ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
Statements contained in this report that are not historical facts may constitute forward-looking statements (within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended), which involve significant risks and uncertainties. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and is including this statement for purposes of invoking these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are generally identifiable by the use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” “plan,” or similar expressions. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain and actual results may differ from those predicted. The Company undertakes no obligation to update these forward-looking statements in the future.
The Company cautions readers of this report that a number of important factors could cause the Company’s actual results to differ materially from those expressed in forward-looking statements. Factors that could cause actual results to differ from those predicted and could affect the future prospects of the Company include, but are not limited to: (i) general economic conditions, either nationally or in our market area, that are worse than expected; (ii) changes in the interest rate environment that reduce our interest margins, reduce the fair value of financial instruments or reduce the demand for our loan products; (iii) increased competitive pressures among financial services companies; (iv) changes in consumer spending, borrowing and savings habits; (v) changes in the quality and composition of our loan or investment portfolios, including associated allowances and reserves; (vi) changes in future allowance for credit losses, including changes required under relevant accounting and regulatory requirements; (vii) the ability to pay future dividends; (viii) changes in real estate market values in our market area; (ix) decreased demand for loan products, deposit flows, competition, or decreased demand for financial services in our market area; (x) major catastrophes such as earthquakes, floods or other natural or human disasters and infectious disease outbreaks, the related disruption to local, regional and global economic activity and financial markets, and the impact that any of the foregoing may have on us and our customers and other constituencies; (xi) legislative or regulatory changes that adversely affect our business or changes in the monetary and fiscal policies of the U.S. government, including policies of the U.S. Treasury and the Federal Reserve Board; (xii) technological changes that may be more difficult or expensive than expected; (xiii) success or consummation of new business initiatives may be more difficult or expensive than expected; (xiv) our ability to successfully execute our business plan and strategies and integrate the business operations of acquired businesses into our business operations; (xv) our ability to manage market risk, credit risk and operational risk in the current economic environment; (xvi) adverse changes in the securities markets; (xvii) the inability of third party service providers to perform; and (xviii) changes in accounting policies and practices, as may be adopted by bank regulatory agencies or the Financial Accounting Standards Board.
Overview
Our results of operations depend primarily on our net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets, consisting primarily of loans, investment securities, including mortgage-backed securities, and other interest-earning assets (primarily cash and cash equivalents), and the interest we pay on our interest-bearing liabilities, consisting primarily of interest-bearing checking accounts, money market accounts, statement savings accounts, individual retirement accounts, certificates of deposit and advances from the FHLB of Pittsburgh. Our results of operations also are affected by our provisions for credit losses, noninterest income and noninterest expense. Noninterest income currently consists primarily of service fees, service charges, earnings on bank-owned life insurance, net gains on the sale of investment securities and unrealized gains or losses on equity securities.
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Noninterest expense currently consists primarily of salaries and employee benefits, occupancy and equipment, data processing and professional fees. Our results of operations also may be affected significantly by general and local economic and competitive conditions, changes in market interest rates, governmental policies, and actions of regulatory authorities.
Business Strategy
The Company is focused on serving the financial needs of consumers and businesses in our primary markets of Southeastern Pennsylvania and Southern and Central New Jersey. Through our wholly owned bank subsidiary, William Penn Bank, we deliver a comprehensive range of traditional depository and lending products, online banking services, and cash management tools for small businesses. Our business strategy is to continue to operate and grow a profitable community-oriented financial institution. We plan to achieve this by executing our strategy described below:
Continuing to emphasize our established relationship-based banking business model.
Our primary strategic objective is to further our relationship-based business model that emphasizes securing strong, long-lasting customer relationships. We employ a group of talented employees with relationships in retail, commercial, and small business banking that assist us in our efforts to build relationships and enhance the William Penn brand. We believe that customer satisfaction is a key to sustainable growth and profitability. While continually striving to ensure that our products and services meet our customers’ needs, we also encourage our employees to focus on providing personal service and attentiveness to our customers in a proactive manner. We believe that many opportunities remain to deliver what our customers want in the form of exceptional service and convenience, and we intend to continue to focus our operating strategy on taking advantage of these opportunities. Consistent with this strategy, in fiscal 2022 we began offering private banking services that provide high net worth clients a primary point of contact that is dedicated to their personal and business financial needs.
Focusing on our commercial lending activities while also maintaining our residential portfolio.
At June 30, 2024, $211.9 million, or 44.7%, of our total loan portfolio was secured by commercial non-residential real estate, multi-family real estate, commercial construction and land, and commercial business loans, compared to $120.4 million, or 25.9%, of our loan portfolio at June 30, 2021. We intend to continue to increase our commercial lending activities, particularly with respect to commercial real estate, multi-family residential and commercial business loans, in the future. We believe the recent expansion of our multi-family residential and commercial real estate lending activities has helped to diversify our balance sheet and increase our presence in our market area. We have added experienced commercial lending personnel and enhanced our infrastructure in order to implement this component of our business strategy.
At June 30, 2024, $127.9 million, or 27.0%, of our total loan portfolio was secured by owner-occupied one- to four-family residential real estate loans and we intend to continue to offer this type of lending in the future. We believe there are opportunities to increase our residential mortgage lending in our market area, and we intend to take advantage of these opportunities through our existing lending staff and residential mortgage origination channels.
We believe that strong asset quality is a key to long-term financial success, and we have sought to maintain a high level of asset quality and mitigate credit risk by using conservative underwriting standards for all of our residential and commercial lending products, combined with diligent monitoring and collection efforts. We will continue to seek commercial and residential lending opportunities in our market area that will further our business strategy and that are also consistent with our conservative underwriting standards.
Continuing to invest in our facilities and expand our branch network through de novo branching.
We have been enhancing and optimizing both our facilities and branch network in recent years. We have consolidated most of our non-branch operations into one location located in Bristol, Pennsylvania that opened in November 2019 and we have consolidated our loan origination and servicing administration operations into one location located in Philadelphia, Pennsylvania that we acquired in connection with our acquisition of Washington Savings Bank. Effective June 30, 2022, we consolidated three existing Bank branches into one branch based on branch deposit levels and the close geographic proximity of the three consolidating branches. In addition, effective December 31, 2022, we consolidated two existing Bank branches into one branch based on branch deposit levels and the close geographic proximity of the two consolidating branches.
In the future, we may consider branch expansion opportunities within our market area and adjacent markets, and we may seek to grow our deposit base by adding branches to our existing twelve-branch network. We opened a new branch office in Yardley, Pennsylvania
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in March 2021, a new branch office in Doylestown, Pennsylvania in September 2021 and a new branch office in Hamilton Township, New Jersey in December 2021. We will consider opening additional new branches in desirable locations in attractive growth markets.
Improving our technology platform.
We are committed to building a technology platform that enables us to deliver best-in-class products and services to our customers and is also scalable to accommodate our long-term growth plans. To accomplish this objective, we have made and are continuing to make substantial investments in our information technology infrastructure, including data backup, security, accessibility, integration, business continuity, website development, online and mobile banking technologies, cash management technology and internal/external ease of use. We continue to develop new strategies for streamlining internal and external practices using technology such as online account opening, an online education center, and remote appointments.
Employing a stockholder-focused management of capital.
