MALN BANC The purpose of this analysis is to provide the reader with information relevant to understanding and assessing the Company's results of operations for the periods presented herein and financial condition as ofDecember 31, 2022 andSeptember 30, 2022 . In order to fully understand this analysis, the reader is encouraged to review the consolidated financial statements and accompanying notes thereto appearing elsewhere in this report. Forward-Looking Statements This report contains certain forward-looking statements with respect to the financial condition, results of operations, plans, objectives, future performance and business of the Company and its subsidiaries, including statements preceded by, followed by or that include words or phrases such as "believes," "expects," "anticipates," "plans," "trend," "objective," "continue," "remain," "pattern" or similar expressions or future or conditional verbs such as "will," "would," "should," "could," "might," "can," "may" or similar expressions. The statements contained herein that are not historical facts are forward-looking statements based on management's experience and beliefs concerning current conditions and future developments and their potential effects on the Company, including, without limitation, plans, strategies and goals, and statements about the Company's expectations regarding revenue and asset growth, financial performance and profitability, loan and deposit growth, yields and returns, loan diversification and credit management, and shareholder value creation. Such statements involve inherent risks and uncertainties, many of which are difficult to predict and are generally beyond the control of the Company. There can be no assurance that future developments affecting the Company will be the same as those anticipated by management. The Company cautions readers that a number of important factors could cause actual results to differ materially from those expressed in, or implied or projected by, such forward-looking statements. These risks and uncertainties include, but are not limited to, the following: the impact on our business, operations, financial condition, liquidity, results of operations, prospects and trading prices of our shares arising out of or resulting from the COVID-19 pandemic, and the related increase inFDIC premiums, the effects of, and changes in, trade, monetary and fiscal policies and laws, including changes in interest rate policies of theBoard of Governors of theFederal Reserve System ; inflation, interest rate, market and monetary fluctuations; the impact of competition and the acceptance of the Company's products and services by new and existing customers; the impact of changes in financial services policies, laws and regulations; technological changes; any undersupply or oversupply of inventory and deterioration in values of real estate in the markets in which the Company operates, including residential and commercial; changes in the value of real estate held-for-sale; the effect of changes in accounting policies and practices, as may be adopted from time-to-time by bank regulatory agencies, theSEC , thePublic Company Accounting Oversight Board , the FASB or other accounting standards setters; possible other-than-temporary impairment of securities held by the Company; the effects of the Company's lack of a widely-diversified loan portfolio, including the risks of geographic and industry concentrations; ability to attract deposits and other sources of liquidity; changes in the competitive environment among financial and bank holding companies and other financial service providers and banks; unanticipated or prolonged litigation or other matters before regulatory agencies, whether currently existing or commencing in the future, that delay the occurrence or non-occurrence of events or results in elevated expenses or unexpected outcomes; changes in the interest rate environment may reduce interest margins or the fair value of financial instruments, or increase the cost of our subordinated debt securities; unexpected loss of key personnel and future to attract and retain talent; prepayment speeds, loan origination and sale volumes, charge-offs and loan loss provisions may vary substantially from period to period; general economic conditions and real estate valuations may be less favorable than expected; political developments, wars or other hostilities may disrupt or increase volatility in securities markets or other economic conditions; legislative or regulatory changes or actions may adversely affect the businesses in which the Company is engaged; changes and trends in the securities markets may adversely impact the Company; the impact on our business, operations, results of operations and prospects resulting from our pending merger withFirst Bank could be significant, including the Company's ability to retain talent in connection with the announcement of and pendency of the merger; the ability of the Company andFirst Bank to obtain regulatory and shareholder approvals and meet other closing conditions to the pending merger on the expected terms and schedule; the impact of reputational risk created by the developments discussed above on such matters as business generation and retention, funding and liquidity could be significant; the outcome of any regulatory or legal investigations and proceedings; the impact of any change in theFDIC insurance assessment rate or the rules and regulations related to the calculation of theFDIC insurance assessment amount; and the Company's ability to manage the risk involved in the foregoing. Additional factors that could cause actual results to differ materially from those expressed in the forward-looking statements are discussed in the Company's 2022 Annual Report filed with theSEC and available at theSEC's Internet site (http://www.sec.gov). The Company undertakes no obligation to revise or publicly release any revision or update to these forward-looking statements to reflect events or circumstances that occur after the date on which such statements were made, unless required by law. -42-
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Critical Accounting Policies
The accounting and reporting policies followed by the Company conform, in all
material respects, to GAAP. In preparing the consolidated financial statements,
management has made estimates, judgments and assumptions that affect the
reported amounts of assets and liabilities as of the dates of the consolidated
statements of financial condition and for the periods indicated in the
statements of net income. Actual results could differ significantly from those
estimates.
