PRUL BANC The following discussion should be read in conjunction with our unaudited consolidated financial statements included elsewhere in this Form 10-Q and with our Annual Report on Form 10-K, as amended, for the year endedSeptember 30, 2021 (the "Form 10-K"). Overview.Prudential Bancorp, Inc. (the "Company") was formed byPrudential Bancorp, Inc. of Pennsylvania to become the successor holding company forPrudential Bank (the "Bank") (formerly known asPrudential Savings Bank ) as a result of the second-step conversion ofPrudential Mutual Holding Company completed inOctober 2013 . The Company's results of operations are primarily dependent on the results of the Bank, which is a wholly owned subsidiary of the Company. The Company's results of operations depend to a large extent on net interest income, which primarily is the difference between the income earned on its loan and securities portfolios and the cost of funds, which is the interest paid on deposits and borrowings. Results of operations are also affected by our provision for loan losses, non-interest income (which includes impairment charges) and non-interest expense. Non-interest expense principally consists of salaries and employee benefits, office occupancy expense, depreciation, data processing expense, payroll taxes and other expenses. Our results of operations are also significantly affected by general economic and competitive conditions, especially changes resulting from the ongoing COVID-19 pandemic and the governmental actions taken to address it including shelter-in-place orders and required closing of non-essential businesses, as well as changes in interest rates, government policies and actions of regulatory authorities. Future changes in applicable laws, regulations or government policies may materially impact our financial condition and results of operations. The Bank is subject to regulation by theFederal Deposit Insurance Corporation (the "FDIC") and thePennsylvania Department of Banking and Securities (the "Department"). The Bank's main office is located inPhiladelphia, Pennsylvania , with nine additional full-service banking offices located inPhiladelphia, Delaware andMontgomery Counties inPennsylvania . The Bank's primary business consists of attracting deposits from the general public and using those funds together with borrowings to originate loans and to invest primarily inU.S. Government and agency securities and mortgage-backed securities. In 2005, the Bank formedPSB Delaware, Inc. , aDelaware corporation, as a subsidiary of the Bank. In 2006, all mortgage-backed securities then owned by the Company's predecessor were transferred toPSB Delaware, Inc. PSB Delaware, Inc.'s activities are included as part of the consolidated financial statements. Critical Accounting Policies and Estimates. In reviewing and understanding financial information for the Company, you are encouraged to read and understand the significant accounting policies used in preparing our financial statements. These policies are described in Note 1 of the notes to our unaudited consolidated financial statements included in Item 1 hereof as well as in Note 2 to our audited consolidated financial statements included in the Form 10-K. The accounting and financial reporting policies of the Company conform to accounting principles generally accepted inthe United States of America ("U.S. GAAP") and to general practices within the banking industry. Accordingly, the financial statements require certain estimates, judgments and assumptions, which are believed to be reasonable, based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities as well as contingent assets and contingent liabilities at the date of the financial statements and the reported amounts of income and expenses during the periods presented. The following accounting policies comprise those that management believes are the most critical to aid in fully understanding and evaluating our reported financial results. These policies require numerous estimates or economic assumptions that may prove inaccurate or may be subject to variations which may significantly affect our reported results and financial condition for the period or in future periods. Allowance for Loan Losses. The allowance for loan losses is established through a provision for loan losses charged to expense. Losses are charged against the allowance for loan losses when management believes that the collectability in full of the principal of a loan is unlikely. Subsequent recoveries are added to the allowance. The allowance for loan losses is maintained at a level that management considers adequate to provide for estimated losses and impairments based upon an evaluation of known and inherent losses in the loan portfolio that are both probable and reasonable to estimate. For the quarter endedDecember 31, 2021 , the analysis took into account the exposure to credit deterioration 30
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due to the ongoing COVID-19 pandemic. Loan impairment is evaluated based on the fair value of collateral or estimated net realizable value. It is the policy of management to provide for losses on unidentified loans in its portfolio in addition to criticized and classified loans. Management monitors its allowance for loan losses at least quarterly and makes adjustments to the allowance through the provision for loan losses as economic conditions and other pertinent factors indicate. The quarterly review and adjustment of the qualitative factors employed in the allowance methodology and the updating of historic loss experience allow for timely reaction to emerging conditions and trends. In this context, a series of qualitative factors are used in a methodology as a measurement of how current circumstances are affecting the loan portfolio. Included in these qualitative factors are:
? Levels of past due, classified, criticized and non-accrual loans, troubled debt
restructurings and loan modifications;
? Nature and volume of loans;
Changes in lending policies and procedures, underwriting standards,
? collections, charge-offs and recoveries and for commercial loans, the level of
loans being approved with exceptions to the Bank's lending policy;
? Experience, ability and depth of management and staff;
National and local economic and business conditions, including various market
? segments, especially in light of the effects of the COVID-19 pandemic and
actions taken to address it on both the national and local economies;
? Quality of the Bank's loan review system and the degree of Board oversight;
? Concentrations of credit and changes in levels of such concentrations; and
? Effect of external factors on the level of estimated credit losses in the
current portfolio.
