UNITED STATES SECURITIES AND EXCHANGE COMMISSION | |||
Washington, D.C. 20549 | |||
FORM 8-K/A (Amendment No. 1) | |||
CURRENT REPORT | |||
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |||
Date of Report (Date of earliest event reported) | January 1, 2017 | ||
Prudential Bancorp, Inc. | |||||||
(Exact name of registrant as specified in its charter) | |||||||
Pennsylvania | 000-55084 | 46-2935427 | |||||
(State or other jurisdiction | (Commission File Number) | (IRS Employer | |||||
of incorporation) | Identification No.) | ||||||
1834 West Oregon Avenue, Philadelphia, Pennsylvania | 19145 | ||||||
(Address of principal executive offices) | (Zip Code) | ||||||
Registrant’s telephone number, including area code | (215) 755-1500 |
Not Applicable | ||
(Former name or former address, if changed since last report) | ||
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2 below): | ||
☐ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) | |
☐ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) | |
☐ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) | |
☐ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) | |
Explanatory Note
This Current Report on Form 8-K/A (“Form 8-K/A”) amends the Current Report on Form 8-K filed by Prudential Bancorp, Inc. (the “Company”) on January 3, 2017 reporting the completion on January 1, 2017 of the acquisition of Polonia Bancorp, Inc. (“Polonia”) and its wholly owned subsidiary, Polonia Bank, pursuant to the terms of the Agreement and Plan of Merger dated as of June 2, 2016 by and between the Company and Polonia, to include the financial statements and pro forma financial information required by Item 9.01 of Form 8-K with regard to the acquisition of Polonia by the Company.
Item 9.01 | Financial Statements and Exhibits | |
(a) | Financial Statements of Businesses Acquired. | |
(i) The audited consolidated financial statements of Polonia as of December 31, 2015 and 2014 are incorporated as Exhibit 99.2 (incorporated into this Item 9.01(a) by reference to the Company’s Registration Statement on Form S-4, as amended, initially filed with the Securities and Exchange Commission (the “SEC”) on July 22, 2016.) | ||
(ii) The unaudited statement of financial condition of Polonia as of September 30, 2016, and the unaudited consolidated statements of income (loss) for the nine months ended September 30, 2016 and 2015, the unaudited consolidated statements of comprehensive income (loss) for the nine months ended September 30, 2016 and 2015, the unaudited consolidated statement of changes in stockholders’ equity for the nine months ended September 30, 2016 and the unaudited consolidated statements of cash flows for the nine months ended September 30, 2016 and 2015 and the related notes thereto are filed herewith as Exhibit 99.3 and incorporated into this Item 9.01(a) by reference thereto. | ||
(b) | Pro Forma Financial Information. | |
The unaudited pro forma combined condensed consolidated statement of financial condition as of December 31, 2016 and the unaudited combined condensed consolidated statements of operations for the three months ended December 31, 2016 required by this item are incorporated are filed herewith as Exhibit 99.4 and are incorporated into this Item 9.01(b) by reference thereto. | ||
(c) |
Not applicable. | |
(d) | The following exhibits are included with this Report: |
2 |
Exhibit No. |
Description | |
2.1 | Agreement and Plan of Merger dated June 2, 2016 by and between Prudential Bancorp, Inc. and Polonia Bancorp, Inc. (filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K dated as of June 2, 2016 filed on June 2, 2016 and incorporated herein by reference) | |
23.1 | Consent of S.R. Snodgrass, P.C. | |
99.1 | Press release dated January 3, 2017 (filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K dated as of January 3, 2017 and filed on January 3, 2017 and incorporated herein by reference) | |
99.2 | Audited consolidated financial statements of Polonia of December 31, 2015 and 2014 (incorporated herein by reference to the Company’s Registration Statement on Form S-4, as amended, initially filed with the SEC on July 22, 2016) | |
99.3 | Unaudited consolidated statement of financial condition of Polonia as of September 30, 2016, and the unaudited consolidated statements of income(loss) for the nine months ended September 30, 2016 and 2015, unaudited consolidated statements of comprehensive income(loss) for the nine-months ended September 30, 2016 and 2015, the unaudited consolidated statement of changes in stockholders’ equity for the nine months ended September 30, 2016 and the unaudited consolidated statements of cash flows for the nine months ended September 30, 2016 and 2015 | |
99.4 | Unaudited pro forma combined condensed statement of financial condition as of December 31, 2016 and the unaudited pro forma combined condensed consolidated statement of operations for the three months ended December 31, 2016 |
3 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
PRUDENTIAL BANCORP, INC. | ||||
By: | /s/ Jack E. Rothkopf | |||
Name: | Jack E. Rothkopf | |||
Title: |
Senior Vice President, Chief Financial Officer and Treasurer | |||
Date: March 17, 2017 |
4 |
EXHIBIT INDEX
Exhibit No. |
Description | |
2.1 | Agreement and Plan of Merger dated June 2, 2016 by and between Prudential Bancorp, Inc. and Polonia Bancorp, Inc. (filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K dated as of June 2, 2016 filed on June 2, 2016 and incorporated herein by reference) | |
23.1 | Consent of S.R. Snodgrass, P.C. | |
99.1 | Press release dated January 3, 2017 (filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K dated as of January 3, 2017 and filed on January 3, 2017 and incorporated herein by reference) | |
99.2 | Audited consolidated financial statements of Polonia of December 31, 2015 and 2014 (incorporated herein by reference to the Company’s Registration Statement on Form S-4, as amended, initially filed with the SEC on July 22, 2016) | |
99.3 | Unaudited consolidated statement of financial condition of Polonia as of September 30, 2016, and the unaudited consolidated statements of income(loss) for the nine months ended September 30, 2016 and 2015, unaudited consolidated statements of comprehensive income(loss) for the nine-months ended September 30, 2016 and 2015, the unaudited consolidated statement of changes in stockholders’ equity for the nine months ended September 30, 2016 and the unaudited consolidated statements of cash flows for the nine months ended September 30, 2016 and 2015 | |
99.4 | Unaudited pro forma combined condensed statement of financial condition as of December 31, 2016 and the unaudited pro forma combined condensed consolidated statement of operations for the three months ended December 31, 2016 |
5 |
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statement No. 333-212641 on Form S-4 of Prudential Bancorp, Inc. and subsidiary (the “Company”) and in this Form 8-K/A of the Company, our report dated April 6, 2016, relating to the audited consolidated financial statements of Polonia Bancorp, Inc. as of December 31, 2015, and for the year then ended, which appears in the Form S-4 Registration Statement of the Company filed with the SEC on July 22, 2016.
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Cranberry Township, Pennsylvania
March 17, 2017
Exhibit 99.3
POLONIA BANCORP, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
September 30, | December 31, | |||||||
2016 | 2015 | |||||||
ASSETS | ||||||||
Cash and due from banks | $ | 1,546,949 | $ | 1,785,566 | ||||
Interest-bearing deposits with other institutions | 11,952,389 | 29,351,650 | ||||||
Cash and cash equivalents | 13,499,338 | 31,137,216 | ||||||
Certificates of deposit | 12,644,000 | 15,980,000 | ||||||
Investment securities available for sale | 71,815,048 | 54,871,523 | ||||||
Loans receivable | 154,418,653 | 161,765,015 | ||||||
Covered loans | 10,473,739 | 11,686,062 | ||||||
Total loans | 164,892,392 | 173,451,077 | ||||||
Less: allowance for loan losses | 1,001,889 | 1,272,072 | ||||||
Net loans | 163,890,503 | 172,179,005 | ||||||
Accrued interest receivable | 708,984 | 671,994 | ||||||
Federal Home Loan Bank stock | 3,648,800 | 3,659,700 | ||||||
Premises and equipment, net | 3,922,751 | 3,998,409 | ||||||
Bank-owned life insurance | 4,241,518 | 4,257,456 | ||||||
FDIC indemnification asset | (39,274 | ) | 473,951 | |||||
Other assets | 5,121,838 | 4,381,552 | ||||||
TOTAL ASSETS | $ | 279,453,506 | $ | 291,610,806 | ||||
LIABILITIES | ||||||||
Deposits | $ | 174,535,929 | $ | 188,222,282 | ||||
FHLB advances – short term | 12,000,000 | - | ||||||
FHLB advances – long term | 49,000,000 | 56,000,000 | ||||||
Advances by borrowers for taxes and insurance | 529,737 | 988,906 | ||||||
Accrued interest payable | 169,694 | 139,397 | ||||||
Other liabilities | 6,124,833 | 8,759,648 | ||||||
TOTAL LIABILITIES | 242,360,193 | 254,110,233 | ||||||
Commitments and contingencies | - | - | ||||||
STOCKHOLDERS’ EQUITY | ||||||||
Preferred stock ($.01 par value; 1,000,000 shares authorized; none issued or outstanding) | - | - | ||||||
Common stock ($.01 par value; 14,000,000 shares authorized; 3,348,827 and 3,348,827 shares issued) | 33,488 | 33,488 | ||||||
Additional paid-in-capital | 25,758,750 | 25,591,969 | ||||||
Retained earnings | 12,290,719 | 12,849,370 | ||||||
Unallocated shares held by Employee Stock Ownership Plan “ESOP” (147,941 and 162,288 shares) | (1,232,911 | ) | (1,354,858 | ) | ||||
Accumulated other comprehensive income | 243,267 | 380,604 | ||||||
TOTAL STOCKHOLDERS’ EQUITY | 37,093,313 | 37,500,573 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 279,453,506 | $ | 291,610,806 |
See accompanying notes to the unaudited consolidated financial statements.
1 |
POLONIA BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS) (UNAUDITED)
Nine Months | ||||||||
Ended September 30, | ||||||||
2016 | 2015 | |||||||
INTEREST AND DIVIDEND INCOME | ||||||||
Loans receivable | $ | 5,620,539 | $ | 6,582,498 | ||||
Investment securities | 898,661 | 1,001,335 | ||||||
Other interest and dividend income | 324,878 | 255,862 | ||||||
Total interest and dividend income | 6,844,078 | 7,839,695 | ||||||
INTEREST EXPENSE | ||||||||
Deposits | 1,164,066 | 1,276,493 | ||||||
FHLB advances – short term | 5,703 | - | ||||||
FHLB advances – long term | 1,049,441 | 1,098,045 | ||||||
Advances by borrowers for taxes and insurance | 2,207 | 2,550 | ||||||
Total interest expense | 2,221,417 | 2,377,088 | ||||||
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES | 4,622,661 | 5,462,607 | ||||||
Provision for loan losses | - | 73,150 | ||||||
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES | 4,622,661 | 5,389,457 | ||||||
NONINTEREST INCOME | ||||||||
Service fees on deposit accounts | 69,109 | 80,001 | ||||||
Loss on bank-owned life insurance | (15,938 | ) | (6,815 | ) | ||||
Gains on sales of Investment securities, net | 716,841 | 560,367 | ||||||
Gain on sale of loans, net | 76 | 2,687,925 | ||||||
Rental income | 206,329 | 197,927 | ||||||
Other | 46,538 | 473,537 | ||||||
Total noninterest income | 1,022,955 | 3,992,942 | ||||||
NONINTEREST EXPENSE | ||||||||
Compensation and employee benefits | 2,957,854 | 4,586,672 | ||||||
Occupancy and equipment | 909,535 | 993,365 | ||||||
Federal deposit insurance premiums | 382,809 | 412,402 | ||||||
Data processing expense | 318,975 | 306,778 | ||||||
Professional fees | 455,142 | 577,541 | ||||||
Other | 1,437,014 | 1,937,768 | ||||||
Total noninterest expense | 6,461,329 | 8,814,526 | ||||||
Income (loss) before income tax expense | (815,713 | ) | 567,873 | |||||
Income tax expense (benefit) | (257,062 | ) | 235,729 | |||||
NET INCOME (LOSS) | $ | (558,651 | ) | $ | 332,144 | |||
EARNINGS PER SHARE – Basic | $ | (0.18 | ) | $ | 0.11 | |||
EARNINGS PER SHARE –Diluted | $ | (0.18 | ) | $ | 0.10 |
See accompanying notes to the unaudited consolidated financial statements.
