Year-over-year tone shift - average net-tone change across Risk Factors and MD&A vs the prior 10-K. This filing is -0.03pp more bearish than last year's.
Why YoY instead of absolute: the LM lexicon has ~6.6× more negative words than positive (legal/risk-disclosure language is heavy on hedging), so every 10-K reads bearish on raw tone. Year-over-year change strips that bias and surfaces the actual shift in management's framing.
Tone shift by section
The two components the gauge averages: how Risk Factors and MD&A each shifted in net tone versus last year's 10-K. The headline above is their average, so a green needle over a soft section just means the other section carried it.
Risk Factors
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Net-tone change vs last year's 10-K.
MD&A
-0.03pp
Flat
Net-tone change vs last year's 10-K.
Per-snippet highlights
Sentence-level sentiment highlighting with category and subcategory filters is coming once the snippet-scoring pipeline lands. For now, dig into the actual section text on the Sections tab.
No section text extracted for this filing. The 10-K may use a non-standard template that the parser doesn't recognize - the original doc is still linked in the Stats tab.
Language change vs prior 10-K
MD&A (Item 7) - words with the biggest YoY frequency increase
Negative rising
loss+1
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Positive rising
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effective+1
benefit+1
MD&A (Item 7)
8,868 words
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This section is intended to help investors understand the financial performance of HV Bancorp, Inc. and its subsidiary through a discussion of the factors affecting our financial condition as of December 31, 2022 and 2021, and our results of operations for the year ended December 31, 2022 and 2021, respectively. This section should be read in conjunction with the audited consolidated financial statements and notes to the audited consolidated financial statements that appear beginning on page 46 of this annual report.
Overview
HV Bancorp, Inc., through the Bank, provides financial services to individuals and businesses from our main office in Doylestown, Pennsylvania, and from our seven full-service banking offices located in Plumsteadville, Philadelphia, Warrington and Huntingdon Valley, Pennsylvania and Mount Laurel, New Jersey. We also operate a limited service branch in Philadelphia, Pennsylvania. Our administrative offices and executive offices are located in Doylestown, Pennsylvania. Our Business Banking office is located in Philadelphia, Pennsylvania. We have loan production and sales offices located in Mount Laurel, New Jersey, Doylestown, Pennsylvania, Huntingdon Valley, Pennsylvania, and Wilmington, Delaware; and a loan origination office in Montgomeryville, Pennsylvania. Our primary market area includes Montgomery, Bucks and Philadelphia Counties in Pennsylvania, Burlington County in New Jersey and New Castle County in Delaware. Our principal business consists of attracting retail deposits from the general public in our market area and investing those deposits, together with funds generated from operations and borrowings, primarily in one- to four-family residential mortgage loans, commercial real estate loans (including multi-family loans), construction loans, home equity loans and lines of credit and, to a lesser extent, consumer loans. We retain our loans in portfolio depending on market conditions, but we primarily sell our fixed-rate one- to four-family residential mortgage loans in the secondary market. We also invest in various investment securities. Our revenue is derived principally from interest on loans and investments and loan sales. Our primary sources of funds are deposits, Federal Home Loan Bank (“FHLB”) advances and principal and interest payments on loans and securities.
Our results of operations depend primarily on our net interest income which is the difference between the interest income we earn on our interest-earning assets and the interest we pay on our interest-bearing liabilities. Our results of operations also are affected by our provision for loan losses, non-interest income and non-interest expense. Non-interest income currently consists primarily of gains recognized from the sale of residential mortgage loans in the secondary market, fees for customer services, gain (loss) from derivative instruments, gain on sale of mortgage servicing rights, net, change in fair value of loans held-for-sale and sales of securities. Non-interest expense currently consists primarily of expenses related to salaries and employee benefits, occupancy, data processing related operations, professional fees and other expenses .
Our results of operations also may be affected significantly by general, regional, and local economic and competitive conditions, changes in market interest rates, governmental policies and actions of regulatory authorities.
Merger with Citizens Financial
As previously announced, on October 18, 2022, the Company, the Bank, Citizens Financial Services, Inc. (“Citizens Financial”), First Citizens Community Bank (“FCCB”) and CZFS Acquisition Company, LLC entered into a merger agreement that provides that the Company will merge with and into Citizens Financial, with Citizens Financial remaining as the surviving corporation (the “Merger”). Following the Merger, the Bank will merge with and into FCCB, with FCCB remaining as the surviving bank (the “Bank Merger”).
The Company’s shareholders approved the Merger on February 15, 2023. On March 24, 2023, the Pennsylvania Department of Banking and Securities approved the Merger and the Bank Merger. On March 30, 2023, the Board of Governors of the Federal Reserve System approved the Bank Merger and waived the application for the Merger. The completion of the Merger and the Bank Merger remain subject to customary closing conditions. The Merger is expected to close in the first half of 2023.
