risk-based assets capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The new capital conservation buffer requirement began being phased-in January 2016 at 0.625% of risk-weighted assets and become fully phased in January 2019. An institution will be subject to limitations on paying dividends, engaging in share repurchases and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations will establish a maximum percentage of eligible retained income that can be utilized for such actions. We are in compliance with these requirements as of September 30, 2021.
The application of more stringent capital requirements could, among other things, result in lower returns on equity, require the raising of additional capital, and result in regulatory actions if we were to be unable to comply with such requirements. Furthermore, the imposition of liquidity requirements in connection with the implementation of Basel III could result in our having to lengthen the term of our funding, restructure our business models, and/or increase our holdings of liquid assets. Implementation of changes to asset risk weightings for risk-based capital calculations, items included or deducted in calculating regulatory capital and/or additional capital conservation buffers could result in management modifying its business strategy, and could limit our ability to make distributions, including paying dividends or repurchasing shares. Specifically, beginning in 2017, the Bank’s ability to pay dividends is limited if it does not have the capital conservation buffer required by the new capital rules, which may further limit our ability to pay dividends to stockholders.
Federal Reserve Board policy could limit our ability to pay dividends to our shareholders.
The Federal Reserve Board has issued a policy statement regarding the payment of dividends and the repurchase of shares of common stock by bank holding companies. In general, the policy provides that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. These regulatory policies could affect our ability to pay dividends, repurchase shares of common stock or otherwise engage in capital distributions.
Risks Related to Our Business and Industry Generally
We are a community bank and our ability to maintain our reputation is critical to the success of our business.
We are a community bank, and our reputation is one of the most valuable components of our business. A key component of our business strategy is to rely on our reputation for customer service and knowledge of local markets to expand our presence by capturing new business opportunities from existing and prospective customers in our current market and contiguous areas. As such, we strive to conduct our business in a manner that enhances our reputation. This is done, in part, by recruiting, hiring and retaining employees who share our core values of being an integral part of the communities we serve, delivering superior service to our customers and caring about our customers and associates. If our reputation is negatively affected by the actions of our employees, by our inability to conduct our operations in a manner that is appealing to current or prospective customers, or otherwise, our business and, therefore, our operating results may be materially adversely affected.
Strong competition within our market area could hurt our profits and slow growth.
We face intense competition in making loans, attracting deposits and hiring and retaining experienced employees. This competition has made it more difficult for us to make new loans and attract deposits. Price competition for loans and deposits sometimes results in us charging lower interest rates on our loans and paying higher interest rates on our deposits, which reduces our net interest income. Competition also makes it more difficult and costly to attract and retain qualified employees. Some of the institutions with which we compete have substantially greater resources and lending limits than we have and may offer services that we do not provide. We expect competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Our profitability depends upon our continued ability to compete successfully in our market area.
448
Our asset size may make it more difficult for us to compete.
Our asset size may make it more difficult to compete with other financial institutions that are larger and can more easily afford to invest in the marketing and technologies needed to attract and retain customers. Because our principal source of income is the net interest income we earn on our loans and investments after deducting interest paid on deposits and other sources of funds, our ability to generate the revenues needed to cover our expenses and finance such investments is limited by the size of our loan and investment portfolios. Accordingly, we are not always able to offer new products and services as quickly as our competitors. Our lower earnings may also make it more difficult to offer competitive salaries and benefits. In addition, our smaller customer base may make it difficult to generate meaningful non-interest income from non-traditional banking activities. Finally, as a smaller institution, we are disproportionately affected by the continually increasing costs of compliance with new banking and other regulations.
Our success depends on hiring and retaining certain key personnel.
Our performance largely depends on the talents and efforts of highly skilled individuals. We rely on key personnel to manage and operate our business, including major revenue generating functions such as loan and deposit generation, as well as operational functions such as regulatory compliance and information technology. The loss of key staff may adversely affect our ability to maintain and manage these functions effectively, which could negatively affect our revenues. In addition, loss of key personnel could result in increased recruiting and hiring expenses, which could cause a decrease in our net income. Our continued ability to compete effectively depends on our ability to attract new employees and to retain and motivate our existing employees.
Risks Related to Operational Matters
If the Company fails to maintain an effective system of internal controls, it may not be able to accurately report its financial results or prevent fraud. As a result, current and potential shareholders could lose confidence in the Company’s financial reporting, which could harm its business and the trading price of its common stock.
The Company has established a process to document and evaluate its internal controls over financial reporting in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and the related regulations, which require annual management assessments of the effectiveness of the Company’s internal controls over financial reporting. In this regard, management has, among other things, dedicated internal resources and engaged outside consultants to (i) assess and document the adequacy of internal controls over financial reporting, (ii) take steps to improve control processes, where appropriate, (iii) validate through testing that controls are functioning as documented and (iv) implement a continuous reporting and improvement process for internal control over financial reporting. Although the Company’s management and audit committee believe that its system of internal controls is effective, the Company cannot be certain that these measures will ensure that the Company implements and maintains adequate controls over its financial processes and reporting in the future. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm the Company’s operating results or cause the Company to fail to meet its reporting obligations. If the Company fails to correct any issues in the design or operating effectiveness of internal controls over financial reporting, or fails to prevent fraud, current and potential shareholders could lose confidence in the Company’s financial reporting, which could harm its business and the trading price of its common stock.
The Company is subject to a variety of operational risks, including reputational risk, legal and compliance risk, and the risk of fraud or theft by employees or outsiders.
The Company is exposed to many types of operational risks, including reputational risk, legal and compliance risk, the risk of fraud or theft by employees or outsiders, and unauthorized transactions by employees or operational errors, including clerical or record-keeping errors or those resulting from faulty or disabled computer or telecommunications systems. Negative public opinion can result from its actual or alleged conduct in any number of activities, including lending practices, corporate governance and acquisitions and from actions taken by government regulators and community organizations in response to those activities. Negative public opinion can adversely affect its ability to attract and keep customers and can expose the Company to litigation and regulatory action.
45
Because the nature of the financial services business involves a high volume of transactions, certain errors may be repeated or compounded before they are discovered and successfully rectified. The Company’s necessary dependence upon automated systems to record and process its transaction volume may further increase the risk that technical flaws or employee tampering or manipulation of those systems will result in losses that are difficult to detect. The Company also may be subject to disruptions of its operating systems arising from events that are wholly or partially beyond its control (for example, computer viruses or electrical or telecommunications outages), which may give rise to disruption of service to customers and to financial loss or liability. The Company is further exposed to the risk that its external vendors may be unable to fulfill their contractual obligations (or will be subject to the same risk of fraud or operational errors by their respective employees as the Company is) and to the risk that its (or its vendors’) business continuity and data security systems prove to be inadequate. The occurrence of any of these risks could result in a diminished ability of the Company to operate its business, potential liability to clients, reputational damage and regulatory intervention, which could adversely affect its business, financial condition and results of operations, perhaps materially.
The Company relies on other companies to provide key components of its business infrastructure.
Third parties provide key components of the Company’s business infrastructure, for example, system support and network access. While the Company has selected these third party vendors carefully, it does not control their actions. Any problems caused by these third parties, including those resulting from their failure to provide services for any reason or their poor performance of services, could adversely affect the Company’s ability to deliver products and services to its customers and otherwise conduct its business. Replacing these third party vendors could also entail significant delay and expense.
The Company’s operations may be adversely affected by cyber security risks.
In the ordinary course of business, the Company collects and stores sensitive data, including proprietary business information and personally identifiable information of our customers and employees in systems and on networks. In some cases, this confidential or proprietary information is collected compiled, processed, transmitted or stored by third parties on our behalf. The secure processing, maintenance and use of this information is critical to operations and our business strategy. The Company has invested in accepted technologies, and continually reviews processes and practices that are designed to protect our networks, computers and data from damage or unauthorized access. Despite these security measures, the Company’s computer systems and infrastructure or those of third parties used by us to compile, process or store such information may be vulnerable to attacks by hackers or breached due to employee error, malfeasance, or other disruptions. A breach of any kind could compromise systems and the information stored there could be accessed, damaged or disclosed. A breach in security could result in legal claims, regulatory penalties, disruption in operations, and damage to the Company’s reputation, which could adversely affect our business.