2 |
POLONIA BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
Nine Months Ended September 30, | ||||||||
2016 | 2015 | |||||||
Net income (loss) | $ | (558,651 | ) | $ | 332,144 | |||
Changes in net unrealized gain (loss) on investment securities available for sale | 508,754 | 1,277,422 | ||||||
Tax effect | (172,976 | ) | (434,324 | ) | ||||
Reclassification adjustment for gains on sale of Investment securities included in net income (loss) | (716,841 | ) | (560,367 | ) | ||||
Tax effect | 243,726 | 190,525 | ||||||
Total other comprehensive income (loss) | (137,337 | ) | 473,256 | |||||
Total comprehensive income (loss) | $ | (695,988 | ) | $ | 805,400 |
See accompanying notes to the unaudited consolidated financial statements.
3 |
POLONIA BANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
Common Stock | Additional Paid-In- | Retained | Unallocated Shared Held | Accumulated Other Comprehensive | ||||||||||||||||||||||||
Shares | Amount | Capital | Earnings | by ESOP | Income | Total | ||||||||||||||||||||||
Balance, December 31, 2015 | 3,348,827 | $ | 33,488 | $ | 25,591,969 | $ | 12,849,370 | $ | (1,354,858 | ) | $ | 380,604 | $ | 37,500,573 | ||||||||||||||
Net loss | (558,651 | ) | (558,651 | ) | ||||||||||||||||||||||||
Other comprehensive loss, net | (137,337 | ) | (137,337 | ) | ||||||||||||||||||||||||
Stock options compensation expense | 80,467 | 80,467 | ||||||||||||||||||||||||||
Allocation of unearned ESOP shares | 33,812 | 121,947 | 155,759 | |||||||||||||||||||||||||
Allocation of unearned restricted share awards | 52,502 | 52,502 | ||||||||||||||||||||||||||
Balance, September 30, 2016 | 3,348,827 | $ | 33,488 | $ | 25,758,750 | $ | 12,290,719 | $ | (1,232,911 | ) | $ | 243,267 | $ | 37,093,313 |
See accompanying notes to the unaudited consolidated financial statements.
4
POLONIA BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended September 30, | ||||||||
2016 | 2015 | |||||||
OPERATING ACTIVITIES | ||||||||
Net (loss) income | $ | (558,651 | ) | $ | 332,144 | |||
Adjustments to reconcile net (loss) income to net cash used for operating activities: | ||||||||
Provision for loan losses | - | 73,150 | ||||||
Depreciation, amortization, and accretion | 853,094 | 818,944 | ||||||
Investment securities, gains | (716,841 | ) | (560,367 | ) | ||||
Proceeds from sale of loans held for sale | - | 51,880,887 | ||||||
Net gain on sale of loans held for sale | - | (2,445,559 | ) | |||||
Origination of loans held for sale | - | (48,308,430 | ) | |||||
Net gain on sale of loans held for investment | - | (242,366 | ) | |||||
Loss (gain) on the sale of other real estate owned | 44,334 | (72,469 | ) | |||||
Loss on bank-owned life insurance | 15,938 | 6,815 | ||||||
Deferred federal income taxes | (795,595 | ) | (929,980 | ) | ||||
(Increase) decrease in accrued interest receivable | (36,990 | ) | 116,322 | |||||
Increase in accrued interest payable | 30,297 | 30,983 | ||||||
Decrease in accrued payroll and commissions | - | - | ||||||
Compensation expense for stock options, ESOP and restricted stock | 288,728 | 305,960 | ||||||
Other, net | (1,888,531 | ) | 779,089 | |||||
Net cash provided by (used for) operating activities | (2,764,217 | ) | 1,785,123 | |||||
INVESTING ACTIVITIES | ||||||||
Investment securities available for sale: | ||||||||
Proceeds from principal repayments and maturities | 10,133,404 | 3,609,768 | ||||||
Purchases | (44,440,424 | ) | (4,700,000 | ) | ||||
Proceeds from sales | 17,699,162 | 8,616,069 | ||||||
Investment securities held to maturity: | ||||||||
Proceeds from principal repayments and maturities | - | 4,569,283 | ||||||
Maturities of certificates of deposit | 27,343,000 | - | ||||||
Purchases of certificates of deposit | (24,007,000 | ) | - | |||||
Proceeds from sale of loans held for investment | - | 26,366,649 | ||||||
Decrease in loans receivable, net | 6,301,002 | 6,396,095 | ||||||
Decrease in covered loans | 1,237,440 | 1,195,825 | ||||||
Purchases of Federal Home Loan Bank stock | (734,900 | ) | (65,900 | ) | ||||
Redemptions of Federal Home Loan Bank stock | 745,800 | 241,400 | ||||||
Proceeds from the sale of other real estate owned | 138,026 | 349,637 | ||||||
Payments received from FDIC under loss share agreement | 18,826 | 122,270 | ||||||
Purchase of premises and equipment | (162,474 | ) | (63,417 | ) | ||||
Net cash provided by (used for) investing activities | (5,728,138 | ) | 46,637,679 | |||||
FINANCING ACTIVITIES | ||||||||
Decrease in deposits, net | (13,686,354 | ) | (13,757,062 | ) | ||||
Increase in FHLB advances – short term | 12,000,000 | - | ||||||
Repayments on FHLB advances – long term | (7,000,000 | ) | (3,000,000 | ) | ||||
Decrease in advances by borrowers for taxes and insurance, net | (459,169 | ) | (664,786 | ) | ||||
Exercised options | - | 17,497 | ||||||
Net cash used for financing activities | (9,145,523 | ) | (17,404,351 | ) | ||||
Increase (decrease) in cash and cash equivalents | (17,637,878 | ) | 31,018,451 | |||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 31,137,216 | 12,174,230 | ||||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 13,499,338 | $ | 43,192,681 | ||||
SUPPLEMENTAL CASH FLOW DISCLOSURES | ||||||||
Cash paid: | ||||||||
Interest | $ | 2,191,120 | $ | 2,346,105 | ||||
Income taxes | - | 455,000 | ||||||
Noncash items: | ||||||||
Transfer of investment securities held to maturity to available for sale | - | 40,103,961 | ||||||
Loans transferred to other real estate owned | 922,385 | - |
5
POLONIA BANCORP, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Basis of Presentation
Polonia Bancorp, Inc. (the “Company”), a Maryland corporation, was incorporated in August 2011 and organized by Polonia MHC, Polonia Bancorp, and Polonia Bank (the “Bank”) to facilitate the second-step conversion of the Company from the mutual holding company structure to the stock holding company structure (the “Conversion”). Upon consummation of the Conversion, which occurred on November 9, 2012, the Company became the holding company for the Bank and a 100 percent publicly owned stock holding company.
The Bank was incorporated under federal law in 1923. The Bank is a federally chartered savings bank located in Huntingdon Valley, Pennsylvania, whose principal sources of revenue emanate from its investment securities portfolio and its portfolio of residential real estate, commercial real estate, and consumer loans, as well as a variety of deposit services offered to its customers through five offices located in the Greater Philadelphia area. As of September 30, 2016, the Bank was subject to regulation by the Office of Comptroller of the Currency (“OCC”) and the Federal Deposit Insurance Corporation (“FDIC”).
The consolidated financial statements include the accounts of the Bank and the Bank’s wholly owned subsidiaries, PBHMC (“PBMHC”), a Delaware investment company, and Community Abstract Agency, LLC (“CAA”). CAA provides title insurance on loans secured by real estate. All significant intercompany transactions have been eliminated in consolidation. The investment in subsidiaries on the parent Company’s financial statements is carried at the parent Company’s equity in the underlying net assets.
The accompanying unaudited interim financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine month period ended September 30, 2016 are not necessarily indicative of the results that may be expected for the full year. The December 31, 2015 Consolidated Balance Sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. generally accepted accounting principles (“GAAP”). For additional information, refer to the financial statements and footnotes thereto included in the Company’s Form 10-K for the year ended December 31, 2015.
Use of Estimates in the Preparation of Financial Statements
The accounting principles followed by the Company and the methods of applying these principles conform to GAAP and to general practice within the banking industry. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the Consolidated Balance Sheet date and reported amounts of revenues and expenses for the period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant changes in the near term relate to the determination of the allowance for loan losses, the valuation of deferred tax assets, and the fair value of financial instruments.
6 |
Reclassification of Comparative Amounts
Certain items previously reported have been reclassified to conform to the current year’s reporting format. Such reclassifications did not affect consolidated net income or consolidated stockholders’ equity.
2. Earnings Per Share
There are no convertible securities which would affect the numerator in calculating basic and diluted earnings per share; therefore, net income (loss) as presented on the Consolidated Statement of Income (Loss) will be used as the numerator.
The following table set forth the composition of the weighted-average shares (denominator) used in the basic and diluted earnings per share computation.
Nine Months Ended | ||||||||
September 30, | ||||||||
2016 | 2015 | |||||||
Net income (loss): | $ | (558,651 | ) | $ | 332,144 | |||
Weighted average number of shares issued | 3,348,827 | 3,334,427 | ||||||
Less weighted average number of unearned ESOP shares | (154,358 | ) | (173,466 | ) | ||||
Less weighted average number of nonvested restricted stock awards | (10,658 | ) | (27,774 | ) | ||||
Weighted average shares outstanding basic | 3,183,811 | 3,133,187 | ||||||
Dilutive effect of nonvested stock | - | - | ||||||
Dilutive effect of stock options | - | 52,349 | ||||||
Weighted average shares outstanding diluted | 3,183,811 | 3,185,536 | ||||||
Earnings per share: | ||||||||
Basic | $ | (0.18 | ) | $ | 0.11 | |||
Diluted | (0.18 | ) | 0.10 |
At September 30, 2016 there were 9,111 shares of restricted stock outstanding at a grant date fair value of $10.25 per share and options to purchase 128,051 shares of common stock ranging from a price of $10.25 per share to a price of $13.31 per share that were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive. At September 30, 2015 there 15,255 shares of restricted stock outstanding at a grant date fair value of $10.25 per share and options to purchase 134,880 shares of common stock ranging from a price of $10.25 per share to a price of $13.25 per share that were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive.
7 |
3. Investment Securities
The amortized cost, gross unrealized gains and losses, fair value of investment securities available for sale are summarized as follows:
September 30, 2016 | ||||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
Available for Sale | ||||||||||||||||
Mortgage-backed securities: | ||||||||||||||||
Fannie Mae | $ | 13,475,078 | $ | 224,874 | $ | (5,129 | ) | $ | 13,694,823 | |||||||
Freddie Mac | 13,551,810 | 86,375 | (7,968 | ) | 13,630,217 | |||||||||||
Government National Mortgage Association | 775,040 | 40,888 | (4,943 | ) | 810,985 | |||||||||||
Collateralized mortgage obligations-government sponsored entities | 26,058,634 | 43,213 | (79,418 | ) | 26,022,429 | |||||||||||
Total mortgage-backed securities | 53,860,562 | 395,350 | (97,458 | ) | 54,158,454 | |||||||||||
Corporate securities | 15,444,203 | 92,405 | (33,187 | ) | 15,503,421 | |||||||||||
Municipal securities | 1,825,343 | 20,300 | - | 1,845,643 | ||||||||||||
Total debt securities | 71,130,108 | 508,055 | (130,645 | ) | 71,507,518 | |||||||||||
Common stock | 316,354 | 12,009 | (20,833 | ) | 307,530 | |||||||||||
Total investment securities | $ | 71,446,462 | $ | 520,064 | $ | (151,478 | ) | $ | 71,815,048 | |||||||
December 31, 2015 | ||||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
Available for Sale | ||||||||||||||||
Mortgage-backed securities: | ||||||||||||||||
Fannie Mae | $ | 25,168,077 | $ | 615,222 | $ | (93,362 | ) | $ | 25,689,937 | |||||||
Freddie Mac | 10,161,730 | 82,167 | (120,472 | ) | 10,123,425 | |||||||||||
Government National Mortgage Association | 399,799 | 48,639 | (2 | ) | 448,436 | |||||||||||
Collateralized mortgage obligations-government sponsored entities | 984,609 | 23,730 | (16,865 | ) | 991,474 | |||||||||||
Total mortgage-backed securities | 36,714,215 | 769,758 | (230,701 | ) | 37,253,272 | |||||||||||
Corporate securities | 16,921,170 | 88,731 | (51,995 | ) | 16,957,906 | |||||||||||
Municipal securities | 499,649 | 106 | - | 499,755 | ||||||||||||
Total debt securities | 54,135,034 | 858,595 | (282,696 | ) | 54,710,933 | |||||||||||
Common stock | 159,816 | 774 | - | 160,590 | ||||||||||||
Total investment securities | $ | 54,294,850 | $ | 859,369 | $ | (282,696 | ) | $ | 54,871,523 |
8 |
The following table shows the Company’s gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position.