At the effective time of the Merger, each outstanding share of Company common stock will be converted into the right to receive, at the election of such holder, either (i) 0.4000 shares of Citizens Financial common stock, or (ii) $30.50 in cash, together with cash in lieu of fractional shares, if any. All such elections are subject to adjustment on a pro rata basis, so that 80% of the aggregate merger consideration paid to the Company shareholders will be the stock consideration and the remaining 20% will be the cash consideration.
Critical Accounting Estimates
The discussion and analysis of the financial condition and results of operations are based on our financial statements, which are prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. The estimates and assumptions that we use are based on historical experience and various other factors and are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, resulting in a change that could have a material impact on the carrying value of our assets and liabilities and our results of operations.
The following represents our critical accounting estimates:
Allowance for loan losses. The allowance for loan losses is the amount estimated by management as necessary to cover losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses, which is charged to income. Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment.
The allowance for loan losses represents management’s estimate of losses inherent in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans. The allowance for loan losses is increased by the provision for loan losses, and decreased by charge-offs, net of recoveries. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. All, or part, of the principal balance of loans receivable are charged off to the allowance as soon as it is determined that the repayment of all, or part, of the principal balance is highly unlikely.
The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance. The allowance is based on the Bank ’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available.
The allowance consists of specific, and general components. The specific component relates to loans that are classified as impaired. For loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers pools of loans by loan class including commercial loans not considered impaired, as well as smaller balance homogeneous loans, such as residential mortgage, home equity, home equity lines of credit and consumer loans. These pools of loans are evaluated for loss exposure based upon historical loss rates for each of these categories of loans, adjusted for qualitative factors.
These qualitative risk factors include:
Lending policies and procedures, including underwriting standards and collection, charge-off, and recovery practices;
National, regional, and local economic and business conditions as well as the condition of various market segments, including the value of underlying collateral for collateral dependent loans;
Nature and volume of the portfolio and terms of loans;
Volume and severity of past due, classified and nonaccrual loans as well as and other loan modifications;
Existence and effect of any concentrations of credit and changes in the level of such concentrations; and
Effect of external factors, such as competition and legal and regulatory requirements.
Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. In addition, the FDIC and the Pennsylvania Department of Banking and Securities, as an integral part of their examination process, periodically review our allowance for loan losses. These agencies may require us to recognize adjustments to the allowance based on judgments about information available to them at the time of their examination. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would adversely affect earnings. On January 1, 2023, we adopted CECL.
See Note 1 of the notes to the audited consolidated financial statements of the Company included in this annual report .
Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are reduced by a valuation allowance if, based on the weight of the evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized. See also Note 14– Income Taxes in the Notes to the Consolidated Financial Statements.
Investment 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 reasons underlying the decline, the magnitude and duration of the decline and whether or not management intends to sell or expects that it is more likely than not it will be required to sell the security prior to an anticipated recovery of 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 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 losses) and (b) the amount of the total other-than-temporary impairment related to 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 other factors is recognized in other comprehensive income (loss).
Fair Value Measurements . Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A more detailed description of the fair values measured at each level of the fair value hierarchy and our methodology can be found in Note 15 of the audited consolidated financial statements of the Company included in this transition report on Form 10-K.
D e r i v a ti v e Instruments and H ed g i ng A c ti v i t i es . We u s e d e ri v a ti v e i n s tr u m en t s as p a r t of our o v e r a l l s t r a t e g y t o m ana g e our e x po s u r e t o m a r k et r is k s p ri m a r i l y a ss oc i a t ed w it h f l u c t u a ti o n s i n i n t e r e s t r a t e s . A s a m a tt er of p o l i c y , we do not u s e de ri v a t i v es f or speculative pu r p o s e s . A l l of our de ri v a t i v e i n s t r u m en t s t ha t a r e m ea s u r e d at f a i r v a l ue on a r e c u r ri ng ba s i s and a r e i n c l uded i n t he consolidated st a t e m en t s o f f i na n c i a l cond i t i on as mortgage banking derivatives and other liabilities. T h e fai r v al u e o f our d er i v ati v e i n str u m e n ts , o t h e r t h a n Interest Rate Lock Commitments (“ IR L C ”) i s d e t e r m i ned by u t i li z i ng quo t ed p r i c es f r o m d ea l er s i n s u c h s ec u riti e s o r t h i r d - p ar t y m od el s u ti li z i n g observable m a r k e t i n pu t s . The fair value of the Company’s IRLC instruments are based upon the underlying mortgage loan adjusted for the probability of such commitments being exercised and estimated costs to complete and originate the loan. The ch a n g es i n t he f a i r v a l ue of d e r i v a t i v e i n s t r u m en t s a r e i n c l ud ed i n non-interest income i n t he consolidated s t a t e m en t s of income .
