WILLIAM PENN BANCORPORATION Forward-Looking Statements
Statements contained in this report that are not historical facts may constitute forward-looking statements (within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended), which involve significant risks and uncertainties. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and is including this statement for purposes of invoking these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are generally identifiable by the use of the words "believe," "expect," "intend," "anticipate," "estimate," "project," "plan," or similar expressions. The Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain and actual results may differ from those predicted. The Company undertakes no obligation to update these forward-looking statements in the future. The Company cautions readers of this report that a number of important factors could cause the Company's actual results to differ materially from those expressed in forward-looking statements. Factors that could cause actual results to differ from those predicted and could affect the future prospects of the Company include, but are not limited to: (i) general economic conditions, either nationally or in our market area, that are worse than expected (including higher inflation and its impact on national and local economic conditions); (ii) changes in the interest rate environment that reduce our interest margins, reduce the fair value of financial instruments or reduce the demand for our loan products; (iii) increased competitive pressures among financial services companies; (iv) changes in consumer spending, borrowing and savings habits; (v) changes in the quality and composition of our loan or investment portfolios; (vi) changes in real estate market values in our market area; (vii) decreased demand for loan products, deposit flows, competition, or decreased demand for financial services in our market area; (viii) major catastrophes such as earthquakes, floods or other natural or human disasters and infectious disease outbreaks, including the current coronavirus (COVID-19) pandemic, the related disruption to local, regional and global economic activity and financial markets, and the impact that any of the foregoing may have on us and our customers and other constituencies; (ix) legislative or regulatory changes that adversely affect our business or changes in the monetary and fiscal policies of theU.S. government, including policies of theU.S. Treasury and theFederal Reserve Board ; (x) technological changes that may be more difficult or expensive than expected; (xi) success or consummation of new business initiatives may be more difficult or expensive than expected; (xii) our ability to successfully execute our business plan and integrate the business operations of acquired businesses into our business operations, (xiii) the inability to successfully deploy the proceeds raised in our recently completed second-step conversion offering; (xiv) adverse changes in the securities markets; (xv) the inability of third party service providers to perform; and (xvi) changes in accounting policies and practices, as may be adopted by bank regulatory agencies or theFinancial Accounting Standards Board .
Critical Accounting Policies
We consider accounting policies involving significant judgments and assumptions by management that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies. We consider these accounting policies to be our critical accounting policies. The judgments and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances. Actual results could differ from these judgments and estimates under different conditions, resulting in a change that could have a material impact on the carrying values of our assets and liabilities and our results of operations.
Allowance for Loan Losses
We consider the allowance for loan and losses to be a critical accounting
policy. The allowance for loan losses is determined by management based upon
portfolio segments, past historical experience, evaluation of estimated losses
and impairment in the loan portfolio, current economic conditions, and other
pertinent factors. Management also considers risk characteristics by portfolio
segments including, but not limited to, renewals and real estate valuations. The
allowance for loan losses is maintained at a level that management considers
adequate to provide for estimated losses and impairment based upon an evaluation
of known and inherent risk in the loan portfolio. Loan impairment is evaluated
based on the fair value of collateral or present value of expected cash flows.
While management uses the best information available to make such evaluations,
future adjustments to the allowance may be necessary if economic conditions
differ substantially from the assumptions used in making the evaluations.