Maintaining a strong capital base is critical to support our long-range business plan. We intend to continue to manage our capital position through the growth of assets, as well as the utilization of appropriate capital management tools, consistent with applicable regulations and policies, and subject to market conditions. Under current federal regulations, subject to limited exceptions, we were not able to repurchase shares of our common stock during the first year following the completion of our second-step conversion offering, which occurred on March 24, 2021. On March 11, 2022, the Company issued a press release announcing that the Company’s Board of Directors had authorized a stock repurchase program to acquire up to 758,528 shares of the Company’s outstanding common stock, or approximately 5.0% of outstanding shares. That stock repurchase program became effective on March 25, 2022. On June 9, 2022, the Company issued a press release announcing that the Company’s Board of Directors had authorized a second stock repurchase program to acquire up to 771,445 shares, or approximately 5.0%, of the Company’s outstanding stock, commencing upon the completion of the Company’s first stock repurchase program. On August 18, 2022, the Company issued a press release announcing that the Company's Board of Directors had authorized a third stock repurchase program to acquire up to 739,385 shares, or approximately 5.0%, of the Company's outstanding common stock, commencing upon the completion of the Company's second stock repurchase program. On February 17, 2023, the Company issued a press release announcing that the Company's Board of Directors had authorized a fourth stock repurchase program to acquire up to 698,312 shares, or approximately 5.0%, of the Company's outstanding common stock, commencing upon the completion of the Company's third stock repurchase program. The Company completed this stock repurchase program on May 31, 2023. On May 5, 2023, the Company issued a press release announcing that the Company's Board of Directors had authorized a fifth stock repurchase program to acquire up to 1,281,019 shares, or approximately 10.0%, of the Company's outstanding common stock, commencing upon the completion of the Company's fourth stock repurchase program. The Company completed this stock repurchase program on August 28, 2023. On August 29, 2023, the Company issued a press release announcing that the Company's Board of Directors had authorized a sixth stock repurchase program to acquire up to 1,138,470 shares, or approximately 10.0%, of the Company's outstanding common stock. The sixth stock repurchase program was authorized following the completion of the Company’s fifth stock repurchase program on August 28, 2023. The Company completed this stock repurchase program on October 30, 2023. On October 18, 2023, the Company issued a press release announcing that the Company's Board of Directors had authorized a seventh stock repurchase program to acquire up 1,046,610 shares, or approximately 10.0%, of the Company's outstanding common stock. The seventh stock repurchase program was authorized following the completion of the Company’s sixth stock repurchase program on October 30, 2023. As of September 5, 2024, there were 49,542 shares remaining to be purchased under the Company’s seventh repurchase program.
On July 21, 2021, the Company declared a one-time special dividend of $0.30 per common share, payable August 18, 2021, to common shareholders of record at the close of business on August 2, 2021. During the fiscal year ended June 30, 2022, the Company paid regular cash dividends of $0.06 per common share, including dividends of $0.03 per common share for the quarters ended March 31, 2022 and June 30, 2022, but did not pay regular cash dividends during the quarters ended September 30, 2021 and December 31, 2022. During the fiscal years ended June 30, 2024 and 2023, the Company paid regular cash dividends totaling an aggregate of $0.12 per common share, consisting of quarterly cash dividends of $0.03 per common share for each of the four fiscal quarters. As previously disclosed, the Company’s Board of Directors had declared a cash dividend of $0.03 per share, that was paid on August 8, 2024, to common shareholders of record at the close of business on July 29, 2024. In determining the amount of any future dividends, the board of directors will consider the Company’s financial condition and results of operations, tax considerations, capital requirements and alternative uses for capital, industry standards, and economic conditions. The Company cannot guarantee that it will continue to pay dividends or that, if paid, it will not reduce or eliminate dividends in the future.
Critical Accounting Policies
We consider accounting policies involving significant judgments and assumptions by management that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies. We consider these accounting policies to
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be our critical accounting policies. The judgments and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances. Actual results could differ from these judgments and estimates under different conditions, resulting in a change that could have a material impact on the carrying values of our assets and liabilities and our results of operations.
Allowance for Credit Losses
We consider the allowance for credit losses to be a critical accounting policy. Note 2 to the Company’s Consolidated Financial Statements for the year ended June 30, 2024 discusses significant accounting policies, including the allowance for credit losses and the adoption of Accounting Standards Codification (“ASC”) 326, which changed the methodology under which management calculates its reserve for loans, investment securities and unfunded loan commitments, now referred to as the allowance for credit losses. Please refer to Note 2 to the Company’s Consolidated Financial Statements for detail regarding the Company’s adoption of Accounting Standards Update (“ASU”) 2016-13: Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and the allowance for credit losses. Although we believe that we use the best information available to establish the allowance for credit 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 credit .
Our financial results are affected by the changes in and the level of the allowance for credit losses. This process involves our analysis of complex internal and external variables, and it requires that we exercise judgment to estimate an appropriate allowance for credit losses. As a result of the uncertainty associated with this subjectivity, we cannot assure the precision of the amount reserved, should we experience sizeable loan losses in any particular period. For example, changes in the financial condition of individual borrowers, economic conditions, or the condition of various markets in which collateral may be sold could require us to significantly decrease or increase the level of the allowance for credit losses. Such an adjustment could materially affect net income as a result of the change in provision for credit losses. We also have approximately $3.3 million as of June 30, 2024 in non-performing assets consisting of non-performing loans. Most of these loans are collateral dependent assets where we may have to incur credit losses to write the assets down to their current appraised value less selling costs. We continue to assess the collectability of these loans and update our appraisals on these loans each year. To the extent the property values continue to , there could be additional incurred on these non-performing loans which may be material. In recent periods, we experienced asset quality metrics including low levels of , net charge-offs and non-performing assets. Management considered market conditions in deriving the estimated allowance for credit ; however, given the continued economic , the ultimate amount of could vary from that estimate.
Goodwill
The acquisition method of accounting for business combinations requires us to record assets acquired, liabilities assumed, and consideration paid at their estimated fair values as of the acquisition date. The excess of consideration paid (or the fair value of the equity of the acquiree) over the fair value of net assets acquired represents goodwill. Goodwill totaled $4.9 million at June 30, 2024 and June 30, 2023. Goodwill and other indefinite lived intangible assets are not amortized on a recurring basis, but rather are subject to periodic impairment testing. The provisions of Accounting Standards Codification (“ASC”) Topic 350 allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test.
The Company performs its annual impairment evaluation on June 30 or more frequently if events and circumstances indicate that the fair value of the banking unit is less than its carrying value. During the year ended June 30, 2024, the Company included considerations of the current economic environment in its evaluation, and determined that it is not more likely than not that the carrying value of goodwill is impaired. No goodwill impairment exists during the year ended June 30, 2024.
Income Taxes
We are subject to the income tax laws of the various jurisdictions where we conduct business and estimate income tax expense based on amounts expected to be owed to these various tax jurisdictions. The estimated income tax expense (benefit) is reported in the consolidated statements of income. The evaluation pertaining to the tax expense and related tax asset and liability balances involves a high degree of judgment and subjectivity around the ultimate measurement and resolution of these matters.
Accrued taxes represent the net estimated amount due to or to be received from tax jurisdictions either currently or in the future and are reported in other assets on our consolidated statements of financial condition. We assess the appropriate tax treatment of transactions and filing positions after considering statutes, regulations, judicial precedent and other pertinent information and maintain tax accruals
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consistent with our evaluation. Changes in the estimate of accrued taxes occur periodically due to changes in tax rates, interpretations of tax laws, the status of examinations by the tax authorities and newly enacted statutory, judicial and regulatory guidance that could impact the relative merits of tax positions. These changes, when they occur, impact accrued taxes and can materially affect our operating results. We regularly evaluate our uncertain tax positions and estimate the appropriate level of reserves related to each of these positions.
As of June 30, 2024 and 2023, we had net deferred tax assets totaling $9.6 million and $9.5 million, respectively. We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. If currently available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax assets and liabilities. These judgments require us to make projections of future taxable income. Management believes, based upon current facts, that it is more likely than not that there will be sufficient taxable income in future years to realize the deferred tax assets. The judgments and estimates we make in determining our deferred tax assets are inherently subjective and are reviewed on a continual basis as regulatory and business factors change. Any reduction in estimated future taxable income may require us to record a valuation allowance against our deferred tax assets. A valuation allowance that results in additional income tax expense in the period in which it is recognized would affect earnings. Our net deferred tax assets were determined based on the current enacted federal tax rate of 21%. Any possible future reduction in federal tax rates, would reduce the value of our net deferred tax assets and result in immediate write-down of the net deferred tax assets though our statement of operations, the effect of which would be material.
