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FOX CHASE BANCORP INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

May 2, 2014

Forward-Looking Statements This quarterly report contains forward-looking statements that are based on assumptions and may describe future plans, strategies and expectations of the Company. These forward-looking statements are generally identified by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project" or similar expressions. The Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company and its subsidiaries include, but are not limited to, changes in interest rates, national and regional economic conditions, legislative and regulatory changes, monetary and fiscal policies of the U.S. government, including policies of the U.S. Treasury and the Federal Reserve Board, the credit quality and composition of the loan and investment portfolios, valuation of assets acquired through foreclosure, deposit flows, competition, demand for loan products and for financial services in the Company's market area, changes in real estate market values in the Company's market area, changes in relevant accounting principles and guidelines and inability of third party service providers to perform as required. Additional factors that may affect our results are discussed in the sections titled "Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the Securities and Exchange Commission on March 7, 2014, and its other Securities and Exchange Commission reports. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, the Company does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.



Unless the context indicates otherwise, all references in this Form 10-Q to "Company," "we," "us" and "our" refer to Fox Chase Bancorp, Inc. and its subsidiary.

Critical Accounting Policies

The discussion and analysis of the financial condition and results of operations are based on our consolidated financial statements, which are prepared in conformity with generally accepted accounting principles in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of income and expenses. The estimates and assumptions that we use are based on historical experience and various other factors and are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, resulting in a change that could have a material impact on the carrying value of our assets and liabilities and our results of operations. We consider accounting policies involving significant judgments and assumptions by management that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies. We consider the following to be our critical accounting policies. Allowance for Loan Losses Deferred Income Taxes



Valuation and Other-Than-Temporary Impairment of Investment Securities

Valuation of Assets Acquired Through Foreclosure

There have been no material changes in the Company's critical accounting policies, judgments and estimates, including assumptions or estimation techniques utilized, as compared to the Company's most recent Annual Report on Form 10-K.

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Comparison of Financial Condition at March 31, 2014 and December 31, 2013

Total assets were $1.08 billion at March 31, 2014 and $1.12 billion at December 31, 2013. Total loans were $693.4 million at March 31, 2014, a decrease of $27.1 million, or 3.8%, from $720.5 million at December 31, 2013. Total commercial loans decreased $22.7 million, or 3.9%, comprised of decreases of $19.4 million in commercial and industrial loans and $11.4 million in multi-family and commercial real estate loans, partially offset by an increase of $8.0 million in commercial construction loans. The decrease in commercial real estate loans and commercial and industrial loans was primarily due to seasonal utilization of lines of credit at December 31, 2013 which paid down during the first quarter of 2014. During the three months ended March 31, 2014, one- to four-family residential mortgage loans decreased $3.3 million and consumer loans decreased $1.1 million due to normal amortization exceeding new loans originated. Deposits increased $19.8 million, or 2.9%, from $673.7 million at December 31, 2013 to $693.5 million at March 31, 2014. During the three months ended March 31, 2014, money market accounts increased $28.0 million and noninterest-bearing demand accounts increased $26.1 million. Offsetting these increases were decreases in brokered deposits of $22.1 million and non-brokered certificates of deposit of $10.9 million. The increase in money market accounts was due to a large deposit from a municipal customer. The increase in noninterest-bearing demand accounts was primarily due to deposits obtained from commercial borrowing relationships. The decreases in brokered deposits and non-brokered certificates of deposit were due to maturities during the period exceeding new issuances. Short-term borrowings decreased $53.4 million, or 66.3%, from $80.5 million at December 31, 2013 to $27.1 million at March 31, 2014. Stockholders' equity increased $1.3 million to $174.8 million at March 31, 2014 compared to $173.5 million at December 31, 2013 primarily due to net income of $2.0 million, other comprehensive income of $1.8 million and stock based compensation activity of $593,000, offset by dividends paid of $3.0 million for the three months ended March 31, 2014.