To be annou n c ed s e c u r i t i es ( “ T BA s ” ) a r e “ forward d e l i v e r y” s ecu r i t i es con s i d e r ed de ri v a t i v e i n s t r u m en t s u n d er de ri v a t i v es and hed g i ng accoun t i ng g u i dance, ( F A SB A SC 815). We u t i li z e T BA s t o p r o t e c t a g a i n s t t he p r i ce r is k i n h e r e nt i n d e r i v a t i v e l o a n co m m it m en ts . T BA s a r e v a l ued b a s ed on f o r w a r d de a l e r m a r k s fr om our a p p r o v ed c ou n t e r p a r t i e s . We u tili z e a t h ird - pa rt y m a r k et p r i c i ng s e r v i c e , w h i ch co m p il es cu r r e n t p ri c es f or i n s t r u m en t s f r om m a r k et s ou r c e s and t h o s e pr i c es r e p r e s e n t t h e c u r r ent e xecu t ab l e p ri c e. T BA s a r e r ec o r d e d at f a i r v a l ue on t h e consolidated s t a t e m en t s of f i na n c i a l con d i ti on i n mortgage derivatives a nd o t h e r li a b i l i ti e s w it h c h an g es i n f a i r v a l ue r ec o r ded i n non-interest i nco m e i n t he consolidated s t a t e m en t s of income.
Loan co m m it m en t s t h a t a r e de ri v a t i v es a r e r eco g n i z ed at f a i r v a l ue on t h e consolidated s t a t e m en t s of f i n a nc i al con d i t i on as mortgage banking derivatives and as o t h er l i a b i l i t i e s w it h cha n g es i n t he i r f a i r v a l u es r e c o r d ed as a gain i n hedging instruments in non-interest i nco m e in t h e consolidated s t a t e m en t s of income . Outstanding IRLCs are subject to interest rate risk and related price risk during the period from the date of issuance through the date of loan funding, cancellation or expiration. Loan commitments generally range between 30 and 90 days; however, the borrower is not obligated to obtain the loan. We are subject to fallout risk related to IRLCs, which is realized if approved borrowers choose not to close on the loans within the terms of the IRLCs. We have used mandatory commitments
to substantially reduce these risks. See Note 1 1 Derivatives and Risk Management Activities in the audited consolidated financial statements of the Company in this annual report .
Comparison of Financial Condition at December 31, 2022 and December 31, 2021
Total Assets
Total assets increased $55.7 million to $615.8 million at December 31, 2022, from $560.1 million at December 31, 2021. The increase was primarily the result of increases of $143.8 million in loans receivable, net, $40.9 million in investment securities, $3.7 million in bank-owned life insurance and $1.1 million in other assets, which were offset by decreases of $104.5 million in cash and cash equivalents, $25.3 million in loans held-for-sale and $3.2 million in mortgage servicing rights.
Cash and cash equivalents
Cash and cash equivalents decreased $104.5 million to $16.3 million at December 31, 2022 from $120.8 million at December 31, 2021, primarily as a result of increased funding of loans and purchases of investment securities.
Investment Securities
Investment securities increased by $40.9 million to $85.4 million at December 31, 2022 from $44.5 million at December 31, 2021. The increase was primarily due to purchases of $61.9 million of U.S. Treasury securities, mortgage-backed, collateralized mortgage obligations and corporate notes offset by $15.8 million in proceeds from sales and maturities and principal repayments during the year ended December 31, 2022, $2.3 million in net unrealized loss on available-for-sale securities and $2.3 million in net unrealized loss on securities transferred to held-to-maturity. The increase in comprehensive loss in the available-for-sale portfolio reflects recent increases in market interest rates.
At December 31, 2022, our held-to-maturity portion of the securities portfolio, at amortized cost, was $29.8 million, and our available-for-sale portion of the securities portfolio, at fair value, was $55.7 million compared to $44.5 million of available-for-sale securities at December 31, 2021. During the quarter ended June 30, 2022, the Company transferred $30.2 million at amortized cost of available-to-sale securities to held-to-maturity securities .
