HV BANCORP, INC. Forward-Looking Statements
This Quarterly Report on Form 10-Q contains certain forward-looking statements and information relating to the Company within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on the beliefs of management as well as assumptions made by and information currently available to management. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words like "believe," "expect," "anticipate," "estimate," and "intend" or future or conditional verbs such as "will," "should," "could," or "may" and similar expressions or the negative thereof. Certain factors that could cause actual results to differ materially from expected results include, the negative impact of severe, wide-ranging and continuing disruptions caused by the spread of coronavirus COVID-19 and any other pandemic, epidemic or health-related crisis on our operations, current customers and the economy in general, inflation and monetary fluctuations and volatility, changes in the interest rate environment, increases in nonperforming loans, legislative and regulatory changes that adversely affect the business of the Company, and changes in the securities markets. Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, actual results may vary materially from those described herein. We caution readers not to place undue reliance on forward-looking statements. The Company disclaims any obligation to revise or update any forward-looking statements contained in this Form 10-Q to reflect future events or developments.
Overview
HV Bancorp, Inc. provides financial services to individuals and businesses from our main office inDoylestown, Pennsylvania , and from our seven full-service banking offices located inPlumsteadville ,Philadelphia ,Warrington andHuntingdon Valley, Pennsylvania andMount Laurel, New Jersey . We also operate a limited service branch inPhiladelphia, Pennsylvania . Our administrative offices and executive offices are located inDoylestown, Pennsylvania . Our Business Banking office is located inPhiladelphia, Pennsylvania . We have loan production and sales offices located inMount Laurel, New Jersey ,Doylestown, Pennsylvania ,Huntingdon Valley, Pennsylvania andWilmington, Delaware ; and a loan origination office inMontgomeryville, Pennsylvania . Our primary market area includesMontgomery ,Bucks andPhiladelphia Counties inPennsylvania ,Burlington County inNew Jersey andNew Castle County inDelaware . Our principal business consists of attracting retail deposits from the general public in our market area and investing those deposits, together with funds generated from operations and borrowings, primarily in one-to-four family residential mortgage loans, commercial real estate loans (including multi-family loans), construction loans, home equity loans and lines of credit and, to a lesser extent, consumer loans. We retain our loans in portfolio depending on market conditions, but we primarily sell our fixed-rate one-to-four family residential mortgage loans in the secondary market. We also invest in various investment securities. Our revenue is derived principally from interest on loans and investments and loan sales. Our primary sources of funds are deposits,Federal Home Loan Bank ("FHLB") advances and principal and interest payments on loans and securities. Our results of operations depend primarily on our net interest income which is the difference between the interest income we earn on our interest-earning assets and the interest we pay on our interest-bearing liabilities. Our results of operations also are affected by our provision for loan losses, non-interest income and non-interest expense. Non-interest income currently consists primarily of gains recognized from the sale of residential mortgage loans in the secondary market, fees for customer services, gain (loss) from derivative instruments, gain on sale of mortgage servicing rights, net, change in fair value of loans held-for-sale and sales of securities. Non-interest expense currently consists primarily of expenses related to salaries and employee benefits, occupancy, data processing related operations, professional fees and other expenses.
Our results of operations also may be affected significantly by general, regional, and local economic and competitive conditions, changes in market interest rates, governmental policies and actions of regulatory authorities.
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--------------------------------------------------------------------------------Critical Accounting Policies
The accounting and financial reporting policies of the Company conform to accounting principles generally accepted inthe United States of America 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 at the date of the financial statements and the reported amounts of income and expenses during the periods presented. Critical 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 current period or in future periods. Our critical accounting policies involving significant judgments and assumptions used in the preparation of the consolidated financial statements as ofSeptember 30, 2022 , have remained unchanged from the disclosures presented in our Annual Report on Form 10-K, for the year endedDecember 31, 2021 . The complete list of Critical Accounting Policies are described in the Annual Report on Form 10-K, for the year endedDecember 31, 2021 .
Comparison of Statements of Financial Condition at
Total Assets Total assets increased$43.2 million to$603.3 million atSeptember 30, 2022 , from$560.1 million atDecember 31, 2021 . The increase was primarily the result of increases of$119.2 million in loans receivable, net,$41.4 million in investment securities,$3.6 million in bank-owned life insurance and$1.4 million in other assets which were offset by decreases of$93.7 million in cash and cash equivalents,$24.9 million in loans held-for-sale and$3.2 million in mortgage servicing rights. Cash and cash equivalents Cash and cash equivalents decreased$93.7 million to$27.1 million atSeptember 30, 2022 , from$120.8 million atDecember 31, 2021 , primarily as a result of funding of loans and purchases of investment securities.
Investment securities increased$41.4 million or 93.0%, to$85.9 million atSeptember 30, 2022 , from$44.5 million atDecember 31, 2021 . The increase was primarily due to purchases of$61.9 million ofU.S. Treasury securities, mortgage-backed, collateralized mortgage obligations and corporate notes offset by$15.8 million in proceeds from sales and maturities and principal repayments during the nine months endedSeptember 30, 2022 and a$4.6 million net unrealized loss on available-for-sale securities. The increase in comprehensive loss in the available-for-sale portfolio reflects recent increases in market interest rates. AtSeptember 30, 2022 , our held-to-maturity portion of the securities portfolio, at amortized cost, was$29.9 million , and our available-for-sale portion of the securities portfolio, at fair value, was$56.0 million compared to$44.5 million available-for-sale portion of the securities portfolio atDecember 31, 2021 . During the quarter endingJune 30 2022 , the Company transferred$30.2 million of investment securities from available-to-sale to held-to-maturity. . 50
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Net Loans
Net loans increased$119.2 million to$444.4 million atSeptember 30, 2022 , from$325.2 million atDecember 31, 2021 . Commercial real estate loans increased by$60.6 million to$177.5 million atSeptember 30, 2022 , from$116.9 million atDecember 31, 2021 and there was a$22.5 million increase in commercial business loans to$52.7 million atSeptember 30, 2022 , from$30.2 million atDecember 31, 2021 . In addition, one-to-four family residential real estate loans increased$38.7 million from$106.3 million atDecember 31, 2021 , to$145.0 million atSeptember 30, 2022 . Finally, construction loans increased$20.2 million to$63.1 million atSeptember 30, 2022 , from$42.9 million atDecember 31, 2021 . Offsetting these increases, was a$20.9 million decrease in SBA Paycheck Protection Program ("PPP") loans from Rounds 1 and 2 to$2.0 million atSeptember 30, 2022 from$22.9 million atDecember 31, 2021 as a result of PPP loan forgiveness from the SBA. Finally, there was a$1.0 million decrease in home equity and HELOC loans from$3.2 million atDecember 31, 2021 , to$2.2 million atSeptember 30, 2022 . InNovember 2017 , the Bank entered into a loan purchase agreement with a broker to purchase a portfolio of private education loans made to American citizens attending AMA-approved medical schools inCaribbean nations. The broker serves as a lender, holder, program designer and developer, administrator, and secondary market for the loan portfolios they generate. AtSeptember 30, 2022 , the balance of the private education loans was$3.7 million . The private student loans were made following a proven credit criteria and were underwritten in accordance with the Bank's policies. AtSeptember 30, 2022 , there were two loans with a balance of approximately$49,000 that were past due 90 days or more.