In determining the allowance for loan losses, management has established a general pooled allowance. Values assigned to the qualitative factors and those developed from historic loss experience provide a dynamic basis for the calculation of reserve factors for both pass-rated loans (the general pooled allowance) and those for criticized and classified loans. The amount of the specific allowance is determined through a loan-by-loan analysis of certain large dollar commercial real estate loans, construction and land development loans and multi-family loans. Loans not individually reviewed are evaluated as a group using reserve factor percentages based on historical loss experience and the qualitative factors described above. In determining the appropriate level of the general pooled allowance, management makes estimates based on internal risk ratings, which take into account such factors as debt service coverage, loan-to-value ratios and external factors. Estimates are periodically measured against actual loss experience. This evaluation is inherently subjective as it requires material estimates including, among others, exposure at default, the amount and timing of expected future cash flows on impaired loans, value of collateral, estimated losses on our commercial, construction and residential loan portfolios and historical loss experience. All of these estimates may be susceptible to significant change. While management analyzed its allowance in light of the COVID-19 pandemic, such analysis will need to be continually refined and reviewed in light of the ongoing nature of the effects of the COVID-19 pandemic. While management uses the best information available to make loan loss allowance evaluations, adjustments to the allowance may be necessary based on changes in economic and other conditions or changes in accounting guidance. In addition, the Department and theFDIC , as an integral part of their examination processes, periodically review our allowance for loan losses. The Department and theFDIC may require the recognition of adjustments to the allowance for loan losses based on their judgment of information available to them at the time of their examination. To the extent that actual outcomes differ from management's estimates, additional provisions to the allowance for loan losses may be required that would adversely affect earnings in future periods. 31
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Investment and mortgage-backed securities available for sale. Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated using quoted prices of securities with similar characteristics or discounted cash flows and are classified within Level 2 of the fair value hierarchy. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. There were no securities with a Level 3 classification as ofDecember 31, 2021 orSeptember 30, 2021 . Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. In light of the ongoing COVID-19 pandemic, management is taking into account the effects the pandemic may have on securities and their impairment. The Company determines whether the unrealized losses are temporary or are considered other than temporary. The evaluation is based upon factors such as the creditworthiness of the issuers/guarantors, the underlying collateral, if applicable, and the continuing performance of the securities. In addition, the Company also considers the likelihood that the security will be required to be sold because of regulatory concerns, our internal intent not to dispose of the security prior to maturity and whether the entire cost basis of the security is expected to be recovered. In determining whether the cost basis will be recovered, management evaluates other facts and circumstances that may be indicative of an "other-than-temporary" impairment condition. This includes, but is not limited to, an evaluation of the type of security, length of time and extent to which the fair value has been less than cost, and near-term prospects of the issuer. In addition, certain assets are measured at fair value on a non-recurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The Company measures impaired loans and other real estate owned at fair value on a non-recurring basis.
Valuation techniques and models utilized for measuring financial assets and liabilities are reviewed and validated by the Company at least quarterly.
