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, 2014
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________ to _______________
Commission File No.: 000-54246
ALLIANCE BANCORP, INC. OF PENNSYLVANIA
(Exact name of registrant as specified in its charter)
| Pennsylvania | 56-2637804 | |
| (State or other jurisdiction | (I.R.S. Employer | |
| of incorporation or organization) | Identification Number) | |
| 541 Lawrence Road | ||
| Broomall, Pennsylvania | 19008 | |
| (Address) | (Zip Code) |
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, 2014, the aggregate value of the 3,386,175 shares of Common Stock of Alliance Bancorp, Inc. of Pennsylvania, which excludes 675,716 shares held by all directors and officers of the Registrant and the Registrant's Employee Stock Ownership Plan ("ESOP") as a group, was approximately $55.0 million. This figure is based on the last trade price of $16.24 per share of the Registrant's Common Stock on June 30, 2014. 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 2, 2015, was 4,026,699.
TABLE OF CONTENTS
| 2 |
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.
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 eight banking offices located in Delaware and Chester Counties, Pennsylvania, 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, 2014, the Company had $420.8 million of total assets, $344.8 million of total deposits and stockholders’ equity of $66.5 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.
Recent Development – Agreement with WSFS Financial Corporation
On March 3, 2015, the Company announced that it entered into an Agreement and Plan of Reorganization (the “Merger Agreement”) with WSFS Financial Corporation (“WSFS”) providing for, among other things, the merger of the Company with and into WSFS (the “Merger”) and the merger of the Bank with and into Wilmington Savings Fund Society, FSB, a federal savings bank and wholly owned subsidiary of WSFS. Under the terms of the Merger Agreement, all shares of common stock of the Company will be exchanged in the aggregate for approximately $26.6 million in cash and 816,151 shares of WSFS common stock. Each stockholder of the Company will be able to elect to receive, for each share of common stock of the Company, either 0.28955 shares of WSFS common stock or $22.00 in cash. The Merger is subject to customary closing conditions, including regulatory approvals and approval from the shareholders of the Company.
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.
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 Whiteland 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.
| 3 |
Lending Activities
General. At December 31, 2014, the Company's total portfolio of loans receivable amounted to $311.0 million, or 73.9%, of the Company's $420.8 million of total assets at such time. Over the past 16 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 $121.1 million or 38.9% of the total loan portfolio at December 31, 2014 while single family residential mortgage loans amounted to $121.3 million or 39.0% 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, 2014, such loan categories amounted to $24.5 million, $25.9 million, $3.8 million and $14.4 million, respectively, or 7.8%, 8.3%, 1.2% and 4.6% 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, 2014, the Company’s single-family mortgage loans decreased by $2.9 million or 2.3% to $121.3 million. For the year ended December 31, 2014 the Company’s commercial real estate loans decreased by $1.7 million or 1.4% to $121.1 million.
More recently, the Company has increased the originations of both residential and commercial construction real estate loans as well as commercial business loans. For the year ended December 31, 2014 total real estate construction loans increased $6.1 million or 30.9% to $25.9 million. For the year ended December 31, 2014 commercial business loans increased by $4.0 million or 38.4% to $14.4 million.
| 4 |
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, | ||||||||||||||||||||||||||||||||||||||||
| 2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||||||||||||||||||||||||
| Amount | % | Amount | % | Amount | % | Amount | % | Amount | % | |||||||||||||||||||||||||||||||
| (Dollars in Thousands) | ||||||||||||||||||||||||||||||||||||||||
| Real estate loans: | ||||||||||||||||||||||||||||||||||||||||
| Single-family (1) | $ | 121,336 | 39.02 | % | $ | 124,223 | 40.88 | % | $ | 126,676 | 44.48 | % | $ | 118,059 | 40.76 | % | $ | 114,985 | 39.44 | % | ||||||||||||||||||||
| Multi-family (2) | 24,512 | 7.88 | 22,181 | 7.30 | 20,935 | 7.35 | 10,757 | 3.71 | 6,293 | 2.16 | ||||||||||||||||||||||||||||||
| Commercial | 121,069 | 38.94 | 122,814 | 40.41 | 111,309 | 39.09 | 130,191 | 44.95 | 131,509 | 45.11 | ||||||||||||||||||||||||||||||
| Land and construction: (3) | ||||||||||||||||||||||||||||||||||||||||
| Residential | 6,824 | 2.19 | 4,035 | 1.33 | 2,198 | 0.77 | 7,369 | 2.54 | 8,881 | 3.05 | ||||||||||||||||||||||||||||||
| Commercial | 19,078 | 6.13 | 15,757 | 5.18 | 8,456 | 2.97 | 7,226 | 2.49 | 14,876 | 5.10 | ||||||||||||||||||||||||||||||
| Total real estate loans | 289,819 | 94.16 | 289,010 | 95.10 | 269,574 | 94.66 | 273,602 | 94.45 | 276,544 | 94.86 | ||||||||||||||||||||||||||||||
| Consumer: | ||||||||||||||||||||||||||||||||||||||||
| Student | 3,550 | 1.14 | 4,239 | 1.39 | 5,021 | 1.77 | 6,178 | 2.13 | 6,747 | 2.31 | ||||||||||||||||||||||||||||||
| Savings account | 161 | 0.05 | 223 | 0.08 | 297 | 0.10 | 398 | 0.14 | 362 | 0.13 | ||||||||||||||||||||||||||||||
| Other | 47 | 0.02 | 33 | 0.01 | 30 | 0.01 | 40 | 0.01 | 43 | 0.02 | ||||||||||||||||||||||||||||||
| Total consumer loans | 3,758 | 1.21 | 4,495 | 1.48 | 5,348 | 1.88 | 6,616 | 2.28 | 7,152 | 2.46 | ||||||||||||||||||||||||||||||
| Commercial business loans | 14,402 | 4.63 | 10,403 | 3.42 | 9,852 | 3.46 | 9,481 | 3.27 | 7,822 | 2.68 | ||||||||||||||||||||||||||||||
| Total loans receivable | 310,979 | 100.00 | % | 303,908 | 100.00 | % | 284,774 | 100.00 | % | 289,699 | 100.00 | % | 291,518 | 100.00 | % | |||||||||||||||||||||||||
| Less: | ||||||||||||||||||||||||||||||||||||||||
| Deferred fees | 735 | 788 | 979 | 402 | 372 | |||||||||||||||||||||||||||||||||||
| Allowance for loan losses | 4,465 | 4,243 | 4,919 | 4,000 | 5,090 | |||||||||||||||||||||||||||||||||||
| Loans receivable, net | $ | 305,779 | $ | 298,877 | $ | 278,876 | $ | 285,297 | $ | 286,056 | ||||||||||||||||||||||||||||||
| (1) | At December 31, 2014, 2013, 2012, 2011, and 2010, includes $12.2 million, $12.5 million, $13.9 million, $17.1 million, and $18.6 million, respectively, of home equity loans and lines. |
| (2) | At December 31, 2014, 2013, 2012, 2011, and 2010, includes $4.8 million, $8.0 million, $4.3 million, $4.5 million, and $5.1 million, of loans reclassified from commercial real estate loans and land and construction loans to multi-family loans. |
| (3) | At December 31, 2014, 2013, 2012, 2011, and 2010, excludes $18.1 million, $14.2 million, $8.8 million, $4.2 million, and $5.9 million, respectively, of undisbursed funds on land and construction loans. |
| 5 |
Contractual Maturities. The following table sets forth the scheduled contractual maturities of the Company's loans receivable at December 31, 2014. 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 | $ | 6,567 | $ | 2,290 | $ | 15,988 | $ | 20,879 | $ | 10 | $ | 3,783 | $ | 49,517 | ||||||||||||||
| After one year through three years | 4,386 | 247 | 8,152 | 4,573 | 69 | 7,802 | 25,229 | |||||||||||||||||||||
| After three years through five years | 9,139 | 9,400 | 15,127 | 450 | 436 | 2,637 | 37,189 | |||||||||||||||||||||
| After five years through fifteen years | 67,925 | 12,030 | 72,240 | — | 3,036 | 180 | 155,411 | |||||||||||||||||||||
| Over fifteen years | 33,319 | 545 | 9,562 | — | 207 | — | 43,633 | |||||||||||||||||||||
| Total (1) | $ | 121,336 | $ | 24,512 | $ | 121,069 | $ | 25,902 | $ | 3,758 | $ | 14,402 | $ | 310,979 | ||||||||||||||
| Interest rate terms on amounts due after one year: | ||||||||||||||||||||||||||||
| Fixed | $ | 101,627 | $ | 21,521 | $ | 86,295 | $ | 5,023 | $ | 42 | $ | 10,619 | $ | 225,127 | ||||||||||||||
| Adjustable | $ | 13,142 | $ | 701 | $ | 18,786 | — | $ | 3,706 | — | $ | 36,335 | ||||||||||||||||
| (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.
| 6 |
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, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| (In Thousands) | ||||||||||||
| Real estate loan originations: | ||||||||||||
| Single-family (1) | $ | 10,401 | $ | 12,740 | $ | 13,894 | ||||||
| Multi-family | — | — | — | |||||||||
| Commercial | 19,554 | 34,497 | 27,998 | |||||||||
| Land and construction: | ||||||||||||
| Residential | 10,296 | 20,429 | 13,476 | |||||||||
| Commercial | 9,860 | 14,616 | 10,037 | |||||||||
| Total real estate loan originations | 50,111 | 82,282 | 65,405 | |||||||||
| Consumer originations: | ||||||||||||
| Savings account | 62 | 96 | 104 | |||||||||
| Other | 1 | — | — | |||||||||
| Total consumer loan originations | 63 | 96 | 104 | |||||||||
| Commercial business originations | 4,805 | 1,996 | 1,945 | |||||||||
| Total loan originations | 54,979 | 84,374 | 67,454 | |||||||||
| Purchase of real estate loans: | ||||||||||||
| Single-family | — | — | — | |||||||||
| Multi-family | — | — | — | |||||||||
| Residential construction | — | — | — | |||||||||
| Commercial | — | 893 | 128 | |||||||||
| Commercial construction | 4,351 | — | — | |||||||||
| Total real estate loan purchases | 4,351 | 893 | 128 | |||||||||
| Total loan originations and purchases | 59,330 | 85,267 | 67,582 | |||||||||
| Less: | ||||||||||||
| Principal loan repayments | (51,735 | ) | (61,981 | ) | (68,536 | ) | ||||||
| Transfers to OREO | (243 | ) | (2,385 | ) | (4,442 | ) | ||||||
| Loans and participations sold | — | — | — | |||||||||
| Other, net (2) | (450 | ) | (900 | ) | (1,025 | ) | ||||||
| Net increase (decrease) | $ | 6,902 | $ | 20,001 | $ | (6,421 | ) | |||||
| (1) | Includes $545,000, $538,000, and $719,000 of home equity lines of credit originated during the years ended December 31, 2014, 2013 and 2012, 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.
| 7 |
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 $10.4 million and $12.7 million during 2014 and 2013, respectively. When possible, we emphasize the origination of single-family residential adjustable-rate mortgage loans (“ARMs”). Originations of such loans amounted to $-0- and $125,000 during 2014 and 2013, respectively. We also originate fixed-rate single-family residential real estate loans with terms of five, ten, 15, 20, 25 and 30 years. In the past, 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 were sold without any recourse to the Company by the purchaser in the event of default on the loan by the borrower and are generally sold with servicing released. We had no sales of residential mortgage loans for the years ended December 31, 2014 and December 31, 2013. More recently the Company has been originating and portfolioing a 30 year fixed rate single-family loan with a balloon payment due in 10 or 15 years.
| 8 |
In accordance with the Company’s increased emphasis on commercial real estate loan originations in recent years, such originations amounted to $19.6 million and $34.5 million during 2014 and 2013, respectively. In addition, land and construction loan originations amounted to $20.2 million and $35.1 million during 2014 and 2013, 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, 2014 and 2013, the Company’s single-family loan portfolio included $14.1 million or 11.6% and $15.5 million or 12.4%, respectively, of such subprime loans. The Company reported $435,000 or 3.1% and $433,000 or 2.8% of these loans as nonperforming at December 31, 2014 and December 31, 2013, 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 $4.4 million of loans during the year ended December 31, 2014 and $893,000 during the year ended December 31, 2013. Substantially all of our purchased loans were secured by properties located in Pennsylvania. As of December 31, 2014, the outstanding balance of our purchased loans amounted to $2.6 million and included $290,000 of multifamily real estate loans, $171,000 of single-family residential real estate loans, and $1.7 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 loans outstanding to any one borrower including such borrower’s affiliates will not exceed 15% of the Bank’s capital.
Single-Family Residential Real Estate Loans. The Company originates residential loans secured primarily by first mortgage liens on existing single-family residences. The Company also originates shorter term home equity loans which may be secured by first or second mortgages. At December 31, 2014, $121.3 million or 39.0% of the Company's total loan portfolio consisted of single-family residential real estate loans. Of the $121.3 million of such loans at December 31, 2014, $13.7 million or 11.3% had adjustable rates of interest and $107.6 million or 88.7% 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 offer ARMs, such loan products have not been as attractive due to the lower interest rate environment which has prevailed since the recession, resulting in a greater demand for fixed 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.
| 9 |
The Company has continued to originate a limited amount of fixed-rate mortgage loans with terms up to 30 years. Generally, the Company emphasizes the origination of fixed-rate loans with terms of 15 years or less for its 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. Many of these types of loans may not qualify under the new regulatory guidelines known as “qualified residential mortgages” (QRM) after December 31, 2015. As a result of these new rules the Company is reevaluating the risks associated with making loans that are outside “QRM” guidelines which although are permissible result in other types of risks.
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, 2014, the Company held a first lien on a majority of the properties securing home equity loans from the Company. At December 31, 2014, home equity loans and lines amounted to $12.2 million or 3.9% 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, 2014, $24.5 million or 7.9% of the Company's total loan portfolio consisted of loans secured by existing multi-family residential real estate. At December 31, 2014, $121.1 million or 38.9% 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 residential and 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, 2014 was secured by properties located in the Company’s primary market area. As of December 31, 2014, the five largest multi-family residential and commercial real estate loan relationships had outstanding balances of $11.4 million, $8.5 million, $7.0 million, $6.4 million and $5.0 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 75% 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 1.20. 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, 2014, the Company had no nonperforming multi-family residential loans and three nonperforming commercial real estate loans with balances of $849,000. At December 31, 2014, the Company had no multi-family loans and ten commercial real estate loans in the amount of $6.0 million that were considered performing 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, 2014, construction loans amounted to $25.9 million or 8.3% of the Company's total loan portfolio, which consisted of $6.8 million of residential and $19.1 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. As of December 31, 2014 the five largest real estate construction loans had outstanding balances of $3.9 million, $3.1 million, $2.1 million, $2.1 million, and $1.1 million, respectively, all of which were performing in accordance with their terms and were current at such date.
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, borrower liquidity, 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, 2014, 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 $3.8 million or 1.2% of the total loan portfolio at December 31, 2014. Student loans amounted to $3.6 million or 1.1% of the total loan portfolio at December 31, 2014. 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 $161,000 or 0.1% of the total loan portfolio at December 31, 2014. 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.
| 11 |
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, 2014, there were 69 nonperforming student loans which amounted to $235,000, compared to 113 nonperforming student loans which amounted to $412,000 at December 31, 2013. All of these nonperforming student loans are fully guaranteed by the U.S. Government.
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 $14.4 million or 4.6% of the total loan portfolio at December 31, 2014 and were primarily secured by receivables, equipment, 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, 2014, 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 $35,000 at December 31, 2014 compared to $240,000 at December 31, 2013. 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, 2014, the Company had $1.3 million in OREO. The $1.3 million of OREO consists of two commercial real estate properties in the amount of $342,000, three improved single family building lots totaling $870,000, and one single family property in the amount of $63,000, substantially all of which are located within the Company’s primary 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, 2014, the Company had thirteen loans classified as performing troubled debt restructurings consisting of three single-family loans which amounted to $850,000 and ten commercial real estate loans which amounted to $6.0 million. All such loans have been performing in accordance with their restructured terms and conditions. At December 31, 2014, 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, 2014, 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 | $ | 346 | 0.29 | % | $ | 146 | 0.12 | % | $ | 1,082 | 0.89 | % | ||||||||||||
| Multi-family | 147 | 0.60 | — | — | — | 0.60 | ||||||||||||||||||
| Commercial | 832 | 0.69 | 427 | 0.35 | 347 | 0.29 | ||||||||||||||||||
| Land and construction | — | — | — | — | — | — | ||||||||||||||||||
| Commercial business | 9 | 0.06 | — | — | — | — | ||||||||||||||||||
| Consumer | 201 | 5.35 | 101 | 2.66 | 235 | 6.25 | ||||||||||||||||||
| Total | $ | 1,535 | $ | 674 | $ | 1,664 | ||||||||||||||||||
| 13 |
The following table sets forth the amounts and categories of the Company's nonperforming loans and assets at the dates indicated.
| December 31, | ||||||||||||||||||||
| 2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||||
| (Dollars in Thousands) | ||||||||||||||||||||
| Non-accruing loans: | ||||||||||||||||||||
| Real estate: | ||||||||||||||||||||
| Single-family | $ | 391 | $ | 752 | $ | 664 | $ | 1,055 | $ | 74 | ||||||||||
| Multi-family | — | — | — | — | — | |||||||||||||||
| Commercial | 849 | 744 | 2,873 | 3,016 | 2,128 | |||||||||||||||
| Land and construction | — | — | — | 7,707 | 11,423 | |||||||||||||||
| Commercial business | — | — | — | 81 | 74 | |||||||||||||||
| Consumer | — | — | — | — | — | |||||||||||||||
| Total non-accruing loans | 1,240 | 1,496 | 3,537 | 11,859 | 13,699 | |||||||||||||||
| Accruing loans 90 days or more delinquent: | ||||||||||||||||||||
| Real estate: | ||||||||||||||||||||
| Single-family | 692 | 638 | 1,742 | 2,018 | 2,308 | |||||||||||||||
| Multi-family | — | — | — | — | — | |||||||||||||||
| Commercial | — | — | — | — | — | |||||||||||||||
| Land and construction | — | — | — | — | — | |||||||||||||||
| Commercial business | — | — | — | — | — | |||||||||||||||
| Consumer | 235 | 412 | 324 | 561 | 284 | |||||||||||||||
| Total accruing loans 90 days or more delinquent | 927 | 1,050 | 2,066 | 2,579 | 2,592 | |||||||||||||||
| Total non-performing loans | 2,167 | 2,546 | 5,603 | 14,438 | 16,291 | |||||||||||||||
| Other real estate owned: | ||||||||||||||||||||
| Real estate acquired through, or in lieu of, foreclosure | 1,275 | 3,191 | 2,092 | 2,587 | 2,675 | |||||||||||||||
| Total other real estate owned | 1,275 | 3,191 | 2,092 | 2,587 | 2,675 | |||||||||||||||
| Total non-performing assets | 3,442 | 5,737 | 7,695 | 17,025 | 18,966 | |||||||||||||||
| Total performing troubled debt restructurings | 6,900 | 4,823 | 9,106 | 4,114 | 2,895 | |||||||||||||||
| Total non-performing assets and total performing troubled debt restructurings | $ | 10,342 | $ | 10,560 | $ | 16,801 | $ | 21,139 | $ | 21,861 | ||||||||||
| Total non-performing assets and total performing troubled debt restructurings as a percentage of total assets | 2.46 | % | 2.48 | % | 3.65 | % | 4.50 | % | 4.81 | % | ||||||||||
| Total non-performing assets as a percentage of total assets | 0.82 | % | 1.35 | % | 1.67 | % | 3.63 | % | 4.17 | % | ||||||||||
If the Company’s $1.2 million of non-accruing loans at December 31, 2014 had been current in accordance with their terms during 2014, the gross income on such loans would have been approximately $73,000 during 2014. The Company actually recorded $32,000 in interest income on such loans during 2014. If the Company’s $1.5 million of non-accruing loans at December 31, 2013 had been current in accordance with their terms during 2013, the gross income on such loans would have been approximately $69,000 during 2013. The Company actually recorded $19,000 in interest income on such loans during 2013. 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 $2.3 million to $3.4 million or 0.82% of total assets at December 31, 2014 as compared to $5.7 million or 1.35% of total assets at December 31, 2013. The nonperforming assets at December 31, 2014 included $2.2 million in nonperforming loans and $1.2 million in OREO. The decrease in nonperforming assets was primarily due to a $1.9 million decrease in other real estate owned and a $379,000 decrease in nonperforming loans as of December 31, 2014. Overall, nonperforming loans included $1.1 million in single-family residential real estate loans, $849,000 in commercial real estate loans, and $235,000 in student loans, which are fully guaranteed by the U.S. Government. The Company continues to aggressively work towards the resolution of its nonperforming assets. The allowance for loan losses amounted to $4.5 million or 206.1% of nonperforming loans at December 31, 2014 as compared to $4.2 million or 166.7% at December 31, 2013.
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, 2014, the Company had $9.8 million of classified and criticized loans, of which $1.3 million consisted of loans designated as special mention, $8.5 million classified as substandard loans and no assets classified as doubtful or loss. The $1.3 million of loans designated as special mention consisted of $711,000 in single family real estate loans and $541,000 in commercial real estate loans. The $8.5 million of loans designated as substandard consisted of $1.6 million in single family real estate loans and $6.9 million in commercial real estate loans. Substantially all of these loans are located in the Company’s primary market area. In addition, the Company had $1.2 million in OREO properties classified as substandard, substantially 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 collectability 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.
| 15 |
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.
The following table summarizes changes in the allowance for loan losses and other selected statistics for the periods presented.
| Year Ended December 31, | ||||||||||||||||||||
| 2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||||
| (Dollars in Thousands) | ||||||||||||||||||||
| Average loans receivable, net (1) | $ | 306,358 | $ | 287,808 | $ | 283,597 | $ | 291,719 | $ | 288,192 | ||||||||||
| Allowance for loan losses, beginning of year | $ | 4,243 | $ | 4,919 | $ | 4,000 | $ | 5,090 | $ | 3,538 | ||||||||||
| Provision for loan losses | 450 | 900 | 1,025 | 3,250 | 2,120 | |||||||||||||||
| Charge-offs: | ||||||||||||||||||||
| Single-family residential | (100 | ) | (458 | ) | (42 | ) | (75 | ) | (81 | ) | ||||||||||
| Multi-family residential | — | (359 | ) | — | — | — | ||||||||||||||
| Commercial real estate | (185 | ) | (813 | ) | (59 | ) | (306 | ) | (137 | ) | ||||||||||
| Land and construction | — | — | (440 | ) | (3,898 | ) | — | |||||||||||||
| Consumer | (4 | ) | (7 | ) | (9 | ) | (7 | ) | (16 | ) | ||||||||||
| Commercial business | — | — | — | (123 | ) | (365 | ) | |||||||||||||
| Total charge-offs | (289 | ) | (1,637 | ) | (550 | ) | (4,409 | ) | (599 | ) | ||||||||||
| Recoveries: | ||||||||||||||||||||
| Single-family residential | 53 | 19 | 10 | — | — | |||||||||||||||
| Multi-family residential | — | — | — | — | — | |||||||||||||||
| Commercial real estate | 7 | 7 | 12 | 18 | — | |||||||||||||||
| Land and construction | — | 30 | 420 | 51 | — | |||||||||||||||
| Consumer | 1 | 5 | 2 | — | 1 | |||||||||||||||
| Commercial business | — | — | — | — | 30 | |||||||||||||||
| Total recoveries | 61 | 61 | 444 | 69 | 31 | |||||||||||||||
| Allowance for loan losses, end of year | $ | 4,465 | $ | 4,243 | $ | 4,919 | $ | 4,000 | $ | 5,090 | ||||||||||
| Net charge-offs to average loans receivable, net | 0.07 | % | 0.55 | % | 0.04 | % | 1.49 | % | 0.20 | % | ||||||||||
| Allowance for loan losses to total loans receivable | 1.44 | % | 1.40 | % | 1.73 | % | 1.38 | % | 1.75 | % | ||||||||||
| Allowance for loan losses to total non-performing loans | 206.1 | % | 166.7 | % | 87.79 | % | 27.70 | % | 31.24 | % | ||||||||||
| Net charge-offs to allowance for loan losses | 5.11 | % | 37.14 | % | 2.15 | % | 108.50 | % | 11.16 | % | ||||||||||
| (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, | ||||||||||||||||||||||||||||||||||||||||
| 2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||||||||||||||||||||||||
| 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 | $ | 881 | 39.02 | % | $ | 833 | 40.88 | % | $ | 1,027 | 44.48 | % | $ | 693 | 40.76 | % | $ | 411 | 39.44 | % | ||||||||||||||||||||
| Multi-family residential | 302 | 7.88 | 304 | 7.30 | 623 | 7.35 | 234 | 3.71 | 247 | 2.16 | ||||||||||||||||||||||||||||||
| Commercial real estate | 2,204 | 38.94 | 2,259 | 40.41 | 2,674 | 39.09 | 2,289 | 44.95 | 2,072 | 45.11 | ||||||||||||||||||||||||||||||
| Land and construction | 773 | 8.32 | 618 | 6.51 | 352 | 3.74 | 525 | 5.03 | 2,151 | 8.15 | ||||||||||||||||||||||||||||||
| Consumer | 16 | 1.21 | 14 | 1.48 | 18 | 1.88 | 20 | 2.28 | 19 | 2.46 | ||||||||||||||||||||||||||||||
| Commercial business | 289 | 4.63 | 215 | 3.42 | 225 | 3.46 | 239 | 3.27 | 190 | 2.68 | ||||||||||||||||||||||||||||||
| Total | $ | 4,465 | 100.00 | % | $ | 4,243 | 100.00 | % | $ | 4,919 | 100.00 | % | $ | 4,000 | 100.00 | % | $ | 5,090 | 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, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| (In Thousands) | ||||||||||||
| Mortgage-backed securities: | ||||||||||||
| FNMA pass-through certificates | $ | 1,305 | $ | 2,228 | $ | 3,887 | ||||||
| FHLMC pass-through certificates | 829 | 1,282 | 2,247 | |||||||||
| GNMA pass-through certificates | 1,044 | 1,189 | 1,390 | |||||||||
| Total mortgage-backed securities | $ | 3,178 | (1) | $ | 4,699 | (2) | $ | 7,524 | (3) | |||
| (1) | At December 31, 2014, gross unrealized gains on such securities amounted to $211,000 and gross unrealized losses amounted to $-0-. |
| (2) | At December 31, 2013, gross unrealized gains on such securities amounted to $296,000 and gross unrealized losses amounted to $-0-. |
| (3) | At December 31, 2012, gross unrealized gains on such securities amounted to $511,000 and gross unrealized losses amounted to $13. |
| 18 |
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, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| (In Thousands) | ||||||||||||
| Mortgage-backed securities purchased | $ | — | $ | — | $ | — | ||||||
| Mortgage-backed securities sold | — | — | — | |||||||||
| Principal repayments | (1,436 | ) | (2,610 | ) | (3,587 | ) | ||||||
| Change in net unrealized gain | (85 | ) | (215 | ) | (192 | ) | ||||||
| Net decrease | $ | (1,521 | ) | $ | (2,825 | ) | $ | (3,779 | ) | |||
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, 2014 and 2013, the Company had no mortgage-backed securities that were pledged to secure 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, 2014 is presented below.
| December 31, 2014 | ||||||||||||||||||||
| 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 | $ | 23 | $ | 219 | $ | 370 | $ | 135 | $ | 747 | ||||||||||
| FNMA pass-through certificates | 106 | 515 | 49 | 571 | 1,241 | |||||||||||||||
| GNMA pass-through certificates | — | — | 184 | 795 | 979 | |||||||||||||||
| Total | $ | 129 | $ | 734 | $ | 603 | $ | 1,501 | $ | 2,967 | (1) | |||||||||
| Weighted average yield | 5.62 | % | 4.73 | % | 6.13 | % | 2.36 | % | 3.85 | % | ||||||||||
| (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, 2014, our investment securities amounted to $40.9 million, of which $16.0 million was designated as available for sale and $24.9 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 $23.9 million in general obligation bonds and $980,000 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, | ||||||||||||||||||||||||
| 2014 | 2013 | 2012 | ||||||||||||||||||||||
| Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||||||||||||
| (In Thousands) | ||||||||||||||||||||||||
| U.S. Government and agency securities | $ | 16,000 | $ | 15,996 | $ | 22,000 | $ | 21,321 | $ | 9,000 | $ | 9,000 | ||||||||||||
| Municipal obligations | 24,927 | 25,587 | 28,358 | 28,402 | 25,325 | 26,525 | ||||||||||||||||||
| Total | $ | 40,927 | (1) | $ | 41,583 | (1) | $ | 50,358 | (1) | $ | 49,723 | (1) | $ | 34,325 | $ | 35,525 | ||||||||
| (1) | At December 31, 2014, investment securities with an amortized cost totaling $16.0 million were designated as available for sale. At December 31, 2014, gross unrealized losses amounted to $19,000 and there were $15,000 in gross unrealized gains. At December 31, 2014, $6.0 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, 2014 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, 2014 | ||||||||||||||||||||
| 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 | $ | — | $ | 6,000 | $ | 3,000 | $ | 7,000 | $ | 16,000 | (1) | |||||||||
| Municipal obligations | 200 | 7,798 | 5,011 | 11,918 | 24,927 | (2) | ||||||||||||||
| Total | $ | 200 | $ | 13,798 | $ | 8,011 | $ | 18,918 | $ | 40,927 | ||||||||||
| Weighted average yield | 0.71 | % | 1.04 | % | 2.28 | % | 3.29 | % | 2.23 | % | ||||||||||
| (1) | The $16.0 million of U.S. Government agency securities are designated as available for sale. |
| (2) | The $24.9 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.