Comparison of Operating Results for the Three Months Ended March 31, 2014 and 2013

General. Net income increased $129,000, or 7.1%, to $2.0 million for the three months ended March 31, 2014, compared to $1.8 million for the three months ended March 31, 2013. The increase in net income was due to a decrease in the provision for loan losses of $640,000 and an increase in net interest income of $404,000, offset by a decrease in noninterest income of $595,000 and an increase in noninterest expenses of $318,000. Net Interest Income. Net interest income increased $404,000, or 5.1%, to $8.3 million for the three months ended March 31, 2014 compared to $7.9 million for the same period in 2013, primarily due to an increase in total interest income of $186,000 and a decrease in total interest expense of $218,000. The increase in total interest income was primarily due to a $19.9 million increase in the average balance of interest-earning assets. The increase in the average balance of interest-earning assets was primarily due to a $26.7 million increase in total loans offset by a decrease in mortgage related securities of $6.3 million. The yield on interest-earning assets was 3.88% for the three month periods ended March 31, 2014 and 2013. The yield on mortgage-related securities increased from 2.15% to 2.31%, primarily due to slower security prepayments resulting in reduced premium amortization and the yield on total loans decreased from 4.73% to 4.59%, primarily due to lower yields on commercial loan originations. The decrease in total interest expense was due to a decrease in the cost of interest-bearing liabilities from 1.03% to 0.89%, offset by a $17.0 million increase in average interest-bearing liabilities. The decrease in the average cost of interest-bearing liabilities was due to decreases in the average cost of interest-bearing deposits from 0.82% to 0.64% and borrowings from 1.65% to 1.58%. The decrease in the average cost of interest-bearing deposits reflects the continued low interest rate environment combined with maturities of higher rate certificates of deposit. The decrease in the average cost of borrowings was primarily due to the continued low interest rate environment. 29



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Average Balances and Yields. The following table presents information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting annualized average yields and costs. The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented. Net loan origination fees and costs are included in interest income on loans and are insignificant. Yields are not presented on a tax-equivalent basis. Any adjustments necessary to present yields on a tax-equivalent basis are insignificant. Three Months Ended March 31, 2014 2013 Average Interest and Yield/ Average Interest and Yield/ Balance Dividends Cost Balance Dividends Cost Assets: (Dollars in thousands) Interest-earning assets: Interest-earning demand deposits $ 7,325 $ - 0.03 % $ 5,146 $ 1 0.04 % Mortgage related securities Available-for-sale 244,412 1,454 2.38 % 296,237 1,612 2.18 % Held-to-maturity 72,686 374 2.06 % 27,135 126 1.86 % Total mortgage related securities 317,098 1,828 2.31 % 323,372 1,738 2.15 % Investment securities 18,416 120 2.61 % 20,970 71 1.34 % Loans: Residential loans 126,752 1,510 4.76 % 155,759 1,843 4.73 % Commercial loans 566,150 6,335 4.54 % 502,930 5,868 4.73 % Consumer loans 22,081 265 4.80 % 29,595 351 4.75 % Total Loans 714,983 8,110 4.59 % 688,284 8,062 4.73 % Allowance for loan losses (11,603 ) (11,443 ) Net loans 703,380 8,110 676,841 8,062 Total interest-earning assets 1,046,219 10,058 3.88 % 1,026,329 9,872 3.88 % Noninterest-earning assets 46,457 47,877 Total assets $ 1,092,676$ 1,074,206 Liabilities and equity: Interest-bearing liabilities: NOW and money market deposit accounts $ 177,050 92 0.21 % $ 163,307 85 0.21 % Savings accounts 108,804 59 0.22 % 98,585 33 0.14 % Brokered deposits 67,350 97 0.59 % 59,878 84 0.57 % Certificates of deposit 220,142 650 1.20 % 258,256 975 1.53 % Total interest-bearing deposits 573,346 898 0.64 % 580,026 1,177 0.82 % Short-term borrowings 35,915 25 0.28 % 49,070 32 0.27 % FHLB advances 150,000 570 1.54 % 113,118 502 1.80 % Other borrowed funds 30,000 248 3.34 % 30,000 248 3.36 % Total borrowings 215,915 843 1.58 % 192,188 782 1.65 % Total interest-bearing liabilities 789,261 1,741 0.89 % 772,214 1,959 1.03 % Noninterest-bearing deposits 119,207 112,873 Other noninterest-bearing liabilities 8,619 8,537 Total liabilities 917,087 893,624 Stockholders' equity 178,266 177,119 Accumulated comprehensive income (2,677 ) 3,463 Total stockholders' equity 175,589 180,582 Total liabilities and stockholders' equity $ 1,092,676$ 1,074,206 Net interest income $ 8,317$ 7,913 Interest rate spread 2.99 % 2.85 % Net interest margin 3.17 % 3.07 % Average interest-earning assets to average interest-bearing liabilities 132.56 % 132.91 % 30