Net Loans
Net loans increased $143.8 million to $469.0 million at December 31, 2022, from $325.2 million at December 31, 2021. Commercial real estate loans increased by $68.9 million to $185.8 million at December 31, 2022, from $116.9 million at December 31, 2021 and there was a $24.3 million increase in commercial business loans to $54.5 million at December 31, 2022, from $30.2 million at December 31, 2021. In addition, one-to-four family residential real estate loans increased $48.7 million to $155.0 million at December 31, 2022 from $106.3 million at December 31, 2021 and construction loans increased $26.3 million to $69.2 million at December 31, 2022, from $42.9 million at December 31, 2021. Offsetting these increases, was a $22.4 million decrease in SBA Paycheck Protection Program (“PPP”) loans to $472,000 at December 31, 2022 from $22.9 million at December 31, 2021 as a result of PPP loan forgiveness from the SBA . Additionally, home equity and HELOC loans decreased $879,000 to $2.3 million at December 31, 2022 from $3.2 million at December 31, 2021.
In November 2017, the Bank entered into a loan purchase agreement with a broker to purchase a portfolio of private education loans made to American citizens attending AMA-approved medical schools in Caribbean nations. The broker serves as a lender, holder, program designer and developer, administrator, and secondary market for the loan portfolios they generate. At December 31, 2022 , the balance of the private education loans was $3.7 million. The private student loans were made following a proven credit criteria and were underwritten in accordance with the Bank’s policies . At December 31, 2022 , there was sevens loans with a balance of approximately $514,000 that were past due 90 days or more.
Loans Held For Sale
Loans held for sale decreased $25.3 million to $15.2 million at December 31, 2022 from $40.5 million at December 31, 2021. This decrease was primarily a result of originations of $274.5 million of one- to four-family residential real estate loans during the year ended December 31, 2022 net of principle sales of $305.6 million of loans in the secondary market during this same period.
Deposits
Deposits increased $61.2 million, or 13.2%, to $525.2 million at December 31, 2022, from $464.0 million at December 31, 2021. Our core deposits (consisting of demand deposits, money market, passbook and statement and checking accounts) increased $26.4 million, or 6.1%, to $458.2 million at December 31, 2022, from $431.8 million at December 31, 2021 . Certificates of deposit increased $34.8 million, or 108.3%, to $67.0 million at December 31, 2022, from $32.2 million at December 31, 2021, resulting from increases of $40.9 million in certificates of deposit issued through brokers offset by a $6.1 million decrease in retail certificates of deposit.
Advances from the Federal Home Loan Bank
As of December 31, 2022 and December 31, 2021, the Company had $26.6 million and $26.4 million in advances outstanding, respectively. During July 2020, the Company refinanced advances of $27.0 million from the Federal Home Loan Bank to reduce the cost of borrowing.
Advances from the Federal Reserve Paycheck Protection Program Liquidity Facility (“PPPLF”)
As of December 31, 2022, there were no advances from the Federal Reserve PPPLF as a result of repayments of $3.1 million from PPP loan forgiveness from the SBA compared to $3.1 million at December 31, 2021.
Subordinated Debt
On May 28, 2021, the Company issued a $10.0 million subordinated note. This note has a maturity date of May 28, 2031, and bears interest at a fixed rate of 4.50% per annum through May 28, 2026. Thereafter, the note rate is adjustable and resets quarterly based on the then current 90-day average Secured Overnight Financing Rate (“SOFR”) plus 325 basis points for U.S. dollar denominated loans as published by the Federal Reserve Bank of New York. The Company may, at its option, at any time on an interest payment date, on or after May 28, 2026, redeem the notes, in whole or in part, at par plus accrued interest to the date of redemption. The balance of subordinated debt, net of unamortized debt issuance costs, was $10.0 million at December 31, 2022 and 2021 .
Total Shareholders’ Equity
Total shareholders’ equity decreased $543,000 to $42.1 million at December 31, 2022, compared to $42.6 million at December 31, 2021. The decrease resulted primarily from other comprehensive losses of $3.1 million due to the fair value adjustments, net of deferred tax, on the investment securities available-for-sale portfolio, which reflects recent increases in market interest rates and $372,000 in treasury stock repurchases primarily as part of the stock repurchase plan. Offsetting these decreases was net income of $2.2 million for the year ended December 31, 2022, share based compensation expense of $535,000, ESOP shares committed to be released of $46,000 and stock option exercises of $136,000. See Note 10 of the Notes to the Audited Consolidated Financial Statements.
Comparison of Statements of Income for the Year Ended December 31, 2022 and 2021
General
Net income decreased $1.9 million, or 46.3%, to $2.2 million for the year ended December 31, 2022 from $4.1 million for the year ended December 31, 2021. The decrease in net income for the year ended December 31, 2022 was primarily due to a decrease of $5.5 million in in non-interest income, an increase of $982,000 in provision for loan losses and a $526,000 increase in non-interest expense partially offset by an increase of $4.3 million in net interest income and a decrease of $889,000 in income tax expense as compared to the year ended December 31, 2021.