Balance Sheet Analysis
Comparison of Financial Condition at June 30, 2024 and 2023
Total assets decreased $28.9 million, or 3.4%, to $818.7 million at June 30, 2024, from $847.6 million at June 30, 2023, primarily due to a $21.0 million decrease in available for sale and held to maturity investments and a $6.9 million decrease in net loans. The Company used $38.0 million of cash during the year ended June 30, 2024 to repurchase shares of stock under its previously announced stock repurchase programs.
Cash and cash equivalents decreased $595 thousand, or 2.9%, to $20.2 million at June 30, 2024, from $20.8 million at June 30, 2023. The decrease in cash and cash equivalents was primarily due to the repurchase of 3,117,615 shares at a total cost of $38.0 million, a $5.5 million decrease in deposits and $1.2 million of cash dividend payments to shareholders, partially offset by a $14.0 million increase in advances from the FHLB of Pittsburgh, approximately $19.3 million of investment principal paydowns, a $6.9 million decrease in net loans, and $3.3 million of net proceeds from the purchase and sale of investment securities.
Investments
Our investment portfolio consists primarily of corporate bonds with maturities of five to ten years, municipal securities with maturities of five to more than ten years and mortgage-backed securities issued by Fannie Mae, Freddie Mac or Ginnie Mae with stated final maturities of 30 years or less. Total investments decreased $20.6 million, or 7.7%, to $245.8 million at June 30, 2024, from $266.4 million at June 30, 2023. The decrease in investments was primarily due to approximately $19.3 million of principal paydowns of securities included in the available for sale and held to maturity portfolios and $3.3 million of net proceeds from the purchase and sale of investment securities, partially offset by a $1.8 million decrease in the gross unrealized loss on available for sale securities. The Company remains focused on maintaining a high-quality investment portfolio that provides a steady stream of cash flows.
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The following table sets forth the amortized cost and fair value of investment securities at the dates indicated:
At June 30,
Amortized
Fair
Amortized
Fair
(Dollars in thousands)
Cost
Value
Cost
Value
Securities available for sale:
Mortgage-backed securities
U.S. agency collateralized mortgage obligations
U.S. government agency securities
Municipal bonds
Corporate bonds
Total securities available for sale
Securities held to maturity:
Mortgage-backed securities
U.S. government agency securities
Municipal bonds
Total securities held to maturity
Total investment securities
The following tables set forth the stated maturities and weighted average yields of investment securities at June 30, 2024. The weighted average yield is calculated by dividing income, which has not been tax effected on tax-exempt obligations, within each contractual maturity range by the outstanding amount of the related investment. Certain securities have adjustable interest rates and will reprice monthly, quarterly, semi-annually or annually within the various maturity ranges. The table presents contractual maturities for mortgage-backed securities and does not reflect repricing or the effect of prepayments.
More than
More than
One
One Year to
Five Years to
More than
Year or Less
Five Years
Ten Years
Ten Years
Total
Weighted
Weighted
Weighted
Weighted
Weighted
June 30, 2024
Carrying
Average
Carrying
Average
Carrying
Average
Carrying
Average
Carrying
Average
(Dollars in thousands)
Value
Yield
Value
Yield
Value
Yield
Value
Yield
Value
Yield
Securities available for sale:
Mortgage-backed securities
U.S. agency collateralized mortgage obligations
U.S. government agency securities
Municipal bonds
Corporate bonds
Total securities available for sale
Securities held to maturity:
Mortgage-backed securities
U.S. agency collateralized mortgage obligations
Municipal bonds
Total securities held to maturity
Total investment securities
Loans
Our loan portfolio consists primarily of one-to four-family residential mortgage loans, one-to four-family commercial real estate investor loans and non-residential commercial real estate loans. Our loan portfolio also consists of residential construction, home equity and lines of credit, multi-family residential real estate, commercial, construction and consumer loans. Net loans decreased $6.9 million, or 1.5%, to $470.6 million at June 30, 2024, from $477.5 million at June 30, 2023. The interest rate environment has caused a slowdown in borrower demand, and the Company continues to maintain conservative lending practices and pricing discipline.
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The following table shows the loan portfolio at the dates indicated:
At June 30,
(Dollars in thousands)
Amount
Percent
Amount
Percent
Residential real estate loans:
One- to four-family
Home equity and HELOCs
Residential construction
Total residential real estate loans
Commercial real estate loans:
One- to four-family investor
Multi-family
Commercial non-residential
Commercial construction and land
Total commercial real estate loans
Commercial loans
Consumer loans
Total loans
Allowance for credit losses
Loans, net
The following table sets forth certain information at June 30, 2024 regarding the dollar amount of loan principal repayments becoming due during the periods indicated. The table below does not include any estimate of prepayments which significantly shorten the average life of all loans and may cause our actual repayment experience to differ from that shown below. Demand loans having no stated schedule of repayments and no stated maturity are reported as due in one year or less.
Home
One- to
Equity
One- to
Commercial
Commercial
June 30, 2024
Four-Family
and
Residential
Four-Family
Multi-
Non-
Construction
Total
(Dollars in thousands)
Residential
HELOCs
Construction
Investor
Family
Residential
and Land
Commercial
Consumer
Loans
Amounts due in:
One year or less
More than 1 – 5 years
More than 5 – 15 years
More than 15 years
Total
The following table sets forth all loans at June 30, 2024 that are due after June 30, 2025 and have either fixed interest rates or floating or adjustable interest rates:
Due After June 30, 2025
At June 30, 2024
Floating or
(Dollars in thousands)
Fixed Rates
Adjustable Rates
Total
Residential real estate loans:
One- to four-family
Home equity and HELOCs
Residential construction
Commercial real estate loans:
One- to four-family investor
Multi-family
Commercial non-residential
Commercial construction and land
Commercial loans
Consumer loans
Total
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Premises and equipment held for sale
As of June 30, 2024, the Company has two properties with a total carrying value of $2.2 million in the held for sale classification included in accrued interest receivable and other assets on the Company’s consolidated statements of financial condition. The Company intends to sell these properties by December 31, 2024.
Deposits
Deposits are a major source of our funds for lending and other investment purposes, and our deposits are provided primarily by individuals within our market area. Deposits decreased $5.5 million, or 0.9%, to $629.8 million at June 30, 2024, from $635.3 million at June 30, 2023. The decrease in deposits was primarily due to a $31.6 million decrease in money market accounts and an $8.1 million decrease in savings accounts, partially offset by a $16.2 million increase in interest bearing checking accounts and a $14.3 million increase in certificate of deposit accounts. The interest rate environment has created significant pricing competition for deposits within our market.
The following table sets forth the deposits as a percentage of total deposits for the dates indicated:
At June 30,
Percent of
Percent of
Total
Total
(Dollars in thousands)
Amount
Deposits
Amount
Deposits
Non-interest bearing checking
Interest bearing checking
Money market accounts
Savings and club accounts
Certificates of deposit
Total
The following table sets forth the maturity of the portion of our certificates of deposit that are in excess of the $250,000 Federal Deposit Insurance Corporation insurance limit as of June 30, 2024:
June 30, 2024
Certificates
(Dollars in thousands)
of Deposit
Maturity Period:
Three months or less
Over three through six months
Over six through twelve months
Over twelve months
Total
Excluding intercompany deposits, the estimated amount of total uninsured and uncollateralized deposits as of June 30, 2024 was $108.2 million compared to $112.0 million as of June 30, 2023.
