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 and for the three and six months endedMarch 31, 2022 litigation settlement charges incurred in connection with the settlement of pending litigation ( see Part II, Item 1 there of). 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 Company is subject to regulation as a bank holding company by theBoard of Governors of theFederal Reserve System . 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 34 Table of Contents
based upon an evaluation of known and inherent losses in the loan portfolio that are both probable and reasonable to estimate. For the quarter endedMarch 31, 2022 , the analysis took into account the exposure to credit deterioration 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 35 Table of Contents 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. 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 ofMarch 31, 2022 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. 36 Table of ContentsU.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 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 is 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. Forward-looking statements can be identified by the use of words such as "may," "should," "will," "could," "estimates," "predicts," "potential," "continue," "anticipates," "believes," "plans," "expects," "future," "intends," "projects," the negative of these terms and other comparable terminology. These forward-looking statements include, but are not limited to, statements regarding the outlook and expectations of the Company with regards to the proposed merger (the "Merger") with and intoFulton pursuant to the Agreement and Plan of Merger datedMarch 1, 2022 (the "Merger Agreement"), the strategic and financial benefits of the Merger, including the expected impact of the Merger on the Company's future financial performance pending the completion of the Merger, and the timing of the closing of the Merger. Forward-looking statements are neither historical facts, nor assurance of future performance. Instead, the statements are based on current beliefs, expectations and assumptions regarding the future of the Company's business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of The Company's control, and actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not unduly rely on any of these forward-looking statements. Any forward-looking statement is based only on information currently available and speaks only as of the date when made. The Company undertakes no obligation, other than as required by law, to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Forward-looking statements contained in this Form 10-Q are subject to, among others, the following risks, uncertainties and assumptions:
•The possibility that the anticipated benefits of the Merger, including anticipated cost savings and strategic gains, are not realized when expected or at all, including as a result of the impact of, or challenges arising from, the integration of The Company intoFulton or as a result of the strength of the economy, competitive factors in the areas where The Company andFulton do business, or as a result of other unexpected factors or events; •The timing and completion of the Merger is dependent on the satisfaction of customary closing conditions, including approval by The Company shareholders, which cannot be assured and various other factors that cannot be predicted with precision at this point;
•The occurrence of any event, change or other circumstances that could give rise to the right of one or both of the parties to terminate the Merger Agreement;
•Completion of the Merger is subject to bank regulatory approvals and such approvals may not be obtained in a timely manner or at all or may be subject to conditions which may cause additional significant expense or delay the consummation of the Merger;
•Potential adverse reactions or changes to business or employee relationships, including those resulting from the announcement or completion of the Merger;
•The outcome of any legal proceedings related to the Merger which may be
instituted against
37
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•Unanticipated challenges or delays in the integration of The Company's business intoFulton's business and or the conversion of The Company's operating systems and customer data ontoFulton's may significantly increase the expense associated with the Merger; and •Other factors that may affect future results of the Company andFulton . In addition to the foregoing and the 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 , including Item 1A of Part II of this Form 10-Q. 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
COMPARISON OF FINANCIAL CONDITION AT
Total assets decreased by$91.5 million to approximately$1.0 billion atMarch 31, 2022 from$1.1 billion atSeptember 30, 2021 . Net loans receivable decreased$67.7 million to$550.5 million atMarch 31, 2022 from$618.2 million atSeptember 30, 2021 . The decrease was primarily related to paydowns in construction and land development 38