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Table of Contents Rate/Volume Analysis. The following table sets forth the effects of changing rates and volumes on our net interest income. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by current volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the prior columns. Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013 Increase (Decrease) Due to Rate Volume Net Interest Income: (In thousands) Interest-earning demand deposits $ - $ (1 )$ (1 ) Mortgage related securities Available-for-sale 124 (282 ) (158 ) Held-to-maturity 35 213 248 Total mortgage related securities 159 (69 ) 90 Investment securities 58 (9 ) 49 Loans: Residential loans 10 (343 ) (333 ) Commercial loans (271 ) 738 467 Consumer loans 3 (89 ) (86 ) Total loans (258 ) 306 48 Total interest-earning assets (41 ) 227 186 Interest Expense: NOW and money market deposits - 7 7 Savings accounts 22 4 26 Brokered deposits 3 10 13 Certificates of deposit (181 ) (144 ) (325 ) Total interest-bearing deposits (156 ) (123 ) (279 ) Short-term borrowings 1 (8 ) (7 ) FHLB advances (95 ) 163 68 Total borrowings (94 ) 155 61 Total interest-bearing liabilities (250 ) 32



(218 ) Net change in net interest income $ 209$ 195$ 404

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Provision for Loan Losses. The Company did not record a provision for loan losses for the three months ended March 31, 2014. For the three months ended March 31, 2013, the Company recorded a provision for loan losses of $640,000. The absence of a provision for loan losses for the three months ended March 31, 2014 was primarily due to: (1) a reduction in loan balances from December 31, 2013 to March 31, 2014 and (2) reduced provision related to certain impaired loans.



The following table provides information with respect to our nonperforming assets and impaired loans at the dates indicated.

March 31, 2014 December 31, 2013 (Dollars in thousands) Nonaccruing Loans: One- to four-family real estate $ 2,242 $



2,390

Multi-family and commercial real estate 1,545 3,031 Construction - 3,231 Consumer 192 128 Commercial and industrial - - Total 3,979 8,780 Accruing Loans Past Due 90 Days or More: Total $ - $ - Nonperforming Loans 3,979 8,780 Assets Acquired Through Foreclosure 4,574



6,252

Total Nonperforming Assets $ 8,553 $



15,032

Total nonperforming loans to total loans 0.56 % 1.20 % Total nonperforming assets to total assets 0.79 1.35 Impaired Loans: Nonaccruing loans $ 3,979 $ 8,780 Accruing troubled debt restructurings 5,107 6,786 Other impaired loans 4,526 - Total impaired loans $ 13,612 $ 15,566



At March 31, 2014, nonperforming assets were comprised of the following:

Four multi-family and commercial real estate loans, the largest of which

is secured by multi-use rental properties located in Montgomery County,

Pennsylvania.

Thirteen one- to four-family loans, the largest of which is secured by a

single-family home located in Montgomery County, Pennsylvania.

Four consumer loans which are secured by second or third lien mortgage

positions.

Assets acquired through foreclosure consisting of six properties.

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Noninterest Income. The following table summarizes noninterest income for the three months ended March 31, 2014 and 2013.

Three Months Ended March 31, $ % 2014 2013 Change Change (Dollars in thousands) Service charges and other fee income $ 352 $ 361 $ (9 ) (2.5 )% Net loss on sale of assets acquired through foreclosure - (4 ) 4 100.0 Income on bank-owned life insurance 117 116 1 0.9 Equity in earnings of affiliate (33 ) 170 (203 ) (119.4 ) Net gain on sale of investment securities - 361 (361 ) (100.0 ) Other 23 50 (27 ) (54.0 ) Total Noninterest Income $ 459 $ 1,054 $ (595 ) (56.5 )% Noninterest income decreased $595,000 from the three months ended March 31, 2013 compared to the same period in 2014. Net gain on sale of investment securities decreased $361,000 due to the sale of investment securities with an amortized cost of $6.5 million during the three months ended March 31, 2013. No securities were sold during the three months ended March 31, 2014. Equity in earnings of affiliates decreased $203,000 due to decreased income on the Bank's investment in PMA due to lower mortgage loan volume for the 2014 period.



Noninterest Expense. The following table summarizes noninterest expense for the three months ended March 31, 2014 and 2013.