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The allowance for loan losses is established through a provision for loan losses charged to expense, which is based upon past loan loss experience and an evaluation of estimated losses in the current loan portfolio, including the evaluation of impaired loans. Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment. Among the material estimates required to establish the allowance are: overall economic conditions; value of collateral; strength of guarantors; loss exposure at default; the amount and timing of future cash flows on impaired loans; and determination of loss factors to be applied to the various segments of the portfolio. All of these estimates are susceptible to significant change. Management regularly reviews the level of loss experience, current economic conditions and other factors related to the collectability of the loan portfolio. Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. In addition, theFederal Deposit Insurance Corporation and thePennsylvania Department of Banking and Securities , as an integral part of their examination process, periodically review our allowance for loan losses. Our financial results are affected by the changes in and the level of the allowance for loan losses. This process involves our analysis of complex internal and external variables, and it requires that we exercise judgment to estimate an appropriate allowance for loan losses. As a result of the uncertainty associated with this subjectivity, we cannot assure the precision of the amount reserved, should we experience sizeable loan losses in any particular period. For example, changes in the financial condition of individual borrowers, economic conditions, or the condition of various markets in which collateral may be sold could require us to significantly decrease or increase the level of the allowance for loan losses. Such an adjustment could materially affect net income as a result of the change in provision for loan losses. We also have approximately$4.8 million as ofSeptember 30, 2022 in non-performing assets consisting of non-performing loans. Most of these assets are collateral dependent loans where we have incurred credit losses to write the assets down to their current appraised value less selling costs. We continue to assess the collectability of these loans and update our appraisals on these loans each year. To the extent the property values continue to decline, there could be additional losses incurred on these non-performing loans which may be material. In recent periods, we experienced strong asset quality metrics including low levels of delinquencies, net charge-offs and non-performing assets. Management considered market conditions in deriving the estimated allowance for loan losses; however, given the continued economic difficulties and uncertainties and the COVID-19 pandemic, the ultimate amount of loss could vary from that estimate. InJune 2016 , the FASB issued ASU 2016-13: Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Topic 326 amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis, Topic 326 eliminates the probable initial recognition threshold in current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses. This update affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The amendments in this update are expected to be effective for us onJuly 1, 2023 . The Company is actively working on preliminary test calculations and data validation, as well as process and procedural documentation. As ofSeptember 30, 2022 , the Company began performing a parallel run of the new expected lifetime loss model with its current incurred loss model and is currently evaluating the results and assumptions of its new model to estimate lifetime credit losses. The Company expects to recognize a one-time cumulative-effect adjustment to the allowance for loan losses as ofJuly 1, 2023 , but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements.
The acquisition method of accounting for business combinations requires us to record assets acquired, liabilities assumed, and consideration paid at their estimated fair values as of the acquisition date. The excess of consideration paid (or the fair value of the equity of the acquiree) over the fair value of net assets acquired represents goodwill.Goodwill totaled$4.9 million atSeptember 30, 2022 .Goodwill and other indefinite lived intangible assets are not amortized on a recurring basis, but rather are subject to periodic impairment testing. The provisions of Accounting Standards Codification ("ASC") Topic 350 allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. During the three months endedSeptember 30, 2022 , management considered the then current economic environment caused by the COVID-19 pandemic in its evaluation, and determined, based on the totality of its qualitative assessment, that it is not more likely than not that the carrying value of goodwill is impaired. No goodwill impairment existed during the three months endedSeptember 30, 2022 . 32 Table of Contents Income Taxes
We are subject to the income tax laws of the various jurisdictions where we conduct business and estimate income tax expense based on amounts expected to be owed to these various tax jurisdictions. The estimated income tax expense (benefit) is reported in the Consolidated Statements of Income. The evaluation pertaining to the tax expense and related tax asset and liability balances involves a high degree of judgment and subjectivity around the ultimate measurement and resolution of these matters. Accrued taxes represent the net estimated amount due to or to be received from tax jurisdictions either currently or in the future and are reported in other assets on our Consolidated Statements of Financial Condition. We assess the appropriate tax treatment of transactions and filing positions after considering statutes, regulations, judicial precedent and other pertinent information and maintain tax accruals consistent with our evaluation. Changes in the estimate of accrued taxes occur periodically due to changes in tax rates, interpretations of tax laws, the status of examinations by the authorities and newly issued or enacted statutory, judicial and regulatory guidance that could impact the relative merits of tax positions. These changes, when they occur, impact accrued taxes and can materially affect our operating results. We regularly evaluate our uncertain tax positions and estimate the appropriate level of reserves related to each of these positions. As ofSeptember 30, 2022 , we had net deferred tax assets totaling$9.4 million . We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial carrying amounts of existing assets and liabilities and their respective tax bases. If currently available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax assets and liabilities. These judgments require us to make projections of future taxable income. Management believes, based upon current facts, that it is more likely than not that there will be sufficient taxable income in future years to realize the deferred tax assets. The judgments and estimates we make in determining our deferred tax assets are inherently subjective and are reviewed on a continual basis as regulatory and business factors change. Any reduction in estimated future taxable income may require us to record a valuation allowance against our deferred tax assets. A valuation allowance that results in additional income tax expense in the period in which it is recognized would negatively affect earnings. Our net deferred tax assets were determined based on the current enacted federal tax rate of 21%. Any possible future reduction in federal tax rates, would reduce the value of our net deferred tax assets and result in immediate write-down of the net deferred tax assets though our statement of operations, the effect of which would be material.