Interest Income
Total interest income increased $6.2 million, or 37.1%, to $22.9 million for the year ended December 31, 2022 from $16.7 million for the year ended December 31, 2021. The increase was primarily the result of a $4.6 million increase in interest and fees on loans, $1.1 million increase in interest on investment securities and a $440,000 increase in interest-earning deposits with banks. The average yield on our interest-earning assets increased 118 basis points to 4.15% for the year ended December 31, 2022 as compared to 2.97% for the year ended December 31, 2021 due to the rising interest rate environment. The average balance of our interest-earning assets decreased by $12.1 million to $550.8 million for the year ended December 31, 2022 as compared to $562.9 million for the year ended December 31,
20 21 . The de crease was primarily a result of a decrease in the average balance of interest-earning deposits of $68.1 million offset by a $42.5 million incre ase in the average balance of investment securities and a $ 13.3 million increase in the average balance of loans .
Interest and fees on loans increased $4.6 million, or 29.3%, to $20.3 million for the year ended December 31, 2022 from $15.7 million for the year ended December 31, 2021. This increase resulted from a $13.3 million increase in the average balance of loans to $402.1 million for the year ended December 31, 2022 from $388.8 million for the year ended December 31, 2021, primarily as a result of increases in commercial real estate and other commercial business and construction loans offset by a decrease in the average balance in PPP loans and loans held for sale. The average yield on loans increased 101 basis points to 5.06% for the year ended December 31, 2022 from 4.05% for the year ended December 31, 2021.
Interest and dividends on investments, mortgage-backed securities and collateralized mortgage obligations increased $1.1 million to $1.8 million for the year ended December 31, 2022 from $706,000 for the year ended December 31, 2021. Interest on investment securities increased as a result of $959,000 increases in interest income on U.S. Government Agency securities, corporate bonds and municipal securities to $1.5 million for 2022 from $572,000 for 2021 and a $128,000 increase in interest income on mortgage-backed securities and collateral mortgage obligation securities to $262,000 for the year ended December 31, 2022, from $134,000 for the year ended December 31, 2021. The average yield on investment securities increased to 2.37% for the year ended December 31, 2022 from 2.12% for the year ended December 31, 2021. The average balance of investment securities increased by $42.5 million to $75.7 million for the year ended December 31, 2022, from $33.2 million for the year ended December 31, 2021.
Interest on interest-earning deposits increased $440,000 to $621,000 for the year ended December 31, 2022 from $181,000 for the year ended December 31, 2021 due to an increase of 74 basis points in the average yield on interest-earning deposits with banks to 0.87% for the year ended December 31, 2022, from 0.13% for the year ended December 31, 2021 as result of the increase in the Fed Funds rate during 2022. Offsetting this increase was a decrease in the average balance of interest-earning deposits of $68.1 million to $71.0 million for the year ended December 31, 2022, from $139.1 million for the year ended December 31, 2021.
Interest Expense
Total interest expense increased $1.8 million to $4.0 million for the year ended December 31, 2022 from $2.2 million for the year ended December 31, 2021 primarily due to a $1.6 million increase in interest on deposits, $183,000 increase in interest expense from subordinated debt and $86,000 increase in interest expense on advances from the Federal Home Loan Bank offset by a $71,000 decrease in interest expense on advances from the PPPLF.
Interest on deposits increased $1.6 million to $3.1 million for the year ended December 31, 2022 from $1.5 million for the year ended December 31, 2021 as a result of an increase in the average cost of deposits of 41 basis points to 0.78% for the year ended December 31, 2022 from 0.37% for the year ended December 31, 2021. Offsetting this increase, was a decrease in the average interest-bearing deposits of $4.8 million from $401.3 million during the year ended December 31, 2021 to $396.5 million during the year ended December 31, 2022. The average rate paid on money market deposits was 0.83% for the year ended December 31, 2022 compared to 0.57% for the year ended December 31, 2021 as a result of the rising interest rate environment. In addition, the average rate paid on demand deposits was 0.61% for the year ended December 31, 2022 compared to 0.18% for the year ended December 31, 2021 as a result of the rising interest rate environment. The decrease in the average balance of interest-bearing deposits was primarily the result of a decrease of $5.2 million in the average balance of our certificates of deposit offset by a $377,000 increase in the average balance of our core deposit accounts. The decrease in the average balance of our certificates of deposit of $5.2 million from $48.1 million for the year ended December 31, 2021, to $42.9 million for the year ended December 31, 2022, was primarily the result of a decrease of $14.1 million in the average balance in retail certificates of deposit offset by an increase of $8.9 million for the year ended December 31, 2022 in the average balance in certificates of deposit issued through brokers to $13.3 million for the year ended December 31, 2022 from $4.4 million for the year ended December 31, 2021. The average cost of certificates of deposit was 1.60% for the year ended December 31, 2022, as compared to 0.90% for the year ended December 31, 2021.