Our ability to successfully compete may be reduced if we are unable to make technological advances.
The banking industry is experiencing rapid changes in technology. In addition to improving customer services, effective use of technology increases efficiency and enables financial institutions to reduce costs. As a result, our future success will depend in part on our ability to address our customers’ needs by using technology. We cannot assure you that we will be able to effectively develop new technology-driven products and services or be successful in marketing these products to our customers. Many of our competitors have far greater resources than we have to invest in technology.
Risks Related to Accounting Matters
We expect that implementation of a new accounting standard could require us to increase our allowance for loan losses and may have a material adverse effect on our financial condition and results of operations.
The Financial Accounting Standards Board (“FASB”) has adopted a new accounting standard that will be effective for the Bank for our fiscal year beginning on October 1, 2023. This standard, referred to as Current Expected Credit Loss, or CECL, will require financial institutions to determine periodic estimates of lifetime expected credit losses on loans, and recognize the expected credit losses as allowances for loan losses. This will change the current method of providing allowances for loan losses that are probable, which we expect may require us to increase our allowance for loan
46
losses, and to greatly increase the data we would need to collect and review to determine the appropriate level of the allowance for loan losses. Any increase in our allowance for loan losses, or expenses incurred to determine the appropriate level of the allowance for loan losses, may have a material adverse effect on our financial condition and results of operations.
If our intangible assets, including goodwill, are either partially or fully impaired in the future, it would decrease earnings.
We are required to test our goodwill and other identifiable intangible assets for impairment on an annual basis and more regularly if indicators of impairment exist. The impairment testing process considers a variety of factors, including the current market price of our common stock, the estimated net present value of our assets and liabilities and information concerning the terminal valuation of similar insured depository institutions. Future impairment testing may result in a partial or full impairment of the value of our goodwill or other identifiable intangible assets, or both. If an impairment determination is made in a future reporting period, our earnings and the book value of these intangible assets will be reduced by the amount of the impairment. However, the recording of such an impairment loss would have no impact on the tangible book value of our shares of common stock or our regulatory capital levels.
Other Risks Related to our Business
We may be required to transition from the use of the LIBOR interest rate index in the future.
We have certain FHLB advances, brokered deposits, loans and investment securities indexed to LIBOR to calculate the loan interest rate. The continued availability of the LIBOR index is not guaranteed after 2021. We cannot predict whether and to what extent banks will continue to provide LIBOR submissions to the administrator of LIBOR or whether any additional reforms to LIBOR may be enacted. At this time, no consensus exists as to what rate or rates may become acceptable alternatives to LIBOR (with the exception of overnight repurchase agreements, which are expected to be based on the Secured Overnight Financing Rate, or SOFR). The language in our LIBOR-based contracts and financial instruments has developed over time and may have various events that trigger when a successor rate to the designated rate would be selected. If a trigger is satisfied, contracts and financial instruments may give the calculation agent discretion over the substitute index or indices for the calculation of interest rates to be selected. The implementation of a substitute index or indices for the calculation of interest rates under our loan agreements with our borrowers may result in our incurring significant expenses in effecting the transition, may result in reduced loan balances if borrowers do not accept the substitute index or indices, and may result in disputes or litigation with customers over the appropriateness or comparability to LIBOR of the substitute index or indices, which could have an adverse effect on our results of operations.
Legal and regulatory proceedings and related matters could adversely affect us.
We have been and may in the future become involved in legal and regulatory proceedings. We consider most of the proceedings to be in the normal course of our business or typical for the industry; however, it is inherently difficult to assess the outcome of these matters, and we may not prevail in any proceedings or litigation. There could be substantial costs and management diversion in such litigation and proceedings, and any adverse determination could have a materially adverse effect on our business, reputation, or our financial condition and results of our operations.
Climate change may materially adversely affect the Company's business and results of operations.
Concerns over the long-term effects of climate change have led and will continue to lead to governmental efforts around the world to mitigate those impacts. Consumers and businesses also may voluntarily change their behavior as a result of these concerns. The Company and its customers will need to respond to new laws and regulations as well as consumer and business preferences resulting from climate change concerns. The Company and its customers may face cost increases, asset value reductions and operating process changes. The impact on our customers will likely vary depending on their specific attributes, including reliance on or role in carbon-intensive activities. Among the impacts to the Company could be a drop in demand for our products and services, particularly in certain sectors. In addition, we could face reductions in creditworthiness on the part of some customers or in the value of assets securing loans. The Company’s efforts to take these risks into account in making lending and other decisions, including by increasing our business with
47
climate-friendly companies, may not be effective in protecting the Company from the negative impact of new laws and regulations or changes in consumer or business behavior.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
We currently conduct business from our main office and nine banking offices. On January 1, 2017, the Company completed its acquisition of Polonia Bancorp and Polonia Bank, Polonia Bancorp’s wholly owned subsidiary. The
48
acquisition added five banking offices to our existing properties. The following table sets forth the net book value of the land, building and leasehold improvements and certain other information with respect to our offices at September 30, 2021.
| | | | | | | | | | |
|
| | | | | Net Book Value | | | | |
| | | | Date of | | of Property and | | | | |
| | | | Lease | | Leasehold | | Amount of | ||
Description/Address |
| Leased/Owned |
| Expiration |
| Improvements |
| Deposits | ||
| | | | | | (In Thousands) | ||||
Main Office |
| Owned |
| N/A | | $ | 120 | | $ | 414,328 |
1834 West Oregon Avenue | | | | | | | | | | |
Philadelphia, PA 19145 | | | | | | | | | | |
| | | | | | | | | | |
Huntingdon Valley Executive Office |
| Owned |
| N/A | |
| 2,895 | |
| 30,353 |
3993 Huntingdon Pike | | | | | | | | | | |
Huntingdon Valley, PA 19006 | | | | | | | | | | |
| | | | | | | | | | |
Broad Street Financial Center |
| Owned |
| N/A | |
| 152 | |
| 48,770 |
1722 South Broad Street | | | | | | | | | | |
Philadelphia, PA 19145 | | | | | | | | | | |
| | | | | | | | | | |
Pennsport Financial Center |
| Owned |
| N/A | |
| 8 | |
| 37,389 |
238A Moore Street | | | | | | | | | | |
Philadelphia, PA 19148 | | | | | | | | | | |
| | | | | | | | | | |
Drexel Hill Financial Center |
| Leased |
| Oct-27 | |
| 5 | |
| 47,789 |
1270 Township Line Road | | | | | | | | | | |
Drexel Hill, PA 19026 | | | | | | | | | | |
| | | | | | | | | | |
Center City Financial Center |
| Leased |
| Jan-26 | |
| 31 | |
| 15,268 |
1500 JFk Boulevard | | | | | | | | | | |
Philadelphia, PA 19103 | | | | | | | | | | |
| | | | | | | | | | |
Alleghney Financial Center |
| Owned |
| N/A | |
| 769 | |
| 49,078 |
2644-56 E Alleghney Avenue | | | | | | | | | | |
Philadelphia, PA 19134 | | | | | | | | | | |
| | | | | | | | | | |
Spring Garden Financial Center |
| Owned |
| N/A | |
| 1,357 | |
| 36,532 |
2133-35 Spring Garden Street | | | | | | | | | | |
Philadelphia, PA 19130 | | | | | | | | | | |
| | | | | | | | | | |
Richmond Financial Center |
| Owned |
| N/A | |
| 204 | |
| 5,899 |
4800 Richmond Street | | | | | | | | | | |
Philadelphia, PA 19137 | | | | | | | | | | |
| | | | | | | | | | |
Frankford Financial Center |
| Owned |
| N/A | |
| 381 | |
| 26,109 |
8000 Frankford Avenue | | | | | | | | | | |
Philadelphia, PA 19136 | | | | | | | | | | |
| | | | | | | | | | |
Total | | | | | | $ | 5,922 | | $ | 711,515 |
Item 3. Legal Proceedings
On March 31, 2016, Island View Properties, Inc. t/a Island View Crossing II and Renato J. Gualtieri (“Plaintiffs”) filed a complaint against the Bank in the Court of Common Pleas of Philadelphia County (the “CCP Action”) asserting, among other things, that the Bank breached various loan agreements and related agreements for a development known as
49
Island View Crossing. In its complaint, Plaintiffs seek the amount of $27 million. The Company filed objections to the complaint seeking to dismiss significant portions of Plaintiffs’ claims. On August 31, 2016, the Court dismissed the majority of the claims. After that order, the Company filed an answer denying Plaintiffs’ claims as well as a counterclaim seeking damages for failure to pay the outstanding loans and not completing the project. Discovery was ongoing and a trial was scheduled for October 2, 2017. On June 30, 2017, Plaintiff Island View Crossing II filed a Chapter 11 bankruptcy and on or about July 18, 2017, the Bank removed the CCP Action to bankruptcy court (the “Removed Action”).