The Company's accounting policies are fundamental to understanding Management's
Discussion and Analysis ("MD&A") of financial condition and results of
operations. The Company has identified the determination of the ALLL, loans held
for sale, 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. Additional
information on these policies can be found in the Company's 2022 Annual Report
and Note 2 of the Notes to the Unaudited Consolidated Financial Statements.
There have been no significant changes to the Company's Critical Accounting
Policies as described in its 2022 Annual Report.
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 such sources based on available capacity, term flexibility, and
cost. As of
Capital Strength The Bank's capital ratios continued to exceed the highest required regulatory benchmark levels. As ofDecember 31, 2022 , common equity Tier 1 capital ratio was 19.69%, Tier 1 leverage ratio was 16.53%, Tier 1 risk-based capital ratio was 19.69% and the total risk-based capital ratio was 20.77%.
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 ofDecember 31, 2022 , the Company had three COVID-19 modified loans totaling$31.8 million , representing 3.94 percent of loans outstanding as of such date. The COVID-19 loan modifications do not classify as TDRs as they fall under Section 4013 of the CARES Act, as amended, and further details regarding these modifications are provided in the table below. 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. December 31, 2022 Percentage of Number of Loan Modified Gross Gross Loans Loans Exposure Loans Modified (Dollars in thousands) Residential mortgage - $ -$ 176,207 0.00 % Construction and Development: Residential and commercial - - 22,871 0.00 % Land loans - - 545 0.00 %Total Construction and Development - - 23,416 0.00 % Commercial: Commercial real estate 3 31,842 408,671 7.79 % Farmland - - 11,435 0.00 % Multi-family - - 50,004 0.00 % Commercial and industrial - - 105,345 0.00 % Other - - 13,192 0.00 % Total Commercial 3 31,842 588,647 5.41 % Consumer: Home equity lines of credit - - 12,849 0.00 % Second mortgages - - 4,024 0.00 % Other - - 2,252 0.00 % Total Consumer - - 19,125 0.00 % Total loans 3$ 31,842 $ 807,395 3.94 % -43-
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September 30, 2022
Percentage of
Number of Loan Modified Gross Gross
Loans
Loans Exposure Loans Modified
(Dollars in thousands)
Residential mortgage - $ - $ 175,957 0.00 %
Construction and Development:
Residential and commercial - - 24,362 0.00 %
Land loans - - 550 0.00 %
Total Construction and Development - - 24,912 0.00 %
Commercial:
Commercial real estate 3 32,041 406,914 7.87 %
Farmland - - 11,506 0.00 %
Multi-family - - 55,295 0.00 %
Commercial and industrial - - 102,703 0.00 %
Other - - 13,356 0.00 %
Total Commercial 3 32,041 589,774 5.74 %
Consumer:
Home equity lines of credit - - 13,233 0.00 %
Second mortgages - - 4,395 0.00 %
Other - - 2,136 0.00 %
Total Consumer - - 19,764 0.00 %
Total loans 3 $ 32,041 $ 810,407 3.95 %
Certain industries included within our commercial real estate loans were
particularly impacted by social distancing, quarantines, and the economic impact
of the COVID-19 pandemic. All the three COVID-19 modified commercial real estate
loans were hotels.