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loans and one-to-four residential mortgage family loans, partially offset by increases in commercial business loans. The investment portfolio decreased fromSeptember 30, 2021 toMarch 31, 2022 by$10.2 million to$315.8 million primarily as a result of paydowns of securities, while cash and cash equivalents decreased by$12.8 million . Total liabilities decreased by$81.2 million betweenSeptember 30, 2021 andMarch 31, 2022 to$888.8 million due primarily to a$40.7 million decrease in deposits and a$25.2 decrease in borrowings. AtMarch 31, 2022 , the Company had FHLB advances outstanding of$206.8 million , as compared to$232.0 million atSeptember 30, 2021 as the Company allowed higher costing FHLB borrowings as well as certificates of deposit to run-off as they matured in order to reduce its cost of funds. All of the FHLB borrowings atMarch 31, 2022 had maturities of less than three years. Total stockholders' equity decreased by$10.3 million to$120.1 million atMarch 31, 2022 from$130.4 million atSeptember 30, 2021 . The decrease was primarily due to unrealized losses in the investment portfolio of$13.5 million . These unrealized losses were due to the increase in interest rates during the latter part of theMarch 2022 quarter. The decline also reflected the effects of the litigation settlements described above which were the primary cause of the$4.7 million loss experienced for the six months endedMarch 31, 2022 . The decrease in stockholders' equity also reflected the effect dividend payments totaling$1.1 million during the six months endedMarch 31, 2022 . Partially offsetting the decrease were unrealized gains of$8.8 million in the interest rate swap participation agreement portfolio.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED
Net income (loss). The Company reported a net loss of$6.5 million , or ($0.84 ) per basic and diluted share, for the quarter endedMarch 31, 2022 as compared to net income of$1.7 million , or$0.22 per basic share and$0.21 per diluted share, for the same quarter in fiscal 2021. For the six months endedMarch 31, 2022 , the Company reported a net loss of$4.7 million , or ($0.60 ) per basic and diluted share, as compared to net income of$3.6 million , or$0.44 per basic and$0.44 per diluted share, for the same period in fiscal 2021. The losses incurred for the fiscal 2022 periods were attributable to the previously disclosed litigation settlements described in Item 1 of Part II below as well as expenses incurred in conjunction with the pending merger withFulton announced onMarch 2, 2022 . Net interest income. Although average interest-earning assets declined by$125.6 million for the three months endedMarch 31, 2022 as compared to the same period in 2021, net interest income for the second quarter of fiscal 2022 amounted to$5.7 million , decreasing by only$37,000 as compared to the same period in fiscal 2021. The$673,000 decrease in interest income was offset almost completely by a decrease of$636,000 in interest paid on deposits and borrowings. The weighted average cost of borrowings and deposits decreased 7 basis points to 1.45% for the quarter endedMarch 31, 2022 from 1.52% for the same period in fiscal 2021 due to decreases in market rates of interest prior toMarch 2022 which affected both deposit and borrowing costs. Although the weighted average yield on interest-earning assets increased during the quarter endedMarch 31, 2022 , the decrease in earning asset balances led to an overall decline in interest income. The weighted average yield on our interest-earning assets increased by 16 basis points, to 3.61% for the quarter endedMarch 31, 2022 from the comparable period in fiscal 2021 primarily do the change in investment mix as investment paydowns were primarily applicable to lower yielding amortizing securities Average interest-earning assets declined by$113.4 million for the six months endedMarch 31, 2022 as compared to the same period in fiscal 2021. However, due to relative shifts in yields earned and rates paid which offset such decline in part, net interest income was$11.6 million , increasing by$209,000 as compared to the same period in fiscal 2021. The increase was due to a$1.3 million , or 17.2%, decrease in interest paid on deposits and borrowings partially offset by a decrease of$1.1 million , or 5.9%, in interest income. The decrease in interest income was primarily due to the decrease in the weighted average balance of interest-earning assets. The weighted average cost of borrowings and deposits decreased to 1.45% during the six months endedMarch 31, 2022 from 1.55% during the comparable period in fiscal 2021 primarily due to decreases in market rates of interest until recently. For the three and six months endedMarch 31, 2022 , the net interest margin was 2.33% and 2.32%, respectively, compared to 2.08% and 2.05%, respectively, for the same periods in fiscal 2021. The margin improvement 39
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experienced in the fiscal 2022 periods in large part reflected the more rapid
decline in interest-bearing liability costs compared to asset yields in response
to the declining interest rate environment that was in effect through most of
the fiscal 2022 periods.
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.