Within the bankruptcy, Island View Crossing II, as the debtor and the Chapter 11 Trustee, filed a separate adversary proceeding against the Bank seeking to avoid certain collateral mortgages made by Island View as well as seeking to avoid certain loans made to Island View Crossing II including, but not limited to, a $1.4 million loan and a $5.5 million loan. The complaint was filed on or about December 3, 2018 and that action was ultimately consolidated with the Removed Action.
The discovery phase of litigation has concluded. The parties have each filed motions for summary judgment with the Court on multiple issues. In August 2021, the court denied the Trustee’s motion and granted, in part, the Bank’s motion. The court has allowed for the production of expert witnesses and rebuttal reports by December 2021. A pretrial conference with the Court is scheduled for mid-February 2022.
Given the stage of the case and pending motions, we are unable to determine the likelihood of an unfavorable outcome at this time. The Bank, however, intends to vigorously defend against all claims.
Prudential Bancorp is involved in various legal proceedings occurring in the ordinary course of business. Management of the Company, based on discussions with litigation counsel, does not believe that such proceedings will have a material adverse effect on the financial condition or operations of Prudential Bancorp. There can be no assurance that any of the outstanding legal proceedings to which the Company is a party will not be decided adversely to the Company's interests and have a material adverse effect on the financial condition and operations of the Company.
Item 4. Mine Safety Disclosures
Not applicable
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
(a) Our common stock is traded on the NASDAQ Global Market (NASDAQ) under the symbol “PBIP”. At December 1, 2021, there were approximately 396 registered shareholders of record, not including the number of persons or entities whose stock is held in nominee or "street" name through various brokerage firms and banks.
50
The following table shows the quarterly high and low trading prices of our stock, reported on the NASDAQ Stock Market, and the amount of cash dividends declared per share for each of the quarters in fiscal 2021 and 2020:
| | | | | | | | | |
|
| | | | | |
| Cash | |
| | Stock Price | | dividends | |||||
Quarter ended: |
| High |
| Low |
| per share | |||
September 30, 2021 | | $ | 15.26 | | $ | 13.55 | | $ | 0.07 |
June 30, 2021 |
| | 14.91 |
| | 13.53 |
| | 0.07 |
March 31, 2021 |
| | 15.39 |
| | 11.50 |
| | 0.07 |
December 31, 2020 |
| | 14.27 |
| | 10.42 |
| | 0.07 |
| | | | | | | | | |
|
| | | | | | | Cash | |
| | Stock Price | | dividends | |||||
Quarter ended : |
| High |
| Low |
| per share | |||
September 30, 2020 | | $ | 12.66 | | $ | 9.53 | | $ | 0.07 |
June 30, 2020 |
| | 14.29 |
| | 9.90 |
| | 0.07 |
March 31, 2020 |
| | 18.58 |
| | 10.26 |
| | 0.50 |
December 31, 2019 |
| | 18.59 |
| | 16.51 |
| | 0.07 |
(b)Not applicable
(c)The Company’s repurchases of equity shares for the fourth quarter of fiscal year 2021 were as follows:
| | | | | | | | | |
|
| |
| | |
| Total Number |
| |
| | | | | | | of Shares | | |
| | | | | | | Purchased as | | |
| | | | | | | Part of | | Maximum Number |
| | Total | | | | | Publicly | | of Shares that May |
| | Number of | | Average | | Announced | | Yet Be Purchased | |
| | Shares | | Price Paid | | Plans or | | Under Plans or | |
Period | | Purchased | | Per Share | | Programs (1) | | Programs (1) | |
July 1 - 31, 2021 | | 49,687 | | $ | 13.87 | | 49,687 | | 785,643 |
August 1 - 31, 2021 |
| 27,885 | | | 13.77 |
| 27,885 |
| 757,758 |
September 1 - 30, 2021 |
| — | | | — |
| — |
| 757,758 |
| | 77,572 | | $ | 13.84 | | 77,572 | | |
Item 6. [Reserved]
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
At September 30, 2021, we had total assets of $1.1 billion, including total net loans of $618.2 million, aggregate investment and mortgage-backed securities of $326.0 million (both available for sale and held to maturity), total deposits of $711.5 million, total borrowings of $232.0 million and total stockholders’ equity of $130.5 million.
The Company conducts community banking activities by accepting deposits and making loans secured by properties located primarily in our market area. Our lending products consist of residential mortgage loans, including loans
51
for sale in the secondary market, along with commercial real estate, multi-family residential and construction loans. The Company also originates commercial business and consumer loans in an effort to maintain strong customer relationships.
The worldwide COVID-19 pandemic has caused significant volatility and disruption in the financial markets both in the United States and globally. We are working with both residential and commercial borrowers to help them meet the unexpected financial challenges stemming from the COVID-19 pandemic and will continue to do so.
Despite the challenging current market and economic conditions, the Company continues to maintain capital substantially in excess of regulatory requirements. Furthermore, most of our assets and liabilities are monetary in nature; therefore the current levels of increased inflation, which affect the Company’s cost of operations, are less important than the impact of interest rate shifts on our financial performance.
This Management’s Discussion and Analysis section is intended to assist in understanding the financial condition and results of operations of Prudential Bancorp. The results of operations of Prudential Bancorp are primarily dependent on the results of the Bank. The information contained in this section should be read in conjunction with our consolidated financial statements and the accompanying notes to the consolidated financial statements contained in Item 8 of this Annual Report on Form 10-K.
Critical Accounting Policies and Estimates
In reviewing and understanding financial information for Prudential Bancorp, you are encouraged to read and understand the significant accounting policies used in preparing our financial statements. These policies are described in Note 2 of the notes to our consolidated financial statements included in Item 8 hereof. The accounting and financial reporting policies of Prudential Bancorp conform to accounting principles generally accepted in the United States of America (“U.S. GAAP”) and to general practices within the banking industry. Accordingly, the financial statements require certain estimates, judgments and assumptions, which are believed to be reasonable, based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities as well as contingent assets and contingent liabilities at the date of the financial statements and the reported amounts of income and expenses during the periods presented. The following accounting policies comprise those that management believes are the most critical to aid in fully understanding and evaluating our reported financial results. These policies require numerous estimates or economic assumptions that may prove inaccurate or may be subject to variations which may significantly affect our reported results and financial condition for the period or in future periods.Further, subsequent changes in economic or market conditions could have a material impact on these estimates and our financial condition and operating results in future periods. There have been no significant changes in our application of accounting policies since September 30, 2020. For additional information concerning critical accounting policies, see Note 1 of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data." and the discussion below.