Interest on advances from the Federal Home Loan Bank increased $86,000 to $481,000 for the year ended December 31, 2022 from $395,000 for the year ended December 31, 2021 primarily as a result of an increase in the average balance of Federal Home Loan Bank advances. The average balance of Federal Home Loan Bank advances increased by $2.6 million to $28.9 million during the year ended December 31, 2022 as compared to $26.3 million during the year ended December 31, 2021. In addition, the average cost of Federal Home Loan Bank advances increased by 16 basis points to 1.66% for the year ended December 31, 2022 from 1.50% for the year ended December 31, 2021 .
Interest expense on advances from the PPPLF decreased $71,000 to $1,000 for the year ended December 31, 2022 from $72,000 for the year ended December 31, 2021. The decrease was primarily the result of a $23.4 million decrease in the average balance in advances from the PPPLF to $495,000 for the year ended December 31, 2022 from $23.9 million for the year ended December 31, 2021, and a
decrease in average cost of advances from the PPPLF to 2 0 basis points for the year ended December 31, 202 2 , from 30 basis points for the year ended December 31, 2021 .
Interest expense on subordinated debt increased $183,000 to $451,000 for the year ended December 31, 2022 from $268,000 for the year ended December 31, 2021 as a result of an increase in the average balance of the subordinated debt. The average balance of the subordinated debt increased by $4.5 million to $10.0 million during the year ended December 31, 2022 as compared to $5.5 million during the year ended December 31, 2021. Offsetting this increase, was a decrease in the average cost of the subordinated debt to 4.51% for the year ended December 31, 2022 from 4.87% for the year ended December 31, 2021. O n May 28, 2021, the Company sold and issued a $10.0 million in aggregate principal amount 4.50% fixed to floating rate subordinated note due 2031 (see footnote 9 subordinated debt in the consolidated financial statements for further discussion).
Net Interest Income
Net interest income increased $4.3 million, or 30.0%, to $18.8 million for the year ended December 31, 2022 from $14.5 million for the year ended December 31, 2021 as our net interest-earning assets increased by $9.0 million to $114.9 million for the year ended December 31, 2022 from $105.9 million for the year ended December 31, 2021. Our interest rate spread increased by 74 basis points to 3.22% for the year ended December 31, 2022 from 2.48% for the year ended December 31, 2021. Our net interest margin increased by 85 basis points to 3.42% for the year ended December 31, 2022 from 2.57% for the year ended December 31, 2021.
Average Balances and Yields . The following table sets forth average balance sheets, average yields and costs, and certain other information for the years indicated. No tax-equivalent yield adjustments have been made. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or interest expense.
For the Year Ended December 31,
Average Balance
Interest Income/
Expense
Yield/
Cost
Average Balance
Interest Income/
Expense
Yield/
Cost
(Dollars in thousands)
Interest-earning assets:
Loans (1)
Cash and cash equivalents
Investment securities
Restricted investment in bank stock
Total interest-earning assets
Non-interest-earning assets
Total assets
Interest-bearing liabilities:
Demand deposits
Money market deposit accounts
Passbook and statement savings accounts
Checking accounts
Certificates of deposit
Total deposits
Federal Home Loan Bank advances
Federal Reserve PPPLF
Subordinated debt
Total interest-bearing liabilities
Non-interest-bearing liabilities:
Checking
Other
Total liabilities
Shareholders' Equity
Total liabilities and Shareholders' equity
Net interest income
Interest rate spread (2)
Net interest-earning assets (3)
Net interest margin (4)
Average interest-earning assets to average
interest-bearing liabilities
Includes loans held for sale.
Interest rate spread represents the difference between the average yield on average interest-earning assets and the average cost of average interest-bearing liabilities.
Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
Net interest margin represents net interest income divided by average total interest-earning assets.
Rate/Volume Analysis
The following table presents the effects of changing rates and volumes on our net interest income for the years indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately, based on the changes due to rate and the changes due to volume.
For Year Ended
December 31, 2022 vs 2021
Increase (Decrease) Due to
Total
Increase
Volume
Rate
(Decrease)
(In thousands)
Interest-earning assets:
Loans
Cash and cash equivalents
Investment securities
Restricted investment in bank stock
Total interest-earning assets
Interest-bearing liabilities:
Demand deposits
Money market deposit accounts
Passbook and statement savings accounts
Checking accounts
Certificates of deposit
Total deposits
Federal Home Loan Bank advances
Federal Reserve PPPLF
Subordinated debt
Total interest-bearing liabilities
Change in net interest income
Provision for Loan Losses
We establish a provision for loan losses, which is charged to operations, in order to maintain the allowance for loan losses at a level we consider necessary to absorb credit losses incurred in the loan portfolio that are both probable and reasonably estimated at the balance sheet date. In determining the level of the allowance for loan losses, we consider past and current loss experience, evaluations of real estate collateral, current economic conditions, volume and type of lending, adverse situations that may affect a borrower’s ability to repay a loan and the levels of non-performing loans. The amount of the allowance is based on estimates, and actual losses may vary from such estimates as more information becomes available or economic conditions change .