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 or to balance cash flows during times of high loan production. 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, 2014.
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.
| 21 |
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, | ||||||||||||||||||||||||
| 2014 | 2013 | 2012 | ||||||||||||||||||||||
| Amount | Percent | Amount | Percent | Amount | Percent | |||||||||||||||||||
| (In Thousands) | ||||||||||||||||||||||||
| Passbook and statement savings accounts | $ | 51,538 | 14.9 | % | $ | 52,198 | 15.1 | % | $ | 50,284 | 13.6 | % | ||||||||||||
| Money market accounts | 24,427 | 7.1 | 26,433 | 7.7 | 28,057 | 7.6 | ||||||||||||||||||
| Certificates of deposit | 194,020 | 56.3 | 197,086 | 57.1 | 222,060 | 59.8 | ||||||||||||||||||
| NOW and Super NOW accounts | 56,438 | 16.4 | 53,252 | 15.4 | 54,393 | 14.7 | ||||||||||||||||||
| Non-interest bearing accounts | 18,357 | 5.3 | 16,409 | 4.7 | 16,243 | 4.4 | ||||||||||||||||||
| Total deposits at end of year | $ | 344,780 | 100.0 | % | $ | 345,378 | 100.0 | % | $ | 371,037 | 100.0 | % | ||||||||||||
The following table sets forth the net deposit flows of the Company during the periods indicated.
| Year Ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| (In Thousands) | ||||||||||||
| Decrease before interest credited | $ | (2,849 | ) | $ | (28,112 | ) | $ | (8,213 | ) | |||
| Interest credited | 2,251 | 2,453 | 3,202 | |||||||||
| Net deposit decrease | $ | (598 | ) | $ | (25,659 | ) | $ | (5,011 | ) | |||
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, 2014 | ||||
| (In Thousands) | ||||
| Three months or less | $ | 8,707 | ||
| Over three months through six months | 6,694 | |||
| Over six months through twelve months | 9,454 | |||
| Over twelve months | 28,330 | |||
| Total | $ | 53,185 | ||
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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, | ||||||||||||||||||||||||
| 2014 | 2013 | 2012 | ||||||||||||||||||||||
| Average Balance | Average Rate Paid | Average Balance | Average Rate Paid | Average Balance | Average Rate Paid | |||||||||||||||||||
| (Dollars in Thousands) | ||||||||||||||||||||||||
| Passbook and statement Savings accounts | $ | 51,929 | 0.20 | % | $ | 51,509 | 0.20 | % | $ | 48,668 | 0.23 | % | ||||||||||||
| Money market accounts | 24,469 | 0.23 | 27,346 | 0.22 | 30,419 | 0.29 | ||||||||||||||||||
| Certificates of deposit | 198,281 | 0.99 | 208,760 | 1.04 | 234,743 | 1.23 | ||||||||||||||||||
| NOW and Super NOW | 54,032 | 0.22 | 53,862 | 0.22 | 52,551 | 0.22 | ||||||||||||||||||
| Non-interest bearing accounts | 18,232 | — | 15,873 | — | 15,087 | — | ||||||||||||||||||
| Total average deposits | $ | 346,943 | 0.68 | %(1) | $ | 357,350 | 0.72 | %(1) | $ | 381,468 | 0.87 | %(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, 2014 and 2013 and the amounts at December 31, 2013, which mature during the periods indicated.
| December 31, | Amounts at December 31, 2014 Maturing Within | |||||||||||||||||||||||
| Certificates of Deposit | 2014 | 2013 | One Year | Two Years | Three Years | Thereafter | ||||||||||||||||||
| (In Thousands) | ||||||||||||||||||||||||
| 1.0% or less | $ | 117,462 | $ | 132,704 | $ | 95,906 | $ | 19,074 | $ | 2,482 | $ | — | ||||||||||||
| 1.01% to 2.0% | 63,914 | 49,680 | 12,934 | 36,872 | 9,014 | 5,094 | ||||||||||||||||||
| 2.01% to 3.0% | 12,504 | 14,033 | 2,006 | 2,647 | 4,958 | 2,893 | ||||||||||||||||||
| 3.01% to 4.9% | 140 | 669 | 34 | 105 | 1 | — | ||||||||||||||||||
| Total certificates of deposit | $ | 194,020 | $ | 197,086 | $ | 110,880 | $ | 58,698 | $ | 16,455 | $ | 7,987 | ||||||||||||
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, 2014, 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, 2014, the Company had $203,000 of FHLB stock.
| 23 |
The following table sets forth certain information regarding borrowed funds at or for the dates indicated:
| At or for the Year Ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| (Dollars in Thousands) | ||||||||||||
| FHLB of Pittsburgh advances: | ||||||||||||
| Average balance outstanding | — | — | — | |||||||||
| Maximum amount outstanding at any month-end during the year | — | — | — | |||||||||
| Balance outstanding at end of year | — | — | — | |||||||||
| Weighted average interest rate during the year | — | — | — | |||||||||
| Weighted average interest rate at end of year | — | — | — | |||||||||
| Total borrowings: | ||||||||||||
| Average balance outstanding | $ | 2,645 | $ | 2,867 | $ | 3,027 | ||||||
| Maximum amount outstanding at any month-end during the year | 3,687 | 4,449 | 3,982 | |||||||||
| Balance outstanding at end of year | 2,918 | 3,437 | 3,261 | |||||||||
| Weighted average interest rate during the year | 0.19 | % | 0.17 | % | 0.26 | % | ||||||
| Weighted average interest rate at end of year | 0.17 | % | 0.19 | % | 0.23 | % | ||||||
Employees
The Company had 74 full-time employees and 10 part-time employees at December 31, 2014. 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, 2014 and 2013, amounted to $62.5 million and $61.2 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, 2014 and 2013, there were no properties held and seven properties held by 908 Hyatt Street LLC, respectively.
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.
| 24 |
The Company experiences strong competition for real estate loans principally from other savings associations, commercial banks and credit unions. 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.
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.
2010 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. Alliance Bank does not have any hybrid capital items or trust preferred securities. |
| · | The prohibition on payment of interest on demand deposits was repealed. |
| 25 |
| · | 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. |
| · | 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. For a discussion of regulatory capital requirements applicable to Alliance Bancorp that began being phased in in January 1, 2015, see “New Capital Rules” below. |
| · | 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. |
| 26 |
New Capital Requirements
The Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, adopted Basel III in September 2010, which constitutes a strengthened set of capital requirements for banking organizations in the United States and around the world. In July of 2013 the respective U.S. federal banking agencies issued final rules implementing Basel III and the Dodd-Frank Act capital requirements to be fully-phased in on a global basis on January 1, 2019.
The new regulations generally apply to both Alliance Bancorp and Alliance Bank. They establish a new tangible common equity capital requirement, increase the minimum requirement for the current Tier 1 risk-weighted asset (“RWA”) ratio, phase out certain kinds of intangibles treated as capital and certain types of instruments and change the risk weightings of certain assets used to determine required capital ratios. The new common equity Tier 1 capital component requires capital of the highest quality – predominantly composed of retained earnings and common stock instruments. For community banks such as Alliance Bank, a common equity Tier 1 capital ratio 4.5% became effective on January 1, 2015. The new capital rules also increased the current minimum Tier 1 capital ratio from 4.0% to 6.0% beginning on January 1, 2015. In addition, institutions that seek the freedom to make capital distributions and pay discretionary bonuses to executive officers without restriction must also maintain greater than 2.5% in common equity attributable to a capital conservation buffer to be phased in from January 1, 2016 until January 1, 2019. The new rules also increase the risk weights for several categories of assets, including an increase from 100% to 150% for certain acquisition, development and construction loans and more than 90-day past due exposures. The new capital rules maintain the general structure of the prompt corrective action rules applicable to insured institutions like Alliance Bank, but incorporate the new common equity Tier 1 capital requirement and the increased Tier 1 RWA requirement into the prompt corrective action framework.
Volcker Rule
Regulations were recently adopted by the federal banking agencies to implement the provisions of the Dodd Frank Act commonly referred to as the Volcker Rule. The regulations contain prohibitions and restrictions on the ability of financial institution holding companies and their affiliates to engage in proprietary trading and to hold certain interests in, or to have certain relationships with, various types of investment funds, including hedge funds and private equity funds. The regulations became effective on April 1, 2014 with full compliance being phased in over a period ending on July 21, 2015. The Company is currently reviewing its investment portfolio to ensure compliance as the various provisions of the Volcker Rule regulations become effective.
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.
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.
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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. To implement the 2010 legislation, the FDIC 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.
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.
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, 2014, Alliance Bank’s capital ratios exceeded each of its capital requirements and is considered well capitalized.
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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, 2014, 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.
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:
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| · | 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. |
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.
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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 FHLBs. 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, 2014, Alliance Bank was in compliance with this requirement.
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, 2014, 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. The 2010 legislation authorized the FRB to establish capital requirements for savings and loan holding companies and the FRB promulgated regulations that established those capital requirements that began being phased in on January 1, 2015. 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.
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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.
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 QTL test set forth in the Home Owners’ Loan Act. 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). 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.
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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, 2014, 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.
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. An exception is available for small taxpayers (less than $500 million in assets) which applies to Alliance Bank. Alliance Bank is permitted to establish a reserve for bad debts and to make additions to the reserve. These additions can, within specified formula limits, be deducted in arriving at taxable income.
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 have a bank charter.
At December 31, 2014, 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, 2014, had $1.5 million of AMT available as credit for carryover purposes.
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Net Operating and Capital 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, 2014, Alliance Bancorp and Alliance Bank had no net operating loss carryforwards for federal income tax purposes, and approximately $619,000 in capital loss carryforwards expiring over the next two years. In December 2013, the Company recorded a full valuation allowance for such capital loss carryforwards as it is more likely than not the Company will be unable to realize these benefits.
As of December 31, 2014, the Alliance Bancorp had approximately $4.0 million of state net operating loss carryforwards, transferred from the former Mutual Holding Company, expiring from 2019 through 2030. Alliance Bancorp has recorded a full valuation allowance for these carryforwards as projected state income at Alliance Bancorp is not anticipated to be sufficient to realize these benefits.
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.
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, 2014, the Bank had no net operating loss for state tax purposes.
Not applicable
Item 1B. Unresolved Staff Comments.
None
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Offices and Properties
At December 31, 2014, the Company conducted its business from its executive offices in Broomall, Pennsylvania and seven 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, 2014.
| Description/Address | Leased/Owned | Net Book Value of Premises and Fixed Assets | Amount of Deposits | |||||||||
| (In Thousands) | ||||||||||||
| MAIN OFFICE | ||||||||||||
| Lawrence Park | Owned | $ | 1,050 | $ | 82,734 | |||||||
| 541 Lawrence Road | ||||||||||||
| Broomall, PA 19008 | ||||||||||||
| BRANCH OFFICES | ||||||||||||
| Secane | Leased (1) | 50 | 60,543 | |||||||||
| 925 Providence Road | ||||||||||||
| Secane, PA 19018 | ||||||||||||
| Newtown Square | Leased (2) | 27 | 28,632 | |||||||||
| 252 & West Chester Pike | ||||||||||||
| Newtown Square, PA 19073 | ||||||||||||
| Havertown | Leased (3) | 68 | 58,357 | |||||||||
| 500 E. Township Line Road | ||||||||||||
| Havertown, PA 19083 | ||||||||||||
| Lansdowne | Owned | 105 | 33,537 | |||||||||
| 9 E. Baltimore Pike | ||||||||||||
| Lansdowne, PA 19050 | ||||||||||||
| Springfield | Leased (4) | 401 | 36,002 | |||||||||
| 153 Saxer Avenue | ||||||||||||
| Springfield, PA 19064 | ||||||||||||
| Shoppes at Brinton Lake | Leased (5) | 30 | 31,640 | |||||||||
| 979 Baltimore Pike | ||||||||||||
| Glen Mills, PA 19342 | ||||||||||||
| Westgate Plaza | Leased (6) | 183 | 13,335 | |||||||||
| 309 Lancaster Ave. | ||||||||||||
| Frazer, PA 19355 | ||||||||||||
| (1) | The lease expires in April 2021 with no further options to extend. |
| (2) | The building is owned but the land is leased. The lease expires in March 2017 with no further options to extend. |
| (3) | The lease expires in January 2016 with one successive option to extend the lease for five years each. |
| (4) | In December of 2013, the Company signed a lease to occupy this property in a sales leaseback transaction. The initial lease term is ten years with three five year renewal options. |
| (5) | The lease expires in January 2022 with two successive options to extend the lease for five years each. |
| (6) | 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. |
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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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| 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 | |
| BDO USA, LLP | Investors, analysts and others seeking | |
| 1801 Market Street, Suite 1700 | information may contact: | |
| Philadelphia, PA 19103 | ||
| 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 | |
| Silver, Freedman, Taff & Tiernan LLP | Direct questions regarding dividend checks, | |
| 3299 K Street, NW, Suite 100 | address and name changes or lost certificates to: | |
| Washington, D.C. 20007 | Computershare | |
| 480 Washington Boulevard, 29th Floor | ||
| Jersey City, NJ 07310 |
Market Information
Alliance Bancorp common stock is traded on the Nasdaq Global Market and quoted under the symbol “ALLB”. The closing price of a share of Alliance Bancorp common stock on December 31, 2014 was $18.41 per share. There were 4,026,699 shares outstanding as of December 31, 2014 and the Company had approximately 1,000 shareholders of record as of March 2, 2015.
| For the Quarter Ended | High | Low | Close | Cash Dividends Declared | ||||||||||||
| December 31, 2014 | $ | 18.41 | $ | 15.68 | $ | 18.41 | $ | .06 | ||||||||
| September 30, 2014 | 16.59 | 15.56 | 16.00 | .06 | ||||||||||||
| June 30, 2014 | 16.24 | 15.20 | 16.24 | .05 | ||||||||||||
| March 31, 2014 | 15.50 | 15.05 | 15.35 | .05 | ||||||||||||
| December 31, 2013 | $ | 15.58 | $ | 14.40 | $ | 15.05 | $ | .05 | ||||||||
| September 30, 2013 | 15.25 | 14.23 | 14.50 | .05 | ||||||||||||
| June 30, 2013 | 14.61 | 13.09 | 14.61 | .05 | ||||||||||||
| March 31, 2013 | 13.35 | 12.50 | 13.35 | .05 | ||||||||||||
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. In January 2013, the Company approved a one year extension to repurchase the remaining 274,730 shares under this program which was completed in August of 2013. In September 2013, the Company approved a one year stock repurchase program of 10% of its outstanding shares or 492,700 shares of common stock. In December 2013, the Company approved a one year stock repurchase program of 10% of its outstanding shares or 451,730 shares of common stock. As of December 31, 2014, 407,605 shares were purchased under the plan at an average cost of $15.53.
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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 (1) | ||||||||||||
| October 2014 | — | — | — | 144,585 | ||||||||||||
| November 2014 | — | — | — | 144,585 | ||||||||||||
| December 2014 | 460 | $ | 17.61 | 460 | 100,000 | |||||||||||
| Totals | 460 | $ | 17.61 | 460 | 100,000 | |||||||||||
| (1) | All shares were repurchased under the Company’s announced repurchase program. On December 12, 2013, the Company announced a program to repurchase up to 451,730 shares, or 10% of its outstanding common stock. The program expired on December 12, 2014 and 407,605 shares were purchased in the open market or by privately negotiated transactions. On July 24, 2014 the Company announced a new stock repurchase program of up to 100,000 shares of common stock upon completion or expiration of the existing program. |
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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, | ||||||||||||||||||||
| 2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||||
| Selected Financial Data | (Dollars in thousands, except per share amounts) | |||||||||||||||||||
| Total assets | $ | 420,829 | $ | 425,502 | $ | 460,915 | $ | 469,487 | $ | 454,476 | ||||||||||
| Cash and cash equivalents | 46,633 | 45,224 | 112,305 | 95,852 | 61,891 | |||||||||||||||
| Loans receivable, net | 305,779 | 298,877 | 278,876 | 285,297 | 286,056 | |||||||||||||||
| Mortgage-backed securities | 3,178 | 4,698 | 7,524 | 11,303 | 16,146 | |||||||||||||||
| Investment securities | 40,922 | 49,680 | 34,325 | 45,245 | 61,428 | |||||||||||||||
| Other real estate owned | 1,275 | 3,191 | 2,092 | 2,587 | 2,675 | |||||||||||||||
| Deposits | 344,780 | 345,378 | 371,037 | 376,048 | 384,595 | |||||||||||||||
| Borrowings (1) | 2,918 | 3,437 | 3,261 | 3,878 | 7,384 | |||||||||||||||
| Stockholders’ equity | 66,451 | 70,169 | 80,002 | 82,995 | 48,991 | |||||||||||||||
| Total liabilities | 354,379 | 355,333 | 380,913 | 386,491 | 405,485 | |||||||||||||||
| Allowance for loan losses | 4,465 | 4,243 | 4,919 | 4,000 | 5,090 | |||||||||||||||
| Non-accrual loans | 1,240 | 1,496 | 3,537 | 11,859 | 13,699 | |||||||||||||||
| Non-performing assets (2) | 3,442 | 5,737 | 7,695 | 17,025 | 18,966 | |||||||||||||||
| Selected Operating Data | ||||||||||||||||||||
| Interest and dividend income | $ | 16,890 | $ | 16,612 | $ | 17,409 | $ | 18,677 | $ | 19,797 | ||||||||||
| Interest expense | 2,256 | 2,460 | 3,210 | 4,104 | 6,434 | |||||||||||||||
| Net interest income | 14,634 | 14,152 | 14,199 | 14,573 | 13,363 | |||||||||||||||
| Provision for loan losses | 450 | 900 | 1,025 | 3,250 | 2,120 | |||||||||||||||
| Net interest income after provision | ||||||||||||||||||||
| for loan losses | 14,184 | 13,252 | 13,174 | 11,323 | 11,243 | |||||||||||||||
| Other income | 789 | 777 | 1,937 | 726 | 1,084 | |||||||||||||||
| Other expenses | 11,393 | 11,861 | 11,910 | 10,979 | 11,375 | |||||||||||||||
| Income before income tax | 3,580 | 2,168 | 3,201 | 1,070 | 952 | |||||||||||||||
| Income tax expense (benefit) | 1,025 | 760 | 659 | (79 | ) | (128 | ) | |||||||||||||
| Net income | $ | 2,555 | $ | 1,408 | $ | 2,542 | $ | 1,149 | $ | 1,080 | ||||||||||
| Basic earnings per share (3) | $ | 0.64 | $ | 0.29 | $ | 0.48 | $ | 0.22 | $ | 0.20 | ||||||||||
| Dilutive earnings per share (3) | $ | 0.63 | $ | 0.29 | $ | 0.48 | $ | 0.21 | $ | 0.20 | ||||||||||
(Notes on Following Page)
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| As of or For the Year Ended December 31, | ||||||||||||||||||||
| 2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||||
| Selected Operating Ratios | ||||||||||||||||||||
| Average yield earned on interest-earning assets | 4.19 | % | 3.94 | % | 3.92 | % | 4.24 | % | 4.64 | % | ||||||||||
| Average rate paid on interest-bearing liabilities | 0.68 | 0.72 | 0.87 | 1.12 | 1.66 | |||||||||||||||
| Average interest rate spread (4) | 3.51 | 3.22 | 3.05 | 3.12 | 2.98 | |||||||||||||||
| Net interest margin (4) | 3.63 | 3.36 | 3.19 | 3.31 | 3.13 | |||||||||||||||
| Ratio of interest-earning assets to interest-bearing liabilities | 120.88 | 122.50 | 120.35 | 120.79 | 110.65 | |||||||||||||||
| Noninterest expense as a percent of average assets | 2.68 | 2.67 | 2.51 | 2.36 | 2.50 | |||||||||||||||
| Return on average assets | 0.60 | 0.32 | 0.54 | 0.25 | 0.24 | |||||||||||||||
| Return on average equity | 3.82 | 1.80 | 3.08 | 1.37 | 2.21 | |||||||||||||||
| Dividend payout ratio | 35.61 | 71.62 | 42.77 | 80.99 | 30.29 | |||||||||||||||
| Efficiency ratio (5) | 73.87 | 79.45 | 73.81 | 71.76 | 78.74 | |||||||||||||||
| Ratio of average equity to average assets | 16.36 | 17.40 | 17.43 | 18.05 | 10.74 | |||||||||||||||
| Full-service offices at end of period | 8 | 8 | 9 | 9 | 9 | |||||||||||||||
| Asset Quality Ratios | ||||||||||||||||||||
| Non-accrual loans as a percentage of total loans receivable | 0.40 | % | 0.49 | % | 1.24 | % | 4.09 | % | 4.71 | % | ||||||||||
| Nonperforming loans as a percent of total loans receivable | 0.70 | 0.84 | 1.97 | 4.98 | 5.59 | |||||||||||||||
| Nonperforming assets as a percent of total assets (2) | 0.82 | 1.35 | 1.67 | 3.63 | 4.17 | |||||||||||||||
| Allowance for loan losses as a percent of total loans receivable | 1.44 | 1.40 | 1.73 | 1.38 | 1.75 | |||||||||||||||
| Allowance for loan losses as a percent of nonperforming loans | 206.06 | 166.66 | 87.79 | 27.70 | 31.24 | |||||||||||||||
| Allowance for loan losses as a percent of non-accrual loans | 360.08 | 283.60 | 139.08 | 33.72 | 37.15 | |||||||||||||||
| Net charge-offs to average loans receivable outstanding during the period | 0.07 | 0.55 | 0.04 | 1.49 | 0.20 | |||||||||||||||
| Bank Capital Ratios | ||||||||||||||||||||
| Tier 1 leverage capital ratio | 14.39 | % | 13.25 | % | 12.76 | % | 12.85 | % | 10.83 | % | ||||||||||
| Tier 1 risk-based capital ratio | 21.94 | 20.87 | 23.43 | 21.85 | 16.13 | |||||||||||||||
| Total risk-based capital ratio | 23.19 | 22.12 | 24.69 | 23.10 | 17.38 | |||||||||||||||
| (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 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 eight banking offices, seven 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, 2014, Alliance Bancorp had $420.8 million of total assets, $344.8 million of total deposits and stockholders’ equity of $66.5 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.
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Our net income amounted to $2.6 million and $1.4 million for the years ended December 31, 2014 and 2013, respectively. The major factor that has impacted our results of operations in these periods has been the low interest rate environment. 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, 2014. The average rates that we pay on our interest-bearing deposits and other liabilities have fallen steadily, from 1.66% for the year ended December 31, 2010 to 0.68% for the year ended December 31, 2014. The average yield earned on interest-earning assets from our investment and loan portfolios have also fallen steadily, from 4.64% for the year ended December 31, 2010 to 3.94% for the year ended December 31, 2013. For the year ended December 31, 2014 the average yield on interest-earning assets increased to 4.19%. Despite the increase in 2014, 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.