Results of Operations
Net income available to common shareholders for the three months ended December
31, 2022 amounted to $1.9 million , or $0.25 per fully diluted common share, a
decrease of $109,000 or 5.4%, as compared with net income of $2.0 million or
$0.27 per fully diluted common share for the three months ended December 31,
2021 . This decrease in net income and diluted earnings per share was primarily
due to an increase in other operating expenses, driven by merger related
expenses incurred during the three months ended December 31, 2022 . Total other
income decreased $242,000 during the three months ended December 31, 2022 as
compared to the three months ended December 31, 2021 mainly due to decreased
prepayment penalties and service charges. Partially offsetting these items was a
$596,000 increase to net interest income during the three months ended December
31, 2022 due to rate related factors. The annualized return on average assets
was 0.75% for the three months ended December 31, 2022 , compared to annualized
return on average assets of 0.69% for three months ended December 31, 2021 . The
annualized return on average shareholders' equity was 5.14% for the three months
ended December 31, 2022 , compared to 5.61% in annualized return on average
shareholders' equity for the three months ended December 31, 2021 .
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 primarily support the loans and investments comprising these assets.
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Net Interest Income
The following table presents the components of net interest income for the
periods indicated:
For the Three Months Ended December 31,
Increase Percent
2022 2021 (Decrease) Change
(Dollars in thousands)
Interest income:
Loans, including fees $ 9,150 $ 8,228 $ 922 11.21 %
Investment securities 820 491 329 67.01
Dividends, restricted stock 267 13 254 1,953.85
Interest-bearing cash accounts 113 91 22 24.18 Total interest income 10,350 8,823 1,527 17.31 Interest expense: Deposits 1,830 1,045 785 75.12 Short-term borrowings 9 - 9 - Long-term borrowings 327 237 90 37.97 Subordinated debt 430 383 47 12.27 Total interest expense 2,596 1,665 931 55.92 Net interest income$ 7,754 $ 7,158 $ 596 8.33 % Net interest income was$7.8 million for the quarter endedDecember 31, 2022 , an increase of$596,000 , or 8.3 percent, from$7.2 million for the quarter endedDecember 31, 2021 . The increase was primarily due to an improvement in rate related factors in interest earning assets which was partially offset by an increase in average rates in interest bearing liabilities. The average yield on interest-earning assets increased 83 basis points for the quarter endedDecember 31, 2022 , to 4.26%, when compared to the same period in 2021 primarily due rising interest rates resulting in additional interest income from net loans and investment securities, which was partially offset by lower average loans. The average rate on interest-bearing liabilities for the quarter endedDecember 31, 2022 increased 59 basis points to 1.28% compared to the quarter endedDecember 31, 2021 , due to higher interest rates on deposits and borrowings. Net interest margin increased to 3.19% for the quarter endedDecember 31, 2022 , from 2.78% for the same period in 2021 as a result of the rising interest rate environment. Interest Income For the quarters endedDecember 31, 2022 and 2021, total interest income was$10.3 million and$8.8 million , respectively. Total interest income increased$1.5 million or 17.3% for the quarter endedDecember 31, 2022 , compared to the quarter endedDecember 31, 2021 , primarily due to rising interest rates resulting in additional interest income from net loans and investment securities partially offset by lower average loans. The average yield on interest-earning assets increased 83 basis points for the quarter endedDecember 2022 , to 4.26%, when compared to the same period in 2021. -45-
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Table of Contents Interest Expense For the quarter endedDecember 31, 2022 , interest expense increased by$931,000 , or 55.9%, to$2.6 million , compared to$1.7 million for the quarter endedDecember 31, 2021 . The increase in interest expense is attributable to higher interest rates on deposits and borrowings during the comparable period. Total average interest-bearing liabilities declined$159.1 million , or 16.4%, to$809.1 million , and the average rate on interest-bearing liabilities increased 59 basis points to 1.28%, compared to 0.69%, for the quarters endedDecember 31, 2022 and 2021, respectively.
