MALN BANC The purpose of this analysis is to provide the reader with information relevant to understanding and assessing the Company's financial condition and results of operations for the periods indicated. To fully appreciate this analysis, the reader is encouraged to review the consolidated financial statements and accompanying notes thereto appearing under Item 8 of this report, and statistical data presented in this document.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
See the first page of this Report for information regarding forward-looking statements.
Critical Accounting Policies and Estimates
Management's Discussion and Analysis of Financial Condition and Results of
Operations is based on our consolidated financial statements, which have been
prepared in accordance with U. S. generally accepted accounting principles
("GAAP"). The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses. In particular, the Company has identified the
determination of the ALLL, OREO, fair value measurements, the evaluation of
deferred tax assets, the other-than-temporary impairment evaluation of
securities, and the valuation of our derivative positions to be critical because
management must make subjective and/or complex judgments about matters that are
inherently uncertain and could be most subject to revision as new information
becomes available. Note 2 to our audited consolidated financial statements
contains a summary of our significant accounting policies. Management believes
our policy with respect to the methodology for the determination of the
allowance for loan losses involves more complexity and requires management to
make difficult and subjective judgments which often require assumptions or
estimates about highly uncertain matters. Changes in these judgments,
assumptions or estimates could materially impact results of operations. This
critical policy and its application are periodically reviewed with the Audit
Committee and our Board of Directors.
The Company makes estimates and assumptions that affect the reported amount of
assets and liabilities, disclosure of contingent assets and liabilities at the
date of the consolidated financial statements, and the reported amounts of
revenue and expenses during the reporting period. Such estimates include ALLL,
fair value of financial estimates, along with assumptions used in the
calculation of income taxes, among others. These estimates and assumptions are
based on management's best estimates and judgment. Management evaluates its
estimates and assumptions on an ongoing basis using loss experience and other
factors, including the current economic environment, which management believes
to be reasonable under the circumstances. We adjust such estimates and
assumptions when facts and circumstances dictate. As future events and their
effects cannot be determined with precision, actual results could differ
significantly from these estimates. Changes in estimates resulting from
continuing changes in the economic environment will be reflected in the
financial statements in future periods. There can be no assurances that actual
results will not differ from those estimates.
Operating, Accounting and Reporting Considerations related to COVID-19
The COVID-19 pandemic has negatively impacted the global economy. In response to
the crisis, the Coronavirus Aid, Relief, and Economic Security ("CARES") Act was
passed by Congress and signed into law on March 27, 2020 . The CARES Act provided
an estimated $2.2 trillion to fight the COVID-19 pandemic and stimulate the
economy by supporting individuals and businesses through loans, grants, tax
changes, and other types of relief. Under Section 4013 of the CARES Act and
based upon regulatory guidance promulgated by federal banking regulators,
qualifying short-term loan modifications resulting in payment deferrals that are
attributable to the adverse impact of COVID-19 are not considered to be troubled
debt restructurings ("TDRs"). Some of the provisions applicable to the Company
include, but are not limited to:
• Accounting for Loan Modifications - The CARES Act provides that a financial
institution may elect to suspend (1) the requirements under GAAP for certain
loan modifications that would otherwise be categorized as a TDR and (2) any
determination that such loan modifications would be considered a TDR,
including the related impairment for accounting purposes. The suspension is
applicable for the term of the loan modification that occurs during the
applicable period for a loan that was not more than 30 days past due as of
the credit of a borrower that is not related to the pandemic.
-28---------------------------------------------------------------------------------
Table of Contents
• Paycheck Protection Program - The CARES Act established the Paycheck
Protection Program ("PPP"), an expansion of the Small BusinessAdministration's 7(a) loan program and the Economic Injury Disaster Loan
Program ("EIDL"), administrated directly by the
("SBA").
Also in response to the COVID-19 pandemic, the Board of Governors of the Federal
Reserve System ("FRB"), the Federal Deposit Insurance Corporation ("FDIC"), the
National Credit Union Administration ("NCUA"), the Office of the Comptroller of
the Currency ("OCC"), and the Consumer Financial Protection Bureau ("CFPB"), in
consultation with the state financial regulators (collectively, the "agencies")
issued a joint interagency statement (issued March 22, 2020 ; revised statement
issued April 7, 2020 ). Some of the provisions applicable to the Company include,
but are not limited to:
• Accounting for Loan Modifications - Loan modifications that do not meet the
conditions of the CARES Act may still qualify as a modification that does not
need to be accounted for as a TDR. The agencies confirmed with FASB staff that
short-term modifications made on a good faith basis in response to COVID-19 to
borrowers who are current on payments prior to any relief granted to them are
not TDRs. This includes short-term (e.g., six months) modifications such as
payment deferrals, fee waivers, extensions of repayment terms, or
insignificant delays in payments. Loan modifications were made in accordance
with Section 4013 of the CARES Act and the Interagency Statement on Loan
Modifications and Reporting for Financial Institutions working with customers
affected by COVID-19 and therefore were not classified as TDRs.
• Past Due Reporting - With regard to loans not otherwise reportable as past
due, financial institutions are not expected to designate loans with deferrals
granted due to COVID-19 as past due because of the deferral. A loan's payment
date is governed by the due date stipulated in the legal agreements. If a
financial institution agrees to a payment deferral, these loans would not be
considered past due during the period of the deferral.
• Nonaccrual Status and Charge-offs - During short-term COVID-19 modifications,
these loans generally should not be reported as nonaccrual or as classified.
OnDecember 27, 2020 , the 2021 Consolidated Appropriations Act was signed into law. The$900 billion relief package includes legislation that extends certain relief provisions of the CARES Act that were set to expire onDecember 31, 2020 . This new legislation extends this relief to the earlier of 60 days after the national emergency declared by the President is terminated orJanuary 1, 2022 .
Paycheck Protection Program
The CARES Act established the PPP, an expansion of the EIDL, administrated directly by the SBA.
The Company started accepting and processing applications for loans under the PPP in earlyApril 2020 , when the program was officially launched by theSBA and Treasury Department under the CARES Act. The Company sold the entirety of its PPP loan portfolio inDecember 2020 . Liquidity Sources
Management has reviewed all primary and secondary sources of liquidity in
preparation for any unforeseen funding needs due to the COVID-19 pandemic and
prioritized based on available capacity, term flexibility, and cost. As of
Capital Strength The Bank's capital ratios continue to exceed the highest required regulatory benchmark levels. As ofSeptember 30, 2022 , common equity Tier 1 capital ratio was 19.27 percent, Tier 1 leverage ratio was 16.30 percent, Tier 1 risk-based capital ratio was 19.27 percent and the total risk-based capital ratio was 20.34 percent. -29-
--------------------------------------------------------------------------------
Table of Contents
Deferral and Modification Requests
The CARES Act provided guidance around the modification of loans as a result of the COVID-19 pandemic, which outlined, among other criteria, that short-term modifications made on a good faith basis to borrowers who were current as defined under the CARES Act prior to any relief, are not TDRs. This includes short-term modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers are considered current under the CARES Act and related regulatory guidance if they are less than 30 days past due on their contractual payments at the time a modification program is implemented. As ofSeptember 30, 2022 , the Company had three COVID-19 pandemic related loan modification agreements totaling$32.0 million representing 4.1 percent of gross loans outstanding. Further details regarding these modifications are provided in the table below. AtSeptember 30, 2021 , the Company had eight COVID-19-related modified loan deferrals totaling$61.2 million or 6.7% of total loans. Of the remaining$32.0 million deferrals, none of the deferrals are paying the contractual interest payments. For loans subject to the program, each borrower is required to resume making regularly scheduled loan payments at the end of the modification period and the deferred amounts will be moved to the end of the loan term. Management anticipates this activity will continue beyond fiscal year 2022. September 30, 2022 Loan Gross Loans Percentage of Modified September Gross Loans Number of Loans Exposure 30, 2022 Modified (Dollars in thousands) Residential mortgage - $ -$ 175,957 0.00 % Construction and Development: Residential and commercial - - 24,362 0.00 % Land loans - - 550 0.00 %Total Construction and Development - - 24,912 0.00 % Commercial: Commercial real estate 3 32,041 406,914 7.87 % Farmland - - 11,506 0.00 % Multi-family - - 55,295 0.00 % Commercial and industrial - - 102,703 0.00 % Other - - 13,356 0.00 % Total Commercial 3 32,041 589,774 5.74 % Consumer: Home equity lines of credit - - 13,233 0.00 % Second mortgages - 4,395 0.00 % Other - - 2,136 0.00 % Total Consumer - - 19,764 0.00 % Total loans 3$ 32,041 $ 810,407 3.95 % -30-
--------------------------------------------------------------------------------
Table of Contents
September 30, 2021
Loan Gross Loans Percentage of
Deferment September Gross Loans
Number of Loans Exposure 30, 2021 Modified
(Dollars in thousands)
Residential mortgage 2 $ 667 $ 198,710 0.07 %
Construction and Development:
Residential and commercial - - 61,492 0.00 %
Land loans - - 2,204 0.00 %
Total Construction and Development - - 63,696 0.00 %
Commercial:
Commercial real estate 6 60,567 426,915 6.63 %
Farmland - - 10,297 0.00 %
Multi-family - - 66,332 0.00 %
Commercial and industrial - - 115,246 0.00 %
Other - - 10,954 0.00 %
Total Commercial 6 60,567 629,744 6.63 %
Consumer:
Home equity lines of credit - - 13,491 0.00 %
Second mortgages - - 5,884 0.00 %
Other - - 2,299 0.00 %
Total Consumer - - 21,674 0.00 %
Total loans 8 $ 61,234 $ 913,824 6.70 %
Allowance for Loan Losses
The allowance for loan losses represents management's estimate of probable loan
losses inherent in the loan portfolio. Determining the amount of the allowance
for loan losses is considered a critical accounting estimate because it requires
significant judgment and the use of estimates related to the amount and timing
of expected future cash flows on impaired loans, estimated losses on pools of
homogeneous loans based on historical loss experience, and consideration of
current economic trends and conditions, all of which may be susceptible to
significant change. The loan portfolio also represents the largest asset type on
the Company's Consolidated Statements of Financial Condition.
The evaluation of the adequacy of the allowance for loan losses includes, among
other factors, an analysis of historical loss rates by loan category applied to
current loan totals and qualitative factors. However, actual loan losses may be
higher or lower than historical trends, which vary. Actual losses on specified
problem loans, which also are provided for in the evaluation, may vary from
estimated loss percentages, which are established based upon a limited number of
potential loss classifications. The allowance for loan losses is established
through a provision for loan losses charged to expense. Management believes that
the current allowance for loan losses will be adequate to absorb loan losses on
existing loans that may become uncollectible based on the evaluation of known
and inherent risks in the loan portfolio. The evaluation takes into
consideration such factors as changes in the nature and size of the portfolio,
overall portfolio quality, and specific problem loans and current economic
conditions which may affect our borrowers' ability to pay.