This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as circumstances change as more information becomes available. The allowance for loan losses is assessed on a quarterly basis and provisions are made for loan losses as required in order to maintain the allowance. Provision for loan losses increased by $982,000 to $1.5 million for the year ended December 31, 2022 primarily as a result of increased originations in commercial real estate and other commercial business loans . During the year ended December 31, 2022, total charge-offs of $397,000 were recorded and $81,000 of recoveries were received. During the year ended December 31, 2021, total charge-offs of $210,000 were recorded and $8,000 of recoveries were received.
Non-Interest Income
Non-interest income decreased $5.5 million to $7.9 million for the year ended December 31, 2022, from $13.4 million for the year ended December 31, 2021. The decrease in non-interest income compared to 2021 was primarily due to decreases of $8.4 million in the gain on sale of loans offset by a $1.0 million gain on sale of mortgage servicing rights, net, a $730,000 increase in change in fair value of loans held-for-sale, a $426,000 decrease in loss from derivative instruments, an increase of $348,000 in other income and an increase of $338,000 in fees for customer services . The gain on sale of loans, net decreased $8.4 million to $6.5 million for the year ended December 31, 2022, from $14.9 million for the year ended December 31, 2021, primarily as a result of lower volume of loan sales, which decreased $365.0 million from $670.6 million for the year ended December 31, 2021, to $305.6 million for the year ended December 31, 2022. Offsetting this decrease, was a $1.0 million gain on sale of mortgage servicing rights, net resulting from the sale of approximately $3.2 million of the mortgage servicing rights during year ended December 31, 2022. In addition, there was a decrease of $730,000 in the change of fair value from ($1.4) million for the year ended December 31, 2021 to ($623,000) for the year ended December 31, 2022 and a $426,000 decrease in loss on derivative instruments from a loss on derivative instruments of $1.2 million for the year ended December 31, 2021 to a loss of $777,000 for the year end December 31, 2022. Fees for customer services increased $338,000 to $833,000 for the year ended December 31, 2022, from $495,000 for the year ended December 31, 2021 primarily as a result of an increase in cash management fees and other commercial fees compared to the prior year. Finally, other income increased $352,000 to $729,000 for the year ended December 31, 2022 from $377,000 for the year ended December 31, 2021. Included in other income for the year ended December 31, 2022 was $354,000 in gain on settlement of bank-owned life insurance (“BOLI”).
Non-Interest Expense
Non-interest expense increased $526,000 or 2.4%, to $22.4 million for the year ended December 31, 2022, from $21.9 million for the year ended December 31, 2021. The increase for the year ended December 31, 2022 compared to the year ended December 31, 2021 primarily reflected increases of $495,000 in merger expenses, $336,000 in other expenses and $191,000 in professional fees offset by decreases of $165,000 in mortgage operation expenses, $163,000 in data processing related operations and $148,000 in salaries and employee benefits.
Included in non-interest expense for the year ended December 31, 2022 was $495,000 of expenses associated with the Merger. In addition, other expenses increased $336,000 or 17.8%, to $2.2 million for the year ended December 31, 2022 from $1.9 million for the year ended December 31, 2021. Professional fees increased $191,000, or 19.7% to $1.2 million for the year ended December 31, 2022 from $971,000 for the year ended December 31, 2021 primarily as a result of increases in expenses related to other consulting fees and accounting and auditing fees. Offsetting these increases was a decrease of $165,000 in mortgage operation expenses which decreased to $357,000 for the year ended December 31, 2022 from $522,000 for the year ended December 31, 2021. Data processing related operations costs decreased $163,000, or 11.1% to $1.3 million for the year ended December 31, 2022 from $1.5 million for the year ended December 31, 2021 as a result of decreased loan originations. Finally, salaries and employee benefits expense decreased by $148,000 to $13.5 million for the year ended December 31, 2022, from $13.7 million for the year ended December 31, 2021.
Income Tax Expense
Income tax expense was $575,000 for the year ended December 31 , 2022 compared to $1.5 million for the year ended December 31 , 2021 as a result of the decrease in income before taxes. Federal income taxes included in total taxes for the years ended December 31 , 2022 and 2021 were $568,000 and $1.1 million, respectively, with effective federal tax rates of 20.2% and 19.1%, respectively. The increase in the effective rate for 2022 compared to 2021 was a result of non-deductible merger expenses offset by a decrease in income before taxes and tax-exempt bank-owned life insurance death benefits.