The following table sets forth the deposit activity for the periods indicated:
Year Ended June 30,
(Dollars in thousands)
Beginning balance
(Decrease) increase before interest credited
Interest credited
Net (decrease) increase in deposits
Ending balance
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The following table sets forth the average balances and weighted average rates of our deposit products for the periods indicated:
Year Ended June 30,
Average
Weighted
Average
Average
Weighted
Average
Balance
Percent
Cost
Balance
Percent
Cost
Non-interest bearing checking accounts
Interest-bearing checking accounts
Money market deposit accounts
Savings and club accounts
Certificates of deposit
Total
Borrowings
Borrowings increased $14.0 million, or 41.2%, to $48.0 million at June 30, 2024, from $34.0 million at June 30, 2023. During the year ended June 30, 2024, the Company borrowed from the FHLB of Pittsburgh to fund a portion of the $38.0 million of share repurchases.
The following table sets forth the outstanding borrowings and weighted averages at the dates or for the periods indicated. We did not have any outstanding borrowings other than FHLB advances for any of the periods presented.
At or For the Year Ended
June 30,
(Dollars in thousands)
Maximum amount outstanding at any month-end during period:
Federal Home Loan Bank advances
Atlantic Community Bankers Bank overnight borrowings
Average outstanding balance during period:
Federal Home Loan Bank advances
Atlantic Community Bankers Bank overnight borrowings
Weighted average interest rate during period:
Federal Home Loan Bank advances
Atlantic Community Bankers Bank overnight borrowings
Balance outstanding at end of period:
Federal Home Loan Bank advances
Atlantic Community Bankers Bank overnight borrowings
Weighted average interest rate at end of period:
Federal Home Loan Bank advances
Atlantic Community Bankers Bank overnight borrowings
Stockholders’ Equity
Stockholders’ equity decreased $36.1 million, or 22.5%, to $124.6 million at June 30, 2024, from $160.7 million at June 30, 2023. The decrease in stockholders’ equity was primarily due to the repurchase of 3,117,615 shares at a total cost of $38.0 million, or $12.18 per share, during the year ended June 30, 2024 under the Company’s previously announced stock repurchase programs, the payment of cash dividends totaling $1.2 million, and a $226 thousand one-time cumulative effect decrease to retained earnings from the adoption of the Current Expected Credit Losses (“CECL”) accounting standard. These decreases to stockholders’ equity were partially offset by a $1.4 million decrease in the accumulated other comprehensive loss component of equity related to the unrealized loss on available for sale securities and $168 thousand of net income during the year ended June 30, 2024.
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Results of Operations for the Years Ended June 30, 2024 and 2023
Summary
The following table sets forth the income summary for the periods indicated:
Year Ended June 30,
Change 2024/2023
(Dollars in thousands)
Net interest income
Recovery for credit losses
Non-interest income
Non-interest expenses
Income tax (benefit) expense
Net income
Return on average assets
Core return on average assets (1) (non-GAAP)
Return on average equity
Core return on average equity (1) (non-GAAP)
Core return on average assets and core return on average equity are non-GAAP financial measures. For a reconciliation of these non-GAAP measures, see “—Non-GAAP Financial Information.”
General
We recorded net income of $168 thousand, or $0.02 per basic and diluted share, for the year ended June 30, 2024 compared to net income of $2.8 million, or $0.22 per basic and diluted share, for the year ended June 30, 2023. We recorded a core net loss ( 1 ) of $205 thousand, or $(0.02) per basic and diluted share, for the year ended June 30, 2024 compared to core net income (1) of $2.8 million, or $0.22 per basic and diluted share, for the year ended June 30, 2023.
Net Interest Income
For the year ended June 30, 2024, net interest income was $17.1 million, a decrease of $6.0 million, or 25.8%, from the year ended June 30, 2023. The decrease in net interest income was primarily due to an increase in interest expense on deposits and borrowings, partially offset by an increase in interest income on loans. The net interest margin measured 2.30% for the year ended June 30, 2024, compared to 2.97% for the year ended June 30, 2023. The decrease in the net interest margin during the year ended June 30, 2024, compared to the same period in 2023, was primarily due to an increase in the average balance of borrowings and deposits and the rise in interest rates that caused an increase in the cost of borrowings and deposits that exceeded the increase in interest income on loans.
Provision for Credit losses
During the year ended June 30, 2024, we recorded a $606 thousand recovery for credit losses primarily due to consistently low levels of net charge-offs, strong asset quality metrics and continued conservative lending practices. During the year ended June 30, 2023, we did not record a provision for credit losses due to improved asset quality metrics and continued low levels of net charge-offs and non-performing assets. Our ACL totaled $3.0 million, or 0.63% of total loans, as of June 30, 2024, compared to $3.3 million, or 0.69% of total loans, as of June 30, 2023. Our total credit losses coverage ratio (2) , including $2.2 million of fair value marks on acquired loans and the $3.0 million allowance for credit losses, was 1.08% as of June 30, 2024 compared to 1.20% as of June 30, 2023, including $2.5 million of fair value marks on acquired loans and the $3.3 million allowance for credit losses. As of June 30, 2024, management believes
( 1 ) Core net income is a non-GAAP financial measure. For a reconciliation of this non-GAAP measure, see “—Non-GAAP Financial Information.”
(2) Total credit losses coverage ratio is a non-GAAP financial measure. For a reconciliation of this non-GAAP measure, see “—Non-GAAP Financial Information.”
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that the allowance is maintained at a level that represents its best estimate of lifetime credit losses. Total credit losses coverage ratio is a non-GAAP financial measure that includes the fair value mark on acquired loans.
Management uses available information to establish the appropriate level of the allowance for credit losses. Future additions or reductions to the allowance may be necessary based on estimates that are susceptible to change as a result of changes in economic conditions and other factors. As a result, our allowance for credit losses may not be sufficient to cover actual credit losses, and future provisions for credit losses could materially adversely affect our operating results. In addition, various regulatory agencies, as an integral part of their examination process, periodically review our allowance for credit losses.
Non-Interest Income
The following table sets forth a summary of non-interest income for the periods indicated:
Year Ended June 30,
(Dollars in thousands)
Service fees
Net loss on sale of other real estate owned
Net gain on sale of securities
Earnings on bank-owned life insurance
Net gain on disposition of premises and equipment
Unrealized gain (loss) on equity securities
Other
Total
For the year ended June 30, 2024, non-interest income totaled $2.8 million, an increase of $886 thousand, or 45.4%, from the year ended June 30, 2023. The increase was primarily due to a $1.0 million increase in the unrealized gain on equity securities from a $629 thousand unrealized loss during the year ended June 30, 2023 to a $387 thousand unrealized gain during the year ended June 30, 2024, as well as a $137 thousand increase in earnings on bank-owned life insurance and a $102 thousand net gain on the sale of securities recorded during the year ended June 30, 2024. These increases to non-interest income were partially offset by a $398 thousand net gain on the sale of premises and equipment primarily associated with the sale of two properties recorded during the year ended June 30, 2023.
Non-Interest Expense
The following table sets forth an analysis of non-interest expense for the periods indicated:
Year Ended June 30,
(Dollars in thousands)
Salaries and employee benefits
Occupancy and equipment
Data processing
Professional fees
Amortization of intangible assets
Other
Total
For the year ended June 30, 2024, non-interest expense totaled $20.9 million, a decrease of $1.2 million, or 5.3%, from the year ended June 30, 2023. The decrease in non-interest expense was primarily due to a $1.0 million decrease in salaries and employee benefits primarily due to a reduction in the number of full-time employees consistent with the Company’s expense management initiatives and a $278 thousand decrease in occupancy and equipment expense consistent with the closure of the Bank’s branch office located in Collingswood, New Jersey effective December 31, 2022. These decreases to non-interest expense were partially offset by a $196 thousand increase in data processing expense.