The evaluation also details historical losses by loan category and the resulting
loan loss rates which are projected for current loan total amounts. Loss
estimates for specified problem loans are also detailed. In addition, the OCC,
as an integral part of its examination process, periodically reviews our
allowance for loan losses. The OCC may require us to make additional provisions
for loan losses based upon information available at the time of the examination.
All of the factors considered in the analysis of the adequacy of the allowance
for loan losses may be subject to change. To the extent actual outcomes differ
from management estimates, additional provisions for loan losses may be required
that could materially adversely impact earnings in future periods.
-31---------------------------------------------------------------------------------
Table of Contents
Qualitative or environmental factors that may result in further adjustments to the quantitative analyses include items such as changes in lending policies and procedures, economic and business conditions, nature and volume of the portfolio, changes in delinquency, concentration of credit trends, and value of underlying collateral. The total net adjustments due to qualitative factors, pay-offs and charge-offs decreased the allowance for loan losses by approximately$2.4 million to$9.1 million from$11.5 million atSeptember 30, 2022 andSeptember 30, 2021 , respectively. . An unallocated component is maintained to cover uncertainties that could affect management's estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. Fair Value Measurements The Company uses fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. Investment securities available for sale, equity securities and interest rate swap agreements are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as impaired loans, other real estate owned and certain other assets. These nonrecurring fair value adjustments typically involve application of lower-of-cost-or-market accounting or write-downs of individual assets. Under the FASB Accounting Standards Codification ("ASC") Topic 820, Fair Value Measurements, the Company groups its assets at fair value in three levels, based on the markets in which the assets are traded and the reliability of the assumptions used to determine fair value. These levels are:
• Level 1 - Valuation is based upon quoted prices for identical instruments
traded in active markets.
• Level 2 - Valuation is based upon quoted prices for similar instruments in
active markets, quoted prices for identical or similar instruments in markets
that are not active, and model-based valuation techniques for which all
significant assumptions are observable in the market.
• Level 3 - Valuation is generated from model-based techniques that usesignificant assumptions not observable in the market. These unobservable
assumptions reflect the Company's own estimates of assumptions that market
participants would use in pricing the asset.
Under FASB ASC Topic 820, the Company bases its fair values on the price that
would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. It is our
policy to maximize the use of observable inputs and minimize the use of
unobservable inputs when developing fair value measurements, in accordance with
the fair value hierarchy in FASB ASC Topic 820.
Fair value measurements for assets where there exists limited or no observable
market data and, therefore, are based primarily upon the Company's or other
third-party's estimates, are often calculated based on the characteristics of
the asset, the economic and competitive environment and other such factors.
Therefore, the results cannot be determined with precision and may not be
realized in an actual sale or immediate settlement of the asset. Additionally,
there may be inherent weaknesses in any calculation technique, and changes in
the underlying assumptions used, including discount rates and estimates of
future cash flows, that could significantly affect the results of current or
future valuations. At September 30, 2022 , the Company had $14.0 million of
assets that were measured at fair value on a non-recurring basis using Level 3
measurements.
Income Taxes
We make estimates and judgments to calculate some of our tax liabilities and
determine the realizability of some of our DTAs, which arise from temporary
differences between the tax and financial statement recognition of revenues and
expenses. We also estimate a reserve for DTAs if, based on the available
evidence, it is more likely than not that some portion of the recorded DTAs will
not be realized in future periods. These estimates and judgments are inherently
subjective. Historically, our estimates and judgments to calculate our deferred
tax accounts have not required significant revision to our initial estimates.
-32---------------------------------------------------------------------------------
Table of Contents
In evaluating our ability to recover DTAs, we consider all available positive and negative evidence, including our past operating results and our forecast of future taxable income. In determining future taxable income, we make assumptions for taxable income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require us to make judgments about our future taxable income and are consistent with the plans and estimates we use to manage our business. Any reduction in estimated future taxable income may require us to record a valuation allowance against our DTAs. An increase in the valuation allowance would result in additional income tax expense in the period and could have a significant impact on our future earnings. Realization of a DTA requires us to exercise significant judgment and is inherently uncertain because it requires the prediction of future occurrences. Our net DTA amounted to$3.7 million and$3.5 million atSeptember 30, 2022 and atSeptember 30, 2021 , respectively. In accordance with ASC Topic 740, the Company evaluates on a quarterly basis, all evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance for DTAs is needed. In conducting this evaluation, management explores all possible sources of taxable income available under existing tax laws to realize the net DTA beginning with the most objectively verifiable evidence first, including available carry back claims and viable tax planning strategies. If needed, management will look to future taxable income as a potential source. Management reviews the Company's current financial position and its results of operations for the current and preceding years. That historical information is supplemented by all currently available information about future years. The Company understands that projections about future performance are subjective. The Company did not have a DTA valuation allowance as ofSeptember 30, 2022 andSeptember 30, 2021 .
Other-Than-Temporary Impairment of Securities
Securities are evaluated on a quarterly basis, and more frequently when market
conditions warrant such an evaluation, to determine whether declines in their
value are other-than-temporary. To determine whether a loss in value is
other-than-temporary, management utilizes criteria such as the reasons
underlying the decline, the magnitude and duration of the decline and whether
management intends to sell or expects that it is more likely than not that it
will be required to sell the security prior to an anticipated recovery of the
fair value. The term "other-than-temporary" is not intended to indicate that the
decline is permanent but indicates that the prospects for a near-term recovery
of value is not necessarily favorable, or that there is a lack of evidence to
support a realizable value equal to or greater than the carrying value of the
investment. Once a decline in value for a debt security is determined to be
other-than-temporary, the other-than-temporary impairment is separated into (a)
the amount of the total other-than-temporary impairment related to a decrease in
cash flows expected to be collected from the debt security (the credit loss) and
(b) the amount of the total other-than-temporary impairment related to all other
factors. The amount of the total other-than-temporary impairment related to the
credit loss is recognized in earnings. The amount of the total
other-than-temporary impairment related to all other factors is recognized in
other comprehensive income.
Derivatives
The Company enters into derivative financial instruments to manage exposures
that arise from business activities that result in the payment of future
uncertain cash amounts, the value of which are determined by interest rates. The
Company is exposed to certain risks arising from both its business operations
and economic conditions. The Company principally manages its exposures to a wide
variety of business and operational risks through management of its core
business activities. The Company manages economic risks, including interest
rate, liquidity, and credit risk primarily by managing the amount, sources, and
duration of its debt funding and the use of derivative financial instruments.
The Company primarily uses interest rate swaps as part of its interest rate risk
management strategy.
Interest rate swaps are valued by a third party, using models that primarily use
market observable inputs, such as yield curves, and are validated by comparison
with valuations provided by the respective counterparties. The credit risk
associated with derivative financial instruments that are subject to master
netting agreements is measured on a net basis by counterparty portfolio. The
significant assumptions used in the models, which include assumptions for
interest rates, are independently verified against observable market data where
possible. Where observable market data is not available, the estimate of fair
value becomes more subjective and involves a high degree of judgment. In this
circumstance, fair value is estimated based on management's judgment regarding
the value that market participants would assign to the asset or liability. This
valuation process takes into consideration factors such as market illiquidity.
Imprecision in estimating these factors can impact the amount recorded on the
balance sheet for an asset or liability with related impacts to earnings or
other comprehensive income.
-33---------------------------------------------------------------------------------
Table of Contents
Other assets increased from$13.9 million atSeptember 30, 2021 , to$18.7 million atSeptember 30, 2022 , due to current year gains on our cash flow hedge and an increase in receivables related to an OREO sale. Other liabilities decreased from$12.3 million atSeptember 30, 2021 , to$6.0 million atSeptember 30, 2022 , primarily due to the payments related to prior year participation loans purchased settled during fiscal year 2022. Results of Operations Net income for the year endedSeptember 30, 2022 , was$7.0 million as compared to a net loss of ($92,000 ) in fiscal year 2021. For fiscal year 2022, the fully diluted earnings per common share was$0.92 as compared with fully diluted loss per common share of ($0.01 ) in fiscal year 2021. The increase in net income and diluted earnings per share were primarily due to no provision recorded in fiscal year 2022 compared to a$11.2 million provision for the same period ending 2021. For the year endedSeptember 30, 2022 , the Company's return on average equity (''ROAE'') was 4.79 percent and its return on average assets (''ROAA'') was 0.63 percent. The comparable ratios for the year endedSeptember 30, 2021 were ROAE of (0.06) percent and ROAA of (0.01) percent.
Net Interest Income and Margin
Net interest income is the difference between the interest earned on the portfolio of earning assets (principally loans and investments) and the interest paid for deposits and borrowings, which support these assets.
The following table presents the components of net interest income for the
periods indicated.
Net Interest Income
Year Ended September 30,
2022 2021
Increase Increase
(Decrease) (Decrease)
from Prior Percent from Prior Percent
(In thousands) Amount Year Change Amount Year Change
Interest income:
Loans, including fees $ 31,832 $ (4,538 ) (12.48 ) $ 36,370 $ (5,071 ) (12.24 )
Investment securities 2,575 1,019 65.49 1,556 384 32.76
Dividends, restricted stock 342 (117 ) (25.49 ) 459 (172 ) (27.26 )
Interest-bearing cash accounts 250 219 706.45 31 (1,032 ) (97.08 )
Total interest income 34,999 (3,417 ) (8.89 ) 38,416 (5,891 ) (13.30 )
Interest expense:
Deposits 3,534 (3,214 ) (47.63 ) 6,748 (6,098 ) (47.47 )
Short-term borrowings 4 (44 ) (91.67 ) 48 48 100.00
Long-term borrowings 776 (1,253 ) (61.75 ) 2,029 (869 ) (29.99 )
Subordinated debt 1,371 (160 ) (10.45 ) 1,531 - -
Total interest expense 5,685 (4,671 ) (45.10 ) 10,356 (6,919 ) (40.05 )
Net interest income $ 29,314 $ 1,254 4.47 $ 28,060 $ 1,028 3.80
Net interest income is directly affected by changes in the volume and mix of
interest-earning assets and interest-bearing liabilities, which support those
assets, as well as changes in the rates earned and paid.
Net interest income for the year ended September 30, 2022 increased $1.3
million , or 4.47 percent, to $29.3 million , from $28.1 million for fiscal year
2021. The Company's net interest margin increased 33 basis points to 2.95
percent in fiscal year ended September 30, 2022 , from 2.62 percent for the
fiscal year ended September 30, 2021 . During fiscal year 2022, our net interest
margin was impacted by a decrease in the costs of money market and
interest-bearing demand deposit accounts.