Derivatives. The Company uses interest rate swaps and caps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the payment of either fixed or variable-rate amounts in exchange for the receipt of variable or fixed-rate amounts from a counterparty. The Company uses interest rate swaps to manage its exposure to changes in fair value. Interest rate swaps designated as fair value hedges involve the receipt of variable-rate payments from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without the exchange of the underlying notional amount. Income Taxes. The Company accounts for income taxes in accordance withU.S. GAAP. The Company records deferred income taxes that reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Management exercises significant judgment in the evaluation of the amount and timing of the recognition of the resulting tax assets and liabilities. The judgments and estimates required for the evaluation are updated based upon changes in business factors and the tax laws. If actual results differ from the assumptions and other considerations used in estimating the amount and timing of tax recognized, there can be no assurance that additional expenses will not be required in future periods. In evaluating our ability to recover deferred tax assets, 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 the amount of taxable income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require us to make judgments about our future taxable income and are consistent with the plans and estimates we use to manage our business. Any reduction in estimated future taxable income may require us to record an additional valuation allowance against our deferred tax assets. An increase in the valuation allowance would result in additional income tax expense in the period and could have a significant impact on our future earnings.U.S. GAAP prescribes a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized. The Company recognizes, when applicable, interest and penalties related to unrecognized tax 32
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benefits in the provision for income taxes in the consolidated income statement. Assessment of uncertain tax positions requires careful consideration of the technical merits of a position based on management's analysis of tax regulations and interpretations. Significant judgment may be involved in the assessment of the tax position. Forward-looking Statements. This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to, expectations or predictions of future financial or business performance, conditions relating to the Company. These forward-looking statements include statements with respect to the Company's beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions, that are subject to significant risks and uncertainties, and are subject to change based on various factors (some of which are beyond the Company's control). The words "may," "could," "should," "would," "will," "believe," "anticipate," "estimate," "expect," "intend," "plan" and similar expressions are intended to identify forward-looking statements. In addition to factors previously disclosed in the reports filed by the Company with theSecurities and Exchange Commission ("SEC") and those identified elsewhere in this press release, the following factors, among others, could cause actual results to differ materially from forward-looking statements or historical performance: the strength ofthe United States economy in general and the strength of the local economies in which the Company conducts its operations; general economic conditions; the scope and duration of the COVID-19 pandemic; the effects of the COVID-19 pandemic, including on the Company's credit quality and operations as well as its impact on general economic conditions; legislative and regulatory changes including actions taken by governmental authorities in response to the COVID-19 pandemic; monetary and fiscal policies of the federal government; the effect of theFederal Reserve's Open Market Committee's likely increase in the federal funds rate starting potentially inMarch 2022 ; changes in tax policies, rates and regulations of federal, state and local tax authorities including the effects of the Tax Reform Act; changes in interest rates, deposit flows, the cost of funds, demand for loan products, including potential declines in demand due to the COVID-19 pandemic, and the demand for financial services, in each case as may be affected by the COVID-19 pandemic, competition, changes in the quality or composition of the Company's loan, investment and mortgage-backed securities portfolios; geographic concentration of the Company's business; fluctuations in real estate values, especially in light of the COVID-19 pandemic; the adequacy of loan loss reserves; the risk that goodwill and intangibles recorded in the Company's financial statements will become impaired; changes in accounting principles, policies or guidelines and other economic, competitive, governmental and technological factors affecting the Company's operations, markets, products, services and fees.
The Company does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company to reflect events or circumstances occurring after the date of this Form 10-Q.
For a complete discussion of the assumptions, risks and uncertainties related to our business, readers are encouraged to review the Company's filings with theSEC , including the "Risk Factors" section in the Company's most recent Form 10-K, as supplemented by its quarterly or other reports subsequently filed with theSEC . Market Overview. The ongoing worldwide COVID-19 pandemic has caused significant volatility and disruption in the financial markets both inthe United States and globally as well as other effects such as supply chain disruptions. We continue to work with both residential and commercial borrowers to help them meet the unexpected financial challenges stemming from the COVID-19 pandemic. The Company continues to focus on the credit quality of its customers, especially in light of the COVID-19 pandemic, closely monitoring the financial status of borrowers throughout the Company's markets, gathering information, working on early detection of potential problems, taking pre-emptive steps where necessary and performing the analysis required to maintain adequate reserves for loan losses.
The Company continues to maintain capital well in excess of regulatory requirements.
The following discussion provides further details on the financial condition of
the Company at
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COMPARISON OF FINANCIAL CONDITION AT
Total assets decreased by$16.3 million to approximately$1.1 billion atDecember 31, 2021 fromSeptember 30, 2021 . Net loans receivable decreased$33.4 million to$584.8 million atDecember 31, 2021 from$618.2 million atSeptember 30, 2021 . The decrease was primarily related to paydowns in construction and land development loans and one-to-four family loans, partially offset by increases in commercial business loans. The investment portfolio decreased betweenSeptember 30, 2021 andDecember 31, 2021 by$10.7 million primarily as a result of paydowns of securities, while cash and cash equivalents increased
by$31.1 million . Total liabilities decreased by$19.4 million during the quarter to$950.6 million atDecember 31, 2021 due primarily to a$24.1 million decrease in borrowings partially offset by a$9.2 million increase in deposits. The growth in deposits was primarily due to an increase in demand deposits. AtDecember 31, 2021 , the Company had FHLB advances outstanding of$207.9 million , as compared to$232.0 million atSeptember 30, 2021 as the Company allowed higher costing FHLB borrowings to run-off as they matured in order to reduce its cost of funds. All of the borrowings atDecember 31, 2021 had maturities of less than five years. Total stockholders' equity increased by$3.1 million to$133.6 million atDecember 31, 2021 from$130.5 million atSeptember 30, 2021 . The increase was primarily due to a$2.7 million increase in the fair value of interest rate swap arrangements. Also contributing to the increase was the$1.8 million in net income for the first quarter of fiscal 2022. These increases were partially offset by a$945,000 decrease in the fair value of investment securities available for sale combined with dividend payments totaling$544,000 during the three months endedDecember 31, 2021 .