Loans Held For Sale
Loans held for sale decreased$24.9 million to$15.6 million atSeptember 30, 2022 from$40.5 million atDecember 31, 2021 as a result of originations of$321.7 million of one-to-four family residential real estate loans during the nine months endedSeptember 30, 2022 , and net of principal sales of$351.5 million of loans in the secondary market during this same period.
Total Liabilities
Total liabilities increased$44.3 million to$561.8 million atSeptember 30, 2022 from$517.5 million atDecember 31, 2021 primarily as a result of a$40.1 million increase in deposits and$10.1 million increase in advances from the FHLB, which were offset by a$3.1 million decrease in advances from theFederal Reserve's Paycheck Protection Program liquidity facility ("PPPLF") and$2.0 million decrease in other liabilities.
Deposits
Deposits increased$40.1 million to$504.1 million atSeptember 30, 2022 from$464.0 million atDecember 31, 2021 . Our core deposits (consisting of demand deposits, money market, passbook and statement and checking accounts) increased$22.5 million to$454.3 million atSeptember 30, 2022 from$431.8 million atDecember 31, 2021 . Certificates of deposit increased$17.6 million to$49.8 million atSeptember 30, 2022 from$32.2 million atDecember 31, 2021 . The increase in certificate of deposits was the result of a$23.0 million increase of certificates of deposit issued through brokers offset by a$5.4 million decrease in retail growth of certificates of deposit.
Advances from the
Advances from the FHLB increased
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Advances from the Federal Reserve PPPLF
As ofSeptember 30, 2022 , there were no advances from the Federal Reserve PPPLF as a result of repayments of$3.1 million from PPP loan forgiveness from the SBA compared to$3.1 million atDecember 31, 2021 .
Subordinated Debt
OnMay 28, 2021 , the Company issued a$10.0 million subordinated note. This note has a maturity date ofMay 28, 2031 , and bears interest at a fixed rate of 4.50% per annum throughMay 28, 2026 . Thereafter, the note rate is adjustable and resets quarterly based on the then current 90-day average Secured Overnight Financing Rate ("SOFR") plus 325 basis points forU.S. dollar denominated loans as published by theFederal Reserve Bank of New York . The Company may, at its option, at any time on an interest payment date, on or afterMay 28, 2026 , redeem the note, in whole or in part, at par plus accrued interest to the date of redemption. The balance of subordinated debt, net of unamortized debt issuance costs, was$10.0 million atSeptember 30, 2022 andDecember 31, 2021 .
Total Shareholders' Equity
Total shareholders' equity decreased$1.2 million to$41.4 million atSeptember 30, 2022 , compared to$42.6 million atDecember 31, 2021 . This decrease is primarily as a result of comprehensive losses of$3.2 million due to the fair value adjustments, net of deferred tax, on the investment securities available-for-sale portfolio which reflects recent increases in market interest rates and$273,000 in treasury stock repurchases primarily as part of the stock repurchase plan. Offsetting these decreases was net income of$1.9 million for the nine months endedSeptember 30, 2022 , share based compensation expense of$262,000 , ESOP shares committed to be released of$46,000 and a stock option exercise of$21,000 .
Comparison of Statements of Income for the Three Months Ended
General Net income decreased$412,000 to$705,000 for the three months endedSeptember 30, 2022 , from$1.1 million for the three months endedSeptember 30, 2021 . The decrease in net income for the three months endedSeptember 30, 2022 , was primarily due to a decrease of$1.6 million in non-interest income and$379,000 increase in provision for loan losses offset by a$1.4 million increase in net interest income, a$231,000 decrease in income taxes. Non-interest expense was$5.6 million for both of the three months endedSeptember 30, 2022 and 2021.
Interest Income
Total interest income increased$1.6 million , or 34.8`%, to$6.2 million for the three months endedSeptember 30, 2022 , from$4.6 million for the three months endedSeptember 30, 2021 . The increase was primarily the result of increases in interest and fees on loans of$1.2 million , interest on investment securities of$339,000 and$106,000 in interest on interest-earning deposits with banks. The average yield on our interest-earning assets increased 95 basis points to 4.51% for the three months endedSeptember 30, 2022 , as compared to 3.56% for the three months endedSeptember 30, 2021 . Total average interest-earning assets increased$39.2 million to$551.2 million for the three months endedSeptember 30, 2022 , from$512.0 million for the three months endedSeptember 30, 2021 . The increase was primarily the result of increases in 55.3 million in the average balance of investment securities and the average balance of loans of$31.6 million offset by a decrease of$47.8 million in average balance of interest-earning deposits with banks. Interest and fees on loans increased$1.2 million to$5.5 million for the three months endedSeptember 30, 2022 , from$4.3 million for the same period in 2021. This increase was primarily due to an increase in the average loans outstanding of$31.6 million , which increased to$423.8 million for the three months endedSeptember 30, 2022 , from$392.2 million for the three months endedSeptember 30, 2021 . In addition, there was an increase in the average yield on loans which increased 80 basis point to 5.21% 52 -------------------------------------------------------------------------------- for the three months endedSeptember 30, 2022 , versus 4.41% for the three months endedSeptember 30, 2021 . The increase in average loans was primarily a result of increases in the average balances of commercial real estate, other commercial business and construction loans offset by a decrease in the average balances of PPP loans and loans held for sale. Interest income on interest-earning deposits increased by$106,000 to$140,000 for the three months endedSeptember 30, 2022 , from$34,000 for the three months endedSeptember 30, 2021 , primarily due to an increase of 147 basis points in the average yield on interest-earning deposits with banks to 1.64% for the three months endedSeptember 30, 2022 , from 0.17% for the three months endedSeptember 30, 2021 . Offsetting this increase, was a decrease in the average balance of interest-earning deposits of$47.8 million to$34.1 million for the three months endedSeptember 30, 2022 , from$81.9 million for the three months endedSeptember 30, 2021 . Interest on investment securities increased by$339,000 to$527,000 for the three months endedSeptember 30, 2022 , from$188,000 for the three months endedSeptember 30, 2021 , respectively as the average balance of investment securities increased by$55.3 million to$91.4 million for the three months endedSeptember 30, 2022 , from$36.1 million for the three months endedSeptember 30, 2021 . Interest on investment securities increased as a result of a$306,000 increase in income on taxable and non-taxable interest and dividend investments to$456,000 for the three months endedSeptember 30, 2022 from$150,000 for the three months endedSeptember 30, 2021 . In addition, interest income on mortgage backed securities and collateralized mortgage obligation securities increased$33,000 to$71,000 for the three months endedSeptember 30, 2022 , from$38,000 for the three months endedSeptember 30, 2021 . The average yield on total securities increased to 2.31% for the three months endedSeptember 30, 2022 , from 2.08% for the three months endedSeptember 30, 2021 .