Three Months Three Months
Ended March 31, Ended March 31,
2022 2021
Average Average
Average Yield/ Average Yield/
Balance Interest Rate (1) Balance Interest Rate (1)
Interest-earning assets:
Investment securities $ 201,510 $ 1,824 3.68 % $ 204,708 $ 1,643 3.25 %
Mortgage-backed securities 123,045 882 2.91 197,221 1,428 2.94
Loans receivable (2) 571,133 5,941 4.22 612,255 6,388 4.23
Other interest-earning assets 92,737 145 0.63 99,802 6 0.02
Total interest-earning assets 988,425 8,792 3.61 1,113,986 9,465 3.45
Cash and non-interest-bearing
balances 2,329 2,198
Non-interest-earning assets 56,324 65,628
Total assets $ 1,047,078 $ 1,181,812
Interest-bearing liabilities:
Savings accounts $ 58,432 $ - - $ 64,803 $ 2 0.01
Checking and money market
accounts 376,172 827 0.89 372,493 873 0.95
Certificate accounts 222,615 934 1.70 293,826 1,085 1.50
Total deposits 657,219 1,761 1.09 731,122 1,960 1.09
Advances from Federal Home Loan
Bank 207,346 1,342 2.62 267,599 1,779 2.70
Advances from borrowers for
taxes and insurance 2,727 1 0.15 1,994 1 0.20
Total interest-bearing
liabilities 867,292 3,104 1.45 1,000,715 3,740 1.52
Non-interest-bearing liabilities
Non-interest-bearing demand
accounts 35,343 29,781
Other liabilities 17,191 20,464
Total liabilities 919,826 1,050,960
Stockholders' equity 127,252 130,852
Total liabilities and
stockholders' equity $ 1,047,078 $ 1,181,812
Net interest-earning assets $ 121,133 $ 113,271
Net interest income, interest
rate spread $ 5,688 2.16 % $ 5,725 1.93 %
Net interest margin (3) 2.33 % 2.08 %
Average interest-earning assets
to average interest-bearing
liabilities 113.97 % 111.32 %
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Six Months Ended Six Months Ended
March 31, March 31,
2022 2021
Average Average
Average Yield/ Average Yield/
Balance Interest Rate (1) Balance Interest Rate (1)
Interest-earning assets: Investment securities (1)$ 197,838 $ 3,586 3.64 %$ 207,264 $ 3,357 3.25 % Mortgage-backed securities 126,491 1,918 3.04 210,837 3,044 2.90 Loans receivable (2) 586,161 12,228 4.18 606,888 12,663 4.18 Other interest-earning assets 91,788 299 0.65 90,711 90 0.20 Total interest-earning assets 1,002,278 18,031 3.61 1,115,700 19,154 3.44 Cash and non interest-bearing balances 2,474 2,352 Non-interest-earning assets 60,098 67,520 Total assets$ 1,064,850 $ 1,185,572 Interest-bearing liabilities: Savings accounts$ 61,375 $ 2 0.01$ 62,367 $ 3 0.01 Checking and money market accounts 376,902 1,669 0.89 372,121 1,839 0.99 Certificate accounts 231,026 2,038 1.77 282,764 2,287 1.62 Total deposits 669,303 3,709 1.11 717,252 4,129 1.15 Advances from Federal Home Loan Bank 212,806 2,704 2.55 279,900 3,615 2.59 Advances from borrowers for taxes and insurance 2,468 1 0.08 2,306 2 0.17 Total interest-bearing liabilities 884,577 6,414 1.45 999,458 7,746 1.55 Non-interest-bearing liabilities Non-interest-bearing demand accounts 35,772 29,160 Other liabilities 14,890 25,875 Total liabilities 935,239 1,054,493 Stockholders' equity 129,611 131,079 Total liabilities and stockholders' equity$ 1,064,850 $ 1,185,572 Net interest-earning assets$ 117,701 $ 116,242 Net interest income, interest rate spread$ 11,617 2.15 %$ 11,408 1.89 % Net interest margin (3) 2.32 % 2.05 % Average interest-earning assets to average interest-bearing liabilities 113.31 % 111.63 %
(1) Yields and rates for the three and six 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 a provision for loan losses of$2.9 million for the three and six months endedMarch 31, 2022 compared to no provision for loan losses in either of the same periods in fiscal 2021. During the three and six months endingMarch 31, 2022 , the Company recorded eight charge offs totaling$3.5 million while during the same periods the Company recorded recoveries aggregating$7,000 and$8,000 , respectively. During the three and six months endingMarch 31, 2021 , the Company recorded no charge offs while during the same periods the Company recorded recoveries aggregating$15,000 and$51,000 , respectively. The preponderance of the charge-offs during the three and six months endedMarch 31, 2022 were attributable to the previously disclosed litigation settlements. The allowance for loan losses totaled$7.9 million , or 1.4% of total loans and 182.8% of total non-performing loans atMarch 31, 2022 (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 atMarch 31, 2022 was sufficient to cover all inherent and known losses associated with the loan
portfolio at such date.