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 collectability of loan principal is unlikely. Subsequent recoveries are added to the allowance. The allowance is an amount that management believes will cover known and inherent losses in the loan portfolio, based on evaluations of the collectability of loans. The evaluations take into consideration such factors as changes in the types and amount of loans in the loan portfolio, historical loss experience, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, estimated losses relating to specifically identified loans, and current economic conditions. This evaluation is inherently subjective as it requires material estimates including, among others, exposure at default, the amount and timing of expected future cash flows on impaired loans, value of collateral, estimated losses on our commercial and residential loan portfolios and general amounts for historical loss experience. All of these estimates may be susceptible to significant change. While management uses the best information available to make loan loss allowance evaluations, adjustments to the allowance may be necessary based on changes in economic and other conditions or changes in accounting guidance. Historically, our estimates of the allowance for loan losses have not required significant adjustments from management’s initial estimates. In addition, the Department and the FDIC, as an integral part of their examination processes, periodically review our allowance for loan losses. The Department and the FDIC may require the recognition of adjustments to the allowance for loan losses based on their judgment of information available to them at the time of their examinations. To the extent that actual outcomes differ from management’s estimates, additional provisions to the allowance for loan losses may be required that would adversely impact earnings in future periods.
Income Taxes. The Company 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 bases of assets and liabilities. The Company 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, the Company 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, the Company 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 the Company 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.
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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 the Company intend to sell or expects that it is more likely than not that the Company 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).
Financial Condition
The Company’s total assets decreased $4.7 million or 1.1% to $420.8 million at December 31, 2014, compared to $425.5 million at December 31, 2013. This decrease was attributed to a $5.3 million or 25.0% decrease in investment securities available for sale, a $3.4 million or 12.1% decrease in investment securities held to maturity, a $1.5 million or 32.4% decrease in mortgage-backed securities, a $1.9 million or 60.0% decrease in OREO, a $445,000 or 68.7% decrease in FHLB stock, a $372,000 or 6.6% decrease in deferred tax assets, a $122,000 or 6.0% decrease in premises and equipment, and a $121,000 or 7.8% decrease in prepaid and other assets. These decreases were partially offset by a $6.9 million or 2.3% increase in net loans, a $1.4 million or 3.1% increase in cash and cash equivalents, and a $280,000 or 2.2% increase in bank owned life insurance.
Total liabilities decreased $955,000 or 0.3% to $354.4 million at December 31, 2014, compared to $355.3 million at December 31, 2013. This decrease was primarily due to a $598,000 or 0.2% decrease in total deposits and a $519,000 or 15.1% decrease in other borrowings. These decreases were partially offset by a $162,000 or 2.5% increase in accrued expenses and other liabilities.
Stockholders’ equity decreased $3.7 million to $66.5 million as of December 31, 2014 compared to $70.2 million at December 31, 2013. The decrease can be attributed to a $6.8 million or 47.8% increase from the purchase of treasury stock. The decrease was partially offset by a $1.6 million or 5.0% increase in retained earnings, a $354,000 or 0.6% increase in additional paid in capital, a $418,000 or 22.3% decrease in accumulated other comprehensive loss, and a $708,000 or 24.0% decrease in common stock acquired by benefit plans.
Nonperforming assets decreased $2.3 million to $3.4 million or 0.82% of total assets at December 31, 2014 as compared to $5.7 million or 1.35% of total assets at December 31, 2013. The nonperforming assets at December 31, 2014 included $2.2 million in nonperforming loans and $1.2 million in OREO. The decrease in nonperforming assets was primarily due to a $1.9 million decrease in OREO and a $379,000 decrease in nonperforming loans. Overall, nonperforming loans included $1.1 million in single-family residential real estate loans, $849,000 in commercial real estate loans, and $235,000 in student loans, which are fully guaranteed by the U.S. Government. The Company continues to aggressively work towards the resolution of its nonperforming assets. The allowance for loan losses amounted to $4.5 million or 206.1% of nonperforming loans at December 31, 2014 as compared to $4.2 million or 166.7% at December 31, 2013.
Results of Operations
General. The Company recorded net income of $2.6 million for the year ended December 31, 2014 as compared to net income of $1.4 million for 2013. Net income increased $1.1 million or 81.5% to $2.6 million or $0.63 per diluted share for the year ended December 31, 2014 as compared to $1.4 million or $0.29 per diluted share for the same period in 2013.
The increase in net income was primarily due to a $278,000 or 1.7% increase in total interest and dividend income, a $203,000 or 8.3% decrease in interest expense, a $450,000 or 50.0% decrease in provision for loan losses, a $12,000 or 1.5% increase in other income, and a $469,000 or 4.0% decrease in other expenses. The items above were partially offset by a $265,000 or 34.9% increase in income tax expense for the year ended December 31, 2014 compared to the year ended December 31, 2013.
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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, | ||||||||||||||||||||||||||||||||||||
| 2014 | 2013 | 2012 | ||||||||||||||||||||||||||||||||||
| 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) | $ | 306,358 | $ | 15,574 | 5.08 | % | $ | 287,808 | $ | 15,205 | 5.28 | % | $ | 283,597 | $ | 15,616 | 5.51 | % | ||||||||||||||||||
| Mortgage-backed securities | 3,916 | 137 | 3.50 | 6,077 | 228 | 3.75 | 9,424 | 368 | 3.90 | |||||||||||||||||||||||||||
| Investment securities (3) | 48,418 | 1,078 | 2.23 | 44,341 | 983 | 2.22 | 44,739 | 1,174 | 2.62 | |||||||||||||||||||||||||||
| Other interest-earning assets | 44,271 | 101 | 0.23 | 83,580 | 196 | 0.23 | 106,815 | 251 | 0.23 | |||||||||||||||||||||||||||
| Total interest-earning assets | 402,963 | 16,890 | 4.19 | 421,806 | 16,612 | 3.94 | 444,575 | 17,409 | 3.92 | |||||||||||||||||||||||||||
| Noninterest-earning assets | 22,393 | 23,433 | 29,068 | |||||||||||||||||||||||||||||||||
| Total assets | $ | 425,356 | $ | 445,239 | $ | 473,643 | ||||||||||||||||||||||||||||||
| Interest-bearing liabilities: | ||||||||||||||||||||||||||||||||||||
| Deposits | $ | 330,711 | 2,251 | 0.68 | $ | 341,477 | 2,454 | 0.72 | $ | 366,381 | 3,202 | 0.87 | ||||||||||||||||||||||||
| Other borrowings | 2,645 | 5 | 0.19 | 2,867 | 6 | 0.17 | 3,032 | 8 | 0.26 | |||||||||||||||||||||||||||
| Total interest-bearing liabilities | 333,356 | 2,256 | 0.68 | 344,344 | 2,460 | 0.72 | 369,413 | 3,210 | 0.87 | |||||||||||||||||||||||||||
| Noninterest-bearing liabilities | 25,058 | 22,601 | 21,681 | |||||||||||||||||||||||||||||||||
| Total liabilities | 358,414 | 366,945 | 391,094 | |||||||||||||||||||||||||||||||||
| Stockholders’ equity | 66,942 | 78,294 | 82,549 | |||||||||||||||||||||||||||||||||
| Total liabilities and stockholders’ equity | $ | 425,356 | $ | 445,239 | $ | 473,643 | ||||||||||||||||||||||||||||||
| Net interest-earning assets | $ | 69,607 | $ | 77,462 | $ | 75,162 | ||||||||||||||||||||||||||||||
| Net interest income/interest rate spread | $ | 14,634 | 3.51 | % | $ | 14,152 | 3.22 | % | $ | 14,199 | 3.05 | % | ||||||||||||||||||||||||
| Net yield on interest- earning assets (2) (3) | 3.63 | % | 3.36 | % | 3.19 | % | ||||||||||||||||||||||||||||||
| Ratio of interest-earning assets to interest-bearing liabilities | 120.88 | % | 122.50 | % | 120.35 | % | ||||||||||||||||||||||||||||||
_____________________________
| (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, | ||||||||||||
| 2014 vs. 2013 | ||||||||||||
| Increase | ||||||||||||
| (Decrease) Due To | ||||||||||||
| Total | ||||||||||||
| Increase | ||||||||||||
| (Dollars in Thousands) | Rate | Volume | (Decrease) | |||||||||
| Interest-earning assets: | ||||||||||||
| Loans receivable | $ | (663 | ) | $ | 1,032 | $ | 369 | |||||
| Mortgage-backed securities | (11 | ) | (80 | ) | (91 | ) | ||||||
| Investment securities | 5 | 90 | 95 | |||||||||
| Other interest-earning assets | (3 | ) | (92 | ) | (95 | ) | ||||||
| Total interest-earning assets | (672 | ) | 950 | 278 | ||||||||
| Interest-bearing liabilities: | ||||||||||||
| Deposits | (129 | ) | (74 | ) | (203 | ) | ||||||
| FHLB advances and other borrowings | — | (1 | ) | (1 | ) | |||||||
| Total interest-bearing liabilities | (129 | ) | (75 | ) | (204 | ) | ||||||
| Increase (decrease) in net interest income | $ | (543 | ) | $ | 1,025 | $ | 482 | |||||
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 increased $482,000 or 3.4% during 2014 as compared to 2013. The increase in net interest income was primarily due to a $278,000 or 1.7% increase in interest income on interest earning assets and a $204,000 or 8.3% decrease in interest expense on interest bearing liabilities. Overall, the interest rate spread increased 29 basis points (one basis point is equal to 1/100 of a percent) from 3.22% for the year ended December 31, 2013 to 3.51% for the year ended December 31, 2014.
Interest and Dividend Income. Interest income increased $278,000 or 1.7% to $16.9 million for the year ended December 31, 2014, compared to 2013. The increase was primarily due to a $369,000 or 2.4% increase in interest income earned on loans and a $95,000 or 9.7% increase in interest income on investment securities. The increase in interest income was partially offset by a $91,000 or 40.0% decrease in interest income earned on mortgage backed securities and a $95,000 or 48.7% decrease in interest income on balances due from depository institutions.
The increase in interest income on loans was primarily due to an $18.6 million or 6.5% increase in the average balance of loans outstanding, partially off-set by a 20 basis point or 3.8% decrease in the average yield earned on loans. The increase in interest income on investment securities was primarily due to a $4.1 million or 9.2% increase in the average balance of investment securities and a 1 basis point or 0.5% increase in the average yield earned on investment securities. The decrease in interest income on mortgage backed securities was primarily due to a $2.2 million or 35.6% decrease in the average balance of mortgage backed securities and a 25 basis point or 6.7% decrease in the average yield earned on mortgage backed securities. The decrease in interest due from depository institutions was due to a $39.3 million or 47.0% decrease in the average balance of balances due from depository institutions.
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Interest Expense. Interest expense decreased $204,000 or 8.3% in 2014 compared to 2013. This decrease was due to a decrease of $203,000 or 8.3% in interest expense on deposits and a decrease of $1,000 or 16.7% in interest expense on other borrowings. The decrease in interest expense on deposits was due to a $10.8 million or 3.2% decrease in the average balance of deposits and a 4 basis point or 5.6% decrease in the average rate paid on deposits. The decrease in interest expense on other borrowings was due to a $222,000 or 7.7% decrease in the average balance outstanding, partially off-set by a 2 basis point or 11.8% increase 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 collectability of the Company’s loan portfolio. The provision for loan losses amounted to $450,000 and $900,000 for the years ended December 31, 2014 and 2013, respectively.
Other Income. Total other income increased $12,000 or 1.5% to $789,000 for the year ended December 31, 2014, compared to 2013. The increase was primarily the result of an $8,000 or 3.2% increase income from services charges on deposit accounts, a $13,000 or 6.6% increase in other fee income, and an $11,000 gain on the sale of premises and equipment. The increase in other income was partially off-set by a $5,000 or 53.1% decrease in the gain on the sale of OREO and a $17,000 or 5.6% decrease in the cash surrender value of bank owned life insurance.
Other Expenses. Total other expenses decreased $469,000 or 4.0% to $11.4 million for the year ended December 31, 2014 compared to $11.9 million for the year ended December 31, 2013. The decrease was primarily due to a $206,000 or 3.0% decrease in salary and employee benefits, a $67,000 or 3.6% decrease in occupancy and equipment expense, a $127,000 or 33.2% decrease in advertising and marketing expense, an $187,000 or 24.3% decrease in professional fees, and a $26,000 or 8.7% decrease in FDIC deposit insurance premiums. These decreases were partially offset by a $74,000 or 61.9% increase in loan and OREO expense and a $73,000 or 6.4% increase in other expense.
Income Tax Expense. Income tax expense amounted to $1.0 million and $760,000 for the years ended December 31, 2014 and 2013, respectively, resulting in effective tax rates of 28.6% and 35.1%, respectively. The increase in income tax expense was primarily due to a higher amount of income before income taxes.
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, 2014, the Company had no outstanding FHLB advances and $181.0 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, 2014, the Company had no such funds outstanding from the Federal Reserve Bank.
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, 2014, the total approved loan commitments outstanding amounted to $5.5 million. At the same date, commitments under unused lines of credit amounted to $36.6 million. Certificates of deposit scheduled to mature in one year or less at December 31, 2014, totaled $110.9 million. Based on historical data, management believes that a significant portion of maturing deposits will remain with the Company. Investment and mortgage-backed securities totaled $44.1 million at December 31, 2014, of which $14.8 million 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.
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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, 2014.
(Dollars in Thousands)
| Total stockholder’s equity or GAAP capital (Bank) | $ | 62,406 | ||
| FDIC adjustment for securities available-for-sale | (137 | ) | ||
| FDIC adjustment for retirement plans | 1,594 | |||
| FDIC adjustment for deferred tax assets | (3,711 | ) | ||
| FDIC tier 1 capital | 60,152 | |||
| Plus: FDIC tier 2 capital (1) | 3,441 | |||
| Total FDIC risk-based capital | $ | 63,593 | ||
| FDIC quarterly average total assets for leverage ratio | $ | 418,116 | ||
| FDIC net risk-weighted assets | 274,227 | |||
| FDIC leverage capital ratio | 14.39 | % | ||
| Minimum requirement (2) | 4.00% to 5.00 | % | ||
| FDIC risk-based capital - tier 1 | 21.94 | % | ||
| Minimum requirement | 4.00 | % | ||
| FDIC total risk-based capital (tier 1 & 2) | 23.19 | % | ||
| 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, 2014, 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, 2014.
| 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 | $ | 2,918 | $ | — | $ | — | $ | — | $ | 2,918 | ||||||||||
| Certificates of deposit | 110,879 | 75,154 | 6,267 | 1,720 | 194,020 | |||||||||||||||
| Retirement plan obligations | 364 | 2,707 | 1,961 | 4,050 | 9,082 | |||||||||||||||
| Operating lease obligations | 476 | 790 | 796 | 1,599 | 3,661 | |||||||||||||||
| Total contractual obligations | $ | 114,637 | $ | 78,651 | $ | 9,024 | $ | 7,369 | $ | 209,681 | ||||||||||
Based on historical data, management believes that a significant portion of maturing deposits will remain with the Company. In the event the maturing deposits do not remain with the Company, its liquidity policy provides for additional liquidity sources which include Federal Home Loan Bank Advances, the sale of available for sale securities, the sale of mortgage loans, securities repurchase agreements, the utilization of loan participations, marketing campaigns for new deposits, brokered deposits, and overnight funds.
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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, | ||||||||
| 2014 | 2013 | |||||||
| (Dollars in thousands) | ||||||||
| Commitments to extend credit:(1) | ||||||||
| Future loan commitments | $ | 5,531 | $ | 3,067 | ||||
| Undisbursed construction loans | 18,053 | 14,248 | ||||||
| Undisbursed home equity lines of credit | 4,703 | 4,260 | ||||||
| Undisbursed commercial lines of credit | 13,712 | 11,270 | ||||||
| Overdraft protection lines | 176 | 184 | ||||||
| Standby letters of credit | 1,134 | 1,512 | ||||||
| Total Commitments | $ | 43,309 | $ | 34,541 | ||||
| (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, 2014 was a negative 21.1% primarily due to the $110.9 million of certificate accounts which mature during the one year period subsequent to December 31, 2014. Based on historical data, management believes that a significant portion of maturing deposits will remain with the Company. In the event the maturing deposits do not remain with the Company, its liquidity policy provides for additional liquidity sources which include Federal Home Loan Bank Advances, the sale of available for sale securities, the sale of mortgage loans, securities repurchase agreements, the utilization of loan participations, marketing campaigns for new deposits, brokered deposits, and overnight funds.
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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.
The following table summarizes the anticipated maturities or repricing of Alliance Bank’s interest-earning assets and interest-bearing liabilities as of December 31, 2014 based on the information and assumptions set forth in the footnotes below (the “GAP Table”).
| 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) | $ | 56,532 | $ | 30,718 | $ | 46,451 | $ | 145,541 | $ | 30,496 | $ | 309,738 | ||||||||||||
| Mortgage-backed securities(2) | 1,598 | 98 | 667 | — | 814 | 3,177 | ||||||||||||||||||
| Investment securities(3) | 13,161 | 3,189 | 7,616 | 11,759 | 5,198 | 40,923 | ||||||||||||||||||
| Other interest-earning assets | 46,633 | — | — | — | — | 46,633 | ||||||||||||||||||
| Total interest-earning assets | 117,924 | 34,005 | 54,734 | 157,300 | 36,508 | 400,471 | ||||||||||||||||||
| Interest-bearing liabilities | ||||||||||||||||||||||||
| Savings accounts(4) | 10,307 | 10,307 | 10,308 | 10,308 | 10,308 | 51,538 | ||||||||||||||||||
| NOW accounts | 56,438 | — | — | — | — | 56,438 | ||||||||||||||||||
| Money market deposit accounts | 24,427 | — | — | — | — | 24,427 | ||||||||||||||||||
| Certificate accounts | 110,879 | 75,154 | 6,267 | 1,720 | — | 194,020 | ||||||||||||||||||
| Borrowed money | 4,501 | — | — | — | — | 4,501 | ||||||||||||||||||
| Total interest-bearing liabilities | 206,552 | 85,461 | 16,575 | 12,028 | 10,308 | 330,924 | ||||||||||||||||||
| Repricing GAP during the period | (88,628 | ) | (51,456 | ) | 38,159 | 145,272 | 26,200 | 69,547 | ||||||||||||||||
| Cumulative GAP | $ | (88,628 | ) | $ | (140,084 | ) | $ | (101,925 | ) | $ | 43,347 | $ | 69,547 | |||||||||||
| Ratio of GAP during the period to total assets | (21.1 | )% | (12.2 | )% | 9.1 | % | 34.5 | % | 6.2 | % | ||||||||||||||
| Ratio of cumulative GAP to total assets | (21.1 | )% | (33.3 | )% | (24.2 | )% | 10.3 | % | 16.5 | % | ||||||||||||||
| (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 $1.2 million for nonaccrual loans at December 31, 2014. |
| (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 $51.5 million at December 31, 2014, 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.
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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.
The table below sets forth as of December 31, 2014, 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, 2014 | ||||||||||||
| Change in Interest Rates (Basis Points)(1) | Amount | Dollar Change from Base | Percentage Change from Base | |||||||||
| (Dollars in thousands) | ||||||||||||
| +300 | $ | 53,827 | $ | (12,241 | ) | (18.5 | )% | |||||
| +200 | 58,506 | (7,562 | ) | (11.4 | ) | |||||||
| +100 | 62,780 | (3,288 | ) | (5.0 | ) | |||||||
| Flat | 66,068 | — | — | |||||||||
| -100 | 62,581 | (3,487 | ) | (5.3 | ) | |||||||
| -200 | 60,388 | (5,680 | ) | (8.6 | ) | |||||||
| (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, 2014.
| Change in Interest Rates in Basis Points (Rate Shock) | Net Interest Income | $ Change | % Change | |||||||||
| (Dollars in thousands) | ||||||||||||
| +300 | $ | 13,706 | $ | (748 | ) | (5.2 | )% | |||||
| +200 | 14,006 | (488 | ) | (3.1 | ) | |||||||
| +100 | 14,255 | (199 | ) | (1.4 | ) | |||||||
| Flat | 14,454 | — | — | |||||||||
| -100 | 14,978 | 524 | 3.6 | |||||||||
| -200 | 14,983 | 529 | 3.7 | |||||||||
The above table indicates that as of December 31, 2014, 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, 2015 would be expected to decrease by $488,000 or 3.1% 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.
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Recent Accounting Pronouncements
In January 2014, the FASB issued ASU No. 2014-04, "Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure." The objective of this guidance is to clarify when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. ASU No. 2014-04 states that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, ASU No. 2014-04 requires interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. ASU No. 2014-04 is effective for interim and annual reporting periods beginning after December 15, 2014. The adoption of ASU No. 2014-04 is not expected to have a material impact on the Company's consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (a new revenue recognition standard). The Update’s core principle is that a company will recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, this update specifies the accounting for certain costs to obtain or fulfill a contract with a customer and expands disclosure requirements for revenue recognition. This ASU is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The Company is evaluating the effect of adopting this new accounting Update.
In June 2014, the FASB issued ASU 2014-10, Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. The amendments in this Update change the accounting for repurchase-to-maturity transactions to secured borrowing accounting. For repurchase financing arrangements, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which will result in secured borrowing accounting for the repurchase agreement. The amendments also require enhanced disclosures. The accounting changes in this Update are effective for the first interim or annual period beginning after December 15, 2014. An entity is required to present changes in accounting for transactions outstanding on the effective date as a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. Earlier application is prohibited. The disclosure for certain transactions accounted for as a sale is required to be presented for interim and annual periods beginning after December 15, 2014, and the disclosure for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions accounted for as secured borrowings is required to be presented for annual periods beginning after December 15, 2014, and for interim periods beginning after March 15, 2015. The disclosures are not required to be presented for comparative periods before the effective date. This ASU is not expected to have a significant impact on the Company’s consolidated financial statements.
In August 2014, the FASB issued ASU 2014-14, Receivables–Troubled Debt Restructurings by Creditors (Subtopic 310-40). The amendments in this Update require that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met: (1) the loan has a government guarantee that is not separable from the loan before foreclosure, (2) at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim, and (3) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. The amendments in this Update are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. This ASU is not expected to have a significant impact on the Company’s consolidated financial statements.
In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40). The amendments in this Update provide guidance in accounting principles generally accepted in the United States of America about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The amendments in this ASU are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. This ASU is not expected to have a significant impact on the Company’s consolidated financial statements.
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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.”
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Item 8. Financial Statements and Supplementary Data.
 |
Tel: 215-564-1900 Fax: 215-564-3940 www.bdo.com |
1801 Market Street, Suite 700 Ten Penn Center Philadelphia, PA 19103 |
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Alliance Bancorp, Inc. of Pennsylvania
Broomall, Pennsylvania
We have audited the accompanying consolidated statements of financial condition of Alliance Bancorp, Inc. of Pennsylvania and its subsidiaries (collectively the “Company”) as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our 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 also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 its subsidiaries at December 31, 2014 and 2013, 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/ BDO USA, LLP
Philadelphia, Pennsylvania
March 25, 2015
BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.