Interest Expense
Total interest expense increased$291,000 to$864,000 for the three months endedSeptember 30, 2022 , from$573,000 for the three months endedSeptember 30, 2021 , primarily due to a$271,000 increase in interest expense on deposits and a$31,000 increase in interest expense on advances from the FHLB offset by a$10,000 decrease in interest expense on advances from the PPPLF. Interest expense on deposits increased$271,000 to$621,000 for the three months endedSeptember 30, 2022 , from$350,000 for the three months endedSeptember 30, 2021 , primarily as a result of an increase in the average cost of deposits of 26 basis points to 0.64% for the three months endedSeptember 30, 2022 from 0.38% for the three months endedSeptember 30, 2021 . In addition, the average balance of interest bearing deposits increased$18.5 million from$372.2 million for the three months endedSeptember 30, 2021 , to$390.7 million for the three months endedSeptember 30, 2022 . This increase was primarily the result of a$24.9 million increase in the average balance of our core deposits (consisting of demand deposits, money market, passbook and statement and checking accounts) from the three months endedSeptember 30, 2021 , to the three months endedSeptember 30, 2022 . The average rate paid on money market deposits increased to 0.66% for the three months endedSeptember 30, 2022 , from 0.57% for the three months endedSeptember 30, 2021 . Offsetting this increase, was a decrease of$6.4 million in the average balance of our certificates of deposits from$42.0 million for the three months endedSeptember 30, 2021 , to$35.6 million for the three months endedSeptember 30, 2022 . This was primarily the result of decrease of$13.9 million in the average balance in retail certificate of deposits offset by a$7.5 million increase in the average balance of certificates of deposit issued through brokers compared to the three months endedSeptember 30, 2021 . The average cost of certificates of deposit was 1.02% for the three months endedSeptember 30, 2022 , as compared to 0.80% for the three months endedSeptember 30, 2021 . Interest expense on advances from the PPPLF decreased from$10,000 for the three months endedSeptember 30, 2021 as compared to no expense for the three months endedSeptember 30, 2022 . There were no advances from the PPPLF for the three monthsSeptember 30, 2022 as compared to$14.9 million in average balances for the three monthsSeptember 30, 2021 . 53 -------------------------------------------------------------------------------- Interest expense on advances from the FHLB increased$31,000 to$130,000 for three months endedSeptember 30, 2022 , compared to$99,000 for the three months endedSeptember 30, 2021 . The average balance increased$3.4 million to$29.8 million for the three months endedSeptember 30, 2022 from$26.4 million for the three months endedSeptember 30, 2021 . The average rate on FHLB advances increased 24 basis points to 1.74% for the three months endedSeptember 30, 2022 from 1.50% for the three months endedSeptember 30, 2021 . Interest expense on subordinated debt was$113,000 for the three months endedSeptember 30, 2022 and$114,000 for the three months endedSeptember 30, 2021 . The average balance was$10.0 million for the three months endedSeptember 30, 2022 and 2021, respectively. The average rate on subordinated debt of was 4.52% for the three months endedSeptember 30, 2022 compared to 4.56% for the three months endedSeptember 30, 2021 . As previously discussed, onMay 28, 2021 , the Company issued a$10.0 million principal amount 4.50% fixed to floating rate subordinated note due 2031. Net Interest Income Net interest income increased$1.4 million to$5.4 million for the three months endedSeptember 30, 2022 , from$4.0 million for the three months endedSeptember 30, 2021 . Our net interest-earning assets increased$32.2 million to$120.8 million for the three months endedSeptember 30, 2022 , from$88.6 million for the three months endedSeptember 30, 2021 . Our interest rate spread increased by 69 basis points to 3.71% for the three months endedSeptember 30, 2022 , from 3.02% for the three months endedSeptember 30, 2021 . Our net interest margin increased 78 basis points to 3.89% for the three months endedSeptember 30, 2022 , from 3.11% for the three months endedSeptember 30, 2021 . 54 --------------------------------------------------------------------------------
Average Balances, Net Interest Income, Yields Earned and Rates Paid
The following table shows for the periods indicated the total dollar amount of
interest from average interest-earning assets and the resulting yields, as well
as the interest expense on average interest-bearing liabilities, expressed both
in dollars and rates, and the net interest margin. All average balances are
based on daily balances.
For the Three Months Ended September 30,
2022 2021
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Cost(5) Balance Expense Cost (5)
(Dollars in thousands)
Interest-earning assets:
Loans (1) $ 423,801 $ 5,524 5.21 %
140 1.64 % 81,920 34 0.17 %
Investment securities 91,408 527 2.31 % 36,093 188 2.08 %
Restricted investment in bank stock 1,973 30 6.08 % 1,854 18 3.88 %
Total interest-earning assets 551,248 6,221 4.51 % 512,041 4,559 3.56 %
Non-interest-earning assets 28,799 31,167
Total assets $ 580,047 $ 543,208
Interest-bearing liabilities:
Demand deposits $ 145,748 196 0.54 % $ 148,058 74 0.20 %
Money market deposit accounts 118,408 194 0.66 % 95,370 137 0.57 %
Passbook and statement savings
accounts 39,862 12 0.12 % 34,186 12 0.14 % Checking accounts-Municipal 51,087 128 1.00 % 52,641 43 0.33 % Certificates of deposit 35,562 91 1.02 % 41,963 84 0.80 % Total deposits 390,667 621 0.64 % 372,218 350 0.38 % Federal Home Loan Bank advances 29,822 130 1.74 % 26,359 99 1.50 % Federal Reserve PPPLF advances - - 0.00 % 14,857 10 0.27 % Subordinated debt 9,997 113 4.52 % 9,996 114 4.56 % Total interest-bearing liabilities 430,486 864 0.80 % 423,430 573 0.54 % Non-interest-bearing liabilities: Checking 98,119 65,829 Other 11,094 13,493 Total liabilities 539,699 502,752 Shareholders' Equity 40,348 40,456
Total liabilities and Shareholders'
equity$ 580,047 $ 543,208 Net interest income$ 5,357 $ 3,986 Interest rate spread (2) 3.71 % 3.02 % Net interest-earning assets (3)$ 120,762 $ 88,611 Net interest margin (4) 3.89 % 3.11 %
Average interest-earning assets to
average interest-bearing liabilities 128.05 % 120.93 %
(1) Includes loans held for sale.
