MALN BANC The purpose of this analysis is to provide the reader with information relevant to understanding and assessing the Company's financial condition and results of operations for the periods indicated. To fully appreciate this analysis, the reader is encouraged to review the consolidated financial statements and accompanying notes thereto appearing under Item 8 of this report, and statistical data presented in this document.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
See the first page of this Report for information regarding forward-looking statements.
Critical Accounting Policies and Estimates
Management's Discussion and Analysis of Financial Condition and Results of
Operations is based on our consolidated financial statements, which have been
prepared in accordance with U. S. generally accepted accounting principles
("GAAP"). The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses. In particular, the Company has identified the
determination of the ALLL, OREO, fair value measurements, the evaluation of
deferred tax assets, the other-than-temporary impairment evaluation of
securities, and the valuation of our derivative positions to be critical because
management must make subjective and/or complex judgments about matters that are
inherently uncertain and could be most subject to revision as new information
becomes available. Note 2 to our audited consolidated financial statements
contains a summary of our significant accounting policies. Management believes
our policy with respect to the methodology for the determination of the
allowance for loan losses involves more complexity and requires management to
make difficult and subjective judgments which often require assumptions or
estimates about highly uncertain matters. Changes in these judgments,
assumptions or estimates could materially impact results of operations. This
critical policy and its application are periodically reviewed with the Audit
Committee and our Board of Directors.
The Company makes estimates and assumptions that affect the reported amount of
assets and liabilities, disclosure of contingent assets and liabilities at the
date of the consolidated financial statements, and the reported amounts of
revenue and expenses during the reporting period. Such estimates include the
valuation of loans, goodwill, intangible assets, and other long-lived assets,
along with assumptions used in the calculation of income taxes, among others.
These estimates and assumptions are based on management's best estimates and
judgment. Management evaluates its estimates and assumptions on an ongoing basis
using loss experience and other factors, including the current economic
environment, which management believes to be reasonable under the circumstances.
We adjust such estimates and assumptions when facts and circumstances dictate.
Decreased real estate values, volatile credit markets, inflation, and persistent
high unemployment have combined to increase the uncertainty inherent in such
estimates and assumptions. As future events and their effects cannot be
determined with precision, actual results could differ significantly from these
estimates. Changes in estimates resulting from continuing changes in the
economic environment will be reflected in the financial statements in future
periods. There can be no assurances that actual results will not differ from
those estimates.
Operating, Accounting and Reporting Considerations related to COVID-19
The COVID-19 pandemic has negatively impacted the global economy. In response to
the crisis, the Coronavirus Aid, Relief, and Economic Security ("CARES") Act was
passed by Congress and signed into law on March 27, 2020 . The CARES Act provided
an estimated $2.2 trillion to fight the COVID-19 pandemic and stimulate the
economy by supporting individuals and businesses through loans, grants, tax
changes, and other types of relief. Under Section 4013 of the CARES Act and
based upon regulatory guidance promulgated by federal banking regulators,
qualifying short-term loan modifications resulting in payment deferrals that are
attributable to the adverse impact of COVID-19 are not considered to be troubled
debt restructurings ("TDRs"). Some of the provisions applicable to the Company
include, but are not limited to:
• Accounting for Loan Modifications - The CARES Act provides that a
financial institution may elect to suspend (1) the requirements under GAAP
for certain loan modifications that would otherwise be categorized as a
TDR and (2) any determination that such loan modifications would be
considered a TDR, including the related impairment for accounting
purposes. The suspension is applicable for the term of the loanmodification that occurs during the applicable period for a loan that was
not more than 30 days past due as of
not applicable to any adverse impact on the credit of a borrower that is
not related to the pandemic.
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• Paycheck Protection Program - The CARES Act established the Paycheck
Protection Program ("PPP"), an expansion of the Small Business
Administration's 7(a) loan program and the Economic Injury Disaster Loan
Program ("EIDL"), administrated directly by the Small Business
Administration ("SBA").
Also in response to the COVID-19 pandemic, the Board of Governors of the Federal
Reserve System ("FRB"), the Federal Deposit Insurance Corporation ("FDIC"), the
National Credit Union Administration ("NCUA"), the Office of the Comptroller of
the Currency ("OCC"), and the Consumer Financial Protection Bureau ("CFPB"), in
consultation with the state financial regulators (collectively, the "agencies")
issued a joint interagency statement (issued March 22, 2020 ; revised statement
issued April 7, 2020 ). Some of the provisions applicable to the Company include,
but are not limited to:
• Accounting for Loan Modifications - Loan modifications that do not meet
the conditions of the CARES Act may still qualify as a modification that
does not need to be accounted for as a TDR. The agencies confirmed with
FASB staff that short-term modifications made on a good faith basis inresponse to COVID-19 to borrowers who are current on payments prior to any
relief granted to them are not TDRs. This includes short-term (e.g., six
months) modifications such as payment deferrals, fee waivers, extensions
of repayment terms, or insignificant delays in payments. Loan
modifications were made in accordance with Section 4013 of the CARES Act
and the Interagency Statement on Loan Modifications and Reporting for
Financial Institutions working with customers affected by COVID-19 and
therefore were not classified as TDRs.
• Past Due Reporting - With regard to loans not otherwise reportable as past
due, financial institutions are not expected to designate loans with
deferrals granted due to COVID-19 as past due because of the deferral. A
loan's payment date is governed by the due date stipulated in the legal
agreements. If a financial institution agrees to a payment deferral, these
loans would not be considered past due during the period of the deferral.
• Nonaccrual Status and Charge-offs - During short-term COVID-19
modifications, these loans generally should not be reported as nonaccrual
or as classified.
OnDecember 27, 2020 , the 2021 Consolidated Appropriations Act was signed into law. The$900 billion relief package includes legislation that extends certain relief provisions of the CARES Act that were set to expire onDecember 31, 2020 . This new legislation extends this relief to the earlier of 60 days after the national emergency declared by the President is terminated orJanuary 1, 2022 .
Paycheck Protection Program
The CARES Act established the PPP, an expansion of the EIDL, administrated directly by the SBA.
The Company started accepting and processing applications for loans under the PPP in earlyApril 2020 , when the program was officially launched by theSBA and Treasury Department under the CARES Act. The Company sold the entirety of its PPP loan portfolio inDecember 2020 . Liquidity Sources
Management has reviewed all primary and secondary sources of liquidity in
preparation for any unforeseen funding needs due to the COVID-19 pandemic and
prioritized based on available capacity, term flexibility, and cost. As of
Capital Strength
The Company's capital ratios continue to exceed the highest required regulatory benchmark levels. As ofSeptember 30, 2021 , common equity Tier 1 capital ratio was 14.53 percent, Tier 1 leverage ratio was 11.84 percent, Tier 1 risk-based capital ratio was 14.53 percent and the total risk-based capital ratio was 18.33 percent.
Deferral and Modification Requests
The CARES Act provided guidance around the modification of loans as a result of
the COVID-19 pandemic, which outlined, among other criteria, that short-term
modifications made on a good faith basis to borrowers who were current as
defined under the CARES Act prior to any relief, are not TDRs. This includes
short-term modifications such as payment deferrals, fee waivers, extensions of
repayment terms, or other delays in payment that are insignificant. Borrowers
are considered current under the CARES Act and related regulatory guidance if
they are less than 30 days past due on their contractual payments at the time a
modification program is implemented. As of
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September 30, 2021 , the Company had eight COVID-19 pandemic related loan
modification agreements totaling $61.2 million representing 6.7 percent of gross
loans outstanding. Further details regarding these modifications are provided in
the table below. At September 30, 2020 , the Company had 43 COVID-19-related
modified loan deferrals totaling $144.8 million or 13.9% of total loans. Of the
remaining $61.2 million deferrals, approximately $37.3 million or 54.7% of the
deferrals are paying the contractual interest payments. For loans subject to the
program, each borrower is required to resume making regularly scheduled loan
payments at the end of the modification period and the deferred amounts will be
moved to the end of the loan term. Management anticipates this activity will
continue beyond fiscal year 2021.
September 30, 2021
Gross Loans Percentage of
Loan Modified September 30, Gross Loans
Number of Loans Exposure 2021 Modified
(Dollars in thousands)
Residential mortgage 2 $ 667 $ 198,710 0.07 %
Construction and
Development:
Residential and commercial - - 61,492 0.00 %
Land loans - - 2,204 0.00 %
Total Construction and -
Development - 63,696 0.00 %
Commercial:
Commercial real estate 6 60,567 426,915 6.63 %
Farmland - - 10,297 0.00 %
Multi-family - - 66,332 0.00 %
Commercial and industrial - - 115,246 0.00 %
Other - - 10,954 0.00 %
Total Commercial 6 60,567 629,744 6.63 %
Consumer:
Home equity lines of credit - - 13,491 0.00 %
Second mortgages - 5,884 0.00 %
Other - - 2,299 0.00 %
Total Consumer - - 21,674 0.00 %
Total loans 8 $ 61,234 $ 913,824 6.70 %
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September 30, 2020
Loan Gross Loans Percentage of
Deferment September 30, Gross Loans
Number of Loans Exposure 2020 Modified
(Dollars in thousands)
Residential mortgage 5 $ 1,288 $ 242,090 0.12 %
Construction and
Development:
Residential and commercial - - 65,703 0.00 %
Land loans - - 3,110 0.00 %
Total Construction and -
Development - 68,813 0.00 %
Commercial:
Commercial real estate 21 131,348 495,398 12.65 %
Farmland 1 2,288 7,517 0.22 %
Multi-family 2 3,718 67,767 0.36 %
Commercial and industrial 10 5,547 116,584 0.53 %
Other - - 10,142 0.00 %
Total Commercial 34 142,901 697,408 13.75 %
Consumer:
Home equity lines of credit 3 579 17,128 0.06 %
Second mortgages 1 17 10,711 0.00 %
Other - - 2,851 0.00 %
Total Consumer 4 596 30,690 0.06 %
Total loans 43 $ 144,785 $ 1,039,001 13.94 %
Allowance for Loan Losses
The allowance for loan losses represents management's estimate of probable loan
losses inherent in the loan portfolio. Determining the amount of the allowance
for loan losses is considered a critical accounting estimate because it requires
significant judgment and the use of estimates related to the amount and timing
of expected future cash flows on impaired loans, estimated losses on pools of
homogeneous loans based on historical loss experience, and consideration of
current economic trends and conditions, all of which may be susceptible to
significant change. The loan portfolio also represents the largest asset type on
the Company's Consolidated Statements of Financial Condition.
The evaluation of the adequacy of the allowance for loan losses includes, among
other factors, an analysis of historical loss rates by loan category applied to
current loan totals and qualitative factors. However, actual loan losses may be
higher or lower than historical trends, which vary. Actual losses on specified
problem loans, which also are provided for in the evaluation, may vary from
estimated loss percentages, which are established based upon a limited number of
potential loss classifications. The allowance for loan losses is established
through a provision for loan losses charged to expense. Management believes that
the current allowance for loan losses will be adequate to absorb loan losses on
existing loans that may become uncollectible based on the evaluation of known
and inherent risks in the loan portfolio. The evaluation takes into
consideration such factors as changes in the nature and size of the portfolio,
overall portfolio quality, and specific problem loans and current economic
conditions which may affect our borrowers' ability to pay.