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED
Net income. The Company reported net income of$1.8 million , or$0.24 per basic share and diluted share, for the quarter endedDecember 31, 2021 as compared to$1.8 million , or$0.23 per basic share and diluted share, for the same quarter in fiscal 2021. Net interest income. For the three months endedDecember 31, 2021 , net interest income amounted to$5.9 million as compared to$5.7 million for the same period in 2020. The increase reflected a decrease of$696,000 in interest paid on deposits and borrowings which was partially offset by a$451,000 decrease in interest income. The weighted yield on interest-earning assets increased 17 basis points to 3.61% from 3.44% for the three months endedDecember 31, 2020 primarily as a result of a change in the mix of the investment portfolio as shorter term amortizing securities have paid down more quickly than the longer term bullet securities. The weighted average cost of borrowings and deposits decreased 13 basis points to 1.46% for the quarter endedDecember 31, 2021 from 1.59% for the same period in 2020 due to decreases in market rates of interest. The net interest margin increased to 2.32% during the quarter endedDecember 31, 2021 from 2.02% for the comparable period in 2020. The margin improvement experienced in the current period in large part reflected the decline in interest-bearing liability costs combined with the increase in the yield earned on interest-earning assets, offset partially by the decline in net interest-earning assets. Average balances, net interest income, and yields earned and rates paid. The following table shows for the periods indicated the total dollar amount of interest earned from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities and the resulting costs, expressed both in dollars and rates, the interest rate spread and the net interest margin. Average yields and rates have been annualized. Tax-exempt income and yields have not been adjusted to a tax-equivalent basis. All average balances are based on monthly balances. Management does not believe that the monthly averages differ significantly from what the daily averages would be. 34 Table of Contents Three Months Three Months Ended December 31, Ended December 31, 2021 2020 Average Average Average Yield/ Average Yield/ Balance Interest Rate (1) Balance Interest Rate (1) Interest-earning assets: Investment securities$ 194,245 $ 1,763 3.60 %$ 209,764 $ 1,715 3.24 % Mortgage-backed securities 129,863 1,035 3.16 224,157 1,616 2.86 Loans receivable (2) 600,862 6,287 4.15 601,637 6,275 4.14 Other interest-earning assets 90,859 154 0.67 81,817 84 0.41 Total interest-earning assets 1,015,829 9,239 3.61 1,117,375 9,690 3.44 Cash and non-interest-bearing balances 2,616 2,501 Non-interest-earning assets 63,791 69,375 Total assets$ 1,082,236 $ 1,189,251 Interest-bearing liabilities: Savings accounts$ 64,253 $ 2 0.01$ 59,983 $ 1 0.01 Checking and money market accounts 377,615 843 0.89 371,757 966 1.03 Certificate accounts 239,253 1,102 1.83 271,943 1,202 1.75 Total deposits 681,121 1,947 1.13 703,683 2,169 1.22 Advances from Federal Home Loan Bank 218,147 1,362 2.48 291,933 1,836 2.50 Advances from borrowers for taxes and insurance 2,215 1 0.18 2,611 1 0.15 Total interest-bearing liabilities 901,483 3,310 1.46 998,227 4,006 1.59 Non-interest-bearing liabilities Non interest-bearing demand accounts 36,192 28,553 Other liabilities 12,620 31,170 Total liabilities 950,295 1,057,950 Stockholders' equity 131,941 131,301 Total liabilities and stockholders' equity$ 1,082,236 $ 1,189,251 Net interest-earning assets$ 114,346 $ 119,148 Net interest income, interest rate spread$ 5,929 2.15 %$ 5,684 1.85 % Net interest margin (3) 2.32 % 2.02 % Average interest-earning assets to average interest-bearing liabilities 112.68 % 111.94 %
(1) Yields and rates for the three month periods are annualized.
(2) Includes non-accrual loans. Calculated net of unamortized deferred fees,
undisbursed portion of loans-in-process and the allowance for loan losses.
(3) Equals net interest income divided by average interest-earning assets. Provision for loan losses. The Company recorded no provision for loan losses for the three months endedDecember 31, 2021 as the$3.0 million provision expense incurred in fiscal 2020, combined with minimal recent charge-offs, was deemed sufficient to maintain the allowance at a level sufficient to cover all inherent and known losses in the current portfolio. During the three months endedDecember 31, 2021 and 2020, the Company recorded recoveries of$1,000 and$15,000 , respectively, and a charge off totaling$136,000 for the three months endingDecember 31, 2021 and none in the three-month period endingDecember 31, 2020 . Although our COVID-19 loan deferrals were as high as$149.7 million during portions of fiscal 2020, all COVID-19 deferrals had ended bySeptember 30, 2020 . All of loans that had been granted COVID-19 deferrals were current as ofDecember 31, 2021 . The allowance for loan losses totaled$8.4 million , or 1.4% of total loans, and 104.0% of total non-performing loans atDecember 31, 2021 (which included loans acquired at their fair value as a result of the acquisition ofPolonia Bancorp, Inc. ("Polonia") as ofJanuary 1, 2017 ) as compared to$8.5 million , or 1.4% of total loans and 101.6% of total non-performing loans atSeptember 30, 2021 . The Company believes that the allowance for loan losses atDecember 31, 2021 was sufficient to cover all inherent and known losses associated with the loan
portfolio at such date.