-34---------------------------------------------------------------------------------
Table of Contents
As previously mentioned, the increase in net interest income during fiscal year 2022 was attributable in part to decrease in costs on money market and interest-bearing demand deposit accounts. The Company experienced an increase of$5.3 million in average noninterest-bearing deposits during fiscal year 2022 and a decrease of$67.0 million in average interest-bearing demand, savings, money market and time deposits during fiscal year 2022. During the fiscal year endedSeptember 30, 2022 , the Company's net interest spread increased by 33 basis points reflecting a decrease in both the average yield on interest-earning assets and the average interest rates paid on interest-bearing liabilities of 6 basis points and 39 basis points, respectively. For the fiscal year endedSeptember 30, 2022 , average interest-earning assets decreased by$78.8 million to$1.0 billion , as compared with the fiscal year endedSeptember 30, 2021 . The change in average interest-earning asset volume was primarily due to decreased loan volume. Average interest-bearing liabilities decreased by$114.4 million in fiscal year 2022 compared to fiscal year 2021, primarily due to a decrease in average interest-bearing deposits. The factors underlying the year-to-year changes in net interest income are re?ected in the tables presented above. The table on page 36 presents the Average Statements of Condition with Interest and Average Rates shows the Company's consolidated average balance of assets, liabilities and shareholders' equity, the amount of income produced from interest-earning assets and the amount of expense incurred from interest-bearing liabilities, and net interest income as a percentage of average interest-earning assets. Total Interest Income Interest income for the year endedSeptember 30, 2022 , decreased by$3.4 million , or 8.9 percent, as compared with the year endedSeptember 30, 2021 . This decrease was primarily due to a decrease in loan volume, partially offset by an increase in investments.
The average balance of the Company's loan portfolio decreased
The average loan portfolio represented 86.1 percent of the Company's interest-earning assets (on average) during fiscal year 2022 and 91.8 percent for fiscal year 2021. Average investment securities increased during fiscal year 2022 by$38.4 million compared to fiscal year 2021. Interest-bearing cash increased in fiscal year 2022 by$14.3 million compared to fiscal year 2021. The average yield on interest-earning assets decreased from 3.58 percent in fiscal year 2021 to 3.52 percent in fiscal year 2022. Interest Expense Interest expense for the year endedSeptember 30, 2022 , was impacted by both rate related and volume related factors. The changes resulted in decreased expense of$4.7 million primarily due to a decrease in rates paid on money market and other interest-bearing deposits from fiscal year 2021 to fiscal year 2022. The cost of total average interest-bearing liabilities decreased to 0.64 percent for the year endedSeptember 30, 2022 , a decrease of 39 basis points, from 1.03 percent for the year endedSeptember 30, 2021 . The Company's net interest spread, (i.e., the average yield on average interest-earning assets minus the average rate paid on interest-bearing liabilities) increased 33 basis points to 2.88 percent in fiscal year 2022 from 2.55 percent for fiscal year 2021. The increase in fiscal year 2022 reflected a decreased cost in interest-bearing liabilities. Rate/Volume Analysis The following table quanti?es the impact on net interest income and margin resulting from volume changes in average balances of interest earning assets, interest bearing liabilities, and average related yields and associated funding costs over the past two years. Any change in interest income or expense attributable to both changes in volume and changes in rate has been allocated in proportion to the relationship of the absolute dollar amount of change in each category. -35-
--------------------------------------------------------------------------------
Table of Contents
Analysis of Variance in Net Interest Income Due to Volume and Rates
Fiscal Year 2022/2021
Increase (Decrease)
Due to Change in:
Average Average Net
(In thousands) Volume Rate Change
Interest-earning assets:
Loans, including fees $ (4,785 ) $ 247 $ (4,538 )
Investment securities 1,036 (17 ) 1,019
Interest-bearing cash accounts 20 199 219
Dividends, restricted stock (118 ) 1 (117 )
Total interest-earning assets (3,847 ) 430 (3,417 ) Interest-bearing liabilities: Money market deposits
(63 ) (742 ) (805 )
Savings deposits 7 (16 ) (9 )
Certificates of deposit (667 ) (462 ) (1,129 )
Other interest-bearing deposits (117 ) (1,154 ) (1,271 ) Total interest-bearing deposits (840 ) (2,374 ) (3,214 ) Borrowings
(1,255 ) (202 ) (1,457 )
Total interest-bearing liabilities (2,095 ) (2,576 ) (4,671 )
Change in net interest income
The following table, ''Average Statements of Condition with Interest and Average Rates'' presents for the years endedSeptember 30, 2022 and 2021, the Company's average assets, liabilities, and shareholders' equity. The Company's net interest income, net interest spreads and net interest income as a percentage of interest-earning assets (net interest margin) are also re?ected. No tax equivalent adjustments have been made as the amounts are not material. Year Ended September 30, 2022 2021 Average Interest Average Average Interest Average Outstanding Earned Yield Outstanding Earned Yield/ Balance /Paid /Rate Balance /Paid Rate (In thousands) ASSETS Interest earning assets: Loans receivable(1)$ 854,808 $ 31,832 3.72 %$ 984,125 $ 36,370 3.70 % Investment securities 96,024 2,575 2.68 57,666 1,556 2.70 Deposits in other banks 35,956 250 0.70 21,626 31 0.14 FHLB stock 6,313 342 5.42 8,487 459 5.41 Total interest earning assets(1) 993,101 34,999 3.52 1,071,904 38,416 3.58 Non-interest earning assets Cash and due from banks 59,813 94,986 Bank owned life insurance 26,120 25,713 Other assets 24,331 28,530 Other real estate owned 4,882 5,581 Allowance for loan losses (9,309 ) (12,454 ) Total non-interest earning assets 105,837
142,356
Total assets$ 1,098,938 $ 1,214,260 LIABILITIES AND SHAREHOLDERS' EQUITY Interest bearing liabilities: Money Market accounts$ 331,076 $ 921 0.28 %$ 343,640 $ 1,726 0.50 % Savings accounts 54,374 46 0.09 48,558 59 0.12 Certificate accounts 112,457 1,153 1.03 159,109 2,282 1.43 Other interest-bearing deposits 299,881 1,414 0.47 313,460 2,681 0.86 Total deposits 797,788 3,534 0.44 864,767 6,748 0.78 Borrowed funds 88,824 2,151 2.42 136,197 3,608 2.65 Total interest-bearing liabilities 886,612 5,685 0.64 1,000,964 10,356 1.03 Non-interest bearing liabilities Demand deposits 55,925 50,619 Other liabilities 11,251 16,684 Total non-interest-bearing liabilities 67,176 67,303 Shareholders' equity 145,150 145,993 Total liabilities and shareholders' equity$ 1,098,938 $ 1,214,260 Net interest spread 2.88 % 2.55 % Net interest margin 2.95 % 2.62 % Net interest income$ 29,314
$ 28,060
--------------------------------------------------------------------------------
(1) Includes non-accrual loans during the respective periods. Calculated net of
unamortized deferred loan fees, loan discounts, undisbursed portions of
loans-in-process, and allowance for loan losses.
-36---------------------------------------------------------------------------------
Table of Contents
Other Income
The following table presents the principal categories of other ("non-interest")
income for each of the years in the two-year period ended September 30, 2022 .
Year Ended September 30,
Increase %
2022 2021 (Decrease) Change
(In thousands)
Service charges and other fees $ 1,237 $ 1,323 $ (86 ) (6.50 )%
Rental income-other 196 217 (21 ) (9.68 )
Net gains on sale and call of available
for sale securities - 779 (779 ) (100.00 )
Net gains on sale of loans 100 788 (688 ) (87.31 )
Earnings on bank-owned life insurance 794 656 138 21.04
Total other income $ 2,327 $ 3,763 $ (1,436 ) (38.16 )%
For the fiscal year ended September 30, 2022 , total other income decreased $1.4
million compared to the fiscal year ended September 30, 2021 . This decrease was
primarily a result of decreases of $779,000 in net gain on sale and call of
available for sale securities and $688,000 in net gain on sale of loans,
partially offset by an increase of $138,000 in excess of death benefit on
banked-owned life insurance.
The increase on the sale of investments resulted from managing and optimizing
normal portfolio activity during 2021. The decrease in the gain on sale of loans
was primarily the result of a strategic effort to originate and sell residential
loans in the low interest rate environment throughout fiscal year 2021 and the
gain on sale of PPP loans during 2021.
Other Expense
The following table presents the principal categories of other expense for each
of the years in the two-year period ended
Year Ended September 30,
Increase %
2022 2021 (Decrease) Change
(In thousands)
Salaries and employee benefits
2,138 2,198 (60 ) (2.73 )
Federal deposit insurance premium 277 313 (36 ) (11.50 )
Advertising 129 109 20 18.35
Data processing 1,259 1,267 (8 ) (0.63 )
Professional fees 3,831 3,178 653 20.55
Other real estate owned expense, net 305 866 (561 ) (64.78 )
Pennsylvania shares tax 592 678 (86 ) (12.68 )
Other operating expense 4,842 3,199 1,643 51.36
Total other expense $ 22,766 $ 20,951 $ 1,815 8.66 %
Total other expense for the fiscal year ended September 30, 2022 increased $1.8
million , or 8.7%, to $22.8 when compared to the fiscal year ended September 30,
2021 . The increase was primarily due to an increase of $1.6 million , or a 51.4%
increase in other operating expenses. The increase in other operating expenses
was mainly due to $1.5 million of real estate tax expense and $359,000 valuation
allowance adjustment related to a $13.3 million loan held for sale. In addition,
professional fees increased by $653,000 to $3.8 million at September 30, 2022 ,
from $3.2 million at September 30, 2021 , primarily due to legal fees associated
with loan workouts and related matters concerning nonperforming loans. These
increases were offset by a decrease in other real estate owned ("OREO") expenses
of $561,000 to $305,000 at September 30, 2022 , when compared to $866,000 for the
fiscal year ended September 30, 2021 .
Financial Condition
Investment Portfolio
For the year ended September 30, 2022 , the average volume of investment
securities increased by $38.4 million to approximately $96.0 million or 9.7
percent of average interest-earning assets, from $57.7 million or 5.4 percent of
average interest-earning assets, for the year ended September 30, 2021 . At
September 30, 2022 , the total investment portfolio amounted to $110.0 million ,
an increase of $39.2 million from September 30, 2021 . The increase in the
investment portfolio was primarily due to purchases in the investment portfolio
of $53.8 million , partially offset by maturities, calls and principal repayments
in the amount of $6.1 during fiscal year 2022. At September 30, 2022 , the
principal components of the investment portfolio were government agency
obligations, federal agency obligations, including mortgage-backed securities,
obligations of U.S. states and political subdivision, corporate bonds and notes,
a trust preferred security and equity securities.
-37---------------------------------------------------------------------------------
Table of Contents
During the year ended
As ofSeptember 30, 2022 , the estimated fair value of the available-for-sale securities disclosed below was primarily dependent upon the movement in market interest rates, particularly given the negligible inherent credit risk associated with these securities. These investment securities are comprised of securities that are rated investment grade by at least one bond credit rating service. Although the fair value will fluctuate as the market interest rates move, management believes that these fair values will recover as the underlying portfolios mature and are reinvested in market rate yielding investments. The Company does not intend to sell and expects that it is not more likely than not that it will be required to sell these securities until such time as the value recovers or the securities mature. Management does not believe any individual unrealized loss as ofSeptember 30, 2022 , represents other-than-temporary impairment. Securities available-for-sale are a part of the Company's interest rate risk management strategy and may be sold in response to changes in interest rates, changes in prepayment risk, liquidity management and other factors. The Company continues to reposition the investment portfolio as part of an overall corporate-wide strategy to produce reasonable and consistent margins where feasible, while attempting to limit risks inherent in the Company's balance sheet.