(2) Interest rate spread represents the difference between the average yield on
average interest-earning assets and the average cost of average
interest-bearing liabilities.
(3) Net interest-earning assets represent total average interest-earning assets
less total interest-bearing liabilities.
(4) Net interest margin represents net interest income divided by total average
interest-earning assets.
(5) Annualized.
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Rate/ Volume Analysis
The following table presents the effects of changing rates and volumes on net
interest income for the periods indicated. The rate column shows the effects
attributable to changes in rate (changes in rate multiplied by prior volume).
The volume column shows the effects attributable to changes in volume (changes
in volume multiplied by prior rate). The net column represents the sum of the
prior columns.
For purposes of this table, changes attributable to both rate and volume, which
cannot be segregated, have been allocated proportionately, based on the changes
due to rate and the changes due to volume.
For the Three Months Ended
September 30, 2022 vs 2021
Total
Increase (Decrease) Due to Increase
Volume Rate (Decrease)
(In thousands)
Interest-earning assets:
Loans $ 119 $ 1,086 $ 1,205
Interest-earning deposits with banks (37 ) 143 106
Investment securities 265 74 339
Restricted investment in bank stock - 12 12
Total interest-earning assets 347 1,315 1,662
Interest-bearing liabilities:
Demand deposits (2 ) 124 122
Money market deposit accounts 17 40 57
Passbook and statement savings accounts 3 (3 ) -
Checking accounts-Municipal (2 ) 87 85
Certificates of deposit (22 ) 29 7
Total deposits (6 ) 277 271
Federal Home Loan Bank advances 5 26 31
Federal Reserve PPPLF (2 ) (8 ) (10 )
Subordinated debt 114 (115 ) (1 )
Total interest-bearing liabilities 111 180 291
Change in net interest income $ 236 $ 1,135 $ 1,371
Provision for Loan Losses
We establish a provision for loan losses, which is charged to operations, in
order to maintain the allowance for loan losses at a level we consider necessary
to absorb credit losses incurred in the loan portfolio that are both probable
and reasonably estimated at the balance sheet date. In determining the level of
the allowance for loan losses, we consider past and current loss experience,
evaluations of real estate collateral, current economic conditions, volume and
type of lending, adverse situations that may affect a borrower's ability to
repay a loan and the levels of non-performing loans. The amount of the allowance
is based on estimates, and actual losses may vary from such estimates, as more
information becomes available or economic conditions change. However, due to the
uncertainty of the impact, the Company will continue to monitor and additional
adjustment to the allowance for loan losses may be necessary.
This evaluation is inherently subjective, as it requires estimates that are
susceptible to significant revision as circumstances change as more information
becomes available. The allowance for loan losses is assessed on a quarterly
basis and provisions are made for loan losses as required in order to maintain
the allowance for loan losses.
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Provision for loan losses increased by $379,000 to $608,000 for the three months
ended September 30, 2022 , from $229,000 for the three months ended September 30,
2021 . Non-performing loans decreased $608,000 , or 16.2% from $3.8 million at
December 31, 2021 , to $3.1 million as of September 30, 2022 , as a result of a
decrease in one construction loan totaling $1.0 million and $478,000 decrease in
medical education loans offset by a $946,000 increase in one-to four-family
compared to December 31, 2021 . During the three months ended September 30, 2022 ,
there were net charge-offs of $209,000 recorded compared to net charge-offs of
$30,000 recorded during the three months ended September 30, 2021 .
Non-Interest Income
Non-interest income decreased$1.6 million or 48.5% to$1.7 million for the three months endedSeptember 30, 2022 , from$3.3 million for the three months endedSeptember 30, 2021 . Non-interest income decreased$1.6 million compared to the same period in 2021 primarily due to a$1.5 million decrease in the gain on sale of loans, and a decrease of$568,000 in change in fair value of loans held for sale offset by an increase of$435,000 in gain of derivative instruments, net. The gain on sale of loans, net decreased$1.5 million to$1.5 million for the three months endedSeptember 30, 2022 compared to$3.0 million for the three months endedSeptember 30, 2021 primarily as a result of reduced volumes of loans sold. In addition, there was a$568,000 decrease in the change in fair value to ($130,000 ) for the three months endedSeptember 30, 2022 from$438,000 for the three months endedSeptember 30, 2021 resulting from the reduction in inventory of loans held for sale. Offsetting these decreases was a gain on derivative instruments, which increased$435,000 to a gain on derivative instruments of$13,000 for the three months endedSeptember 30, 2022 from a loss on derivative instruments of ($422,000 ) for the three months endedSeptember 30, 2021 . Non-Interest Expense
Non-interest expense was
Income Tax Expense
Income tax expense was$131,000 for the three months endedSeptember 30, 2022 , compared to expense of$362,000 in expense for the three months endedSeptember 30, 2021 . Federal income taxes included in total taxes for the three months endedSeptember 30, 2022 and 2021 was$136,000 and$276,000 , respectively, with effective federal tax rates of 16.3% and 18.7%. The decrease in the effective tax rate for the three months endedSeptember 30, 2022 , compared to the same period a year ago reflected a decrease in income before taxes. For the three months endedSeptember 30, 2022 ,Pennsylvania state tax was a benefit of$5,000 for the three months endedSeptember 30, 2022 compared to expense of$78,000 , with effective rate of 5.3% for the three months endedSeptember 30, 2021 . The decrease in the effective tax rate for the three months endedSeptember 30, 2022 , compared to the same period a year ago reflected a decrease in income before taxes. In addition, there was noNew Jersey state tax expense for the three months endedSeptember 30, 2022 compared to$8,000 for the three months endedSeptember 30, 2021 .