Allowance for Loan Losses. The allowance for loan losses is established through a provision for loan losses charged to expense. Losses are charged against the allowance for loan losses when management believes that the collectability in full of the principal of a loan is unlikely. Subsequent recoveries are added to the allowance. The allowance for loan losses is maintained at a level that management considers adequate to provide for estimated losses and impairments based upon an evaluation of known and inherent losses in the loan portfolio that are both probable and reasonable to estimate. Loan impairment is evaluated based on the fair value of collateral or estimated net realizable value. It is the policy of management to provide for losses on unidentified loans in its portfolio in addition to criticized and classified loans.
Management monitors its allowance for loan losses at least quarterly and makes adjustments to the allowance through the provision for loan losses as economic conditions and other pertinent factors indicate. The quarterly review and adjustment of the qualitative factors employed in the allowance methodology and the updating of historic loss experience allow for timely reaction to emerging conditions and trends. In this context, a series of qualitative factors are used in a methodology as a measurement of how current circumstances are affecting the loan portfolio. Included in these qualitative factors are:
52
In determining the allowance for loan losses, management has established both specific and general pooled allowances. Values assigned to the qualitative factors and those developed from historic loss experience provide a dynamic basis for the calculation of reserve factors for both pass-rated loans (general pooled allowance) and for criticized and classified loans. The amount of the specific allowance is determined through a loan-by-loan analysis of certain large dollar commercial real estate loans. Loans not individually reviewed are evaluated as a group using reserve factor percentages based on historical loss experience and the qualitative factors described above. In determining the appropriate level of the general pooled allowance, management makes estimates based on internal risk ratings, which take into account such factors as debt service coverage, loan-to-value ratios and external factors. Estimates are periodically measured against actual loss experience.
This evaluation is inherently subjective as it requires material estimates including, among others, exposure at default, the amount and timing of expected future cash flows on impaired loans, value of collateral, estimated losses on our commercial, construction and residential loan portfolios and historical loss experience. All of these estimates may be susceptible to significant change. While management analyzed its allowance in light of the COVID-19 pandemic, such analysis will need to be continually refined and reviewed in light of the ongoing nature of the effects of the COVID-19 pandemic.
While management uses the best information available to make loan loss allowance evaluations, adjustments to the allowance may be necessary based on changes in economic and other conditions or changes in accounting guidance. In addition, the Department and the FDIC, as an integral part of their examination processes, periodically review our allowance for loan losses. The Department and the FDIC may require the recognition of adjustments to the allowance for loan losses based on their judgment of information available to them at the time of their examinations. To the extent that actual outcomes differ from management’s estimates, additional provisions to the allowance for loan losses may be required that would adversely affect earnings in future periods.
Investment and Mortgage-Backed Securities Available for Sale. Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated using quoted prices of securities with similar characteristics or discounted cash flows and are classified within Level 2 of the fair value hierarchy. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy, although there were no securities with that classification as of September 30, 2021 or 2020.
Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. In light of the COVID-19 pandemic, management is taking into account the effects the pandemic may have on securities and their impairment. The Company determines whether the unrealized losses are temporary or are considered other than temporary. The Company determines whether the unrealized losses are temporary in accordance with U.S. GAAP. The evaluation is based upon factors such as the
53
creditworthiness of the issuers/guarantors, the underlying collateral, if applicable, and the continuing performance of the securities. In addition, the Company also considers the likelihood that the security will be required to be sold by a regulatory agency, our internal intent not to dispose of the security prior to maturity and whether the entire cost basis of the security is expected to be recovered. In determining whether the cost basis will be recovered, management evaluates other facts and circumstances that may be indicative of an other-than-temporary impairment condition. This includes, but is not limited to, an evaluation of the type of security, length of time and extent to which the fair value has been less than cost, and near-term prospects of the issuer.
In addition, certain assets are measured at fair value on a non-recurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The Company measures impaired loans and loans transferred into real estate owned at fair value on a non-recurring basis.
Valuation techniques and models utilized for measuring financial assets and liabilities are reviewed and validated by the Company at least quarterly.
Derivatives. The Company uses interest rate swaps and caps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the payment of either fixed or variable-rate amounts in exchange for the receipt of variable or fixed-rate amounts from a counterparty, respectively. The Company uses interest rate swaps to manage its exposure to changes in fair value. Interest rate swaps designated as fair value hedges involve the receipt of variable-rate payments from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without the exchange of the underlying notional amount.
Income Taxes. The Company accounts for income taxes in accordance with U.S. GAAP. The Company records deferred income taxes that reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Management exercises significant judgment in the evaluation of the amount and timing of the recognition of the resulting tax assets and liabilities. The judgments and estimates required for the evaluation are updated based upon changes in business factors and the tax laws. If actual results differ from the assumptions and other considerations used in estimating the amount and timing of tax recognized, there can be no assurance that additional expenses will not be required in future periods.
In evaluating our ability to recover deferred tax assets, we consider all available positive and negative evidence, including our past operating results and our forecast of future taxable income. In determining future taxable income, we make assumptions for the amount of taxable income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require us to make judgments about our future taxable income and are consistent with the plans and estimates we use to manage our business. Any reduction in estimated future taxable income may require us to record an additional valuation allowance against our deferred tax assets. An increase in the valuation allowance would result in additional income tax expense in the period and could have a significant impact on our future earnings.
U.S. GAAP prescribes a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized. The Company recognizes, when applicable, interest and penalties related to unrecognized tax benefits in the provision for income taxes in the consolidated income statement. Assessment of uncertain tax positions requires careful consideration of the technical merits of a position based on management's analysis of tax regulations and interpretations. Significant judgment may be involved in the assessment of the tax position.
Recent Accounting Pronouncements
Information regarding recent accounting pronouncements is included in Note 2 to the audited consolidated financial statements set forth in Item 8 hereto.
54
Selected Financial Data
Set forth below is selected financial and other data of Prudential Bancorp. Reference is made to the consolidated financial statements and related notes contained in Item 8 which provide additional information.