The evaluation also details historical losses by loan category and the resulting
loan loss rates which are projected for current loan total amounts. Loss
estimates for specified problem loans are also detailed. In addition, the OCC,
as an integral part of its examination process, periodically reviews our
allowance for loan losses. The OCC may require us to make additional provisions
for loan losses based upon information available at the time of the examination.
All of the factors considered in the analysis of the adequacy of the allowance
for loan losses may be subject to change. To the extent actual outcomes differ
from management estimates, additional provisions for loan losses may be required
that could materially adversely impact earnings in future periods.
Qualitative or environmental factors that may result in further adjustments to
the quantitative analyses include items such as changes in lending policies and
procedures, economic and business conditions, nature and volume of
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the portfolio, changes in delinquency, concentration of credit trends, and value
of underlying collateral. The total net adjustments due to all qualitative
factors increased the allowance for loan losses by approximately $8.2 million to
$11.5 million and $8.6 million to $12.4 million at September 30, 2021 and
September 30, 2020 , respectively.
An unallocated component is maintained to cover uncertainties that could affect
management's estimate of probable losses. The unallocated component of the
allowance reflects the margin of imprecision inherent in the underlying
assumptions used in the methodologies for estimating specific and general losses
in the portfolio.
Other Real Estate Owned
Assets acquired through foreclosure consist of OREO and financial assets
acquired from debtors. OREO is carried at the lower of cost or fair value, less
estimated selling costs. The fair value of OREO is determined using current
market appraisals obtained from approved independent appraisers, agreements of
sale, and comparable market analysis from real estate brokers, where
applicable. Changes in the fair value of assets acquired through foreclosure at
future reporting dates or at the time of disposition will result in an
adjustment in assets acquired through foreclosure expense or net gain (loss) on
sale of assets acquired through foreclosure, respectively.
Fair Value Measurements
The Company uses fair value measurements to record fair value adjustments to
certain assets to determine fair value disclosures. Investment and
mortgage-backed securities available for sale are recorded at fair value on a
recurring basis. Additionally, from time to time, the Company may be required to
record at fair value other assets on a nonrecurring basis, such as impaired
loans, real estate owned and certain other assets. These nonrecurring fair value
adjustments typically involve application of lower-of-cost-or-market accounting
or write-downs of individual assets.
Under the FASB Accounting Standards Codification ("ASC") Topic 820, Fair Value
Measurements, the Company groups its assets at fair value in three levels, based
on the markets in which the assets are traded and the reliability of the
assumptions used to determine fair value. These levels are:
• Level 1 - Valuation is based upon quoted prices for identical instruments
traded in active markets.
• Level 2 - Valuation is based upon quoted prices for similar instruments in
active markets, quoted prices for identical or similar instruments in
markets that are not active, and model-based valuation techniques for
which all significant assumptions are observable in the market.
• Level 3 - Valuation is generated from model-based techniques that use
significant assumptions not observable in the market. These unobservable
assumptions reflect the Company's own estimates of assumptions that market
participants would use in pricing the asset.
Under FASB ASC Topic 820, the Company bases its fair values on the price that
would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. It is our
policy to maximize the use of observable inputs and minimize the use of
unobservable inputs when developing fair value measurements, in accordance with
the fair value hierarchy in FASB ASC Topic 820.
Fair value measurements for assets where there exists limited or no observable
market data and, therefore, are based primarily upon the Company's or other
third-party's estimates, are often calculated based on the characteristics of
the asset, the economic and competitive environment and other such factors.
Therefore, the results cannot be determined with precision and may not be
realized in an actual sale or immediate settlement of the asset. Additionally,
there may be inherent weaknesses in any calculation technique, and changes in
the underlying assumptions used, including discount rates and estimates of
future cash flows, that could significantly affect the results of current or
future valuations. At September 30, 2021 , the Company had $19.9 million of
assets that were measured at fair value on a non-recurring basis using Level 3
measurements.
Income Taxes
We make estimates and judgments to calculate some of our tax liabilities and
determine the recoverability of some of our DTAs, which arise from temporary
differences between the tax and financial statement recognition of revenues and
expenses. We also estimate a reserve for DTAs if, based on the available
evidence, it is more likely than not that some portion of the recorded DTAs will
not be realized in future periods. These estimates and judgments are
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inherently subjective. Historically, our estimates and judgments to calculate
our deferred tax accounts have not required significant revision to our initial
estimates.
In evaluating our ability to recover DTAs, we consider all available positive
and negative evidence, including our past operating results and our forecast of
future taxable income. In determining future taxable income, we make assumptions
for taxable income, the reversal of temporary differences and the implementation
of feasible and prudent tax planning strategies. These assumptions require us to
make judgments about our future taxable income and are consistent with the plans
and estimates we use to manage our business. Any reduction in estimated future
taxable income may require us to record a valuation allowance against our DTAs.
An increase in the valuation allowance would result in additional income tax
expense in the period and could have a significant impact on our future
earnings.
Realization of a DTA requires us to exercise significant judgment and is
inherently uncertain because it requires the prediction of future occurrences.
Our net DTA amounted to $3.5 million and $3.7 million at September 30, 2021 and
at September 30, 2020 , respectively. In accordance with ASC Topic 740, the
Company evaluates on a quarterly basis, all evidence, both positive and
negative, to determine whether, based on the weight of that evidence, a
valuation allowance for DTAs is needed. In conducting this evaluation,
management explores all possible sources of taxable income available under
existing tax laws to realize the net DTA beginning with the most objectively
verifiable evidence first, including available carry back claims and viable tax
planning strategies. If needed, management will look to future taxable income as
a potential source. Management reviews the Company's current financial position
and its results of operations for the current and preceding years. That
historical information is supplemented by all currently available information
about future years. The Company understands that projections about future
performance are subjective. The Company did not have a DTA valuation allowance
as of September 30, 2021 and September 30, 2020 .
Other-Than-Temporary Impairment of Securities
Securities are evaluated on a quarterly basis, and more frequently when market
conditions warrant such an evaluation, to determine whether declines in their
value are other-than-temporary. To determine whether a loss in value is
other-than-temporary, management utilizes criteria such as the reasons
underlying the decline, the magnitude and duration of the decline and whether
management intends to sell or expects that it is more likely than not that it
will be required to sell the security prior to an anticipated recovery of the
fair value. The term "other-than-temporary" is not intended to indicate that the
decline is permanent but indicates that the prospects for a near-term recovery
of value is not necessarily favorable, or that there is a lack of evidence to
support a realizable value equal to or greater than the carrying value of the
investment. Once a decline in value for a debt security is determined to be
other-than-temporary, the other-than-temporary impairment is separated into (a)
the amount of the total other-than-temporary impairment related to a decrease in
cash flows expected to be collected from the debt security (the credit loss) and
(b) the amount of the total other-than-temporary impairment related to all other
factors. The amount of the total other-than-temporary impairment related to the
credit loss is recognized in earnings. The amount of the total
other-than-temporary impairment related to all other factors is recognized in
other comprehensive income.
Derivatives
The Company enters into derivative financial instruments to manage exposures
that arise from business activities that result in the payment of future
uncertain cash amounts, the value of which are determined by interest rates. The
Company is exposed to certain risks arising from both its business operations
and economic conditions. The Company principally manages its exposures to a wide
variety of business and operational risks through management of its core
business activities. The Company manages economic risks, including interest
rate, liquidity, and credit risk primarily by managing the amount, sources, and
duration of its debt funding and the use of derivative financial
instruments. The Company primarily uses interest rate swaps as part of its
interest rate risk management strategy.
Interest rate swaps are valued by a third party, using models that primarily use
market observable inputs, such as yield curves, and are validated by comparison
with valuations provided by the respective counterparties. The credit risk
associated with derivative financial instruments that are subject to master
netting agreements is measured on a net basis by counterparty portfolio. The
significant assumptions used in the models, which include assumptions for
interest rates, are independently verified against observable market data where
possible. Where observable market data is not available, the estimate of fair
value becomes more subjective and involves a high degree of judgment. In this
circumstance, fair value is estimated based on management's judgment regarding
the value that market participants would assign to the asset or liability. This
valuation process takes into consideration factors such as market illiquidity.
Imprecision in estimating these factors can impact the amount recorded on the
balance sheet for an asset or liability with related impacts to earnings or
other comprehensive income.
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Other assets decreased from $16.3 million at September 30, 2020 , to $12.1
million at September 30, 2021 . Other liabilities also decreased from $12.6
million at September 30, 2020 , to $10.5 million at September 30, 2021 , primarily
due to the change in fair value of derivatives related to the Bank's commercial
loan hedging program during fiscal year 2021.
Results of Operations
Net loss for the year endedSeptember 30, 2021 , was$(92,000) as compared to$644,000 earned in fiscal year 2020. For fiscal year 2021, the fully diluted loss per common share was$(0.01) as compared with earnings per common share of$0.08 per share in fiscal year 2020. The decreases in net income and diluted earnings per share were primarily due to the previously disclosed write down and transfer of four commercial real estate loans to held for sale atSeptember 30, 2021 , at a fair value of$32.5 million , and the resultant provision for loan loss expense recorded of$11.2 million . For the year endedSeptember 30, 2021 , the Company's return on average equity (''ROAE'') was (0.06) percent and its return on average assets (''ROAA'') was (0.01) percent. The comparable ratios for the year endedSeptember 30, 2020 were ROAE of 0.45 percent and ROAA of 0.05 percent.
Net Interest Income and Margin
Net interest income is the difference between the interest earned on the portfolio of earning assets (principally loans and investments) and the interest paid for deposits and borrowings, which support these assets.
The following table presents the components of net interest income for the
periods indicated.
Net Interest Income
Year Ended September 30,
2021 2020
Increase Increase
(Decrease) (Decrease)
from Prior Percent from Prior Percent
(In thousands) Amount Year Change Amount Year Change
Interest income:
Loans, including fees $ 36,370 $ (5,071) (12.24) $ 41,441 $ (2,313 ) (5.29 )
Investment securities 1,556 384 32.76 1,172 (17 ) (1.43 )
Dividends, restricted
stock 459 (172 ) (27.26 ) 631 4 0.64
Interest-bearing cash
accounts 31 (1,032 ) (97.08 ) 1,063 (1,202 ) (53.07 )
Total interest income 38,416 (5,891 ) (13.30 ) 44,307 (3,528 ) (7.38 )
Interest expense:
Deposits 6,748 (6,098 ) (47.47 ) 12,846 (1,502 ) (10.47 )
Short-term borrowings 48 48 100.00 - (7 ) (100.00 )
Long-term borrowings 2,029 (869) (29.99) 2,898 25 0.87
Subordinated debt 1,531 - - 1,531 (1 ) (0.07 )
Total interest expense 10,356 (6,919 ) (40.05 ) 17,275 (1,485 ) (7.92 )
Net interest income $ 28,060 $ 1,028 3.80 $ 27,032 $ (2,043 ) (7.03 )
Net interest income is directly affected by changes in the volume and mix of
interest-earning assets and interest-bearing liabilities, which support those
assets, as well as changes in the rates earned and paid.
Net interest income for the year ended September 30, 2021 , increased $1.0
million , or 3.80 percent, to $28.1 million , from $27.0 million for fiscal year
2020. The Company's net interest margin increased 32 basis points to 2.62
percent in fiscal year ended September 30, 2021 , from 2.30 percent for the
fiscal year ended September 30, 2020 . During fiscal year 2021, our net interest
margin was impacted by a decrease in the costs of money market and
interest-bearing demand deposit accounts.
