealized Losses | (3,900) | 0 |
Due after 1 year through 5 years-Fair Value | 6,033,500 | |
Due after 5 years through 10 years-Fair Value | 3,997,020 | 2,000,500 |
Total-Fair Value | 3,997,020 | 8,034,000 |
Investments Security Obligations Of Freddie Mac [Member]
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Due after 1 year through 5 years-Amortized Cost | 2,000,000 | |
Due after 10 years-Amortized Cost | 5,000,000 | |
Total Amortized Cost | 7,000,000 | |
Due after 1 year through 5 years-Gross Unrealized Gain | 0 | |
Due after 10 years-Gross Unrealized Gain | 29,790 | |
Total-Gross Unrealized Gains | 29,790 | |
Due after 1 year through 5 years-Gross Unrealized Losses | (3,210) | |
Due after 10 years-Unrealized losses | 0 | |
Total-Gross Unrealized Losses | (3,210) | |
Due after 1 year through 5 years-Fair Value | 1,996,790 | |
Due after 10 years-Fair Value | 5,029,790 | |
Total-Fair Value | 7,026,580 | |
Investment Security Obligations Of Fannie Mae [Member]
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Due after 1 year through 5 years-Amortized Cost | 3,000,000 | 3,000,000 |
Due after 5 years through 10 years-Amortized Cost | 4,997,050 | |
Due after 10 years-Amortized Cost | 2,000,000 | |
Total Amortized Cost | 5,000,000 | 7,997,050 |
Due after 1 year through 5 years-Gross Unrealized Gain | 2,060 | 1,823 |
Due after 5 years through 10 years-Gross Unrealized Gain | 11,780 | |
Due after 10 years-Gross Unrealized Gain | 660 | |
Total-Gross Unrealized Gains | 2,720 | 13,603 |
Due after 1 year through 5 years-Gross Unrealized Losses | 0 | (1,300) |
Due after 5 years through 10 years-Gross Unrealized Losses | 0 | |
Due after 10 years-Unrealized losses | 0 | |
Total-Gross Unrealized Losses | 0 | (1,300) |
Due after 1 year through 5 years-Fair Value | 3,002,060 | 3,000,523 |
Due after 5 years through 10 years-Fair Value | 5,008,830 | |
Due after 10 years-Fair Value | 2,000,660 | |
Total-Fair Value | 5,002,720 | 8,009,353 |
Municipal Bonds [Member]
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Due in 1 year or less-Amortized Cost | 190,555 | |
Due after 1 years through 5 years-Amortized Cost | 2,994,234 | 1,000,000 |
Due after 5 years through 10 years-Amortized Cost | 4,893,853 | 1,765,871 |
Due after 10 years-Amortized Cost | 17,246,518 | 19,408,876 |
Total-Amortized Cost | 25,325,160 | 22,174,747 |
Due in 1 year or less-Gross Unrealized Gains | 0 | |
Due after 1 years through 5 years-Gross Unrealized Gains | 52,797 | 74,470 |
Due after 5 years through 10 years-Gross Unrealized Gains | 108,123 | 61,457 |
Due after 10 years-Gross Unrealized Gains | 1,044,136 | 889,333 |
Total-Gross Unrealized Gains | 1,205,056 | 1,025,260 |
Due in 1 year or less-Gross Unrealized Losses | (14) | |
Due after 1 years through 5 years-Gross Unrealized Losses | (2,173) | 0 |
Due after 5 years through 10 years-Gross Unrealized Losses | 0 | (138) |
Due after 10 years-Gross Unrealized Losses | (2,603) | 0 |
Total-Gross Unrealized Gains(Losses) | (4,790) | (138) |
Due in 1 year or less-Fair Value | 190,541 | |
Due after 1 years through 5 years-Fair Value | 3,044,858 | 1,074,470 |
Due after 5 years through 10 years-Fair Value | 5,001,976 | 1,827,190 |
Due after 10 years-Fair Value | 18,288,051 | 20,298,209 |
Total-Fair Value | $ 26,525,426 | $ 23,199,869 |
Summary of Significant Accounting Policies (Details 2) (USD $)
In Thousands, unless otherwise specified |
Dec. 31, 2012
|
Dec. 31, 2011
|
---|---|---|
Total non-accruing loans | $ 3,537 | $ 11,859 |
Single-family [Member]
|
||
Total non-accruing loans | 664 | 1,055 |
Multi-family [Member]
|
||
Total non-accruing loans | 0 | 0 |
Commercial [Member]
|
||
Total non-accruing loans | 2,873 | 3,016 |
Land and construction [Member]
|
||
Total non-accruing loans | 0 | 7,707 |
Commercial business [Member]
|
||
Total non-accruing loans | 0 | 81 |
Consumer [Member]
|
||
Total non-accruing loans | $ 0 | $ 0 |
Retirement Plans (Details 4) (USD $)
|
Dec. 31, 2012
|
---|---|
Expected Benefit Payments From the Trust | |
2013 | $ 153,049 |
2014 | 454,353 |
2015 | 93,394 |
2016 | 1,470,425 |
2017 | 316,225 |
2018-2022 | $ 2,888,379 |
Fair Value Measurements and Fair Values of Financial Instruments (Tables)
|
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Fair Value Accounting [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fair Value, Assets Measured on Recurring Basis [Table Text Block] | The following table summarizes assets measured at fair value on a recurring basis as of December 31, 2012, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):
The following table summarizes assets measured at fair value on a recurring basis as of December 31, 2011, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):
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Fair Value Assets Measured On Nonrecurring Basis [Text Block] | For assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at December 31, 2012 (in thousands) are as follows:
For assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at December 31, 2011 (in thousands) are as follows:
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Fair Value Inputs, Assets, Quantitative Information [Table Text Block] | The following table presents quantitative information with regards to Level 3 fair value measurements at December 31, 2012.