Comparison of Statements of Income for the Nine Months Ended
General Net income decreased$1.8 million to$1.9 million for the nine months endedSeptember 30, 2022 , from$3.7 million for the nine months endedSeptember 30, 2021 . The decrease in net income for the nine months endedSeptember 30, 2021 , was primarily due to a decrease of$4.3 million in non-interest income,$313,000 increase in non-interest expenses and an increase of$715,000 in provision for loan losses offset by increases of$2.6 million in net interest income and a decrease of$1.0 in income tax expense. 57
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Interest Income
Total interest income increased$2.9 million , or 23.4% to$15.3 million for the nine months endedSeptember 30, 2022 from$12.4 million for the nine months endedSeptember 30, 2021 . The increase was primarily the result of an increase in interest and fees on loans of$1.9 million ,$771,000 in interest on investment securities and$194,000 in interest income on interest-earning deposits. The average yield on our interest-earning assets increased 91 basis points to 3.80% for the nine months endedSeptember 30, 2022 , as compared to 2.89% for the nine months endedSeptember 30, 2021 . Total average interest-earning assets decreased$35.6 million from$573.5 million for the nine months endedSeptember 30, 2021 , to$537.9 million for the nine months endedSeptember 30, 2022 . The decrease was primarily a result of a decrease in the average balance of interest-earning deposits with banks of$65.3 million and a decrease of$12.2 million in the average balance of loans offset by a$41.7 million increase in the average balance of investment securities. Interest and fees on loans increased$1.9 million to$13.6 million for the nine months endedSeptember 30, 2022 , from$11.7 million for the nine months endedSeptember 30, 2021 . This increase was primarily due to an increase the average yield on loans of 80 basis point to 4.78% for the nine months endedSeptember 30, 2022 , versus 3.98% for the nine months endedSeptember 30, 2021 . The average loans outstanding decreased$12.2 million to$380.7 million for the nine months endedSeptember 30, 2022 , from$392.9 million for the nine months endedSeptember 30, 2021 primarily as a result of a decrease in the average balance of PPP loans and loans-held-for sale, at fair value offset by increases in the average balances of construction loans, commercial real estate and other commercial business. Interest on investment securities increased by$771,000 to$1.3 million for the nine months endedSeptember 30, 2022 , from$505,000 for the nine months endedSeptember 30, 2021 , respectively. Interest on investment securities increased as a result of a$679,000 increase in income on taxable and non-taxable interest and dividend investments and a$92,000 increase in interest income on mortgage backed securities and collateralized mortgage obligation securities. The average balance of investment securities increased by$41.7 million to$72.5 million for the nine months endedSeptember 30, 2022 , from$30.8 million for the nine months endedSeptember 30, 2021 . The average yield on total securities increased to 2.35% for the nine months endedSeptember 30, 2022 , from 2.18% for the nine months endedSeptember 30, 2021 . Interest income on interest-earning deposits increased by$194,000 to$328,000 for the nine months endedSeptember 30, 2022 , from$134,000 for the nine months endedSeptember 30, 2021 . The increase was primarily due to an increase in average yield on interest-earning deposits with banks, which increased 41 basis points, to 0.53% for the nine months endedSeptember 30, 2022 , from 0.12% for the nine months endedSeptember 30, 2021 . Offsetting this increase, was a decrease in the average balance of interest-earning deposits of$65.3 million to$82.7 million for the nine months endedSeptember 30, 2022 , from$148.0 million for the nine months endedSeptember 30, 2021 .
Interest Expense
Total interest expense increased$285,000 to$1.9 million for the nine months endedSeptember 30, 2022 , from$1.7 million for the nine months endedSeptember 30, 2021 primarily due to a$181,000 increase in interest expense on subordinated debt,$142,000 increase in interest expense on deposits and a$30,000 increase in interest expense on advances from the FHLB offset by a$68,000 decrease in interest expense on advances from the PPPLF. Interest expense on subordinated debt increased$181,000 to$338,000 for the nine months endedSeptember 30, 2022 from$157,000 for the nine months endedSeptember 30, 2021 primarily the result of an increase of$5.9 million in the average balance of subordinated debt to$10.0 million for the nine months endedSeptember 30, 2022 from$4.1 million or the nine months endedSeptember 30, 2021 . Offsetting this increase was a decrease in the rate of 54 basis points from 5.05% for the nine months endedSeptember 30, 2021 , to 4.51% for the nine months endedSeptember 30, 2022 . As previously discussed, onMay 28, 2021 , the Company sold and issued a$10.0 million in aggregate principal amount 4.50% fixed to floating rate subordinated note due 2031. 58 -------------------------------------------------------------------------------- Interest expense on deposits increased$142,000 to$1.3 million for the nine months endedSeptember 30, 2022 , from$1.1 million for the nine months endedSeptember 30, 2021 , primarily from the average cost of deposits which increased to 44 basis points for the nine months endedSeptember 30, 2022 from 36 basis points for the nine months endedSeptember 30, 2021 . Offsetting this increase was a decrease in the average balance of interest bearing deposits of$40.3 million from$424.9 million in the average balance of interest bearing deposits fromSeptember 30, 2021 to$384.6 in million in the average balance of interest bearing deposits for the nine months endedSeptember 30, 2022 . The decrease in the average balance of interest bearing deposits of$40.3 million from$424.9 million as ofSeptember 30, 2021 , to$384.6 million as ofSeptember 30, 2022 , was primarily as a result of a$20.8 million decrease in the average balance of our core deposit accounts and a decrease of$19.5 million in the average balance of our certificates of deposit. The average rate paid on money market deposits decreased 4 basis points to 0.55% for the nine months endedSeptember 30, 2022 , from 0.59% for the nine months endedSeptember 30, 2021 . The decrease in the balance of our certificates of deposits of$19.5 million from$52.9 million for the nine months endedSeptember 30, 2021 , to$33.4 million for the nine months endedSeptember 30, 2022 , was primarily the result of a decrease of$16.8 million in the average balance in retail certificate of deposits and a$2.7 million decrease in the average balance of certificates of deposit issued through brokers. The average balance of brokered certificates of deposits was$5.7 million for the nine months endedSeptember 30, 2021 as compared to$3.0 million for the nine months endedSeptember 30, 2022 . The average cost of certificates of deposit was 0.79% for the nine months endedSeptember 30, 2022 , as compared to 0.93% for the nine months endedSeptember 30, 2021 . Interest expense on advances from the FHLB increased$30,000 to$326,000 for the nine months endedSeptember 30, 2022 from$296,000 or the nine months endedSeptember 30, 2021 . The average rate on advances from the FHLB was 1.56% for the nine months endedSeptember 30, 2022 compared to 1.50% for the nine months endedSeptember 30, 2021 and the average balance increased$1.5 million to$27.8 million for the nine months endedSeptember 30, 2022 from$26.3 million for the nine months endedSeptember 30, 2021 . Interest expense on advances from the PPPLF decreased$68,000 to$1,000 for the nine months endedSeptember 30, 2022 , from$69,000 for the nine months endedSeptember 30, 2021 . The decrease was primarily the result of a$29.5 million decrease in the average balance in advances from the PPPLF to$644,000 for the nine months endedSeptember 30, 2022 from$30.1 million for the nine months endedSeptember 30, 2021 .