| | | | | | | | | | | | | | |
| | At September 30, | ||||||||||||
|
| 2021 |
| 2020 |
| 2019 |
| 2018 |
| 2017 | ||||
| | (Dollars in Thousands) | ||||||||||||
Selected Financial Condition Data: | | | | | | | | | | | | | | |
Total assets | | $ | 1,100,468 | | 1,223,353 | | $ | 1,289,434 | | $ | 1,081,170 | | $ | 899,540 |
Cash and cash equivalents | |
| 82,698 |
| 117,081 | |
| 47,968 | |
| 48,171 | |
| 27,903 |
Investment and mortgage-backed securities: | |
|
|
|
| |
|
| |
|
| |
|
|
Held-to-maturity | |
| 20,074 |
| 22,860 | |
| 68,635 | |
| 59,852 | |
| 61,284 |
Available-for-sale | |
| 305,969 |
| 420,415 | |
| 512,822 | |
| 306,187 | |
| 178,402 |
Loans receivable, net | |
| 618,206 |
| 588,300 | |
| 585,456 | |
| 602,932 | |
| 571,343 |
Deposits | |
| 711,515 |
| 770,949 | |
| 745,444 | |
| 784,258 | |
| 635,982 |
FHLB advances | |
| 232,025 |
| 285,254 | |
| 376,904 | |
| 154,683 | |
| 114,318 |
Non-performing loans | |
| 8,379 |
| 13,037 | |
| 13,936 | |
| 13,389 | |
| 15,397 |
Non-performing assets | |
| 12,488 |
| 13,037 | |
| 14,284 | |
| 14,415 | |
| 15,589 |
Total stockholders’ equity, substantially restricted | |
| 130,456 |
| 129,117 | |
| 139,611 | |
| 128,409 | |
| 136,179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55
| | | | | | | | | | | | | | | | |
| | Year Ended September 30, |
| |||||||||||||
|
| 2021 |
| 2020 |
| 2019 |
| 2018 |
| 2017 |
| |||||
| | (Dollars in Thousands, except Per Share Data) |
| |||||||||||||
Selected Operating Data: | | | | | | | | | | | | | | | |
|
Total interest income | | $ | 38,037 | | $ | 42,227 | | $ | 44,040 | | $ | 34,851 | | $ | 26,343 | |
Total interest expense | |
| 14,798 | |
| 19,425 | |
| 19,289 | |
| 10,137 | |
| 5,266 | |
Net interest income | |
| 23,239 | |
| 22,802 | |
| 24,751 | |
| 24,714 | |
| 21,077 | |
Provision for loan losses | |
| 200 | |
| 3,025 | |
| 100 | |
| 810 | |
| 2,990 | |
Net interest income after provision for loan losses | |
| 23,039 | |
| 19,777 | |
| 24,651 | |
| 23,904 | |
| 18,087 | |
Total non-interest income | |
| 3,639 | |
| 8,103 | |
| 3,094 | |
| 2,500 | |
| 2,198 | |
Total non-interest expense | |
| 17,629 | |
| 16,725 | |
| 16,270 | |
| 15,639 | |
| 16,566 | |
Income before income taxes | |
| 9,049 | |
| 11,155 | |
| 11,475 | |
| 10,765 | |
| 3,719 | |
Income tax expense | |
| 1,269 | |
| 1,600 | |
| 1,945 | |
| 3,701 | |
| 941 | |
Net income | | $ | 7,780 | | $ | 9,555 | | $ | 9,530 | | $ | 7,064 | | $ | 2,778 | |
Basic earnings per share | | $ | 0.98 | | $ | 1.12 | | $ | 1.09 | | $ | 0.80 | | $ | 0.33 | |
Diluted earnings per share | | $ | 0.98 | | $ | 1.12 | | $ | 1.07 | | $ | 0.78 | | $ | 0.32 | |
Dividends paid per common share | | $ | 0.28 | | $ | 0.71 | | $ | 0.65 | | $ | 0.70 | | $ | 0.12 | |
| | | | | | | | | | | | | | | | |
Selected Operating Ratios(1): | |
|
| |
|
| |
|
| |
|
| |
|
| |
Average yield earned on interest-earning assets | |
| 3.49 | % |
| 3.54 | % |
| 3.92 | % |
| 3.77 | % |
| 3.65 | % |
Average rate paid on interest-bearing liabilities | |
| 1.53 | |
| 1.79 | |
| 1.91 | |
| 1.23 | |
| 0.82 | |
Average interest rate spread(2) | |
| 1.97 | |
| 1.75 | |
| 2.01 | |
| 2.55 | |
| 2.83 | |
Net interest margin(2) | |
| 2.13 | |
| 1.92 | |
| 2.20 | |
| 2.68 | |
| 2.92 | |
Average interest-earning assets to average interest-bearing liabilities | |
| 112.38 | |
| 109.69 | |
| 111.46 | |
| 111.81 | |
| 111.83 | |
Net interest income after provision for loan losses to non-interest expense | |
| 130.69 | |
| 118.25 | |
| 151.51 | |
| 152.85 | |
| 109.18 | |
Total non-interest expense to total average assets | |
| 1.52 | |
| 1.33 | |
| 1.38 | |
| 1.60 | |
| 2.10 | |
Efficiency ratio(3) | |
| 65.59 | |
| 54.12 | |
| 58.43 | |
| 57.47 | |
| 71.18 | |
Return on average assets | |
| 0.67 | |
| 0.79 | |
| 0.81 | |
| 0.72 | |
| 0.35 | |
Return on average equity | |
| 5.93 | |
| 6.88 | |
| 7.06 | |
| 5.45 | |
| 2.16 | |
Average equity to average total assets | |
| 11.35 | |
| 11.04 | |
| 11.47 | |
| 13.28 | |
| 16.31 | |
(Footnotes on next page)
56
| | | | | | | | | | | |
| | At or For the Year Ended September 30, |
| ||||||||
|
| 2021 |
| 2020 |
| 2019 |
| 2018 |
| 2017 |
|
Asset Quality Ratios(4): | | | | | | | | | | |
|
Non-performing loans as a percent of total loans receivable(5) | | 1.36 | % | 2.22 | % | 2.38 | % | 2.22 | % | 2.69 | % |
Non-performing assets as a percent of total assets(5) |
| 1.13 |
| 1.07 |
| 1.11 |
| 1.33 |
| 1.73 | |
Allowance for loan losses as a percent of non-performing loans |
| 101.65 |
| 63.68 |
| 38.70 |
| 38.59 |
| 29.01 | |
Allowance for loan losses as a percent of total loans |
| 1.36 |
| 1.39 |
| 0.91 |
| 0.85 |
| 0.78 | |
Net charge-offs to average loans receivable |
| 0.00 |
| 0.02 |
| (0.02) |
| 0.02 |
| 0.37 | |
| | | | | | | | | | | |
Capital Ratios(4) (6): |
|
|
|
|
|
|
|
|
|
| |
Tier 1 leverage ratio |
|
|
|
|
|
|
|
|
|
| |
Company |
| 11.48 | % | 10.34 | % | 10.89 | % | 12.51 | % | 14.81 | % |
Bank |
| 11.30 |
| 10.51 |
| 10.49 |
| 11.86 |
| 13.59 | |
| | | | | | | | | | | |
Tier 1 common risk-based capital ratio |
|
|
|
|
|
|
|
|
|
| |
Company |
| 16.70 |
| 17.21 |
| 18.43 |
| 19.74 |
| 23.94 | |
Bank |
| 16.37 |
| 16.88 |
| 18.10 |
| 18.73 |
| 21.97 | |
| | | | | | | | | | | |
Tier 1 risk-based capital ratio |
|
|
|
|
|
|
|
|
|
| |
Company |
| 16.70 |
| 17.21 |
| 18.43 |
| 19.74 |
| 23.94 | |
Bank |
| 16.37 |
| 16.88 |
| 18.10 |
| 18.73 |
| 21.97 | |
| | | | | | | | | | | |
Total risk-based capital ratio |
|
|
|
|
|
|
|
|
|
| |
Company |
| 17.85 |
| 18.41 |
| 19.27 |
| 20.58 |
| 24.83 | |
Bank |
| 17.55 |
| 18.08 |
| 18.94 |
| 19.56 |
| 22.86 | |
57
Average Balances, Net Interest Income, and Yields Earned and Rates Paid. The following table shows for the periods indicated the total dollar amount of interest from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and the net interest margin. All average balances are based on monthly balances. Management does not believe that the monthly averages differ significantly from what the daily averages would be.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
| ||||||||||||||||||||||
| | Year Ended September 30, |
| ||||||||||||||||||||||
| | 2021 | | 2020 | | 2019 |
| ||||||||||||||||||
| | | | | | | | Average | | | | | | | | Average | | | | | | | | Average |
|
| | Average | | | | | Yield/ | | Average | | | | | Yield/ | | Average | | | | | Yield/ |
| |||
| | Balance |
| Interest |
| Rate |
| Balance |
| Interest |
| Rate |
| Balance |
| Interest |
| Rate |