Comparison of Financial Condition at
Summary. Total assets decreased$28.5 million , or 3.2%, to$851.5 million atSeptember 30, 2022 , from$880.0 million atJune 30, 2022 , primarily due to a$17.1 million decrease in cash and cash equivalents and a$7.8 million increase in the unrealized loss on available for sale securities net of deferred taxes. Cash and cash equivalents decreased$17.1 million , or 47.1%, to$19.1 million atSeptember 30, 2022 , from$36.2 million atJune 30, 2022 . The decrease in cash and cash equivalents was primarily driven by a$10.0 million decrease in advances from the FHLB ofPittsburgh and a$6.4 million decrease in deposits. Investments. Total investments decreased$9.9 million , or 3.5%, to$277.2 million atSeptember 30, 2022 , from$287.1 million atJune 30, 2022 . The decrease in investments was primarily due to a$10.1 million increase in the gross unrealized loss on available for sale securities. The increase in the gross unrealized loss on available for sale securities is due to current interest rate levels relative to the Company's cost and not credit quality. The Company remains focused on maintaining a high-quality investment portfolio that provides a steady stream of cash flows both in the current and in rising interest rate environments. Loans. Net loans decreased$3.0 million , or 0.6%, to$472.5 million atSeptember 30, 2022 , from$475.5 million atJune 30, 2022 . The interest rate environment has created a highly competitive market for lending. The Company maintains conservative lending practices and is focused on lending to borrowers with high credit quality within its market footprint. Deposits. Deposits decreased$6.4 million , or 1.1%, to$600.2 million atSeptember 30, 2022 , from$606.6 million atJune 30, 2022 . The decrease in deposits was primarily due to a$13.5 million decrease in non-interest-bearing checking accounts, partially offset by a$7.3 million increase in interest-bearing checking accounts. The interest rate environment has created a highly competitive market for deposits. 33
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Borrowings. Borrowings decreased
Stockholders' Equity. Stockholders' equity decreased
The
decrease in stockholders' equity was primarily due to a$7.8 million increase in the accumulated other comprehensive loss component of the unrealized loss on available for sale securities, the repurchase of 397,352 shares at a cost of$4.6 million , or$11.53 per share, and the payment of a$0.03 per share quarterly cash dividend inAugust 2022 totaling$419 thousand , partially offset by$1.0 million of net income recorded during the quarter endedSeptember 30, 2022 . Book value per share measured$12.50 as ofSeptember 30, 2022 compared to$12.91 as ofJune 30, 2022 , and tangible book value per share measured$12.12 as ofSeptember 30, 2022 compared to$12.54 as ofJune 30, 2022 . Tangible book value per share is a non-GAAP financial measure that excludes goodwill and other intangible assets. Please refer to the "Non-GAAP Financial Information" section below for a reconciliation of tangible book value per share to book value per share. As previously announced, onAugust 18, 2022 , the Company's Board of Directors authorized a third stock repurchase program to acquire up to 739,385 shares, or approximately 5.0%, of the Company's outstanding shares, commencing upon the completion of the Company's second stock repurchase program. As ofSeptember 30, 2022 , the Company had repurchased a total of 1,164,288 shares under these repurchase programs at a total cost of$13.7 million , or$11.73 per share.