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Alliance Bancorp, Inc. of Pennsylvania and Subsidiaries
Consolidated Statements of Financial Condition
| December 31, | December 31, | |||||||
| 2014 | 2013 | |||||||
| Assets | ||||||||
| Cash and cash due from depository institutions | $ | 1,360,506 | $ | 1,529,727 | ||||
| Interest bearing deposits with depository institutions | 45,272,420 | 43,694,283 | ||||||
| Total cash and cash equivalents | 46,632,926 | 45,224,010 | ||||||
| Investment securities available for sale | 15,995,700 | 21,321,240 | ||||||
| Mortgage-backed securities available for sale | 3,177,497 | 4,698,480 | ||||||
| Investment securities held to maturity (fair value - 2014, $25,587,126; 2013, $28,402,334) | 24,926,782 | 28,357,846 | ||||||
| Loans receivable - net of allowance for loan losses - 2014, $4,464,992; 2013, $4,242,600 | 305,778,982 | 298,877,281 | ||||||
| Accrued interest receivable | 1,455,308 | 1,465,235 | ||||||
| Premises and equipment – net | 1,914,065 | 2,036,033 | ||||||
| Other real estate owned (OREO) | 1,275,000 | 3,190,900 | ||||||
| Federal Home Loan Bank (FHLB) stock-at cost | 202,500 | 647,000 | ||||||
| Bank owned life insurance | 12,731,020 | 12,451,196 | ||||||
| Deferred tax asset – net | 5,301,074 | 5,673,376 | ||||||
| Other prepaid expenses and assets | 1,438,401 | 1,559,373 | ||||||
| Total Assets | $ | 420,829,255 | $ | 425,501,970 | ||||
| Liabilities and Stockholders’ Equity | ||||||||
| Liabilities | ||||||||
| Non-interest bearing deposits | $ | 18,356,657 | $ | 16,408,743 | ||||
| Interest bearing deposits | 326,423,101 | 328,969,454 | ||||||
| Total deposits | 344,779,758 | 345,378,197 | ||||||
| Other borrowings | 2,917,933 | 3,436,766 | ||||||
| Accrued expenses and other liabilities | 6,681,024 | 6,518,484 | ||||||
| Total Liabilities | 354,378,715 | 355,333,447 | ||||||
| Commitments and Contingencies (Note 10) | ||||||||
| Stockholders’ Equity | ||||||||
| Common stock, $.01 par value; shares authorized – 50,000,000 shares issued - 5,474,437; shares outstanding - 2014, 4,026,699; 2013, 4,467,304 | 54,747 | 54,747 | ||||||
| Additional paid-in capital | 56,939,352 | 56,585,226 | ||||||
| Retained earnings | 34,318,241 | 32,673,120 | ||||||
| Common stock acquired by benefit plans | (2,248,846 | ) | (2,957,306 | ) | ||||
| Accumulated other comprehensive loss | (1,457,014 | ) | (1,874,695 | ) | ||||
| Treasury stock, at cost: 2014, 1,447,738 shares; 2013, 1,007,133 shares | (21,155,940 | ) | (14,312,569 | ) | ||||
| Total Stockholders’ Equity | 66,450,540 | 70,168,523 | ||||||
| Total Liabilities and Stockholders’ Equity | $ | 420,829,255 | $ | 425,501,970 | ||||
See notes to consolidated financial statements.
| 54 |
Alliance Bancorp, Inc. of Pennsylvania and Subsidiaries
Consolidated Statements of Income
| Years Ended December 31, | ||||||||
| 2014 | 2013 | |||||||
| Interest and Dividend Income | ||||||||
| Loans, including fees | $ | 15,574,221 | $ | 15,204,664 | ||||
| Mortgage-backed securities | 137,227 | 227,821 | ||||||
| Investment securities: | ||||||||
| Taxable | 276,630 | 150,773 | ||||||
| Tax – exempt | 776,496 | 825,112 | ||||||
| Dividends | 24,630 | 6,907 | ||||||
| Balances due from depository institutions | 100,797 | 196,443 | ||||||
| Total interest and dividend income | 16,890,001 | 16,611,720 | ||||||
| Interest Expense | ||||||||
| Deposits | 2,251,122 | 2,453,245 | ||||||
| Other borrowings | 5,280 | 6,185 | ||||||
| Total interest expense | 2,256,402 | 2,459,430 | ||||||
| Net Interest Income | 14,633,599 | 14,152,290 | ||||||
| Provision for Loan Losses | 450,000 | 900,000 | ||||||
| Net Interest Income After Provision for Loan Losses | 14,183,599 | 13,252,290 | ||||||
| Other Income | ||||||||
| Service charges on deposit accounts | 258,741 | 250,605 | ||||||
| Other fee income | 205,140 | 192,509 | ||||||
| Gain on sale of OREO, net | 4,107 | 8,763 | ||||||
| Increase in cash surrender value of bank owned life insurance | 279,824 | 296,513 | ||||||
| Rental income from OREO | 28,100 | 28,172 | ||||||
| Gain on sale of premise and equipment | 10,847 | — | ||||||
| Other | 2,312 | 540 | ||||||
| Total other income | 789,071 | 777,102 | ||||||
| Other Expenses | ||||||||
| Salaries and employee benefits | 6,738,766 | 6,944,570 | ||||||
| Occupancy and equipment | 1,796,607 | 1,863,621 | ||||||
| FDIC deposit insurance premiums | 273,269 | 299,377 | ||||||
| Advertising and marketing | 256,596 | 383,908 | ||||||
| Professional fees | 582,859 | 770,121 | ||||||
| Loan and OREO expense | 193,754 | 119,678 | ||||||
| Directors’ fees | 229,200 | 230,650 | ||||||
| Provision for loss on OREO | 117,000 | 117,780 | ||||||
| Other | 1,204,735 | 1,131,771 | ||||||
| Total other expenses | 11,392,786 | 11,861,476 | ||||||
| Income Before Income Tax Expense | 3,579,884 | 2,167,916 | ||||||
| Income Tax Expense | 1,025,000 | 760,000 | ||||||
| Net Income | $ | 2,554,884 | $ | 1,407,916 | ||||
| Basic Earnings per Share | $ | 0.64 | $ | 0.29 | ||||
| Dilutive Earnings per Share | $ | 0.63 | $ | 0.29 | ||||
See notes to consolidated financial statements.
| 55 |
Alliance Bancorp, Inc. of Pennsylvania and Subsidiaries
Consolidated Statements of Comprehensive Income
| Years Ended December 31, | ||||||||
| 2014 | 2013 | |||||||
| Net Income | $ | 2,554,884 | $ | 1,407,916 | ||||
| Other Comprehensive Income (Loss) | ||||||||
| Additional minimum liability for Retirement Plans-net of tax benefit - 2014, $14,713; 2013, $201,180; | 28,555 | 390,528 | ||||||
| Unrealized gain (loss) on securities net of tax expense (benefit) 2014, $200,458; 2013, $(303,839) | 389,126 | (589,804 | ) | |||||
| Total Other Comprehensive Income (Loss) | 417,681 | (199,276 | ) | |||||
| Comprehensive Income | $ | 2,972,565 | $ | 1,208,640 | ||||
See notes to consolidated financial statements.
| 56 |
Alliance Bancorp, Inc. of Pennsylvania and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
Years Ended December 31, 2014 and 2013
| Common Stock | Additional
Paid-in Capital | Retained Earnings | Common Stock Acquired by Benefit Plans | Accumulated
Other Comprehensive Loss | Treasury Stock | Total Stockholders’ Equity | ||||||||||||||||||||||
| Balance, January 1, 2013 | $ | 54,747 | $ | 56,342,788 | $ | 32,273,617 | $ | (3,561,708 | ) | $ | (1,675,419 | ) | $ | (3,431,739 | ) | $ | 80,002,286 | |||||||||||
| Tax adjustment for benefit plans | 75,000 | 75,000 | ||||||||||||||||||||||||||
| ESOP shares committed to be released | 153,600 | 153,600 | ||||||||||||||||||||||||||
| Net income | 1,407,916 | 1,407,916 | ||||||||||||||||||||||||||
| Dividends declared ($0.20 per share) | (1,008,413 | ) | (1,008,413 | ) | ||||||||||||||||||||||||
| Stock-based compensation (stock options) | 167,438 | 167,438 | ||||||||||||||||||||||||||
| Stock-based compensation (restricted stock) | 450,802 | 450,802 | ||||||||||||||||||||||||||
| Acquisition of treasury stock (734,430 shares) | (10,880,830 | ) | (10,880,830 | ) | ||||||||||||||||||||||||
| Other comprehensive loss | (199,276 | ) | (199,276 | ) | ||||||||||||||||||||||||
| Balance, December 31, 2013 | $ | 54,747 | $ | 56,585,226 | $ | 32,673,120 | $ | (2,957,306 | ) | $ | (1,874,695 | ) | $ | (14,312,569 | ) | $ | 70,168,523 | |||||||||||
| Tax adjustment for benefit plans | 144,000 | 144,000 | ||||||||||||||||||||||||||
| ESOP shares committed to be released | 176,918 | 176,918 | ||||||||||||||||||||||||||
| Net income | 2,554,884 | 2,554,884 | ||||||||||||||||||||||||||
| Dividends declared ($0.22 per share) | (909,763 | ) | (909,763 | ) | ||||||||||||||||||||||||
| Stock-based compensation (stock options) | 210,126 | 210,126 | ||||||||||||||||||||||||||
| Stock-based compensation (restricted stock) | 531,542 | 531,542 | ||||||||||||||||||||||||||
| Acquisition of treasury stock (440,605 shares) | (6,843,371 | ) | (6,843,371 | ) | ||||||||||||||||||||||||
| Other comprehensive income | 417,681 | 417,681 | ||||||||||||||||||||||||||
| Balance, December 31, 2014 | $ | 54,747 | $ | 56,939,352 | $ | 34,318,241 | $ | (2,248,846 | ) | $ | (1,457,014 | ) | $ | (21,155,940 | ) | $ | 66,450,540 | |||||||||||
See notes to consolidated financial statements.
| 57 |
Alliance Bancorp, Inc. of Pennsylvania and Subsidiaries
Consolidated Statements of Cash Flows
| Years Ended December 31, | ||||||||
| 2014 | 2013 | |||||||
| Cash Flow From Operating Activities | ||||||||
| Net income | $ | 2,554,884 | $ | 1,407,916 | ||||
| Adjustments to reconcile net income to cash provided by operating activities: | ||||||||
| Provision for: | ||||||||
| Loan losses | 450,000 | 900,000 | ||||||
| Depreciation and amortization | 479,533 | 600,456 | ||||||
| Write down of OREO | 117,000 | 117,780 | ||||||
| Stock-based compensation expense | 1,062,586 | 846,840 | ||||||
| Deferred tax expense | 157,131 | 480,000 | ||||||
| Gain on the sale of premises and equipment | (10,847 | ) | — | |||||
| Gain on the sale of OREO | (4,107 | ) | (8,763 | ) | ||||
| Changes in assets and liabilities which provided (used) cash: | ||||||||
| Accrued expenses and other liabilities | 205,808 | (172,259 | ) | |||||
| Prepaid expenses and other assets | 120,972 | 499,726 | ||||||
| Increase in cash surrender value of bank owned life insurance | (279,824 | ) | (296,513 | ) | ||||
| Accrued interest receivable | 9,927 | 37,157 | ||||||
| Net cash provided by operating activities | 4,863,063 | 4,412,340 | ||||||
| Cash Flow From Investing Activities | ||||||||
| Purchase of investment securities-available for sale | (12,000,000 | ) | (26,000,000 | ) | ||||
| Purchase of investment securities-held to maturity | (530,000 | ) | (4,845,000 | ) | ||||
| Loans originated and acquired | (59,330,157 | ) | (85,267,469 | ) | ||||
| Proceeds from maturities and calls of investment securities | 21,961,064 | 14,812,314 | ||||||
| Redemption of FHLB stock | 444,500 | 691,100 | ||||||
| Principal repayments of: | ||||||||
| Loans | 51,735,456 | 61,981,279 | ||||||
| Mortgage-backed securities | 1,436,107 | 2,610,308 | ||||||
| Purchase of premises and equipment | (367,718 | ) | (325,911 | ) | ||||
| Proceeds from the sale of premises and equipment | 21,000 | 1,044,890 | ||||||
| Proceeds from the sale of OREO | 2,046,007 | 1,176,763 | ||||||
| Net cash provided by (used in) investing activities | 5,416,259 | (34,121,726 | ) | |||||
| Cash Flow From Financing Activities | ||||||||
| Dividends paid | (909,763 | ) | (1,008,413 | ) | ||||
| Decrease in deposits | (598,439 | ) | (25,658,530 | ) | ||||
| Purchase of treasury stock | (6,843,371 | ) | (10,880,830 | ) | ||||
| (Decrease) increase in other borrowings | (518,833 | ) | 176,233 | |||||
| Net cash used in financing activities | (8,870,406 | ) | (37,371,540 | ) | ||||
| Increase (Decrease) in Cash and Cash Equivalents | 1,408,916 | (67,080,926 | ) | |||||
| Cash and Cash Equivalents, Beginning of Year | 45,224,010 | 112,304,936 | ||||||
| Cash and Cash Equivalents, End of Year | $ | 46,632,926 | $ | 45,224,010 | ||||
| Supplemental Disclosures of Cash Flow Information- | ||||||||
| Cash paid during the period for: | ||||||||
| Interest | $ | 2,256,581 | $ | 2,459,248 | ||||
| Income taxes | $ | 400,000 | $ | 296,606 | ||||
| Supplemental Schedule of Noncash Financing and Investing Activities: | ||||||||
| Other real estate acquired in settlement of loans | $ | 243,000 | $ | 2,384,900 | ||||
| Deferred gain on sale of premises and equipment | $ | — | $ | 667,174 | ||||
See notes to consolidated financial statements.
| 58 |
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 eight banking offices located in Delaware and Chester Counties, which are suburbs of Philadelphia. The Bank is primarily engaged in attracting deposits from the general public through its branch offices and using such deposits primarily to (i) originate and purchase loans secured by first liens on single-family (one-to-four units) residential and commercial real estate properties and (ii) invest in securities issued by the U.S. Government and agencies thereof, municipal and corporate debt securities and certain mutual funds. The Bank derives its income principally from interest earned on loans, mortgage-backed securities and investments and, to a lesser extent, from fees received in connection with the origination of loans and for other services. The Bank's primary expenses are interest expense on deposits and borrowings and general operating expenses.
The Bank is subject to regulation by the Pennsylvania Department of Banking and Securities (the "Department"), as its chartering authority and primary regulator, and by the Federal Deposit Insurance Corporation (the "FDIC"), which insures the Bank's deposits up to applicable limits. 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, 2014, for items that should potentially be recognized or disclosed in these consolidated financial statements. The evaluation was conducted through the date these consolidated financial statements were issued.
2. 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, 2014 and 2013, there were no and seven properties held by 908 Hyatt Street LLC, respectively.
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 valuation of deferred tax assets, liability and expense of employee benefit obligations, and evaluation of securities for other than temporary impairment.
| 59 |
Segment Information – The Company has one reportable segment. 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, 2014 and 2013, 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 maturities of 90 days or less, with depository institutions. As of December 31, 2014 and 2013, the Bank’s minimum required reserve balance with the Federal Reserve Bank was approximately $745,000 and $770,000, 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.
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).
Federal Home Loan Bank Stock- FHLB Stock, which represents the required investment in the common stock of a correspondent bank, is carried at cost.
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.
| 60 |
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. |
| 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.
| 61 |
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.
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 multi-family, commercial, and land and construction loans secured by real estate, and commercial business 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.
| 62 |
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 individual single-family loans secured by real estate and consumer 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.
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.
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 of the policy cash surrender value 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 betterments 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 basis 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.
| 63 |
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. As of December 31, 2014, the Company believes it has no uncertain tax positions.
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, 2010 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 $98,000 and $75,000 for 2014, and 2013, respectively.
The Company maintains a Retirement Income Plan (“RIP”) which was curtailed as of December 31, 2014. The prepaid funded status for the RIP included in other assets was $599,000 and $99,000 at December 31, 2014 and 2013, respectively. The expense associated with the RIP for the years ended December 31, 2014, and 2013 was $210,000, and $289,000, respectively
The Company also maintains a Supplemental Executive Retirement Plan (“SERP”). The accrued amount for the SERP included in other liabilities was $4.0 million and $4.0 million at December 31, 2014 and 2013, respectively. The expense associated with the SERP for the years ended December 31, 2014, and 2013 was $226,000, and $288,000, respectively
Advertising Costs- The Company follows the policy of charging the costs of advertising to expense as incurred. Advertising costs were approximately $257,000 and $384,000 for the years ended December 31, 2014 and December 31, 2013, 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. CSEs for which the grant price exceeds the average market price over the period have an anti-dilutive effect on EPS, and, accordingly, are excluded from the calculation. There were 32,800 and 48,000 anti-dilutive CSEs at December 31, 2014 and December 31, 2013, respectively.
| 64 |
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, | ||||||||
| 2014 | 2013 | |||||||
| Net Income | $ | 2,554,884 | $ | 1,407,916 | ||||
| Weighted average shares outstanding | 4,132,196 | 5,009,281 | ||||||
| Adjusted average unearned ESOP shares | (141,694 | ) | (155,635 | ) | ||||
| Weighted average shares outstanding – basic | 3,990,502 | 4,853,646 | ||||||
| Effect of dilutive common stock equivalents | 66,463 | 23,597 | ||||||
| Adjusted weighted average shares outstanding-dilutive | 4,056,965 | 4,877,243 | ||||||
| Basic earnings per share | $ | 0.64 | $ | 0.29 | ||||
| Dilutive earnings per share | $ | 0.63 | $ | 0.29 | ||||
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, net of income tax benefits, are as follows:
| December 31, | December 31, | |||||||
| 2014 | 2013 | |||||||
| Net unrealized gain (loss) on available for sale securities | $ | 136,295 | $ | (252,831 | ) | |||
| Net unrealized loss on retirement plans | (1,593,309 | ) | (1,621,864 | ) | ||||
| Total accumulated other comprehensive loss | $ | (1,457,014 | ) | $ | (1,874,695 | ) | ||
Recent Accounting Pronouncements – In January 2014, the FASB issued ASU No. 2014-04, "Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure." The objective of this guidance is to clarify when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. ASU No. 2014-04 states that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, ASU No. 2014-04 requires interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. ASU No. 2014-04 is effective for interim and annual reporting periods beginning after December 15, 2014. The adoption of ASU No. 2014-04 is not expected to have a material impact on the Company's consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 660): Summary and Amendments that Create Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs—Contracts with Customers (Subtopic 340-40). The guidance in this update supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and most industry-specific guidance throughout the industry topics of the codification. For public companies, this update will be effective for interim and annual periods beginning after December 15, 2016. The Company is currently assessing the impact that this guidance will have on its consolidated financial statements, but does not expect the guidance to have a material impact on the Company's consolidated financial statements.
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In June 2014, the FASB issued ASU 2014-10, Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. The amendments in this Update change the accounting for repurchase-to-maturity transactions to secured borrowing accounting. For repurchase financing arrangements, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which will result in secured borrowing accounting for the repurchase agreement. The amendments also require enhanced disclosures. The accounting changes in this Update are effective for the first interim or annual period beginning after December 15, 2014. An entity is required to present changes in accounting for transactions outstanding on the effective date as a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. Earlier application is prohibited. The disclosure for certain transactions accounted for as a sale is required to be presented for interim and annual periods beginning after December 15, 2014, and the disclosure for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions accounted for as secured borrowings is required to be presented for annual periods beginning after December 15, 2014, and for interim periods beginning after March 15, 2015. The disclosures are not required to be presented for comparative periods before the effective date. This ASU is not expected to have a significant impact on the Company’s consolidated financial statements.
In August 2014, the FASB issued ASU 2014-14, Receivables–Troubled Debt Restructurings by Creditors (Subtopic 310-40). The amendments in this Update require that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met: (1) the loan has a government guarantee that is not separable from the loan before foreclosure, (2) at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim, and (3) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. The amendments in this Update are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. This ASU is not expected to have a significant impact on the Company’s consolidated financial statements.
In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40). The amendments in this Update provide guidance in accounting principles generally accepted in the United States of America about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The amendments in this ASU are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. This ASU is not expected to have a significant impact on the Company’s consolidated 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, 2014 | ||||||||||||||||
| Amortized | Gross Unrealized | Fair | ||||||||||||||
| Available for Sale: | Cost | Gains | Losses | Value | ||||||||||||
| Obligations of Federal Home Loan Bank: | ||||||||||||||||
| Due after 1 year through 5 years | $ | 3,000,000 | $ | 2,420 | $ | (7,550 | ) | $ | 2,994,870 | |||||||
| Due after 5 years through 10 years | 3,000,000 | 80 | (6,320 | ) | 2,993,760 | |||||||||||
| Due after 10 years | 4,000,000 | 5,160 | (680 | ) | 4,004,480 | |||||||||||
| Total | $ | 10,000,000 | $ | 7,660 | $ | (14,550 | ) | $ | 9,993,110 | |||||||
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| December 31, 2014 | ||||||||||||||||
| Amortized | Gross Unrealized | Fair | ||||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
| Obligations of FHLMC: | ||||||||||||||||
| Due after 1 year through 5 years | $ | 2,000,000 | $ | — | $ | (4,820 | ) | $ | 1,995,180 | |||||||
| Total | $ | 2,000,000 | $ | — | $ | (4,820 | ) | $ | 1,995,180 | |||||||
| December 31, 2014 | ||||||||||||||||
| Amortized | Gross Unrealized | Fair | ||||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
| Obligations of Fannie Mae: | ||||||||||||||||
| Due after 1 year through 5 years | $ | 1,000,000 | $ | 450 | $ | — | $ | 1,000,450 | ||||||||
| Due after 10 years | 3,000,000 | 6,960 | — | 3,006,960 | ||||||||||||
| Total | $ | 4,000,000 | $ | 7,410 | $ | — | $ | 4,007,410 | ||||||||
| Total Investment Securities Available for Sale | $ | 16,000,000 | $ | 15,070 | $ | (19,370 | ) | $ | 15,995,700 | |||||||
| December 31, 2014 | ||||||||||||||||
| Amortized | Gross Unrealized | Fair | ||||||||||||||
| Held to Maturity | Cost | Gains | Losses | Value | ||||||||||||
| Municipal Obligations: | ||||||||||||||||
| Due in 1 year or less | $ | 200,294 | $ | 282 | — | $ | 200,576 | |||||||||
| Due after 1 years through 5 years | 7,797,743 | 13,778 | (38,439 | ) | 7,773,082 | |||||||||||
| Due after 5 years through 10 years | 5,011,365 | 41,415 | (8,422 | ) | 5,044,358 | |||||||||||
| Due after 10 years | 11,917,380 | 652,666 | (936 | ) | 12,569,110 | |||||||||||
| Total | $ | 24,926,782 | $ | 708,141 | $ | (47,797 | ) | $ | 25,587,126 | |||||||
| December 31, 2013 | ||||||||||||||||
| Amortized | Gross Unrealized | Fair | ||||||||||||||
| Available for Sale: | Cost | Gains | Losses | Value | ||||||||||||
| Obligations of Federal Home Loan Bank: | ||||||||||||||||
| Due after 1 year through 5 years | $ | 3,000,000 | $ | — | $ | (39,010 | ) | $ | 2,960,990 | |||||||
| Due after 5 years through 10 years | 5,000,000 | — | (247,870 | ) | 4,752,130 | |||||||||||
| Due after 10 years | 4,000,000 | — | (176,480 | ) | 3,823,520 | |||||||||||
| Total | $ | 12,000,000 | $ | — | $ | (463,360 | ) | $ | 11,536,640 | |||||||
| December 31, 2013 | ||||||||||||||||
| Amortized | Gross Unrealized | Fair | ||||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
| Obligations of FHLMC: | ||||||||||||||||
| Due after 1 year through 5 years | $ | 2,000,000 | $ | 1,680 | $ | (6,850 | ) | $ | 1,994,830 | |||||||
| Total | $ | 2,000,000 | $ | 1,680 | $ | (6,850 | ) | $ | 1,994,830 | |||||||
| 67 |
| December 31, 2013 | ||||||||||||||||
| Amortized | Gross Unrealized | Fair | ||||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
| Obligations of Fannie Mae: | ||||||||||||||||
| Due after 1 year through 5 years | $ | 5,000,000 | $ | 580 | $ | (20,700 | ) | $ | 4,979,880 | |||||||
| Due after 10 years | 3,000,000 | — | (190,110 | ) | 2,809,890 | |||||||||||
| Total | $ | 8,000,000 | $ | 580 | $ | (210,810 | ) | $ | 7,789,770 | |||||||
| Total Investment Securities Available for Sale | $ | 22,000,000 | $ | 2,260 | $ | (681,020 | ) | $ | 21,321,240 | |||||||
| December 31, 2013 | ||||||||||||||||
| Amortized | Gross Unrealized | Fair | ||||||||||||||
| Held to Maturity | Cost | Gains | Losses | Value | ||||||||||||
| Municipal Obligations: | ||||||||||||||||
| Due in 1 year or less | $ | 1,435,196 | $ | 1,707 | — | $ | 1,436,903 | |||||||||
| Due after 1 years through 5 years | 6,227,714 | 32,026 | (12,188 | ) | 6,247,552 | |||||||||||
| Due after 5 years through 10 years | 6,152,302 | 23,159 | (183,666 | ) | 5,991,795 | |||||||||||
| Due after 10 years | 14,542,634 | 273,122 | (89,672 | ) | 14,726,084 | |||||||||||
| Total | $ | 28,357,846 | $ | 330,014 | $ | (285,526 | ) | $ | 28,402,334 | |||||||
Included in obligations of U.S. Government agencies at December 31, 2014 and December 31, 2013, were $16.0 million and $20.3 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.
There were no investment securities sold by the Company in 2014 or 2013. Investment securities with an aggregate carrying value of $6.0 million and $5.7 million were pledged as collateral for certain deposits at December 31, 2014 and 2013, respectively.
The following table shows the fair value and unrealized losses on securities aggregated by category and the length of time that individual securities have been in a continuous unrealized loss position.
| December 31, 2014 | ||||||||||||||||||||||||
| Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
| Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | |||||||||||||||||||
| Securities Available for Sale | ||||||||||||||||||||||||
| U.S. Government obligations | $ | 2,993,900 | $ | 6,100 | $ | 2,986,730 | $ | 13,270 | $ | 5,980,630 | $ | 19,370 | ||||||||||||
| Mortgage-Backed Securities | $ | 13,833 | $ | 132 | $ | — | $ | — | $ | 13,833 | $ | 132 | ||||||||||||
| Securities Held to Maturity | ||||||||||||||||||||||||
| Municipal obligations | $ | 2,126,057 | $ | 13,457 | $ | 2,972,973 | $ | 34,340 | $ | 5,099,029 | $ | 47,797 | ||||||||||||
| 68 |
| December 31, 2013 | ||||||||||||||||||||||||
| Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
| Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | |||||||||||||||||||
| Securities Available for Sale | ||||||||||||||||||||||||
| U.S. Government obligations | $ | 19,318,980 | $ | 681,020 | $ | — | $ | — | $ | 19,318,980 | $ | 681,020 | ||||||||||||
| Securities Held to Maturity | ||||||||||||||||||||||||
| Municipal obligations | $ | 10,209,969 | $ | 245,262 | $ | 427,312 | $ | 40,264 | $ | 10,637,281 | $ | 285,526 | ||||||||||||
As of December 31, 2014, 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, 2014, there were 5 U.S. government obligations, 1 mortgage-backed security, and 8 municipal securities in an unrealized loss position. Of the securities in an unrealized loss position at December 31, 2014, there were 3 U.S. government obligations, no mortgage-backed securities, and 5 municipal securities 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, 2014 represents an other-than-temporary impairment.
| 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, 2014 | ||||||||||||||||
| Amortized | Gross Unrealized | Fair | ||||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
| GNMA pass-through certificates | $ | 979,046 | $ | 64,673 | $ | — | $ | 1,043,719 | ||||||||
| FHLMC pass-through certificates | 746,774 | 81,808 | (132 | ) | 828,450 | |||||||||||
| FNMA pass-through certificates | 1,240,870 | 64,458 | — | 1,305,328 | ||||||||||||
| Total | $ | 2,966,690 | $ | 210,939 | $ | (132 | ) | $ | 3,177,497 | |||||||
| December 31, 2013 | ||||||||||||||||
| Amortized | Gross Unrealized | Fair | ||||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
| GNMA pass-through certificates | $ | 1,108,979 | $ | 79,972 | — | $ | 1,188,951 | |||||||||
| FHLMC pass-through certificates | 1,179,561 | 102,355 | — | 1,281,916 | ||||||||||||
| FNMA pass-through certificates | 2,114,257 | 113,356 | $ | — | 2,227,613 | |||||||||||
| Total | $ | 4,402,797 | $ | 295,683 | $ | — | $ | 4,698,480 | ||||||||
At December 31, 2014 and 2013, the Company had no mortgage-backed securities pledged for certain customer deposits of the Company. There were no sales of mortgage-backed securities in 2014 or 2013.
| 69 |
| 5. | Loans Receivable, Related Allowance for Loan Losses, and Credit Quality |
Loans receivable consist of the following:
| December 31, | ||||||||
| 2014 | 2013 | |||||||
| Real estate loans: | ||||||||
| Single-family | $ | 121,335,941 | $ | 124,222,742 | ||||
| Multi-family | 24,512,058 | 22,181,608 | ||||||
| Commercial | 121,069,114 | 122,813,820 | ||||||
| Land and construction | 25,901,911 | 19,792,113 | ||||||
| Commercial business | 14,402,645 | 10,403,004 | ||||||
| Consumer | 3,757,722 | 4,495,150 | ||||||
| Total loans receivable | 310,979,391 | 303,908,437 | ||||||
| Less: | ||||||||
| Deferred fees | (735,417 | ) | (788,557 | ) | ||||
| Allowance for loan losses | (4,464,992 | ) | (4,242,600 | ) | ||||
| Loans receivable - net | $ | 305,778,982 | $ | 298,877,280 | ||||
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.