September 30, 2016 | ||||||||||||||||||||||||
Less Than Twelve Months | Twelve Months or Greater | Total | ||||||||||||||||||||||
Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | |||||||||||||||||||
Mortgage-backed securities: | ||||||||||||||||||||||||
Fannie Mae | $ | 476,327 | $ | (5,129 | ) | $ | - | $ | - | $ | 476,327 | $ | (5,129 | ) | ||||||||||
Freddie Mac | 4,487,653 | (7,968 | ) | - | - | 4,487,653 | (7,968 | ) | ||||||||||||||||
Government National Mortgage Association | 427,762 | (4,942 | ) | 1,243 | (1 | ) | 429,005 | (4,943 | ) | |||||||||||||||
Collateralized mortgage obligations-government sponsored entities | 18,415,388 | (69,144 | ) | 306,209 | (10,274 | ) | 18,721,597 | (79,418 | ) | |||||||||||||||
Total mortgage-backed Securities | 23,807,130 | (87,138 | ) | 307,452 | (10,275 | ) | 24,114,582 | (97,485 | ) | |||||||||||||||
Corporate securities | 2,475,365 | (33,187 | ) | - | - | 2,475,365 | (33,187 | ) | ||||||||||||||||
Total debt securities | 26,282,495 | (120,370 | ) | 307,452 | (10,275 | ) | 26,589,947 | (130,645 | ) | |||||||||||||||
Common stock | 153,673 | (20,833 | ) | - | - | 153,673 | (20,833 | ) | ||||||||||||||||
Total investment securities | $ | 26,436,168 | $ | (141,203 | ) | $ | 307,452 | $ | (10,275 | ) | $ | 26,743,620 | $ | (151,478 | ) |
December 31, 2015 | ||||||||||||||||||||||||
Less Than Twelve Months | Twelve Months or Greater | Total | ||||||||||||||||||||||
Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | |||||||||||||||||||
Mortgage-backed securities: | ||||||||||||||||||||||||
Fannie Mae | $ | 8,990,826 | $ | (93,362 | ) | $ | - | $ | - | $ | 8,990,826 | $ | (93,362 | ) | ||||||||||
Freddie Mac | 3,619,913 | (13,501 | ) | 4,501,893 | (106,971 | ) | 8,121,806 | (120,472 | ) | |||||||||||||||
Government National Mortgage Association | 1,332 | (2 | ) | - | - | 1,332 | (2 | ) | ||||||||||||||||
Collateralized mortgage obligations-government sponsored entities | 515,046 | (16,472 | ) | 5,257 | (393 | ) | 520,303 | (16,865 | ) | |||||||||||||||
Total mortgage-backed Securities | 13,127,117 | (123,337 | ) | 4,507,150 | (107,364 | ) | 17,634,267 | (230,701 | ) | |||||||||||||||
Corporate securities | 11,156,390 | (51,995 | ) | - | - | 11,156,390 | (51,995 | ) | ||||||||||||||||
Total | $ | 24,283,507 | $ | (175,332 | ) | $ | 4,507,150 | $ | (107,364 | ) | $ | 28,790,657 | $ | (282,696 | ) |
The Company reviews its position quarterly and has determined that at September 30, 2016, the declines outlined in the above table represent temporary declines and the Company does not intend to sell these securities and does not believe it will be required to sell these securities before recovery of their cost basis, which may be at maturity. There were 43 positions that were temporarily impaired at September 30, 2016. The Company has concluded that the unrealized losses disclosed above are not other than temporary but are the result of interest rate changes that are not expected to result in the non-collection of principal and interest during the period.
9
The amortized cost and fair value of debt securities at September 30, 2016, by contractual maturity, are shown below. Mortgage-backed securities provide for periodic, general monthly, payments of principal and interest and have contractual maturities ranging from 3 to 30 years. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Available for Sale | ||||||||
Amortized Cost | Fair Value | |||||||
Due within one year | $ | 5,209,097 | $ | 5,215,581 | ||||
Due after one year through five years | 13,579,447 | 13,666,836 | ||||||
Due after five years through ten years | 7,408,408 | 7,455,456 | ||||||
Due after ten years | 44,933,156 | 45,169,645 | ||||||
Total | $ | 71,130,108 | $ | 71,507,518 |
For the nine month period ended September 30, 2016 the Company realized gross gains of $716,841 and proceeds from the sale of investment securities of $17,699,162.
On August 1, 2015 the Company transferred all of its held-to-maturity investment securities, which consisted of $40.1 million in mortgage-backed securities, to available-for sale. The purpose of this transfer was to provide additional liquidity and to provide the ability to reduce exposure to interest rate risk through the sale of longer term securities. Subsequently, the Company sold 3 securities which were longer term in maturity to provide additional liquidity and to reduce exposure to interest rate risk.
For the nine month period ended September 30, 2015 the Company realized gross gains of $560,367 and proceeds from the sale of investment securities of $8,616,069.
4. Loans Receivable
Loans receivable consist of the following:
September 30, | December 31, | |||||||
2016 | 2015 | |||||||
Mortgage loans: | ||||||||
One-to-four family | $ | 138,779,462 | $ | 144,242,214 | ||||
Multi-family and commercial real estate | 8,046,044 | 10,414,249 | ||||||
146,825,506 | 154,656,463 | |||||||
Commercial loans | 3,439 | 7,181 | ||||||
Home equity loans | 2,638,820 | 2,827,816 | ||||||
Home equity lines of credit (“HELOCs”) | 3,480,644 | 2,459,848 | ||||||
Education loans | 977,231 | 1,233,539 | ||||||
Other consumer loans | 391 | 693 | ||||||
Non-covered consumer loans purchased | 371,147 | 466,805 | ||||||
Covered loans | 10,473,739 | 11,686,062 | ||||||
164,770,917 | 173,338,407 | |||||||
Less: | ||||||||
Net deferred loan costs | (121,475 | ) | (112,670 | ) | ||||
Allowance for loan losses | 1,001,889 | 1,272,072 | ||||||
Total | $ | 163,890,503 | $ | 172,179,005 |
10
The components of covered loans by portfolio class as of September 30, 2016 and December 31, 2015 were as follows:
September 30, 2016 | December 31, 2015 | |||||||
Mortgage loans: | ||||||||
One-to-four family | $ | 5,050,537 | $ | 5,457,518 | ||||
Multi-family and commercial real estate | 5,398,372 | 6,200,152 | ||||||
10,448,909 | 11,657,670 | |||||||
Commercial | 24,830 | 28,392 | ||||||
Total Loans | $ | 10,473,739 | $ | 11,686,062 |
The carrying value of loans acquired and accounted for in accordance with ASC 310-30 was determined by projecting discounted contractual cash flows.
The outstanding balance, including interest, and carrying values of loans acquired were as follows:
2016 | 2015 | |||||||||||||||
Acquired Loans With Specific Evidence of Deterioration in Credit Quality (ASC 310-30) | Acquired Loans Without Specific Evidence of Deterioration in Credit Quality (ASC 310-30 Analogized) | Acquired Loans With Specific Evidence of Deterioration in Credit Quality (ASC 310-30) | Acquired Loans Without Specific Evidence of Deterioration in Credit Quality (ASC 310-30 Analogized) | |||||||||||||
Outstanding balance | $ | 676,492 | $ | 15,571,800 | $ | 739,499 | $ | 17,776,069 | ||||||||
Carrying amount, net of allowance | $ | 460,458 | $ | 10,384,428 | $ | 473,500 | $ | 11,679,367 |
During the nine months ended September 30, 2016 and 2015, respectively, the Company did not record a provision or charge-off for increases in the expected losses for acquired loans with specific evidence of deterioration in credit quality.
Changes in the accretable yield for acquired loans were as follows for the nine months ended September 30, 2016 and 2015.
Nine Months | Nine Months | |||||||
Acquired Loans Without Specific Evidence of Deterioration in Credit Quality (ASC 310-30 Analogized) | Acquired Loans Without Specific Evidence of Deterioration in Credit Quality (ASC 310-30 Analogized) | |||||||
Balance at beginning of period | $ | 5,599,018 | $ | 6,381,792 | ||||
Reclassifications and other | (437,629 | ) | 581,414 | |||||
Accretion | (594,432 | ) | (719,345 | ) | ||||
Balance at end of period | $ | 4,566,957 | $ | 6,243,861 |
11
The $594,432 and $719,345 recognized as accretion represents the interest income earned on acquired loans for the nine months ended September 30, 2016 and 2015, respectively. Included in reclassifications and other for loans acquired without specific evidence of deterioration in credit quality was $97,444 and $(1,092,535) of reclassifications from non-accretable discounts to accretable discounts for the nine months ended September 30, 2016 and 2015, respectively. The remaining $(535,073) and $(511,121) change in the accretable yield represents reductions in contractual interest due to contractual principal prepayments for the nine months ended September 30, 2016 and 2015, respectively.
5. Allowance for Loan Losses
Management has an established methodology to determine the adequacy of the allowance for loan losses that assesses the risks and losses inherent in the loan portfolio. For purposes of determining the allowance for loan losses, the Company has segmented certain loans in the portfolio by product type. Loans are segmented into the following pools: one-to-four family real estate, multi-family and commercial real estate, commercial loans, home equity loans, home equity lines of credit, and education and other consumer loans. Historical loss percentages for each risk category are calculated and used as the basis for calculating allowance allocations. These historical loss percentages are calculated over a three year period for all portfolio segments. Certain qualitative factors are then added to the historical allocation percentage to get the adjusted factor to be applied to non-classified loans. The following qualitative factors are analyzed for each portfolio segment:
● | Levels of and trends in delinquencies and classifications |
● | Trends in volume and terms |
● | Changes in collateral |
● | Changes in management and lending staff |
● | Economic trends |
● | Concentrations of credit |
● | Changes in lending policies |
● | Changes in loan review |
● | External factors |
These qualitative factors are reviewed each quarter and adjusted based upon relevant changes within the portfolio.
The total allowance reflects management’s estimate of loan losses inherent in the loan portfolio at the Consolidated Balance Sheet date. The Company considers the allowance for loan losses adequate to cover loan losses inherent in the loan portfolio, at September 30, 2016.
12
The following table summarizes changes in the allowance for loan losses:
Allowance for Loan Losses For the Nine Months Ended September 30, 2016 and 2015 | ||||||||||||||||||||||||||||||||
One-to- Four
Family | Multi-Family
| Commercial | Home Equity | HELOCs | Education and Other Consumer | Unallocated | Total | |||||||||||||||||||||||||
Nine Months Ended September 30, 2016 | ||||||||||||||||||||||||||||||||
Allowance for Loan Losses: | ||||||||||||||||||||||||||||||||
Balance at beginning of period | $ | 774,482 | $ | 306,606 | $ | 18 | $ | 10,638 | $ | 17,055 | $ | 5,570 | $ | 157,703 | $ | 1,272,072 | ||||||||||||||||
Provision (credit) for loan losses | 149,053 | (183,904 | ) | (8 | ) | 1,893 | (8,703 | ) | (1,239 | ) | 42,908 | - | ||||||||||||||||||||
Charge-offs | (283,143 | ) | - | - | - | - | - | - | (283,143 | ) | ||||||||||||||||||||||
Recoveries | 12,960 | - | - | - | - | - | - | 12,960 | ||||||||||||||||||||||||
Net (charge-offs) recoveries | (270,183 | ) | - | - | - | - | - | - | (270,183 | ) | ||||||||||||||||||||||
Balance at end of period | $ | 653,352 | $ | 122,702 | $ | 10 | $ | 12,531 | $ | 8,352 | $ | 4,331 | $ | 200,611 | $ | 1,001,889 | ||||||||||||||||
Nine Months Ended September 30, 2015 | ||||||||||||||||||||||||||||||||
Allowance for Loan Losses: | ||||||||||||||||||||||||||||||||
Balance at beginning of period | $ | 962,753 | $ | 427,636 | $ | - | $ | 7,590 | $ | 10,599 | $ | 6,771 | $ | 634 | $ | 1,415,983 | ||||||||||||||||
Provision (credit) for loan losses | (4,028 | ) | (71,569 | ) | 21 | 3,346 | 2,684 | 73 | 142,623 | 73,150 | ||||||||||||||||||||||
Charge-offs | (128,424 | ) | - | - | - | - | - | - | (128,424 | ) | ||||||||||||||||||||||
Recoveries | 221 | - | - | - | - | - | - | 221 | ||||||||||||||||||||||||
Net (charge-offs) recoveries | (128,203 | ) | - | - | - | - | - | - | (128,203 | ) | ||||||||||||||||||||||
Balance at end of period | $ | 830,522 | $ | 356,067 | $ | 21 | $ | 10,936 | $ | 13,283 | $ | 6,844 | $ | 143,257 | $ | 1,360,930 |
The decrease in the allowance for loan losses related to the one-to-four family real estate loan portfolio is related to the decrease in the balance of loans and the adjustment of the qualitative factors. The decrease in the allowance for loan losses to the commercial real estate loan portfolio is related to the adjustment of qualitative factors.