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At December 31, 2021 , the Company's non-performing assets totaled $12.2 million
or 1.1% of total assets as compared to $12.5 million or 1.1% of total assets at
September 30, 2021 . Non-performing assets at December 31, 2021 included three
construction loans aggregating $3.6 million , 18 one-to-four family residential
mortgage loans aggregating $3.2 million , two commercial real estate loans
aggregating $1.3 million and two pieces of other real estate owned that related
to two non-performing construction loans aggregating $4.1 million that were
foreclosed during the third quarter of fiscal 2021. At December 31, 2021 , the
Company had three loans totaling $1.6 million that were classified as troubled
debt restructurings ("TDRs"). All three TDRs are on non-accrual. Two of the TDRs
consist of loans aggregating $898,000 secured by two single-family residential
properties and are performing in accordance with the restructured terms. The
remaining TDR is a $705,000 commercial real estate loan is part of a lending
relationship totaling $5.5 million (after taking into account the previously
disclosed $1.9 million write-down recognized during the quarter ending March 31,
2017 related to this borrowing relationship and the two construction loans noted
above that became other real estate owned during the quarter ended June 30,
2021 ). The primary project of the borrower (the development of a 169-unit
townhouse project in Bristol Borough , Pennsylvania ) is the subject of litigation
between the Bank and the borrower. As previously disclosed, subsequent to the
commencement of the litigation, the borrower filed for bankruptcy under Chapter
11 (Reorganization) of the federal bankruptcy code in June 2017 . The Bank moved
the underlying litigation with the borrower noted above from state court to the
federal bankruptcy court in which the bankruptcy proceeding is being heard. The
state litigation is stayed pending the resolution of the bankruptcy proceedings.
As of December 31, 2021 , 45 units have been sold in the project resulting in
$1.3 million applied against the outstanding debt owed the Bank.
At December 31, 2021 , the Company had $2.3 million of loans delinquent
30-89 days as to interest and/or principal. Such amount consisted of seven
one-to-four family residential loans totaling $1.5 million , one commercial real
estate loan in the amount of $649,000 , one commercial business loan in the
amount of $66,000 and one consumer loan in the amount of $48,000 . At
September 30, 2021 , the Company had $524,000 of loans delinquent 30-89 days as
to interest and/or principal. Such amount consisted of six one-to-four family
residential loans totaling $423,000 and one consumer loan totaling $37,000 .
At December 31, 2021 , the Company also had a total of 15 loans aggregating $3.6
million that had been designated "special mention". These loans consist of 12
one-to-four family residential loans totaling $1.5 million and three commercial
real estate loans totaling $2.0 million . At September 30, 2021 , we had a total
of 19 loans aggregating $8.1 million designated as "special mention".
The following table shows the amounts of non-performing assets (defined as
non-accruing loans, accruing loans 90 days or more past due as to principal
and/or interest and real estate owned) as of December 31, 2021 and September 30,
2021 . At neither date did the Company have any loans 90 days or more past due
that were accruing.
December 31 , September 30,
2021 2021
Non-accruing loans:One-to-four family residential $ 3,185 $ 3,006 Commercial real estate 1,280
1,280
Construction and land development 3,593
4,093
Total non-accruing loans 8,058
8,379
Other real estate owned, net (1) 4,109
4,109
Total non-performing assets$ 12,167
Total non-performing loans as a percentage of loans 1.38 % 1.36 % Total non-performing loans as a percentage of total assets 0.74 % 0.76 % Total non-performing assets as a percentage of total assets 1.12 % 1.13 %
Non-interest income. With respect to the quarter ended
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quarter of fiscal 2022 as compared to the first quarter of fiscal 2021 primarily due to decreases in interest rate swap income of$78,000 together with a$40,000 decrease in income from gain recognized on loans sold. Non-interest expense. Non-interest expense stayed relatively stable increasing modestly from$4.1 million for the three month period endedDecember 3, 2020 to$4.2 million for the three months endedDecember 31, 2021 . Income tax expense. For the three-month period endedDecember 31, 2021 , the Company recorded income tax expense of$254,000 , compared to income tax expense of$286,000 for the same period in the prior year. The decline is primarily due to the increase in the current quarter of interest income on municipal securities, which is generally non taxable for federal income tax purposes.