Income Taxes
For the year ended June 30, 2024, the Company recorded a $458 thousand income tax benefit, reflecting an effective tax rate of (157.9)%, compared to a provision for income taxes of $200 thousand, reflecting an effective tax rate of 6.7%, for the year ended June 30, 2023. The income tax benefit recorded during the year ended June 30, 2024 was primarily due to the $290 thousand loss before income taxes coupled with the $1.2 million of federal tax-exempt income recorded on bank-owned life insurance. The Company recorded a $211
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thousand income tax benefit related to a refund received associated with the carryback of net operating losses under the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act during the year ended June 30, 2023.
Average Balances and Yields
The following tables present information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting annualized average yields and costs. The yields and costs for the periods indicated are derived by dividing income or expense by the average daily balances of assets or liabilities, respectively, for the periods presented. Loan fees, including prepayment fees, are included in interest income on loans and are not material. Non-accrual loans are included in the average balances only. Any adjustments necessary to present yields on a tax equivalent basis are insignificant.
Year Ended June 30,
Average
Interest and
Yield/
Average
Interest and
Yield/
(Dollars in thousands)
Balance
Dividends
Cost
Balance
Dividends
Cost
Interest-earning assets:
Loans (1)
Investment securities (2)
Other interest-earning assets
Total interest-earning assets
Non-interest-earning assets
Total assets
Interest-bearing liabilities:
Interest-bearing checking accounts
Money market deposit accounts
Savings and club accounts
Certificates of deposit
Total interest-bearing deposits
FHLB advances and other borrowings
Total interest-bearing liabilities
Non-interest-bearing liabilities:
Non-interest-bearing deposits
Other non-interest-bearing liabilities
Total liabilities
Total stockholders' equity
Total liabilities and equity
Net interest income
Interest rate spread (3)
Net interest-earning assets (4)
Net interest margin (5)
Ratio of interest-earning assets to interest-bearing liabilities
Includes nonaccrual loan balances and interest, if any, recognized on such loans.
Includes securities available for sale and securities held to maturity.
Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.
Net interest margin represents net interest income divided by average total interest-earning assets.
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Rate/Volume Analysis
The following table sets forth the effects of changing rates and volumes on our net interest income. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by current rate). The total column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume which cannot be segregated, have been allocated proportionately based on the changes due to rate and the changes due to volume.
Year Ended June 30, 2024
Compared to
Year Ended June 30, 2023
Increase (Decrease)
Due to
(Dollars in thousands)
Volume
Rate
Total
Interest income:
Loans
Investment securities
Other interest-earning assets
Total interest-earning assets
Interest expense:
Interest-bearing checking accounts
Money market deposit accounts
Savings and club accounts
Certificates of deposit
Total interest-bearing deposits
FHLB advances and other borrowings
Total interest-bearing liabilities
Net change in net interest income
Risk Management
General
Managing risk is an essential part of successfully managing a financial institution. Our most prominent risk exposures are credit risk, interest rate risk and market risk. Credit risk is the risk of not collecting the interest and/or the principal balance of a loan or investment when it is due. Interest rate risk is the potential reduction of net interest income as a result of changes in interest rates. Market risk arises from fluctuations in interest rates that may result in changes in the values of financial instruments, such as available for sale securities that are accounted for at fair value. Other risks that we face are operational risk, liquidity risk and reputation risk. Operational risk includes risks related to fraud, regulatory compliance, processing errors, technology, and disaster recovery. Liquidity risk is the possible inability to fund obligations to depositors, lenders or borrowers. Reputation risk is the risk that negative publicity or press, whether true or not, could cause a decline in our customer base or revenue.
Management of Credit Risk
The objective of our credit risk management strategy is to quantify and manage credit risk and to limit the risk of loss resulting from an individual customer default. Our credit risk management strategy focuses on conservatism, diversification within the loan portfolio and significant levels of monitoring. Our lending practices include conservative exposure limits and underwriting, extensive documentation and collection standards. Our credit risk management strategy also emphasizes diversification on both an industry and customer level as well as regular credit examinations and management reviews of large credit exposures and credits experiencing deterioration of credit quality.
Classified Assets
FDIC regulations and our Asset Classification Policy provide that loans and other assets considered to be of lesser quality be classified as “substandard,” “doubtful” or “loss” assets. 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 institution 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
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“collection or liquidation in full,” on the basis of currently existing facts, conditions and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. We classify an asset as “special mention” if the asset has a potential weakness that warrants management’s escalated level of attention. While such assets are not impaired, management has concluded that if the potential weakness in the asset is not addressed, the value of the asset may deteriorate, adversely affecting the repayment of the asset. Loans classified as impaired for financial reporting purposes are generally those loans classified as substandard or for regulatory reporting purposes.
An insured institution is required to establish allowances for credit losses in an amount deemed prudent by management for loans classified as substandard or doubtful, as well as for other problem loans. General allowances represent loss allowances which have been established to recognize the inherent losses associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as “loss,” it is required to charge off such amounts. An institution’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the FDIC and the Pennsylvania Department of Banking and Securities.
The following table sets forth information with respect to our non-performing assets at the dates indicated.
At June 30,
(Dollars in thousands)
Non-accrual loans:
Residential real estate loans:
One- to four-family
Home equity and HELOCs
Residential construction
Total residential real estate loans
Commercial real estate loans:
One- to four-family investor
Multi-family
Commercial non-residential
Commercial construction and land
Total commercial real estate loans
Commercial loans
Consumer loans
Total non-accrual loans
Accruing loans past due 90 days or more:
Residential real estate loans:
One- to four-family
Home equity and HELOCs
Residential construction
Total residential real estate loans
Commercial real estate loans:
Multi-family
Commercial non-residential
Commercial construction and land.
Total commercial real estate loans
Commercial loans
Consumer loans
Total accruing loans past due 90 days or more
Total non-performing loans
Real estate owned
Total non-performing assets
Total non-performing loans to total loans
Total non-performing assets to total assets
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During the year ended June 30, 2024, nonperforming assets decreased 20.7% to $3.3 million from $4.2 million as of June 30, 2023. The Company’s ratio of non-performing assets to total assets decreased to 0.40% as of June 30, 2024 from 0.49% as of June 30, 2023.
Total nonperforming loans consisted of 30 loans to 27 unrelated borrowers as of June 30, 2024 and June 30, 2023. Interest income on non-performing loans would have increased by approximately $167 thousand and $192 thousand during the years ended June 30, 2024 and 2023, respectively, if these loans had performed in accordance with their terms during the respective periods. There were no loans greater than 90 days delinquent that remained on accrual status as of June 30, 2024 and 2023.
There are circumstances when foreclosure and liquidations are the remedy pursued. However, from time to time, as part of our loss mitigation strategy, we may renegotiate the loan terms ( i.e. , interest rate, structure, repayment term, etc.) based on the economic or legal reasons related to the borrower’s financial difficulties. We had no loans modified to borrowers experiencing financial difficulties during the years ended June 30, 2024 and 2023.
At June 30, 2024, none of our 30 substandard loans with an aggregate balance of $3.3 million were considered loans modified to borrowers experiencing financial difficulties and were included in nonperforming assets. At June 30, 2023, none of our 30 substandard loans with an aggregate balance of $4.0 million were considered loans modified to borrowers experiencing financial difficulties and were included in nonperforming assets.
The following table provides information about delinquencies in our loan portfolio at the dates indicated:
At June 30,
Days Past Due
Days Past Due
(Dollars in thousands)
90 or more
90 or more
Residential real estate loans:
One- to four-family
Home equity and HELOCs
Residential construction
Commercial real estate loans:
One- to four-family investor
Multi-family
Commercial non-residential
Commercial construction and land
Commercial loans
Consumer loans
Total
The following table summarizes classified and criticized assets of all portfolio types at the dates indicated:
At June 30,
(Dollars in thousands)
Classified loans:
Substandard
Doubtful
Loss
Total classified loans
Special mention
Total criticized loans (1)
Criticized residential real estate and consumer loans include all residential real estate and consumer loans that were on non-accrual status and all residential and consumer loans that were greater than 90 days delinquent on the dates presented.