Variance in Net Interest Income
The following table quantifies the impact on net interest income resulting from
changes in average balances and average rates during the periods presented. Any
change in interest income or expense attributable to both changes in volume and
changes in rate has been allocated to change in rate of each category.
Analysis of Variance in Net Interest Income Due to Changes in Volume and Rates
Three Months Ended December 31,
2022 and 2021
Increase (Decrease) Due to Change in:
Average Average Net
Volume Rate Change
(In thousands)
Interest Earning Assets:
Loans, including fees $ (803 ) $ 1,725 $ 922
Investment securities 225 104 329
Interest-bearing cash accounts (1 ) 255 254
Dividends, restricted stock 3 19
22
Total interest-earning assets$ (576 ) $ 2,103 $ 1,527 Interest Bearing Liabilities: Money Market deposits$ (145 ) $ 269 $ 124 Savings deposits - 4 4 Certificates of deposits 100 290 390 Other interest-bearing deposits (22 ) 289
267
Total interest-bearing deposits (67 ) 852
785
Borrowings and Subordinated debt 94 52
146
Total interest-bearing liabilities $ 27
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Average Balances, Net Interest Income, and Yields Earned and Rates Paid
The following table shows for the periods indicated the total dollar amount of
interest from average interest-earning assets and the resulting yields, as well
as the interest expense on average interest-bearing liabilities, expressed both
in dollars and rates, and the NIM (net interest income as a percentage of
average interest-earning assets). All average balances are based on monthly
balances. Management does not believe that the monthly averages differ
significantly from what the daily averages would be. Quarterly rates, yields,
spreads, and margins throughout this MD&A are calculated on an annualized basis
where appropriate. No tax equivalent adjustments have been made as the amounts
are not material.
Three Months Ended December 31,
2022 2021
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
(Dollars in thousands)
ASSETS
Interest Earning
Assets:
Loans, including
fees(1) $ 824,361 $ 9,150 4.44 % $ 913,587 $ 8,228 3.60 %
Investment securities 110,033 820 2.98 % 75,427 491 2.60 %
Interest-bearing cash
accounts 30,650 267 3.48 % 32,775 13 0.16 %
Dividends, restricted
stock 6,949 113 6.50 % 6,699 91 5.43 %
Total interest-earning
assets(1) 971,993 10,350 4.26 % 1,028,488 8,823 3.43 %
Non-interest-earning
assets:
Cash and due from banks 5,386 105,989
Bank-owned life
insurance 26,292 26,125
Other assets 27,918 26,042
Other real estate owned 228 4,961
Allowance for loan
losses (9,121 ) (14,157 )
Total
non-interest-earning
assets 50,703 148,960
Total assets $ 1,022,696 $ 1,177,448
LIABILITIES &
SHAREHOLDERS' EQUITY
Interest-Bearing
Liabilities:
Money Market deposits $ 174,702 402 0.92 % $ 367,761 278 0.30 %
Savings deposits 53,623 15 0.11 % 53,336 11 0.08 %
Certificates of
deposits 150,044 703 1.87 % 113,622 312 1.10 %
Other interest-bearing
deposits 324,911 710 0.87 % 341,550 444 0.52 %
Total interest-bearing
deposits 703,280 1,830 1.04 % 876,269 1,045 0.48 %
Borrowings 105,837 766 2.90 % 91,919 620 2.70 %
Total interest-bearing
liabilities 809,117 2,596 1.28 % 968,188 1,665 0.69 %
Non-interest-bearing
liabilities:
Demand deposits 56,755 54,092
Other liabilities 8,460 11,408
Total non-interest
bearing liabilities 65,215 65,500
Shareholders' equity 148,364 143,760
Total liabilities and
shareholders' equity $ 1,022,696 $ 1,177,448
Net interest spread 2.98 % 2.74 %
Net interest margin 3.19 % 2.78 %
Net interest income $ 7,754 $ 7,158 (1) Includes non-accrual loans during the respective periods. Calculated net of deferred loan fees and loan discounts.