The
decline also reflects the slight decrease in income before taxes earned for the first quarter of fiscal 2022.
COVID-19 Related Information
As noted above, in response to the current situation surrounding the COVID-19 pandemic, the Company continues to provide assistance to its customers in a variety of ways. The Company participated in the Paycheck Protection Program offered under the CARES Act as aSmall Business Administration ("SBA") lender. All of such loans were sold, recognizing a gain of$110,000 during fiscal 2020. During fiscal 2021, we worked with a third party in order for our customers to be able to participate in the updated PPP loan program adopted as part of the COVID-19 stimulus bill enacted inDecember 2020 as part of the 2021 Consolidated Appropriations Act. The primary method of relief was to allow borrowers to defer their loan payments for three months (and extending the term of the loan accordingly). The CARES Act and regulatory guidelines suspend temporarily the determination of certain loan modifications related to the COVID-19 pandemic from being treated as TDRs. Such suspension period endedDecember 31, 2021 . See "Asset Quality" above. While the Company's banking operations were not restricted by the government stay-at-home orders, the Company took and continues to take steps to protect its employees and customers by providing for remote working for many employees, enhancing cleaning procedures for the Company's offices, in particular its branch offices, requiring face masks to be worn by employees and maintaining appropriate social distancing in our offices. The Company continues to assess and monitor the ongoing COVID-19 pandemic and will take additional such steps as are necessary to protect its employees and assist its depositor and borrower customers during these challenging times.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Liquidity is the ability to maintain cash flows that are adequate to fund operations and meet other obligations on a timely and cost-effective basis in various market conditions. The ability of the Company to meet its current financial obligations is a function of balance sheet structure, the ability to liquidate assets and the availability of alternative sources of funds. To meet the needs of the clients and manage the risk of the Company, the Company engages in liquidity planning and management. Our primary sources of funds are deposits, scheduled principal and interest payments on loans, loan prepayments and the maturity of loans, mortgage-backed securities and other investments, and other funds provided from operations. While scheduled payments from the amortization of loans and mortgage-backed securities and maturing investment securities are relatively predictable sources of funds, deposit flows and loan and securities prepayments can be greatly influenced by market rates of interest, economic conditions and competition. The Company also maintains excess funds in short-term, interest-earning assets that provide additional liquidity. AtDecember 31, 2021 , the Company's cash and cash equivalents amounted to$113.8 million . In addition, its available-for-sale investment securities amounted to an aggregate of$297.5 million at such date. 37 Table of Contents
We use our liquidity to fund existing and future loan commitments, to fund maturing certificates of deposit and demand deposit withdrawals, to invest in other interest-earning assets, and to meet operating expenses. AtDecember 31, 2021 , the Company had$22.1 million in outstanding commitments to originate loans, not including loans in process. The Company also had commitments under unused lines of credit of$34.9 million and letters of credit outstanding of$1.1 million atDecember 31, 2021 . Certificates of deposit as ofDecember 31, 2021 that are maturing in one year or less totaled$159.1 million . We anticipate that a significant portion of the maturing certificates of deposit will be redeposited with us unless we determine to lower rates to below those of our competition in order to facilitate the reduction of higher cost deposits during periods when there is excess cash on hand or in order to satisfy our asset/liability goals. There were no deposits as ofDecember 31, 2021 requiring the pledging of collateral. In addition to cash flows from loan and securities payments and prepayments as well as from sales of available for sale securities, we have significant borrowing capacity available to fund liquidity needs should the need arise. Our borrowings consist solely of advances from the FHLB ofPittsburgh , of which we are a member. Under terms of the collateral agreement with the FHLB, we pledge residential mortgage loans, certain investment securities as well as our stock in the FHLB as collateral for such advances. AtDecember 31, 2021 , we had$207.9 million in outstanding FHLB advances and had the ability to obtain an additional$135.0 million in FHLB advances. The Bank maintains unsecured borrowing facilities with ACBB and PNC for$12.5 million and$10.0 million , respectively. There were no draws on either facility as ofDecember 31, 2021 . The Bank has also obtained approval to borrow from theFederal Reserve Bank discount window.
We anticipate that we will continue to have sufficient funds and alternative funding sources to meet our current commitments.
Capital Resources
The following table summarizes the Company's and Bank's regulatory capital
ratios as of
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imposed by Basel III on bank holding companies because the Company is deemed to
be a small bank holding company. Accordingly, the Company's regulatory capital
ratios are provided for informational purposes only.