The following tables present the allowance for credit losses and recorded investments in loans by category:
At September 30, 2016 | ||||||||||||||||||||||||||||||||
One-to- Four Family Real Estate | Multi-family and Commercial Real Estate | Commercial | Home Equity | HELOCs | Education and Other Consumer | Unallocated | Total | |||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||||||
Ending balance | $ | 653,352 | $ | 122,702 | $ | 10 | $ | 12,531 | $ | 8,352 | $ | 4,331 | $ | 200,611 | $ | 1,001,889 | ||||||||||||||||
Ending balance: individually evaluated for impairment | $ | 3,104 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 3,104 | ||||||||||||||||
Ending balance: collectively evaluated for impairment | $ | 650,248 | $ | 122,702 | $ | 10 | $ | 12,531 | $ | 8,352 | $ | 4,331 | $ | 200,611 | $ | 998,785 | ||||||||||||||||
Ending balance: loans acquired with deteriorated credit quality | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||
Loans: | ||||||||||||||||||||||||||||||||
Ending balance | $ | 143,829,999 | $ | 13,444,416 | $ | 28,269 | $ | 2,638,820 | $ | 3,480,644 | $ | 1,348,769 | $ | - | $ | 164,770,917 | ||||||||||||||||
Ending balance: individually evaluated for impairment | $ | 2,088,027 | $ | 592,777 | $ | - | $ | 46,300 | $ | - | $ | - | $ | - | $ | 2,727,104 | ||||||||||||||||
Ending balance: collectively evaluated for impairment | $ | 136,691,435 | $ | 7,453,267 | $ | 3,439 | $ | 2,592,520 | $ | 3,480,644 | $ | 977,622 | $ | - | $ | 151,198,927 | ||||||||||||||||
Ending balance: loans acquired with deteriorated credit quality | $ | 5,050,537 | $ | 5,398,372 | $ | 24,830 | $ | - | $ | - | $ | 371,147 | $ | - | $ | 10,844,886 |
13 |
At December 31, 2015 | ||||||||||||||||||||||||||||||||
One-to- Four Family Real Estate | Multi-family and Commercial Real Estate | Commercial | Home Equity | HELOCs | Education and Other Consumer | Unallocated | Total | |||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||||||
Ending balance | $ | 774,482 | $ | 306,606 | $ | 18 | $ | 10,638 | $ | 17,055 | $ | 5,570 | $ | 157,703 | $ | 1,272,072 | ||||||||||||||||
Ending balance: individually evaluated for impairment | $ | 3,104 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 3,104 | ||||||||||||||||
Ending balance: collectively evaluated for impairment | $ | 771,378 | $ | 306,606 | $ | 18 | $ | 10,638 | $ | 17,055 | $ | 5,570 | $ | 157,703 | $ | 1,268,968 | ||||||||||||||||
Ending balance: loans acquired with deteriorated credit quality | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||
Loans: | ||||||||||||||||||||||||||||||||
Ending balance | $ | 149,699,732 | $ | 16,614,401 | $ | 35,573 | $ | 2,827,816 | $ | 2,459,848 | $ | 1,701,037 | $ | - | $ | 173,338,407 | ||||||||||||||||
Ending balance: individually evaluated for impairment | $ | 2,027,628 | $ | 604,554 | $ | - | $ | 52,803 | $ | - | $ | - | $ | - | $ | 2,684,985 | ||||||||||||||||
Ending balance: collectively evaluated for impairment | $ | 142,214,586 | $ | 9,809,695 | $ | 7,181 | $ | 2,775,013 | $ | 2,459,848 | $ | 1,234,232 | $ | - | $ | 158,500,555 | ||||||||||||||||
Ending balance: loans acquired with deteriorated credit quality | $ | 5,457,518 | $ | 6,200,152 | $ | 28,392 | $ | - | $ | - | $ | 466,805 | $ | - | $ | 12,152,867 |
Credit Quality Information
The following tables represent credit exposures by internally assigned grades at September 30, 2016 and December 31, 2015. The grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled or at all. The Company’s internal credit risk grading system is based on experiences with similarly graded loans.
The Company’s internally assigned grades are as follows:
Pass – loans which are protected by the current net worth and paying capacity of the obligor or by the value of the underlying collateral. There are six sub-grades within the pass category to further distinguish the loan.
Special Mention – loans where a potential weakness or risk exists, which could cause a more serious problem if not corrected. The Special mention category includes assets that are fundamentally sound yet, exhibit unacceptable credit risk or deteriorating trends or characteristics which, if left uncorrected, may result in deterioration of the repayment prospects for the asset or in the Company’s credit position at some future date.
Substandard – loans that have a well-defined weakness based on objective evidence and are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. All loans greater than 90 days past due are considered Substandard.
Doubtful – loans classified as Doubtful have all the weaknesses inherent in a Substandard asset. In addition, these weaknesses make collection or liquidation in full highly questionable and improbable, based on existing circumstances. Loans in the Doubtful category have all the weaknesses inherent in one classified as Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
14 |
Loss – loans classified as a Loss are considered uncollectible, or of such value that continuance as an asset is not warranted. Loans in the Loss category are considered uncollectable and of little value that their continuance as bankable is not warranted.
The following table presents classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard, Doubtful, and Loss within the internal risk rating system as of September 30, 2016 and December 31, 2015.
September 30, | December 31, | |||||||||||||||
2016 | 2015 | |||||||||||||||
Multi-Family | Multi-Family | |||||||||||||||
and Commercial | and Commercial | |||||||||||||||
Real Estate | Commercial | Real Estate | Commercial | |||||||||||||
Pass | $ | 9,327,910 | $ | 28,269 | $ | 13,335,644 | $ | 35,573 | ||||||||
Special Mention | 1,673,193 | - | 1,977,627 | - | ||||||||||||
Substandard | 2,443,313 | - | 1,301,130 | - | ||||||||||||
Doubtful | - | - | - | - | ||||||||||||
Loss | - | - | - | - | ||||||||||||
Total | $ | 13,444,416 | $ | 28,269 | $ | 16,614,401 | $ | 35,573 |
Multi-family and commercial real estate and commercial loans are categorized by risk classification as of September 30, 2016 and December 31, 2015. For one-to-four family real estate, home equity, HELOCs, and education and other consumer loans, the Company evaluates credit quality based on the performance of the individual credits. Payment activity is reviewed by management on a monthly basis to determine how loans are performing. Loans are considered to be nonperforming when they become 90 days past due.
The following table presents recorded investment in the loan classes based on payment activity as of September 30, 2016 and December 31, 2015:
At September 30, 2016 | |||||||||||||||||||||
One-to- Four Family Real Estate | Home Equity | HELOCs | Education and Other Consumer | Non-covered Consumer Loans Purchased | |||||||||||||||||
Performing | $ | 141,833,312 | $ | 2,592,520 | $ | 3,480,644 | $ | 912,647 | $ | 371,147 | |||||||||||
Nonperforming | 1,996,687 | 46,300 | - | 64,975 | - | ||||||||||||||||
Total | $ | 143,829,999 | $ | 2,638,820 | $ | 3,480,644 | $ | 977,622 | $ | 371,147 |
At December 31, 2015 | |||||||||||||||||||||
One-to- Four Family Real Estate | Home Equity | HELOCs | Education and Other Consumer | Non-covered Consumer Loans Purchased | |||||||||||||||||
Performing | $ | 147,714,397 | $ | 2,775,013 | $ | 2,459,848 | $ | 1,144,941 | $ | 400,682 | |||||||||||
Nonperforming | 1,985,335 | 52,803 | - | 89,291 | 66,123 | ||||||||||||||||
Total | $ | 149,699,732 | $ | 2,827,816 | $ | 2,459,848 | $ | 1,234,232 | $ | 466,805 |
15
The following table presents an aging analysis of the recorded investment of past-due loans:
At September 30, 2016 | ||||||||||||||||||||||||||||
30-59 Days Past Due | 60-89 Days Past Due | 90 Days Or Greater | Total Past Due | Current | Total Loans Receivable | Recorded Investment > 90 Days and Accruing | ||||||||||||||||||||||
One-to-four family real estate | $ | 381,730 | $ | - | $ | 1,993,583 | $ | 2,375,313 | $ | 141,454,686 | $ | 143,829,999 | $ | - | ||||||||||||||
Multi-family and commercial real estate | 25,152 | - | 361,021 | 386,173 | 13,058,243 | 13,444,416 | - | |||||||||||||||||||||
Commercial | - | - | - | - | 28,269 | 28,269 | - | |||||||||||||||||||||
Home equity | - | - | 46,300 | 46,300 | 2,592,520 | 2,638,820 | - | |||||||||||||||||||||
HELOCs | - | 12,938 | - | - | 3,480,644 | 3,480,644 | - | |||||||||||||||||||||
Education and other consumer | 4,666 | - | 64,975 | 69,641 | 907,981 | 977,622 | - | |||||||||||||||||||||
Non-covered consumer loans purchased | - | - | - | - | 371,147 | 371,147 | - | |||||||||||||||||||||
Total | $ | 411,548 | $ | 12,938 | $ | 2,465,879 | $ | 2,877,427 | $ | 161,893,490 | $ | 164,770,917 | $ | - |
At December 31, 2015 | ||||||||||||||||||||||||||||
30-59 Days Past Due | 60-89 Days Past Due | 90 Days Or Greater | Total Past Due | Current | Total Loans Receivable | Recorded Investment > 90 Days and Accruing | ||||||||||||||||||||||
One-to-four family real estate | $ | 133,937 | $ | 98,977 | $ | 1,808,449 | $ | 2,041,363 | $ | 147,658,369 | $ | 149,699,732 | $ | - | ||||||||||||||
Multi-family and commercial real estate | 94,508 | 204,633 | 139,091 | 438,232 | 16,176,169 | 16,614,401 | - | |||||||||||||||||||||
Commercial | - | - | - | - | 35,573 | 35,573 | - | |||||||||||||||||||||
Home equity | 52,803 | - | - | 52,803 | 2,775,013 | 2,827,816 | - | |||||||||||||||||||||
HELOCs | - | - | - | - | 2,459,848 | 2,459,848 | - | |||||||||||||||||||||
Education and other consumer | 17,413 | - | 89,291 | 106,704 | 1,127,528 | 1,234,232 | - | |||||||||||||||||||||
Non-covered consumer loans purchased | - | - | 66,123 | 66,123 | 400,682 | 466,805 | - | |||||||||||||||||||||
Total | $ | 298,661 | $ | 303,610 | $ | 2,102,954 | $ | 2,705,225 | $ | 170,633,182 | $ | 173,338,407 | $ | - |
Nonaccrual Loans
Loans are generally considered for nonaccrual status upon 90 days delinquency. When a loan is placed in nonaccrual status, previously accrued but unpaid interest is deducted from interest income.
On the following table are the loans on nonaccrual status as of September 30, 2016 and December 31, 2015. The balances are presented by class of loans.