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As previously mentioned, the increase in net interest income during fiscal year
2021 was attributable in part to decrease in costs on money market and
interest-bearing demand deposit accounts. The Company experienced an increase of
$3.4 million in noninterest-bearing deposits during fiscal year 2021 and an
increase of $43.8 million in interest-bearing demand, savings, money market and
time deposits during fiscal year 2021. During the fiscal year ended September
30, 2021 , the Company's net interest spread increased by 46 basis points
reflecting a decrease in both the average yield on interest-earning assets and
the average interest rates paid on interest-bearing liabilities of 20 basis
points and 66 basis points, respectively.
For the fiscal year ended September 30, 2021 , average interest-earning assets
decreased by $101.4 million to $1.1 billion , as compared with the fiscal year
ended September 30, 2020 . The change in average interest-earning asset volume
was primarily due to decreased deposits in other banks combined with decreased
loan volume. Average interest-bearing liabilities decreased by $24.1 million in
fiscal year 2021 compared to fiscal year 2020, due primarily to a decrease in
average borrowings.
The factors underlying the year-to-year changes in net interest income are
re?ected in the tables presented above. The table on page 39 (Average Statements
of Condition with Interest and Average Rates) shows the Company's consolidated
average balance of assets, liabilities and shareholders' equity, the amount of
income produced from interest-earning assets and the amount of expense incurred
from interest-bearing liabilities, and net interest income as a percentage of
average interest-earning assets.
Total Interest Income
Interest income for the year ended September 30, 2021 , decreased by
approximately $5.9 million , or 13.3 percent, as compared with the year ended
September 30, 2020 . This decrease was due primarily to a decrease in the rate
earned on loans combined with decreased loan volume.
The average balance of the Company's loan portfolio decreased
The average loan portfolio represented approximately 91.8 percent of the Company's interest-earning assets (on average) during fiscal year 2021 and 87.5 percent for fiscal year 2020. Average investment securities increased during fiscal year 2021 by$14.4 million compared to fiscal year 2020. Interest-bearing cash decreased in fiscal year 2021 by$72.2 million compared to fiscal year 2020. The average yield on interest-earning assets decreased from 3.78 percent in fiscal year 2020 to 3.58 percent in fiscal year 2021.
Interest Expense
Interest expense for the year ended
The cost of total average interest-bearing liabilities decreased to 1.03 percent for the year endedSeptember 30, 2021 , a decrease of 66 basis points, from 1.69 percent for the year endedSeptember 30, 2020 . The Company's net interest spread, (i.e., the average yield on average interest-earning assets minus the average rate paid on interest-bearing liabilities) increased 46 basis points to 2.55 percent in fiscal year 2021 from 2.09 percent for fiscal year 2020. The increase in fiscal year 2021 reflected a decreased cost in interest-bearing liabilities.
Rate/Volume Analysis
The following table quanti?es the impact on net interest income and margin
resulting from volume changes in average balances of interest earning assets,
interest bearing liabilities, and average related yields and associated funding
costs over the past two years. Any change in interest income or expense
attributable to both changes in volume and changes in rate has been allocated in
proportion to the relationship of the absolute dollar amount of change in each
category.
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Analysis of Variance in Net Interest Income Due to Volume and Rates
Fiscal Year 2021/2020
Increase (Decrease)
Due to Change in:
Average Average Net
(In thousands) Volume Rate Change
Interest-earning assets:
Loans, including fees $ (1,701) $ (3,370 ) $ (5,071 )
Investment securities 391 (7 ) 384
Interest-bearing cash accounts (816 ) (216 ) (1,032 )
Dividends, restricted stock (100 ) (72 ) (172 )
Total interest-earning assets (2,226) (3,665 ) (5,891 ) Interest-bearing liabilities: Money market deposits
904 (3,188 ) (2,284 )
Savings deposits 7 2 9
Certificates of deposit (1,846 ) (1,134 ) (2,980 )
Other interest-bearing deposits 227 (1,070 ) (843 )
Total interest-bearing deposits (708 ) (5,390 ) (6,098 )
Borrowings (707) (114 ) (821)
Total interest-bearing liabilities (1,415) (5,504 ) (6,919 )
Change in net interest income
The following table, ''Average Statements of Condition with Interest and Average Rates'' presents for the years endedSeptember 30, 2021 , and 2020, the Company's average assets, liabilities, and shareholders' equity. The Company's net interest income, net interest spreads and net interest income as a percentage of interest-earning assets (net interest margin) are also re?ected. Year Ended September 30, 2021 2020 Average Interest Average Average Interest Average Outstanding Earned Yield Outstanding Earned Yield/ Balance /Paid /Rate Balance /Paid Rate (In thousands) ASSETS Interest earning assets: Loans receivable(1)$ 984,125 $ 36,370 3.70 %$ 1,026,221 $ 41,441 4.04 % Investment securities 57,666 1,556 2.70 43,237 1,172 2.71 Deposits in other banks 21,626 31 0.14 93,807 1,063 1.13 FHLB stock 8,487 459 5.41 10,089 631 6.25 Total interest earning assets(1) 1,071,904 38,416 3.58 1,173,354 44,307 3.78 Non-interest earning assets Cash and due from banks 94,986 15,365 Bank owned life insurance 25,713 20,260 Other assets 28,530 28,133 Other real estate owned 5,581 5,796 Allowance for loan losses (12,454 ) (10,386 ) Total non-interest earning assets 142,356 59,168 Total assets$ 1,214,260 $ 1,232,522 LIABILITIES AND SHAREHOLDERS' EQUITY Interest bearing liabilities: Money Market accounts$ 343,640 $ 1,726 0.50 %$ 280,427 $ 4,010 1.43 % Savings accounts 48,558 59 0.12 42,983 50 0.12 Certificate accounts 159,109 2,282 1.43 244,980 5,262 2.15 Other interest-bearing deposits 313,460 2,681 0.86 294,523 3,524 1.20 Total deposits 864,767 6,748 0.78 862,913 12,846 1.49 Borrowed funds 136,197 3,608 2.65 162,109 4,429 2.73 Total interest-bearing liabilities 1,000,964 10,356 1.03 1,025,022 17,275 1.69 Non-interest bearing liabilities Demand deposits 50,619 44,833 Other liabilities 16,684 18,150 Total non-interest-bearing liabilities 67,303 62,983 Shareholders' equity 145,993 144,517 Total liabilities and shareholders' equity$ 1,214,260 $ 1,232,522 Net interest spread 2.55 % 2.09 % Net interest margin 2.62 % 2.30 % Net Interest income$ 28,060
$ 27,032
(1) Includes non-accrual loans during the respective periods. Calculated net of
unamortized deferred loan fees, loan discounts, undisbursed portions of
loans-in-process, and allowance for loan losses.
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Other Income
The following table presents the principal categories of other ("non-interest")
income for each of the years in the two-year period ended September 30, 2021 .
Year Ended September 30,
Increase %
2021 2020 (Decrease) Change
(In thousands)
Service charges and other fees
217 217 - -
Net gains on sale of investments 779 330 449 136.06
Net gains on sale of loans 788 116 672 579.31
Earnings on bank-owned life insurance 656 509 147 28.88
Total other income $ 3,763 $ 2,488 $ 1,275 51.25 %
For the fiscal year ended September 30, 2021 , total other income increased $1.3
million compared to the fiscal year ended September 30, 2020 . This increase was
primarily a result of increases of $672,000 in net gain on sales of loans,
$449,000 in net gain on sale of investments, and $147,000 in earnings on
banked-owned life insurance.
The increase on the sale of investments resulted from managing and optimizing
normal portfolio activity, while the gain on sale of loans was primarily the
result of a strategic effort to originate and sell residential loans in the low
interest rate environment throughout fiscal year 2021 and the gain on sale of
PPP loans, previously announced in the first fiscal quarter ended December 31,
2020 .
Other Expense
The following table presents the principal categories of other expense for each
of the years in the two-year period ended
Year Ended September 30,
Increase %
2021 2020 (Decrease) Change
(In thousands)
Salaries and employee benefits
2,198 2,309 (111 ) (4.81 )
Federal deposit insurance premium 313 155 158 101.94
Advertising 109 119 (10 ) (8.40 )
Data processing 1,267 1,105 162 14.66
Professional fees 3,178 1,995 1,183 59.30
Other real estate owned expense, net 866 88 778 884.09
Pennsylvania shares tax 678 678 - -
Other operating expense 3,199 2,964 235 7.93
Total other expense $ 20,951 $ 18,302 $ 2,649 14.47 %
For the fiscal year ended September 30, 2021 , total other expense increased $2.6
million , or 14.5 percent, compared to the fiscal year ended September 30, 2020 .
This increase primarily resulted from increases of $1.2 million in professional
fees associated with legal, accounting, and audit expenses related to the
Company's periodic and annual filings including matters arising out of the
Company's prior restatements, $778,000 in net OREO expense due to the Company's
valuation adjustment for one commercial real estate property, $254,000 in
salaries and employee benefits, $235,000 in other operating expenses, and
$158,000 in federal deposit insurance premiums.