To Be
Well Capitalized
Under Prompt
Required for Capital Corrective
Adequacy Action
Ratio Purposes Provisions
December 31, 2021:
Tier 1 capital (to average assets)
Company 11.87 % N/A N/A
Bank 11.73 % 4.00 % 5.0 %
Tier 1 Common (to risk-weighted assets)
Company 17.53 % N/A N/A
Bank 17.29 % 4.5 % 6.5 %
Tier 1 capital (to risk-weighted assets)
Company 17.53 % N/A N/A
Bank 17.29 % 6.0 % 8.0 %
Total capital (to risk-weighted assets)
Company 18.75 % N/A N/A
Bank 18.51 % 8.0 % 10.0 %
September 30, 2021:
Tier 1 capital (to average assets)
Company 11.48 % N/A N/A
Bank 11.30 % 4.0 % 5.0 %
Tier 1 Common (to risk-weighted assets)
Company 16.70 % N/A N/A
Bank 16.37 % 4.5 % 6.5 %
Tier 1 capital (to risk-weighted assets)
Company 16.70 % N/A N/A
Bank 16.37 % 6.0 % 8.0 %
Total capital (to risk-weighted assets)
Company 17.87 % N/A N/A
Bank 17.55 % 8.0 % 10.0 %
Effective January 1, 2021 , qualifying community banking organizations may elect
to comply with a greater than 9% community bank leverage ratio (the "CBLR")
requirement in lieu of the currently applicable requirements for calculating and
reporting risk-based capital ratios. The CBLR is equal to Tier 1 capital divided
by average total consolidated assets. In order to qualify for the CBLR election,
a community bank must (i) have a leverage capital ratio greater than 9%, (2)
have less than $10 billion in average total consolidated assets, (3) not exceed
certain levels of off-balance sheet exposure and trading assets plus trading
liabilities and (4) not be an advanced approaches banking organization. A
community bank that meets the above qualifications and elects to utilize the
CBLR is considered to have satisfied the risk-based and leverage capital
requirements in the generally applicable capital rules and is also considered to
be "well capitalized" under the prompt corrective action rules. As of December
31, 2021 , the Bank chose to not elect to use the CBLR requirement.
EXPOSURE TO CHANGES IN INTEREST RATES
How We Manage Market Risk. Market risk is the risk of loss from adverse changes
in market prices and interest rates. Our market risk arises primarily from
interest rate risk which is inherent in our lending, investment and deposit
gathering activities. To that end, management actively monitors and manages
interest rate risk exposure. In addition to market risk, our primary risk is
credit risk on our loan portfolio. We attempt to manage credit risk through our
loan underwriting and oversight policies.
The principal objective of our interest rate risk management function is to
evaluate the interest rate risk embedded in certain balance sheet accounts,
determine the level of risk appropriate given our business strategy, operating
environment, capital and liquidity requirements and performance objectives, and
manage the risk consistent with approved guidelines. We seek to manage our
exposure to risks from changes in interest rates while at the same time
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trying to improve our net interest spread. We monitor interest rate risk as such risk relates to our operating strategies. We have established an Asset/Liability Committee which is comprised of our President and Chief Executive Officer, Chief Financial Officer,Chief Lending Officer , Treasurer and Controller. The Asset/Liability Committee meets on a regular basis and is responsible for reviewing our asset/liability policies and interest rate risk position. Both the extent and direction of shifts in interest rates are uncertainties that could have an adverse impact on future earnings. In recent years, as a part of our asset/liability management strategy we primarily have reduced our investment in longer term fixed-rate callable agency bonds, increased our origination or purchase of hybrid adjustable-rate single-family residential mortgage loans, commercial real estate and construction loans (which typically bear adjustable rates indexed to the WSJ Prime) and increased our portfolio of step-up callable agency bonds and agency issued collateralized mortgage-backed securities ("CMOs") with short effective lives. In addition, during the past year we implemented interest rate swaps to reduce funding cost for a five year period. However, notwithstanding the foregoing steps, we remain subject to a significant level of interest rate risk in a low interest rate environment due to the high proportion of our loan portfolio that consists of fixed-rate loans as well as our decision in prior periods to invest a significant amount of our assets in long-term, fixed-rate investment and mortgage-backed securities. Gap Analysis. The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are "interest rate sensitive" and by monitoring the Company's interest rate sensitivity "gap." An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that same time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. During a period of rising interest rates, a negative gap would tend to affect adversely net interest income while a positive gap would tend to result in an increase in net interest income. Conversely, during a period of falling interest rates, a negative gap would tend to result in an increase in net interest income while a positive gap would tend to adversely affect net interest income. The following table sets