Results of Operations for the Three Months Ended
Summary
The following table sets forth the income summary for the periods indicated:
Three Months Ended September 30,
Change Fiscal 2022/2021
(Dollars in thousands) 2022 2021 $ %
Net interest income $ 6,241 $ 5,262 $ 979 18.61 %
Provision (recovery) for loan losses - (30)
30 100.00
Non-interest income 282 705 (423) (60.00)
Non-interest expenses 5,563 4,867 696 14.30
Income tax benefit (67) (30) (37) 123.33
Net income $ 1,027 $ 1,160 $ (133) (11.47)
Return on average assets (annualized) 0.48 % 0.56 % Core return on average assets(1) (non-GAAP) (annualized) 0.48 0.41 Return on average equity (annualized) 2.14 2.16 Core return on average equity(1) (non-GAAP) (annualized) 2.14 1.57
Core return on average assets and core return on average equity are non-GAAP
financial measures. Please refer to the "Non-GAAP Financial Information"
(1) section below for a reconciliation of core return on average assets to return
on average assets and core return on average equity to return on average
equity.
General
The Company recorded net income of $1.0 million , or $0.08 per basic and diluted
share, for the three months ended September 30, 2022 , compared to net income of
$1.2 million , or $0.08 per basic and diluted share, for the three months ended
September 30, 2021 . The Company recorded core net income of $1.0 million , or
$0.08 per basic and diluted share, for the three months ended September 30,
2022 , compared to core net income of $846 thousand , or $0.06 per basic diluted
share, for the three months ended September 30, 2021 . Core net income is a
non-GAAP financial measure that excludes certain pre-tax adjustments and the tax
impact of such adjustments, and income tax benefit adjustments. Please refer to
the "Non-GAAP Financial Information" section below for a reconciliation ofcore net income to net income. Net Interest Income
For the three months endedSeptember 30, 2022 , net interest income was$6.2 million , an increase of$979 thousand , or 18.6%, from the three months endedSeptember 30, 2021 . The increase in net interest income was primarily due to an increase in interest income on 34
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investments and loans, partially offset by an increase in interest expense on borrowings and deposits. The net interest margin measured 3.19% for the three months endedSeptember 30, 2022 compared to 2.80% for the three months endedSeptember 30, 2021 . The increase in the net interest margin during the three months endedSeptember 30, 2022 compared to the same period in 2021 was primarily due to an improvement in asset mix during the twelve months endedSeptember 30, 2022 , including a$108.8 million decrease in cash and cash equivalents, a$109.5 million increase in investment securities and an$18.3 million increase in net loans.
Provision for Loan Losses
We did not record a provision for loan losses during the three months endedSeptember 30, 2022 due to improved asset quality metrics and continued low levels of net charge-offs and non-performing assets. The provision for loan losses was a$30 thousand net recovery during the quarter endedSeptember 30, 2021 . The provision credit for the quarter endedSeptember 30, 2021 was primarily due to continued stable asset quality metrics, including continued low levels of net charge-offs and non-performing assets. Our allowance for loan losses totaled$3.3 million , or 0.70% of total loans and 0.92% of total loans, excluding acquired loans, as ofSeptember 30, 2022 , compared to$3.4 million , or 0.71% of total loans and 0.94% of total loans, excluding acquired loans, as ofJune 30, 2022 . Total loans, excluding acquired loans, is non-GAAP financial measure that excludes loans acquired in a business combination. Please refer to the "Non-GAAP Financial Information" section below for a reconciliation of the ratio of the allowance for loan losses to total loans, excluding acquired loans, to the ratio of the allowance for loan losses to total loans. Based on a review of the loans that were in the loan portfolio atSeptember 30, 2022 , management believes that the allowance is maintained at a level that represents its best estimate of inherent losses in the loan portfolio that were both probable and reasonably estimable at such date. Management uses available information to establish the appropriate level of the allowance for loan losses. Future additions or reductions to the allowance may be necessary based on estimates that are susceptible to change as a result of changes in economic conditions and other factors. As a result, our allowance for loan losses may not be sufficient to cover actual loan losses, and future provisions for loan losses could materially adversely affect our operating results. In addition, various bank regulatory agencies, as an integral part of their examination process, periodically review our allowance for loan losses.