On the basis of management’s review of its assets, at June 30, 2024 and 2023, we classified $889 thousand and $1.2 million, respectively, of our assets as special mention and $3.3 million and $4.0 million, respectively, of our assets as substandard. We classified none of our assets as doubtful or loss at June 30, 2024 or at June 30, 2023. The loan portfolio is reviewed on a regular basis to determine whether any loans require classification in accordance with applicable regulations. Not all classified assets constitute nonperforming assets.
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Allowance for Credit Losses on Loans
The Company maintains its ACL at a level that management believes to be appropriate to absorb estimated lifetime credit losses as of the date of the Consolidated Statements of Financial Condition. The Company established its allowance in accordance with the guidance included in ASC 326, Financial Instruments – Credit Losses . The ACL is a valuation reserve established and maintained by charges against income and is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. Loans, or portions thereof, are charged-off against the ACL when they are deemed uncollectible. Expected recoveries do not exceed the aggregate amounts previously charged-off and expected to be charged-off. The ACL is an estimate of lifetime expected credit losses, that considers our historical loss experience, the historical loss experience of a peer group of banks identified by management, current conditions and the forecast of future economic conditions. The determination of an appropriate ACL is inherently subjective and may have significant changes from period to period. The methodology for determining the ACL has two main components: evaluation of expected credit for certain groups of homogeneous loans that share similar risk characteristics and evaluation of loans that do not share risk characteristics with other loans. The ACL is measured on a collective (pool) basis when similar characteristics exist. The Company’s loan portfolio is segmented by loan types that have similar risk characteristics and behave similarly during economic cycles.
Historical credit loss experience is the basis for the estimate of expected credit losses. We apply our historical loss rates and the historical loss rates of a group of peer banks identified by management to pools of loans with similar risk characteristics using the Weighted-Average Remaining Maturity (“WARM”) method. The remaining contractual life of the pools of loans with similar risk characteristics is adjusted by expected scheduled payments and prepayments. After consideration of the historical loss calculation, management applies qualitative adjustments to reflect the current conditions and reasonable and supportable forecasts not already reflected in the historical loss information. Our reasonable and supportable forecast adjustment is based on a regional economic indicator obtained from the St. Louis Federal Reserve economic database. The Company selected eight qualitative metrics which were correlated with the Bank and its peer group’s historical loss patterns. The eight qualitative metrics include: changes in lending policies and procedures, changes in national and local economic conditions as well as business conditions, changes in the nature, complexity, and volume of the portfolio, changes in the experience, ability, and depth of lenders and lending management, changes in the volume and of past due and classified loans, changes in the quality of the Bank’s loan review system, changes in the value of collateral securing the loans, and changes in or the existence of credit concentrations. The adjustments are weighted for relevance before applying to each pool of loans. Each quarter, management reviews the recommended adjustment factors and applies any additional adjustments based on local and current conditions.
The Company has elected to exclude $2.0 million of accrued interest receivable as of June 30, 2024 from the measurement of its ACL. When a loan is placed on non-accrual status, any outstanding accrued interest is reversed against interest income. Accrued interest on loans is reported in the accrued interest receivable and other assets line on the consolidated statements of financial condition.
The ACL for individual loans begins with the use of normal credit review procedures to identify whether a loan no longer shares similar risk characteristics with other pooled loans and, therefore, should be individually assessed. We evaluate all commercial loans that meet the following criteria: (1) when it is determined that foreclosure is probable, (2) substandard, doubtful and nonperforming loans when repayment is expected to be provided substantially through the operation or sale of the collateral, (3) when it is determined by management that a loan does not share similar risk characteristics with other loans. Credit loss estimates are calculated based on the following three acceptable methods for measuring the ACL: 1) the present value of expected future cash flows discounted at the loan’s original effective interest rate; 2) the loan’s observable market price; or 3) the fair value of the collateral when the loan is collateral dependent. Our individual loan evaluations consist primarily of the fair value of collateral method because most of our loans are collateral dependent. Collateral values are discounted to consider disposition costs when appropriate. A charge-off is recorded if the fair value of the loan is less than the loan balance.
The ACL analysis is presented and discussed quarterly with the current expected credit losses (“CECL”) committee, which consists of executive management, including the CEO, and is also presented and reviewed with the board of directors. In addition, the FDIC and the Pennsylvania Department of Banking and Securities, as an integral part of their examination process, periodically review our ACL.
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The following table sets forth the breakdown of the allowance for credit losses by loan category at the dates indicated:
At June 30,
Allowance
Allowance
Amount to
Allowance
Amount to
Allowance
Total
to Loans in
Total
to Loans in
(Dollars in thousands)
Amount
Allowance
Category
Amount
Allowance
Category
Residential real estate loans:
One- to four-family
Home equity and HELOCs
Residential construction
Commercial real estate loans:
One- to four-family investor
Multi-family
Commercial non-residential
Commercial construction and land
Commercial loans
Consumer loans
Total allowance for credit losses
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The following table sets forth an analysis of the activity in the allowance for credit losses for the periods indicated:
At or For the Year Ended June 30,
(Dollars in thousands)
Allowance at beginning of period
Impact of adopting ASU 2016-13
Recovery for credit losses
Charge-offs:
Residential real estate loans:
One- to four-family
Home equity and HELOCs
Residential construction
Total residential real estate loans
Commercial real estate loans:
One- to four-family investor
Multi-family
Commercial non-residential
Commercial construction and land
Total commercial real estate loans
Commercial loans
Consumer loans
Total charge-offs
Recoveries:
Residential real estate loans:
One- to four-family
Home equity and HELOCs
Residential construction
Total residential real estate loans
Commercial real estate loans:
One- to four-family investor
Multi-family
Commercial non-residential
Commercial construction and land
Total commercial real estate loans
Commercial loans
Consumer loans
Total recoveries
Net (charge-offs) recoveries
Allowance at end of period
Total loans (1)
Average loans outstanding
Ratio of allowance to non-accruing loans
Ratio of allowance to total loans
Ratio of net recoveries (charge-offs) to average loans
One- to four-family
Home equity and HELOCs
Residential construction
One- to four-family investor
Multi-family
Commercial non-residential
Commercial construction and land
Commercial loans
Consumer loans
Total ratio of net recoveries (charge-offs) to average loans
The allowance for credit losses decreased $324 thousand to $3.0 million at June 30, 2024 from $3.3 million at June 30, 2023. During the year ended June 30, 2024, the changes in the provision for credit losses for each category of loan type were primarily due to fluctuations in the outstanding balance of each category of loans collectively evaluated for impairment and the adoption of ASU 2016-13. The overall decrease in the allowance can be primarily attributed to consistently low levels of net charge-offs, strong asset quality metrics and continued conservative lending practices.
The allowance for credit losses decreased $96 thousand to $3.3 million at June 30, 2023 from $3.4 million at June 30, 2022. During the year ended June 30, 2023, the changes in the provision for loan losses for each category of loan type were primarily due to fluctuations in the outstanding balance of each category of loans collectively evaluated for impairment. The overall decrease in the allowance can be primarily attributed to improved asset quality metrics, including continued low levels of net charge-offs and non-performing assets.
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Allowance for Credit Losses on Unfunded Loan Commitments
The Company estimates expected credit losses over the contractual period in which the Bank is exposed to credit risk via a contractual obligation to extend credit unless that obligation is unconditionally cancellable by the Bank. The allowance for credit losses on unfunded loan commitments is included in accrued interest payable and other liabilities in the Company’s Statements of Financial Condition and is adjusted through credit loss expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life.