forth the amounts of our interest-earning assets and interest-bearing liabilities outstanding atDecember 31, 2021 , 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 amounts of assets and liabilities shown which reprice or mature during a particular period were determined in accordance with the earlier of the term to repricing or the contractual maturity of the asset or liability. The table sets forth an approximation of the projected repricing of assets and liabilities atDecember 31, 2021 , 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 table reflect principal balances expected to be redeployed and/or repriced as a result of contractual amortization, anticipated prepayments of adjustable-rate loans and fixed-rate loans, and as a result of contractual rate adjustments on adjustable-rate loans. Annual prepayment rates for variable-rate and fixed-rate single-family and multi-family residential and commercial mortgage loans are assumed to range from 10.7% to 28.0%. The annual prepayment rate for mortgage-backed securities is assumed to range from 0.6% to 22.6%. For savings accounts, checking accounts and money markets, the decay rates vary on an annual basis over a ten year period. 40 Table of Contents More than More than More than 3 Months 3 Months 1 Year 3 Years More than Total or Less to 1 Year to 3 Years to 5 Years 5 Years Amount (Dollars in Thousands) Interest-earning assets(1): Investment and mortgage-backed securities$ 13,265 $ 34,120 $
69,600
145,937 101,738 169,250 88,446 87,685 593,056 Other interest-earning assets (3) 120,070
249 747 110 - 121,176
Total interest-earning assets
Interest-bearing liabilities: Savings accounts$ 3,562 $ 10,447 $
98,396
42,002 60,263 124,508 8,285 - 235,058
Advances from Federal Home Loan
Bank 1,159 57,460 149,261 - - 207,880
Real estate tax escrow accounts 2,790 - - - - 2,790
Total interest-bearing liabilities
Interest-earning assets less interest-bearing liabilities$ 222,131 $ (14,947) $ (201,990) $ 107,275 $ 14,859 $ 127,328 Cumulative interest-rate sensitivity gap(4)$ 222,131 $ 207,184 $ 5,194 $ 112,469 $ 127,328 Cumulative interest-rate gap as a percentage of total assets at December 31, 2021 20.49 % 19.11 %
0.48 % 10.37 % 11.74 %
Cumulative interest-earning assets as a percentage of cumulative interest-bearing liabilities at December 31, 2021 488.74 % 199.51 %
100.80 % 116.05 % 114.21 %
Interest-earning assets are included in the period in which the balances are
(1) 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, investment securities are reflected at
amortized cost.
For purposes of the gap analysis, loans receivable includes non-performing
(3) loans and is gross of the allowance for loan losses and unamortized deferred
loan fees, but net of the undisbursed portion of loans-in-process.
(4) Includes restricted stock in the FHLB of
(5) Cumulative interest-rate sensitivity gap represents the difference between
interest-earning assets and interest-bearing liabilities.
Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as variable-rate loans, have features
which restrict changes in interest rates both on a short-term basis and over the
life of the asset. Further, in the event of a change in interest rates,
prepayment and early withdrawal levels would likely deviate significantly from
those assumed in calculating the table. Finally, the ability of many borrowers
to service their variable-rate loans may be adversely affected in the event of
an interest rate increase.
Net Portfolio Value Analysis. Our interest rate sensitivity also is monitored by
management through the use of a model which generates estimates of the changes
in our net portfolio value ("NPV") 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 "Sensitivity Measure" is the decline in the NPV ratio, in
basis points, caused by a 0% increase or decrease in rates, whichever produces a
larger decline. The following table sets forth our NPV as of
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Change in
Interest Rates NPV as % of Portfolio
In Basis Points Net Portfolio Value Value of Assets
(Rate Shock) Amount $Change % Change NPV Ratio Change
(Dollars in Thousands)
300 $ 140,555 $ (24,624) (14.91) % 13.90 % (1.49) %
200 $ 149,711 $ (15,468) (9.36) % 14.51 % (0.88) %
100 $ 158,705 $ (6,474) (3.92) % 15.07 % (0.32) %
Static $ 165,179 $ - - 15.39 % -
(100) $ 165,751 $ 572 0.35 % 15.24 % (0.15) %
(200) $ 168,177 $ 2,997 1.81 % 15.31 % (0.08) %
(300) $ 186,311 $ 21,131 12.79 % 16.65 % 1.26 %
AtSeptember 30, 2021 , the Company's NPV was$156.3 million or 14.4% of the market value of assets. Following a 200 basis point increase in interest rates, the Company's "post shock" NPV would be$138.0 million or 13.2% of the market value of assets. Conversely, a 200 basis point decrease in interest rates would result in a post shock NPV of$165.4 million or 14.9% of the market value of assets. 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 requires 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 model provides an indication of interest rate risk exposure at a particular point in time, such model is not intended to and does not provide a precise forecast of the effect of changes in market interest rates on net interest income and will differ from actual results.
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