Financial Condition
Investment Portfolio
For the year endedSeptember 30, 2021 , the average volume of investment securities increased by$14.4 million to approximately$57.7 million or 5.4 percent of average interest-earning assets, from$43.2 million or 3.7 percent of average interest-earning assets, for the year endedSeptember 30, 2020 . AtSeptember 30, 2021 , the total investment portfolio amounted to$70.8 million , an increase of$24.3 million fromSeptember 30, 2020 . The increase in the investment portfolio was primarily due to purchases in the investment portfolio of$53.7 million , partially offset -38- -------------------------------------------------------------------------------- by maturities, calls and principal repayments in the amount of$12.8 million and sales in the amount of$17.3 million during fiscal year 2021. AtSeptember 30, 2021 , the principal components of the investment portfolio were government agency obligations, federal agency obligations, including mortgage-backed securities, obligations ofU.S. states and political subdivision, corporate bonds and notes, a trust preferred security and equity securities. During the year endedSeptember 30, 2021 , volume related factors increased investment revenue by$391,000 , while rate related factors decreased investment revenue by$7,000 . The yield on investments decreased by one basis point to 2.70 percent from a yield of 2.71 percent during the year endedSeptember 30, 2020 . As ofSeptember 30, 2021 , the estimated fair value of the available-for-sale securities disclosed below was primarily dependent upon the movement in market interest rates, particularly given the negligible inherent credit risk associated with these securities. These investment securities are comprised of securities that are rated investment grade by at least one bond credit rating service. As ofSeptember 30, 2021 , the Company held five corporate securities and twoU.S. government agency security, one municipal security, and one single issuer trust preferred security which were in an unrealized loss position. Although the fair value will fluctuate as the market interest rates move, management believes that these fair values will recover as the underlying portfolios mature and are reinvested in market rate yielding investments. The Company does not intend to sell and expects that it is not more likely than not that it will be required to sell these securities until such time as the value recovers or the securities mature. Management does not believe any individual unrealized loss as ofSeptember 30, 2021 represents other-than-temporary impairment. Securities available-for-sale are a part of the Company's interest rate risk management strategy and may be sold in response to changes in interest rates, changes in prepayment risk, liquidity management and other factors. The Company continues to reposition the investment portfolio as part of an overall corporate-wide strategy to produce reasonable and consistent margins where feasible, while attempting to limit risks inherent in the Company's balance sheet. For fiscal year 2021, proceeds of available-for-sale investment securities sold amounted to approximately$17.3 million . There were gains of approximately$779,000 associated with these sales. For fiscal year 2020, proceeds of available-for-sale investment securities sold amounted to approximately$8.9 million and gross realized gains on investment securities sold amounted to approximately$330,000 . The varying amount of sales from the available-for-sale portfolio reflects the significant volatility present in the market. Given the historic low interest rates prevalent in the market, it is necessary for the Company to protect itself from interest rate exposure. Securities that once appeared to be sound long-term investments can, after changes in the market, become securities that the Company wishes to sell to avoid losses and mismatches of interest-earning assets and interest-bearing liabilities at a later time. -39- -------------------------------------------------------------------------------- The table below illustrates the maturity distribution and weighted average yield for investment securities atSeptember 30, 2021 , based on a contractual maturity. More than Five More than One Year Years through Ten More than Ten One year or less through Five Years Years Years Total Weighted Weighted Weighted Weighted Weighted Amortized Average Amortized Average Amortized Average Amortized Average Amortized Fair Average Cost Yield Cost Yield Cost Yield Cost Yield Cost Value Yield (In thousands) Available for Sale Securities:U.S. government agencies and obligations $ - - % $ - - % $ - - %$ 5,000 2.59 %$ 5,000 $ 4,993 2.59 % State and municipal obligations - - 945 2.00 - - 1,822 2.55 2,767 2,765 2.36 Single issuer trust preferred security - - - - 1,000 0.75 - - 1,000 875 0.75 Corporate debt securities - - 3,500 1.25 26,989 3.35 1,500 3.75 31,989 32,180 3.14 Total $ - - %$ 4,445 1.41 %$ 27,989 3.27 %$ 8,322 2.79 %$ 40,756 $ 40,813 2.96 % Held to Maturity
Securities:
U.S. government agencies and obligations $ - - % $ - - %$ 5,000 2.01 %$ 5,000 2.70 %$ 10,000 $ 10,011 2.35 State and municipal obligations $ - - %$ 1,093 2.19 %$ 665 2.39 %$ 4,304 1.41 %$ 6,062 $ 6,117 1.67 % Corporate debt securities - - 3,383 3.82 - - - - 3,383 3,607 3.82 Mortgage- backed securities - - - - 311 1.93 8,752 1.89 9,062 9,178 1.89 Total $ - - %$ 4,476 3.42 %$ 5,977 2.05 %$ 18,056 2.00 %$ 28,507 $ 28,913 2.23 % Equity Securities: Mutual fund 500 4.00 % - - % 1,000 4.00 % - - % 1,500 1,500 4.00 % Total$ 500 4.00 % $ - - %$ 1,000 4.00 % $ - - %$ 1,500 $ 1,500 4.00 %
Total Investment Securities$ 500 4.00 %$ 8,921 2.15 %$ 33,966 4.50 %$ 26,378 1.76 %$ 70,763 $ 71,226 2.98 %
For information regarding the carrying value of the investment portfolio, see Note 6 and Note 12 of the Notes to the Consolidated Financial Statements.
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The following table sets forth the carrying value of the Company's investment
securities, as of
2021 2020
(In thousands)
Investment Securities Available-for-Sale:
2,765 3,105
Single issuer trust preferred security 875 925
Corporate debt securities 32,180 20,948
Total available-for-sale $ 40,813 $ 30,018
Investment Securities Held-to-Maturity:
U.S. government agencies $ 10,000 $ -
State and municipal obligations 6,062 1,794
Corporate debt securities 3,383 3,498
Mortgage-backed securities:
Collateralized mortgage obligations, fixed-rate 9,062 9,678
Total held-to-maturity $ 28,507 $ 14,970
Equity Securities:
Mutual fund $ 1,500 $ 1,523
Total equity securities $ 1,500 $ 1,523
Total investment securities $ 70,820 $ 46,511 For additional information regarding the Company's investment portfolio, see Note 6 and Note 12 of the Notes to the Consolidated Financial Statements.
Loan Portfolio
Lending is one of the Company's primary business activities. The Company's loan portfolio consists of residential, construction and development, commercial and consumer loans, serving the diverse customer base in its market area. The composition of the Company's portfolio continues to change due to the local economy. Factors such as the economic climate, interest rates, real estate values and employment all contribute to these changes in the composition of the Company's portfolio. Growth is generated through business development efforts, repeat customer requests for new financings, penetration into existing markets and entry into new markets. The Company seeks to create growth in commercial lending, which primarily includes commercial real estate, multi-family, farmland, and commercial and industrial lending, by offering customer-focused products and competitive pricing and by capitalizing on the positive trends in its market area. Products offered are designed to meet the financial requirements of the Company's customers. It is the objective of the Company's credit policies to diversify the commercial loan portfolio to limit concentrations in any single industry. AtSeptember 30, 2021 , total gross loans amounted to$913.8 million , a decrease of$125.2 million or 12.0 percent as compared toSeptember 30, 2020 . AtSeptember 30, 2021 , total net loans amounted to$903.0 million , a decrease of$123.9 million or 12.1 percent as compared toSeptember 30, 2020 . For the year endedSeptember 30, 2021 , the gross loan portfolio saw declines of$43.4 million in residential mortgage loans,$67.7 million in commercial loans,$9.08 million in consumer loans, and$5.1 million in construction and land loans. The average balance of our total loans decreased$42.1 million , or 4.1 percent, for the year endedSeptember 30, 2021 , as compared toSeptember 30, 2020 , while the average yield on loans decreased 34 basis points to 3.70 percent for the year endedSeptember 30, 2021 , from 4.04 percent for the year endedSeptember 30, 2020 . During fiscal year 2021 compared to fiscal year 2020, the volume-related factors during the period contributed to a decrease of interest income on loans of$1.7 million , while the rate-related changes decreased interest income by$3.3 million . -41- --------------------------------------------------------------------------------
The following table presents information regarding the components of the Company's loan portfolio (which does not include loans held for sale, except as noted below) on the dates indicated.
September 30,
2021 2020 2019 2018 2017
(In thousands)
Residential mortgage $ 198,710 $ 242,090 $ 220,011 $ 197,219 $ 192,500
Construction and Development:
Residential and commercial 61,492 65,703 40,346 37,433 35,622
Land 2,204 3,110 3,420 9,221 18,377
Total construction and development 63,696 68,813 43,766 46,654 53,999
Commercial:
Commercial real estate 426,915 495,398 547,727 498,229 442,060
Farmland 10,297 7,517 7,563 12,066 1,723
Multi-family 66,332 67,767 62,884 45,102 39,768
Commercial and industrial 115,246 116,584 99,747 73,895 70,677
Other 10,954 10,142 4,450 6,164 4,160
Total commercial 629,744 697,408 722,371 635,456 558,388
Consumer:
Home equity lines of credit 13,491 17,128 19,506 14,884 16,509
Second mortgages 5,884 10,711 13,737 18,363 22,480
Other 2,299 2,851 2,030 2,315 2,570
Total consumer 21,674 30,690 35,273 35,562 41,559
Total loans 913,824 1,039,001 1,021,421 914,891 846,446
Deferred loan fees and costs, net 629 326 663 566 590
Allowance for loan losses (11,472 ) (12,433 ) (10,095 ) (9,021 ) (8,405 )
Loans receivable, net $ 902,981 $ 1,026,894 $ 1,011,989 $ 906,436 $ 838,631
At September 30, 2021 , our net loan portfolio totaled $903.0 million or 74.7
percent of total assets. Our principal lending activity has been the origination
of residential, commercial, and commercial real estate loans. Through our loan
policy, we utilize strict underwriting guidelines to maintain low average
loan-to-value ("LTV") ratios and require maximum gross debt ratios and minimum
debt coverage ratios.
Loans are subject to federal and state law and regulations. Interest rates
charged by us on loans are affected principally by the demand for such loans and
the supply of money available for lending purposes and the rates offered by our
competitors. These factors are, in turn, affected by general and economic
conditions, the monetary policy of the federal government, including the Federal
Reserve Bank , legislative tax policies and governmental budgetary matters.
The loans receivable portfolio is segmented into residential mortgage loans,
construction and development loans, commercial loans and consumer loans. The
residential mortgage loan segment has one class, one- to four-family first lien
residential mortgage loans. The construction and development loan segment
consists of the following classes: residential and commercial construction loans
and land loans. Residential construction loans are made for the acquisition of
and/or construction on a lot or lots on which a residential dwelling is to be
built and occupied by the homeowner. Commercial construction loans are made for
the purpose of acquiring, developing, and constructing a commercial use
structure and for acquisition, development, and construction of residential
properties by residential developers. The commercial loan segment consists of
the following classes: commercial real estate loans, multi-family real estate
loans, and other commercial loans, which are also generally known as commercial
and industrial loans or commercial business loans. The consumer loan segment
consists of the following classes: home equity lines of credit, second mortgage
loans and other consumer loans, primarily unsecured consumer lines of credit.
Residential Lending. Residential mortgage originations are secured primarily by
properties located in the Company's market areas and surrounding areas. At
September 30, 2021 , $198.7 million , or 21.7 percent, of our total loans in our
portfolio consisted of single-family residential mortgage loans
Our single-family residential mortgage loans generally are underwritten on terms
and documentation conforming to guidelines issued by Federal Home Loan Mortgage
Corporation ("Freddie Mac") and the Federal National Mortgage Association
("Fannie Mae"). Applications for one- to four-family residential mortgage loans
are taken by our loan
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origination officers and are accepted at any of our banking offices and are then
referred to the lending department in order to process the loan, which consists
primarily of obtaining all documents required by Freddie Mac and Fannie Mae
underwriting standards, and completing the underwriting, which includes making a
determination whether the loan meets our underwriting standards such that the
Bank can extend a loan commitment to the customer. We generally have retained
for our portfolio a substantial portion of the single-family residential
mortgage loans that we originate. We currently originate fixed-rate, fully
amortizing mortgage loans with maturities of 10 to 30 years. We also offer
adjustable rate mortgage ("ARM") loans where the interest rate either adjusts on
an annual basis or is fixed for the initial one, three, five or seven years and
then adjusts annually. However, due to the low interest rate environment and
demand for fixed rate products, we have not originated a significant amount of
ARM loans in recent years. At September 30, 2021 , $59.5 million , or 29.9
percent, of our one- to four-family residential mortgage loans consisted of ARM
loans.
In prior years, the Company purchased single-family residential mortgage loans and consumer loans from a network of mortgage brokers. The Company now has correspondent lending relationships, but the Bank independently underwrites these loans.