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Fair Value By Balance Sheet Grouping [Text Block] | The carrying amount and estimated fair values of the Company’s assets and liabilities were as follows as of the dates indicated.
(1) Includes non-interest bearing accounts, totaling $11,859. |
Mortgage-Backed Securities Available for Sale (Details) (USD $)
|
Dec. 31, 2012
|
Dec. 31, 2011
|
---|---|---|
Available-for-sale Securities, Amortized Cost Basis | $ 7,013,105 | $ 10,600,402 |
Available-for-sale Securities, Gross Unrealized Gains | 510,839 | 704,694 |
Available-for-sale Securities, Gross Unrealized Gain (Loss) | (13) | (2,244) |
Available-for-sale Securities, Fair Value Disclosure | 7,523,931 | 11,302,852 |
Government National Mortgage Association Certificates and Obligations (Gnma) [Member]
|
||
Available-for-sale Securities, Amortized Cost Basis | 1,287,235 | 1,449,270 |
Available-for-sale Securities, Gross Unrealized Gains | 102,862 | 95,464 |
Available-for-sale Securities, Gross Unrealized Gain (Loss) | 0 | 0 |
Available-for-sale Securities, Fair Value Disclosure | 1,390,097 | 1,544,734 |
Federal Home Loan Mortgage Corporation Certificates and Obligations (Fhlmc) [Member]
|
||
Available-for-sale Securities, Amortized Cost Basis | 2,085,814 | 3,527,880 |
Available-for-sale Securities, Gross Unrealized Gains | 161,082 | 272,105 |
Available-for-sale Securities, Gross Unrealized Gain (Loss) | 0 | 0 |
Available-for-sale Securities, Fair Value Disclosure | 2,246,896 | 3,799,985 |
Federal National Mortgage Association Certificates and Obligations (Fnma) [Member]
|
||
Available-for-sale Securities, Amortized Cost Basis | 3,640,056 | 5,623,252 |
Available-for-sale Securities, Gross Unrealized Gains | 246,895 | 337,125 |
Available-for-sale Securities, Gross Unrealized Gain (Loss) | (13) | (2,244) |
Available-for-sale Securities, Fair Value Disclosure | $ 3,886,938 | $ 5,958,133 |
Commitments and Contingencies (Details) (USD $)
|
Dec. 31, 2012
|
Dec. 31, 2011
|
---|---|---|
Commitments Issued Using Current Loan Policies and Underwriting Guidelines | $ 10,403,182 | $ 9,384,500 |
Fixed Rate [Member]
|
||
Commitments Issued Using Current Loan Policies and Underwriting Guidelines | 2,714,832 | 8,072,000 |
Adjustable Rate [Member]
|
||
Commitments Issued Using Current Loan Policies and Underwriting Guidelines | $ 7,688,350 | $ 1,312,500 |
Deposits (Details Textual)
|
Dec. 31, 2012
|
Dec. 31, 2011
|
---|---|---|
Deposits Weighted Average Interest Rate | 0.87% | 1.13% |
Summary of Significant Accounting Policies (Details 7) (USD $)
|
12 Months Ended | |
---|---|---|
Dec. 31, 2012
|
Dec. 31, 2011
|
|
Net Income | $ 2,541,604 | $ 1,149,149 |
Weighted average shares outstanding | 5,413,892 | 5,474,437 |
Adjusted average unearned ESOP shares | (164,348) | (133,522) |
Weighted average shares outstanding - basic | 5,249,544 | 5,340,915 |
Effect of dilutive common stock equivalents | 35,327 | 159,647 |
Adjusted weighted average shares outstanding-dilutive | 5,284,871 | 5,500,562 |
Basic earnings per share (in dollars per share) | $ 0.48 | $ 0.22 |
Dilutive earnings per share (in dollars per share) | $ 0.48 | $ 0.21 |
Consolidated Statements of Cash Flows (USD $)
|
12 Months Ended | |
---|---|---|
Dec. 31, 2012
|
Dec. 31, 2011
|
|
Cash Flow From Operating Activities | ||
Net income | $ 2,541,604 | $ 1,149,149 |
Adjustments to reconcile net income to cash provided by operating activities: | ||