September 30, 2016 | December 31, 2015 | |||||||
One-to-four family mortgage | $ | 1,996,687 | $ | 1,985,335 | ||||
Multi-family and commercial real estate | 361,886 | 219,927 | ||||||
Home equity | 46,300 | 52,803 | ||||||
Education and other consumer | 64,975 | 89,291 | ||||||
Non-covered consumer loans purchased | - | 66,123 | ||||||
Total | $ | 2,469,848 | $ | 2,413,479 |
Interest income on loans would have been increased by approximately $81,071 and $76,575 during the nine months ended September 30, 2016 and 2015, respectively, if these loans had performed in accordance with their original terms. Management evaluates commercial real estate loans which are 90 days or more past due for impairment.
16
Impaired Loans
The following table presents the recorded investment and unpaid principal balances for impaired loans and related allowance, if applicable.
September 30, 2016 | ||||||||||||
Recorded Investment | Unpaid Principal Balance | Related Allowance | ||||||||||
With no related allowance recorded: | ||||||||||||
One-to-four family real estate | $ | 2,170,152 | $ | 2,978,674 | $ | - | ||||||
Multi-family and commercial real estate | 1,043,604 | 1,247,777 | - | |||||||||
Commercial | - | 1,142 | - | |||||||||
Home equity | 46,300 | 50,466 | - | |||||||||
With an allowance recorded: | ||||||||||||
One-to-four family real estate | $ | 144,085 | $ | 151,652 | $ | 3,104 | ||||||
Total: | ||||||||||||
One-to-four family real estate | $ | 2,314,237 | $ | 3,130,326 | $ | 3,104 | ||||||
Multi-family and commercial real estate | 1,043,604 | 1,247,777 | - | |||||||||
Commercial | - | 1,142 | - | |||||||||
Home equity | 46,300 | 50,466 | - |
December 31, 2015 | ||||||||||||
Recorded Investment | Unpaid Principal Balance | Related Allowance | ||||||||||
With no related allowance recorded: | ||||||||||||
One-to-four family real estate | $ | 2,149,908 | $ | 2,832,646 | $ | - | ||||||
Multi-family and commercial real estate | 924,634 | 1,079,027 | - | |||||||||
Commercial | - | 32,077 | - | |||||||||
Home equity | 52,803 | 55,309 | - | |||||||||
Consumer | 66,123 | 66,123 | - | |||||||||
With an allowance recorded: | ||||||||||||
One-to-four family real estate | $ | 149,842 | $ | 154,345 | $ | 3,104 | ||||||
Total: | ||||||||||||
One-to-four family real estate | $ | 2,299,750 | $ | 2,986,991 | $ | 3,104 | ||||||
Multi-family and commercial real estate | 924,634 | 1,079,027 | - | |||||||||
Commercial | - | 32,077 | - | |||||||||
Home equity | 52,803 | 55,309 | - | |||||||||
Consumer | 66,123 | 66,123 | - |
17
The following table represents the average recorded investments in the impaired loans and the related amount of interest recognized during the time within the period that the impaired loans were impaired.
Nine Months Ended | |||||||||||||||
September 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
Average
Recorded Investment |
Average Recorded Investment | Interest Income Recognized | Interest Income Recognized | ||||||||||||
With no related allowance recorded: | |||||||||||||||
One-to-four family real estate | $ | 2,167,099 | $ | 2,817,493 | $ | 13,201 | $ | 10,804 | |||||||
Multi-family and commercial real estate | 1,105,056 | 1,071,290 | 26,825 | 27,692 | |||||||||||
Commercial | - | - | 487 | 1,964 | |||||||||||
Home equity | 49,046 | 56,886 | - | - | |||||||||||
Consumer | 3,645 | 14,694 | - | - | |||||||||||
With an allowance recorded: | |||||||||||||||
One-to-four family real estate | $ | 146,636 | $ | 440,255 | $ | - | $ | 14,159 | |||||||
Multi-family and commercial real estate | - | - | - | - | |||||||||||
Home equity | - | - | - | - | |||||||||||
Commercial | - | - | - | - | |||||||||||
Total: |
|||||||||||||||
One-to-four family real estate | $ | 2,313,735 | $ | 3,257,748 | $ | 13,201 | $ | 24,963 | |||||||
Multi-family and commercial real estate | 1,105,056 | 1,071,290 | 26,825 | 27,692 | |||||||||||
Commercial | - | - | 487 | 1,964 | |||||||||||
Home equity | 49,046 | 56,886 | - | - | |||||||||||
Commercial | 3,645 | 14,694 | - | - |
Foreclosed Assets Held For Sale
Foreclosed assets acquired in settlement of loans are carried at fair value, less estimated costs to sell, and are included in other assets on the Consolidated Balance Sheet. As of September 30, 2016 and December 31, 2015 included with other assets were $775,928 and $182,360, respectively, of foreclosed assets. As of September 30, 2016, there were no consumer residential mortgages that were foreclosed on or received via a deed in lieu transaction prior to the period end. As of September 30, 2016, the Company has initiated formal foreclosure proceedings on $46,300 of consumer residential mortgages, which have not yet been transferred into foreclosed assets.
Loan Modifications and Troubled Debt Restructurings
A loan is considered to be a troubled debt restructuring loan when the Company grants a concession to the borrower because of the borrower’s financial condition that it would not otherwise consider. Such concessions include the reduction of interest rates, forgiveness of principal or interest, or other modifications of interest rates that are less than the current market rate for new obligations with similar risk.
There were no loan modifications that are considered troubled debt restructurings completed during the nine month periods ended September 30, 2016 and 2015, respectively.
There were no loans granted a term concession for the nine month periods ended September 30, 2016 and 2015, respectively.
There were no troubled debt restructurings modified within the past year that subsequently defaulted during the nine month periods ended September 30, 2016 and 2015.
18
6. Indemnification Asset
Changes in the FDIC indemnification asset during the nine months ended September 30, 2016 and 2015, respectively, were as follows:
2016 | 2015 | |||||||
Balance at December 31 | $ | 473,951 | $ | 1,417,355 | ||||
Cash payments received or receivable due from the FDIC | (18,826 | ) | (122,270 | ) | ||||
Increase in FDIC share of estimated losses | - | - | ||||||
Net amortization | (494,399 | ) | (596,547 | ) | ||||
Balance at September 30 | $ | (39,274 | ) | $ | 698,538 |
7. Deposits
Deposit accounts are summarized as follows for the periods ending September 30, 2016 and December 31, 2015.
September 30, 2016 | December 31, 2015 | |||||||||||||||
Amount | % | Amount | % | |||||||||||||
Non-interest bearing demand | $ | 6,521,711 | 3.73 | % | $ | 6,136,545 | 3.26 | % | ||||||||
NOW accounts | 15,312,543 | 8.77 | 15,712,121 | 8.35 | ||||||||||||
Money market deposit | 33,729,877 | 19.33 | 33,809,176 | 17.96 | ||||||||||||
Savings | 30,311,984 | 17.37 | 29,879,155 | 15.88 | ||||||||||||
Time deposits | 88,659,814 | 50.80 | 102,685,285 | 54.55 | ||||||||||||
Total | $ | 174,535,929 | 100.00 | % | $ | 188,222,282 | 100.00 | % |
8. Supplemental Retirement Plans
The Company has supplemental retirement plans (“SRPs”) that cover three former officers and one current senior officer of the Bank. At September 30, 2016 and December 31, 2015, $1,879,233 and $2,033,918, respectively, has been accrued under these SRPs, and this liability and the related deferred tax asset of $638,939 and $691,532, respectively, are recognized in the financial statements.
The SRPs provide an annual salary continuation benefit to the officers following their termination of employment. The SRP for a former president of the Bank provides an annual benefit, payable for the lifetime of the former president, of $75,000 adjusted annually for the change in the consumer price index. The current annual benefit is $123,000. If the former president predeceases his spouse, his surviving spouse will be entitled to a reduced benefit for the remainder of her lifetime. The SRP for the second former president provides a lifetime annual benefit equal to 60 percent of his final full year annual gross taxable compensation adjusted annually for the change in the consumer price index or 4 percent, whichever is higher. The current annual benefit is $126,000. The SRPs for one current and one former senior officer provide for an annual benefit at the rate of $50,000 per year for 20 years. If the officer terminates employment prior to age 65, the SRP benefit commences on the earlier of five years after retirement or age 65. Otherwise, the SRP benefit commences following termination of employment. The Company records periodic accruals for the cost of providing such benefits by charges to income.
The following table illustrates the components of the net periodic benefit cost for the supplemental retirement plan:
Nine Months Ended | ||||||||
September 30, | ||||||||
2016 | 2015 | |||||||
Components of net periodic benefit cost: | ||||||||
Service cost | $ | 76,357 | $ | 70,338 | ||||
Interest cost | 70,134 | 56,335 | ||||||
Net periodic benefit cost | $ | 146,491 | $ | 126,673 |
19
Additionally, the Company has an obligation to provide a post-retirement death benefit to the designated beneficiary of a former president of the Bank. There are two components to the death benefit. The first is a lump sum benefit of $2,000,000. This benefit is not conditioned on or linked to any life insurance policy. The second component is an amount equal to 40% of the proceeds in excess of $2,000,000 payable on the death of the former president under a life insurance policy held by the Bank, provided that the total after-tax benefit does not exceed $4,000,000. At September 30, 2016 and December 31, 2015, $2,693,485 and $2,628,815, respectively, have been accrued related to this liability and the related deferred tax assets of $673,475 and $651,488, respectively, are recognized in the financial statements.
Under the SRPs with one former and one current officer, if the executive dies during the benefit payment period, the executive’s designated beneficiary will receive a lump sum payment equal to the remaining payments. If the executive dies prior to retirement, his designated beneficiary will receive a lump sum payment of $1,000,000 under a split-dollar life insurance agreement with the executive.
The Company funded life insurance policies with an aggregate amount of $3,085,000 on the lives of former and current officers that currently have total death benefits of $11,975,329. The cash surrender value of these policies totaled $4,241,518 and $4,257,456 at September 30, 2016 and December 31, 2015, respectively.
The Company maintains a nonqualified deferred compensation plan for one senior officer whereby the participant is able to defer compensation to be matched 100 percent by the Company. The deferral, match, and earnings thereon are held in Rabbi Trusts. The Rabbi Trust assets are included in other assets, and the related deferred compensation payable is included in other liabilities. The Rabbi Trust assets and the related deferred compensation payable at September 30, 2016, was $578,346. Earnings from the Rabbi Trust increase the asset and increase the deferred compensation payable. Losses from the Rabbi Trust decrease the asset and decrease the deferred compensation payable. There is no net income statement effect.
9. Contingencies
On August 5, 2015, Lane Brennen, a former employee of the Bank, filed a complaint in state court naming the Bank, the Bank’s former chief executive officer, the Bank’s chief financial officer, the Bank’s former chief lending officer and an employee of the Bank as defendants (Lane Brennen v Polonia Bank et al., Philadelphia Court of Common Pleas, Case ID 150800526). The complaint alleges claims for breach of his employment contract, violation of Pennsylvania’s Wage Payment and Collection Law, and for unlawful retaliation and demands an accounting. Mr. Brennan seeks compensation that he alleges is owed to him under the terms of his employment agreement, as well as other compensatory and punitive damages. Under the terms of Mr. Brennen’s employment agreement, he received a portion of the net income from the Bank’s FHA lending operations, which he managed. The Bank is vigorously defending against these claims. However, the defense may not be successful and insurance may not be adequate to fully fund any judgment, settlement or costs of defense of this action. The individual defendants may be entitled to indemnification from the Bank, for which there may be no insurance coverage. The Bank has asserted claims against Mr. Brennen for breach of contract and breach of fiduciary duties.
From time to time, we may be party to various legal proceedings incident to our business. In the opinion of management, the resolution of these legal actions is not expected to have a material adverse effect on our results of operations.
20 |
10. Fair Value Measurements
The following disclosures show the hierarchal disclosure framework associated with the level of pricing observations utilized in measuring assets and liabilities at fair value. The three broad levels of pricing are as follows:
Level I: Quoted prices are available in active markets for identical assets or liabilities as of the reported date.
Level II: Pricing inputs are other than the quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities includes items for which quoted prices are available but traded less frequently and items that are fair-valued using other financial instruments, the parameters of which can be directly observed.