We underwrite one- to four-family residential mortgage loans with loan-to-value ratios of up to 95 percent, provided that the borrower obtains private mortgage insurance on loans that exceed 80 percent of the appraised value or sales price, whichever is less, of the secured property. We also require that title insurance, hazard insurance and, if appropriate, flood insurance be maintained on all properties securing real estate loans. We require that a licensed appraiser from our list of approved appraisers perform and submit to us an appraisal on all properties secured by a first mortgage on one- to four-family first mortgage loans. Our mortgage loans generally include due-on-sale clauses, which provide us with the contractual right to deem the loan immediately due and payable in the event the borrower transfers ownership of the property. Due-on-sale clauses are an important means of adjusting the yields of fixed-rate mortgage loans in portfolio and we generally exercise our rights under these clauses. Construction and Development Loans. The amount of our outstanding construction and development loans in our portfolio increased to$63.7 million or 7.0 percent of gross loans atSeptember 30, 2021 from$68.8 million or 6.6 percent of gross loans as ofSeptember 30, 2020 . We generally limit construction loans to builders and developers with whom we have an established relationship, or who are otherwise known to officers of the Bank. Our construction loans also include single-family residential construction loans which may if approved convert to permanent, long-term mortgage loans upon completion of construction ("construction/perm" loans). During the initial or construction phase, these construction/perm loans require payment of interest only, which generally is tied to the prime rate, as the home is being constructed. On residential construction to perm loans the final interest rate is approved upon the earlier of the completion of construction or one year, these loans if approved by the appropriate approving authority, convert to long-term (generally 30 years), amortizing, fixed-rate single-family mortgage loans. Our portfolio of construction loans generally have a maximum term as approved based upon the underwriting (for individual, owner-occupied dwellings), and loan-to-value ratios less than 80 percent. Residential construction loans to developers are made on either a pre-sold or speculative (unsold) basis. Limits are placed on the number of units that can be built on a speculative basis based upon the reputation and financial position of the builder, his/her present obligations, the location of the property and prior sales in the development and the surrounding area. Generally, a limit of two unsold homes (one model home and one speculative home) is placed per project. Prior to committing to a construction loan, we require that an independent appraiser prepare an appraisal of the property. Each project also is reviewed and inspected at its inception and prior to every disbursement of loan proceeds. Disbursements are made after inspections based upon a percentage of project completion and monthly payment of interest is required on all construction loans. Our construction loans also include loans for the acquisition and development of land for sale (i.e., roads, sewer and water lines). We typically make these loans only in conjunction with a commitment for a construction loan for the units to be built on the site. These loans are secured by a lien on the property and are limited to a loan-to-value ratio not exceeding 75 percent of the appraised value at the time of origination. The loans have a variable rate of interest and require monthly payments of interest. The principal of the loan is repaid as units are sold and released. We limit loans of this type to our market area and to developers with whom we have established relationships. In most cases, we also obtain personal guarantees from the borrowers. Our loan portfolio included two loans secured by unimproved real estate and lots ("land loan"), with an outstanding balance of$2.2 million , constituting 0.2 percent of total loans, atSeptember 30, 2021 . -43- -------------------------------------------------------------------------------- In order to mitigate some of the risks inherent to construction lending, we inspect properties under construction, review construction progress prior to advancing funds, work with builders with whom we have established relationships, require annual updating of tax returns and other financial data of developers and obtain personal guarantees from the principals. AtSeptember 30, 2021 , approximately$443,000 , or 3.7 percent, of our allowance for loan losses was attributed to construction and development loans. We had no construction and development loans that were non-performing atSeptember 30, 2021 and atSeptember 30, 2020 . We had no construction and development loans that were performing TDRs atSeptember 30, 2021 and atSeptember 30, 2020 . Commercial Lending. AtSeptember 30, 2021 , our loans secured by commercial real estate amounted to$426.9 million and constituted 46.7 percent of our gross loans at such date. During the year endedSeptember 30, 2021 , the commercial real estate loan portfolio decreased by$68.5 million , or 13.82 percent. During fiscal year 2021, we had$11.9 million in charge-offs of commercial real estate loans, as compared to$8.3 million of charge-offs of commercial real estate loans for fiscal year 2020. Our commercial real estate loan portfolio consists primarily of loans secured by office buildings, retail and industrial use buildings, strip shopping centers, mixed-use and other properties used for commercial purposes located in our market area. Although terms for commercial real estate and multi-family loans vary, our underwriting standards generally allow for terms up to 10 years with the interest rate being reset in the fifth year and with amortization typically not greater than 25 years and loan-to-value ratios of not more than 80 percent. Interest rates are either fixed or adjustable, based upon the index rate plus a margin, and fees ranging from 0.5 percent to 1.50 percent are charged to the borrower at the origination of the loan. Prepayment fees are charged on most loans in the event of early repayment. Generally, we obtain personal guarantees of the principals as additional collateral for commercial real estate and multi-family real estate loans. Commercial and multi-family real estate loans generally present a higher level of risk than loans secured by one- to four-family residences. This greater risk is due to several factors, including the concentration of principal in a limited number of loans and borrowers, the effect of general economic conditions on income producing properties and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by commercial and multi-family real estate is typically dependent upon the successful operation of the related real estate project. If the cash flow from the project is reduced (for example, if leases are not obtained or renewed, a bankruptcy court modifies a lease term, or a major tenant is unable to fulfill its lease obligations), the borrower's ability to repay the loan may be impaired. As ofSeptember 30, 2021 , there was zero non-accruing commercial real estate mortgage loans. This excludes commercial real estate mortgage loans held-for-sale that were classified as non-accruing in the amount of$21.1 million . As ofSeptember 30, 2021 ,$7.0 million , or 61.4 percent of our allowance for loan losses, was allocated to commercial real estate mortgage loans. As ofSeptember 30, 2021 , our commercial real estate loans held in our portfolio that were deemed performing troubled debt restructurings increased to$12.2 million from$11.4 million as ofSeptember 30, 2020 . AtSeptember 30, 2021 , our multi-family loan portfolio included 23 loans with an aggregate book value of$66.3 million secured by multi-family (more than four units) properties, constituting 7.3 percent of our gross loans at such date. As ofSeptember 30, 2021 , we had no non-accruing multi-family loans. AtSeptember 30, 2021 , we had$115.2 million in commercial business loans, or 12.6 percent of gross loans outstanding, in our portfolio. Our commercial business loans generally have been made to small to mid-sized businesses located in our market area. The commercial business loans in our portfolio assist us in our asset/liability management since they generally provide shorter maturities and/or adjustable rates of interest in addition to generally having higher rates of return which are designed to compensate for the additional credit risk associated with these loans. The commercial business loans which we have originated may be either a revolving line of credit or for a fixed term of generally 10 years or less. Interest rates are adjustable, indexed to a published prime rate of interest, or fixed. Generally, equipment, machinery, real property or other corporate assets secure such loans. Personal guarantees from the business principals are generally obtained as additional collateral. Generally, commercial business loans are characterized as having higher risks associated with them than single-family residential mortgage loans. As ofSeptember 30, 2021 , we had one$2.5 million non-accruing commercial loan in our loan portfolio. At such date, approximately$2.3 million , or 19.8 percent of the allowance for loan losses, was allocated to commercial business loans primarily due to a specific reserve of$1.5 million on the same loan mentioned above. AtSeptember 30, 2021 , one commercial business loan totaling$549,000 was deemed a performing troubled debt restructuring loan. There were no commercial troubled debt restructured loans atSeptember 30, 2020 . -44- -------------------------------------------------------------------------------- In our underwriting procedures, consideration is given to the stability of the property's cash flow history, future operating projections, current and projected occupancy levels, location, and physical condition. Generally, our practice in recent periods is to impose a debt service ratio (the ratio of net cash flows from operations before the payment of debt service/debt service) of not less than 120 percent. We also evaluate the credit and financial condition of the borrower, and if applicable, the guarantor. Appraisal reports prepared by independent appraisers are obtained on each loan to substantiate the property's market value and are reviewed by us prior to the closing of the loan. Consumer Lending. In our efforts to provide a full range of financial services to our customers, we offer various types of consumer loans. Our consumer loans amounted to$21.7 million or 2.4 percent of our total loan portfolio atSeptember 30, 2021 . The largest components of our consumer loans are home equity lines of credit, which amounted to$13.5 million atSeptember 30, 2021 , and loans secured by second mortgages, consisting primarily of home equity loans, which amounted to$5.9 million atSeptember 30, 2021 . Our consumer loans also include automobile loans, unsecured personal loans and loans secured by deposits. Consumer loans are originated primarily through existing and walk-in customers and direct advertising. Our home equity lines of credit are variable rate loans tied to LIBOR, treasury, and prime rates. Our second mortgages may have fixed or variable rates, although they generally have had fixed rates in recent periods. Our second mortgages have a maximum term to maturity of 15 years. Both our second mortgages and our home equity lines of credit generally are secured by the borrower's primary residence. However, our security generally consists of a second lien on the property. Our lending policy provides that the maximum loan-to-value ratio on our home equity lines of credit is 80 percent when the Bank has the first mortgage. However, the maximum loan-to-value ratio on our home equity lines of credit is reduced to 75 percent when the Bank does not have the first mortgage. AtSeptember 30, 2021 , the unused portion of our home equity lines of credit was$25.7 million . Consumer loans generally have higher interest rates and shorter terms than residential loans; however, they have additional credit risk due to the type of collateral securing the loan or in some cases the absence of collateral. In the year endedSeptember 30, 2021 , we recovered$129,000 of previously charged-off consumer loans mostly consisting of second mortgage loans, as compared to$66,000 of charge-offs, mostly consisting of second mortgage loans, during the year endedSeptember 30, 2020 . As ofSeptember 30, 2021 , we had$278,000 of non-accruing second mortgage loans and$23,000 of non-accruing home equity lines of credit, representing an increase of$21,000 over the amount of non-accruing second mortgage loans and home equity lines of credit atSeptember 30, 2020 . AtSeptember 30, 2021 ,$1.0 million of our consumer loans were classified as substandard consumer loans. AtSeptember 30, 2021 , an aggregate of$163,000 of our allowance for loan losses was allocated to second mortgages and home equity lines of credit. -45-
-------------------------------------------------------------------------------- The following table presents the contractual maturity of our loans held in portfolio atSeptember 30, 2021 . The table does not include the effect of prepayments or scheduled principal amortization. Loans having no stated repayment schedule or maturity and overdraft loans are reported as being due in one year or less. At September 30, 2021, Maturing After One Years In One Year Through After Five or Less Five Years Years Total (In thousands) Residential mortgage$ 1,087 $ 4,237 $ 193,386 $ 198,710 Construction and Development: Residential and commercial 21,059 26,672 13,761 61,492 Land 1,634 570 - 2,204 Total construction and development 22,693 27,242 13,761 63,696 Commercial: Commercial real estate 28,857 230,010 168,048 426,915 Farmland 3,650 1,062 5,585 10,297 Multi-family 15,709 23,083 27,540 66,332 Commercial and industrial 43,584 61,262 10,400 115,246 Other 6,628 4,326 - 10,954 Total commercial 98,428 319,743 211,573 629,744 Consumer: Home equity lines of credit - 887 12,604 13,491 Second mortgages 501 1,226 4,157 5,884 Other 205 1,918 176 2,299 Total consumer 706 4,031 16,937 21,674 Total$ 122,914 $ 355,253 $ 435,657 $ 913,824 Loans with: Fixed rates$ 17,835 $ 121,268 $ 184,894 $ 323,997 Variable rates 105,079 233,985 250,763 589,827 Total$ 122,914 $ 355,253 $ 435,657 $ 913,824
For additional information regarding loans, see Note 7 of the Notes to the Consolidated Financial Statements.