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Other Income
The following table presents the principal categories of other income for the
periods indicated:
Three Months Ended December 31,
Increase Percent
2022 2021 (Decrease) Change
(Dollars in thousands)
Service charges and other fees $ 177 $ 454 $ (277 ) (61.01 )%
Rental income-other 49 52 (3 ) (5.77 )
Net gains on sale of loans 8 52 (44 ) (84.62 )
Earnings on bank-owned life insurance 173 169 4 2.37
Other real estate owned income, net 78 - 78 -
Total other income $ 485 $ 727 $ (242 ) (33.29 )%
For the three months ended December 31, 2022 , total other income amounted to
$485,000 , a decrease of $242,000 , or 33.3%, compared to the three months ended
December 31, 2021 . The decrease in total other income was primarily due to a
decrease of $277,000 in prepayment penalties, service charges and other fees
during the quarter ended December 31, 2022 as compared to the quarter ended
December 31, 2021 .
Other Expense
The following table presents the principal categories of other expense for the
periods indicated:
Three Months Ended December 31,
Increase Percent
2022 2021 (Decrease) Change
(Dollars in thousands)
Salaries and employee benefits
12.51 % Occupancy expense 537 515 22
4.27
Federal deposit insurance premium 64 76 (12 ) (15.79 ) Advertising 32 32 - - Data processing 275 320 (45 ) (14.06 ) Professional fees 763 1,055 (292 ) (27.68 ) Merger related expense 511 - 511 - Pennsylvania shares tax 127 170 (43 ) (25.29 ) Other operating expenses 871 765 106 13.86 Total other expense$ 5,762 $ 5,228 $ 534 10.21 % Other expenses for the quarter endedDecember 31, 2022 increased$534,000 , or 10.2%, to$5.8 million when compared to the quarter endedDecember 31, 2021 . The increase was primarily due to an increase of$511,000 of merger related expenses for the three months endedDecember 31, 2022 . These expenses primarily consisted of legal and professional fees. -48-
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Table of Contents Income Taxes The Company recorded income tax expense of$569,000 during the quarter endedDecember 31, 2022 , compared to$640,000 for the quarter endedDecember 31, 2021 . The effective tax rates for the Company for the quarters endedDecember 31, 2022 and 2021, were 23.0% and 24.1%, respectively. The effective tax rate includes discrete tax items related to non-deductible merger-related expenses recognized in the first quarter of the fiscal year 2023. Investment Portfolio For the three months endedDecember 31, 2022 , the average volume of investment securities increased by$34.6 million to$110.0 million , or 11.3% of average earning assets, from$75.4 million , or 7.3% of average earning assets, for the three months endedDecember 31, 2021 . AtDecember 31, 2022 , the total investment portfolio amounted to$109.9 million . AtDecember 31, 2022 , the principal components of the investment portfolio were government agency obligations, federal agency obligations, including mortgage-backed securities, obligations ofU.S. states and political subdivisions,U.S. treasury note, corporate bonds and notes, a trust preferred security, and taxable mutual funds. Loan Portfolio 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 local competition. Factors such as the economic climate, interest rates, real estate values and employment all contribute to changes in the composition of the Company's portfolio. Any growth of the loan portfolio 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 and limit concentrations in any single industry. Total gross loans, which excludes loans held-for-sale decreased by$3.0 million to$807.4 million atDecember 31, 2022 when compared toSeptember 30, 2022 . Construction loans decreased by$1.5 million , commercial loans decreased by$1.1 million , consumer loans declined by$600,000 , and residential loans increased by$250,000 , in each case, atDecember 31, 2022 when compared toSeptember 30, 2022 .