Non-Interest Income
The following table sets forth a summary of non-interest income for the periods
indicated:
Three Months Ended September,
(Dollars in thousands) 2022 2021
Service fees $ 211 $ 213 Net gain on sale of securities - 62 Earnings on bank-owned life insurance 273 238 Unrealized (loss) gain on equity securities (273) 105 Net loss on disposition of premises and equipment
(1) - Other 72 87 Total $ 282$ 705
For the three months endedSeptember 30, 2022 , non-interest income totaled$282 thousand , a decrease of$423 thousand , or 60.0%, from the three months endedSeptember 30, 2021 . The decrease was primarily due to a$273 thousand unrealized loss on equity securities recorded during the three months endedSeptember 30, 2022 compared to a$105 thousand unrealized gain on equity securities recorded during the three months endedSeptember 30, 2021 , as well as a$62 thousand gain on sale of securities recorded during the three months endedSeptember 30, 2021 . These decreases to non-interest income were partially offset by a$35 thousand increase in earnings on bank-owned life insurance due to the purchase of additional bank-owned life insurance ("BOLI") during fiscal year endedJune 30, 2022 . 35 Table of Contents Non-Interest Expense The following table sets forth an analysis of non-interest expense for the periods indicated: Three Months Ended September 30, (Dollars in thousands) 2022 2021
Salaries and employee benefits
788 675
Data processing 431 421
Professional fees 263 248
Amortization of intangible assets 48 57
Prepayment penalties - 64
Other 792 690
Total $ 5,563 $ 4,867 For the three months endedSeptember 30, 2022 , non-interest expense totaled$5.6 million , an increase of$696 thousand , or 14.3%, from the three months endedSeptember 30, 2021 . The increase in non-interest expense was primarily due to a$529 thousand increase in salaries and employee benefits due to annual merit increases and a$351 thousand increase in employee stock-based compensation expense associated with the Company's 2022 Equity Incentive Plan. The increase in non-interest expense can also be attributed to a$113 thousand increase in occupancy and equipment expense associated with new branch locations inDoylestown, Pennsylvania andHamilton Township, New Jersey that were opened during the three months endedDecember 31, 2021 . During the three months endedSeptember 30, 2022 , the Company made a strategic decision to close the Bank's branch office located inCollingswood, New Jersey and to consolidate the deposits from this branch office into the Bank'sAudubon, New Jersey branch office after assessing the branch's profitability and its close geographic proximity to theAudubon, New Jersey branch location.
Income Taxes
For the three months endedSeptember 30, 2022 , we recorded a$67 thousand income tax benefit, reflecting an effective tax rate of (7.0)%, compared to a$30 thousand income tax benefit, reflecting an effective tax rate of (2.7)%, for the same period in 2021. The Company recorded a$211 thousand and a$235 thousand income tax benefit related to refunds received associated with the carryback of net operating losses under the CARES Act during the three months endedSeptember 30, 2022 and 2021, respectively. Income tax benefit and the effective tax rate for the three months endedSeptember 30, 2022 and 2021 were impacted by the previously discussed income tax benefit from refunds received associated with the carryback of net operating losses under the CARES Act.
Asset Quality
During the three months endedSeptember 30, 2022 , nonperforming assets decreased 26.3% to$4.8 million from$6.5 million as ofJune 30, 2022 . The decrease in nonperforming assets was driven by a decrease in nonaccrual loans primarily due to the payoff of one$1.7 million one-to four-family residential real estate loan that moved to non-accrual status during the fiscal year endedJune 30, 2022 . During the three months endedSeptember 30, 2022 , the Company received payment from the borrower for full satisfaction of the loan. Total nonperforming loans consisted of 34 loans to 33 unrelated borrowers atSeptember 30, 2022 , as compared to 37 loans to 36 unrelated borrowers atJune 30, 2022 . Interest income related to non-performing loans would have been approximately$75 thousand during the three months endedSeptember 30, 2022 if these loans had performed in accordance with their terms during the period rather than having been on non-accrual. There are circumstances when foreclosure and liquidations are the remedy pursued. However, from time to time, as part of our loss mitigation strategy, we may renegotiate the loan terms (i.e., interest rate, structure, repayment term, etc.) based on the economic or legal reasons related to the borrower's financial difficulties. We had no TDRs during the three months endedSeptember 30, 2022 . Impaired loans atSeptember 30, 2022 included$586 thousand of performing loans whose terms have been modified in TDRs, compared to$593 thousand atJune 30, 2022 . The amount of TDR loans included in impaired loans decreased as a result principal payments and pay-offs. These restructured loans are being monitored by