Level III: Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
This hierarchy requires the use of observable market data when available.
The following table presents the assets reported on the Consolidated Balance Sheets at their fair value as of September 30, 2016 and December 31, 2015, by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at September 30, 2016 and December 31, 2015, are as follows:
September 30, 2016 | ||||||||||||||||
Level I | Level II | Level III | Total | |||||||||||||
Assets: | ||||||||||||||||
Investment securities available for sale | ||||||||||||||||
Mortgage-backed securities | $ | - | $ | 54,158,454 | $ | - | $ | 54,158,454 | ||||||||
Corporate Securities | - | 15,503,421 | - | 15,503,421 | ||||||||||||
Municipal securities | - | 1,845,643 | - | 1,845,643 | ||||||||||||
Common stock | 307,530 | - | - | 307,530 | ||||||||||||
Total | $ | 307,530 | $ | 71,507,518 | $ | - | $ | 71,815,048 |
December 31, 2015 | ||||||||||||||||
Level I | Level II | Level III | Total | |||||||||||||
Assets: | ||||||||||||||||
Investment securities available for sale | ||||||||||||||||
Mortgage-backed securities | $ | - | $ | 37,253,272 | $ | - | $ | 37,253,272 | ||||||||
Corporate Securities | - | 16,957,906 | - | 16,957,906 | ||||||||||||
Municipal securities | - | 499,755 | - | 499,755 | ||||||||||||
Common stock | 160,590 | - | - | 160,590 | ||||||||||||
Total | $ | 160,590 | $ | 54,710,933 | $ | - | $ | 54,871,523 |
For financial assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at September 30, 2016 and December 31, 2015, are as follows:
September 30, 2016 | ||||||||||||||||
Level I | Level II | Level III | Total | |||||||||||||
Assets: | ||||||||||||||||
Impaired loans | $ | - | $ | - | $ | 3,401,037 | $ | 3,401,037 | ||||||||
Other real estate owned | - | - | 775,928 | 775,928 |
21 |
December 31, 2015 | ||||||||||||||||
Level I | Level II | Level III | Total | |||||||||||||
Assets: | ||||||||||||||||
Impaired loans | $ | - | $ | - | $ | 3,340,206 | $ | 3,340,206 | ||||||||
Other real estate owned | - | - | 182,360 | 182,360 |
The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Company has utilized Level 3 inputs to determine fair value.
September 30, 2016 | |||||||||||
Quantitative Information About Level III Fair Value Measurements | |||||||||||
Fair Value Estimate |
Valuation Techniques |
Unobservable Input |
Range | Weighted Average | |||||||
Impaired loans | $ | 2,128,935 | Appraisal of | Appraisal | |||||||
collateral (1) | adjustments (2) | 0% to 20% | 6% | ||||||||
Liquidation | |||||||||||
expenses (2) | 0% to 6% | 5% | |||||||||
1,272,102 | Discounted | Discount Rates | 5% to 8% | 7% | |||||||
cash flows | |||||||||||
Other real estate owned | 775,928 | Appraisal of | Liquidation | ||||||||
collateral (1) | Expenses (2) | 6% | 6% |
December 31, 2015 | |||||||||||
Quantitative Information About Level III Fair Value Measurements | |||||||||||
Fair Value Estimate |
Valuation Techniques |
Unobservable Input |
Range | Weighted Average | |||||||
Impaired loans | $ | 1,827,370 | Appraisal of | Appraisal | |||||||
collateral (1) | adjustments (2) | 0% to 20% | 8% | ||||||||
Liquidation | |||||||||||
expenses (2) | 0% to 6% | 5% | |||||||||
1,512,836 | Discounted | Discount rates | 5% to 8% | 7% | |||||||
cash flows | |||||||||||
Other real estate owned | 182,360 | Appraisal of | Liquidation | ||||||||
collateral (1) | Expenses (2) | 6% | 6% | ||||||||
(1) Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level III inputs, which are not identifiable.
(2) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.
All of the securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quoted market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions among other things.
22 |
Impaired loans are reported at fair value utilizing Level 3 inputs. For these loans, a review of the collateral is conducted and an appropriate allowance for loan losses is allocated to the loan. At September 30, 2016, and December 31, 2015 impaired loans with a carrying value of $3,404,141 and $3,343,310, respectively, were reduced by specific valuation allowances totaling $3,104 resulting in a net fair value of $3,401,037 and $3,340,206, respectively, based on Level 3 inputs.
Other real estate owned is reported at fair value utilizing Level 3 inputs. For these assets, a review of the collateral and an analysis of the expenses related to selling these assets are conducted and a charge-offs recorded to the allowance for loan losses.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy, within which the fair value measurement in its entirety falls, has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset.
The measurement of fair value should be consistent with one of the following valuation techniques: market approach, income approach, and/or cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). For example, valuation techniques consistent with the market approach often use market multiplies derived from a set of comparables. Multiples might lie in ranges with a different multiple for each comparable. The selection of where within the range the appropriate multiple falls requires judgment, considering factors specific to the measurement (qualitative and quantitative). Valuation techniques consistent with the market approach include matrix pricing. Matrix pricing is a mathematical technique used principally to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. As of September 30, 2016 and December 31, 2015, all of the financial assets measured at fair value, on a recurring basis, utilized the market approach.
11. Fair Value Disclosure
The estimated fair values of the Company’s financial instruments are as follows:
Fair Value Measurements at September 30, 2016 | ||||||||||||||||||||
Carrying Value | Fair Value | Level I | Level II | Level III | ||||||||||||||||
Financial assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 13,499,338 | $ | 13,499,338 | $ | 13,499,338 | $ | - | $ | - | ||||||||||
Certificates of deposit | 12,644,000 | 12,769,176 | - | - | 12,769,176 | |||||||||||||||
Investment securities available for sale | 71,815,048 | 71,815,048 | 307,530 | 71,507,518 | - | |||||||||||||||
Net loans receivable | 163,890,503 | 175,750,568 | - | - | 175,750,568 | |||||||||||||||
Accrued interest receivable | 708,984 | 708,984 | 708,984 | - | - | |||||||||||||||
Federal Home Loan Bank stock | 3,648,800 | 3,648,800 | 3,648,800 | - | - | |||||||||||||||
Bank-owned life insurance | 4,241,518 | 4,241,518 | 4,241,518 | - | - | |||||||||||||||
FDIC indemnification asset | (39,274 | ) | (39,274 | ) | - | - | (39,274 | ) | ||||||||||||
Financial liabilities: | ||||||||||||||||||||
Deposits | 174,535,929 | 175,750,568 | 85,876,115 | - | 89,874,453 | |||||||||||||||
FHLB advance – short term | 12,000,000 | 12,000,000 | 12,000,000 | - | - | |||||||||||||||
FHLB advance – long term | 49,000,000 | 50,514,100 | - | - | 50,514,100 | |||||||||||||||
Advances by borrowers for taxes and insurance | 529,737 | 529,737 | 529,737 | - | - | |||||||||||||||
Accrued interest payable | 169,694 | 169,694 | 169,694 | - | - |
23 |
Fair Value Measurements at December 31, 2015 | ||||||||||||||||||||
Carrying Value | Fair Value | Level I | Level II | Level III | ||||||||||||||||
Financial assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 31,137,216 | $ | 31,137,216 | $ | 31,137,216 | $ | - | $ | - | ||||||||||
Certificates of deposit | 15,980,000 | 16,019,950 | - | - | 16,019,950 | |||||||||||||||
Investment securities available for sale | 54,871,523 | 54,871,523 | 160,590 | 54,710,933 | - | |||||||||||||||
Net loans receivable | 172,179,005 | 172,746,996 | - | - | 172,746,996 | |||||||||||||||
Accrued interest receivable | 671,994 | 671,994 | 671,994 | - | - | |||||||||||||||
Federal Home Loan Bank stock | 3,659,700 | 3,659,700 | 3,659,700 | - | - | |||||||||||||||
Bank-owned life insurance | 4,257,456 | 4,257,456 | 4,257,456 | - | - | |||||||||||||||
FDIC indemnification asset | 473,951 | 473,951 | - | - | 473,951 | |||||||||||||||
Financial liabilities: | ||||||||||||||||||||
Deposits | 188,222,282 | 190,019,274 | 85,536,997 | - | 104,482,277 | |||||||||||||||
FHLB advance – long term | 56,000,000 | 57,596,000 | - | - | 57,596,000 | |||||||||||||||
Advances by borrowers for taxes and insurance | 988,906 | 988,906 | 988,906 | - | - | |||||||||||||||
Accrued interest payable | 139,397 | 139,397 | 139,397 | - | - |
Financial instruments are defined as cash, evidence of ownership interest in an entity, or a contract that creates an obligation or right to receive or deliver cash or another financial instrument from/to a second entity on potentially favorable or unfavorable terms.
Fair value is defined as the amount at which a financial instrument could be exchanged in a current transaction between willing parties other than in a forced or liquidation sale. If a quoted market price is available for a financial instrument, the estimated fair value would be calculated based upon the market price per trading unit of the instrument.
If no readily available market exists, the fair value estimates for financial instruments should be based upon management’s judgment regarding current economic conditions, interest rate risk, expected cash flows, future estimated losses, and other factors as determined through various option pricing formulas or stimulation modeling. As many of these assumptions result from judgments made by management based upon estimates that are inherently uncertain, the resulting estimated fair values may not be indicative of the amount realizable in the sale of a particular financial instrument. In addition, changes in assumptions on which the estimated fair values are based may have a significant impact on the resulting estimated fair values.
As certain assets such as deferred tax assets and premises and equipment are not considered financial instruments, the estimated fair value of financial instruments would not represent the full value of the Company.
The Company employed simulation modeling in determining the estimated fair value of financial instruments for which quoted market prices were not available based upon the following assumptions.
Cash and Cash Equivalents, Accrued Interest Receivable, Federal Home Loan Bank Stock, FHLB advances - short term, Accrued Interest Payable and Advances by Borrowers for Taxes and Insurance
The fair value is equal to the current carrying value.
Investment Securities Available for Sale
The fair value of investment securities available for sale is equal to the available quoted market price. If no quoted market price is available, fair value is estimated using the quoted market price for similar securities.
24 |
Net Loans Receivable
The fair value is estimated by discounting future cash flows using current market inputs at which loans with similar terms and qualities would be made to borrowers of similar credit quality. Where quoted market prices were available, primarily for certain residential mortgage loans, such market rates were utilized as estimates for fair value.
Acquired loans are recorded at fair value on the date of acquisition. The fair values of loans with evidence of credit deterioration (impaired loans) are recorded net of a nonaccretable difference and, if appropriate, an accretable yield. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is the nonaccretable difference, which is included in the carrying amount of acquired loans.
FDIC Indemnification Asset
As part of the Purchase and Assumption Agreements entered into in connection with the acquisition of Earthstar Bank, the Bank and the FDIC entered into loss sharing agreements. These agreements cover realized losses on loans, which are more fully described in Note 6.
Under the agreement, the FDIC agreed to reimburse the Bank for 80% of realized losses. The indemnification asset was originally recorded at fair value on the acquisition date (December 10, 2010) and at September 30, 2016 and December 31, 2015, the carrying value of the FDIC indemnification asset was $(39,274) and $473,951, respectively.
From the date of acquisition, the agreements extend ten years for one-to-four family real estate loans and five years for the other loans. The loss sharing assets are measured separately from the loan portfolios because they are not contractually embedded in the loans and are not transferable with the loans should the Bank choose to dispose of them. Fair values on the acquisition dates were estimated using projected cash flows available for loss sharing based on the credit adjustments estimated for each loan pool and the loss sharing percentages. These cash flows were discounted to reflect the uncertainty of the timing and receipt of the loss sharing reimbursements from the FDIC. The Bank will collect the assets over the next several years. The amount ultimately collected will depend on the timing and amount of collections and charge-offs on the acquired assets covered by the loss sharing agreements. While the assets were recorded at their estimated fair values on the acquisition dates, it is not practicable to complete fair value analyses on a quarterly or annual basis. Estimating the fair value of the FDIC indemnification asset would involve preparing fair value analyses of the entire portfolios of loans and foreclosed assets covered by the loss sharing agreements from the acquisition on a quarterly or annual basis.