Net Interest Income
Net interest income increased$2.6 million to$13.4 million for the nine months endedSeptember 30, 2022 , from$10.8 million for the nine months endedSeptember 30, 2021 . Our net interest-earning assets increased$26.8 million to$114.8 million for the nine months endedSeptember 30, 2022 , from$88.0 million for the nine months endedSeptember 30, 2021 . Our interest rate spread increased by 75 basis points to 3.19% for the nine months endedSeptember 30, 2022 from 2.44% for the nine months endedSeptember 30, 2021 . Our net interest margin was 3.32% for the nine months endedSeptember 30, 2022 , compared to 2.51% for the nine months endedSeptember 30, 2021 . 59
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Average Balances, Net Interest Income, Yields Earned and Rates Paid
The following table shows for the periods indicated the total dollar amount of
interest from average interest-earning assets and the resulting yields, as well
as the interest expense on average interest-bearing liabilities, expressed both
in dollars and rates, and the net interest margin. All average balances are
based on daily balances.
For the Nine Months Ended September 30,
2022 2021
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Cost(5) Balance Expense Cost (5)
(Dollars in thousands)
Interest-earning assets:
Loans (1) $ 380,684 $ 13,646 4.78 % $ 392,892 $ 11,735 3.98 %
Interest-earning deposits with banks 82,706 328 0.53 % 147,976 134 0.12 %
Investment securities 72,531 1,276 2.35 % 30,834 505 2.18 %
Restricted investment in bank stock 1,943 74 5.08 % 1,822 66 4.86 %
Total interest-earning assets 537,864 15,324 3.80 % 573,524 12,440 2.89 %
Non-interest-earning assets 30,005 26,314
Total assets $ 567,869 $ 599,838
Interest-bearing liabilities:
Demand deposits $ 143,095 356 0.33 % $ 202,675 221 0.15 %
Money market deposit accounts 111,116 455 0.55 % 86,236 380 0.59 %
Passbook and statement savings
accounts 38,925 35 0.12 % 33,053 36 0.15 % Checking accounts-Municipal 58,063 230 0.53 % 50,092 126 0.34 % Certificates of deposit 33,399 199 0.79 % 52,871 370 0.93 % Total deposits 384,598 1,275 0.44 % 424,927 1,133 0.36 % Federal Home Loan Bank advances 27,804 326 1.56 % 26,317 296 1.50 % Federal Reserve PPPLF advances 644 1 0.21 % 30,106 69 0.31 % Subordinated debt 9,997 338 4.51 % 4,143 157 5.05 % Total interest-bearing liabilities 423,043 1,940 0.61 % 485,493 1,655 0.45 % Non-interest-bearing liabilities: Checking 92,940 61,444 Other 11,081 13,807 Total liabilities 527,064 560,744 Shareholders' Equity 40,805 39,094
Total liabilities and Shareholders'
equity$ 567,869 $ 599,838 Net interest income$ 13,384 $ 10,785 Interest rate spread (2) 3.19 % 2.44 % Net interest-earning assets (3)$ 114,821 $ 88,031 Net interest margin (4) 3.32 % 2.51 %
Average interest-earning assets to
average interest-bearing liabilities 127.14 % 118.13 %
(1) Includes loans held for sale.
(2) Interest rate spread represents the difference between the average yield on
average interest-earning assets and the average cost of average
interest-bearing liabilities.
(3) Net interest-earning assets represent total average interest-earning assets
less total interest-bearing liabilities.
(4) Net interest margin represents net interest income divided by total average
interest-earning assets.
(5) Annualized.
60
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Rate/ Volume Analysis
The following table presents the effects of changing rates and volumes on net
interest income for the periods indicated. The rate column shows the effects
attributable to changes in rate (changes in rate multiplied by prior volume).
The volume column shows the effects attributable to changes in volume (changes
in volume multiplied by prior rate). The net column represents the sum of the
prior columns.
For purposes of this table, changes attributable to both rate and volume, which
cannot be segregated, have been allocated proportionately, based on the changes
due to rate and the changes due to volume.
For the Nine Months Ended
September 30, 2022 vs 2021
Total
Increase (Decrease) Due to Increase
Volume Rate (Decrease)
(In thousands)
Interest-earning assets:
Loans $ (454 ) $ 2,365 $ 1,911
Interest-earning deposits with banks (90 ) 284 194
Investment securities 718 53 771
Restricted investment in bank stock 4 4 8
Total interest-earning assets 178 2,706 2,884
Interest-bearing liabilities:
Demand deposits (91 ) 226 135
Money market deposit accounts 111 (36 ) 75
Passbook and statement savings accounts 7 (8 ) (1 )
Checking accounts-Municipal 18 86 104
Certificates of deposit (111 ) (60 ) (171 )
Total deposits (66 ) 208 142
Federal Home Loan Bank advances 15 15 30
Federal Reserve PPPLF (47 ) (21 ) (68 )
Subordinated debt 157 24 181
Total interest-bearing liabilities 59 226 285
Change in net interest income $ 119 $ 2,480 $ 2,599
Provision for Loan Losses
Provision for loan losses increased by $715,000 to $1.4 million for the nine
months ended September 30, 2022 , from $644,000 for the nine months ended
September 30, 2021 as a result of increase in loan volume. Non-performing loans
decreased $608,000 , or 16.2% from $3.8 million at December 31, 2021 , to $3.1
million as of September 30, 2022 , as a result of a decrease in one construction
loan totaling $1.0 million and $478,000 decrease in medical education loans
offset by a $946,000 increase in one-to four-family compared to December 31,
2021 . During the nine months ended September 30, 2022 , total net charge-offs
were $338,000 . Total net charge-offs were $202,000 for the nine months ended
September 30, 2021 .
Non-Interest Income
Non-interest income decreased $4.3 million to $7.0 million for the nine months
ended September 30, 2022 , from $11.3 million for the nine months ended September
30, 2021 . The decrease in non-interest income compared to the same period in
2021 was primarily due to a $5.6 million decrease in the gain on sale of loans,
net and a $432,000 increase in loss on derivative instruments, net offset by a
$1.0 million gain on sale of mortgage servicing right, net. The gain on sale of
loans, net decreased $5.6 million to $5.6 million for the nine months ended
September 30, 2022 , from $11.2 million for the nine months
61
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ended September 30, 2021 , primarily as a result of lower volume of loan sales,
which decreased $153.2 million from $504.7 million for the nine months ended
September 30, 2021 , to $351.5 million for the nine months ended September 30,
2022 . In addition, there was an increase of $432,000 in loss on derivative
instruments from a gain on derivative instruments of $55,000 for the nine months
ended September 30, 2021 to a loss on derivative instruments of ($377,000 ) for
the nine months end September 30, 2022 . Offsetting these decreases, was a $1.0
million gain on sale of mortgage servicing rights, net resulting from the sale
of approximately $3.2 million of the mortgage servicing rights during the nine
months ended September 30, 2022 . Finally, other income increased $486,000 to
$658,000 for the nine months ended September 30, 2022 from $172,000 for the nine
months ended September 30, 2021 . Included in other income for the nine months
ended September 30, 2022 was $352,000 in gain on settlement of bank-owned life
insurance ("BOLI").