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AtMarch 31, 2022 , the Company's non-performing assets totaled$8.2 million or 0.8% of total assets as compared to$12.5 million or 1.1% of total assets atSeptember 30, 2021 . The decline reflected the effects of the litigation settlements described above. Non-performing assets atMarch 31, 2022 included two construction loans aggregating$2.0 million , 16 one-to-four family residential mortgage loans aggregating$2.4 million and two pieces of other real estate owned that related to two non-performing construction loans aggregating$3.8 million that were foreclosed during the third quarter of fiscal 2021 (and are part of the Island View relationship which was the subject of the litigation described below in Item 1 of Part II). AtMarch 31, 2022 , the Company had two loans totaling$692,000 that were classified as troubled debt restructurings ("TDRs"). The two TDRs are on non-accrual and consist of loans secured by two single-family residential properties. Both TDRs are performing in accordance with the restructured terms. AtMarch 31, 2022 , the Company had$8,000 of loans delinquent 30-89 days as to interest and/or principal. Such amount consisted of one one-to-four family residential loan in the amount of$8,000 . AtSeptember 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$488,000 and one consumer loan totaling$36,000 . AtMarch 31, 2022 , the Company also had a total of 12 loans aggregating$3.2 million that had been designated "special mention". These loans consist of nine one-to-four family residential loans totaling$1.2 million and three commercial real estate loans totaling$2.0 million . AtSeptember 30, 2021 , the Company had a total of 15 loans aggregating$8.1 million designated as "special mention". These loans consist of 11 one-to-four family residential loans totaling$1.4 million one multi-family loan of$4.6 million and three commercial real estate loans totaling$2.1 million . The following table shows the amounts of non-performing assets (defined as non-accruing loans, accruing loans 90 days or more past due as to principal and/or interest and real estate owned) as ofMarch 31, 2022 andSeptember 30, 2021 . At neither date did the Company have any loans 90 days or more past due that were accruing.March 31 ,September 30, 2022 2021 Non-accruing loans:
One-to-four family residential$ 2,372 $
3,006
Commercial real estate -
1,280
Construction and land development 1,963
4,093
Total non-accruing loans 4,335
8,379
Other real estate owned, net 3,828
4,109
Total non-performing assets$ 8,163 $
12,488
Total non-performing loans as a percentage of loans 0..79 % 1.36 % Total non-performing loans as a percentage of total assets 0.43 % 0.76 % Total non-performing assets as a percentage of total assets 0.81 %
1.13 %
Non-interest income. Non-interest income amounted to$287,000 and$657,000 for the three and six month periods endedMarch 31, 2022 , respectively, compared to$575,000 and$1.1 million , respectively, for the comparable periods in fiscal 2021. The higher level of non-interest income in the fiscal 2021 periods was attributable to favorable valuations of certain interest rate swap participation agreements during fiscal 2021 compared to the fiscal 2022 periods in which losses were recognized such instruments due to the shift in interest rates. Non-interest expense. For the three and six month periods endedMarch 31, 2022 , non-interest expense increased$7.1 million or 163.4% and$7.2 million or 85.4%, respectively, compared to the same periods in the prior fiscal year.