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 $434,000 and $503,000 of these loans at December 31, 2014 and December 31, 2013, respectively. During 2014, there were no new loans or lines of credit issued to directors and executive officers, $69,000 in principal repayments, and no advances on existing lines of credit. Unused lines of credit to directors and executive officers at December 31, 2014 and December 31, 2013, were $312,000 and $287,000, respectively.
The performance and credit quality of the loan portfolio is 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, 2014:
| 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 | $ | 346,478 | $ | 146,382 | $ | 1,082,543 | $ | 1,575,403 | $ | 119,760,538 | $ | 121,335,941 | $ | 691,385 | ||||||||||||||
| Multi-family | 146,603 | — | — | 146,603 | 24,365,455 | 24,512,058 | — | |||||||||||||||||||||
| Commercial | 832,266 | 426,852 | 346,640 | 1,605,758 | 119,463,356 | 121,069,114 | — | |||||||||||||||||||||
| Land and construction | — | — | — | — | 25,901,911 | 25,901,911 | — | |||||||||||||||||||||
| Commercial business | 9,184 | — | — | 9,184 | 14,393,461 | 14,402,645 | — | |||||||||||||||||||||
| Consumer | 200,548 | 100,472 | 235,135 | 536,155 | 3,221,567 | 3,757,722 | 235,135 | |||||||||||||||||||||
| Total | $ | 1,535,079 | $ | 673,706 | $ | 1,664,318 | $ | 3,873,103 | $ | 307,106,288 | $ | 310,979,391 | $ | 926,520 | ||||||||||||||
| 70 |
The following table presents the classes of the loan portfolio summarized by the past due status as of December 31, 2013:
| 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 | $ | 531,900 | $ | 158,770 | $ | 1,390,066 | $ | 2,080,736 | $ | 122,142,006 | $ | 124,222,742 | $ | 638,325 | ||||||||||||||
| Multi-family | — | — | — | — | 22,181,608 | 22,181,608 | — | |||||||||||||||||||||
| Commercial | 455,132 | 197,971 | 744,069 | 1,397,172 | 121,416,648 | 122,813,820 | — | |||||||||||||||||||||
| Land and construction | — | — | — | — | 19,792,113 | 19,792,113 | — | |||||||||||||||||||||
| Commercial business | 64,188 | — | — | 64,188 | 10,338,816 | 10,403,004 | — | |||||||||||||||||||||
| Consumer | 122,564 | 89,550 | 411,526 | 623,640 | 3,871,510 | 4,495,150 | 411,526 | |||||||||||||||||||||
| Total | $ | 1,173,784 | $ | 446,291 | $ | 2,545,661 | $ | 4,165,736 | $ | 299,742,701 | $ | 303,908,437 | $ | 1,049,851 | ||||||||||||||
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, 2014:
| (Dollars in thousands) | Pass | Special Mention | Substandard | Doubtful | Total | |||||||||||||||
| Real estate: | ||||||||||||||||||||
| Single-family | $ | 119,044 | $ | 711 | $ | 1,581 | $ | — | $ | 121,336 | ||||||||||
| Multi-family | 24,512 | — | — | — | 24,512 | |||||||||||||||
| Commercial | 113,603 | 541 | 6,925 | — | 121,069 | |||||||||||||||
| Land and construction | 25,902 | — | — | — | 25,902 | |||||||||||||||
| Commercial business | 14,402 | — | — | — | 14,402 | |||||||||||||||
| Consumer | 3,758 | — | — | — | 3,758 | |||||||||||||||
| Total | $ | 301,221 | $ | 1,252 | $ | 8,506 | $ | — | $ | 310,979 | ||||||||||
The following table presents the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company's internal risk rating system as of December 31, 2013:
| (Dollars in thousands) | Pass | Special Mention | Substandard | Doubtful | Total | |||||||||||||||
| Real estate: | ||||||||||||||||||||
| Single-family | $ | 122,472 | $ | 361 | $ | 1,390 | $ | — | $ | 124,223 | ||||||||||
| Multi-family | 22,181 | — | — | — | 22,181 | |||||||||||||||
| Commercial | 113,920 | 1,479 | 7,415 | — | 122,814 | |||||||||||||||
| Land and construction | 19,792 | — | — | — | 19,792 | |||||||||||||||
| Commercial business | 10,403 | — | — | — | 10,403 | |||||||||||||||
| Consumer | 4,495 | — | — | — | 4,495 | |||||||||||||||
| Total | $ | 293,263 | $ | 1,840 | $ | 8,805 | $ | — | $ | 303,908 | ||||||||||
| 71 |
The following table presents nonaccrual loans by classes of the loan portfolio.
| December 31, | ||||||||
| (Dollars in thousands) | 2014 | 2013 | ||||||
| Real estate: | ||||||||
| Single-family | $ | 391 | $ | 752 | ||||
| Multi-family | — | — | ||||||
| Commercial | 849 | 744 | ||||||
| Land and construction | — | — | ||||||
| Commercial business | — | — | ||||||
| Consumer | — | — | ||||||
| Total non-accruing loans | $ | 1,240 | $ | 1,496 | ||||
If the Company’s $1.2 million of non-accruing loans at December 31, 2014 had been current in accordance with their terms during 2014, the gross income on such loans would have been approximately $73,000 for 2014. The Company actually recorded $32,000 in interest income on such loans for 2014. If the Company’s $1.5 million of non-accruing loans at December 31, 2013 had been current in accordance with their terms during 2013, the gross income on such loans would have been approximately $69,000 for 2013. The Company actually recorded $19,000 in interest income on such loans for 2013.
| 72 |
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, 2014:
| (Dollars in thousands) | Single Family Real Estate | Multi Family Real Estate | Commercial Real Estate | Land and Construction | Consumer | Commercial Business | Total | |||||||||||||||||||||
| Allowance for loan losses for the year ended December 31, 2014: | ||||||||||||||||||||||||||||
| Beginning balance | $ | 833 | $ | 304 | $ | 2,259 | $ | 618 | $ | 14 | $ | 215 | $ | 4,243 | ||||||||||||||
| Charge-offs | (100 | ) | — | (185 | ) | — | (4 | ) | — | (289 | ) | |||||||||||||||||
| Recoveries | 53 | — | 7 | — | 1 | — | 61 | |||||||||||||||||||||
| Provisions | 95 | (2 | ) | 123 | 155 | 5 | 74 | 450 | ||||||||||||||||||||
| Ending balance | $ | 881 | $ | 302 | $ | 2,204 | $ | 773 | $ | 16 | $ | 289 | $ | 4,465 | ||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||
| Ending balance | $ | 881 | $ | 302 | $ | 2,204 | $ | 773 | $ | 16 | $ | 289 | $ | 4,465 | ||||||||||||||
| Ending balance: | ||||||||||||||||||||||||||||
| individually evaluated for impairment | $ | 22 | $ | — | $ | 414 | $ | — | $ | — | $ | — | $ | 436 | ||||||||||||||
| Ending balance: | ||||||||||||||||||||||||||||
| collectively evaluated for impairment | $ | 859 | $ | 302 | $ | 1,790 | $ | 773 | $ | 16 | $ | 289 | $ | 4,029 | ||||||||||||||
| Loans receivable: | ||||||||||||||||||||||||||||
| Ending balance | $ | 121,336 | $ | 24,512 | $ | 121,069 | $ | 25,902 | $ | 3,758 | $ | 14,402 | $ | 310,979 | ||||||||||||||
| Ending balance: | ||||||||||||||||||||||||||||
| individually evaluated for impairment | $ | 1,041 | $ | — | $ | 7,826 | $ | — | $ | — | $ | — | $ | 8,867 | ||||||||||||||
| Ending balance: | ||||||||||||||||||||||||||||
| collectively evaluated for impairment | $ | 120,295 | $ | 24,512 | $ | 113,243 | $ | 25,902 | $ | 3,758 | $ | 14,402 | $ | 302,112 | ||||||||||||||
| 73 |
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, 2013:
| (Dollars in thousands) | Single Family Real Estate | Multi Family Real Estate | Commercial
Real Estate | Land and Construction | Consumer | Commercial
Business | Total | |||||||||||||||||||||
| Allowance for loan losses for the year ended December 31, 2013: | ||||||||||||||||||||||||||||
| Beginning balance | $ | 1,027 | $ | 623 | $ | 2,674 | $ | 352 | $ | 18 | $ | 225 | $ | 4,919 | ||||||||||||||
| Charge-offs | (458 | ) | (359 | ) | (813 | ) | — | (7 | ) | — | (1,637 | ) | ||||||||||||||||
| Recoveries | 19 | — | 7 | 30 | 5 | — | 61 | |||||||||||||||||||||
| Provisions | 245 | 40 | 391 | 236 | (2 | ) | (10 | ) | 900 | |||||||||||||||||||
| Ending balance | $ | 833 | $ | 304 | $ | 2,259 | $ | 618 | $ | 14 | $ | 215 | $ | 4,243 | ||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||
| Ending balance | $ | 833 | $ | 304 | $ | 2,259 | $ | 618 | $ | 14 | $ | 215 | $ | 4,243 | ||||||||||||||
| Ending balance: | ||||||||||||||||||||||||||||
| individually evaluated for impairment | $ | 18 | $ | — | $ | 526 | $ | — | $ | — | $ | — | $ | 544 | ||||||||||||||
| Ending balance: | ||||||||||||||||||||||||||||
| collectively evaluated for impairment | $ | 815 | $ | 304 | $ | 1,733 | $ | 618 | $ | 14 | $ | 215 | $ | 3,699 | ||||||||||||||
| Loans receivable: | ||||||||||||||||||||||||||||
| Ending balance | $ | 124,223 | $ | 22,181 | $ | 122,814 | $ | 19,792 | $ | 4,495 | $ | 10,403 | $ | 303,908 | ||||||||||||||
| Ending balance: | ||||||||||||||||||||||||||||
| individually evaluated for impairment | $ | 552 | $ | — | $ | 8,895 | $ | — | $ | — | $ | — | $ | 9,447 | ||||||||||||||
| Ending balance: | ||||||||||||||||||||||||||||
| collectively evaluated for impairment | $ | 123,671 | $ | 22,181 | $ | 113,919 | $ | 19,792 | $ | 4,495 | $ | 10,403 | $ | 294,461 | ||||||||||||||
| 74 |
The following table summarizes information in regards to impaired loans by loan portfolio class as of and for the year ended December 31, 2014:
| (Dollars in Thousands) | Recorded Investment | Unpaid Principal Balance | Related Allowance | Average Recorded Investment | Interest Income Recognized While Impaired | |||||||||||||||
| With no related allowance recorded: | ||||||||||||||||||||
| Real estate: | ||||||||||||||||||||
| Single-family | $ | 850 | $ | 850 | $ | — | $ | 517 | $ | 51 | ||||||||||
| Commercial | $ | 4,121 | $ | 4,121 | $ | — | $ | 3,947 | $ | 193 | ||||||||||
| With an allowance recorded: | ||||||||||||||||||||
| Real estate: | ||||||||||||||||||||
| Single-family | $ | 191 | $ | 191 | $ | 22 | $ | 191 | $ | 9 | ||||||||||
| Commercial | $ | 3,705 | $ | 3,705 | $ | 414 | $ | 4,155 | $ | 206 | ||||||||||
| Total: | ||||||||||||||||||||
| Real estate: | ||||||||||||||||||||
| Single-family | $ | 1,041 | $ | 1,041 | $ | 22 | $ | 708 | $ | 60 | ||||||||||
| Commercial | $ | 7,826 | $ | 7,826 | $ | 414 | $ | 8,102 | $ | 399 | ||||||||||
The following table summarizes information in regards to impaired loans by loan portfolio class as of and for the year ended December 31, 2013:
| (Dollars in Thousands) | Recorded Investment | Unpaid Principal Balance | Related Allowance | Average Recorded Investment | Interest Income Recognized While Impaired | |||||||||||||||
| With no related allowance recorded: | ||||||||||||||||||||
| Real estate: | ||||||||||||||||||||
| Single-family | $ | 361 | $ | 361 | $ | — | $ | 361 | $ | 13 | ||||||||||
| Commercial | $ | 3,835 | $ | 4,263 | $ | — | $ | 3,411 | $ | 239 | ||||||||||
| With an allowance recorded: | ||||||||||||||||||||
| Real estate: | ||||||||||||||||||||
| Single-family | $ | 191 | $ | 191 | $ | 18 | $ | 191 | $ | 12 | ||||||||||
| Commercial | $ | 5,060 | $ | 5,187 | $ | 526 | $ | 4,759 | $ | 198 | ||||||||||
| Total: | ||||||||||||||||||||
| Real estate: | ||||||||||||||||||||
| Single-family | $ | 552 | $ | 552 | $ | 18 | $ | 552 | $ | 25 | ||||||||||
| Commercial | $ | 8,895 | $ | 9,450 | $ | 526 | $ | 8,170 | $ | 437 | ||||||||||
| 75 |
The following table summarizes information in regards to loans classified as troubled debt restructurings during the year ended December 31, 2014:
| (Dollars in Thousands) | Number of Contracts | Pre-Modification Outstanding Recorded Investments | Post-Modification Outstanding Recorded Investments | |||||||||
| Real estate: | ||||||||||||
| Single family | 1 | $ | 464 | $ | 500 | |||||||
| Commercial | 2 | $ | 2,273 | $ | 2,273 | |||||||
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 twelve months ended December 31, 2014.
At December 31, 2014, the Company had thirteen loans classified as performing troubled debt restructurings consisting of three single-family real estate loans which amounted to $850,000 and ten commercial real estate loans which amounted to $6.0 million. Two of the three single-family real estate loans, which amounted to $351,000 were classified as special mention in the Company’s allowance for loan losses and have no allowance against them. One of the three single family real estate loans, in the amount of $499,000 was classified as substandard and had no allowance against it. Four of the ten commercial real estate loans, in the amount of $901,000 were classified as special mention and one of the four loans had a $3,000 allowance against it. Five of the ten commercial real estate loans, which amounted to $5.1 million are classified as substandard in the Company’s allowance for loan losses and had a $219,000 allowance against them. All such loans have been performing in accordance with their restructured terms and conditions. At December 31, 2014, the Company had one single-family real estate nonperforming loan classified as a troubled debt restructuring in the amount of $191,000. The single-family real estate loan was classified as substandard in the Company’s allowance for loan losses and had a $22,000 allowance against it. All of the troubled debt restructurings consisted of changes in interest rates or maturity extensions and no principal was forgiven.
The following table summarizes information in regards to loans classified as troubled debt restructurings during the year ended December 31, 2013:
| (Dollars in Thousands) | Number of Contracts | Pre-Modification Outstanding Recorded Investments | Post-Modification Outstanding Recorded Investments | |||||||||
| Real estate: | ||||||||||||
| Commercial | 2 | $ | 891 | $ | 921 | |||||||
There were no troubled debt restructurings with a payment default, with the payment default occurring within 12 months of restructure, and payment default occurring during the year ended December 31, 2013.
At December 31, 2013, the Company had eleven loans classified as performing troubled debt restructurings consisting of two single-family loans which amounted to $361,000 and nine commercial real estate loans which amounted to $4.5 million. The two single-family loans were classified as special mention in the Company’s allowance for loan losses and have no allowance against them. Five of the nine commercial real estate loans, which amounted to $1.5 million are classified as special mention in the Company’s allowance for loan losses and have a $57,000 allowance against them. Four of the nine commercial real estate loans, which amounted to $3.0 million are classified as substandard in the Company’s allowance for loan losses and have a $220,000 allowance against them. All such loans have been performing in accordance with their restructured terms and conditions. At December 31, 2013, the Company had one single-family nonperforming loan classified as a troubled debt restructuring in the amount of $191,000. The single-family loan was classified as substandard in the Company’s allowance for loan losses and had an $18,000 allowance against it. All of the troubled debt restructurings consisted of changes in interest rates and no principal was forgiven.
| 76 |
| 6. | Premises and Equipment |
Premises and equipment are summarized by major classifications as follows:
| Estimated Useful | December 31, | |||||||||
| Life in Years | 2014 | 2013 | ||||||||
| Land | Indefinite | $ | 125,014 | $ | 125,014 | |||||
| Buildings | 40 | 4,900,080 | 4,711,536 | |||||||
| Furniture and fixtures | 2-7 | 6,133,481 | 6,039,714 | |||||||
| Total | 11,158,575 | 10,876,264 | ||||||||
| Accumulated depreciation | (9,244,510 | ) | (8,840,231 | ) | ||||||
| Net | $ | 1,914,065 | $ | 2,036,033 | ||||||
Depreciation and amortization expense for the years ended December 31, 2014 and 2013 amounted to $480,000 and $600,000, respectively.
| 7. | Deposits |
Deposits consist of the following major classifications:
| December 31, | ||||||||||||||||
| 2014 | 2013 | |||||||||||||||
| Amount | Percent | Amount | Percent | |||||||||||||
| Money market deposit accounts | $ | 24,427,479 | 7.1 | % | $ | 26,433,484 | 7.6 | % | ||||||||
| Passbook and statement savings accounts | 51,538,256 | 15.0 | 52,197,435 | 15.1 | ||||||||||||
| Certificates of less than $100,000 | 140,834,938 | 40.9 | 144,064,208 | 41.7 | ||||||||||||
| Certificates of $100,000 or more | 53,184,682 | 15.4 | 53,022,110 | 15.4 | ||||||||||||
| NOW accounts | 56,437,746 | 16.3 | 53,252,217 | 15.4 | ||||||||||||
| Non-interest bearing accounts | 18,356,657 | 5.3 | 16,408,743 | 4.8 | ||||||||||||
| Total | $ | 344,779,758 | 100.0 | % | $ | 345,378,197 | 100.0 | % | ||||||||
A summary of certificates by scheduled maturity was as follows:
| December 31, 2014 | ||||||||
| Amount | Percent | |||||||
| 2015 | $ | 110,879,204 | 57.1 | % | ||||
| 2016 | 58,698,183 | 30.3 | % | |||||
| 2017 | 16,455,681 | 8.5 | % | |||||
| 2018 | 3,617,242 | 1.8 | % | |||||
| 2019 | 2,649,397 | 1.4 | % | |||||
| Thereafter | 1,719,913 | 0.9 | % | |||||
| Total | $ | 194,019,620 | 100.0 | % | ||||
| 77 |
A summary of interest expense on deposits was as follows:
| Year Ended December 31, | ||||||||
| 2014 | 2013 | |||||||
| Money market deposit accounts | $ | 60,959 | $ | 60,752 | ||||
| Other savings deposits | 102,807 | 102,704 | ||||||
| Certificates of less than $100,000 | 1,068,641 | 1,285,949 | ||||||
| Certificates of $100,000 or more | 901,148 | 886,498 | ||||||
| NOW accounts | 117,567 | 117,342 | ||||||
| Total | $ | 2,251,122 | $ | 2,453,245 | ||||
| 8. | Borrowings |
At December 31, 2014 and 2013, the Company had other borrowings of $2.9 million and $3.4 million, respectively. Other borrowings consists 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 utilize 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, 2014 and 2014, respectively. In addition to the $20.0 million credit line with the FHLB, the Company had the ability to borrow an additional $161.0 million at December 31, 2014.
| 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, 2014 and 2013 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 2011.
| 78 |
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, | ||||||||
| 2014 | 2013 | |||||||
| Deferred tax assets: | ||||||||
| Depreciation and amortization | $ | 330,820 | $ | 287,300 | ||||
| Allowance for loan losses | 1,518,100 | 1,442,620 | ||||||
| Additional minimum liability for retirement plans | 820,796 | 835,509 | ||||||
| Supplemental retirement benefits | 1,366,120 | 1,355,240 | ||||||
| Deferred gain on the sale of premises and equipment | 208,000 | 227,000 | ||||||
| Stock benefit plan | 281,860 | 215,900 | ||||||
| Capital loss carryforwards | 210,000 | 386,000 | ||||||
| Alternative minimum tax | 1,459,000 | 1,676,000 | ||||||
| State tax loss carryforwards | 291,000 | 295,000 | ||||||
| Net unrealized loss on securities available for sale | — | 130,246 | ||||||
| Other | 142,750 | 223,681 | ||||||
| Total deferred tax assets | 6,628,446 | 7,074,496 | ||||||
| Valuation allowance | (501,000 | ) | (681,000 | ) | ||||
| Deferred tax liabilities: | ||||||||
| Deferred loan fees | (40,460 | ) | (52,020 | ) | ||||
| Pension Plan | (715,700 | ) | (668,100 | ) | ||||
| Net unrealized gain on securities available for sale | (70,212 | ) | — | |||||
| Total deferred tax liabilities | (826,372 | ) | (720,120 | ) | ||||
| Net deferred tax asset | $ | 5,301,074 | $ | 5,673,376 | ||||
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, 2014, the Company had approximately $575,000 and $44,000 of capital loss carryforwards, which result in a deferred tax asset of $210,000, expiring in 2015 and 2016, respectively. The Company recorded a full valuation allowance for these carryforwards as it is more likely than not the Company will be unable to realize these benefits.
As of December 31, 2014, the Company had approximately $4.0 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 for income taxes consisted of the following for the years ended December 31:
| 2014 | 2013 | |||||||
| Current, federal | $ | 679,869 | $ | 280,000 | ||||
| Deferred, federal | 157,131 | 480,000 | ||||||
| Current, state | 188,000 | — | ||||||
| Total | $ | 1,025,000 | $ | 760,000 | ||||
| 79 |
The Company’s federal income tax expense differs from that computed at the statutory tax rate as follows:
| Year Ended December 31, | ||||||||||||||||
| 2014 | 2013 | |||||||||||||||
| Percentage | Percentage | |||||||||||||||
| of Pretax | of Pretax | |||||||||||||||
| Amount | Income | Amount | Income | |||||||||||||
| Expense at statutory rate | $ | 1,217,161 | 34.0 | % | $ | 737,091 | 34.0 | % | ||||||||
| Adjustments resulting from: | ||||||||||||||||
| Tax-exempt income | (264,009 | ) | (7.4 | ) | (280,538 | ) | (12.9 | ) | ||||||||
| Increase in cash surrender value of life insurance | (95,140 | ) | (2.7 | ) | (100,814 | ) | (4.7 | ) | ||||||||
| State tax expense net of federal tax benefit | 124,080 | 3.5 | — | — | ||||||||||||
| Valuation allowance for capital loss carryforward | — | — | 386,000 | 17.8 | ||||||||||||
| Other | 42,908 | 1.2 | 18,261 | 0.9 | ||||||||||||
| Income tax expense per consolidated statements of income | $ | 1,025,000 | 28.6 | % | $ | 760,000 | 35.1 | % | ||||||||
| 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 $5.5 million and $3.1 million in outstanding loan commitments, excluding unused lines of credit and the undisbursed portion of loans in process, at December 31, 2014 and 2013, respectively, which were expected to fund within the next three months. Unused commitments under unused lines of credit amounted to $36.6 million and $30.0 million at December 31, 2014 and December 31, 2013, respectively. In addition, the Company had $1.1 million and $1.5 million in standby letters of credit at December 31, 2014 and 2013, 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, | ||||||||
| 2014 | 2013 | |||||||
| Fixed-rate (ranging from 1.99% to 5.25%) | $ | 2,831,000 | $ | 1,867,450 | ||||
| Adjustable-rate | 2,700,000 | 1,200,000 | ||||||
| Total | $ | 5,531,000 | $ | 3,067,450 | ||||
| 80 |
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, | ||||||||
| 2014 | 2013 | |||||||
| Future loan commitments | $ | 5,531,000 | $ | 3,067,450 | ||||
| Undisbursed construction loans | 18,053,123 | 14,247,660 | ||||||
| Undisbursed home equity lines of credit | 4,702,969 | 4,259,993 | ||||||
| Undisbursed commercial lines of credit | 13,712,440 | 11,270,226 | ||||||
| Overdraft protection lines | 176,219 | 184,383 | ||||||
| Standby letters of credit | 1,133,889 | 1,511,730 | ||||||
| Total | $ | 43,309,640 | $ | 34,541,442 | ||||
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, 2014.
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 2014 and 2013 were $471,000 and $461,000, respectively. The Company maintains offices at eight locations, including six bank offices which it rents under leases expiring over the next 13 years. The following is a summary of future minimum rental payments required under all non-cancellable operating leases as of December 31, 2014:
| Year Ending December 31, | ||||
| 2015 | $ | 476,406 | ||
| 2016 | 397,240 | |||
| 2017 | 392,529 | |||
| 2018 | 394,119 | |||
| 2019 | 402,227 | |||
| Thereafter | 1,599,373 | |||
| Total minimum rental payments | $ | 3,661,894 | ||
| 81 |
| 11. | Retirement Plans |
The Company has a defined benefit pension 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. At December 31, 2014 the defined benefit pension plan was curtailed and as a result the participants will no longer accrue benefits. The Company is responsible for the future payments to the participants.
Pension expense was $210,000 and $289,000, in 2014 and 2013, respectively.