Non-Interest Expense
Non-interest expense increased $313,000 or 1.9% to $16.6 million for the nine
months ended September 30, 2022 , from $16.3 million for the nine months ended
September 30, 2021 . The increase was primarily as a result of $181,000 increase
in salaries and employee benefits and $152,000 increase in professional fees.
Salaries and employee benefits expense increased by $181,000 to $10.4 million
for the nine months ended September 30, 2022 , from $10.2 million for the nine
months ended September 30, 2021 . Professional fees increased approximately
$152,000 to $921,000 for the nine months ended September 30, 2022 , from $769,000
for the nine months ended September 30, 2021 , primarily because of increases in
expenses related to other consulting fees and accounting and auditing fees.
Income Tax Expense
Income tax expense was$443,000 for the nine months endedSeptember 30, 2022 , compared to$1.4 million for the nine months endedSeptember 30, 2021 . Federal income taxes included in total taxes for the nine months endedSeptember 30, 2022 and 2021 was$373,000 and$958,000 , respectively, with effective federal tax rates of 15.6% and 18.8%. The decrease in the effective tax rate for the nine months endedSeptember 30, 2022 , compared to the same period a year ago reflected a decrease in income before taxes and the tax benefit related to BOLI claim proceeds. For the nine months endedSeptember 30, 2022 ,Pennsylvania state tax was a benefit of ($17,000 ) compared to expense of$341,000 with effective rate of 6.7% for the nine months endedSeptember 30, 2021 , respectively. In addition,New Jersey state tax was$87,000 for the nine months endedSeptember 30, 2022 compared to$95,000 for the nine months endedSeptember 30, 2021 . 62 -------------------------------------------------------------------------------- Non-Performing Assets We define non-performing loans as loans that are either non-accruing or accruing whose payments are 90 days or more past due and non-accruing troubled debt restructuring ("TDRs"). Non-performing assets, including non-performing loans and other real estate owned, totaled$3.1 million , or 0.5% of total assets, atSeptember 30, 2022 . There were no non-accruing TDRs atSeptember 30, 2022 , and atDecember 31, 2021 . The following table sets forth the amounts and categories of our non-performing assets at the dates indicated. There were no accruing loans past due 90 days or more atSeptember 30, 2022 , and atDecember 31, 2021 . At September 30, At December 31, 2022 2021 (Dollars in thousands) Non-accrual loans: Residential: One- to four-family $ 2,010 $ 1,064 Home equity & HELOCs 63 68 Commercial: Commercial real estate - - Commercial business - 95 SBA PPP loans - - Main Street Lending Program - - Construction 192 1,168 Consumer: Medical education 880 1,358 Other - - Total non-accrual loans 3,145 3,753 Loans accruing past 90 days - - Total non-performing loans 3,145 3,753 Real estate owned - - Other non-performing assets - - Total non-performing assets $ 3,145 $ 3,753 Ratios:
Total non-performing loans to total
loans receivable 0.70 % 1.14 %
Total non-performing loans to total
assets 0.52 % 0.67 %
Total non-performing assets to total
assets 0.52 % 0.67 %
63--------------------------------------------------------------------------------
Allowance for Loan Losses
The following table sets forth activity in our allowance for loan losses for the
periods indicated.
For the For the
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
(Dollars in thousands) (Dollars in thousands)
Balance at beginning of year $ 2,990 $ 2,260 $ 2,368 $ 2,017
Charge-offs:
Residential:
One-to-four family - - - -
Home equity & HELOCs - - - -
Commercial real estate - - - -
Commercial business - - (75 ) -
Construction - - - -
Consumer: - - - -
Medical education (247 ) (38 ) (314) (210 )
Other - - - -
Total charge-offs (247 ) (38 ) (389 ) (210 )
Recoveries:
Residential:
One-to-four family - - - -
Home equity & HELOCs - - - -
Commercial real estate - - - -
Commercial business - - - -
Construction - - - -
Consumer:
Medical education 38 8 51 8
Other - - - -
Total recoveries 38 8 51 8
Net (charge-offs) recoveries (209 ) (30 ) (338 ) (202 )
Provision for loan losses 608 229 1,359 644
Balance at end of period $ 3,389 $
2,459
Ratios:
Net charge-offs to average loans outstanding 0.05 % 0.01 % 0.09 % 0.06 % Allowance for loan losses to non-performing loans at end of period 107.76 % 62.25 % 107.76 % 62.25 %
Allowance for loan losses to total loans at
end of period 0.76 % 0.78 % 0.76 % 0.78 %
64--------------------------------------------------------------------------------
Liquidity and Capital Resources
Liquidity Management. Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Our primary sources of funds are deposits, principal and interest payments on loans and securities, proceeds from sales of loans and securities, and matured loans and securities. In addition, we can use brokered certificates of deposit as a funding source of our asset base. As ofSeptember 30, 2022 , the Company had$23.0 million in brokered certificates of deposits, or 3.8% of total assets. AtDecember 31, 2021 , there were no brokered certificates of deposit outstanding. We also have the ability to borrow from the FHLB ofPittsburgh .Huntingdon Valley Bank had FHLB ofPittsburgh advances of$37.0 million outstanding with unused borrowing capacity of$179.4 million as ofSeptember 30, 2022 . Additionally, atSeptember 30, 2022 , the Bank has the ability to borrow$6.0 million fromAtlantic Community Bankers Bank andHV Bancorp Inc. has the ability to borrow up to$3.0 million for a total of$9.0 million . We have not borrowed against the credit lines withAtlantic Community Bankers Bank for the nine months endedSeptember 30, 2022 . The board of directors is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of our customers as well as unanticipated contingencies. We believe that we have enough sources of liquidity to satisfy our short and long-term liquidity needs as ofSeptember 30, 2022 . We monitor and adjust our investments in liquid assets based upon our assessment of: (1) expected loan demand; (2) expected deposit flows; (3) yields available on interest-earning deposits and securities; and (4) the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning deposits and short-and intermediate-term securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are cash and cash equivalents, which include federal funds sold and interest-earning deposits in other banks. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. AtSeptember 30, 2022 , cash and cash equivalents totaled$27.1 million . Securities classified as available-for-sale, which provide additional sources of liquidity, totaled$56.0 million atSeptember 30, 2022 . Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided by operating activities was$28.8 million for the nine months endedSeptember 30, 2022 , compared to$13.4 million for the nine months endedSeptember 30, 2021 . Net cash used in investing activities, which consists primarily of disbursements for loan originations and the purchase of securities, offset by principal collections on loans and proceeds from maturing securities, was$169.1 million and$15.5 million for the nine months endedSeptember 30, 2022 , andSeptember 30, 2021 , respectively. Net cash provided by financing activities was$46.6 million for the nine months endedSeptember 30, 2022 compared to net cash used in of$327.8 million for the nine months endedSeptember 30, 2021 respectively. Net cash provided by financing activities for the nine months endedSeptember 30, 2022 , consisted primarily of increases in deposits of$40.1 million and net increase of$10.0 million in short-term borrowing from FHLB offset by repayments of$3.1 million in repayments in PPPLF advances from theFederal Reserve , and purchases of treasury stock of$273,000 . Net cash used in financing activities for the nine months endedSeptember 30, 2021 , consisted primarily of a decrease in deposits of$290.9 million and repayments of$44.9 million from the PPPLF offset by proceeds of$10.0 million from the issuance of subordinated debt. We are committed to maintaining a strong liquidity position. We monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments. Certificates of deposit due within one year ofSeptember 30, 2022 , totaled$43.1 million of total deposits. Included in certificate of deposits of$43.1 million due within one year, is approximately$23.0 million of brokered certificate of deposits maturing in one year. If these deposits do not remain with us, we will be required to seek other sources of funds, including other deposits and FHLB advances. Depending on market conditions, we may be required to pay higher rates on such deposits or borrowings than we currently pay. We believe, however, based on past experience that a significant portion of such deposits 65
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will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.