| ||||||
| | (Dollars in Thousands) |
| ||||||||||||||||||||||
Interest-earning assets: | | |
|
| |
|
|
|
| |
|
| |
|
|
|
| |
|
| |
|
|
| |
Investment securities (1) | | $ | 201,571 | | $ | 6,816 |
| 3.38 | % | $ | 224,716 | | $ | 6,942 |
| 3.09 | % | $ | 191,214 | | $ | 6,822 |
| 3.57 | % |
Mortgage-backed securities | |
| 184,848 | |
| 5,445 |
| 2.95 | % |
| 318,069 | |
| 9,198 |
| 2.89 | % |
| 300,318 | |
| 9,561 |
| 3.18 | % |
Loans receivable (2) | |
| 613,956 | |
| 25,661 |
| 4.18 | % |
| 583,367 | |
| 25,140 |
| 4.31 | % |
| 587,102 | |
| 26,736 |
| 4.55 | % |
Other interest-earning assets | |
| 88,992 | |
| 115 |
| 0.13 | % |
| 62,509 | |
| 947 |
| 1.51 | % |
| 45,895 | |
| 921 |
| 2.01 | % |
Total interest-earning assets | |
| 1,089,367 | |
| 38,037 |
| 3.49 | % |
| 1,188,661 | |
| 42,227 |
| 3.54 | % |
| 1,124,529 | |
| 44,040 |
| 3.92 | % |
Non-interest-earning assets | |
| 66,718 | |
| |
| | |
| 69,492 | |
| |
| | |
| 51,811 | |
| |
| | |
Total assets | | $ | 1,156,085 | | | | | | | $ | 1,258,153 | | | | | | | $ | 1,176,340 | | | | | | |
Interest-bearing liabilities: | |
|
| |
|
| |
| |
|
| |
|
| |
| |
|
| |
|
| |
| |
Savings accounts | | $ | 62,847 | | $ | 10 | | 0.01 | % | $ | 83,757 | | $ | 38 | | 0.05 | % | $ | 88,049 | | $ | 124 | | 0.14 | % |
Checking and money market accounts | |
| 370,245 | |
| 3,580 | | 0.97 | % |
| 245,421 | |
| 2,045 | | 0.83 | % |
| 125,148 | |
| 899 | | 0.72 | % |
Certificate accounts | |
| 277,314 | |
| 4,687 | | 1.69 | % |
| 413,308 | |
| 8,819 | | 2.13 | % |
| 555,004 | |
| 12,137 | | 2.19 | % |
Total interest bearing deposits | |
| 710,406 | |
| 8,277 | | 1.17 | % |
| 742,486 | |
| 10,902 | | 1.47 | % |
| 768,201 | |
| 13,160 | | 1.71 | % |
FHLB advances | |
| 258,990 | |
| 6,521 | | 2.52 | % |
| 341,154 | |
| 8,523 | | 2.50 | % |
| 240,739 | |
| 6,130 | | 2.55 | % |
Total interest-bearing liabilities | |
| 969,396 | |
| 14,798 | | 1.53 | % |
| 1,083,640 | |
| 19,425 | | 1.79 | % |
| 1,008,940 | |
| 19,290 | | 1.91 | % |
Non-interest-bearing liabilities: | |
| 55,498 | |
| | | | |
| 35,665 | |
| | | | |
| 32,443 | |
| | | | |
Total liabilities | |
| 1,024,894 | |
| | | | |
| 1,119,305 | |
| | | | |
| 1,041,383 | |
| | | | |
Stockholders' equity | |
| 131,191 | |
| | | | |
| 138,848 | |
| | | | |
| 134,957 | |
| | | | |
Total liabilities and stockholders' equity | | $ | 1,156,085 | | | | | | | $ | 1,258,153 | | | | | | | $ | 1,176,340 | | | | | | |
Net interest-earning assets | | $ | 119,971 | | | | | | | $ | 105,021 | | | | | | | $ | 115,589 | | | | | | |
Net interest income, interest rate spread | | | | | $ | 23,239 | | 1.97 | |
| | | $ | 22,802 | | 1.75 | % |
| | | $ | 24,750 | | 2.00 | % |
Net interest margin (3) | |
| | |
| | | 2.13 | % |
| | |
| | | 1.92 | % |
| | |
| | | 2.20 | % |
Average interest-earning assets to average interest-bearing liabilities | |
| | |
| | | 112.38 | % |
| | |
| | | 109.69 | % |
| | |
| | | 111.46 | % |
Rate/Volume Analysis. The following table shows the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities affected our interest income and expense during the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in rate, which is the change in rate multiplied by prior year volume, and (2) changes in
58
volume, which is the change in volume multiplied by prior year rate. The combined effect of changes in both rate and volume has been allocated proportionately to the change due to rate and the change due to volume.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 2021 vs. 2020 |
| 2020 vs. 2019 | ||||||||||||||||||||
| | Increase (Decrease) Due to | | | | | Increase (Decrease) Due to | | | | ||||||||||||||
| | | | | | | | | | | Total | | | | | | | | | | | Total | ||
| | | | | | | | Rate/ | | Increase | | | | | | | | Rate/ | | Increase | ||||
|
| Rate |
| Volume |
| Volume |
| (Decrease) |
| Rate |
| Volume |
| Volume |
| (Decrease) | ||||||||
| | (In Thousands) | ||||||||||||||||||||||
Interest income: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Investment securities | | $ | 657 | | $ | (715) | | $ | (68) | | $ | (126) | | $ | (915) | | $ | 1,195 | | $ | (160) | | $ | 120 |
Mortgage-backed securities |
| | 171 |
| | (3,853) |
| | (72) |
| | (3,753) |
| | (880) |
| | 565 |
| | (48) |
| | (363) |
Loans receivable, net |
| | (758) |
| | 1,318 |
| | (40) |
| | 521 |
| | (1,421) |
| | (170) |
| | (5) |
| | (1,596) |
Other interest-earning assets |
| | (866) |
| | 401 |
| | (367) |
| | (832) |
| | (228) |
| | 334 |
| | (80) |
| | 26 |
Total interest income |
| | (796) |
| | (2,849) |
| | (547) |
| | (4,190) |
| | (3,444) |
| | 1,924 |
| | (293) |
| | (1,813) |
Interest expense: |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Savings accounts |
| | (24) |
| | (8) |
| | 4 |
| | (28) |
| | (85) |
| | (7) |
| | 5 |
| | (87) |
Checking and money market accounts (interest-bearing and non-interest bearing) |
| | 328 |
| | 1,040 |
| | 165 |
| | 1,535 |
| | 146 |
| | 862 |
| | 138 |
| | 1,146 |
Certificate accounts |
| | (1,834) |
| | (2,902) |
| | 603 |
| | (4,132) |
| | (294) |
| | (3,099) |
| | 75 |
| | (3,318) |
Total deposits |
| | (1,530) |
| | (1,870) |
| | 772 |
| | (2,625) |
| | (233) |
| | (2,244) |
| | 218 |
| | (2,259) |
FHLB advances |
| | 67 |
| | (2,053) |
| | (16) |
| | (2,002) |
| | (116) |
| | 2,557 |
| | (47) |
| | 2,394 |
Total interest expense |
| | (1,463) |
| | (3,923) |
| | 756 |
| | (4,627) |
| | (349) |
| | 313 |
| | 171 |
| | 135 |
Increase (decrease) in net interest income | | $ | 667 | | $ | 1,074 | | $ | (1,303) | | $ | 437 | | $ | (3,095) | | $ | 1,611 | | $ | (464) | | $ | (1,948) |
Comparison of Financial Condition at September 30, 2021 and September 30, 2020
The Company had total assets of $1.1 billion at September 30, 2021 compared to $1.2 billion at September 30, 2020. At September 30, 2021, the investment portfolio had decreased by $117.2 million to $326.0 million as compared to $443.2 million at September 30, 2020 primarily as a result of investment securities sales, calls and paydowns of amortizing mortgage-backed securities. Partially offsetting the decrease, net loans receivable increased by $29.9 million to $618.2 million at September 30, 2021 from $588.3 million at September 30, 2020 due primarily to the continued efforts to expand our commercial real estate and commercial business portfolio. Cash and cash equivalents decreased by $35.4 million to $82.7 million at September 30, 2021 compared to $117.1 million at September 30, 2020.