Loans held-for-sale amounted to
At
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Average loan balances decreased
Allowance for Loan Losses and Related Provision
The ALLL provides an estimate of probable but unconfirmed losses in the loan portfolio as of the financial statement date. Additions to the ALLL are made through provisions charged against current operations and through recoveries made on loans previously charged-off. The ALLL is maintained at an amount considered adequate by management to provide for probable loan losses inherent in the loan portfolio based upon a periodic evaluation of the portfolio's risk characteristics. In establishing an appropriate ALLL, 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. Given the economic volatility impacting national, regional, and local markets, the Company's analysis of its ALLL takes into consideration the potential impact that current trends may have on the Company's borrower base. Although management uses the best information reasonably available to management, the level of the ALLL remains an estimate, which is subject to significant judgment and short-term change. Our regulators, as an integral part of their examination process, periodically review the Company's ALLL. Our regulators may require the Company to increase the ALLL based on their analysis of information available to them at the time of their 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 ALLL may be necessary due to economic factors impactingNew Jersey andPennsylvania real estate and the economy in general, as well as operating, regulatory and other conditions beyond the Company's control. The allowance for loan losses atDecember 31, 2022 amounted to$9.1 million , or 1.13% of total gross loans excluding loans held-for-sale, compared to$9.1 million , or 1.12% of total gross loans excluding loans held-for-sale, atSeptember 30, 2022 . The Company did not record a provision for loan losses for the quarters endedDecember 31, 2022 or 2021. Net charge-offs were ($9,000 ) and$1.0 million for the three months endedDecember 31, 2022 and 2021, respectively. The decrease is reflective of there not being any charge offs recorded during theDecember 2022 period. We will continue to experience periodic charge-offs in the future as exit strategies with respect to certain of our loans are considered and executed, in particular as it relates to our clients impacted by the COVID-19 pandemic. Loans with previously established specific reserves may ultimately result in a charge-off under a variety of scenarios. The level of the ALLL for the respective periods reflects the credit quality within the loan portfolio, the loan volume recorded or lost during the periods, the changing composition of the commercial and residential real estate loan portfolios and other related factors. In management's view, the level of the ALLL atDecember 31, 2022 was adequate to cover losses inherent in the loan portfolio. Actual results could differ materially from management's analysis, based principally upon the factors considered by management in establishing the ALLL. -50-
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Changes in the ALLL are presented in the following table for the periods
indicated:
Three Months Ended December 31,
2022 2021
(Dollars in thousands)
Average loans outstanding $ 824,361 $ 913,857
Total gross loans at end of period $ 807,395 $ 867,574
Analysis of the Allowance of Loan Losses:
Balance at beginning of period $
9,090
Charge-offs: Commercial: Commercial real estate - - Commercial and industrial - 1,430 Consumer: Second mortgages - 85 Other - - Total charge-offs - 1,515 Recoveries: Residential Mortgage 5 1 Commercial: Commercial real estate - 75 Commercial and industrial 1 - Consumer: Home equity lines of credit 1 - Second mortgages 2 4 Second mortgages - - Total recoveries 9 80 Net charge-offs (9 ) 1,435 Provision for loan losses - - Balance at end of period $ 9,099$ 10,037 Ratios: Ratio of allowance for loan losses to non-performing loans 466.14 % 560.73 % Ratio of net charge-offs to average loans outstanding (1) 0.00 % 0.19 % Ratio of net charge-offs to total allowance for loan losses (0.10 )% 14.30 % (1) Annualized Asset Quality The Company manages asset quality and credit risk by maintaining diversification in its loan portfolio and through review processes that include analysis of credit requests and ongoing examination of outstanding loans, delinquencies, and potential problem loans, with particular attention to the loan portfolio's dynamics and mix of assets. The Company endeavors to identify loans experiencing difficulty early in the process in an attempt to correct the problems, to record charge-offs promptly based on realistic assessments of current collateral values and cash flows, and to maintain an adequate ALLL 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 90 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, all past due amounts have been collected and a satisfactory period of ongoing repayments exists. Accruing loans past due 90 days or more are generally well-secured and in the process of collection. -51-
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Non-Performing Assets, OREO and Troubled Debt Restructured Loans
Non-performing loans include non-accrual loans and accruing loans that 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.