Three Months Ended March 31, $ % 2014 2013 Change Change (Dollars in thousands) Salaries, benefits and other compensation $ 3,641 $ 3,505$ 136 3.9 % Occupancy expense 496 447 49 11.0 Furniture and equipment expense 111 124 (13 ) (10.5 ) Data processing costs 385 398 (13 ) (3.3 ) Professional fees 478 288 190 66.0 Marketing expense 41 30 11 36.7 FDIC premiums 165 185 (20 ) (10.8 ) Assets acquired through foreclosure expense 321 285 36 12.6 Other 355 413 (58 ) (14.0 ) Total Noninterest Expense $ 5,993 $ 5,675$ 318 5.6 % Noninterest expense increased $318,000 from the three months ended March 31, 2013 compared to the same period in 2014. Professional fees increased $190,000 due to increased loan workout costs. Salaries, benefits and other compensation increased $136,000, primarily as a result of increased staffing costs and annual merit increases. Occupancy expense increased $49,000, primarily due to increased snow removal expense. Other noninterest expense decreased $58,000 primarily due to decreased regulatory assessments. Income Taxes. The income tax provision for the three months ended March 31, 2014 was $827,000 compared to $825,000 for the three months ended March 31, 2013. The Company's effective income tax rate was 29.7% for the three months ended March 31, 2014, compared to 31.1% for the three months ended March 31, 2013. These rates reflect the Company's levels of tax-exempt income for both periods relative to the overall level of taxable income.



Liquidity and Capital Management

Liquidity Management. Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, loan repayments and sales, security repayments, maturities and sales, and funds available from the FHLB, Federal Reserve Bank and commercial banks. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loans and securities sales and prepayments are greatly influenced by general interest rates, economic conditions and competition. 33



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The following table presents certain of our contractual obligations as of March 31, 2014. Payments Due by Period Less Than One One to Three Three to Five Contractual Obligations Total Year Years Years More Than Five Years (In thousands) March 31, 2014 Operating lease obligations (1) $ 799$ 441$ 358 $ - $ - FHLB advances and other borrowings (2) 218,849 80,327 50,839 87,683 - Other long-term obligations (3) 2,917 1,763 1,154 - - Total $ 222,565$ 82,531$ 52,351$ 87,683 $ - (1) Represents lease obligations for operations center, one loan production office and equipment. (2) Includes principal and projected interest payments. (3) Represents obligations to the Company's third-party data processing provider and other vendors. We regularly adjust our investments in liquid assets and our short-term borrowing position based upon our assessment of: (1) expected loan demand; (2) expected deposit flows; (3) cash flows on our loans and investments; (4) yields available on interest-earning deposits and securities; and (5) the objectives of our asset/liability management policy. We use a variety of measures to assess our liquidity needs, which are provided to our Asset/Liability Management Committee on a regular basis. Our policy is to maintain net liquidity of at least 50% of our funding obligations over the next month. Additionally, our policy is to maintain an amount of cash and short-term marketable securities equal to at least 15% of net deposits and liabilities that will mature in one year or less. Our most liquid assets are cash and cash equivalents. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. At March 31, 2014, cash and cash equivalents totaled $8.9 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $250.0 million at March 31, 2014. In addition, at March 31, 2014, we had the ability to borrow a total of approximately $417.4 million from the FHLB, of which we had $150.0 million outstanding. As of March 31, 2014, the Bank also had a maximum borrowing capacity of $66.4 million with the Federal Reserve Bank of Philadelphia, through the Discount Window. Additionally, as of March 31, 2014, the Bank had overnight borrowing facilities with the FHLB of Pittsburgh and the Federal Reserve Bank as well as federal funds lines of credit with three other commercial banks.



At March 31, 2014, we had $221.9 million in commitments outstanding, which consisted of $15.8 million in home equity and consumer loan commitments, $194.4 million in commercial loan commitments, $11.4 million in standby letters of credit and $313,000 in commercial letters of credit.