Total liabilities decreased by $124.2 million to $970.0 million at September 30, 2021 as compared to September 30, 2020 due primarily to a $59.4 million decrease in deposits and a $53.2 million decrease in FHLB borrowings. We have consciously allowed higher costing FHLB borrowings and certificates of deposit to run off at maturity as part of our efforts to both reduce our cost of funds as well as improve our net interest margin.
Total stockholders’ equity increased by $1.3 million to $130.5 million at September 30, 2021 from $129.1 million at September 30, 2020. The increase was primarily due to net income of $7.8 million recognized during the fiscal year ended September 30, 2021. Also contributing to the increase was an after tax $5.3 million increase in the fair value of interest rate swap arrangements. These increases were largely offset by the cost of net stock repurchases totaling $5.0 million, an after tax decrease in fair value of investment securities available for sale of $4.5 million and dividend payments totaling $2.2 million during the fiscal year ended September 30, 2021.
.
59
Results of Operations for the Years Ended September 30, 2021, 2020 and 2019
General.
2021 vs. 2020. For the fiscal year ended September 30, 2021, the Company recognized net income of $7.8 million, or $0.98 per diluted share, as compared to net income of $9.6 million, or $1.12 per diluted share, for the fiscal year ended September 30, 2020.
2020 vs. 2019. For the fiscal year ended September 30, 2020, the Company recognized net income of $9.6 million, or $1.12 per diluted share, as compared to net income of $9.5 million, or $1.07 per diluted share, for the fiscal year ended September 30, 2019.
Net Interest Income.
2021 vs. 2020. For the fiscal year ended September 30, 2021, net interest income was $23.2 million as compared to $22.8 million for fiscal 2020. The increase was due to a $4.6 million, or 23.8%, decrease in interest paid on deposits and borrowings. This was largely offset by a decrease of $4.2 million, or 9.9%, in interest income. The weighted average cost of borrowings and deposits decreased to 1.53% for the fiscal year ended September 30, 2021 from 1.79% for fiscal 2020 primarily due to decreases in market rates of interest. The decrease in interest income was primarily due to the decrease in the weighted average balance of interest-earning assets of $99.3 million and to a lesser extent by the 5 basis point decline to 3.49% in the weighted average yield earned on our interest-earning assets. The decrease in the average balance of interest-earning assets was primarily due to paydowns in the investment portfolio, primarily mortgage-backed securities.
2020 vs. 2019. For the fiscal year ended September 30, 2020, net interest income was $22.8 million as compared to $24.8 million for fiscal 2019. The decrease primarily was due to a decrease of $1.6 million, or 6.0%, in interest on loans combined with a $136,000 or 0.7% increase in interest expense. The weighted average yield on interest-earning assets decreased by 38 basis points, to 3.54%, for the fiscal year ended September 30, 2020 from 3.92% for fiscal 2019 primarily due to the reduction in market yields of interest which created downward pressure on our yields in all interest-earning asset categories, in particular commercial real estate and construction loans which generally bear adjustable rates. The increase in interest expense was due to a $74.7 million increase in the average balance of interest-bearing liabilities used to fund growth during fiscal 2020. The weighted average cost of borrowings and deposits decreased by 12 basis points to 1.79% for fiscal 2020 from 1.91% for fiscal 2019.
Provision for Loan Losses.
2021 vs. 2020. The Company recorded provisions for loan losses of $200,000 for the fiscal year ended September 30, 2021, compared to a $3.0 million provision for loan losses for fiscal 2020, as the $3.0 million provision expense incurred in fiscal 2020, combined with minimal charge-offs, was deemed sufficient to maintain the allowance at a level sufficient to cover all inherent and probable losses in the current portfolio prior to the fourth quarter of fiscal 2021. During the fiscal year ending September 30, 2021, the Company recorded one charge off of $40,000 while during the same periods the Company recorded recoveries aggregating $54,000. During the fiscal year ending September 30, 2020, the Company recorded charge offs of $145,000. During the fiscal year ended September 30, 2020, the Company recorded recoveries aggregating $30,000. Although our COVID-19 loan deferrals were as high as $149.7 million during portions of fiscal 2020, all existing deferrals had ended by September 30, 2020. All of the loans which had been on deferral were current as of September 30, 2021.
The allowance for loan losses totaled $8.5 million, or 1.4% of total loans, and 101.6% of total non-performing loans at September 30, 2021 (which included loans acquired at their fair value as a result of the acquisition of Polonia Bancorp as of January 1, 2017) as compared to $8.3 million, or 1.4% of total loans and 63.7% of total non-performing loans at September 30, 2020. The Company believes that the allowance for loan losses at September 30, 2021 was sufficient to cover all inherent and known losses associated with the loan portfolio at such date.
60
2020 vs. 2019. The Company recorded provisions for loan losses of $3.0 million for the fiscal year ended September 30, 2020, compared to a $100,000 provision for loan losses for fiscal 2019, primarily due to the continued uncertainty associated with the economic effects of the COVID-19 pandemic, especially in light of the increasing level of cases of COVID-19 in 2020, and the potential credit deterioration caused thereby. Minimal delinquencies had occurred as of September 30, 2020 due to the effects of the COVID-19 pandemic. There were no loan deferments outstanding as of September 30, 2020 and all existing deferrals had ended by September 30, 2020 compared to loans on deferral totaling $149.7 million, or 21.6% of total loans at June 30, 2020. Two participation interests in commercial real estate loans aggregating $10.0 million, or 1.5% of total loans, each entered into a subsequent deferral period during October 2020. These deferments were not considered to be TDRs as of September 30, 2020 as all applicable borrowers were current as of December 31, 2019 and the request for the deferments were related to the current economic conditions caused by the COVID-19 pandemic, and not by underlying weaknesses within the respective loans. During the fiscal year ending September 30, 2020, the Company recorded charge offs of $145,000 and recoveries aggregating $30,000. During the fiscal year ended September 30, 2019, the Company recorded two charge offs amounting to $38,000. Recoveries of $166,000 were recognized during the fiscal year ended September 30, 2019.
The allowance for loan losses totaled $8.3 million, or 1.4% of total loans and 63.7% of total non-performing loans at September 30, 2020 as compared to $5.4 million, or 0.9% of total loans and 38.7% of total non-performing loans at September 30, 2019.
Non-interest Income.
2021 vs. 2020. With respect to the year ended September 30, 2021, non-interest income amounted to $3.6 million compared with $8.1 million for fiscal 2020. Thehigher level of non-interest income experienced in fiscal 2020 was primarily attributable to the aggregate $6.0 million of gains on sale of investment securities compared to $1.6 million for fiscal 2021 reflecting the sale in fiscal 2020 of $142.1 million of investment securities.
2020 vs. 2019. With respect to the year ended September 30, 2020, non-interest income amounted to $8.1 million compared with $3.1 million for fiscal 2019. The increase experienced in the 2020 period was primarily attributable to the gain on sale of investment securities totaling $6.0 million compared to gains of totaling $1.1 million during fiscal 2020. The investment securities sales were consummated in fiscal 2020 to recognize gains in the portfolio in order to take advantage of the historically low interest rate environment which resulted in significant appreciation in the fair value of such investments.
Non-interest Expense.
2021 vs. 2020. For the fiscal year ended September 30, 2021, non-interest expense increased $904,000 to $17.6 million, compared to $16.7 million in fiscal 2020. The increase was due in largepart to the hiring of additional personnel in our lending operations to support the continued expansion of our lending activities.
2020 vs. 2019. For the fiscal year ended September 30, 2020, non-interest expense increased $660,000 to $16.7 million, compared to $16.1 million in fiscal 2019. The increase was due in largepart to the hiring of additional personnel in our lending operations to support our expanded lending activities. Partially offsetting this increase for the fiscal year ended September 30, 2020 was a decrease in occupancy and advertising expense as the Company maintained its focus on the continued implementation of operating efficiencies. The efficiency ratio for the fiscal year ended September 30, 2020 improved to 54.1% from 58.4% for fiscal 2020.
Income Tax Expense.