The net pension costs for the years ended December 31, 2014 and 2013 included the following components:
| 2014 | 2013 | |||||||
| Net Periodic Benefit Cost | ||||||||
| Service Cost | $ | 290,115 | $ | 295,577 | ||||
| Interest Cost | 321,686 | 261,131 | ||||||
| Expected Return on Plan Assets | (574,806 | ) | (504,112 | ) | ||||
| Amortization of Prior Service Cost | 12,685 | 12,685 | ||||||
| Curtailment | 50,742 | — | ||||||
| Amortization of Loss | 109,584 | 223,797 | ||||||
| Net Periodic Benefit Cost | $ | 210,006 | $ | 289,078 | ||||
Other changes in plan assets and benefit obligations recognized in other comprehensive income (loss)
| Net gain | $ | (186,866 | ) | $ | (202,807 | ) | ||
| Amortization of net loss | (109,584 | ) | (223,797 | ) | ||||
| Amortization of prior service cost | (63,427 | ) | (12,685 | ) | ||||
| Total recognized in other comprehensive income (loss) | $ | (359,877 | ) | $ | (439,289 | ) | ||
| Total recognized in net periodic benefit cost and other comprehensive income (loss) | $ | (149,871 | ) | $ | (150,211 | ) |
The estimated net loss and prior service cost for the defined benefit pension plan that will be amortized from accumulated other comprehensive loss into net periodic benefit cost over the next fiscal year are $49,385 and $-0-, respectively.
| Key Assumptions | 2014 | 2013 | ||||||
| Discount Rate for Net Periodic Benefit Cost | 4.25 | % | 3.50 | % | ||||
| Salary Scale for Net Periodic Benefit Cost | 3.00 | % | 2.50 | % | ||||
| Expected Return on Plan Assets | 7.50 | % | 8.00 | % | ||||
| Discount Rate for Plan Obligations | 3.50 | % | 4.25 | % | ||||
| Salary Scale for Plan Obligations | N/A | 3.00 | % | |||||
During 2014, the Company adopted the new mortality tables reflecting longer life expectancy published by the Society of Actuaries on October 27, 2014. These revised tables resulted in an increase in the pension plan's projected benefit obligation of approximately $300,000 as of December 31, 2014.
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:
| 2014 | 2013 | |||||||
| Change in Projected Benefit Obligation | ||||||||
| Projected Benefit Obligation at Beginning of Year | $ | 7,597,479 | $ | 6,656,322 | ||||
| Service Cost | 290,115 | 295,577 | ||||||
| Interest Cost | 321,686 | 261,131 | ||||||
| Curtailment | (1,267,296 | ) | — | |||||
| Benefits paid | (353,289 | ) | (195,187 | ) | ||||
| Actuarial Loss | 1,091,740 | 579,636 | ||||||
| Projected Benefit Obligation at End of Year | 7,680,435 | 7,597,479 | ||||||
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| Change in Plan Assets During Year | ||||||||
| Fair Value of Plan Assets at Beginning of Year | 7,696,447 | 6,005,079 | ||||||
| Actual Return on Plan Assets | 586,116 | 1,286,555 | ||||||
| Employer Contributions | 350,000 | 600,000 | ||||||
| Benefits Paid | (353,289 | ) | (195,187 | ) | ||||
| Fair Value of Plan Assets at End of Year | 8,279,274 | 7,696,447 | ||||||
| Funded Status at End of Year, included in other assets | $ | 598,839 | $ | 98,968 | ||||
| Benefit Obligations at End of Year | ||||||||
| Accumulated Benefit Obligation | $ | 7,680,435 | $ | 6,369,762 |
| Amounts Recognized in Accumulated Other Comprehensive Loss | ||||||||
| Net loss | $ | 1,240,288 | $ | 1,536,738 | ||||
| Prior service cost | — | 63,427 | ||||||
| Total | $ | 1,240,288 | $ | 1,600,165 |
Expected Contributions to the Plan
The Company plans to contribute $-0- to the pension plan in 2015.
Expected Benefit Payments From the Plan
| 2015 | $ | 106,793 | ||
| 2016 | 1,670,455 | |||
| 2017 | 282,045 | |||
| 2018 | 1,118,637 | |||
| 2019 | 87,889 | |||
| 2020-2024 | 2,162,485 |
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, 2014.
| Investment Class | Percentage of Assets | |||||||
| Fixed Income Investments-mutual funds | $ | 2,403,320 | 29.0 | % | ||||
| Equity Investments-mutual funds | 5,083,809 | 61.4 | % | |||||
| Cash and Cash Equivalents | 792,145 | 9.6 | % | |||||
| Fair Value as of December 31, 2014 | $ | 8,279,274 | 100.0 | % | ||||
Fixed income investments are 50.7% invested in a total return bond fund and 49.3% invested in a short term investment grade fund. The equity investments consist of 11.1% small-cap mutual funds, 13.3% mid-cap mutual funds, and 75.6% large-cap mutual funds.
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The following table summarizes assets measured at fair value on a recurring basis as of December 31, 2014, 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 | $ | 792,145 | $ | 792,145 | $ | — | $ | — | ||||||||
| Mutual Funds | 7,487,129 | 7,487,129 | — | — | ||||||||||||
| Total | $ | 8,279,274 | $ | 8,279,274 | $ | — | $ | — | ||||||||
The following table summarizes assets measured at fair value on a recurring basis as of December 31, 2013, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value.
| 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 | $ | 805,065 | $ | 805,065 | $ | — | $ | — | ||||||||
| Mutual Funds | 6,891,382 | 6,891,382 | — | — | ||||||||||||
| Total | $ | 7,696,447 | $ | 7,696,447 | $ | — | $ | — | ||||||||
The Company has an unfunded 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 fixed amount. 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, | ||||||||
| Change in benefit obligation during year | 2014 | 2013 | ||||||
| Benefit obligation at beginning of year | $ | 4,842,687 | $ | 4,865,765 | ||||
| Service cost | — | 54,821 | ||||||
| Interest cost | 201,150 | 198,442 | ||||||
| Benefit payments | (193,718 | ) | (158,792 | ) | ||||
| Actuarial (gain) loss | 341,471 | (117,549 | ) | |||||
| Benefit obligation at end of year | 5,191,590 | 4,842,687 | ||||||
| Change in plan assets during year | ||||||||
| Fair value of plan assets at beginning of year | — | — | ||||||
| Employer contributions | 193,718 | 158,792 | ||||||
| Benefit payments | (193,718 | ) | (158,792 | ) | ||||
| Fair value of plan assets at end of year | — | — | ||||||
| Funded status | ||||||||
| Funded status (included in other liabilities) | (5,191,590 | ) | (4,842,689 | ) | ||||
| Unrecognized net loss | 1,173,817 | 857,209 | ||||||
| Unrecognized prior service cost | — | — | ||||||
| Net liability recognized | $ | (4,017,773 | ) | $ | (3,985,480 | ) | ||
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| Change in accumulated other comprehensive loss | ||||||||
| Accumulated other comprehensive loss at beginning of year | $ | 857,208 | $ | 1,009,627 | ||||
| Amortization of net loss | 24,862 | 34,870 | ||||||
| Actuarial gain (loss) | (341,471 | ) | 117,549 | |||||
| Amortization of prior service cost | — | — | ||||||
| Net change in other comprehensive loss | 316,609 | (152,419 | ) | |||||
| Accumulated other comprehensive loss at end of year | $ | 1,173,817 | $ | 857,208 | ||||
| Expected cash-flow information for years after current fiscal year | ||||||||
| 2015 | $ | 257,092 | ||||||
| 2016 | 377,441 | |||||||
| 2017 | 377,441 | |||||||
| 2018 | 377,441 | |||||||
| 2019 | 377,441 | |||||||
| 2020-2024 | 1,887,205 |
| 2014 | 2013 | |||||||
| Net periodic benefit cost | ||||||||
| Service cost | $ | — | $ | 54,821 | ||||
| Interest cost | 201,150 | 198,443 | ||||||
| Amortization of prior service cost | — | — | ||||||
| Amortization of net loss | 24,862 | 34,870 | ||||||
| Net periodic benefit cost | $ | 226,012 | $ | 288,134 | ||||
| Key Assumptions | ||||||||
| Discount rate during the year | 4.25 | % | 4.00 | % | ||||
| Discount rate at end of year | 3.50 | % | 4.25 | % | ||||
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 15 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 years ended December 31, 2014 and December 31, 2013 was $236,000 and $189,000, respectively.
The following table presents the components of the ESOP shares inclusive of shares purchased prior to 2007:
| December 31, | ||||||||
| 2014 | 2013 | |||||||
| Shares released for allocation | 178,325 | 172,856 | ||||||
| Unearned shares | 134,734 | 148,675 | ||||||
| Total ESOP shares | 313,059 | 321,531 | ||||||
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| 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, 2014, that the Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 2014, 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.
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 | |||||||||||||||||||
| As of December 31, 2014: | (Dollars in thousands) | |||||||||||||||||||||||
| Tier 1 Capital | $ | 60,152 | 14.39 | % | $ | 16,725 | 4.00 | % | $ | 20,906 | 5.00 | % | ||||||||||||
| (to average assets) | ||||||||||||||||||||||||
| Tier 1 Capital | 60,152 | 21.94 | 10,969 | 4.00 | 16,454 | 6.00 | ||||||||||||||||||
| (to risk-weighted assets) | ||||||||||||||||||||||||
| Total Capital | 63,593 | 23.19 | 21,938 | 8.00 | 27,423 | 10.00 | ||||||||||||||||||
| (to risk-weighted assets) | ||||||||||||||||||||||||
| As of December 31, 2013: | (Dollars in thousands) | |||||||||||||||||||||||
| Tier 1 Capital | $ | 56,693 | 13.25 | % | $ | 17,114 | 4.00 | % | $ | 21,393 | 5.00 | % | ||||||||||||
| (to average assets) | ||||||||||||||||||||||||
| Tier 1 Capital | 56,693 | 20.87 | 10,867 | 4.00 | 16,301 | 6.00 | ||||||||||||||||||
| (to risk-weighted assets) | ||||||||||||||||||||||||
| Total Capital | 60,099 | 22.12 | 21,734 | 8.00 | 27,168 | 10.00 | ||||||||||||||||||
| (to risk-weighted assets) | ||||||||||||||||||||||||
The Bank’s capital at December 31, 2014 and 2013 for financial statement purposes differs from regulatory Tier 1 capital amounts by $137,000 and $253,000, respectively, representing the exclusion for regulatory purposes of unrealized gains and losses on securities available for sale and by $1.6 million and $1.6 million, respectively, representing the exclusion of amounts in accumulated other comprehensive loss from the application of FASB ASC Topic 715 (Compensation-Retirement Benefits), and $3.7 million and $4.6 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, July 20, 2012, and December 11, 2013, a total of 208,200, 3,000, and 7,750 shares of 2011 RRP awards were granted, respectively. The 2011 RRP shares generally vest at the rate of 20% per year over five years.
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A summary of the status of the shares under the 2011 RRP as of December 31, 2014 and December 31, 2013 and changes during the years ended December 31, 2014 and December 31, 2013 are presented below:
| Year Ended December 31, 2014 | ||||||||
| Weighted | ||||||||
| Number of | average grant | |||||||
| shares | date fair value | |||||||
| Restricted at the beginning of period | 135,070 | $ | 11.22 | |||||
| Granted | — | — | ||||||
| Vested | (51,610 | ) | $ | 11.17 | ||||
| Forfeited | (1,500 | ) | $ | 15.34 | ||||
| Restricted at the end of period | 81,960 | $ | 11.34 | |||||
| Year Ended December 31, 2013 | ||||||||
| Weighted | ||||||||
| Number of | average grant | |||||||
| shares | date fair value | |||||||
| Restricted at the beginning of the period | 169,560 | $ | 11.08 | |||||
| Granted | 7,750 | $ | 15.34 | |||||
| Vested | (42,240 | ) | $ | 11.07 | ||||
| Forfeited | — | — | ||||||
| Restricted at the end of the period | 135,070 | $ | 11.22 | |||||
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, 2014, approximately 51,610 shares were amortized to expense, based on the proportional and accelerated vesting of the awarded shares, resulting in recognition of approximately $532,000 in compensation expense with a related tax benefit of $181,000. Of the $532,000 in compensation expense, approximately $102,000 related to the accelerated vesting of certain awarded shares. As of December 31, 2014, approximately $688,000 in additional compensation expense is scheduled to be recognized over the remaining weighted average vesting period of 2.25 years. During the year ended December 31, 2013, approximately 42,219 shares were amortized to expense, based on the proportional vesting of the awarded shares, resulting in recognition of approximately $451,000 in compensation expense with a related tax benefit of $153,000. As of December 31, 2013, approximately $1.2 million in additional compensation expense was scheduled to be recognized over the remaining weighted average vesting period of 3.25 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, July 20, 2012, and December 11, 2013 options to purchase 277,750, 9,500, and 38,500 shares of common stock were awarded, respectively. As of December 31, 2014, a total of 5,792 shares of common stock have been reserved for future grant pursuant to the 2011 Option Plan.
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A summary of the status of the Company’s stock options under the 2011 Option Plan as of December 31, 2014 and December 31, 2013, and changes during the years ended December 31, 2014 and December 31, 2013, are presented below:
| Year Ended December 31, 2014 | ||||||||
| Weighted | ||||||||
| Number of | average | |||||||
| shares | exercise price | |||||||
| Options outstanding at the beginning of period | 325,750 | $ | 11.60 | |||||
| Granted | — | — | ||||||
| Exercised | — | — | ||||||
| Forfeited | (5,700 | ) | $ | 15.34 | ||||
| Options outstanding at the end of period | 320,050 | $ | 11.53 | |||||
| Exercisable at end of the period | 186,150 | $ | 11.23 | |||||
| Year Ended December 31, 2013 | ||||||||
| Weighted | ||||||||
| Number of | average | |||||||
| Shares | exercise price | |||||||
| Options outstanding at the beginning of period | 287,250 | $ | 11.10 | |||||
| Granted | 38,500 | $ | 15.34 | |||||
| Exercised | — | — | ||||||
| Forfeited | — | — | ||||||
| Options outstanding at the end of the period | 325,750 | $ | 11.60 | |||||
| Exercisable at the end of the period | 113,000 | $ | 11.07 | |||||
The fair value of each option grant is estimated using the Black-Scholes pricing model with the following weighted average assumptions for the options granted in 2013: dividend yield of 2.0%, risk-free interest rate of 1.53%, expected life of 7.0 years, and volatility of 28.35%. The calculated fair value of options granted in 2013 was $4.12.
The weighted average contractual term of the options outstanding was 7.5 years and 8.2 years at December 31, 2014 and December 31, 2013, respectively.
During the years ended December 31, 2014 and December 31, 2013, respectively, approximately $210,000, of which approximately $31,000 related to the accelerated vesting of certain awards, and $167,000 was recognized in compensation expense for the 2011 Option Plan. At December 31, 2014 and December 31, 2013, respectively, approximately $335,000 and $568,000 in additional compensation expense for awarded options remained unrecognized. The weighted average period over which this expense will be recognized is approximately 2.25 years and 3.25 years at December 31, 2014 and December 31, 2013, 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:
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Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2: Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.
Level 3: Prices or valuation techniques that require inputs that are both significant to fair value measurement and unobservable (i.e. support with little or no market value activity).
An asset or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
The following methods and assumptions were used to estimate the fair value of certain Company assets and liabilities:
Cash and Cash Equivalents (Carried at Cost), The carrying amounts reported in the consolidated statements of financial condition for cash and short-term instruments approximate those assets’ fair values.
Investment and Mortgage-Backed Securities, The fair value of securities available for sale (carried at fair value) and held to maturity (carried at amortized cost) are determined by obtaining quoted market prices on nationally recognized securities exchanges for identical securities (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 of the impaired loans consists of the loan balances, net of any valuation allowance. At December 31, 2014 and December 31, 2013, the fair value of the impaired loans consists of loan balances of $3.9 million and $5.3 million, respectively, net of valuation allowances of $436,000 and $544,000, respectively; and loan balances of $-0- and $728,000, respectively, net of partial charge-offs of $-0- and $428,000, respectively.
Other Real Estate Owned (“OREO”). OREO assets are originally recorded at fair value upon transfer of the loans to OREO, net of estimated cost to dispose of the assets. Subsequently, OREO assets are carried at the lower of carrying value or fair value. The fair value of OREO is based on independent appraisals less selling costs. Appraised values may be discounted based upon management’s historical knowledge and changes in the market conditions from the time of the appraisal. Because of the high degree of judgment required in estimating the fair value of OREO and because of the relationship between fair value and general economic conditions, the Company considers fair values of OREO to be highly sensitive to market conditions. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements. At December 31, 2014 and December 31, 2013 the fair value consists of OREO balances of $1.0 million and $1.1 million, respectively, net of valuation allowances of $131,000 and $155,000, respectively. These amounts differ from the balances disclosed on the Statement of Financial Condition due to certain OREO assets being carried at carrying value, as they have not required additional write-downs subsequent to transfer.
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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.
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, 2014, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):
| Description | Total | (Level 1) Prices in Active Markets for Identical Assets |
(Level 2) Significant Other Observable Inputs |
(Level 3) Significant Unobservable Inputs |
||||||||||||
| Investment security obligations of FHLB | $ | 9,993 | $ | — | $ | 9,993 | $ | — | ||||||||
| Investment security obligations of Fannie Mae | 4,007 | — | 4,007 | — | ||||||||||||
| Investment security obligations of Freddie Mac | 1,995 | — | 1,995 | — | ||||||||||||
| Mortgaged backed security obligations of GNMA | 1,044 | — | 1,044 | — | ||||||||||||
| Mortgaged backed security obligations of FHLMC | 829 | — | 829 | — | ||||||||||||
| Mortgaged backed security obligations of FNMA | 1,305 | — | 1,305 | — | ||||||||||||
| Total | $ | 19,173 | $ | — | $ | 19,173 | $ | — | ||||||||
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, 2014 (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 | $ | 3,460 | $ | — | $ | — | $ | 3,460 | ||||||||
| Other real estate owned | 870 | — | — | 870 | ||||||||||||
| Total | $ | 4,330 | $ | — | $ | — | $ | 4,330 | ||||||||
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The following table presents quantitative information with regards to Level 3 fair value measurements at December 31, 2014.
| Description | Fair Value at December 31, 2014 | Valuation Technique | Unobservable Input | Range (Weighted Average) | ||||||
| Impaired loans | $ | 3,460 | Appraisal of collateral | Appraisal adjustments (1) | 5%-30% (20%) | |||||
| Other real estate owned | 870 | Appraisal of collateral | Appraisal adjustments (1) | 10%-0% (4%) | ||||||
| Total | $ | 4,330 | ||||||||
_________________
| (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. |
The following table summarizes assets measured at fair value on a recurring basis as of December 31, 2013, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):
| Description | Total | (Level 1) Prices in Active Markets for Identical Assets | (Level 2) Significant Other Observable Inputs | (Level 3) Significant Unobservable Inputs | ||||||||||||
| Investment security obligations of FHLB | $ | 11,537 | $ | — | $ | 11,537 | $ | — | ||||||||
| Investment security obligations of Fannie Mae | 7,789 | — | 7,789 | — | ||||||||||||
| Investment security obligations of Freddie Mac | 1,995 | — | 1,995 | — | ||||||||||||
| Mortgaged backed security obligations of GNMA | 1,189 | — | 1,189 | — | ||||||||||||
| Mortgaged backed security obligations of FHLMC | 1,282 | — | 1,282 | — | ||||||||||||
| Mortgaged backed security obligations of FNMA | 2,228 | — | 2,228 | — | ||||||||||||
| Total | $ | 26,020 | $ | — | $ | 26,020 | $ | — | ||||||||
For assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at December 31, 2013 (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 | $ | 5,008 | $ | — | $ | — | $ | 5,008 | ||||||||
| Other real estate owned | 978 | — | — | 978 | ||||||||||||
| Total | $ | 5,986 | $ | — | $ | — | $ | 5,986 | ||||||||
| 91 |
The following table presents quantitative information with regards to Level 3 fair value measurements at December 31, 2013.
| Description | Fair Value at December 31, 2013 | Valuation Technique | Unobservable Input | Range (Weighted Average) | ||||||
| Impaired loans | $ | 5,008 | Appraisal of collateral | Appraisal adjustments (1) | 5%-30% (18%) | |||||
| Other real estate owned | 987 | Appraisal of collateral | Appraisal adjustments (1) | 10%-5% (4%) | ||||||
| Total | $ | 5,986 | ||||||||
_________________
| (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. |
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, 2014 | ||||||||||||||||
| Carrying | Level 1 | Level 2 | Level 3 | |||||||||||||
| Amount | Fair Value | Fair Value | Fair Value | |||||||||||||
| (In thousands) | ||||||||||||||||
| Assets: | ||||||||||||||||
| Cash and due from banks | $ | 1,361 | $ | 1,361 | $ | — | $ | — | ||||||||
| Interest bearing deposits at banks | 45,272 | 45,272 | — | — | ||||||||||||
| Investment securities | 40,922 | — | 41,583 | — | ||||||||||||
| Mortgage-backed securities | 3,177 | — | 3,177 | — | ||||||||||||
| Loans receivable | 305,779 | — | — | 305,849 | ||||||||||||
| FHLB stock | 203 | — | 203 | — | ||||||||||||
| Accrued interest receivable | 1,455 | — | 1,455 | — | ||||||||||||
| Liabilities: | ||||||||||||||||
| NOW and MMDA deposits (1) | $ | 99,222 | $ | — | $ | 99,222 | $ | — | ||||||||
| Other savings deposits | 51,538 | — | 51,538 | — | ||||||||||||
| Certificate accounts | 194,020 | — | 194,305 | — | ||||||||||||
| Borrowings | 2,918 | — | 2,918 | — | ||||||||||||
| Accrued interest payable | 9 | — | 9 | — | ||||||||||||
| Off balance sheet instruments | — | — | — | — | ||||||||||||
_______________________
(1) Includes non-interest bearing accounts totaling $18,357.
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| At December 31, 2013 | ||||||||||||||||
| Carrying | Level 1 | Level 2 | Level 3 | |||||||||||||
| Amount | Fair Value | Fair Value | Fair Value | |||||||||||||
| (In thousands) | ||||||||||||||||
| Assets: | ||||||||||||||||
| Cash and due from banks | $ | 1,530 | $ | 1,530 | $ | — | $ | — | ||||||||
| Interest bearing deposits at banks | 43,694 | 43,694 | — | — | ||||||||||||
| Investment securities | 49,679 | — | 49,724 | — | ||||||||||||
| Mortgage-backed securities | 4,698 | — | 4,698 | — | ||||||||||||
| Loans receivable | 298,878 | — | — | 300,029 | ||||||||||||
| FHLB stock | 647 | — | 647 | — | ||||||||||||
| Accrued interest receivable | 1,465 | — | 1,465 | — | ||||||||||||
| Liabilities: | ||||||||||||||||
| NOW and MMDA deposits (1) | $ | 96,044 | $ | — | $ | 96,044 | $ | — | ||||||||
| Other savings deposits | 52,197 | — | 52,197 | — | ||||||||||||
| Certificate accounts | 197,086 | — | 196,901 | — | ||||||||||||
| Borrowings | 3,437 | — | 3,437 | — | ||||||||||||
| Accrued interest payable | 9 | — | 9 | — | ||||||||||||
| Off balance sheet instruments | — | — | — | — | ||||||||||||
_______________________
(1) Includes non-interest bearing accounts totaling $16,409.
15. Condensed Financial Information – Parent Corporation Only
CONDENSED BALANCE SHEETS-PARENT CORPORATION ONLY
| December 31, | ||||||||
| 2014 | 2013 | |||||||
| ASSETS: | ||||||||
| Cash and cash equivalents | $ | 2,871,165 | $ | 9,729,594 | ||||
| Loan receivable – ESOP | 1,582,865 | 1,730,808 | ||||||
| Premises and equipment, net | 10,000 | 10,000 | ||||||
| Other assets | 271,616 | 261,930 | ||||||
| Investment in Alliance Bank | 62,406,029 | 59,370,438 | ||||||
| Total assets | $ | 67,141,675 | $ | 71,102,770 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| LIABILITIES: | ||||||||
| Accrued tax payable | $ | 11,727 | $ | 185,041 | ||||
| Deferred gain on the sale of premises and equipment | 611,577 | 667,174 | ||||||
| Deferred directors retirement plan | 67,831 | 82,032 | ||||||
| Total liabilities | $ | 691,135 | $ | 934,247 | ||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Total stockholders' equity | 66,450,540 | 70,168,523 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 67,141,675 | $ | 71,102,770 | ||||
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CONDENSED INCOME STATEMENTS-PARENT CORPORATION ONLY
| Years Ended December 31, | ||||||||
| 2014 | 2013 | |||||||
| INCOME: | ||||||||
| Interest income | $ | 67,463 | $ | 98,756 | ||||
| Rental income | — | 38,500 | ||||||
| Amortization of deferred gain | 55,597 | — | ||||||
| Dividend from subsidiary | 1,000,000 | 4,500,000 | ||||||
| Total income | 1,123,060 | 4,637,256 | ||||||
| EXPENSES: | ||||||||
| Directors retirement plan | 10,800 | 10,800 | ||||||
| Depreciation | — | 12,229 | ||||||
| Legal fees | 48,000 | 45,000 | ||||||
| Stock related expense | 57,000 | 56,000 | ||||||
| Capital stock tax | — | 5,446 | ||||||
| Other | 7,700 | 7,700 | ||||||
| Total expenses | 123,500 | 137,175 | ||||||
| INCOME BEFORE INCOME TAX EXPENSE AND EQUITY IN UNDISTRUBUTED NET INCOME OF SUBSIDIARY | 999,560 | 4,500,081 | ||||||
| EQUITY IN UNDISTRUBUTED NET INCOME (LOSS) OF SUBSIDIARY | 1,555,324 | (2,920,165 | ) | |||||
| Income Tax Expense | — | 172,000 | ||||||
| NET INCOME | $ | 2,554,884 | $ | 1,407,916 | ||||
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CONDENSED STATEMENTS OF CASH FLOWS-PARENT CORPORATION ONLY
Years Ended December 31, | ||||||||
2014 | 2013 | |||||||
| OPERATING ACTIVITIES: | ||||||||
| Net income | $ | 2,554,884 | $ | 1,407,916 | ||||
| Adjustments to reconcile net income to cash provided by operating activities: | ||||||||
| Undistributed net (income) loss of subsidiary | (1,555,324 | ) | 2,920,165 | |||||
| Depreciation | — | 12,229 | ||||||
| (Increase) decrease in other assets | (9,686 | ) | 170,773 | |||||
| Decrease in other liabilities | (243,112 | ) | (71,258 | ) | ||||
| Net cash provided by operating activities | 746,762 | 4,439,825 | ||||||
| INVESTING ACTIVITIES: | ||||||||
| Principal repayments on ESOP loan | 147,943 | 139,349 | ||||||
| Proceeds from the sale of premises and equipment | — | 1,044,890 | ||||||
| Net cash provided by investing activities | 147,943 | 1,184,239 | ||||||
| FINANCING ACTIVITIES: | ||||||||
| Purchase of treasury stock | (6,843,371 | ) | (10,880,830 | ) | ||||
| Dividends paid | (909,763 | ) | (1,008,413 | ) | ||||
| Net cash used in financing activities | (7,753,134 | ) | (11,889,243 | ) | ||||
| Net decrease in cash and cash equivalents | (6,858,429 | ) | (6,265,179 | ) | ||||
| Cash and cash equivalents – beginning of period | 9,729,594 | 15,994,773 | ||||||
| Cash and cash equivalents – end of period | $ | 2,871,165 | $ | 9,729,594 | ||||
| Supplemental Schedule of Noncash Financing and Investing Activities: | ||||||||
| Deferred gain on sale of premises and equipment | $ | — | $ | 667,174 | ||||
16. Entry into a Material Definitive Agreement
On March 3, 2015, Alliance Bancorp, Inc. of Pennsylvania (“Alliance”) announced that it entered into an Agreement and Plan of Reorganization (the “Agreement”) with WSFS Financial Corporation (“WSFS”) providing for, among other things, the merger of Alliance with and into WSFS (the “Merger”) and the merger of Greater Delaware Valley Savings Bank d/b/a Alliance Bank, a Pennsylvania-chartered savings bank and a wholly owned subsidiary of Alliance, with and into Wilmington Savings Fund Society, FSB, a federal savings bank and wholly owned subsidiary of WSFS. Under the terms of the Agreement, all shares of Alliance common stock will be exchanged in the aggregate for approximately $26.6 million in cash and 816,151 shares of WSFS common stock. Each stockholder of Alliance will be able to elect to receive, for each of their shares of Alliance Bancorp, Inc. of Pennsylvania common stock, either 0.28955 shares of WSFS common stock or $22.00 in cash. The Merger is subject to customary closing conditions, including regulatory approvals and approval from Alliance’s shareholders.