Certificates of deposit due within one year of March 31, 2014 totaled $159.3 million, including $15.1 million of brokered deposits, representing 60.8% of certificates of deposit at March 31, 2014, an increase from 60.6% at December 31, 2013. We believe the large percentage of certificates of deposit that mature within one year reflect customers' hesitancy to invest their funds for long periods in the current low interest rate environment. If these maturing deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and borrowings. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before March 31, 2015. Our primary investing activities are the origination of loans and the purchase and sale of securities. Our primary financing activities consist of activity in deposit accounts and borrowed funds. Deposit flows are affected by the overall levels of interest rates, the interest rates and products offered by us and our local competitors and other factors. We generally manage the pricing of our deposits to be competitive and to increase core deposit relationships. Occasionally, we offer promotional rates on certain deposit products to attract deposits. The Bancorp is a separate entity apart from the Bank and must provide for its own liquidity. As of March 31, 2014, the Bancorp had $28.9 million in cash and cash equivalents compared to $26.0 million as of December 31, 2013. In addition to its operating expenses, the Bancorp may utilize its cash position for the payment of dividends or to repurchase common stock, subject to applicable restrictions. The Bancorp paid cash dividends of $0.26 per outstanding share of common stock during the first quarter of 2014. The Bancorp did not repurchase common stock during the three months ended March 31, 2014. The Bancorp can receive dividends from the Bank. Payment of such dividends to the Bancorp by the Bank is limited under applicable law. Dividends may be declared and paid only out of accumulated net earnings and may be paid in cash or property other than its own shares. Dividends may not be declared or paid unless stockholders' equity is at least equal to contributed capital. During the three months ended March 31, 2014, the Bank paid a cash dividend of $5.8 million to the Bancorp. 34



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Capital Management. The Bancorp and Bank are subject to various regulatory capital requirements administered by their respective regulators, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At March 31, 2014, the Bancorp and Bank exceeded all applicable regulatory capital requirements. We are considered "well capitalized" under regulatory guidelines.



The following table presents the Bancorp's and the Bank's capital ratios and the minimum capital requirements to be considered ''well capitalized" under applicable regulatory guidelines as of March 31, 2014 and December 31, 2013.

Minimum to be Well March 31, 2014 Ratio Capitalized



Total risk-based capital (to risk-weighted assets) Bancorp

24.55 % 10.0 % Bank 19.78 10.0 Tier 1 capital (to risk-weighted assets) Bancorp 23.51 6.0 Bank 18.74 6.0 Tier 1 capital (to adjusted assets) Bancorp 16.18 5.0 Bank 12.87 5.0 Minimum to be Well December 31, 2013 Ratio Capitalized



Total risk-based capital (to risk-weighted assets) Bancorp

23.67 % 10.0 % Bank 19.48 10.0 Tier 1 capital (to risk-weighted assets) Bancorp 22.63 6.0 Bank 18.44 6.0 Tier 1 capital (to adjusted assets) Bancorp 16.18 5.0 Bank 13.12 5.0 Total stockholders' equity to total assets was 16.1% at March 31, 2014 and 15.5% at December 31, 2013. As a result of the mutual-to-stock conversion completed in June 2010, the Company has significant capital. The Company's financial condition and results of operations have been enhanced by the capital from the offering, resulting in increased net interest-earning assets. However, the large increase in equity resulting from the capital raised in the conversion has and will continue to have an adverse impact on our return on equity until such funds can be deployed into higher yielding assets. The Company may rely on capital management tools such as cash dividends and share repurchases as well as improving operating income to increase its return on equity. In December 2010, the Basel Committee on Banking Supervision, an international forum for cooperation on banking supervisory matters, announced the "Basel III" capital standards, which substantially revised the existing capital requirements for banking organizations. On July 2, 2013, the Federal Reserve adopted a final rule for the Basel III capital framework. The requirements in the rule will begin to phase in on January 1, 2015 for the Company. The requirements in the rule will be fully phased in by January 1, 2019. The rule imposes higher risk-based capital and leverage requirements than those currently in place. Specifically, the rule imposes the following minimum capital requirements: (1) a new common equity Tier 1 risk-based capital ratio of 4.5%; (2) a Tier 1 risk-based capital ratio of 6% (increased from the current 4% requirement); (3) a total risk-based capital ratio of 8% (unchanged from current requirements); and (4) a leverage ratio of 4%. 35 -------------------------------------------------------------------------------- Off-Balance Sheet Arrangements In the normal course of operations, we engage in a variety of financial transactions that, in accordance with U.S. generally accepted accounting principles, are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers' requests for funding and take the form of loan commitments, letters of credit and lines of credit.



For the three-month period ended March 31, 2014, we did not engage in any off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.


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Source: Edgar Glimpses