For fiscal year 2022, there were no sales of available-for-sale investment
securities. For fiscal year 2021, proceeds of available-for-sale investment
securities sold amounted to
The varying amount of sales from the available-for-sale portfolio reflects the
significant volatility present in the market. Given the historic low interest
rates prevalent in the market, it is necessary for the Company to protect itself
from interest rate exposure. Securities that once appeared to be sound long-term
investments can, after changes in the market, become securities that the Company
wishes to sell to avoid losses and mismatches of interest-earning assets and
interest-bearing liabilities at a later time.
-38---------------------------------------------------------------------------------
Table of Contents
The table below illustrates the maturity distribution and weighted average yield for investment securities atSeptember 30, 2022 , based on a contractual maturity. More than Five More than One Year Years through Ten More than Ten One year or less through Five Years Years Years Total Weighted Weighted Weighted Weighted Weighted Amortized Average Amortized
Average Amortized Average Amortized Average Amortized Fair Average
Cost Yield Cost Yield Cost Yield Cost Yield Cost Value Yield
(In thousands)
Available for Sale Securities :
U.S. government agencies $ - - % $ - - % $ - - % $ 5,000 2.59 % $ 5,000 $ 3,580 2.59 %
State and municipal obligations - - 1,231 2.07 % 820 1.75 % 9,964 2.34 % 12,014 9,660 2.26 %
Single issuer trust preferred
security - - - - % 1,000 3.41 % - - % 1,000 946 3.41 %
Corporate debt securities - - 3,500 3.06 % 30,990 3.36 % 1,500 3.75 % 35,990 32,128 3.35 %
US Treasury Note - - 1,488 2.09 % - - - - 1,488 1,443 2.09 %
Mortgage- backed securities
("MBS")
MBS - - - - - - 2,403 2.92 % 2,403 2,087 2.92 %
Total $ - - % $ 6,218 2.63 % $ 32,810 3.32 % $ 18,867 2.61 % $ 57,895 $ 49,844 3.26 %
Held to Maturity Securities :
U.S. government agencies and
obligations $ 4,190 3.20 % $ 4,500 2.80 % $ 2,500 1.99 % $ 18,000 2.73 % $ 29,190 $ 24,283 2.76 %
State and municipal obligations 251 1.01 % 3,672 1.82 % 617 1.89 % 13,478 2.23 % 18,017 15,491 2.10 %
Corporate debt securities - - 3,263 3.82 % - - - - 3,263 3,168 3.82 %
Mortgage- backed securities
Mortgage Backed Security
("MBS"), fixed-rate - - - - - - 2,278 1.98 % 2,278 1,789 1.98 %
Collateralized mortgage
obligations ("CMO"), fixed-rate - - - - 576 1.69 % 5,443 2.47 % 6,018 5,535 2.39 %
Total $ 4,441 3.07 % $ 11,435 2.78 % $ 3,693 1.92 % $ 39,198 2.47 % $ 58,767 $ 50,266 2.56 %
Equity Securities :
Mutual fund - - % 500 2.00 % 874 2.00 % - - % 1,374 1,374 2.00 %
Total $ - - % $ 500 2.00 % $ 874 2.00 % $ - - % $ 1,374 $ 1,374 2.00 %
Total Investment Securities $ 4,441 3.07 % $ 18,153 2.70 % $ 37,377 3.16 % $ 58,066 2.51 % $ 118,037 $ 101,484 2.90 %
For information regarding the carrying value of the investment portfolio, see Note 6 and Note 12 of the Notes to the Consolidated Financial Statements.
-39---------------------------------------------------------------------------------
Table of Contents
The following table sets forth the carrying value of the Company's investment
securities, as of
2022 2021
(In thousands)
Investment Securities Available-for-Sale:
U.S. government agencies $ 3,580 $ 4,993
State and municipal obligations 9,660
2,765
Single issuer trust preferred security 946 875 Corporate debt securities 32,128 32,180 MBS Securities 2,087 - U.S. Treasury Note 1,443 - Total available-for-sale$ 49,844 $ 40,813 Investment Securities Held-to-Maturity: U.S. government agencies$ 29,190 $
10,000
State and municipal obligations 18,017
6,062
Corporate debt securities 3,264
3,383
Mortgage-backed securities:
Mortgage Backed Security ("MBS"), fixed-rate 2,278
Collateralized mortgage obligations ("CMO"), fixed-rate 6,018 9,062
Total held-to-maturity $ 58,767 $ 28,507
Equity Securities :
Mutual fund $ 1,374 $ 1,500
Total equity securities $ 1,374 $ 1,500
Total investment securities $ 109,985 $ 70,820 For additional information regarding the Company's investment portfolio, see Note 6 and Note 12 of the Notes to the Consolidated Financial Statements.
Loan Portfolio Lending is the Company's primary business activity. The Company's loan portfolio consists of residential, construction and development, commercial and consumer loans, serving the diverse customer base in its market area. The composition of the Company's portfolio continues to change due to the local economy. Factors such as the economic climate, interest rates, real estate values and employment all contribute to these changes in the composition of the Company's portfolio. Growth is generated through business development efforts, repeat customer requests for new financings, penetration into existing markets and entry into new markets. The Company seeks to create growth in commercial lending, which primarily includes commercial real estate, multi-family, farmland, and commercial and industrial lending, by offering customer-focused products and competitive pricing and by capitalizing on the positive trends in its market area. Products offered are designed to meet the financial requirements of the Company's customers. It is the objective of the Company's credit policies to diversify the commercial loan portfolio to limit concentrations in any single industry. AtSeptember 30, 2022 , total gross loans amounted to$810.4 million , a decrease of$103.4 million or 11.3 percent as compared toSeptember 30, 2021 . AtSeptember 30, 2022 , total net loans amounted to$801.9 million , a decrease of$101.1 million or 11.2 percent as compared toSeptember 30, 2021 . For the fiscal year endedSeptember 30, 2022 , the gross loan portfolio saw declines of$22.8 million in residential mortgage loans,$40.0 million in commercial loans, and$38.8 million in construction and land loans. The average balance of our total loans decreased$129.3 million , or 13.1 percent, for the fiscal year endedSeptember 30, 2022 , as compared to the fiscal year endedSeptember 30, 2021 , while the average yield on loans increased 2 basis points to 3.72 percent for the fiscal year endedSeptember 30, 2022 , from 3.70 percent for the fiscal year endedSeptember 30, 2021 . During fiscal year 2022 compared to fiscal year 2021, the volume-related factors contributed to a decrease of interest income on loans of$4.8 million , while the rate-related changes increased interest income by$247,000 . -40-
--------------------------------------------------------------------------------
Table of Contents
The following table presents information regarding the components of the Company's loan portfolio (which does not include loans held for sale, except as noted below) on the dates indicated.
September 30,
2022 2021 2020 2019 2018
(In thousands)
Residential mortgage $ 175,957 $ 198,710 $ 242,090 $ 220,011 $ 197,219
Construction and Development:
Residential and commercial 24,362 61,492 65,703 40,346 37,433
Land 550 2,204 3,110 3,420 9,221
Total construction and development 24,912 63,696 68,813 43,766 46,654
Commercial:
Commercial real estate 406,914 426,915 495,398 547,727 498,229
Farmland 11,506 10,297 7,517 7,563 12,066
Multi-family 55,295 66,332 67,767 62,884 45,102
Commercial and industrial 102,703 115,246 116,584 99,747 73,895
Other 13,356 10,954 10,142 4,450 6,164
Total commercial 589,774 629,744 697,408 722,371 635,456
Consumer:
Home equity lines of credit 13,233 13,491 17,128 19,506 14,884
Second mortgages 4,395 5,884 10,711 13,737 18,363
Other 2,136 2,299 2,851 2,030 2,315
Total consumer 19,764 21,674 30,690 35,273 35,562
Total loans 810,407 913,824 1,039,001 1,021,421 914,891
Deferred loan fees and costs, net 537 629 326 663 566
Allowance for loan losses (9,090 ) (11,472 ) (12,433 ) (10,095 ) (9,021 )
Loans receivable, net $ 801,854 $ 902,981 $ 1,026,894 $ 1,011,989 $ 906,436
At September 30, 2022 , our net loan portfolio totaled $801.9 million or 76.8
percent of total assets. Our principal lending activity has been the origination
of residential, commercial, and commercial real estate loans. Through our loan
policy, we utilize strict underwriting guidelines to maintain low average
loan-to-value ("LTV") ratios and require maximum gross debt ratios and minimum
debt coverage ratios.
Loans are subject to federal and state law and regulations. Interest rates
charged by us on loans are affected principally by the demand for such loans and
the supply of money available for lending purposes and the rates offered by our
competitors. These factors are, in turn, affected by general and economic
conditions, the monetary policy of the federal government, including the Federal
Reserve Bank , legislative tax policies and governmental budgetary matters.
The loans receivable portfolio is segmented into residential mortgage loans,
construction and development loans, commercial loans and consumer loans. The
residential mortgage loan segment has one class, one- to four-family first lien
residential mortgage loans. The construction and development loan segment
consists of the following classes: residential and commercial construction loans
and land loans. Residential construction loans are made for the acquisition of
and/or construction on a lot or lots on which a residential dwelling is to be
built and occupied by the homeowner. Commercial construction loans are made for
the purpose of acquiring, developing, and constructing a commercial use
structure and for acquisition, development, and construction of residential
properties by residential developers. The commercial loan segment consists of
the following classes: commercial real estate loans, multi-family real estate
loans, and other commercial loans, which are also generally known as commercial
and industrial loans or commercial business loans. The consumer loan segment
consists of the following classes: home equity lines of credit, second mortgage
loans and other consumer loans, primarily unsecured consumer lines of credit.
Residential Lending. Residential mortgage originations are secured primarily by
properties located in the Company's market areas and surrounding areas. At
September 30, 2022 , $176.0 million , or 21.7 percent, of our total loans in our
portfolio consisted of single-family residential mortgage loans.
-41---------------------------------------------------------------------------------
Table of Contents
Our single-family residential mortgage loans generally are underwritten on terms
and documentation conforming to guidelines issued by Federal Home Loan Mortgage
Corporation ("Freddie Mac") and the Federal National Mortgage Association
("Fannie Mae"). Applications for one- to four-family residential mortgage loans
are taken by our loan origination officers and are accepted at any of our
banking offices and are then referred to the lending department in order to
process the loan, which consists primarily of obtaining all documents required
by Freddie Mac and Fannie Mae underwriting standards, and completing the
underwriting, which includes making a determination whether the loan meets our
underwriting standards such that the Bank can extend a loan commitment to the
customer. We generally have retained for our portfolio a substantial portion of
the single-family residential mortgage loans that we originate. We currently
originate fixed-rate, fully amortizing mortgage loans with maturities of 10 to
30 years. We also offer adjustable rate mortgage ("ARM") loans where the
interest rate either adjusts on an annual basis or is fixed for the initial one,
three, five or seven years and then adjusts annually. However, due to the low
interest rate environment and demand for fixed rate products, we have not
originated a significant amount of ARM loans in recent years. At September 30,
2022 , $49.8 million , or 28.3 percent, of our one- to four-family residential
mortgage loans consisted of ARM loans.