TDR loans represent loans to borrowers experiencing financial difficulties on
which a concession was granted, such as a reduction in interest rate which is
lower than the current market rate for new debt with similar risks, or modified
repayment terms, and are performing under the restructured terms. Such loans, as
long as they are performing in accordance with their restructured terms, are not
included within the Company's non-performing loans. For additional information
regarding loans, see Note 7 of the Notes to the Unaudited 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
performing TDR loans:
December 31, September 30,
2022 2022
(In thousands)
Non-accruing loans:
Non-accrual loans $ 1,277 $ 753
Accruing loans more than 90 days past due 675 243
Total non-performing loans 1,952 996
OREO 259 259
Total non-performing assets $ 2,211 $ 1,255
TDR loans - performing $ 10,075 $ 4,979
Non-accrual loans totaled $1.3 million at December 31, 2022 and $753,000 at
September 30, 2022 . The increase in non-accrual loans was primarily due to
addition of two residential loans with a carrying value of $569,000 during the
three months ended December 31, 2022 . OREO was $259,000 at both December
31, 2022 , and September 30, 2022 . Performing TDR loans were $10.1 million at
December 31, 2022 and $4.8 million at September 30, 2022 . The increase is
primarily related to one additional new TDR commercial and industrial loan at a
carrying value of $4.8 million during the December 31, 2022 period.
Credit quality risk ratings include categories of "pass," "special mention,"
"substandard" and "doubtful." Assets classified as "pass" are those protected by
the current net worth and paying capacity of the obligor or by the value of the
underlying collateral. Assets which do not currently expose the Company to
sufficient risk to warrant classification as substandard or doubtful but possess
certain identified weaknesses are required to be designated as "special
mention." If uncorrected, the potential weaknesses may result in deterioration
of the repayment prospects. An asset is considered "substandard" if it is
inadequately protected by the current net worth and paying capacity of the
obligor or of the collateral pledged, if any. "Substandard" assets include those
characterized by the "distinct possibility" that the Company will sustain "some
loss" if the deficiencies are not corrected. Assets classified as "doubtful"
have all of the weaknesses inherent in those classified as "substandard" with
the added characteristic that the weaknesses present make "collection or
liquidation in full," on the basis of currently existing facts, conditions, and
values, "highly questionable and improbable."
Special mention loans amounted to $32.5 million and $32.7 million
at December 31, 2022 and September 30, 2022 respectively. Substandard loans were
$11.3 million and $11.4 million at December 31, 2022 and September 30, 2022 ,
respectively. Our loans that have been identified as special mention or
substandard are considered potential problem loans due to a variety of changing
conditions affecting the credits, including general economic conditions and/or
conditions applicable to the specific borrowers.
Recent Accounting Pronouncements
Note 2 of the Notes to the Unaudited Consolidated Financial Statements discusses
the expected impact of accounting pronouncements recently issued or proposed but
not yet required to be adopted.
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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 NIMs in a falling rate environment and reduce NIMs 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. AtDecember 31, 2022 , the Company reflected a positive interest sensitivity gap with an interest sensitivity ratio of 1.11:1.00 at the cumulative one-year position. Based on current rising interest rate environment, that at the current time is estimated to continue through the first half of 2023, emphasis will be on controlling liability costs and duration in our efforts to insulate the net interest spread for a potential future decline in rates. 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 loan 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 so as 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 adequately respond 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. -53-
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The Company's primary sources of short-term liquidity consist of cash and cash equivalents and investment securities available-for-sale.