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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, 2014. 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 1992 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, 2014.
| 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 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. |
Not applicable.
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Item 10. Directors, Executive Officers and Corporate Governance.
Directors
Set forth below is a brief description of the background of each director of the Company for at least the last five years, as well as any particular experience, attributes or skills that they possess that qualifies them to serve as a director.
Dennis D. Cirucci. Age 64. Mr. Cirucci has served as President and Chief Executive Officer of the Company since January 2007 and Chief Executive Officer of the Bank since April 2005 and President of the Bank since April 2003. Mr. Cirucci was also the Chief Operating Officer of the Bank between April 1997 and April 2005 and Executive Vice President of the Bank between April 1997 and April 2003. Between January 1993 and April 1997, Mr. Cirucci was the Executive Vice President, Treasurer and Chief Financial Officer. Between 1983 and 1993, Mr. Cirucci was the Bank’s Treasurer and Chief Financial Officer. Prior thereto, Mr. Cirucci was employed as a certified public accountant and national industry specialist with the accounting firm of Deloitte & Touche LLP. In 2012, Mr. Cirucci was appointed to a three year term serving the Community Depository Institution Advisory Council (CDIAC) for the Federal Reserve Bank of Philadelphia and also serves as Chairman of the Pennsylvania Association of Community Bankers. Mr. Cirucci’s positions as Director, President and Chief Executive Officer, his extensive experience in the banking industry and involvement in business and civic organizations in the communities that the Bank operates, as well as his prior accounting background provide the Board valuable insight regarding the business and operations of the Company.
J. William Cotter, Jr. Age 71. Mr. Cotter is the Chairman and a partner in Title Alliance, Ltd, a management company located in Media, Pennsylvania. Mr. Cotter is also the owner of Real Alliances, LLC, a consulting company located in Media, Pennsylvania, and a Director of J.M. Oliver Heating and Air Conditioning Company, Morton, Pennsylvania. In May 2010, Mr. Cotter purchased a controlling interest in 1031Corp, a Pennsylvania Company conducting Section 1031 real estate exchanges. Previously, Mr. Cotter served as Chief Executive Officer of T.A. Title Insurance Co., Media, Pennsylvania from 1979 until his retirement in December 2006. Mr. Cotter’s background and experience in real estate and ownership of other businesses position him well qualified to serve as a director.
Timothy E. Flatley. Age 55. Mr. Flatley is President and founder of Sterling Investment Advisors, Ltd. and has 33 years of experience in the financial services industry. Mr. Flatley has co-founded two financial service companies. Mr. Flatley was a founding member of Robin Hood Ventures, www.robinhoodventures.com, and has served as President of the Board of Directors of Robin Hood Ventures. Mr. Flatley was elected to Chairman of the Executive Committee of the Mid Atlantic Angel Group, www.magfund.com(MAG), in 2010. An active investor, Mr. Flatley has made early stage investments in sixteen private companies. He is an active member of the Association for Corporate Growth. As an experienced investment advisor and investor, Mr. Flatley brings valuable financial acumen and insight to Board.
William E. Hecht. Age 67. Mr. Hecht has been the Chairman of the Board since April 2000. Mr. Hecht was the Chief Executive Officer of the Bank between January 1990 and April 2005. Mr. Hecht was also the President of the Bank between January 1, 1990 and April 2003. Prior thereto, Mr. Hecht was a Senior Vice President and served the Bank in various positions beginning in 1972. Mr. Hecht is an attorney licensed to practice in the Commonwealth of Pennsylvania. Mr. Hecht’s prior service as chief executive officer of the Bank as well as his continued service as Chairman of the Board provide the Board with a wealth of knowledge and experience.
Howard Henick. Age 58. Mr. Henick has been an equity portfolio manager at ScurlyDog Capital, LLC since June 2008. Mr. Henick is a member of SD Capital Partners, LLC, the general partner of SD Financial Institutions and Value Opportunity Fund, LP. ScurlyDog Capital, LLC is a New Jersey state-registered investment advisor specializing in community bank and thrift equities. From 1998 to 2007, Mr. Henick was an executive director at Morgan Stanley & Co. Prior to that, he was an executive director at Deutsche Bank Securities (1997-98), an associate then a vice president at Goldman Sachs (1985-1997) and an associate attorney at Cahill Gordon & Reindel (1981-85). Mr. Henick’s background and experience bring the Board valuable financial expertise and make him well qualified to serve as a director.
Peter J. Meier. Age 60. Mr. Meier has been Executive Vice President and Chief Financial Officer of the Company since January 2007 and Executive Vice President of the Bank since April 2003 and Chief Financial Officer of the Bank since April 1997. Mr. Meier was also a Senior Vice President of the Bank between April 1997 and April 2003. He joined the Bank in 1995 as Vice President of Finance. Prior to joining the Bank, Mr. Meier was employed by other financial institutions and also worked at Deloitte & Touche LLP in public accounting specializing in financial institutions. Mr. Meier is a CPA licensed to practice in the Commonwealth of Pennsylvania. Mr. Meier’s executive service to the Bank and previous financial institutions as well as his public accounting experience make him well qualified to serve as a director.
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Philip K. Stonier. Age 75. Mr. Stonier has been self-employed as an Individual Practitioner, Business Consultant and Tax Preparer since June 2000. Prior thereto, Mr. Stonier was the Treasurer, Financial Vice President and Chief Operating Officer for A&L Handles, Inc., Pottstown, Pennsylvania since 1981. A&L Handles, Inc. develops and manufactures caps and handles for tools. Prior to 1981, Mr. Stonier served as a partner in a small accounting firm. Mr. Stonier is a CPA licensed to practice in the Commonwealth of Pennsylvania. As a certified public accountant and business owner, Mr. Stonier brings a wealth of business, financial and accounting expertise to the Board.
R. Cheston Woolard. Age 62. Mr. Woolard is the senior partner of Woolard, Krajnik, Masciangelo, LLP, a certified public accounting firm with offices in Montgomery and Chester Counties, Pennsylvania. Chet is a member of the American and Pennsylvania Institutes of Certified Public Accountants. Chet is also a member of the West Whiteland Municipal Services Commission and was the Vice Chairman of the Downingtown Area Regional Authority. He is also an elected auditor for West Whiteland Township. As a certified public accountant and elected public official, he possesses a wide variety of business, financial and accounting expertise, which he brings to the Board.
Agreement with the PL Capital Parties
On February 19, 2014, the Company entered into a Standstill Agreement (the “Agreement”) with Financial Edge Fund, L.P., Financial Edge - Strategic Fund, L.P., PL Capital Focused Fund, L.P., Goodbody/PL Capital, L.P., PL Capital, LLC, PL Capital Advisors, LLC, Goodbody/PL Capital, LLC, John W. Palmer, Richard J. Lashley, Howard Henick, ScurlyDog Capital, LLC, SD Capital Partners, LLC and SD Financial Institutions and Value Opportunity Fund, LP (collectively, the “PL Capital Parties”). Pursuant to the Agreement, the Board of Directors of the Company was expanded by one member and Howard Henick was appointed as a director in March 2014. At the Company’s 2014 annual meeting of shareholders, Mr. Henick was re-nominated and elected for an additional three-year term, ending at the Company’s 2017 annual meeting of shareholders. The Agreement also provided that Mr. Henick was elected to the Board of Directors of the Bank.
Pursuant to the Agreement, the PL Capital Parties have agreed not to, among other things, (i) acquire or agree to acquire beneficial ownership in excess of 9.99% of the outstanding common stock of the Company, (ii) engage in or participate in any solicitation of proxies with respect to the voting of any securities of the Company, or (iii) seek to control or change the management, board of directors or policies of the Company or the Bank. At any annual meeting of shareholders during the standstill period, the PL Capital Parties also have agreed: (1) to vote all shares of common stock of the Company they beneficially own in favor of the nominees for election or re-election as a director of the Company selected by the Board of Directors, and (2) with respect to any other proposal submitted by any shareholder to a vote of the Company’s shareholders, to vote all of the shares of common stock of the Company they beneficially own in accordance with the recommendation of the Board of Directors with respect to any such shareholder proposal. However, the Agreement will not limit or affect: (1) any action or inaction by Mr. Henick in his capacity as a member of Board of Directors, provided he acts in good faith in the discharge of his fiduciary duties as a board member; or (2) the ability of the PL Capital Parties to engage in discussions with the president and chief executive officer of the Company, or upon invitation, with other members of management or the Board of Directors.
Executive Officers Who Are Not Directors
Set forth below is a brief description of the background of the executive officers who are not directors of the Company. There are no arrangements or understandings between the Company and such persons pursuant to which such persons were elected as an executive officer of the Company and such officers are not related to any director or other officer of the Company by blood, marriage or adoption.
William T. McGrath. Age 57. Mr. McGrath has been Senior Vice President of the Company since September 2010 and Senior Vice President and Chief Lending Officer of the Bank since September 2008. Prior to joining the Bank, Mr. McGrath was employed by First Priority Bank in Malvern as a Managing Director and Wachovia Bank, N.A. in Philadelphia as a Senior Vice President. He was also previously employed by the Federal Reserve Bank of Philadelphia as a bank examiner. He has over 30 years of banking experience in various lending, credit and management roles.
Suzanne J. Ricci. Age 47. Ms. Ricci has been Senior Vice President and Chief Operating Officer since April 2014 and Senior Vice President of the Company since January 2007 and the Chief Technology Officer and Senior Vice President of the Bank since April 2004. Ms. Ricci was also a Vice President of the Bank and served the Bank in various positions beginning in 1990.
Section 16(a) Beneficial Ownership Reporting Requirements
Section 16(a) of the Securities Exchange Act of 1934, as amended ("Exchange Act") requires the Company’s officers and directors, and persons who own more than 10% of the common stock, to file reports of ownership and changes in ownership with the SEC and the Nasdaq Stock Market. Officers, directors and greater than 10% shareholders are required by regulation to furnish the Company with copies of all Section 16(a) forms they file.
Based solely on review of the copies of such forms furnished to the Company, the Company believes that during, and with respect to, 2014, all Section 16(a) filing requirements applicable to its officers and directors were complied with.
Code of Ethics for Directors, Executive Officers and Financial Professionals
The board of directors has adopted a code of ethics for our directors, executive officers, including the chief executive officer and the chief financial officer, and financial professionals. Our directors and officers are expected to adhere at all times to this code of ethics. Failure to comply with this code of ethics is a serious offense and will result in appropriate disciplinary action. We have posted this code of ethics on our Internet website at www.allianceanytime.com.
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We will disclose on our Internet website at www.allianceanytime.com, to the extent and in the manner permitted by Item 5.05 of Form 8-K, the nature of any amendment to this code of ethics (other than technical, administrative, or other non-substantive amendments), our approval of any material departure from a provision of this code of ethics, and our failure to take action within a reasonable period of time regarding any material departure from a provision of this code of ethics that has been made known to any of our executive officers.
Audit Committee
The Company has established an audit Company. The audit committee engages the Company’s external auditor and reviews with management, the internal auditor and the external auditors the Company’s systems of internal control. In addition, the audit committee reviews with the external auditors and management the annual audited consolidated financial statements (including the Form 10-K), the quarterly Form 10-Q and monitors the Company’s adherence to accounting principles generally accepted in the United States of America for financial reporting. During 2014, the audit committee consisted of Messrs. Woolard (Chairman), Cotter and Stonier.
All of the members of the audit committee are independent as determined by the board of directors and as defined in the Nasdaq Stock Market’s listing standards and the regulations of the Securities and Exchange Commission (“SEC”). Based upon its charter, the audit committee meets a minimum of four times each year. In 2014, the audit committee met in regular session four times. The audit committee reviews and reassesses this charter annually. A copy of the audit committee charter can be viewed on our website at www.allianceanytime.com.
The board of directors have determined that Mr. Woolard, the chairman of the audit committee, meets the requirements adopted by the SEC for qualification as an audit committee financial expert. An audit committee financial expert is defined as a person who has the following attributes: (i) an understanding of accounting principles generally accepted in the United States of America and financial statements; (ii) the ability to assess the general application of such principles in connection with the accounting for estimates, accruals and reserves; (iii) experience preparing, auditing, analyzing or evaluating financial statements that present a breadth and level of complexity or accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by the registrant’s financial statements, or experience actively supervising one or more persons engaged in such activities; (iv) an understanding of internal controls and procedures for financial reporting; and (v) an understanding of audit committee functions.
The identification of a person as an audit committee financial expert does not impose on such person any duties, obligations or liability that are greater than those that are imposed on such person as a member of the audit committee and the board of directors in the absence of such identification. Moreover, the identification of a person as an audit committee financial expert for purposes of the regulations of the SEC does not affect the duties, obligations or liability of any other member of the audit committee or the board of directors. Finally, a person who is determined to be an audit committee financial expert will not be deemed an “expert” for purposes of Section 11 of the Securities Act of 1933.
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Item 11. Executive Compensation.
Summary Compensation Table
The following table sets forth a summary of certain information concerning the compensation awarded to or paid by the Company or its subsidiaries for services rendered in all capacities during the last two fiscal years to our principal executive officer and our two other highest compensated executive officers. We refer to these individuals as the “named executive officers.”
| Name and Principal Position | Year | Salary(1) | Stock | Option | Non-Equity Incentive Plan Compensation(3) | Nonqualified Compensation Earnings(4) | All
Other | Total | ||||||||||||||||||||||
| Dennis D. Cirucci | 2014 | $ | 320,050 | $ | — | $ | — | $ | 66,690 | $ | — | $ | 38,731 | $ | 425,471 | |||||||||||||||
| President and Chief Executive Officer | 2013 | 309,525 | — | — | 73,206 | — | 33,329 | 416,060 | ||||||||||||||||||||||
| Peter J. Meier | 2014 | 198,173 | — | — | 33,024 | — | 36,445 | 267,642 | ||||||||||||||||||||||
| Executive Vice | 2013 | 193,554 | — | — | 36,602 | — | 29,602 | 259,758 | ||||||||||||||||||||||
| President and Chief Financial Officer | ||||||||||||||||||||||||||||||
| William T. McGrath | 2014 | 177,038 | — | — | 29,500 | — | 35,882 | 242,420 | ||||||||||||||||||||||
| Senior Vice | 2013 | 173,596 | — | — | 32,822 | — | 27,473 | 233,891 | ||||||||||||||||||||||
| President and Chief Lending Officer | ||||||||||||||||||||||||||||||
_______________________
| (1) | We periodically review, and may increase, base salaries in accordance with the terms of employment agreements or normal annual compensation review for each of our named executive officers. |
| (2) | Reflects the aggregate grant date value computed in accordance with FASB ASC Topic 718 during the indicated fiscal year with respect to awards of restricted stock and stock options with respect to each of the named executive officers. For a discussion of the assumptions used to establish the valuation of the restricted stock awards and stock options, reference is made to Note 13 of the Notes to the Consolidated Financial Statements of the Company included in Item 8 hereto. |
| (3) | Reflects bonuses for the indicated year paid under the Company’s incentive bonus program. |
| (4) | None of the named executive officer’s received any above market or preferential earnings on compensation that is deferred on a basis that is not tax-qualified. |
| (5) | Includes club dues, automobile expenses, allocations under the ESOP, allocations under the 401(k) Plan, with respect to Messrs. Cirucci and Meier, life insurance premiums paid by the Company under the endorsement split dollar agreements with such executive officers and, with respect to Mr. Meier, tax reimbursement related to his supplemental executive retirement plan. |
Narrative to Summary Compensation Table
Base salaries for our named executive officers are generally approved by the Compensation Committee on an annual basis. The current salaries for 2015 as established by the Compensation Committee are $330,500, $208,000 and $184,000 for Messrs. Cirucci, Meier and McGrath, which represent increases of 3.44%, 4.00% and 3.13%, respectively, over their prior base salaries. Bonuses are earned under the Company’s incentive bonus program based upon the Company’s results of operations. In 2011, the Committee granted to Messrs. Cirucci, Meier and McGrath (i) stock options to purchase 66,500, 33,250 and 23,750 shares of common stock, respectively, with an exercise price of $11.05 and which vest 20% a year over five years from the date of grant commencing on July 20, 2012 under the Company’s 2011 Stock Option Plan; and (ii) 47,000, 22,000 and 15,000 shares of restricted stock, respectively, which vest 20% a year over five years from the date of grant commencing on July 20, 2012 under the Company’s 2011 Recognition and Retention Plan. No awards were made to the named executive officers in 2012, 2013 or 2014. In addition, the named executive officers receive compensation under the Company’s ESOP and 401(k) Plan.
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Outstanding Equity Awards at Fiscal Year-End
The following table sets forth information concerning outstanding equity awards held by each named executive officer as of December 31, 2014. The Company does not maintain an equity incentive plan that provides for payments based upon achievement of goals.
| Option Awards | Stock Awards | |||||||||||||||||||||
| Number of Securities
Underlying Unexercised Options | Exercise | Option Expiration | Number of Shares or Units of Stock That Have Not | Market Value of Shares or Units of Stock That Have Not | ||||||||||||||||||
| Name | Exercisable | Unexercisable(1) | Price(2) | Date | Vested(1) | Vested(3) | ||||||||||||||||
| Dennis D. Cirucci | 39,900 | 26,600 | $ | 11.05 | 7/20/2021 | 18,800 | $ | 346,108 | ||||||||||||||
| Peter J. Meier | 19,950 | 13,300 | 11.05 | 7/20/2021 | 8,800 | $ | 162,008 | |||||||||||||||
| William T. McGrath | 14,250 | 9,500 | 11.05 | 7/20/2021 | 6,000 | $ | 110,460 | |||||||||||||||
_________________
| (1) | The grants of stock options and restricted stock vest 20% each year over five years commencing on July 20, 2012. |
| (2) | Based upon the fair market value on the date of grant. |
| (3) | Based upon a fair market value of $18.41 per share for the common stock as of December 31, 2014. |
Option Exercises and Stock Vested
The following table sets forth certain information with respect to stock options exercised and restricted stock awards vested by the named executive officers during the year ended December 31, 2014.
| Option Awards | Stock Awards | |||||||||||||||
| Name | Number of Shares Acquired On Exercise | Value Realized On Exercise(1) | Number of Shares Acquired On Vesting | Value Realized On Vesting(1) | ||||||||||||
| Dennis D. Cirucci | — | $ | — | 9,400 | $ | 160,230 | ||||||||||
| Peter J. Meier | — | — | 4,400 | 74,824 | ||||||||||||
| William T. McGrath | — | — | 3,000 | 51,137 | ||||||||||||
_________________
| (1) | Based upon the fair market value of a share of common stock on the date of exercise or vesting. |
Employment Agreements
Alliance Bank has entered into amended employment agreements with Dennis D. Cirucci, President and Chief Executive Officer of the Company and the Bank, Peter J. Meier, Executive Vice President and Chief Financial Officer of the Company and the Bank, William T. McGrath, Senior Vice President and Chief Lending Officer of the Company and the Bank and Suzanne J. Ricci, Senior Vice President and Chief Operating Officer of the Company and the Bank.
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The agreement with Mr. Cirucci has a term of three years and the agreements for Messrs. Meier and McGrath and Ms. Ricci have a term of two years. The terms are extended annually unless either the Bank or the executive gives notice at least 60 days prior to the annual anniversary date that the agreement shall not be extended. Under the terms of the agreements, the executives receive an initial annual base salary which is reviewed from time to time and may be increased by the board of directors of the Bank. Under the agreements, Messrs. Cirucci, Meier and McGrath and Ms. Ricci receive a current annual salary of $330,500, $208,000, $184,000 and $178,000, respectively. The executives are entitled to participate in the Bank's benefit plans and programs and receive reimbursement for reasonable business expenses. Each of the agreements is terminable with or without cause by the Bank. The executives have no right to compensation or other benefits pursuant to the agreements for any period after voluntary termination by the executive or termination by the Bank for cause, as defined in the agreement. In the event of the executive’s termination due to retirement or disability, the Bank will continue to provide life, medical, dental and disability coverage for the remaining term of the agreement. In the event of the executive’s death during the term of the agreement, the Bank will continue to provide medical and dental coverage to the executive's surviving spouse until age 65. In each case, if the insurance coverage either cannot be provided or would trigger the payment of certain excise taxes, then the Bank shall pay a lump sum cash equivalency amount to the executive.
In the event that outside of a change in control, as defined in the agreements, (1) the executive terminates his or her employment as a result of certain adverse actions taken by the Bank or (2) the executive’s employment is terminated by the Bank other than for cause, disability, retirement or death, Mr. Cirucci will be entitled to a lump sum cash severance payment equal to three times (two times in the case of Mr. Meier and one times in the case of Mr. McGrath and Ms. Ricci) his average annual compensation, as defined in the agreements. In addition, the executive would be entitled to receive continued coverage under all life, medical, disability and other group insurance plans offered by the Bank until the earlier of the expiration of the remaining term of the agreement or subsequent full-time employment in the case of Messrs. Cirucci and Meier (or until the earlier of one year from the date of termination or subsequent full-time employment in the case of Ms. Ricci and Mr. McGrath), provided that in each case a lump cash equivalency amount will be paid to the executive if such coverage either cannot be provided or would trigger the payment of certain excise taxes. Each executive would also be entitled to receive a lump sum cash payment equal to the projected cost of providing benefits under certain other benefit plans to the executive for the remaining term of the agreement.
Messrs. Cirucci and Meier will be entitled to the same payments and benefits set forth above if their employment is terminated in connection with or following a change in control either by the Bank for other than cause, disability, retirement or death or by the executive as a result of certain adverse actions taken by the Bank. If the employment of Ms. Ricci or Mr. McGrath is terminated in connection with or within 24 months following a change in control for any of the reasons set forth in the preceding sentence, then such executive will be entitled to the following: a lump sum cash severance payment equal to two times his or her average annual compensation, as defined, (2) continued insurance coverage until the earlier of two years from the date of termination or subsequent full-time employment, with a lump sum cash equivalency amount to be paid if such coverage either cannot be provided or would trigger the payment of certain excise taxes, and (3) a lump sum cash payment equal to the projected cost of providing benefits under certain other benefit plans to the executive for the remaining term of the agreement.
The agreements with Messrs. Cirucci and Meier provide that if any of the payments or benefits to be provided thereunder or otherwise upon termination of employment are deemed to constitute a “parachute payment” within the meaning of Section 280G of the Internal Revenue Code, which would cause the executive to incur an excise tax under Section 4999 of the Internal Revenue Code, then the Bank shall pay the executive an amount such that after payment of all federal, state and local income tax and any additional excise tax, the executive will be fully reimbursed for the amount of such excise tax. The agreements with Mr. McGrath and Ms. Ricci provide that if any of the payments or benefits to be provided thereunder or otherwise upon termination of employment are deemed to constitute a “parachute payment” within the meaning of Section 280G of the Internal Revenue Code, then the payments and benefits shall be reduced by the minimum amount necessary so that no excise taxes are triggered under Section 4999 of the Internal Revenue Code.
The agreements also provide that during the term of the agreement and for the 12-month (24-month in the case of Mr. Cirucci) period immediately following termination, the executive will not (i) solicit or induce, or cause others to solicit or induce, any employee of the Bank or any of its affiliates or subsidiaries to leave the employment of such entities, or (iii) solicit any customer of the Bank or any of its affiliates or subsidiaries to transact business with any Company, partnership or other entity which is engaged in any line of business conducted by the Bank or any of its affiliates or subsidiaries during such period, including but not limited to entities which lend money and take deposits, or to reduce or refrain from doing any business with the Bank or its affiliates or subsidiaries, or interfere with or damage any relationship between the Bank or its affiliates or subsidiaries and any such customers.