Deposits and FHLB advances - long term
The fair values of certificates of deposit and FHLB advances are based on the discounted value of contractual cash flows. The discount rates are estimated using rates currently offered for similar instruments with similar remaining maturities. Demand, savings, and money market deposits are valued at the amount payable on demand as of year-end.
Bank-Owned Life Insurance
The fair value is equal to the cash surrender value of the life insurance policies.
Commitments to Extend Credit
These financial instruments are generally not subject to sale, and estimated fair values are not readily available. The carrying value, represented by the net deferred fee arising from the unrecognized commitment and the fair value, determined by discounting the remaining contractual fee over the term of the commitment using fees currently charged to enter into similar agreements with similar credit risk, are not considered material for disclosure.
25 |
12. Accumulated Other Comprehensive Income
The activity in accumulated other comprehensive income for the nine months ended September 30, 2016 and 2015 are as follows:
Accumulated Other Comprehensive Income (1) | ||||
Unrealized Gains (Losses) on Securities Available-for-Sale | ||||
Balance at December 31, 2014 | $ | 216,800 | ||
Other comprehensive income before reclassifications | 843,098 | |||
Amounts reclassified from accumulated other comprehensive income | (369,842 | ) | ||
Period change | 473,256 | |||
Balance at September 30, 2015 | $ | 690,056 | ||
Balance at December 31, 2015 | $ | 380,604 | ||
Other comprehensive income before reclassifications | 335,778 | |||
Amounts reclassified from accumulated other comprehensive income | (473,115 | ) | ||
Period change | (137,337 | ) | ||
Balance at September 30, 2016 | $ | 243,267 |
Details regarding amounts reclassified from accumulated other comprehensive income during the nine month periods ended September 30, 2016, are as follows:
Details about Accumulated Other Comprehensive Income Components | Amount Reclassified from Accumulated Other Comprehensive Income | Affected Line Item in the Consolidated Statements of Income (Loss) | ||||
Investment Securities Available for Sale: | ||||||
Net Investment Securities Gains Reclassified into Earnings | $ | 716,841 | Gains on sale of investment securities, net | |||
Related Income Tax Expense | (243,726 | ) | Income tax expense (benefit) | |||
Total Reclassifications for the Period | $ | 473,115 |
There were $473,115 and $369,842 reclassified from other comprehensive income for the nine month period ended September 30, 2016 and 2015, respectively, resulting from gains on the sale of investment securities.
13. Subsequent Events
On January 1, 2017 the Company’s previously announced merger with and into Prudential Bancorp, Inc. and the merger of Polonia Bank with and into Prudential Bank were completed.
Management is required to evaluate events or transactions that may occur or have occurred after the date of the consolidated statement of financial condition through the date the Company’s consolidated financial statements were issued or available to issued. Subsequent events have been evaluated as of March 17, 2017, the date the Company’s consolidated financial statements were available to be issued.
26 |
EXHIBIT 99.4
UNAUDITED PRO FORMA COMBINED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma combined consolidated financial statements for Prudential Bancorp, Inc. (“Prudential”) and Polonia Bancorp, Inc. (“Polonia”) give effect to the merger of Polonia with and in to Prudential (the “Merger”). The unaudited pro forma combined with consolidated balance sheet as of December 31, 2016 gives effect to the merger as if it occurred on December 31, 2016. The unaudited pro forma combined consolidated statement of income for the three months ending December 31, 2016 gives effect to the merger as if it had occurred on October 1, 2016. The actual completion date of the merger was January 1, 2017.
Pursuant to the Agreement of Plan of Merger, by and between Polonia and Prudential, dated as of June 2, 2016 (the “Merger Agreement”), shareholders of Polonia had the option to receive $11.09 per share in cash or 0.7460 of a share of Prudential common stock for each share of Polonia common stock held thereby, subject to allocation provisions to assure that, in the aggregate, Polonia shareholders received total merger consideration that consisted of 50% stock and 50% cash. As a result of Polonia shareholder stock and cash elections and the related proration provisions of the Merger Agreement, Prudential issued approximately 1,274,197 shares of its common stock and approximately $18.9 million in the Merger.
Prudential expects that it will incur merger and integration charges as a result of the merger. The unaudited pro forma combined consolidated financial statements, while helpful in illustrating the financial characteristics of the combined entity, do not reflect these anticipated merger and integration expenses; nor do they reflect any possible financial benefits through anticipated cost savings, and, hence do not attempt to predict or suggest future results. Furthermore, the unaudited pro forma combined consolidated financial statements do not necessarily reflect what the historical results of the combined entity would have been, had the companies been combined during the period presented.
In addition, the unaudited pro forma combined consolidated financial statements reflect estimates of the fair value of assets acquired and liabilities assumed in the merger. These estimates are preliminary and, as such, their final values may vary from their initial estimates. Any differences between the purchase price for Polonia and the fair value of the identifiable net assets acquired is being recorded as goodwill. The goodwill resulting from the acquisition will not be amortized to expense, but instead will be reviewed for impairment at least annually and to the extent goodwill is impaired, its carrying value will be written down to its implied fair value and a charge will be made to earnings. Core deposit and other intangibles with definite useful lives recorded by Prudential in connection with the acquisition will be amortized to expense over their estimated useful lives.
The pro forma adjustments included herein are subject to change as additional information becomes available and additional analyses are performed. The final allocation of the purchase price will be determined after we complete further analyses under generally accepted accounting principles with respect to the fair value of Polonia’s tangible and identifiable intangible assets and liabilities as of the date the Merger was completed. Increases or decreases in the estimated fair values of the net assets as compared with the information shown in the unaudited pro forma combined condensed consolidated financial information may change the amount of the purchase price allocated to goodwill and other assets and liabilities and may impact Prudential’s statement of income due to adjustments in yield and/or amortization of the adjusted assets or liabilities. The final adjustments may be materially different from the unaudited pro forma adjustments presented herein.
THIS PRO FORMA DATA IS NOT NECESSARILY INDICATIVE OF THE OPERATING RESULTS THAT PRUDENTIAL WOULD HAVE ACHIEVED HAD IT COMPLETED THE MERGER AS OF THE BEGINNING OF THE PERIOD PRESENTED AND SHOULD NOT BE CONSIDERED AS REPRESENTATIVE OF FUTURE OPERATIONS.
The unaudited pro forma combined consolidated financial statements and related notes contain statement which, to the extent that they are not recitations of historical fact, may constitute forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995. Such forward-looking statements may include financial and other projections as well as statements regarding Prudential that may include plans, objectives, performance, revenues, growth, profits, operating expenses of Prudential’s underlying assumptions. The words “may”, “would”, “should”, “could”, “will”, “likely”, “possibly”, “expect”, “anticipate”, “intend”, “estimate”, “target”, “potentially”, “probably”, “outlook”, “predict”, “contemplate”, “continue”, “plan”. “forecast”, “project” and “believe” or other similar words and phrases may identify forward-looking statements. Persons reading the unaudited pro forma combined consolidated financial statements and related notes are cautioned that such statements are only predictions, and that Prudential’s actual future performance may be materially different. All forward-looking information and statements made herein are based on management’s current beliefs and assumptions as of the date hereof and speak only as of the date they are made. Prudential does not undertake to update forward-looking statements.
For a complete discussion of the assumptions, risk and uncertainties that could cause future events to vary materially from the results anticipated, you are encouraged to review our filings with the Securities and Exchange Commission, including our most recent Annual Report on Form 10-K, as well as any changes in risk factors that we may identify our quarterly or other reports filed with the SEC.
UNAUDITED PRO FORMA COMBINED
CONSOLIDATED BALANCE SHEET
December 31, 2016 | |||||||||||||||||||||
Purchase | |||||||||||||||||||||
Accounting | Pro Forma | ||||||||||||||||||||
(dollars in thousands, except per share data) | Prudential | Polonia | Combined | Adjustments | Combined | ||||||||||||||||
ASSETS | |||||||||||||||||||||
Cash and amounts due from depository institutions | 1,580 | 1,567 | 3,147 | - | 3,147 | ||||||||||||||||
Interest-bearing deposits | 6,485 | 21,344 | 27,829 | (18,944 | ) | (b) | 8,885 | ||||||||||||||
Total cash and cash equivalents | 8,065 | 22,911 | 30,976 | (18,944 | ) | 12,032 | |||||||||||||||
Certificates of deposit | 1,853 | 24,990 | 26,843 | - | 26,843 | ||||||||||||||||
Investment and mortgage-backed securities available for sale | 132,636 | 42,945 | 175,581 | (781 | ) | (c) | 174,800 | ||||||||||||||
Investments securities held to maturity | 44,741 | - | 44,741 | - | 44,741 | ||||||||||||||||
Loans and leases | 352,948 | 163,582 | 516,530 | (4,390 | ) | (d) | 512,140 | ||||||||||||||
Less: Allowance for loan and lease losses | (3,454 | ) | (1,002 | ) | (4,456 | ) | 1,002 | (e) | (3,454 | ) | |||||||||||
Net loans and leases | 349,494 | 162,580 | 512,074 | (3,388 | ) | 508,686 | |||||||||||||||
Accrued interest receivable | 2,075 | 687 | 2,762 | - | 2,762 | ||||||||||||||||
Real estate owned | 585 | - | 585 | - | 585 | ||||||||||||||||
Federal Home Loan Bank stock—at cost | 2,970 | 3,399 | 6,369 | - | 6,369 | ||||||||||||||||
Office properties and equipment—net | 1,268 | 3,852 | 5,120 | 3,036 | (f) | 8,156 | |||||||||||||||
Bank owned life insurance | - | 4,316 | 4,316 | - | 4,316 | ||||||||||||||||
Goodwill | - | - | - | 8,871 | (a) | 8,871 | |||||||||||||||
Intangible assets | - | - | - | 1,208 | (g) | 1,208 | |||||||||||||||
Prepaid expenses and other assets | 44,832 | 1,858 | 46,690 | - | 46,690 | ||||||||||||||||
Deferred tax assets-net | 1,595 | 2,986 | 4,581 | 697 | (h) | 5,278 | |||||||||||||||
TOTAL ASSETS | 590,114 | 270,524 | 860,638 | (9,301 | ) | 851,337 | |||||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||||||||||||
LIABILITIES: | |||||||||||||||||||||
Deposits: | |||||||||||||||||||||
Non-interest-bearing | 3,595 | 7,811 | 11,406 | 1,208 | (g) | 12,614 | |||||||||||||||
Interest-bearing | 404,620 | 163,538 | 568,158 | 894 | (i) | 569,052 | |||||||||||||||
Total deposits | 408,215 | 171,349 | 579,564 | 2,102 | 581,666 | ||||||||||||||||
Advances from Federal Home Loan Bank (Short Term) | 64,800 | 7,000 | 71,800 | - | 71,800 | ||||||||||||||||
Advances from Federal Home Loan Bank (Long Term) | - | 49,000 | 49,000 | 1,232 | (j) | 50,232 | |||||||||||||||
Accrued interest payable | 177 | 131 | 308 | - | 308 | ||||||||||||||||
Advances from borrowers for taxes and insurance | 2,513 | 1,022 | 3,535 | - | 3,535 | ||||||||||||||||
Accounts payable and accrued expenses | 1,293 | 7,573 | 8,866 | - | 8,866 | ||||||||||||||||
Total liabilities | 476,998 | 236,075 | 713,073 | 3,334 | 716,407 | ||||||||||||||||
STOCKHOLDERS’ EQUITY: | |||||||||||||||||||||
Preferred stock | - | - | - | - | - | ||||||||||||||||
Common stock | 95 | 34 | 129 | (21 | ) | (k)(p) | 108 | ||||||||||||||
Additional paid-in capital | 96,022 | 26,851 | 122,873 | (5,050 | ) | (l)(p) | 117,823 | ||||||||||||||