Loan losses | 1,025,000 | 3,250,000 |
Depreciation and amortization | 504,591 | 535,701 |
Write down of OREO | 301,830 | 11,446 |
Loss on sale of securities | 0 | 43,952 |
Stock-based compensation expense | 766,000 | 442,591 |
Deferred tax benefit | (39,569) | (199,000) |
Gain on the sale of premises and equipment | (805,817) | 0 |
Gain on the sale of OREO | (326,283) | (3,785) |
Changes in assets and liabilities which provided (used) cash: | ||
Accrued expenses and other liabilities | (177,847) | (554,124) |
Prepaid expenses and other assets | 1,445,016 | 41,333 |
Increase in cash surrender value of bank owned life insurance | (312,319) | (321,378) |
Accrued interest receivable | 163,658 | 175,175 |
Net cash provided by operating activities | 5,085,864 | 4,571,060 |
Cash Flow From Investing Activities | ||
Purchase of investment securities-available for sale | (17,000,000) | (39,920,000) |
Purchase of investment securities-held to maturity | (6,890,000) | (6,605,000) |
Loans originated and acquired | (67,581,828) | (44,583,708) |
Proceeds from maturities and calls of investment securities | 34,733,626 | 62,299,752 |
Proceeds from the sale of securities available for sale and held to maturity | 0 | 957,771 |
Redemption of FHLB stock | 548,700 | 430,000 |
Principal repayments of: | ||
Loans | 68,535,917 | 39,350,611 |
Mortgage-backed securities | 3,587,297 | 4,730,697 |
Purchase of premises and equipment | (778,589) | (392,784) |
Investment in OREO | (486,000) | 0 |
Proceeds from the sale of premises and equipment | 2,852,554 | 0 |
Proceeds from the sale of OREO | 5,447,533 | 2,822,974 |
Net cash provided by investing activities | 22,969,210 | 19,090,313 |
Cash Flow From Financing Activities | ||
Dividends paid | (1,086,960) | (930,654) |
Decrease in deposits | (5,011,190) | (8,546,902) |
Purchase of treasury stock | (3,431,739) | 0 |
Cash from mutual holding company reorganization | 0 | 3,804,517 |
Subscriptions payable | 0 | (7,908,463) |
Proceeds from stock issuance, net | 0 | 29,982,093 |
Acquisition of stock by benefit plans | (1,454,635) | (2,595,141) |
Decrease in other borrowings | (617,812) | (3,505,413) |
Net cash (used in) provided by financing activities | (11,602,336) | 10,300,037 |
Increase in Cash and Cash Equivalents | 16,452,738 | 33,961,410 |
Cash and Cash Equivalents, Beginning of Year | 95,852,198 | 61,890,788 |
Cash and Cash Equivalents, End of Year | 112,304,936 | 95,852,198 |
Supplemental Disclosures of Cash Flow Information- | ||
Interest | 3,209,873 | 4,098,513 |
Income taxes | 0 | 770,000 |
Supplemental Schedule of Noncash Financing and Investing Activities: | ||
Other real estate acquired in settlement of loans | 4,441,710 | 2,742,350 |
Premises and equipment-net acquired from mutual holding company reorganization | 0 | 2,057,259 |
Investments acquired from mutual holding company reorganization | 0 | 310,069 |
Other prepaid expenses and assets (liabilities) acquired (assumed) from mutual holding company reorganization | 0 | (23,102) |
Deferred tax asset-net acquired from mutual holding company reorganization | $ 0 | $ 699,000 |
Borrowings (Details Textual) (USD $)
|
Dec. 31, 2012
|
Dec. 31, 2011
|
---|---|---|
Other borrowings | $ 3,260,533 | $ 3,878,345 |
Line Of Credit Facility, Unused Capacity | 20,000,000 | 20,000,000 |
Line of Credit Facility, Maximum Borrowing Capacity | $ 97,100,000 |
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