Allowance for Loan Losses and Related Provision
The purpose of the allowance for loan losses ("ALLL" or "allowance") is to
absorb the impact of probable losses inherent in the loan portfolio. Additions
to the allowance are made through provisions charged against current operations
and through recoveries made on loans previously charged-off. The allowance is
maintained at an amount considered adequate by management to provide for
potential loan losses based upon a periodic evaluation of the risk
characteristics of the loan portfolio. In establishing an appropriate allowance,
an assessment of the individual borrowers, a determination of the value of the
underlying collateral, a review of historical loss experience and an analysis of
the levels and trends of loan categories, delinquencies and problem loans are
considered. Such qualitative factors as changes in lending policies and
procedures, economic and business conditions, nature and volume of the
portfolio, changes in delinquency, concentration of credit trends, value of
underlying collateral, the level and trend of interest rates, and peer group
statistics are also reviewed. At September 30, 2021 , the level of the allowance
was $11.5 million as compared to a level of $12.4 million at September 30, 2020 .
The Company made loan loss provisions of $11.2 million in fiscal year 2021
compared with $10.6 million in fiscal year 2020. Provision expense was higher
during the fiscal year ended September 30, 2021 , due primarily to four
commercial loans that were transferred to held-for-sale. The level of the
allowance during the fiscal years of 2021 and 2020 re?ects the change in average
volume, credit quality within the loan portfolio, the level of charge-offs, and
loan volume recorded during the periods and the
-46-
--------------------------------------------------------------------------------Company's focus on the changing composition of the commercial and residential real estate loan portfolios.
AtSeptember 30, 2021 , the allowance amounted to 1.21 percent of total gross loans. In management's view, the level of the allowance atSeptember 30, 2021 is adequate to cover losses inherent in the loan portfolio. Management's judgment regarding the adequacy of the allowance constitutes a ''Forward Looking Statement'' under the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from management's analysis, based principally upon the factors considered by management in establishing the allowance. Although management uses the best information reasonably available to it, the level of the allowance remains an estimate, which is subject to signi?cant judgment and short-term change. The OCC, as an integral part of its examination process, periodically reviews the Company's allowance. The OCC may require the Company to increase the allowance based on its analysis of information available to it at the time of its examination. Furthermore, the majority of the Company's loans are secured by real estate in theState of New Jersey and theState of Pennsylvania . Future adjustments to the allowance may be necessary due to economic factors impacting real estate in the Bank's market areas and a deterioration of the economic climate, as well as, operating, regulatory and other conditions beyond the Company's control, including those as a result of the COVID-19 pandemic. The allowance as a percentage of total loans amounted to 1.21 percent and 1.20 percent atSeptember 30, 2021 , and 2020, respectively. Net charge-offs were$12.1 million in fiscal year 2021, compared to net charge-offs of$8.3 million in fiscal year 2020. Charge-offs were higher primarily in the commercial real estate portfolio segment in fiscal year 2021 than in fiscal year 2020 due the transfer of four commercial real estate loans at fair value to loans held for sale during the quarter endedSeptember 30, 2021 . AtSeptember 30, 2021 , the Company recorded a write down of approximately$10.8 million related to three commercial real estate loans with an aggregate book balance of$29.3 million . Included in these loans was one non-accrual commercial real estate loan totaling approximately$12.2 million and two trouble debt restructured commercial real estate loans totaling$17.1 million . These loans were transferred to the held-for-sale loan category at the fair value of$18.9 million reflecting management's intent to sell these loans and the anticipated sale price of such loans. The three loans were subsequently sold inOctober 2021 . There was one additional non-accrual commercial real estate loan transferred to held-for-sale atSeptember 30, 2021 , with an aggregate book balance of$13.6 million , for which the Company continues to evaluate a sale of this loan. -47-
--------------------------------------------------------------------------------
Five-Year Statistical Allowance for Loan Losses
The following table re?ects the relationship of loan volume, the provision and allowance for loan losses and net charge-offs for the past ?ve years.
September 30,
2021 2020 2019 2018 2017
(In thousands)
Average loans outstanding $ 945,457 $ 1,026,221 $ 977,876 $ 860,366 $ 740,646
Total loans at end of period $ 947,023 (1) $ 1,039,001 $ 1,021,421 $ 914,891 $ 846,446
Analysis of the Allowance of Loan
Losses
Balance at beginning of year $ 12,433 $ 10,095 $ 9,021 $ 8,405 $ 5,434
Charge-offs:
Residential mortgage - - 17 60 -
Commercial:
Commercial real estate 11,930 8,330 1,418 276 - Commercial and industrial 379 - - 45 -
Consumer:
Home equity lines of credit - 62 - - - Second mortgages - 3 45 88 218 Other 4 1 37 2 5 Total charge-offs 12,313 8,396 1,517 471 223 Recoveries: Residential mortgage 41 25 79 58 2 Construction and Development: Residential and commercial 4 - - - 90
Commercial:
Commercial real estate 1 6 23 11 40 Commercial and industrial 2 2 4 4 9
Consumer:
Home equity lines of credit 17 1 1 1 18 Second mortgages 108 88 94 52 232 Other 3 2 11 7 12 Total recoveries 176 124 212 133 403 Net charge-offs (recoveries) 12,137 8,272 1,305 3,38 (180 ) Provision for loan losses 11,176 10,610 2,379 954 2,791 Balance at end of year$ 11,472 $ 12,433 $ 10,095 $ 9,021 $ 8,405 Ratio of net charge-offs (recoveries) during the year to average loans outstanding during the year 1.28 % 0.81 % 0.13 % 0.04 % (0.02 )% Allowance for loan losses as a percentage of total loans at end of year 1.21 % 1.20 % 0.99 % 0.99 % 0.99 % (1) Balance includes loans held for sale for 2021.
For additional information regarding loans, see Note 7 of the Notes to the Consolidated Financial Statements.
Implicit in the lending function is the fact that loan losses will be experienced and that the risk of loss will vary with the type of loan being made, the creditworthiness of the borrower and prevailing economic conditions. The allowance for loan losses has been allocated in the table below according to the estimated amount deemed to be reasonably necessary to provide for the possibility of losses being incurred within the following categories of loans atSeptember 30 , for each of the past ?ve years. -48- --------------------------------------------------------------------------------
The table below shows, for three types of loans, the amounts of the allowance allocable to such loans and the percentage of such loans to total loans.
September 30,
2021 2020 2019 2018 2017
Loans Loans Loans Loans Loans
to to to to to
Total Total Total Total Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
(In thousands)
Residential mortgage $ 934 21.8 % $ 1,667 23.3 % $ 1,364 21.6 % $ 1,062 21.6 % $ 1,004 22.7 %
Construction and
Development:
Residential and
commercial 428 6.7 465 6.3 523 3.9 393 4.1 523 4.2
Land loans 15 0.2 23 0.3 20 0.3 49 1.0 132 2.2
Commercial:
Commercial real estate 7,043 46.7 8,682 47.7
5,903 53.7 5,031 54.4 3,581 52.2
Farmland 56 1.1 47 0.7 49 0.7 66 1.3 9 0.2
Multi-family 450 7.3 511 6.5 369 6.2 232 4.9 224 4.7 Commercial and industrial 2,221 12.6 578 11.2
615 9.8 443 8.1 520 8.3
Other 54 1.2 51 1.0 21 0.4 24 0.7 21 0.5
Consumer:
Home equity lines of
credit 76 1.5 130 1.7 122 1.9 82 1.6 90 2.0
Second mortgages 87 0.6 196 1.0 267 1.3 326 2.0 402 2.7
Other 20 0.3 29 0.3 23 0.2 51 0.3 27 0.3
Total allocated 11,384 100.0 12,379 100.0 9,276 100.0 7,759 100.0 6,533 100.0
Unallocated 88 - 54 - 819 - 1,262 - 1,872 -
Balance at end of period
$ 10,095 100.0 %$ 9,021 100.0 %$ 8,405 100.0 % In assessing the adequacy of the allowance, it is recognized that the process, methodology and underlying assumptions require a significant degree of judgment and uncertainty. The estimation of loan losses is not precise; the range of factors considered is wide and is significantly dependent upon management's judgment, including the outlook and potential changes in the economic environment and general market conditions. At present, components of the commercial loan segments of the portfolio are new originations and the associated volumes continue to see increased growth. At the same time, historical loss levels have decreased as factors utilized in assessing the portfolio. Any unallocated portion of the allowance reflects management's estimate of probable inherent but undetected losses within the portfolio due to uncertainties in economic conditions, delays in obtaining information, including unfavorable information about a borrower's financial condition, the difficulty in identifying triggering events that correlate perfectly to subsequent loss rates, and risk factors that have not yet manifested in loss allocation factors.
Asset Quality
The Company manages asset quality and credit risk by maintaining diversi?cation
in its loan portfolio and through review processes that include analysis of
credit requests and ongoing examination of outstanding loans and delinquencies,
with particular attention to portfolio dynamics and mix. The Company strives to
identify loans experiencing difficulty early enough to attempt to correct the
problems, to record charge-offs promptly based on realistic assessments of
current collateral values, and to maintain an adequate allowance for loan losses
at all times.
It is generally the Company's policy to discontinue interest accruals once a
loan is past due as to interest or principal payments for a period of ninety
days. When a loan is placed on non-accrual status, interest accruals cease and
uncollected accrued interest is reversed and charged against current income.
Payments received on non-accrual loans are applied against principal. A loan may
only be restored to an accruing basis when it again becomes well secured and in
the process of collection or all past due amounts have been collected and a
satisfactory period of ongoing repayment exists. Accruing loans past due 90 days
or more are generally well secured and in the process of collection. For
additional information regarding loans, see Note 8 of the Notes to the
Consolidated Financial Statements.
-49-
--------------------------------------------------------------------------------Non-Performing and Past Due Loans and OREO
Non-performing loans include non-accrual loans and accruing loans which are
contractually past due 90 days or more. Non-accrual loans represent loans on
which interest accruals have been suspended. It is the Company's general policy
to consider the charge-off of loans at the point they become past due in excess
of 90 days, with the exception of loans that are both well-secured and in the
process of collection. Troubled debt restructurings represent loans on which a
concession was granted to a borrower, such as a reduction in interest rate to a
rate lower than the current market rate for new debt with similar risks, and
which are currently performing in accordance with the modi?ed terms. For
additional information regarding loans, see Note 7 of the Notes to the
Consolidated Financial Statements.
The following table sets forth, as of the dates indicated, the amount of the
Company's non-accrual loans, accruing loans past due 90 days or more, OREO and
troubled debt restructurings.
At September 30,
2021 2020 2019 2018 2017
(In thousands)
Non-accrual loans:
Residential mortgage $ 879 $ 2,036 $ 1,532 $ 1,817 $ 826
Commercial:
Commercial real estate - 14,414 - 520 -
Commercial and industrial 2,517 - - - -
Total commercial 2,517 14,414 - 520 -
Consumer:
Home equity lines of credit 23 26 30 34 10
Second mortgages 278 254 259 290 202
Other - - - 26 -
Total consumer 301 280 289 350 212
Total non-accrual loans 3,697 16,730 1,821 2,687 1,038
Accruing loans past due 90 days or
more - 58 502 374 173
Total non-performing loans 3,697 16,788 2,323 3,061 1,211
Other real estate owned 4,961 5,796 5,796 - -
Total non-performing assets $ 8,658 $ 22,584 $ 8,119 $ 3,061 $ 1,211
Troubled debt restructured loans -
performing $ 17,601 $ 13,418 $ 12,170 $ 18,640 $ 2,238
At September 30, 2021 , non-performing assets totaled $8.7 million , or 0.72
percent of total assets, as compared with $22.6 million , or 1.87 percent of
total assets, at September 30, 2020 . Total non-performing assets excludes
non-accrual loans held-for-sale. The decrease in non-performing assets was
primarily due to the decrease in non-accrual loans including one commercial real
estate loans totaling $6.6 million returning to accrual status as of September
30,2021 and one commercial real estate loan $7.5 million transferred to loans
held-for-sale for period ending September 30, 2021 . OREO, which is comprised of
one commercial real estate property, totaled $5.0 million at September 30, 2021 ,
compared to $5.8 million at September 30, 2020 .