Unearned ESOP shares | (4,456 | ) | (1,192 | ) | (5,648 | ) | 1,192 | (m) | (4,456 | ) | |||||||||||
Treasury stock, at cost | (21,098 | ) | - | (21,098 | ) | - | (21,098 | ) | |||||||||||||
Accumulated other comprehensive income | (997 | ) | (623 | ) | (1,620 | ) | 623 | (n) | (997 | ) | |||||||||||
Retained earnings | 43,550 | 9,379 | 52,929 | (9,379 | ) | (o) | 43,550 | ||||||||||||||
Total stockholders’ equity | 113,116 | 34,449 | 147,565 | (12,635 | ) | 134,930 | |||||||||||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | 590,114 | 270,524 | 860,638 | (9,301 | ) | 851,337 | |||||||||||||||
Common shares | 8,028,005 | 3,416,311 | (2,142,114 | ) | (p) | 9,302,202 | |||||||||||||||
Book value per common share | $ | 14.09 | $ | 10.08 | $ | 14.51 | |||||||||||||||
Tangible book value per common share | $ | 14.09 | $ | 10.08 | $ | 13.42 |
Unaudited Pro Forma Combined
Consolidated of Statement of Operations
For the Three Months Ending December 31, 2016 | |||||||||||||||||||||
Purchase | |||||||||||||||||||||
Accounting | Pro Forma | ||||||||||||||||||||
(dollars in thousands, except per share data) | Prudential | Polonia | Combined | Adjustments | Combined | ||||||||||||||||
INTEREST INCOME: | |||||||||||||||||||||
Interest on loans | 3,325 | 1,805 | 5,130 | 162 | (q) | 5,292 | |||||||||||||||
Interest on mortgage-backed securities | 571 | 223 | 794 | - | 794 | ||||||||||||||||
Interest and dividends on investments | 606 | 92 | 698 | - | 698 | ||||||||||||||||
Interest on interest-bearing assets | 3 | 71 | 74 | - | 74 | ||||||||||||||||
Total interest income | 4,505 | 2,191 | 6,696 | 162 | 6,858 | ||||||||||||||||
INTEREST EXPENSE | |||||||||||||||||||||
Interest on deposits | 691 | 332 | 1,023 | (69 | ) | (r)(u) | 954 | ||||||||||||||
Interest on borrowings | 166 | 346 | 512 | (135 | ) | (s) | 377 | ||||||||||||||
Total interest expense | 857 | 678 | 1,535 | (204 | ) | 1,331 | |||||||||||||||
NET INTEREST INCOME | 3,648 | 1,513 | 5,161 | 366 | 5,527 | ||||||||||||||||
PROVISION FOR LOAN AND LEASE LOSSES | 185 | - | 185 | - | 185 | ||||||||||||||||
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES | 3,463 | 1,513 | 4,976 | 366 | 5,342 | ||||||||||||||||
NON-INTEREST INCOME | |||||||||||||||||||||
Fees and other service charges | 124 | 24 | 148 | - | 148 | ||||||||||||||||
Gain on sale of loans | 44 | (1 | ) | 43 | - | 43 | |||||||||||||||
Gain on sale of other real estate | - | (279 | ) | (279 | ) | - | (279 | ) | |||||||||||||
Gain on sale of investments and mortgage- | - | (2 | ) | (2 | ) | - | (2 | ) | |||||||||||||
backed securities | - | - | - | - | - | ||||||||||||||||
Income from bank owned life insurance | 166 | 74 | 240 | - | 240 | ||||||||||||||||
Other | 23 | 191 | 214 | - | 214 | ||||||||||||||||
Total non-interest income | 357 | 7 | 364 | - | 364 | ||||||||||||||||
NON-INTEREST EXPENSE | |||||||||||||||||||||
Salaries and employees benefits | 1,637 | 1,452 | 3,089 | - | 3,089 | ||||||||||||||||
Data processing | 112 | 99 | 211 | - | 211 | ||||||||||||||||
Professional services | 319 | 16 | 335 | - | 335 | ||||||||||||||||
Office occupancy | 170 | 165 | 335 | 45 | (t) | 380 | |||||||||||||||
Depreciation | 82 | 23 | 105 | - | 105 | ||||||||||||||||
Deposit insurance | (30 | ) | (13 | ) | (43 | ) | - | (43 | ) | ||||||||||||
Advertising | 37 | 7 | 44 | - | 44 | ||||||||||||||||
Merger related costs | - | 1,290 | 1,290 | - | 1,290 | ||||||||||||||||
Other | 394 | 2,133 | 2,527 | - | 2,527 | ||||||||||||||||
Total non-interest expense | 2,721 | 5,172 | 7,893 | 45 | 7,938 | ||||||||||||||||
INCOME(LOSS) BEFORE INCOME TAXES | 1,099 | (3,652 | ) | (2,553 | ) | 321 | (2,232 | ) | |||||||||||||
Income taxes (benefit) | 370 | (740 | ) | (370 | ) | 109 | (v) | (261 | ) | ||||||||||||
NET INCOME | 729 | (2,912 | ) | (2,183 | ) | 212 | (1,971 | ) | |||||||||||||
Basic earnings per common share | $ | 0.10 | $ | (0.85 | ) | $ | (0.23 | ) | |||||||||||||
Dilutive earnings per common share | $ | 0.10 | $ | (0.85 | ) | $ | (0.22 | ) | |||||||||||||
Weighted-average basic share outstanding | 7,333,531 | 3,416,311 | (2,142,114 | ) | (w) | 8,607,728 | |||||||||||||||
Dilutive shares | 320,746 | - | 320,746 | ||||||||||||||||||
Adjusted weighted-average dilutive shares | 7,654,277 | 3,416,311 | 8,928,474 |
NOTES TO UNAUDITED PRO FORMA COMBINED
CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Basis of Presentation
The unaudited pro forma combined consolidated financial statements have been prepared using business combination method of accounting. The unaudited pro forma combined consolidated statement of operations for the three months ended December 31, 2016 is presented assuming the merger occurred on October 1, 2016. The unaudited pro forma combined consolidated balance sheet as of December 31, 2016 assumes the merger occurred on that date. This information is not intended to reflect the actual results that would have been achieved had the Merger actually occurred on those dates and should not be taken as representing the future consolidated results of operation of Prudential. No consideration was given in the unaudited pro forma combined consolidated financial statements to potential cost savings, fee enhancements or merger integration costs for the combined organization.
Note 2 – Purchase Consideration
Pursuant to the Merger Agreement, shareholders of Polonia had the option to receive $11.09 per share in cash or 0.7460 of a share of Prudential common stock for each share of Polonia common stock held thereby, subject to allocation provisions to assure that, in the aggregate, Polonia shareholders received total merger consideration that consisted of 50% stock and 50% cash. As a result of Polonia shareholder stock and cash elections and the related proration provisions of the Merger Agreement, Prudential issued approximately 1,274,197 shares of its common stock and approximately $18.9 million in the Merger.
NOTES TO UNAUDITED PRO FORMA COMBINED
CONSOLIDATED FINANCIAL STATEMENTS
Under the business combination method of accounting, identifiable assets acquired and liabilities assumed are adjusted to their fair value as of the date of the acquisition. The following items are pro forma adjustments referenced in the Pro Forma Combined Consolidated Balance Sheet to indicate the consideration paid and to adjust the Polonia assets and liabilities to their fair value as of December 31, 2016.
(a) | Calculation of Goodwill Resulting from Merger. | |
(dollars in thousands, except per share data) | ||||
Purchase Consideration | ||||
Polonia Common Stock: | ||||
Total Shares of Common Stock Outstanding | 3,416,311 | |||
Common Stock Issued Cap | 1,708,155 | |||
Shares Redeemed for Cash Cap | 1,708,156 | |||
Prudential Common Stock Issued (conversion rate 0.7460) | 1,274,197 | |||
Prudential Closing Price at December 31, 2016 | $ | 17.12 | ||
Cash-out rate paid per share for Polonia Common Stock | $ | 11.09 | ||
Purchase consideration assigned to Polonia shares exchanged for Prudential Common Stock | $ | 21,814 | ||
Cash Paid to Polonia for Polonia shares | $ | 18,943 | ||
Cash Paid for fractional shares | $ | 1 | ||
$ | 40,758 | |||
Net Assets Acquired | ||||
Polonia stockholders’ equity | $ | 34,449 | ||
Core deposit intangible assets | 1,208 | |||
Estimated adjustments to reflect assets acquired at fair value: | ||||
Investment securities | (781 | ) | ||
Portfolio loans | (4,390 | ) | ||
Allowance for loan and lease losses | 1,002 | |||
Premises | 3,036 | |||
Deferred Taxes | 697 | |||
Total fair value adjustment to assets acquired | $ | (436 | ) | |
Estimated adjustments to reflect liabilities assumed at fair value: | ||||
Time deposits | $ | 894 | ||
Borrowings | 1,232 | |||
Total fair value adjustment to liabilities assumed | $ | 2,126 | ||
Total net assets acquired | $ | 31,887 | ||
Goodwill resulting from merger | $ | 8,871 |
(b) | The $18.9 million reflects the payment of the cash portion of the merger consideration. |
(c) | The ($781,000) purchase accounting adjustment decreases the carrying values of acquired investment securities to their fair value. The Polonia investment portfolio was sold shortly after the acquisition date. |
(d) | The $(4.4) million purchase accounting adjustment decreases the carrying values of the acquired loans to their fair market value and included an interest rate loan fair value and credit fair value adjustments. This adjustment is approximately (2.64%) of Polonia’s loan portfolio. This fair value adjustment assumes an interest rate fair value adjustment comparing the portfolio rates to market rates for similar loans of approximately $(2.1) million, in addition to an estimated credit adjustment of $(2.3) million. |
(e) | In accordance with current purchase accounting guidance, Polonia’s $1.1 million allowance for loan losses, which is equal to 0.61% of portfolio loans, has been eliminated. |
(f) | The $3.0 million purchase accounting adjustment on premises brings the carrying value to its estimated fair value. |
(g) | The $1.2 million adjustment is the estimated fair value of the core deposit base assumed, primarily non-interest bearing checking accounts, and lower rates offered on savings and money market accounts and is amortized through the income statement over the estimated life of the these deposit relationships. |
(h) | The $697,000 increase in the deferred tax asset from the tax impact from the fair value adjustments related to the acquired assets and assumed liabilities. |
(i) | The $894,000 purchase accounting adjustment on interest-bearing deposits, primarily certificates of deposit, adjusts their carrying value to estimated fair value. This adjustment will be amortized through the income statement as a reduction in interest expense over the estimated life of five years. |
(j) | The $1.2 million purchase accounting adjustment on Federal Home Loan Bank advances brings their carrying value to their estimated fair value. This adjustment will be amortized through the income statement as a reduction in interest expense over the estimated life of the Federal Home Loan Bank advances. |
(k) | Elimination of 3,416,311 shares of Polonia common stock ($0.01 par value). |
(l) | Elimination of $26.9 million of Polonia additional paid-in capital in excess of par. |
(m) | Elimination of $(1.2) million related to unearned ESOP shares. The ESOP plan was terminated as a result of the acquisition. |
(n) | Elimination of other comprehensive loss related to acquired investment securities. |
(o) | Elimination of retained earnings of Polonia. |
(p) | Issuance of 1,274,197 shares of Prudential common stock ($0.01 par value), carrying a fair value of $17.12 per common stock. |
NOTES TO UNAUDITED PRO FORMA COMBINED
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDING DECEMBER 31, 2016
Under the business combination method of accounting, identified assets acquired and liabilities assumed are adjusted to their fair value as of the date of acquisition. The following pro forma adjustments to record accretion and amortization of the fair value adjustments for the three months period ended December 31, 2016.
(q) | Recognition of three months of accretion of fair value adjustment applied to acquired loan portfolio. The assumed accretion period is the weighted average contractual maturity of the underlying loans. |
(r) | Recognition of three months of accretion of fair value adjustment applied to assumed time deposits. The assumed accretion period is the weighted average contractual maturity of the underlying deposits. |
(s) | Recognition of three months of accretion of fair value adjustment applied to assumed FHLB advances. The assumed accretion period is the weighted average contractual maturity of the underlying advances. |
(t) | Recognition of three months of increased depreciation expense from the fair value adjustment of acquired premises. The depreciation period was estimated to be 30 years. |
(u) | Recognition of three months amortization of the core deposit intangible asset (“CDI”) recorded as a result of the assumption of $94.7 million of core deposits. The amortization method used for the CDI is a ten year, declining balance method. |
(v) | The tax rate used is 34%. |
(w) | Assumes Prudential’s average outstanding shares for the three month period ending December 31, 2016, combined with the 1,274,194 shares issued to Polonia shareholders were outstanding for the entire period. |
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