In response to rising inflation, theFederal Reserve Board has raised interest rates and anticipates ongoing increases in order to attain a stance of monetary policy to lower inflation. Management continues to closely monitor interest rate sensitivity trends through the Company's asset liability management program. Capital Management. The Bank is subject to various regulatory capital requirements, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. AtSeptember 30, 2022 , the Bank exceeded all regulatory capital requirements and was considered "well capitalized" under regulatory guidelines.
Information presented forSeptember 30, 2022 , andDecember 31, 2021 , reflects the Basel III capital requirements that became effectiveJanuary 1, 2015 , for the Bank. Under these capital requirements and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk- weightings and other factors. Federal bank regulators require the Bank maintain minimum ratios of core capital to adjusted average assets of 4.0%, common equity Tier 1 capital to risk-weighted assets of 4.5%, Tier 1 capital to risk-weighted assets of 6.0% and total risk-based capital to risk-weighted assets of 8.0%. AtSeptember 30, 2022 , the Bank met all the capital adequacy requirements to which it was subject. AtSeptember 30, 2022 , the Bank was "well capitalized" under the regulatory framework for prompt corrective action. InFebruary 2022 , the Company infused$5.0 million to the Bank as Tier 1 capital. To be "well capitalized," the Bank must maintain minimum leverage, common equity Tier 1 risk-based, Tier 1 risk-based and total risk-based capital ratios of at least 5.0%, 6.5%, 8.0% and 10.0%, respectively. Management believes that no conditions or events have occurred sinceSeptember 30, 2022 that would materially adversely change the Bank's capital classifications. The Bank's actual capital amounts and ratios are presented in the table (dollars in thousands): To Be Well Capitalized Under the Prompt Capital Adequacy Corrective Action Actual Purposes Provision (Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio As ofSeptember 30, 2022 Total risk-based capital (to risk-weighted assets)$ 56,429 11.7 % $>38,561 > 8.0% $>48,201 >10.0% Tier 1 capital (to risk-weighted assets) 53,040 11.0 >28,920 > 6.0% >38,561 > 8.0% Tier 1 capital (to average assets) 53,040 9.1 >23,425 > 4.0% >29,282 > 5.0% Tier 1 common equity (to risk -weighted assets) 53,040 11.0 >21,690 > 4.5% >31,330 > 6.5% 66
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As ofDecember 31, 2021 Total risk-based capital (to risk-weighted assets)$ 47,797 13.1 % $>29,168 > 8.0% $>36,460 >10.0% Tier 1 capital (to risk-weighted assets) 45,429 12.5 >21,876 > 6.0% >29,168 > 8.0% Tier 1 capital (to average assets) 45,429 8.2 >22,045 > 4.0% >27,557 > 5.0% Tier 1 common equity (to risk -weighted assets) 45,429 12.5 >16,407 > 4.5% >23,699 > 6.5% As a licensed mortgagee, the Bank is subject to the rules and regulations of theDepartment of Housing and Urban Development ("HUD"),Federal Housing Authority ("FHA") and state regulatory authorities with respect to originating, processing and selling loans. Those rules and regulations, among other things, require the maintenance of minimum net worth levels (which vary based on the portfolio of FHA loans originated by the Bank). Failure to meet the net worth requirements could adversely impact the ability of the Bank to originate loans and access secondary markets. As ofSeptember 30, 2022 , andDecember 31, 2021 , the Bank maintained the minimum required net worth levels. The Bank must hold a capital conservation buffer above its minimum risk-based capital requirements. As ofSeptember 30, 2022 , the Bank is required to maintain a capital conservation buffer of 2.50%. AtSeptember 30, 2022 , the Bank met the capital conservation buffer requirements. Failure to maintain the full amount of the buffer will result in restrictions on the Bank's ability to make capital distributions and to pay discretionary bonuses to executive officers.
Off-Balance Sheet Arrangements and Contractual Obligations
Commitments. As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit and unused lines of credit. While these contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make. AtSeptember 30, 2022 , we had outstanding commitments to originate loans of$42.3 million , unused lines of credit totaling$92.5 million and$700,000 in stand-by letters of credit outstanding. We had$45.1 million outstanding in letters of credit issued by the FHLB to secure certain deposits. We anticipate that we will have sufficient funds available to meet our current lending commitments. Certificates of deposit that are scheduled to mature in less than one year fromSeptember 30, 2022 , totaled$43.1 million of total deposits. Included in certificate of deposits of$43.1 million due within one year, is approximately$23.0 million of brokered certificate of deposits maturing in one year. Management expects that a substantial portion of the maturing certificates of deposit will be renewed. However, if a substantial portion of these deposits is not retained, we may utilizeFederal Home Loan Bank advances or raise interest rates on deposits to attract new accounts, which may result in higher levels of interest expense. Contractual Obligations. In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include data processing services, operating leases for equipment, agreements with respect to borrowed funds and deposit liabilities.
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