Non-interest expense increased in both of the fiscal 2022 periods primarily due
to the increases in litigation, merger and professional services expenses
associated with the previously disclosed litigation settlements and the
announced proposed merger with
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Income tax expense. For the three month and six-month periods endedMarch 31, 2022 , the Company recorded a tax benefit of$1.9 million and$1.6 million , respectively, compared to income tax expense of$235,000 and$521,000 for the same periods in fiscal 2021. The recognition of tax benefits for the three and six month periods in fiscal 2022 was commensurate with the losses incurred for those periods.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity, represented by cash and cash equivalents, is a product of its operating, investing and financing activities. 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. AtMarch 31, 2022 , the Company's cash and cash equivalents amounted to$70.0 million . In addition, its available-for-sale investment securities amounted to an aggregate of$297.1 million at such date. 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. AtMarch 31, 2022 , the Company had$31.1 million in outstanding commitments to originate loans, not including loans in process. The Company also had commitments under unused lines of credit of$47.9 million and letters of credit outstanding of$60,000 atMarch 31, 2022 . Certificates of deposit as ofMarch 31, 2022 that are maturing in one year or less totaled$157.4 million . 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. AtMarch 31, 2022 , we had$206.8 million in outstanding FHLB advances and had the ability to obtain an additional$120.0 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 ofMarch 31, 2022 . 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.
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
March 31, 2022:
Tier 1 capital (to average assets)
Company 11.60 % N/A N/A
Bank 11.44 % 4.00 % 5.0 %
Tier 1 Common (to risk-weighted assets)
Company 17.32 % N/A N/A
Bank 17.07 % 4.5 % 6.5 %
Tier 1 capital (to risk-weighted assets)
Company 17.32 % N/A N/A
Bank 17.07 % 6.0 % 8.0 %
Total capital (to risk-weighted assets)
Company 18.53 % N/A N/A
Bank 18.28 % 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 %
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 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, commercial business and construction loans (which typically bear adjustable rates indexed to the WSJ Prime) and increased our portfolio of step-up callable agency bonds 44 Table of Contents 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 atMarch 31, 2022 , which we expect, based upon certain assumptions, to reprice or mature in each of the future time periods shown (the "GAP Table"). Except as stated below, the 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 atMarch 31, 2022 , on the basis of contractual maturities, anticipated prepayments, and scheduled rate adjustments within a three-month period and subsequent selected time intervals. The loan amounts in the 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 7.0% to 26.4%. The annual prepayment rate for mortgage-backed securities is assumed to range from 0.6% to 18.2%. For savings accounts, checking accounts and money markets, the decay rates vary on an annual basis over a ten year period. 45 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(2)$ 9,901 $ 28,047 $ 65,818 $ 83,825 $ 137,578 $ 325,169 Loans receivable(3) 150,390 104,338 147,362 72,966 83,541 558,597 Other interest-earning assets (4) 76,149 498 498 110 - 77,255
Total interest-earning assets
Interest-bearing liabilities: Savings accounts$ 2,784 $ 8,102 $ 118,559 $ 10,455 $ 89,858 $ 229,758 Checking and money market accounts 7,515 22,545 45,823 29,890 88,020 193,793 Certificate accounts 25,576 56,804 121,807 7,448 - 211,635 Advances from Federal Home Loan Bank 36,225 58,771 111,797 - - 206,793 Real estate tax escrow accounts 1,706 - - - - 1,706
Total interest-bearing liabilities
Interest-earning assets less interest-bearing liabilities$ 162,634 $ (13,339) $ (184,308) $ 109,108 $ 43,241 $ 117,336 Cumulative interest-rate sensitivity gap(5)$ 162,634 $ 149,295 $ (35,013) $ 74,095 $ 117,336 Cumulative interest-rate gap as a percentage of total assets at March 31, 2022 16.12 % 14.80 %
(3.47) % 7.34 % 11.63 %
Cumulative interest-earning assets as a percentage of cumulative interest-bearing liabilities at March 31, 2022 320.35 % 167.85 %
94.33 % 111.13 % 113.91 %
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%
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increase or decrease in rates, whichever produces a larger decline. The
following table sets forth our NPV as of
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 $ 123,168 $ (33,736) (21.50) % 13.10 % (2.55) %
200 $ 133,592 $ (23,311) (14.86) % 13.93 % (1.72) %
100 $ 144,472 $ (12,431) (7.92) % 14.75 % (0.90) %
Static $ 156,904 $ - - 15.65 % -
(100) $ 164,537 $ 7,634 4.87 % 16.09 % 0.44 %
(200) $ 164,752 $ 7,848 5.00 % 15.91 % 0.26 %
(300) $ 162,058 $ 5,154 3.28 % 15.37 % (0.28) %
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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