management and are performing in accordance with their restructured terms. AtSeptember 30, 2022 , none of our thirty-four substandard loans with an aggregate balance of$4.8 million were considered TDRs. 36 Table of Contents Average Balances and Yields The following table presents information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting annualized average yields and costs. The yields and costs for the periods indicated are derived by dividing income or expense by the average daily balances of assets or liabilities, respectively, for the periods presented. Loan fees, including prepayment fees, are included in interest income on loans and are not material. Non-accrual loans are included in the average balances only. Any adjustments necessary to present yields on a tax-equivalent basis are insignificant. Three
Months Ended
2022 2021
Average Interest and Yield/ Average Interest and Yield/
(Dollars in thousands) Balance Dividends Cost Balance Dividends Cost
Interest-earning assets:
Loans(1) $ 477,396 $ 5,297 4.44 % $ 459,034 $ 5,214 4.54 %
Investment securities(2) 287,696 1,657 2.30 131,784 664 2.02
Other interest-earning
assets 17,736 129 2.91 160,400 106 0.26
Total interest-earning
assets 782,828 7,083 3.62 751,218 5,984 3.19Non-interest-earning assets 81,924 71,109 Total assets$ 864,752 $ 822,327
Interest-bearing
liabilities:
Interest-bearing accounts$ 130,261 65 0.20 %$ 103,803 19 0.07 % Money market deposit accounts 172,948 216 0.50 145,032 122 0.34 Savings and club accounts 104,450 21 0.08 101,171 26 0.10 Certificates of deposit 129,583 207 0.64 155,786 317 0.81 Total interest-bearing deposits 537,242 509 0.38 505,792 484 0.38 FHLB advances and other borrowings 54,723 333 2.43 35,457 238 2.68 Total interest-bearing liabilities 591,965 842 0.57 541,249 722 0.53
Non-interest-bearing
liabilities:
Non-interest-bearing
deposits 65,149 50,670 Other non-interest-bearing liabilities 15,352 15,520 Total liabilities 672,466 607,439 Total stockholders' equity 192,286 214,888 Total liabilities and equity$ 864,752
$ 822,327 Net interest income $ 6,241$ 5,262 Interest rate spread(3) 3.05 % 2.66 % Net interest-earning assets(4)$ 190,863 $ 209,969 Net interest margin(5) 3.19 % 2.80 % Ratio of interest-earning assets to interest-bearing liabilities 132.24% 138.79% (1) Includes nonaccrual loan balances and interest recognized on such loans. (2) Includes securities available for sale, securities held to maturity, and equity securities. (3) Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities. (4) Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities. (5) Net interest margin represents net interest income divided by average total interest-earning assets. 37 Table of Contents Rate/Volume Analysis
The following table sets forth the effects of changing rates and volumes on our
net interest income. The rate column shows the effects attributable to changes
in rate (changes in rate multiplied by prior volume). The volume column shows
the effects attributable to changes in volume (changes in volume multiplied by
current rate). The total 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 volume.
Three Months Ended 9/30/2022
Compared to
Three Months Ended 9/30/2021
Increase (Decrease)
Due to
(Dollars in thousands) Volume Rate Total
Interest income:
Loans $ 664 $ (581) $ 83
Investment securities (423) 1,416 993
Other interest-earning assets (691) 714 23
Total interest-earning assets (450) 1,549 1,099
Interest expense:
Interest-bearing checking accounts 37 9 46
Money market deposit accounts 250 (156) 94
Savings and club accounts 5 (10) (5)
Certificates of deposit (1,565) 1,455 (110)
Total interest-bearing deposits (1,273) 1,298 25
FHLB advances and other borrowings 233 (138) 95
Total interest-bearing liabilities (1,040) 1,160 120
Net change in net interest income
Non-GAAP Financial Information
In this report, we present the non-GAAP financial measures discussed below, which are used to evaluate our performance and exclude the effects of certain transactions and one-time events that we believe are unrelated to our core business and not necessarily indicative of our current performance or financial position. Management believes excluding these items facilitates greater visibility into our core businesses and underlying trends that may, to some extent, be obscured by inclusion of such items. Tangible Book Value per Share. Tangible book value per share represents our total equity less goodwill and other intangible assets divided by total common shares outstanding. Management believes tangible book value per share helps management and investors better understand and assess changes from period to period in stockholders' equity exclusive of changes in intangible assets. This non-GAAP data should be considered in addition to results prepared in accordance with Generally Accepted Accounting Principles in theU.S. (GAAP), and is not a substitute for, or superior to, GAAP results. The following table provides a reconciliation of tangible book value per share of common stock to book value per share of common stock, the most directly comparable GAAP financial measure, for the periods presented.