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Benefit Plans
Retirement Income Plan. Alliance Bank maintains the Alliance Bank Retirement Income Plan, a non-contributory defined benefit pension plan qualified under the Employee Retirement Income Security Act of 1974, as amended. Employees became eligible to participate in the retirement plan upon the attainment of age 21 and the completion of one year of eligibility service. For purposes of the retirement plan, an employee earns one year of eligibility service upon the completion of 1,000 hours of service within a one-year eligibility computation period. An employee’s first eligibility computation period is the one-year period beginning on the employee’s date of hire. The Bank closed the Retirement Income Plan to new participants hired after April 30, 2008. In addition, the Bank has frozen the Alliance Bank Retirement Income Plan as of December 31, 2014.
The retirement plan provides for a monthly benefit upon a participant’s retirement at the age of 65. A participant may also receive a benefit on his or her early retirement date, which is the date on which he or she attains age 55, completes ten years of vesting service and such early retirement is approved by the Board. Benefits received prior to a participant’s normal retirement date are reduced by certain factors set forth in the retirement plan. Participants become fully vested in their benefits under the retirement plan upon the completion of five years of vesting service as well as upon the attainment of normal retirement age (age 65).
Employee Stock Ownership Plan. Alliance Bank maintains the Alliance Bank Employee Stock Ownership Plan (“ESOP”) for the benefit of its employees. Employees who have been credited with at least 1,000 hours of service during a 12-month period and who have attained age 21 are eligible to participate in the ESOP. The ESOP purchased 74,073 shares of common stock in the reorganization and offering completed on January 30, 2007 using proceeds of a loan from the former mid-tier holding company. Alliance Bank currently makes quarterly payments of principal and interest on this loan to the Company over a term of 15 years at an annual rate of 8.25%. The ESOP has a second loan from the Company to fund the purchase of 150,991 shares in connection with the second step conversion and reorganization completed in January 2011. For this loan, Alliance Bank makes quarterly payments of principal and interest to the Company over a term of 20 years at an annual rate of 3.25%. The loans are secured by the shares of common stock purchased.
Shares purchased by the ESOP with the loan proceeds are held in a suspense account and released for allocation to participants on a pro rata basis as debt service payments are made. Shares released from the ESOP are allocated to each eligible participant's account based on the ratio of each such participant's compensation to the total compensation of all eligible employee stock ownership plan participants. Forfeitures may be used for several purposes such as the payment of expenses or they may be reallocated among remaining participating employees. The account balances of participants in the ESOP vest ratably over five years. In the case of a “change in control,” as defined in the ESOP, however, participants will become immediately fully vested in their account balances. Participants will also become fully vested in their account balances upon death, disability or retirement. Benefits may be payable upon retirement or separation from service.
The ESOP is subject to the requirements of the Employee Retirement Income Security Act of 1974, as amended, and the applicable regulations of the IRS and the Department of Labor.
2011 Stock Option Plan and 2011 Recognition Plan. In July 2011, shareholders approved our 2011 Stock Option Plan and our 2011 Recognition and Retention Plan. Pursuant to the terms of the 2011 Stock Option Plan, options to acquire up to 325,842 shares of common stock of the Company may be granted to employees and directors. Pursuant to the terms of the 2011 Recognition and Retention Plan, awards of up to 218,977 shares of restricted common stock of the Company may be granted to employees and directors. Under both of these stock benefit plans, awards may vest no faster than 20% per year, beginning one year from the date of grant. However, under both plans, vesting of any award is accelerated upon the death or disability of a recipient or upon a change-in-control of the Company. Initial awards were made to executive officers and directors under the 2011 Stock Option Plan and 2011 Recognition and Retention Plan in July 2011.
Supplemental Executive Retirement Plan. Alliance Bank currently maintains a supplemental executive retirement plan for Messrs. Cirucci and Meier. The supplemental retirement plan provides supplemental annual payments for the life of the participant commencing upon retirement. The supplemental annual payments under this plan are $108,261 and $72,263 for Messrs. Cirucci and Meier, respectively. If an executive has less than 18 years of service at the time of retirement, the annual payments are pro-rated. Messrs. Cirucci and Meier had 31 and 19 years of service, respectively, at December 31, 2014.
Endorsement Split Dollar Agreements. Alliance Bank has purchased insurance policies on the lives of Messrs. Cirucci and Meier, and has entered into endorsement split dollar agreements with each of those officers. The policies are owned by Alliance Bank. Under the agreements with the named executive officers, upon an officer's death while he or she remains employed by Alliance Bank or after a termination of employment, the death benefits under the insurance policies on the officer's life in excess of the cash surrender value will be paid to the officer's beneficiary. Alliance Bank will receive the full cash surrender value, which is expected to reimburse Alliance Bank in full for its life insurance investment.
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The endorsement split dollar agreements may be terminated at any time by the Bank. Upon termination, the Bank may surrender the policy and collect the cash surrender value or, with the officer's consent, transfer the policy to the officer.
Incentive Bonus Program. The Company has maintained a practice of paying incentive cash bonuses based on specific performance criteria as set forth in its annual budget. Target bonuses, expressed as a percentage of salary and category weights assigned to each performance component, are set by the board of directors based on recommendations by the compensation committee. The compensation committee uses various outside sources such as salary surveys and other statistical data in setting the target incentive rate. Individual components are reviewed annually along with the target bonus amounts. The weights assigned to each performance category may be adjusted from year to year to challenge the executives in the areas considered by the board of directors to be more important. Performance payments are generally capped at 120% of a performance category and no bonuses are paid for any individual performance category unless 60% of the targeted goal is met.
For 2014, the incentive bonus program components consisted of budgeted targets for net income, net interest income, noninterest income, noninterest expense, deposit growth and loan production. Each program component was assigned a weight factor and the actual bonus assigned to that component was driven by the percent by which the target was exceeded or missed. The target bonus for 2014 was 25.0% of the chief executive officer’s salary and 20.0% of an executive’s salary and the actual bonus paid for 2014 was 20.8% for the chief executive officer and 16.7% for the other named executive officers.
Director Compensation
During the year ended December 31, 2014 each non-employee member of the board of directors of the Company received $900 for each meeting attended. In addition, Mr. Hecht, as Chairman of the Board, received an annual retainer of $75,000 and each non-employee director, including Mr. Hecht, received an annual retainer of $12,000. The committee chairman and non-employee board members received an additional fee of $600 and $500, respectively, for each committee meeting attended in 2014, except that the chairman of the audit committee received $750 for each meeting attended. The Chairman of the Board receives no committee fees.
The table below summarizes the total compensation paid to our non-employee directors for the fiscal year ended December 31, 2014.
| Name | Fees Earned or Paid in Cash | Stock | Option | All Other | Total | |||||||||||||||
| J. William Cotter, Jr. | $ | 27,000 | $ | — | $ | — | 1,800 | $ | 28,800 | |||||||||||
| Timothy E. Flatley | 26,200 | — | — | 1,800 | 28,000 | |||||||||||||||
| William E. Hecht | 97,800 | — | — | 125,511 | (3) | 223,311 | ||||||||||||||
| Howard Henick (4) | 23,000 | — | — | 1,350 | 24,350 | |||||||||||||||
| Philip K. Stonier | 27,000 | — | — | 1,800 | 28,800 | |||||||||||||||
| R. Cheston Woolard | 27,300 | — | — | 1,800 | 29,100 | |||||||||||||||
______________________
| (1) | Reflects the aggregate grant date value computed in accordance with FASB ASC Topic 18 with respect to the grant of stock options and restricted stock. No stock options or restricted stock was granted to the non-employee directors in 2014. At December 31, 2014, each non-employee director except for Mr. Hecht and Mr. Henick held vested options to purchase 8,010 shares of common stock and unvested options to purchase 5,340 shares of common stock at $11.05 per share and Mr. Hecht held vested options to purchase 9,750 shares of common stock and unvested options to purchase 6,500 shares of common stock at $11.05 per share. In addition, at December 31, 2014 each non-employee director except for Mr. Hecht and Mr. Henick held an unvested restricted stock award for 4,120 shares of common stock and Mr. Hecht held an unvested restricted stock award for 4,360 shares of common stock. |
| (2) | Includes an allocation to each non-employee director of $150 per month under the Directors’ Retirement Plan. |
| (3) | Includes the annual payment of $104,016 pursuant to Mr. Hecht’s supplemental executive retirement plan, life insurance premiums, club dues and automobile expenses. |
| (4) | Mr. Henick was first elected to the Board in April of 2014. |
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Directors’ Retirement Plan. The Company maintains the Directors’ Retirement Plan and Trust Agreement (the “Directors’ Retirement Plan”) in order to provide retirement benefits to non-employee directors who have provided expertise in enabling the Company and Bank to experience successful growth and development.
Each current and future non-employee member of the board of directors of the Company and the Bank is eligible to participate in the Directors’ Retirement Plan, which provides directors with an accrued benefit in an amount equal to the number of months served as a director multiplied by $150. For purposes of determining a director’s accrued benefit, months of service prior to the adoption of the Directors’ Retirement Plan were recognized. The Directors’ Retirement Plan provides that trust may be used to fund its obligations. The amount of the retirement benefit actually received under the Directors’ Retirement Plan shall equal the value of the investments on behalf of such individual as reflected in his account balance.
Under the Directors’ Retirement Plan Trust, the trustees are given limited investment choices. Specifically, the trustees may invest trust assets in common stock of the Company, interest bearing accounts at the Bank, including certificates of deposit with the Bank, U.S. governmental securities and agencies thereof and funds that invest in such securities. The trust also allows the trustees to establish investment options consistent with the foregoing investment authority which the Company may provide to its directors so that they may express their investment preferences. The trustees, however, retain ultimate investment authority over trust assets.
A director shall receive his retirement benefit in the form of a lump sum payment on his retirement date, which is the first day of the quarter following the date of his retirement from service as a member of the board of directors. The Directors’ Retirement Plan provides that if a director dies prior to his retirement date, the director’s retirement benefit shall be paid to the director’s designated beneficiary, and in the absence of such designated beneficiary, to the director’s estate.
Retirement Agreement. The Bank entered into a Retirement Agreement with William E. Hecht, the former chief executive officer of the Bank. The terms of the retirement agreement provide that the Bank will maintain $300,000 in life insurance coverage until he attains age 85. In addition, so long as Mr. Hecht serves as Chairman of the Board of Directors, the Bank will continue to provide certain perquisites, including an office at the Bank's headquarters, club membership, an automobile and other benefits.
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Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Beneficial Ownership of our Common Stock by Certain Beneficial Owners and Management
The following table sets forth as of March 2, 2015 certain information as to the common stock beneficially owned by (a) each person or entity, including any “group” as that term is used in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), who or which was known to us to be the beneficial owner of more than 5% of the issued and outstanding common stock, (b) the directors and director nominees, (c) the executive officers named in the Summary Compensation Table (the “named executive officers”) who do not serve as directors; and (d) all directors and executive officers as a group.
| Beneficial Owner | Amount and Nature of Beneficial Ownership at March 2, 2015(1) | Percent of Class | ||||||
| PL Capital Group 67 Park Place East, Suite 675 Morristown, New Jersey 07960 | 393,196 | (2) | 9.7 | % | ||||
| Clover Partners LP 100 Crescent Ct., Suite 575 Dallas, Texas 75201 | 337,191 | (3) | 8.4 | |||||
| DePrince, Race &Zollo, Inc. 250 Park Avenue South, Suite 250 Winter Park, Florida 32789 | 321,922 | (4) | 8.0 | |||||
| Alliance Bank Employee Stock Ownership Plan 541 Lawrence Avenue Broomall, Pennsylvania 19008 | 313,059 | (5) | 7.8 | |||||
Firefly Value Partners, LP 551 Fifth Avenue, 36th Floor New York, New York 10176 | 307,127 | (6) | 7.6 | |||||
Maltese Capital Management LLC 150 East 52nd Street, 30th Floor New York, New York 10022 | 222,300 | (7) | 5.5 | |||||
| Directors: | ||||||||
| Dennis D. Cirucci | 119,917 | (8) | 2.9 | |||||
| J. William Cotter, Jr. | 44,377 | (9) | 1.1 | |||||
| Timothy E. Flatley | 22,701 | (10) | * | |||||
| William E. Hecht | 74,508 | (11) | 1.8 | |||||
| Howard Henick | 39,376 | (12) | * | |||||
| Peter J. Meier | 66,059 | (13) | 1.6 | |||||
| Philip K. Stonier | 20,952 | (14) | * | |||||
| R. Cheston Woolard | 21,595 | (15) | * | |||||
| Named Executive Officers: | ||||||||
| William T. McGrath | 29,876 | (16) | * | |||||
| All Directors and Executive Officers as a Group (10 persons) | 485,219 | (17) | 11.7 | |||||
| * | Represents less than 1% of our outstanding common stock. |
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| (1) | Based upon filings made pursuant to the Exchange Act and information furnished by the respective individuals. Under regulations promulgated pursuant to the Exchange Act, shares of common stock are deemed to be beneficially owned by a person if he or she directly or indirectly has or shares (i) voting power, which includes the power to vote or to direct the voting of the shares, or (ii) investment power, which includes the power to dispose or to direct the disposition of the shares. Unless otherwise indicated, the named beneficial owner has sole voting and dispositive power with respect to the shares and none of the shares are pledged. |
| (2) | According to filings under the Exchange Act, the PL Capital Group consists of the following persons and entities which share beneficial ownership of certain of the shares: Financial Edge Fund, LP (“Financial Edge Fund”); Financial Edge-Strategic Fund, LP (“Financial Edge Strategic”); PL Capital Focused Fund, L.P. (“Focused Fund”); PL Capital, LLC (“PL Capital”), general partner of Financial Edge Fund, Financial Edge Strategic and Focused Fund; PL Capital Advisors, LLC (“PL Capital Advisors”), the investment advisor to Financial Edge Fund, Financial Edge Strategic, Focused Fund and Goodbody/PL LP; Goodbody/PL Capital, LP (“Goodbody/PL LP”); Goodbody/PL Capital LLC (“Goodbody/PL LLC”), general partner of Goodbody/PL LP; John W. Palmer, as managing member of PL Capital, PL Capital Advisors and Goodbody/PL LLC and individually; Richard Lashley, as a managing member of PL Capital, PL Capital Advisors and Goodbody/PL LLC, and individually. |
| (3) | According to filings under the Exchange Act, the shares are held by MHC Mutual Conversion Fund, L.P., a Texas limited partnership (the “Fund’). The shares are also deemed to be beneficially owned by Clover Partners, L.P., a Texas limited partnership and the general partner and investment advisor of the Fund, Clover Investments, L.L.C., a Texas limited liability company and the general partner of Clover Partners, L.P., and Michael C. Mewhinney, the principal of Clover Investments, L.L.C. |
| (4) | According to filings under the Exchange Act, DePrince, Race & Zollo, Inc. has sole voting power with respect to 316,352 shares and sole dispositive power with respect to 321,922 shares. |
| (5) | The Alliance Bank Employee Stock Ownership Plan (“ESOP”) is an employee benefit plan with individual accounts for the benefit of participating employees and their beneficiaries. The ESOP’s assets are held in trust by the trustees, currently Suzanne J. Ricci, Kathleen P. Lynch and Janet R. Bryan (the “Plan Trustees”). As of the March 2, 2015, 178,325 shares of common stock in the ESOP were allocated to individual accounts established for participating employees and their beneficiaries and 134,734 shares of common stock were unallocated. In general, participating employees have the power and authority to direct the voting of shares of common stock allocated to their individual accounts and unallocated shares of common stock are generally voted by the Plan Trustees in same manner that the majority of the shares that have been allocated are actually voted, subject to the fiduciary duties of the Plan Trustees and applicable law. |
| (6) | According to filings under the Exchange Act, the shares are beneficially owned by FVP Master Fund, L.P. (“FVP Master Fund”); Firefly Value Partners, LP (“Firefly Partners”), which serves as the investment manager of FVP Master Fund; FVP GP, LLC (“FVP GP”), which serves as the general partner of FVP Master Fund; Firefly Management Company GP, LLC (“Firefly Management”), which serves as the general partner of Firefly Partners; and Messrs. Ryan Heslop and Ariel Warszawski, the managing members of FVP GP and Firefly Management. All of the indicated shares are directly owned by FVP Master Fund. Messrs. Heslop and Warszawski, Firefly Partners, Firefly Management and FVP GP may be deemed to share voting and dispositive power over the shares with FVP Master Fund, but disclaim beneficial ownership with respect to any shares not directly owned by such person. |
| (7) | According to filings under the Exchange Act, the shares are held by clients of Maltese Capital Management LLC (“MCM”), a registered investment adviser, and Terry Maltese, as managing member of MCM, who possess shared voting and dispositive power over the shares. |
| (8) | Includes 23,236 shares held in the ESOP, 37,075 shares held in the Company’s Profit Sharing and 401(k) Plan (the “401(k) Plan”) and 39,900 shares which may be acquired upon the exercise of stock options exercisable within 60 days of March 2, 2015. |
| (9) | Includes 542 shares held in a simplified employee pension program, 5,198 shares held in an IRA for the benefit of Mr. Cotter, 8,837 shares held in the trust established pursuant to the Directors' Retirement Plan, 9,646 shares held in Mr. Cotter's family living trust, 9,144 shares held jointly with Mrs. Cotter and 8,010 shares which may be acquired upon the exercise of stock options exercisable within 60 days of March 2, 2015. |
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| (10) | Includes 7,450 shares held jointly with Mr. Flatley's spouse, 5,657 shares held in an IRA for the benefit of Mr. Flatley, 1,584 shares held in the trust established pursuant to the Directors' Retirement Plan and 8,010 shares which may be acquired upon the exercise of stock options exercisable within 60 days of March 2, 2015. |
| (11) | Includes 16,459 shares held in the ESOP, 1,575 shares held in the trust established pursuant to the Directors' Retirement Plan, 46,724 shares held jointly with Mr. Hecht's spouse and 9,750 shares which may be acquired upon the exercise of stock options exercisable within 60 days of March 2, 2015. |
| (12) | Includes 29,289 shares held by SD Financial Institutions and Value Opportunity Fund, L.P., a Delaware limited partnership (“SD Fund”), in Mr. Henick’s capacity as a member of SD Capital Partners, LLC, a Delaware limited liability company and general partner of the SD Fund, and in Mr. Henick’s capacity as portfolio manager of ScurlyDog Capital, LLC, a Delaware limited liability company and investment advisor to the SD Fund and 87 shares held in the trust established pursuant to the Directors’ Retirement Plan. |
| (13) | Includes 11,405 shares held jointly with Mr. Meier's spouse, 15,176 shares held in the ESOP, 19,528 shares held in the 401(k) Plan and 19,950 shares which may be acquired upon the exercise of stock options exercisable within 60 days of March 2, 2015. |
| (14) | Includes 1,500 shares held jointly with Mr. Stonier’s daughter, 1,721 shares held in an IRA for the benefit of Mr. Stonier, 1,901 shares held in the trust established pursuant to the Directors' Retirement Plan and 8,010 shares which may be acquired upon the exercise of stock options exercisable within 60 days of March 2, 2015. |
| (15) | Includes 10,886 shares held jointly with Mr. Woolard's spouse, 1,699 shares held in the trust established pursuant to the Directors' Retirement Plan and 8,010 shares which may be acquired upon the exercise of stock options exercisable within 60 days of March 2, 2015. |
| (16) | Includes 2,801 shares held jointly with Mr. McGrath’s spouse, 4,676 shares held in the ESOP for the benefit of Mr. McGrath, 8,149 shares held in the 401(k) Plan and 14,250 shares which may be acquired upon the exercise of stock options exercisable within 60 days of March 2, 2015. |
| (17) | Includes, in the case of all directors and executive officers of the Company as a group, 70,452 shares of common stock which are held in the ESOP, 70,988 shares of common stock held in the Profit Sharing and 401(k) Plan, 16,106 shares of common stock held in the Directors' Retirement Plan, and 135,840 shares which may be acquired upon the exercise of stock options exercisable within 60 days of March 2, 2015. |
Equity Compensation Plan Information. The following table provides information as of December 31, 2014 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 | 453,620 | (1) | $ | 11.23 | (1) | 5,792 | (1) | |||||
| Equity compensation plans not approved by security holders | — | — | — | |||||||||
| Total | 453,620 | $ | 11.23 | 5,792 | ||||||||
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______________________
| (1) | Includes 81,960 shares subject to restricted stock grants which were not vested as of December 31, 2014. Excludes 5,700 stock options and 1,500 shares of restricted stock that were forfeited in 2014. The weighted-average exercise price and the number of securities remaining available for future issuance under equity compensation plans excludes such restricted stock. |
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Related Party Transactions and Indebtedness of Management
The Company's policy provides that all loans made by Alliance Bank to its directors and officers are made in the ordinary course of business, are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and do not involve more than the normal risk of collectibility or present other unfavorable features. As of December 31, 2014, four of the Company's directors and executive officers or their affiliates had loans outstanding totaling approximately $434,000 in the aggregate. All such loans were made by Alliance Bank in the ordinary course of business, were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with persons not related to Alliance Bank, and did not involve more than the normal risk of collectability or present other unfavorable features.
Under the Company's audit committee charter, the audit committee is required to review and approve all related party transactions, as described in Item 404 of Regulation S-K of the SEC's rules. To the extent such transactions are ongoing business relationships with the Company or the Bank, such transactions shall be reviewed annually and such relationships shall be on terms not materially less favorable than what would be usual and customary in similar transactions between unrelated persons dealing at arms' length.
Item 14. Principal Accounting Fees and Services.
The following table sets forth the aggregate fees paid by us to BDO USA, LLP in 2014 and 2013 for professional services rendered in connection with the audit of the Company’s consolidated financial statements, as well as the fees paid by us for audit-related services, tax services and all other services rendered by BDO USA, LLP.
| Year Ended December 31, | ||||||||
| 2014 | 2013 | |||||||
| Audit fees (1) | $ | 144,596 | $ | 118,783 | ||||
| Audit-related fees | — | — | ||||||
| Tax fees (2) | 18,165 | 861 | ||||||
| All other fees | — | — | ||||||
| Total | $ | 162,761 | $ | 119,644 | ||||
| (1) | Audit fees consist of fees incurred in connection with the audit of our annual consolidated financial statements and the review of the interim consolidated financial statements included in our quarterly reports. |
| (2) | Tax fees include the preparation of state and federal tax returns. |
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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, 2014 and 2013.
Consolidated Statements of Income for the years ended December 31, 2014 and 2013.
Consolidated Statements of Comprehensive Income for the years ended December 31, 2014 and 2013.
Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2014 and 2013.
Consolidated Statements of Cash Flows for the years ended December 31, 2014 and 2013.
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 | |
| 2.1 | Agreement and Plan of Reorganization, dated as of March 2, 2015, by and between WSFS Financial Corporation and Alliance Bancorp, Inc. of Pennsylvania (7) | |
| 3.1 | Articles of Incorporation of Alliance Bancorp, Inc. of Pennsylvania (1) | |
| 3.2 | Amended and Restated Bylaws of Alliance Bancorp, Inc. of Pennsylvania (2) | |
| 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 *(3) | |
| 10.2 | Alliance Bank Amended and Restated Supplemental Executive Retirement Plan and Participation Agreement 409A Restatement *(3) | |
| 10.3 | Greater Delaware Valley Savings d/b/a Alliance Bank Endorsement Split Dollar Insurance Agreement*(4) | |
| 10.4 | Amended and Restated Employment Agreement, dated December 17, 2014, between Alliance Bank and Dennis D. Cirucci *(5) | |
| 10.5 | Amended and Restated Employment Agreement, dated December 17, 2014, between Alliance Bank and Peter J. Meier *(5) | |
| 10.6 | Amended and Restated Employment Agreement, dated December 17, 2014, between Alliance Bank and William T. McGrath *(5) | |
| 10.7 | Amended and Restated Employment Agreement, dated December 17, 2014, between Alliance Bank and Suzanne J. Ricci *(5) | |
| 10.8 | Alliance Bancorp, Inc. of Pennsylvania 2011 Stock Option Plan *(6) | |
| 10.9 | Alliance Bancorp, Inc. of Pennsylvania 2011 Recognition and Retention Plan and Trust Agreement *(6) | |
| 10.10 | Separation, Non-Competition and Consulting Agreement, dated as of March 2, 2015, by and between WSFS Financial Corporation and Alliance Bancorp, Inc. of Pennsylvania and Dennis D. Cirucci* | |
| 10.11 | Separation, Non-Competition and Consulting Agreement, dated as of March 2, 2015, by and between WSFS Financial Corporation and Alliance Bancorp, Inc. of Pennsylvania and Peter J. Meier* | |
| 16.1 | Subsidiaries – Referenced is made to Item 1. Business – Subsidiaries. | |
| 23.1 | Consent of BDO USA, LLP | |
| 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.INS | XBRL Instance Document | |
| 101.SCH | XBRL Taxonomy Extension Schema Document | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF | XBRL Taxonomy Extension Definitions Linkbase Document | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
_____________________
| * | 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 by reference from the Current Report of Alliance Bancorp, Inc. of Pennsylvania (File No. 000-54246) filed with the Securities and Exchange Commission on June 4, 2013. | |
| (3) | 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. | |
| (4) | 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. |
| 110 |
| (5) | 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 December 19, 2014. | |
| (6) | 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) | |
| (7) | 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 March 6, 2015. |
| 111 |
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 25, 2015 | 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 25, 2015 | |
| President | ||
| and Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| /s/Peter J. Meier | ||
| Peter J. Meier | March 25, 2015 | |
| Executive Vice President | ||
| and Chief Financial Officer | ||
| (Principal Financial and Accounting Officer) | ||
| /s/William E. Hecht | ||
| William E. Hecht | March 25, 2015 | |
| Chairman of the Board | ||
| /s/J. William Cotter, Jr. | ||
| J. William Cotter, Jr. | March 25, 2015 | |
| Director | ||
| /s/Philip K. Stonier | ||
| Philip K. Stonier | March 25, 2015 | |
| Director | ||
| /s/R. Cheston Woolard | ||
| R. Cheston Woolard | March 25, 2015 | |
| Director | ||
| /s/Timothy E. Flatley | ||
| Timothy E. Flatley | March 25, 2015 | |
| Director | ||
| /s/Howard Henick | ||
| Howard Henick | March 25, 2015 | |
| Director |
| 112 |