In prior years, the Company purchased single-family residential mortgage loans and consumer loans from a network of mortgage brokers. The Company now has correspondent lending relationships, but the Bank independently underwrites these loans.
We underwrite one- to four-family residential mortgage loans with loan-to-value ratios of up to 95 percent, provided that the borrower obtains private mortgage insurance on loans that exceed 80 percent of the appraised value or sales price, whichever is less, of the secured property. We also require that title insurance, hazard insurance and, if appropriate, flood insurance be maintained on all properties securing real estate loans. We require that a licensed appraiser from our list of approved appraisers perform and submit to us an appraisal on all properties secured by a first mortgage on one- to four-family first mortgage loans. Our mortgage loans generally include due-on-sale clauses, which provide us with the contractual right to deem the loan immediately due and payable in the event the borrower transfers ownership of the property. Due-on-sale clauses are an important means of adjusting the yields of fixed-rate mortgage loans in portfolio and we generally exercise our rights under these clauses. Construction and Development Loans. The amount of our outstanding construction and development loans in our portfolio decreased to$24.9 million or 3.0 percent of gross loans atSeptember 30, 2022 from$63.7 million or 7.0 percent of gross loans as ofSeptember 30, 2021 . We generally limit construction loans to builders and developers with whom we have an established relationship, or who are otherwise known to officers of the Bank. Our construction loans also include single-family residential construction loans which may, if approved, convert to permanent, long-term mortgage loans upon completion of construction ("construction/perm" loans). During the initial or construction phase, these construction/perm loans require payment of interest only, which generally is tied to the prime rate, as the home is being constructed. On residential construction to perm loans the final interest rate is approved upon the earlier of the completion of construction or one year. These loans if approved by the appropriate approving authority, convert to long-term (generally 30 years), amortizing, fixed-rate single-family mortgage loans. Our portfolio of construction loans generally have a maximum term as approved based upon the underwriting (for individual, owner-occupied dwellings), and loan-to-value ratios less than 80 percent. Residential construction loans to developers are made on either a pre-sold or speculative (unsold) basis. Limits are placed on the number of units that can be built on a speculative basis based upon the reputation and financial position of the builder, his/her present obligations, the location of the property and prior sales in the development and the surrounding area. Generally, a limit of two unsold homes (one model home and one speculative home) is placed per project. Prior to committing to a construction loan, we require that an independent appraiser prepare an appraisal of the property. Each project also is reviewed and inspected at its inception and prior to every disbursement of loan proceeds. Disbursements are made after inspections based upon a percentage of project completion and monthly payment of interest is required on all construction loans. Our construction loans also include loans for the acquisition and development of land for sale (i.e., roads, sewer and water lines). We typically make these loans only in conjunction with a commitment for a construction loan for the units to be built on the site. These loans are secured by a lien on the property and are limited to a loan-to-value ratio not exceeding 75 percent of the appraised value at the time of origination. The loans have a variable rate of interest and require monthly payments of interest. The principal of the loan is repaid as units are sold and released. We limit loans of this type to our market area and to developers with whom we have established relationships. In most cases, we also obtain personal guarantees from the borrowers. Our loan portfolio included one loan secured by unimproved real estate and lots ("land loan"), with an outstanding balance of$550,000 , constituting 0.1 percent of total loans, atSeptember 30, 2022 . -42-
--------------------------------------------------------------------------------
Table of Contents
In order to mitigate some of the risks inherent to construction lending, we inspect properties under construction, review construction progress prior to advancing funds, work with builders with whom we have established relationships, require annual updating of tax returns and other financial data of developers and obtain personal guarantees from the principals. AtSeptember 30, 2022 , approximately$134,000 , or 1.5 percent, of our allowance for loan losses was attributed to construction and development loans. We had no construction and development loans that were non-performing atSeptember 30, 2022 orSeptember 30, 2021 . We had no construction and development loans that were performing TDRs atSeptember 30, 2022 orSeptember 30, 2021 . Commercial Lending. AtSeptember 30, 2022 , our loans secured by commercial real estate amounted to$406.9 million and constituted 50.2 percent of our gross loans at such date. During the fiscal year endedSeptember 30, 2022 , the commercial real estate loan portfolio decreased by$20.0 million , or 4.7 percent. During fiscal year 2022, we had no charge-offs of commercial real estate loans, as compared to$11.9 million of charge-offs of commercial real estate loans for fiscal year 2021. Our commercial real estate loan portfolio consists primarily of loans secured by office buildings, retail and industrial use buildings, strip shopping centers, mixed-use and other properties used for commercial purposes located in our market area. Although terms for commercial real estate and multi-family loans vary, our underwriting standards generally allow for terms up to 10 years with the interest rate being reset in the fifth year and with amortization typically not greater than 25 years and loan-to-value ratios of not more than 80 percent. Interest rates are either fixed or adjustable, based upon the index rate plus a margin, and fees ranging from 0.5 percent to 1.50 percent are charged to the borrower at the origination of the loan. Prepayment fees are charged on most loans in the event of early repayment. Generally, we obtain personal guarantees of the principals as additional collateral for commercial real estate and multi-family real estate loans. Commercial and multi-family real estate loans generally present a higher level of risk than loans secured by one- to four-family residences. This greater risk is due to several factors, including the concentration of principal in a limited number of loans and borrowers, the effect of general economic conditions on income producing properties and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by commercial and multi-family real estate is typically dependent upon the successful operation of the related real estate project. If the cash flow from the project is reduced (for example, if leases are not obtained or renewed, a bankruptcy court modifies a lease term, or a major tenant is unable to fulfill its lease obligations), the borrower's ability to repay the loan may be impaired. As ofSeptember 30, 2022 , there were no non-accruing commercial real estate mortgage loans, other than one commercial real estate mortgage loan held-for-sale that was non-accruing in the amount of$13.3 million . As ofSeptember 30, 2022 ,$6.1 million , or 67.2 percent of our allowance for loan losses, was allocated to commercial real estate mortgage loans. As ofSeptember 30, 2022 , our commercial real estate loans held in our portfolio that were deemed performing troubled debt restructurings decreased to$594,000 from$12.2 million as ofSeptember 30, 2021 . AtSeptember 30, 2022 , our multi-family loan portfolio included 23 loans with an aggregate book value of$55.3 million secured by multi-family (more than four units) properties, constituting 6.8 percent of our gross loans at such date. As ofSeptember 30, 2022 , we had no non-accruing multi-family loans. AtSeptember 30, 2022 , we had$102.7 million in commercial business loans, or 12.7 percent of gross loans outstanding, in our portfolio. Our commercial business loans generally have been made to small to mid-sized businesses located in our market area. The commercial business loans in our portfolio assist us in our asset/liability management since they generally provide shorter maturities and/or adjustable rates of interest in addition to generally having higher rates of return which are designed to compensate for the additional credit risk associated with these loans. The commercial business loans which we have originated may be either a revolving line of credit or for a fixed term of generally 10 years or less. Interest rates are adjustable, indexed to a published prime rate of interest, or fixed. Generally, equipment, machinery, real property or other corporate assets secure such loans. Personal guarantees from the business principals are generally obtained as additional collateral. Generally, commercial business loans are characterized as having higher risks associated with them than single-family residential mortgage loans. As ofSeptember 30, 2022 , we had no non-accruing commercial loans in our loan portfolio. At such date, approximately$1.0 million , or 10.5 percent of the allowance for loan losses was allocated to commercial business loans. AtSeptember 30, 2022 , one commercial business loan totaling$625,000 was deemed a performing troubled debt restructuring loan. -43-
--------------------------------------------------------------------------------
Table of Contents
In our underwriting procedures, consideration is given to the stability of the property's cash flow history, future operating projections, current and projected occupancy levels, location, and physical condition. Generally, our practice is to impose a debt service ratio (the ratio of net cash flows from operations before the payment of debt service/debt service) of not less than 120 percent. We also evaluate the credit and financial condition of the borrower, and if applicable, the guarantor. Appraisal reports prepared by independent appraisers are obtained on each loan to substantiate the property's market value and are reviewed by us prior to the closing of the loan. Consumer Lending. In our efforts to provide a full range of financial services to our customers, we offer various types of consumer loans. Our consumer loans amounted to$19.8 million or 2.4 percent of our total loan portfolio atSeptember 30, 2022 . The largest components of our consumer loans are home equity lines of credit, which amounted to$13.2 million atSeptember 30, 2022 , and loans secured by second mortgages, consisting primarily of home equity loans, which amounted to$4.4 million atSeptember 30, 2022 . Our consumer loans also include automobile loans, unsecured personal loans and loans secured by deposits. Consumer loans are originated primarily through existing and walk-in customers and direct advertising. Our home equity lines of credit are variable rate loans tied to LIBOR, treasury, and prime rates. Our second mortgages may have fixed or variable rates, although they generally have had fixed rates in recent periods. Our second mortgages have a maximum term to maturity of 15 years. Both our second mortgages and our home equity lines of credit generally are secured by the borrower's primary residence. However, our security generally consists of a second lien on the property. Our lending policy provides that the maximum loan-to-value ratio on our home equity lines of credit is 80 percent when the Bank has the first mortgage. However, the maximum loan-to-value ratio on our home equity lines of credit is reduced to 75 percent when the Bank does not have the first mortgage. AtSeptember 30, 2022 , the unused portion of our home equity lines of credit was$27.9 million . Consumer loans generally have higher interest rates and shorter terms than residential loans; however, they have additional credit risk due to the type of collateral securing the loan or in some cases the absence of collateral. In the year endedSeptember 30, 2022 , we recovered$57,000 of previously charged-off consumer loans mostly consisting of second mortgage loans, as compared to$129,000 of recoveries, mostly consisting of second mortgage loans during the year endedSeptember 30, 2021 . As ofSeptember 30, 2022 , we had$148,000 of non-accruing second mortgage loans and$20,000 of non-accruing home equity lines of credit, representing a decrease of$133,000 over the amount of non-accruing second mortgage loans and home equity lines of credit atSeptember 30, 2021 . AtSeptember 30, 2022 ,$317,000 of our consumer loans were classified as substandard consumer loans. AtSeptember 30, 2022 , an aggregate of$88,000 of our allowance for loan losses was allocated to second mortgages and home equity lines of credit. -44-
--------------------------------------------------------------------------------
Table of Contents
The following table presents the contractual maturity of our loans held in our portfolio atSeptember 30, 2022 . The table does not include the effect of prepayments or scheduled principal amortization. Loans having no stated repayment schedule or maturity and overdraft loans are reported as being due in one year or less. At September 30, 2022, Maturing After One Years After Five In One Year Through Through After or Less Five Years Fifteen Years Fifteen Years Total (In thousands) Residential mortgage $ 222$ 5,444 $ 38,539 $ 131,752 $ 175,957 Construction and Development: Residential and commercial 22,702 1,660 - - 24,362 Land - 550 - - 550 Total construction and development 22,702 2,210 - - 24,912 Commercial: Commercial real estate 25,038 245,227 134,879 1,770 406,914 Farmland - 2,449 9,057 - 11,506 Multi-family 15,487 20,441 19,367 - 55,295 Commercial and industrial 26,655 66,705 3,377 5,966 102,703 Other 8,198 5,158 - - 13,356 Total commercial 75,378 339,980 166,680 7,736 589,774 Consumer: Home equity lines of credit - 845 4,485 7,903 13,233 Second mortgages 532 1,199 2,664 - 4,395 Other 407 1,588 27 114 2,136 Total consumer 939 3,632 7,176 8,017 19,764 Total$ 99,241 $ 351,266 $ 212,395 $ 147,505 $ 810,407 Loans with: Fixed rates$ 22,375 $ 128,535 $ 80,279 $ 86,473 $ 317,662 Variable rates 76,866 222,731 132,116 61,032 492,745 Total$ 99,241 $ 351,266 $ 212,395 $ 147,505 $ 810,407
For additional information regarding loans, see Note 7 of the Notes to the Consolidated Financial Statements.