Additionally, liquidity is derived from scheduled loan payments of principal and interest, as well as prepayments received. As a contingency plan for any liquidity constraints, liquidity could also be derived from the sale of conforming residential mortgages from our loan portfolio from the temporary curtailment of lending activities. AtDecember 31, 2022 , the Company had$35.0 million in cash and cash equivalents compared to$50.4 million atSeptember 30, 2022 . In addition, our available for sale investment securities amounted to$50.4 million atDecember 31, 2022 and$49.8 million atSeptember 30, 2022 . Deposits Total deposits decreased$47.9 million , or 6.1 percent, from$785.3 million atSeptember 30, 2022 to$737.4 million atDecember 31, 2022 . The decrease in deposits was primarily related to a reduction of$28.8 million in money market deposits and$7.2 million in interest-bearing demand deposits, a$7.0 million decline in non-interest-bearing deposits and a decrease of$3.4 million in time deposits. Non-interest-bearing core deposits; interest-bearing core deposits, savings, money market; and time deposits represent approximately 7%, 73%, and 20% of total deposits, respectively as ofDecember 31, 2022 . Total interest-bearing deposits decreased$40.9 million from$727.3 million atSeptember 30, 2022 to$686.4 million atDecember 31, 2022 . Time deposits$250,000 and over decreased$7.3 million as compared toSeptember 30, 2022 . Time deposits$250,000 and over represented 7.5% of total deposits atDecember 31, 2022 compared to 8.0% atSeptember 30, 2022 . Brokered deposits remained at$9.1 million at bothDecember 31, 2022 andSeptember 30, 2022 . The Company continues to focus on the maintenance and development of its deposit base to align with its funding requirements and liquidity needs, but with an emphasis on serving the needs of its communities to provide a long-term relationship base to efficiently compete for and retain deposits in its market.
The following table depicts the Company's deposits classified by type, with
percentages to total deposits, at
December 31, September 30,
2022 2022 Dollar
Amount Percentage Amount Percentage Change
Balances by types of deposit: (Dollars in thousands)
Savings$ 53,655 7.28 %$ 55,288 7.04 %$ (1,633 ) Money market accounts 250,936 34.03 279,699 35.62 (28,763 ) Interest bearing demand 233,635 31.68 240,819 30.66 (7,184 ) Non-interest bearing demand 51,066 6.92 58,014 7.39 (6,948 ) 589,292 79.91 633,820 80.71 (44,528 ) Certificates of deposit 148,130 20.09 151,503 19.29 (3,373 ) Total$ 737,422 100.00 %$ 785,323 100.00 %$ (47,901 ) Borrowings Advances from FHLB Pittsburgh 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 these advances. As ofDecember 31, 2022 andSeptember 30, 2022 , the Company's outstanding balance of FHLB Pittsburgh advances totaled$80.0 million . Of the$80.0 million in advances, all are short-term fixed-rate advances except$60.0 million of advances that have a rolling 90-day maturity.
The Company did not purchase any securities under agreements to repurchase as a
short-term funding source during the quarters ended
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 three months endedDecember 31, 2022 , cash and cash equivalents decreased by$18.3 million from the balance atSeptember 30, 2022 . Net cash of$7.0 million was provided by operating activities. Net cash provided by investing activities amounted to$4.1 million primarily due to decrease in loans of$3.6 million combined with$523,000 of investment securities. Net cash used in financing activities amounted to$29.4 million , which was primarily attributable to decrease in deposits of$47.9 million which was partially offset by a net increase in borrowings of$18.0 million . -54-
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Table of Contents Shareholders' Equity Total shareholders' equity amounted to$148.7 million , or 14.6% of total assets, atDecember 31, 2022 , compared to$146.4 million , or 14.0% of total assets, atSeptember 30, 2022 . Book value per common share was$19.48 atDecember 31, 2022 , compared to$19.18 atSeptember 30, 2022 . December 31, September 30, 2022 2022 (In thousands, except for per share data) Shareholders' equity $ 148,735 $ 146,445 Book value per common share $ 19.48 $ 19.18 Capital AtDecember 31, 2022 , the Bank's common equity Tier 1 capital ratio was 19.69%, Tier 1 leverage ratio was 16.53%, Tier 1 risk-based capital ratio was 19.69% and the total risk-based capital ratio was 20.77%. AtSeptember 30, 2022 , the Bank's common equity Tier 1 capital ratio was 19.27%, Tier 1 leverage ratio was 16.30%, Tier 1 risk-based capital ratio was 19.27% and the total risk-based capital ratio was 20.34%. AtDecember 31, 2022 , the Bank was in compliance with all applicable regulatory capital requirements.
Information on Stock Repurchases
Information on Stock Repurchases is provided in "Part II. Other Information,
Item 2, Unregistered Sales of
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