(Dollars in thousands, except share and per share data)
As of September 30, As of June 30,
Calculation of Tangible Book Value per Share: 2022 2022
Total stockholders' equity $ 181,194 $ 192,326
Less: goodwill and other intangible assets 5,522 5,570
Total tangible equity (non-GAAP) 175,672 186,756
Total common shares outstanding 14,499,238 14,896,590
Book value per share (GAAP) $ 12.50 $ 12.91
Tangible book value per share (non-GAAP) $
12.12 $ 12.54
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Ratio of the Allowance for Loan Losses to Total Loans, Excluding Acquired Loans.
The ratio of the allowance for loan losses to total loans, excluding acquired loans, represents our allowance for loan losses divided by our gross loans receivable less loans acquired in a business combination. We believe the ratio of the allowance for loan losses to total loans, excluding acquired loans, helps management and investors better understand and assess changes from period to period in the allowance for loan losses exclusive of acquired loans. This non-GAAP data should be considered in addition to results prepared in accordance with Generally Accepted Accounting Principles in theU.S. (GAAP), and is not a substitute for, or superior to, GAAP results. The following table provides a reconciliation of the ratio of the allowance for loan losses to total loans, excluding acquired loans, to the ratio of the allowance for loan losses to total loans, the most directly comparable GAAP financial measure.
(Dollars in thousands)
As of September 30, As of June 30,
Calculation of Allowance for Loan Losses to Total
Loans, Excluding Acquired Loans: 2022 2022
Gross loans receivable $ 476,516 $ 479,669
Less: Loans acquired in a business combination 112,853 118,111
Gross loans receivable, excluding acquired loans
(non-GAAP) 363,663 361,558
Allowance for loan losses $ 3,333 $ 3,409
Allowance for loan losses to total loans (GAAP) 0.70 % 0.71 %
Allowance for loan losses to total loans, excluding acquired loans (non-GAAP)
0.92 % 0.94 %
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Core net income, core earnings per share, core return on average assets, and
core return on average equity. These non-GAAP financial measures exclude
certain pre-tax adjustments and the tax impact of such adjustments, and income
tax benefit adjustments. We believe these ratios help management and investors
better understand the earnings attributable to our core business. This non-GAAP
data should be considered in addition to results prepared in accordance with
Generally Accepted Accounting Principles in the U.S. (GAAP), and is not a
substitute for, or superior to, GAAP results. The following table provides a
reconciliation of these non-GAAP financial measures to the most directly
comparable GAAP financial measures.
For the Three Months Ended
September 30, September 30,
2022 2021
Calculation of core net income:
Net income (GAAP) $ 1,027 $ 1,160
Less pre-tax adjustments: Net gain on sale of securities -
(62)
Net loss on disposition of premises and equipment 1
-
Unrealized loss (gain) on equity securities 273
(105)
Prepayment penalties -
64
Tax impact of pre-tax adjustments (63)
24
Income tax benefit adjustment (211) (235)
Core net income (non-GAAP) $ 1,027 $ 846
Calculation of core earnings per share:
Earnings per share (GAAP) $ 0.08 $ 0.08
Less pre-tax adjustments: Net gain on sale of securities -
-
Net loss on disposition of premises and equipment -
-
Unrealized loss (gain) on equity securities 0.02
-
Prepayment penalties -
-
Tax impact of pre-tax adjustments -
-
Income tax benefit adjustment (0.02)
(0.02)
Core earnings per share (non-GAAP) $ 0.08 $
0.06
Calculation of core return on average assets: Return on average assets (GAAP) 0.48%
0.56%
Less pre-tax adjustments: Net gain on sale of securities -
(0.03)
Net loss on disposition of premises and equipment -
-
Unrealized loss (gain) on equity securities 0.13
(0.05)
Prepayment penalties -
0.03
Tax impact of pre-tax adjustments (0.03)
0.01
Income tax benefit adjustment (0.10)
(0.11)
Core return on average assets (non-GAAP) 0.48%
0.41%
Average assets $ 864,752 $ 822,327
Calculation of core return on average equity:
Return on average equity (GAAP) 2.14% 2.16%
Less pre-tax adjustments: Net gain on sale of securities -
(0.11)
Net loss on disposition of premises and equipment -
-
Unrealized loss (gain) on equity securities 0.57
(0.20)
Prepayment penalties -
0.12
Tax impact of pre-tax adjustments (0.13)
0.04
Income tax benefit adjustment (0.44)