Allowance for Loan Losses and Related Provision
The purpose of the allowance for loan losses ("ALLL" or "allowance") is to
absorb the impact of probable losses inherent in the loan portfolio. Additions
to the allowance are made through provisions charged against current operations
and through recoveries made on loans previously charged-off. The allowance is
maintained at an amount considered adequate by management to provide for
potential loan losses based upon a periodic evaluation of the risk
characteristics of the loan portfolio. In establishing an appropriate allowance,
an assessment of the individual borrowers, a determination of the value of the
underlying collateral, a review of historical loss experience and an analysis of
the levels and trends of loan categories, delinquencies and problem loans are
considered. Such qualitative factors as changes in lending policies and
procedures, economic and business conditions, nature and volume of the
portfolio, changes in delinquency, concentration of credit trends, value of
underlying collateral, the level and trend of interest rates, and peer group
statistics are also reviewed. At September 30, 2022 , the level of the allowance
was $9.1 million as compared to a level of $11.5 million at September 30, 2021 .
The Company made no loan loss provisions in fiscal year 2022 compared with $11.2
million in fiscal year 2021. Provision expense was higher during the fiscal year
ended September 30, 2021 , due primarily to four commercial loans that were
transferred to held-for-sale. The level of the allowance during the fiscal years
of 2022 and 2021 re?ects the change in average volume, credit quality within the
loan portfolio, the level of charge-offs, and loan volume recorded during the
periods and the Company's focus on the changing composition of the commercial
and residential real estate loan portfolios.
-45---------------------------------------------------------------------------------
Table of Contents
AtSeptember 30, 2022 , the allowance amounted to 1.12 percent of total gross loans. In management's view, the level of the allowance atSeptember 30, 2022 is adequate to cover losses inherent in the loan portfolio. Management's judgment regarding the adequacy of the allowance constitutes a ''Forward Looking Statement'' under the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from management's analysis, based principally upon the factors considered by management in establishing the allowance. Although management uses the best information reasonably available to it, the level of the allowance remains an estimate, which is subject to signi?cant judgment and short-term change. The OCC, as an integral part of its examination process, periodically reviews the Company's allowance. The OCC may require the Company to increase the allowance based on its analysis of information available to it at the time of its examination. Furthermore, the majority of the Company's loans are secured by real estate in theState of New Jersey and theState of Pennsylvania . Future adjustments to the allowance may be necessary due to economic factors impacting real estate in the Bank's market areas and a deterioration of the economic climate, as well as, operating, regulatory and other conditions beyond the Company's control, including those as a result of COVID-19. The allowance as a percentage of total loans amounted to 1.12 percent and 1.21 percent atSeptember 30, 2022 and 2021, respectively. Net charge-offs were$2.4 million in fiscal year 2022, compared to net charge-offs of$12.1 million in fiscal year 2021. Charge-offs were higher primarily in the commercial and industrial loan portfolio segment in fiscal year 2022.
At
-46-
--------------------------------------------------------------------------------
Table of Contents
Five-Year Statistical Allowance for Loan Losses
The following table re?ects the relationship of loan volume, the provision and allowance for loan losses and net charge-offs for the past ?ve years.
September 30,
2022 2021 2020 2019 2018
(In thousands)
Average loans outstanding $ 854,808 $ 945,457 $ 1,026,221 $ 977,876 $ 860,366
Total loans at end of period $ 810,407 $ 947,023 (1) $ 1,039,001 $ 1,021,421 $ 914,891
Analysis of the Allowance of Loan Losses
Balance at beginning of year $ 11,472 $ 12,433 $ 10,095 $ 9,021 $ 8,405
Charge-offs:
Residential mortgage - - - 17 60
Commercial:
Commercial real estate - 11,930 8,330 1,418 276
Commercial and industrial 2,415 379 - - 45
Consumer:
Home equity lines of credit - - 62 - -
Second mortgages 106 - 3 45 88
Other - 4 1 37 2
Total charge-offs 2,521 12,313 8,396 1,517 471
Recoveries:
Residential mortgage 5 41 25 79 58
Construction and Development:
Residential and commercial - 4 - - -
Commercial:
Commercial real estate 75 1 6 23 11
Commercial and industrial 2 2 2 4 4
Consumer:
Home equity lines of credit 1 17 1 1 1
Second mortgages 55 108 88 94 52
Other 1 3 2 11 7
Total recoveries 139 176 124 212 133
Net charge-offs 2,382 12,137 8,272 1,305 338
Provision for loan losses - 11,176 10,610 2,379 954
Balance at end of year $ 9,090 $ 11,472 $ 12,433 $ 10,095 $ 9,021
Ratio of net charge-offs during the year
to average loans outstanding during the
year 0.28 % 1.28% 0.81 % 0.13 % 0.04 %
Allowance for loan losses as a
percentage of total loans at end of year 1.12 % 1.21% 1.20 % 0.99 % 0.99 %
(1) Balance includes loans held for sale.
For additional information regarding loans, see Note 7 of the Notes to the Consolidated Financial Statements.
Implicit in the lending function is the fact that loan losses will be experienced and that the risk of loss will vary with the type of loan being made, the creditworthiness of the borrower and prevailing economic conditions. The allowance for loan losses has been allocated in the table below according to the estimated amount deemed to be reasonably necessary to provide for the possibility of losses being incurred within the following categories of loans atSeptember 30 , for each of the past ?ve years. -47-
--------------------------------------------------------------------------------
Table of Contents
The table below shows, by type of loan, the amounts of the allowance allocable to such loans and the percentage of such loans to total loans.
September 30,
2022 2021 2020 2019 2018
Loans Loans Loans Loans Loans
to to to to to
Total Total Total Total Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
(In thousands)
Residential mortgage $ 708 21.7 % $ 934 21.8 % $ 1,667 23.3 % $ 1,364 21.6 % $ 1,062 21.6 %
Construction and Development:
Residential and commercial 131 3.0 428 6.7 465 6.3 523 3.9 393 4.1
Land loans 3 0.1 15 0.2 23 0.3 20 0.3 49 1.0
Commercial:
Commercial real estate 6,040 50.2 7,043 46.7 8,682 47.7 5,903 53.7 5,031 54.4
Farmland 57 1.4 56 1.1 47 0.7 49 0.7 66 1.3
Multi-family 298 6.8 450 7.3 511 6.5 369 6.2 232 4.9
Commercial and industrial 1,158 12.7 2,221 12.6 578 11.2 615 9.8 443 8.1
Other 55 1.7 54 1.2 51 1.0 21 0.4 24 0.7
Consumer:
Home equity lines of credit 67 1.6 76 1.5 130 1.7 122 1.9 82 1.6
Second mortgages 17 0.5 87 0.6 196 1.0 267 1.3 326 2.0
Other 19 0.3 20 0.3 29 0.3 23 0.2 51 0.3
Total allocated 8,553 100.0 11,384 100.0 12,379 100.0 9,276 100.0 7,759 100.0
Unallocated 537 - 88 - 54 - 819 - 1,262 -
Balance at end of period
In assessing the adequacy of the allowance, it is recognized that the process,
methodology and underlying assumptions require a significant degree of judgment
and uncertainty. The estimation of loan losses is not precise; the range of
factors considered is wide and is significantly dependent upon management's
judgment, including the outlook and potential changes in the economic
environment and general market conditions. At present, components of the
commercial loan segments of the portfolio are new originations and the
associated volumes continue to see increased growth. At the same time,
historical loss levels have decreased as factors utilized in assessing the
portfolio. Any unallocated portion of the allowance reflects management's
estimate of probable inherent but undetected losses within the portfolio due to
uncertainties in economic conditions, delays in obtaining information, including
unfavorable information about a borrower's financial condition, the difficulty
in identifying triggering events that correlate perfectly to subsequent loss
rates, and risk factors that have not yet manifested in loss allocation factors.
Asset Quality
The Company manages asset quality and credit risk by maintaining diversi?cation
in its loan portfolio and through review processes that include analysis of
credit requests and ongoing examination of outstanding loans and delinquencies,
with particular attention to portfolio dynamics and mix. The Company strives to
identify loans experiencing difficulty early enough to attempt to correct the
problems, to record charge-offs promptly based on realistic assessments of
current collateral values, and to maintain an adequate allowance for loan losses
at all times.
It is generally the Company's policy to discontinue interest accruals once a
loan is past due as to interest or principal payments for a period of 90 days.
When a loan is placed on non-accrual status, interest accruals cease and
uncollected accrued interest is reversed and charged against current income.
Payments received on non-accrual loans are applied against principal. A loan may
only be restored to an accruing basis when it again becomes well secured and in
the process of collection or all past due amounts have been collected and a
satisfactory period of ongoing repayment exists. Accruing loans past due 90 days
or more are generally well secured and in the process of collection. For
additional information regarding loans, see Note 7 of the Notes to the
Consolidated Financial Statements.
-48---------------------------------------------------------------------------------
Table of Contents
Non-Performing, Past Due Loans and OREO
Non-performing loans include non-accrual loans and accruing loans which are
contractually past due 90 days or more. Non-accrual loans represent loans on
which interest accruals have been suspended. It is the Company's general policy
to consider the charge-off of loans at the point they become past due in excess
of 90 days, with the exception of loans that are both well-secured and in the
process of collection. Troubled debt restructurings represent loans on which a
concession was granted to a borrower, such as a reduction in interest rate to a
rate lower than the current market rate for new debt with similar risks, and
which are currently performing in accordance with the modi?ed terms. For
additional information regarding loans, see Note 7 of the Notes to the
Consolidated Financial Statements.