Performing TDR loans were
Subsequent to the fiscal year endedSeptember 30, 2021 , a$12.2 million non-accrual commercial real estate loan was sold bringing total non-performing loans down to$12.6 million . TDR loans totaled$18.2 million and$21.7 million atSeptember 30, 2021 and atSeptember 30, 2020 , respectively. A total of$17.6 million and$13.4 million of TDR loans were performing pursuant to the terms of their respective modifications atSeptember 30, 2021 , andSeptember 30, 2020 , respectively. AtSeptember 30, 2021 , four TDR loans with an outstanding balance of approximately$640,000 were deemed non-performing, while eight TDR loans with an outstanding balance of approximately$8.3 million were deemed non-performing atSeptember 30, 2020 . The performing TDR loans increased by$4.2 million atSeptember 30, 2021 , compared toSeptember 30, 2020 , primarily due to the addition of two loans; one loan is a$2.2 million commercial loan secured by farmland and the second loan is a$4.3 million commercial real estate loan that returned from non-accrual status atSeptember 30, 2020 . These additions were partially offset by a$3.5 million write down of a commercial real estate loan. -50- --------------------------------------------------------------------------------
Subsequent to
Provision for Income Taxes
The Company recorded a$212,000 income tax benefit in fiscal year 2021 compared to a$36,000 income tax benefit in fiscal year 2020. For a more detailed description of income taxes see Note 13 of the Notes to Consolidated Financial Statements.
Recent Accounting Pronouncements
Please refer to the note on Recent Accounting Pronouncements in Note 2 to the consolidated financial statements in Item 8 for a detailed discussion of new accounting pronouncements.
Asset and Liability Management
Asset and liability management encompasses an analysis of market risk, the control of interest rate risk (interest sensitivity management) and the ongoing maintenance and planning of liquidity and capital. The composition of the Company's statement of condition is planned and monitored by the Company'sAsset and Liability Committee ("ALCO"). In general, management's objective is to optimize net interest income and minimize market risk and interest rate risk by monitoring the components of the statement of condition and the interaction of interest rates. Short-term interest rate exposure analysis is supplemented with an interest sensitivity gap model. The Company utilizes interest sensitivity analysis to measure the responsiveness of net interest income to changes in interest rate levels. Interest rate risk arises when an earning asset matures or when its interest rate changes in a time period different than that of a supporting interest-bearing liability, or when an interest-bearing liability matures or when its interest rate changes in a time period different than that of an earning asset that it supports. While the Company matches only a small portion of specific assets and liabilities, total earning assets and interest-bearing liabilities are grouped to determine the overall interest rate risk within a number of specific time frames. The difference between interest-sensitive assets and interest-sensitive liabilities is referred to as the interest sensitivity gap. At any given point in time, the Company may be in an asset-sensitive position, whereby its interest-sensitive assets exceed its interest-sensitive liabilities, or in a liability-sensitive position, whereby its interest-sensitive liabilities exceed its interest-sensitive assets, depending in part on management's judgment as to projected interest rate trends. The Company's interest rate sensitivity position in each time frame may be expressed as assets less liabilities, as liabilities less assets, or as the ratio between rate sensitive assets ("RSA") and rate sensitive liabilities ("RSL"). For example, a short-funded position (liabilities repricing before assets) would be expressed as a net negative position, when period gaps are computed by subtracting repricing liabilities from repricing assets. When using the ratio method, an RSA/RSL ratio of 1 indicates a balanced position, a ratio greater than 1 indicates an asset-sensitive position and a ratio less than 1 indicates a liability-sensitive position. A negative gap and/or a rate sensitivity ratio less than 1 tends to expand net interest margins in a falling rate environment and reduce net interest margins in a rising rate environment. Conversely, when a positive gap occurs, generally margins expand in a rising rate environment and contract in a falling rate environment. From time to time, the Company may elect to deliberately mismatch liabilities and assets in a strategic gap position. AtSeptember 30, 2021 , the Company reflected a positive interest sensitivity gap with an interest sensitivity ratio of 1.22:1.00 at the cumulative one-year position. Based on management's perception of interest rates remaining low throughout 2021, emphasis has been, and is expected to continue to be, placed on controlling liability costs while extending the maturities of liabilities in our efforts to insulate the net interest spread from rising interest rates in the future. However, no assurance can be given that this objective will be met. The following table sets forth the amounts of our interest-earning assets and interest-bearing liabilities outstanding atSeptember 30, 2021 , which we expect, based upon certain assumptions, to reprice or mature in each of the future time periods shown (the "GAP Table"). Except as stated below, the amount of assets and liabilities shown which reprice or mature during a particular period were determined in accordance with the earlier of term to repricing or the contractual maturity of the asset or liability. The GAP Table sets forth approximation of the projected repricing of assets and liabilities atSeptember 30, 2021 , on the basis of contractual maturities, anticipated prepayments, and scheduled rate adjustments within a three-month period and subsequent selected time intervals. The loan amounts in the GAP Table reflect principal balances expected to be redeployed and/or repriced as a result of contractual -51- -------------------------------------------------------------------------------- amortization and anticipated prepayments of adjustable-rate loans and fixed-rate loans, and as a result of contractual rate adjustments on adjustable-rate loans. More than More than More than 6 Months 6 Months 1 Year 3 Year More than Total or Less to 1 Year to 3 Years to 5 Years 5 Years Amount (In thousands) Interest-earning assets(1): Loans receivable(2)$ 246,058 $ 69,885 $ 320,563 $ 171,533 $ 80,972 $ 889,011 Investment securities and restricted securities 15,525 5,919 3,560 34,180 19,412 78,596 Other interest-earning assets 36,920 - - - - 36,920 Total interest-earning assets 298,503 75,804 324,123 205,713 100,384 1,004,527 Interest-bearing liabilities: Demand and NOW accounts 20,120 20,120 80,481 80,481 135,443 336,645 Money market accounts 45,075 45,075 180,299 114,498 533 385,480 Savings accounts 2,196 2,196 8,785 8,785 28,620 50,582 Certificate accounts 28,058 30,066 39,162 13,479 838 111,603 Borrowings 94,934 20,000 - - - 114,934 Total interest-bearing liabilities 190,383 117,457 308,727 217,243 164,434 999,244 Interest-earning assets less interest- bearing liabilities$ 108,120 $ (41,653 ) $ 15,396 $ (11,530 ) $ (64,050 ) $ 6,938 Cumulative interest-rate sensitivity gap(3)$ 108,120 $ 66,467 $ 81,863 $ 70,333 $ 6,523 Cumulative interest-rate gap as a
percentage of total assets at
September 30, 2021 8.94 % 5.49 % 6.77 % 5.82 % 0.54 % Cumulative interest-earning assets as a percentage of cumulative interest-bearing liabilities at September 30, 2021 156.79 % 121.59 % 113.28 % 108.44 % 100.63 %
(1) Interest-earning assets are included in the period in which the balances are
expected to be redeployed and /or repriced as a result of anticipated
prepayments, scheduled rate adjustments and contractual maturities.
(2) For purposes of the gap analysis, loans receivable excludes non-accrual loans
gross of the allowance for loan losses, undisbursed loan funds, unamortized
discounts and deferred loans fees.
(3) Interest-rate sensitivity gap represents the net cumulative difference
between interest-earning assets and interest-bearing liabilities.
Net Portfolio Value and Net Interest Income Analysis. Our interest rate
sensitivity also is monitored by management through the use of models which
generate estimates of the change in its net portfolio value ("NPV") and net
interest income ("NII") over a range of interest rate scenarios. NPV is the
present value of expected cash flows from assets, liabilities, and off-balance
sheet contracts. The NPV ratio, under any interest rate scenario, is defined as
the NPV in that scenario divided by the market value of assets in the same
scenario.
The table below sets forth as of September 30, 2021 , and 2020 the estimated
changes in our NPV that would result from designated instantaneous changes in
the United States Treasury yield curve. Computations of prospective effects of
hypothetical interest rates changes are based on numerous assumptions, including
relative levels of market interest rates, loan prepayments and deposit decay,
and should not be relied upon as indicative of actual results.
As of September 30, 2021 As of September 30, 2020
Changes in Interest Dollar Percentage Dollar Percentage
Rates Change from Change from Change from Change from
(basis points)(1) Amount Base Base Amount Base Base
(In thousands)
+300 $ 152,219 $ (11,099 ) (7 )% $ 155,658 $ 3,988 3 %
+200 158,876 (4,442 ) (3 ) 159,099 7,429 5
+100 162,206 (1,112 ) (1 ) 158,349 6,679 4
0 163,318 - - 151,670 - -
-100 177,047 13,729 8 158,616 6,946 5
(1) Assumes an instantaneous uniform change in interest rates. A basis point
equals 0.01%.
-52-
-------------------------------------------------------------------------------- In addition to modeling changes in NPV, we also analyze potential changes to NII for a twelve-month period under rising and falling interest rate scenarios. The following table shows our NII model as ofSeptember 30, 2021 .
Changes in Interest Rates in Basis Points Net Interest
(Rate Shock) Income $ Change % Change
(In thousands)
200 $ 45,772 $ 16,652 57.18 %
100 39,183 10,063 34.56
Static 29,120 - -
(100) 28,692 (428 ) (1.47 )
As is the case with the GAP Table, certain shortcomings are inherent in the
methodology used in the above interest rate risk measurements. Modeling changes
in NPV and NII require the making of certain assumptions which may or may not
reflect the manner in which actual yields and costs respond to changes in market
interest rates. In this regard, the models presented assume that the composition
of our interest sensitive assets and liabilities existing at the beginning of a
period remains constant over the period being measured and also assumes that a
particular change in interest rates is reflected uniformly across the yield
curve regardless of the duration to maturity or repricing of specific assets and
liabilities. Accordingly, although the NPV measurements and net interest income
models provide an indication of interest rate risk exposure at a particular
point in time, such measurements are not intended to and do not provide a
precise forecast of the effect of changes in market interest rates on net
interest income and will differ from actual results.
Estimates of Fair Value
The estimation of fair value is significant to a number of the Company's assets, including loans held for sale, investment securities available-for-sale and loans swaps. These are all recorded at either fair value or the lower of cost or fair value. Fair values are volatile and may be influenced by a number of factors. Circumstances that could cause estimates of the fair value of certain assets and liabilities to change include a change in prepayment speeds, discount rates, or market interest rates. Fair values for most available-for-sale investment securities are based on quoted market prices. If quoted market prices are not available, fair values are based on judgments regarding future expected loss experience, current economic condition risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature, involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Liquidity The liquidity position of the Company is dependent primarily on successful management of the Bank's assets and liabilities to meet the needs of both deposit and credit customers. Liquidity needs arise principally to accommodate possible deposit outflows and to meet customers' requests for loans. Scheduled principal loan repayments, maturing investments, short-term liquid assets and deposit inflows, can satisfy such needs. The objective of liquidity management is to enable the Company to maintain sufficient liquidity to meet its obligations in a timely and cost-effective manner. Management monitors current and projected cash flows and adjusts positions as necessary to maintain adequate levels of liquidity. Under its liquidity risk management program, the Company regularly monitors correspondent bank funding exposure and credit exposure in accordance with guidelines issued by the banking regulatory authorities. Management uses a variety of potential funding sources and staggering maturities to reduce the risk of potential funding pressure. Management also maintains a detailed contingency funding plan designed to respond adequately to situations which could lead to stresses on liquidity. Management believes that the Company has the funding capacity to meet the liquidity needs arising from potential events. The Company maintains borrowing capacity through theFederal Home Loan Bank of Pittsburgh secured with loans and marketable securities.