(0.44)
Core return on average equity (non-GAAP) 2.14%
1.57%
Average equity $ 192,286 $ 214,888
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Liquidity and Capital Resources
We maintain liquid assets at levels we believe are adequate to meet our liquidity needs. The Bank's liquidity ratio was 41.7% as ofSeptember 30, 2022 compared to 44.1% as ofJune 30, 2022 . We adjust our liquidity levels to fund deposit outflows, pay real estate taxes on mortgage loans, repay our borrowings, and to fund loan commitments. We also adjust liquidity as appropriate to meet asset and liability management objectives. Our liquidity ratio is calculated as the sum of total cash and cash equivalents and unencumbered investments securities divided by the sum of total deposits and advances from the FHLB ofPittsburgh . The Bank maintains a liquidity ratio policy that requires this metric to be above 10.0% to provide for the effective management of extension risk and other interest rate risks. Our primary sources of liquidity are deposits, amortization and prepayment of loans and mortgage-backed securities, maturities of investment securities, other short-term investments, earnings, and funds provided from operations. While scheduled principal repayments on loans and mortgage-backed securities are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by market interest rates, economic conditions, and rates offered by our competition. We set the interest rates on our deposits to maintain a desired level of total deposits. In addition, we invest excess funds in short-term interest-earning assets, which provide liquidity to meet lending requirements. Liquidity management is both a daily and long-term function of business management. If we require funds beyond our ability to generate them internally, borrowing agreements exist with the FHLB ofPittsburgh to provide advances. As a member of the FHLB ofPittsburgh , we are required to own capital stock in the FHLB ofPittsburgh and are authorized to apply for advances on the security of such stock and certain of our mortgage loans and other assets (principally securities which are obligations of, or guaranteed by,the United States ), provided certain standards related to creditworthiness have been met. We had an available borrowing limit of$296.1 million with the FHLB ofPittsburgh atSeptember 30, 2022 . There were$55.0 million of FHLB ofPittsburgh advances outstanding atSeptember 30, 2022 . AtSeptember 30, 2022 , we had outstanding commitments to originate loans of$20.0 million , unfunded commitments under lines of credit of$72.1 million and$30 thousand of standby letters of credit. AtSeptember 30, 2022 , certificates of deposit scheduled to mature in less than one year totaled$78.9 million . Based on prior experience, management believes that a significant portion of such deposits will remain with us, although there can be no assurance that this will be the case. In the event a significant portion of our deposits are not retained by us, we will have to utilize other funding sources, such as FHLB ofPittsburgh advances, in order to maintain our level of assets. Alternatively, we could reduce our level of liquid assets, such as our cash and cash equivalents. In addition, the cost of such deposits may be significantly higher if market interest rates are higher at the time of renewal.
Inflation
Substantially all of the Company's assets and liabilities relate to banking
activities and are monetary. The consolidated financial statements and related
financial data are presented following GAAP. GAAP currently requires the Company
to measure the financial position and results of operations in terms of
historical dollars, except for securities available for sale, impaired loans,
and other real estate loans that are measured at fair value. Changes in the
value of money due to rising inflation can cause purchasing power loss.
Management's opinion is that movements in interest rates affect the financial
condition and results of operations to a greater degree than changes in the rate
of inflation. It should be noted that interest rates and inflation do affect
each other but do not always move in correlation with each other. The Company's
ability to match the interest sensitivity of its financial assets to the
interest sensitivity of its liabilities in its asset/liability management may
tend to minimize the effect of changes in interest rates on the Company's
performance.
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