The following table sets forth, as of the dates indicated, the amount of the
Company's non-accrual loans, accruing loans past due 90 days or more, OREO and
troubled debt restructurings.
At September 30,
2022 2021 2020 2019 2018
(In thousands)
Non-accrual loans:
Residential mortgage $ 585 $ 879 $ 2,036 $ 1,532 $ 1,817
Commercial:
Commercial real estate - - 14,414 - 520
Commercial and industrial - 2,517 - - -
Total commercial - 2,517 14,414 - 520
Consumer:
Home equity lines of credit 20 23 26 30 34 Second mortgages 148 278 254 259 290 Other - - - - 26 Total consumer 168 301 280 289 350 Total non-accrual loans 753 3,697 16,730 1,821 2,687 Accruing loans past due 90 days or more 243 - 58 502 374 Total non-performing loans 996 3,697 16,788 2,323 3,061 Other real estate owned 259 4,961 5,796 5,796 - Total non-performing assets$ 1,255 $ 8,658 $
22,584
Non-accrual loans, excluding loans held-for-sale, totaled$753,000 atSeptember 30, 2022 , and$3.7 million atSeptember 30, 2021 . The decrease in non-accrual loans was primarily due a charge-off of$2.4 million related to one non-accrual commercial and industrial loan during the fiscal year and then transferred to OREO at a carrying value of$259,000 . The decrease in OREO of$4.7 million atSeptember 30, 2022 , compared toSeptember 30, 2021 , was attributed to a sale at carrying value and the transfer of a new commercial and industrial loan to OREO during fiscal year 2022 totaling$259,000 . Non-accrual loans to total loans were 0.09% and 0.39% atSeptember 30, 2022 and 2021, respectively. The allowance for loan losses to non-accrual loans were 1,207.2% atSeptember 30, 2022 compared to 310.3% atSeptember 30, 2021 . Performing TDR loans were$5.0 million atSeptember 30, 2022 , and$17.6 million atSeptember 30, 2021 . The decrease is primarily related to two TDR commercial real estate loans totaling$17.1 million that were sold during the fiscal year 2021. AtSeptember 30, 2022 , non-performing assets ("NPAs") totaled$1.3 million , or 0.12% of total assets, as compared with$8.7 million , or 0.72% of total assets, atSeptember 30, 2021 . The decrease in NPAs is due to the decrease in non-accrual loans and OREO as described above. -49-
--------------------------------------------------------------------------------
Table of Contents Provision for Income Taxes
The Company recorded a
Recent Accounting Pronouncements
Please refer to the note on Recent Accounting Pronouncements in Note 2 to the consolidated financial statements in Item 8 for a detailed discussion of new accounting pronouncements.
Asset and Liability Management
Asset and liability management encompasses an analysis of market risk, the control of interest rate risk (interest sensitivity management) and the ongoing maintenance and planning of liquidity and capital. The composition of the Company's statement of condition is planned and monitored by the Company'sAsset and Liability Committee ("ALCO"). In general, management's objective is to optimize net interest income and minimize market risk and interest rate risk by monitoring the components of the statement of condition and the interaction of interest rates. Short-term interest rate exposure analysis is supplemented with an interest sensitivity gap model. The Company utilizes interest sensitivity analysis to measure the responsiveness of net interest income to changes in interest rate levels. Interest rate risk arises when an earning asset matures or when its interest rate changes in a time period different than that of a supporting interest-bearing liability, or when an interest-bearing liability matures or when its interest rate changes in a time period different than that of an earning asset that it supports. While the Company matches only a small portion of specific assets and liabilities, total earning assets and interest-bearing liabilities are grouped to determine the overall interest rate risk within a number of specific time frames. The difference between interest-sensitive assets and interest-sensitive liabilities is referred to as the interest sensitivity gap. At any given point in time, the Company may be in an asset-sensitive position, whereby its interest-sensitive assets exceed its interest-sensitive liabilities, or in a liability-sensitive position, whereby its interest-sensitive liabilities exceed its interest-sensitive assets, depending in part on management's judgment as to projected interest rate trends. The Company's interest rate sensitivity position in each time frame may be expressed as assets less liabilities, as liabilities less assets, or as the ratio between rate sensitive assets ("RSA") and rate sensitive liabilities ("RSL"). For example, a short-funded position (liabilities repricing before assets) would be expressed as a net negative position, when period gaps are computed by subtracting repricing liabilities from repricing assets. When using the ratio method, an RSA/RSL ratio of 1 indicates a balanced position, a ratio greater than 1 indicates an asset-sensitive position and a ratio less than 1 indicates a liability-sensitive position. A negative gap and/or a rate sensitivity ratio less than 1 tends to expand net interest margins in a falling rate environment and reduce net interest margins in a rising rate environment. Conversely, when a positive gap occurs, generally margins expand in a rising rate environment and contract in a falling rate environment. From time to time, the Company may elect to deliberately mismatch liabilities and assets in a strategic gap position. AtSeptember 30, 2022 , the Company reflected a positive interest sensitivity gap with an interest sensitivity ratio of 1.20:1.00 at the cumulative one-year position. Based on current rising interest rate environment, that at the current time is estimated to continue through the first half of 2023, emphasis will be on controlling liability costs and duration in our efforts to insulate the net interest spread for a potential future decline in rates. -50-
--------------------------------------------------------------------------------
Table of Contents
The following table sets forth the amounts of our interest-earning assets and interest-bearing liabilities outstanding atSeptember 30, 2022 , which we expect, based upon certain assumptions, to reprice or mature in each of the future time periods shown (the "GAP Table"). Except as stated below, the amount of assets and liabilities shown which reprice or mature during a particular period were determined in accordance with the earlier of term to repricing or the contractual maturity of the asset or liability. The GAP Table sets forth approximation of the projected repricing of assets and liabilities atSeptember 30, 2022 , on the basis of contractual maturities, anticipated prepayments, and scheduled rate adjustments within a three-month period and subsequent selected time intervals. The loan amounts in the GAP Table reflect principal balances expected to be redeployed and/or repriced as a result of contractual amortization and anticipated prepayments of adjustable-rate loans and fixed-rate loans, and as a result of contractual rate adjustments on adjustable-rate loans. More than More than More than 6 Months 6 Months 1 Year 3 Year More than Total or Less to 1 Year to 3 Years to 5 Years 5 Years Amount (In thousands) Interest-earning assets(1): Loans receivable(2)$ 253,251 $ 50,474 $ 207,513 $ 166,576 $ 131,840 $ 809,654 Investment securities and restricted securities 14,284 4,110 17,699 34,352 46,644 117,089 Other interest-earning assets 48,590 - - - - 48,590
Total interest-earning assets 316,125 54,584 225,212
200,928 178,484 975,333
Interest-bearing liabilities:
Demand and NOW accounts 17,921 17,921 71,685 71,685 61,607 240,819
Money market accounts 34,117 34,117 136,467 53,338 21,660 279,699
Savings accounts 2,595 2,595 10,378 10,125 29,595 55,288
Certificate accounts 49,315 45,503 47,136 8,068 1,481 151,503
Borrowings 91,667 13,333 - - - 105,000
Total interest-bearing
liabilities 195,615 113,469 265,666 143,216 114,343 832,309
Interest-earning assets less
interest- bearing liabilities $ 120,510 $ (58,885 ) $ (40,454 ) $ 57,712 $ 64,141 $ 143,024
Cumulative interest-rate
sensitivity gap(3) $ 120,510 $ 61,625 $ 21,171 $ 78,883 $ 143,024
Cumulative interest-rate gap as
a percentage of total assets at
September 30, 2022 11.54 % 5.90 % 2.03 % 7.55 % 13.69 %
Cumulative interest-earning
assets as a percentage of
cumulative interest-bearing
liabilities at September 30,
2022 161.61 % 119.94 % 103.68% 110.99 % 117.18 %
--------------------------------------------------------------------------------
(1) Interest-earning assets are included in the period in which the balances are
expected to be redeployed and /or repriced as a result of anticipated
prepayments, scheduled rate adjustments and contractual maturities.
(2) For purposes of the gap analysis, loans receivable excludes non-accrual loans
gross of the allowance for loan losses, undisbursed loan funds, unamortized
discounts and deferred loans fees.
(3) Interest-rate sensitivity gap represents the net cumulative difference
between interest-earning assets and interest-bearing liabilities.
Net Portfolio Value and Net Interest Income Analysis. Our interest rate
sensitivity is also monitored by management through the use of models which
generate estimates of the change in its net portfolio value ("NPV") and net
interest income ("NII") over a range of interest rate scenarios. NPV is the
present value of expected cash flows from assets, liabilities, and off-balance
sheet contracts. The NPV ratio, under any interest rate scenario, is defined as
the NPV in that scenario divided by the market value of assets in the same
scenario.
The table below sets forth as of September 30, 2022 and 2021 the estimated
changes in our NPV that would result from designated instantaneous changes in
the United States Treasury yield curve. Computations of prospective effects of
hypothetical interest rates changes are based on numerous assumptions, including
relative levels of market interest rates, loan prepayments and deposit decay,
and should not be relied upon as indicative of actual results.
As of September 30, 2022 As of September 30, 2021
Dollar Percentage Dollar Percentage
Changes in Interest Rates Change from Change from Change from Change from
(basis points)(1) Amount Base Base Amount Base Base
(In thousands)
+300 $ 203,397 $ 15,661 8 % $ 152,219 $ (11,099 ) (7 )%
+200 205,164 17,429 9 158,876 (4,442 ) (3 )
+100 199,001 11,266 6 162,206 (1,112 ) (1 )
0 187,836 - - 163,318 - -
-100 174,443 (13,293 ) (7 ) 177,047 13,729 8
--------------------------------------------------------------------------------
(1) Assumes an instantaneous uniform change in interest rates. A basis point
equals 0.01%.
-51---------------------------------------------------------------------------------
Table of Contents
In addition to modeling changes in NPV, we also analyze potential changes to NII for a twelve-month period under rising and falling interest rate scenarios. The following table shows our NII model as ofSeptember 30, 2022 . Net Interest
Changes in Interest Rates in Basis Points
(Rate Shock) Income $ Change % Change
(In thousands)
200 $ 33,953 $ 1,281 4 %
100 33,509 837 3
Static 33,099 427 1
(100) 31,644 (1,028 ) (3 )
As is the case with the GAP Table, certain shortcomings are inherent in the
methodology used in the above interest rate risk measurements. Modeling changes
in NPV and NII require the making of certain assumptions which may or may not
reflect the manner in which actual yields and costs respond to changes in market
interest rates. In this regard, the models presented assume that the composition
of our interest sensitive assets and liabilities existing at the beginning of a
period remains constant over the period being measured and also assumes that a
particular change in interest rates is reflected uniformly across the yield
curve regardless of the duration to maturity or repricing of specific assets and
liabilities. Accordingly, although the NPV measurements and net interest income
models provide an indication of interest rate risk exposure at a particular
point in time, such measurements are not intended to and do not provide a
precise forecast of the effect of changes in market interest rates on net
interest income and will differ from actual results.