The Company's primary sources of short-term liquidity consist of cash and cash equivalents and investment securities available-for-sale.
AtSeptember 30, 2021 , the Company had$136.6 million in cash and cash equivalents compared to$61.4 million atSeptember 30, 2020 . The increase in cash and cash equivalents year over year was due to increased deposits, the Company's decision to build liquidity during the economic downturn in fiscal year 2021, and the cash received from loan paydowns and payoffs throughout the year. In addition, our investment securities available-for-sale amounted to$40.8 million atSeptember 30, 2021 , and$30.0 million atSeptember 30, 2020 . -53- --------------------------------------------------------------------------------
Deposits
Total deposits increased to$938.2 million atSeptember 30, 2021 , from$890.9 million atSeptember 30, 2020 . Total interest-bearing deposits increased from$840.5 million atSeptember 30, 2020 , to$884.3 million atSeptember 30, 2021 , an increase of$43.8 million or 5.2 percent. Time deposits$100,000 and over decreased$85.6 million atSeptember 30, 2021 , as compared toSeptember 30, 2020 , and represented 6.4 percent of total deposits atSeptember 30, 2021 , compared to 16.2 percent atSeptember 30, 2020 . We had brokered deposits totaling$6.1 million atSeptember 30, 2021 , compared to$31.1 million atSeptember 30, 2020 .
The Company continues to place the main focus of its deposit gathering efforts in the maintenance, development, and expansion of its core deposit base.
The following table depicts the Company's deposits classified by interest rates
with percentages to total deposits at
September 30, September 30,
2021 2020 Dollar
Amount Percentage Amount Percentage Change
(In thousands)
Balances by types of deposit: Savings$ 50,582 5.4 %$ 45,072 5.1 %$ 5,510 Money market accounts 385,480 41.1 277,711 31.2 107,769 Interest bearing demand 336,645 35.9 303,682 34.1 32,963 Non-interest bearing demand 53,849 5.7 50,422 5.7 3,427$ 826,556 88.1$ 676,887 76.0$ 149,669 Certificates of deposit 111,603 11.9 214,019 24.0 (102,416 ) Total$ 938,159 100.0 %$ 890,906 100.0 %$ 47,253 AtSeptember 30, 2021 , our certificates of deposit and other time deposits with a balance of$100,000 or more amounted to$60.2 million , of which$32.6 million are scheduled to mature within twelve months. AtSeptember 30, 2021 , the weighted average remaining maturity of our certificate of deposit accounts was 11.4 months. The following table presents the maturity of our certificates of deposit and other time deposits with balances of$100,000 or more atSeptember 30, 2021 . Amount (In thousands) Maturity Period: Three months or less $ 7,121 Over three months through six months 8,188 Over six months through twelve months 17,330 Over twelve months 27,515 Total$ 60,154 Borrowings Borrowings from the FHLB ofPittsburgh are available to supplement the Company's liquidity position and, to the extent that maturing deposits do not remain with the Company, management may replace such funds with advances. As ofSeptember 30, 2021 , and 2020, the Company's outstanding balance of FHLB advances, totaled$90.0 million and$130.0 million , respectively. The$90.0 million in advances as ofSeptember 30, 2021 represents three short-term FHLB advances of fixed-rate borrowing with rollover of 90 days.
During both fiscal year 2021 and 2020, the Company did not purchase
any securities sold under agreements to repurchase as a short-term funding
source. The Company has no secured borrowing agreements with a third party at
Cash Flows
The Consolidated Statements of Cash Flows present the changes in cash and cash
equivalents resulting from the Company's operating, investing and financing
activities. During the year ended
-54-
--------------------------------------------------------------------------------
equivalents increased by $75.2 million from the balance at September 30, 2020 of
$61.4 million . Net cash of $14.8 million was provided by operating activities in
fiscal 2021 compared to net cash of $11.7 million provided by operating
activities in fiscal year 2020. Net cash provided by investing activities
amounted to approximately $58.0 million in fiscal year 2021 compared to net cash
used in investing activities of approximately $35.3 million in fiscal year 2020.
Net cash of $2.4 million was provided by financing activities in fiscal year
2021 compared to net cash of $68.5 million used in financing activities in
fiscal year 2020.
In the normal course of operations, the Company engages in a variety of
financial transactions that, in accordance with GAAP, are not recorded in its
financial statements. These transactions involve, to varying degrees, elements
of credit, interest rate, and liquidity risk. Such transactions are used
primarily to manage customers' requests for funding and take the form of loan
commitments, lines of credit and letters of credit.
The contractual amounts of commitments to extend credit represent the amounts of
potential accounting loss should the contract be fully drawn upon, the customer
defaults and the value of any existing collateral becomes worthless. We use the
same credit policies in making commitments and conditional obligations as we do
for on-balance sheet instruments. Financial instruments whose contract amounts
represent credit risk at September 30, 2021 , and 2020 were as follows:
September 30,
2021 2020
(In thousands)
Commitments to extend credit:(1)
Future loan commitments $ 32,889 $ 7,687
Undisbursed construction loans 12,672 24,551
Undisbursed home equity lines of credit 25,722 24,751
Undisbursed commercial lines of credit 86,842 81,363
Overdraft protection lines 1,549 1,362
Standby letters of credit 9,026 9,074
Total commitments $ 168,700 $ 148,788 (1) Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the
contract. Commitments may require payment of a fee and generally have fixed
expiration dates or other termination clauses.
We anticipate that we will continue to have sufficient funds and alternative funding sources to meet our current commitments.
Shareholders' Equity
Total shareholders' equity amounted to$142.2 million , or 11.8 percent of total assets, atSeptember 30, 2021 , compared to$140.6 million , or 11.6 percent of total assets, atSeptember 30, 2020 . Book value per common share was$18.65 atSeptember 30, 2021 , compared to$18.48 atSeptember 30, 2020 . -55- --------------------------------------------------------------------------------
Capital
The Bank's capital ratios as ofSeptember 30, 2021 , andSeptember 30, 2020 , are as follows: To Be Well Capitalized Under Prompt Excess Over Required for Capital Corrective Well-Capitalized Actual Adequacy Purposes Action Provisions Provision Amount Ratio Amount
Ratio Amount Ratio Amount Ratio
As of
(Dollars in thousands)
Tier 1 leverage (core) capital
(to adjusted tangible
assets) $ 157,518 13.14 % $ 47,946 4.00 % $ 59,933 5.00 % $ 97,585 8.14 %
Common equity Tier 1
(to risk-weighted
assets) 157,518 16.13 43,934 4.50 63,460 6.50 94,058 9.63
Tier 1 risk-based capital
(to risk-weighted assets) 157,518 16.13 58,579 6.00 78,105 8.00 79,413 8.13
Total risk-based capital
(to risk-weighted assets) 169,072 17.32 78,105
8.00 97,632 10.00 71,440 7.32
As of
(to adjusted tangible assets)$ 155,575 12.78 %$ 40,685 4.00 %$ 60,856 5.00 %$ 94,719 7.78 % Common equity Tier 1 (to risk-weighted assets) 155,575 15.40 45,459 4.50 65,663 6.50 89,912 8.90 Tier 1 risk-based capital (to risk-weighted assets) 155,575 15.40 60,612 6.00 80,816 8.00 74,759 7.40 Total risk-based capital (to risk-weighted assets) 168,090 16.64 80,816 8.00 101,020 10.00 67,070 6.64Malvern Bancorp's capital ratios as ofSeptember 30, 2021 , andSeptember 30, 2020 , are as follows: To Be Well Capitalized Under Prompt Excess Over Required for Capital Corrective Well-Capitalized Actual Adequacy Purposes Action Provisions(1) Provision (1) Amount Ratio Amount Ratio Amount Ratio Amount Ratio As of September 30, 2021: (Dollars in thousands) Tier 1 leverage (core) capital (to adjusted tangible assets)$ 142,132 11.84 %$ 48,020 4.00 % N/A N/A N/A N/A Common equity Tier 1 (to risk-weighted assets) 142,132 14.53 44,024 4.50 N/A N/A N/A N/A Tier 1 risk-based capital (to risk-weighted assets) 142,132 14.53 58,699 6.00 N/A N/A N/A N/A Total risk-based capital (to risk-weighted assets) 178,620 18.26 78,265 8.00 N/A N/A N/A N/A As ofSeptember 30, 2020 : Tier 1 leverage (core) capital (to adjusted tangible assets)$ 141,681 11.63 %$ 48,743 4.00 % N/A N/A N/A N/A Common equity Tier 1 (to risk-weighted assets) 141,681 14.00 45,528 4.50 N/A N/A N/A N/A Tier 1 risk-based capital (to risk-weighted assets) 141,681 14.00 60,704 6.00 N/A N/A N/A N/A Total risk-based capital (to risk-weighted assets) 178,972 17.69 80,939 8.00 N/A N/A N/A N/A
(1) The Company is not subject to the regulatory capital ratios imposed by
III on bank holding companies because the Company was deemed to be a small
bank holding company as of
Looking Forward
One of the Company's primary objectives is the improvement of asset quality and
capital preservation. Additional objectives are balancing asset and revenue
growth, while at the same time expanding market presence and diversifying the
Company's ?nancial products. However, it is recognized that objectives, no
matter how focused, are subject to factors beyond the control of the Company,
which can impede its ability to achieve these goals. The following factors
should be considered when evaluating the Company's ability to achieve its
objectives:
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The ?nancial market place is rapidly changing. Banks are no longer the only place to obtain loans, nor the only place to keep ?nancial assets. The banking industry has lost market share to other ?nancial service providers. The future is predicated on the Company's ability to adapt its products, provide superior customer service and compete in an ever-changing marketplace. Net interest income, the primary source of earnings, is impacted favorably or unfavorably by changes in interest rates. Although the impact of interest rate ?uctuations is mitigated by ALCO strategies, signi?cant changes in interest rates can have a material adverse impact on pro?tability. The ability of customers to repay their obligations is often impacted by changes in the regional and local economy. Although the Company sets aside loan loss provisions toward the allowance for loan losses when management determines such action to be appropriate, signi?cant unfavorable changes in the economy could impact the assumptions used in the determination of the adequacy of the allowance. Technological changes will have a material impact on how ?nancial service companies compete for and deliver services. It is recognized that these changes will have a direct impact on how the marketplace is approached and ultimately on pro?tability. The Company has taken steps to improve its traditional delivery channels. However, continued success will likely be measured by the Company's ability to anticipate and react to future technological changes. This ''Looking Forward'' discussion constitutes a forward-looking statement under the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those projected in the Company's forward-looking statements due to numerous known and unknown risks and uncertainties, including the factors referred to above, on the first page of this Report and in other sections of this Report.
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