Pennsylvania state tax was a benefit of ($130,000) for the year ended December 31 , 2022 compared to expense of $308,000 with an effective rate of 5.6% for the year ended December 31, 2021. The decrease in the effective tax rate for the year ended December 31 , 2022 compared to a year ago reflected a decrease in income before taxes. In addition, included in total taxes for the year ended December 31, 2022 and 2021, was $100,000 and
$ 103,000 of New Jersey state tax, respectively and $37,000 of Delaware state tax for the year ended December 31, 2022.
Liquidity and Capital Resources
Liquidity Management . Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Our primary sources of funds are deposits, principal and interest payments on loans and securities, and proceeds from sales, maturities and calls of securities. In addition, we can use brokered certificates of deposit as a funding source of our asset base. As of December 31, 2022, the Company had brokered certificates of deposit of $40.9 million, or 6.6% of total asset with an average cost of 3.77%. As of December 31, 2021, there were no brokered certificates of deposit outstanding.
We also have the ability to borrow from the Federal Home Loan Bank of Pittsburgh. Huntingdon Valley Bank had Federal Home Loan Bank of Pittsburgh advances of $27.0 million outstanding with unused borrowing capacity of $115.8 million as of December 31, 2022. Additionally, at December 31, 2022, we had the ability to borrow $6.0 million from the Atlantic Community Bankers Bank. We have not borrowed against the credit lines with the Atlantic Community Bankers Bank for the year ended December 31, 2022.
The board of directors is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of our customers as well as unanticipated contingencies. We believe that we have enough sources of liquidity to satisfy our short and long-term liquidity needs as of December 31, 2022.
We monitor and adjust our investments in liquid assets based upon our assessment of: (1) expected loan demand; (2) expected deposit flows; (3) yields available on interest-earning deposits and securities; and (4) the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning deposits and short-and intermediate-term securities.
While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are cash and cash equivalents, which include federal funds sold and interest-earnings deposits in other banks. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At December 31, 2022, cash and cash equivalents totaled $16.3 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $55.7 million at December 31, 2022.
Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided by operating activities was $30.5 million and $42.9 million for the year ended December 31, 2022 and 2021, respectively. Net cash used in investing activities, which consists primarily of disbursements for loan originations and the purchase of securities, offset by principal collections on loans and proceeds from maturing securities, was $193.0 million and $32.2 million for the year ended December 31, 2022 and 2021, respectively. During the year ended December 31, 2022 and 2021, we sold $10.0 million and $5.5 million, respectively, in securities available-for-sale. Net cash provided by (used in) financing activities was $58.0 million and ($304.5) million for the year ended December 31, 2022 and 2021, respectively. Net cash used in financing activities for the year ended December 31, 2022 consisted primarily of an increase in deposits of $61.2 million offset by repayments of $3.1 million to the PPPLF. Net cash used in financing activities for the year ended December 31, 2021 consisted primarily of a decrease in deposits of $266.8 million, repayments of $45.6 million from the PPPLF offset by proceeds of $10.0 million from the issuance of subordinated debt.
We are committed to maintaining a strong liquidity position. We monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments. Certificates of deposit due within one year of December 31, 2022, totaled $57.9 million, or 11.0%, of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including other deposits and Federal Home Loan Bank advances. Depending on market conditions, we may be required to pay higher rates on such deposits or
borrowings than we currently pay. We believe, however, based on past experience that a significant portion of such deposits will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered .
Capital Management. Huntingdon Valley Bank is subject to various regulatory capital requirements, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning Statement of Financial Condition assets and off-balance sheet items to broad risk categories. At December 31, 2022, Huntingdon Valley Bank exceeded all regulatory capital requirements and was considered “well capitalized” under regulatory guidelines. See Note 10 of the Notes to the Audited Consolidated Financial Statements.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
Commitments. As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit and unused lines of credit. While these contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make. At December 31, 2022, we had outstanding commitments to originate loans of $30.7 million and unused lines of credit totaling $94.2 million. We anticipate that we will have sufficient funds available to meet our current lending commitments. Certificates of deposit that are scheduled to mature in less than one year from December 31, 2022 totaled $57.9 million. Management expects that a substantial portion of the maturing certificates of deposit will be renewed. However, if a substantial portion of these deposits is not retained, we may utilize Federal Home Loan Bank advances or raise interest rates on deposits to attract new accounts, which may result in higher levels of interest expense.
Contractual Obligations. In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include data processing services, operating leases for equipment, agreements with respect to borrowed funds and deposit liabilities.
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been prepared in accordance with generally accepted accounting principles in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution’s performance than does inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