Allowance for Credit Losses on Held to Maturity Securities
The Company accounts for its held to maturity securities in accordance with Accounting Standards Codification (ASC) 326-20, Financial Instruments – Credit Loss – Measured at Amortized Cost , which requires that the Company measure expected credit losses on held to maturity debt securities on a collective basis by major security type. The estimate of expected credit losses considers historical credit loss information that is adjusted for current economic conditions and reasonable and supportable forecasts.
The Company classifies its held to maturity debt securities into the following major security types: mortgage-backed securities, U.S. government agency securities and municipal bonds. Generally, the mortgage-backed securities and U.S. government agency securities are government guaranteed with a history of no credit losses and the municipal bonds are highly rated with a history of no credit losses. Credit ratings of the municipal bonds are reviewed on a quarterly basis. Based on the government guarantee, our historical experience including no credit losses, and the high credit rating of our municipal bonds, the Company determined that an allowance for credit losses on its held to maturity portfolio is not required.
Accrued interest receivable on held to maturity debt securities totaled $170 thousand as of June 30, 2024 and is included within accrued interest receivable and other assets on the Company’s Consolidated Statements of Financial Condition. This amount is excluded from the estimate of expected credit losses. Generally, held to maturity debt securities are classified as nonaccrual when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about the further collectability of principal or interest. When held to maturity debt securities are placed on nonaccrual status, unpaid interest credited to income is reversed against interest income.
Allowance for Credit Losses on Available for Sale Securities
The Company measures expected credit losses on available for sale debt securities when the Bank intends to sell, or when it is not more likely than not that it will be required to sell, the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the amortized cost basis of the security is written down to fair value through income. For available for sale debt securities that do not meet the previously mentioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, the Company considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this evaluation indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit , equal to the amount that the fair value is less than the amortized cost basis. Any that has not been recorded through an allowance for credit is recognized in other comprehensive income.
The ACL on available for sale debt securities is included within securities available for sale on the Consolidated Statements of Financial Condition. Changes in the allowance for credit losses are recorded within provision for credit losses on the Consolidated Statements of Income. Losses are charged against the allowance when the Company believes the collectability of an available for sale security is in jeopardy or when either of the criteria regarding intent or requirement to sell is met.
Accrued interest receivable on available for sale debt securities totaled $662 thousand as of June 30, 2024 and is included within accrued interest receivable and other assets on the Company’s Consolidated Statements of Financial Condition. This amount is excluded from the estimate of expected credit losses. Generally, available for sale debt securities are classified as nonaccrual when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about the further collectability of principal or interest. When available for sale debt securities are placed on nonaccrual status, unpaid interest credited to income is reversed against interest income.
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Interest Rate Risk Management
Interest rate risk is defined as the exposure to current and future earnings and capital that arises from adverse movements in interest rates. Depending on a bank’s asset/liability structure, adverse movements in interest rates could be either rising or falling interest rates. For example, a bank with predominantly long-term fixed-rate assets and short-term liabilities could have an adverse earnings exposure to a rising rate environment. Conversely, a short-term or variable-rate asset base funded by longer term liabilities could be negatively affected by falling rates. This is referred to as re-pricing or maturity mismatch risk.
Interest rate risk also arises from changes in the slope of the yield curve (yield curve risk), from imperfect correlations in the adjustment of rates earned and paid on different instruments with otherwise similar re-pricing characteristics (basis risk), and from interest rate related options embedded in our assets and liabilities (option risk).
Our objective is to manage our interest rate risk by determining whether a given movement in interest rates affects our net interest income and the market value of our portfolio equity in a positive or negative way and to execute strategies to maintain interest rate risk within established limits. The results at June 30, 2024 indicate a level of risk outside the parameters of our model for net interest income volatility in year one and within the parameters of our model in year two. Our management believes that the June 30, 2024 results indicate a profile that reflects interest rate risk exposures in both rising and declining rate environments for both net interest income and economic value.
Model Simulation Analysis. We view interest rate risk from two different perspectives. The traditional accounting perspective, which defines and measures interest rate risk as the change in net interest income and earnings caused by a change in interest rates, provides the best view of short-term interest rate risk exposure. We also view interest rate risk from an economic perspective, which defines and measures interest rate risk as the change in the market value of portfolio equity caused by changes in the values of assets and liabilities, which fluctuate due to changes in interest rates. The market value of portfolio equity, also referred to as the economic value of equity, is defined as the present value of future cash flows from existing assets, minus the present value of future cash flows from existing liabilities.
These two perspectives give rise to income simulation and economic value simulation, each of which presents a unique picture of our risk of any movement in interest rates. Income simulation identifies the timing and magnitude of changes in income resulting from changes in prevailing interest rates over a short-term time horizon (usually one or two years). Economic value simulation reflects the interest rate sensitivity of assets and liabilities in a more comprehensive fashion, reflecting all future time periods. It can identify the quantity of interest rate risk as a function of the changes in the economic values of assets and liabilities, and the corresponding change in the economic value of equity of the Bank. Both types of simulation assist in identifying, measuring, monitoring and controlling interest rate risk and are employed by management to ensure that variations in interest rate risk exposure will be maintained within policy guidelines.
We produce these simulation reports and discuss them with our management Asset and Liability Committee and Board Risk Committee on at least a quarterly basis. The simulation reports compare baseline (no interest rate change) to the results of an interest rate shock, to illustrate the specific impact of the interest rate scenario tested on income and equity. The model, which incorporates all asset and liability rate information, simulates the effect of various interest rate movements on income and equity value. The reports identify and measure our interest rate risk exposure present in our current asset/liability structure. Management considers a static (current position) analysis as well as non-parallel and gradual changes in interest rates and the yield curve in assessing interest rate exposures.
If the results produce quantifiable interest rate risk exposure beyond our limits, then the testing will have served as a monitoring mechanism to allow us to initiate asset/liability strategies designed to reduce and therefore mitigate interest rate risk. The table below sets forth an approximation of our interest rate risk exposure. The simulation uses projected repricing of assets and liabilities at June 30, 2024. The income simulation analysis presented represents a one-year impact of the interest scenario assuming a static balance sheet. Various assumptions are made regarding the prepayment speed and optionality of loans, investment securities and deposits, which are based on analysis and market information. The assumptions regarding optionality, such as prepayments of loans and the effective lives and repricing of non-maturity deposit products, are documented periodically through evaluation of current market conditions and historical correlations to our specific asset and liability products under varying interest rate scenarios. Because the prospective effects of hypothetical interest rate changes are based on a number of assumptions, these computations should not be relied upon as indicative of actual results. While we believe such assumptions to be reasonable, assumed prepayment rates may not approximate actual future prepayment activity on mortgage-backed securities or agency issued collateralized obligations (secured by one- to four-family loans and multifamily loans). Further, the computation does not reflect any actions that management may undertake in response to changes in interest rates and assumes a constant asset base. Management periodically reviews the rate assumptions based on existing and projected economic conditions and consults with industry experts to validate our model and simulation results.
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The table below sets forth, as of June 30, 2024, the Company’s net portfolio value, the estimated changes in our net portfolio value and net interest income that would result from the designated instantaneous parallel changes in market interest rates.
Twelve Month
Net Interest
Net Portfolio
Income
Value
Percent
Estimated
Percent
Change in Interest Rates (Basis Points)
of Change
NPV
of Change
As of June 30, 2024, based on the scenarios above, net interest income would decrease by approximately 6.10% and 12.31% in a rising interest rate environment. One-year net interest income would increase by approximately 3.57% and 7.21% in a declining interest rate environment.
Economic value at risk would be negatively impacted by both a rise and a decline in interest rates. We have established an interest rate floor of zero percent for measuring interest rate risk.