Estimates of Fair Value
The estimation of fair value is significant to a number of the Company's assets,
including loans held for sale, investment securities available-for-sale and
interest rate swaps. These are all recorded at either fair value or the lower of
cost or fair value. Fair values are volatile and may be influenced by a number
of factors. Circumstances that could cause estimates of the fair value of
certain assets and liabilities to change include a change in prepayment speeds,
discount rates, or market interest rates. Fair values for most
available-for-sale investment securities are based on quoted market prices. If
quoted market prices are not available, fair values are based on judgments
regarding future expected loss experience, current economic condition risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature, involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
Liquidity
The liquidity position of the Company is dependent primarily on successful
management of the Bank's assets and liabilities to meet the needs of both
deposit and credit customers. Liquidity needs arise principally to accommodate
possible deposit outflows and to meet customers' requests for loans. Scheduled
principal loan repayments, maturing investments, short-term liquid assets and
deposit inflows, can satisfy such needs. The objective of liquidity management
is to enable the Company to maintain sufficient liquidity to meet its
obligations in a timely and cost-effective manner.
Management monitors current and projected cash flows and adjusts positions as
necessary to maintain adequate levels of liquidity. Under its liquidity risk
management program, the Company regularly monitors correspondent bank funding
exposure and credit exposure in accordance with guidelines issued by the banking
regulatory authorities. Management uses a variety of potential funding sources
and staggering maturities to reduce the risk of potential funding pressure.
Management also maintains a detailed contingency funding plan designed to
respond adequately to situations which could lead to stresses on liquidity.
Management believes that the Company has the funding capacity to meet the
liquidity needs arising from potential events. The Company maintains borrowing
capacity through the Federal Home Loan Bank of Pittsburgh secured with loans and
marketable securities.
The Company's primary sources of short-term liquidity consist of cash and cash equivalents and investment securities available-for-sale.
AtSeptember 30, 2022 , the Company had$53.3 million in cash and cash equivalents compared to$136.6 million atSeptember 30, 2021 . The decrease in cash and cash equivalents year over year was due to decreased deposits to$785.3 million atSeptember 30, 2022 from$938.2 million atSeptember 30, 2021 combined with an increase in investment securities to$110.0 million atSeptember 30, 2022 from$70.8 million atSeptember 30, 2021 . In fiscal year 2021, t he Company decided to build liquidity during the economic downturn, with the cash received from loan paydowns and payoffs throughout the year. -52-
--------------------------------------------------------------------------------
Table of Contents Deposits Total deposits decreased to$785.3 million atSeptember 30, 2022 , from$938.2 million atSeptember 30, 2021 . Total interest-bearing deposits decreased from$884.3 million atSeptember 30, 2021 , to$727.3 million atSeptember 30, 2022 , a decrease of$157.0 million or 17.8 percent. Time deposits$250,000 and over increased$46.5 million atSeptember 30, 2022 , as compared toSeptember 30, 2021 , and represented 41.6 percent of total time deposits atSeptember 30, 2022 , compared to 14.8 percent atSeptember 30, 2021 . We had brokered deposits totaling$9.1 million atSeptember 30, 2022 , compared to$6.1 million atSeptember 30, 2021 .
The Company continues to place the main focus of its deposit gathering efforts in the maintenance, development, and expansion of its core deposit base.
The following table depicts the Company's deposits classified by interest rates
with percentages to total deposits at
September 30, September 30,
2022 2021 Dollar
Amount Percentage Amount Percentage Change
(In thousands)
Balances by types of deposit: Savings$ 55,288 7.0 %$ 50,582 5.4 %$ 4,706 Money market accounts 279,699 35.6 385,480 41.1 (105,781 ) Interest bearing demand 240,819 30.7 336,645 35.9 (95,826 ) Non-interest bearing demand 58,014 7.4 53,849 5.7 4,165$ 633,820 80.7$ 826,556 88.1$ (192,736 ) Certificates of deposit 151,503 19.3 111,603 11.9 39,900 Total$ 785,323 100.0 %$ 938,159 100.0 %$ (152,836 ) AtSeptember 30, 2022 , our certificates of deposit and other time deposits with a balance of$250,000 or more amounted to$63.0 million , of which$47.7 million are scheduled to mature within twelve months. AtSeptember 30, 2022 , the weighted average remaining maturity of our certificate of deposit accounts was 7.9 months. The following table presents the maturity of our certificates of deposit and other time deposits with balances of$250,000 or more atSeptember 30, 2022 . Amount (In thousands) Maturity Period: Three months or less$ 13,130 Over three months through six months 18,512 Over six months through twelve months 16,083 Over twelve months 15,322 Total$ 63,047 Borrowings Borrowings from the FHLB ofPittsburgh are available to supplement the Company's liquidity position and, to the extent that maturing deposits do not remain with the Company, management may replace such funds with advances. As ofSeptember 30, 2022 and 2021, the Company's outstanding balance of FHLB advances totaled$80.0 million and$90.0 million , respectively. The$80.0 million in advances as ofSeptember 30, 2022 represents two short-term FHLB advances of fixed-rate borrowing with rollover of 90 days and three additional short term-borrowings.
During both fiscal year 2022 and 2021, the Company did not purchase any securities sold under agreements to repurchase as a short-term funding source.
-53-
--------------------------------------------------------------------------------
Table of Contents Cash Flows The Consolidated Statements of Cash Flows present the changes in cash and cash equivalents resulting from the Company's operating, investing and financing activities. During the fiscal year endedSeptember 30, 2022 , cash and cash equivalents decreased by$83.3 million from the balance atSeptember 30, 2021 of$136.6 million . Net cash of$5.9 million was provided by operating activities in fiscal year 2022 compared to net cash of$14.8 million provided by operating activities in fiscal year 2021. Net cash provided by investing activities amounted to$73.6 million in fiscal year 2022 compared to net cash provided by investing activities of$58.0 million in fiscal year 2021. Net cash of$162.9 million was used in financing activities in fiscal year 2022 compared to net cash of$2.4 million provided by financing activities in fiscal year 2021. In the normal course of operations, the Company engages in a variety of financial transactions that, in accordance with GAAP, are not recorded in its financial statements. These transactions involve, to varying degrees, elements of credit, interest rate, and liquidity risk. Such transactions are used primarily to manage customers' requests for funding and take the form of loan commitments, lines of credit and letters of credit. The contractual amounts of commitments to extend credit represent the amounts of potential accounting loss should the contract be fully drawn upon, the customer defaults and the value of any existing collateral becomes worthless. We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments. Financial instruments whose contract amounts represent credit risk atSeptember 30, 2022 and 2021 were as follows: September 30, 2022 2021 (In thousands) Commitments to extend credit:(1) Future loan commitments$ 12,585 $ 32,889 Undisbursed construction loans 9,285 12,672 Undisbursed home equity lines of credit 27,942 25,722 Undisbursed commercial lines of credit 80,535 86,842 Overdraft protection lines 1,482 1,549 Standby letters of credit 7,742 9,026 Total commitments$ 139,571 $ 168,700
--------------------------------------------------------------------------------
(1) Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments may require payment of a fee and generally have fixed expiration
dates or other termination clauses.
We anticipate that we will continue to have sufficient funds and alternative funding sources to meet our current commitments.
Shareholders' Equity Total shareholders' equity amounted to$146.4 million , or 14.0 percent of total assets atSeptember 30, 2022 , compared to$142.2 million , or 11.8 percent of total assets atSeptember 30, 2021 . Book value per common share was$19.18 atSeptember 30, 2022 , compared to$18.65 atSeptember 30, 2021 . -54-
--------------------------------------------------------------------------------
Table of Contents Capital The Bank's capital ratios as ofSeptember 30, 2022 andSeptember 30, 2021 , are as follows: To Be Well Capitalized Under Prompt Excess Over Required for Capital Corrective Well-Capitalized Actual Adequacy Purposes Action Provisions Provision Amount Ratio Amount Ratio Amount Ratio Amount Ratio As of September 30, 2022: (Dollars in thousands) Tier 1 leverage (core) capital (to adjusted tangible assets)$ 166,340 16.30 %$ 40,820 4.00 %$ 51,025 5.00 %$ 115,315 11.30 % Common equity Tier 1 (to risk-weighted assets) 160,340 19.27 38,836 4.50 56,096 6.50 110,244 12.77 Tier 1 risk-based capital (to risk-weighted assets) 166,340 19.27 51,751 6.00 69,042 8.00 97,298 11.27 Total risk-based capital (to risk-weighted assets) 175,512 20.34 69,042 8.00 86,302 10.00 89,210 10.34 As of September 30, 2021: Tier 1 leverage (core) capital (to adjusted tangible assets)$ 157,518 13.14 %$ 47,946 4.00 %$ 59,933 5.00 %$ 97,585 8.14 % Common equity Tier 1 (to risk-weighted assets) 157,518 16.13 43,934 4.50 63,460 6.50 94,058 9.63 Tier 1 risk-based capital (to risk-weighted assets) 157,518 16.13 58,579 6.00 78,105 8.00 79,413 8.13 Total risk-based capital (to risk-weighted assets) 169,072 17.32 78,105 8.00 97,632 10.00 71,440 7.32 Looking Forward One of the Company's primary objectives is the improvement of asset quality and capital preservation. Additional objectives are balancing asset and revenue growth, while at the same time expanding market presence and diversifying the Company's ?nancial products. However, it is recognized that objectives, no matter how focused, are subject to factors beyond the control of the Company, which can impede its ability to achieve these goals. The following factors should be considered when evaluating the Company's ability to achieve its objectives: -55-
--------------------------------------------------------------------------------
Table of Contents
The ?nancial market place is rapidly changing. Banks are no longer the only place to obtain loans, nor the only place to keep ?nancial assets. The banking industry has lost market share to other ?nancial service providers. The future is predicated on the Company's ability to adapt its products, provide superior customer service and compete in an ever-changing marketplace. Net interest income, the primary source of earnings, is impacted favorably or unfavorably by changes in interest rates. Although the impact of interest rate ?uctuations is mitigated by ALCO strategies, signi?cant changes in interest rates can have a material adverse impact on pro?tability. The ability of customers to repay their obligations is often impacted by changes in the regional and local economy. Although the Company sets aside loan loss provisions toward the allowance for loan losses when management determines such action to be appropriate, signi?cant unfavorable changes in the economy could impact the assumptions used in the determination of the adequacy of the allowance. Technological changes will have a material impact on how ?nancial service companies compete for and deliver services and products. It is recognized that these changes will have a direct impact on how the marketplace is approached and ultimately on pro?tability. The Company has taken steps to improve its traditional delivery channels. However, continued success will likely be measured by the Company's ability to anticipate and react to future technological changes. This ''Looking Forward'' discussion constitutes a forward-looking statement under the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those projected in the Company's forward-looking statements due to numerous known and unknown risks and uncertainties, including the factors referred to above, on the first page of this Report and in other sections of this Report.
© Edgar Online, source