Liquidity and Capital Resources
We maintain liquid assets at levels we believe are adequate to meet our liquidity needs. The Bank’s liquidity ratio was 38.5% as of June 30, 2024 compared to 41.7% as of June 30, 2023. We adjust our liquidity levels to fund deposit outflows, pay real estate taxes on mortgage loans, repay our borrowings, and to fund loan commitments. We also adjust liquidity as appropriate to meet asset and liability management objectives. Our liquidity ratio is calculated as the sum of total cash and cash equivalents and unencumbered investments securities divided by the sum of total deposits and advances from the FHLB of Pittsburgh. The Bank maintains a liquidity ratio policy that requires this metric to be above 10.0% to provide for the effective management of extension risk and other interest rate risks.
Our primary sources of liquidity are deposits, amortization and prepayment of loans and mortgage-backed securities, maturities of investment securities, other short-term investments, earnings, and funds provided from operations. While scheduled principal repayments on loans and mortgage-backed securities are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by market interest rates, economic conditions, and rates offered by our competition. We set the interest rates on our deposits to maintain a desired level of total deposits. In addition, we invest excess funds in short-term interest-earning assets, which provide liquidity to meet lending requirements.
Our cash flows are derived from operating activities, investing activities and financing activities as reported in our Consolidated Statements of Cash Flows included with the Consolidated Financial Statements.
Our primary investing activities are the origination of one- to four-family, non-residential and multi-family real estate and other loans and the purchase of investment securities. For the year ended June 30, 2024, our net decrease in loans (principal payments and payoffs exceeded originations) totaled $6.9 million compared to a $2.0 million increase for the year ended June 30, 2023. For the years ended June 30, 2024 and 2023, we did not purchase or sell any loans. Cash received from the sales, calls, maturities and pay-downs on securities totaled $24.8 million and $19.0 million for the years ended June 30, 2024 and 2023, respectively. We purchased $2.2 million and $9.8 million of securities during the years ended June 30, 2024 and 2023, respectively.
Deposit flows are generally affected by the level of interest rates we offer, the interest rates and products offered by local competitors, and other factors. Total deposits decreased $5.5 million during the year ended June 30, 2024 primarily due to a $31.6 million decrease in money market accounts and an $8.1 million decrease in savings accounts, partially offset by a $16.2 million increase in interest bearing checking accounts and a $14.3 million increase in certificate of deposit accounts. Total deposits increased $28.6 million during the year ended June 30, 2023 primarily due to an increase in money market accounts and non-core time deposits. The significant rise in interest rates during the Company’s fiscal year ended June 30, 2023 and elevated rate environment during the fiscal year ended June 30, 2024 created a highly competitive market for deposits and created a shift in our depositors’ preference to these products.
Liquidity management is both a daily and long-term function of business management. If we require funds beyond our ability to generate them internally, borrowing agreements exist with the FHLB of Pittsburgh to provide advances. As a member of the FHLB of Pittsburgh,
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we are required to own capital stock in the FHLB of Pittsburgh and are authorized to apply for advances on the security of such stock and certain of our mortgage loans and other assets (principally securities which are obligations of, or guaranteed by, the United States), provided certain standards related to credit-worthiness have been met. We had an available borrowing limit of $287.3 million and $295.0 million from the FHLB of Pittsburgh as of June 30, 2024 and 2023, respectively. There were $48.0 million and $34.0 million, respectively, of FHLB advances outstanding at June 30, 2024 and 2023, respectively.
At June 30, 2024, we had outstanding commitments to originate loans of $15.7 million, unfunded commitments under lines of credit of $65.7 million and $86 thousand of standby letters of credit. At June 30, 2024, certificates of deposit scheduled to mature in less than one year totaled $154.3 million. Based on prior experience, management believes that a significant portion of such deposits will remain with us, although there can be no assurance that this will be the case. In the event a significant portion of our deposits are not retained by us, we will have to utilize other funding sources, such as FHLB advances, in order to maintain our level of assets. Alternatively, we could reduce our level of liquid assets, such as our cash and cash equivalents. In addition, the cost of such deposits may be significantly higher if market interest rates are higher at the time of renewal.
The Company is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its operating expenses, the Company is responsible for paying any dividends declared to its stockholders, interest and principal on outstanding debt, if any, and for stock repurchases under the Company’s previously announced stock repurchase programs. The Company’s primary source of income is dividends received from the Bank. At June 30, 2024, the Company had liquid assets of $6.2 million.
Off-Balance Sheet Arrangements
For the years ended June 30, 2024 and 2023, we did not engage in any off-balance sheet transactions reasonably likely to have a material adverse effect on our financial condition, results of operations or cash-flows.
Recent Accounting Pronouncements
For a discussion of the impact of recent accounting pronouncements, see Note 2 to the notes to the Consolidated Financial Statements of the Company.
Impact of Inflation and Changing Prices
The consolidated financial statements and related notes of the Company have been prepared in accordance with GAAP, which generally requires the measurement of financial position and operating results in terms of historical dollars without consideration for changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike industrial companies, our assets and liabilities are primarily monetary in nature. As a result, changes in market interest rates have a greater impact on performance than the effects of inflation.
Non-GAAP Financial Information
We prepare our financial statements in accordance with U.S. GAAP. To supplement our financial information presented in accordance with U.S. GAAP, we provide the non-GAAP financial measures discussed below which are used to evaluate our performance and exclude the effects of certain transactions and one-time events that we believe are unrelated to our core business and not necessarily indicative of our current performance or financial position. Management believes excluding these items facilitates greater visibility into our core businesses and underlying trends that may, to some extent, be obscured by inclusion of such items.
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Core Net Income, Core Return on Average Assets, and Core Return on Average Equity
Core net income excludes certain pre-tax adjustments and the tax impact of such adjustments, and income tax benefits. Core return on average assets and core return on average equity represent our core net income divided by average assets and average equity, respectively. Management believes that the presentation of these non-GAAP measures assists investors in understanding the impact of non-recurring items on our net income and return on average assets and our return on average equity ratios. The following table provides a reconciliation of our core net income and our core return on average assets and core return on average equity ratios for each of the periods where these non-GAAP measures are presented:
For the Year Ended June 30,
Calculation of core net income, core return on average assets, and core return on average equity
Net income (GAAP)
Less pre-tax adjustments:
Net loss on sale of other real estate owned
Net gain on sale of securities
Net gain on disposition of premises and equipment
Unrealized (gain) loss on equity securities
Tax impact of pre-tax adjustments
Income tax benefit adjustment
Core net (loss) income (non-GAAP)
Basic average common shares outstanding
Diluted average common shares outstanding
Basic and diluted earnings per share (GAAP)
Basic and diluted core (loss) earnings per share (non-GAAP)
Average assets
Return on average assets (GAAP)
Core (loss) return on average assets (non-GAAP)
Average equity
Return on average equity (GAAP)
Core (loss) return on average equity (non-GAAP)
Total Credit Losses Coverage Ratio
Total Credit Losses Coverage Ratio represents the total of our allowance for credit losses and the fair value mark on acquired loans divided by total loans excluding the fair value mark on acquired loans. Management believes the total credit losses coverage ratio helps management and investors better understand the total coverage for credit losses on loans. This non-GAAP data should be considered in addition to results prepared in accordance with Generally Accepted Accounting Principles in the U.S. (GAAP), and is not a substitute for, or superior to, GAAP results. The following table provides a reconciliation of the total credit losses coverage ratio to allowance for credit losses to total loans, the most directly comparable GAAP financial measure, for the periods presented.
As of June 30,
Calculation of the total credit losses coverage ratio:
Allowance for credit losses
Purchase accounting fair value mark
Total credit losses coverage
Gross loans receivable
Gross loans receivable, excluding purchase accounting fair value mark
Allowance for credit losses to total loans (GAAP)
Total credit losses coverage to total loans (non-GAAP)
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