2021 vs. 2020. For the year ended September 30, 2021, the Company recorded income tax expense of $1.3 million, compared to $1.6 million for fiscal 2020. The reduction in income tax expense in fiscal 2021 was primarily due to the corresponding reduction in pre-tax income during the 2021 period.
61
2020 vs. 2019. For the year ended September 30, 2020, the Company recorded income tax expense of $1.6 million, compared to $2.2 million for fiscal 2019. The reduction in income tax expense in fiscal 2020 was primarily due to tax benefits recognized as a result of stock compensation plans.
COVID-19 Related Information
As noted above, in response to the current situation surrounding the COVID-19 pandemic, the Company is providing assistance to its customers in a variety of ways. The Company participated in the PPP loan program offered under the CARES Act as a Small Business Administration (“SBA”) lender. During the quarter ended June 30, 2020, we had originated 63 requests for PPP loans totaling approximately $5.1 million. These loans were sold during the quarter ended September 30, 2020 at a net gain of $111,000. No additional PPP loans were originated during the fourth quarter of fiscal 2020. We continue to work closely with our loan customers to effectively manage our portfolio through the ongoing uncertainty surrounding the duration, impact and government response to the crisis.
The primary method of relief to address COVID-19 related issues was to allow the borrower to defer their loan payments for three months (and extending the term of the loan accordingly). The CARES Act and regulatory guidelines suspend temporarily the determination of certain loan modifications related to the COVID-19 pandemic from being treated as TDRs. See “Business Lending Activities - Asset Quality” above”.
While the Company’s banking operations were not restricted by the government stay-at-home orders, the Company took steps to protect its employees and customers by providing for remote working for many employees, enhancing cleaning procedures for the Company’s offices, in particular its branch offices, requiring face masks to be worn by employees and maintaining appropriate social distancing in our offices. The Company continues to assess and monitor the ongoing COVID-19 pandemic and will take additional such steps as are necessary to protect its employees and assist its depositor and borrower customers during this difficult time.
Liquidity and Capital Resources
Liquidity
Liquidity is the ability to maintain cash flows that are adequate to fund operations and meet other obligations on a timely and cost-effective basis in various market conditions. The ability of the Company to meet its current financial obligations is a function of balance sheet structure, the ability to liquidate assets and the availability of alternative sources of funds. To meet the needs of the clients and manage the risk of the Company, the Company engages in liquidity planning and management.
Our primary sources of funds are from deposits, scheduled principal and interest payments on loans, loan prepayments and the maturity of loans, mortgage-backed securities and other investments, and other funds provided from operations. While scheduled payments from the amortization of loans and mortgage-backed securities and maturing investment securities are relatively predictable sources of funds, deposit flows and loan prepayments can be greatly influenced by general interest rates, economic conditions and competition. We also maintain excess funds in short-term, interest-bearing assets that provide additional liquidity. At September 30, 2021, our cash and cash equivalents amounted to $82.7 million. In addition, our available-for-sale investment and mortgage-backed securities amounted to an aggregate of $306.0 million at September 30, 2021.
We use our liquidity to fund existing and future loan commitments, to fund maturing certificates of deposit and demand deposit withdrawals, to invest in other interest-earning assets, and to meet operating expenses. At September 30, 2021, we had certificates of deposit maturing within the next 12 months amounting to $182.7 million. We anticipate that a significant portion of the maturing certificates of deposit will be redeposited with us unless we determine to lower rates to below those of our competition in order to facilitate the reduction of higher cost deposits during periods when there is excess cash on hand or in order to satisfy our asset/liability goals. There were no deposits as of September 30, 2021 requiring the pledging of collateral.
62
In addition to cash flows from loan and securities payments and prepayments as well as from sales of available for sale securities, we have significant borrowing capacity available to fund liquidity requirements should the need arise. As of September 30, 2021, the Bank had $101.7 million of available borrowing capacity from the FHLB of Pittsburgh along with a line of credit that has been established with the Federal Reserve Bank of Philadelphia and a $12.5 million line of credit with Atlantic Community Bankers Bank (“ACBB”)(neither one which was drawn against in fiscal 2021). In addition, the Bank has the ability to generate brokered certificates of deposit (and has used such deposits on occasion, including in fiscal 2021).
Derivatives
Derivatives. To remain competitive in our local lending area and to support the Company’s asset/liability positioning, on occasion the Bank enters into interest rate swap contracts to control its funding costs. Derivative financial instruments include futures, forwards, interest rate swaps, option contracts, and other financial instruments with similar characteristics. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statements of financial condition. Commitments to extend credit generally have fixed expiration dates and may require additional collateral from the borrower if deemed necessary. Commitments to extend credit are not recorded as an asset or liability by us until the instrument is exercised.
Commitments
The following table summarizes our outstanding commitments to originate loans and to advance additional amounts pursuant to outstanding letters of credit, lines of credit and undisbursed construction loans at September 30, 2021.
| | | | | | | | | | | | | | | |
| | Total |
| Amount of Commitment Expiration - Per Period | |||||||||||
| | Amounts | | Less than | | 1-3 | | 3-5 | | After 5 | |||||
|
| Committed |
| 1 Year |
| Years |
| Years |
| Years | |||||
| | (In Thousands) | |||||||||||||
Letters of credit | | $ | 1,162 | | $ | 1,162 | | $ | — | | $ | — | | $ | — |
Lines of credit | |
| 68,081 | |
| 24,752 | |
| 35,724 | |
| 652 | |
| 6,953 |
Undisbursed portions of loans in process | |
| 80,619 | |
| 33,504 | |
| 47,115 | |
| — | |
| — |
Commitments to originate loans | |
| 34,931 | |
| 34,931 | |
| — | |
| — | |
| — |
Total commitments | | $ | 184,793 | | $ | 94,349 | | $ | 82,839 | | $ | 652 | | $ | 6,953 |
Contractual Cash Obligations
The following table summarizes our contractual cash obligations at September 30, 2021.
| | | | | | | | | | | | | | | |
|
| | |
| Less than |
| 1-3 |
| 3-5 |
| After 5 | ||||
| | Total | | 1 Year | | Years | | Years | | Years | |||||
| | (In Thousands) | |||||||||||||
Certificates of deposit | | $ | 244,877 | | $ | 182,720 | | $ | 53,245 | | $ | 8,912 | | $ | — |
Advances from FHLB | |
| 232,025 | |
| 65,477 | |
| 166,548 | |
| — | |
| — |
Total long-term debt | |
| 476,902 | |
| 248,197 | |
| 219,793 | |
| 8,912 | |
| — |
Short-term borrowings, FHLB | |
| — | |
| — | |
| — | |
| — | |
| — |
Advances from borrowers for taxes and insurance | |
| 1,698 | |
| 1,698 | |
| — | |
| — | |
| — |
Operating lease obligations | |
| 1,297 | |
| 213 | |
| 436 | |
| 357 | |
| 291 |
Total contractual obligations | | $ | 479,897 | | $ | 250,108 | | $ | 220,229 | | $ | 9,269 | | $ | 291 |
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 $5.0 million and $22.3 million for the years ended September 30, 2021 and 2020, respectively. The $5.0 million of net cash provided in fiscal 2021 was primarily due to net income of $7.8 million combined with $6.5 million of proceeds from the sales of loans, partially offset by the effects of other operating activities including $6.4 million of loans originated for sale. Net cash provided by investing activities, which consist primarily of disbursements for loan originations and purchases and the purchase of investment and mortgage-backed securities, offset by principal collections on loans and proceeds from maturing investment and
63
mortgage-backed securities and from the sale of investment and mortgage-backed securities, was $81.9 million for the year ended September 30, 2021, primarily due to the purchase or origination of $280.3 million of loans, offset in part by $246.8 million of principal collections on loans combined with purchases of investment and mortgage-backed securities aggregating $56.9 million, offset by maturities, pre-payments, proceeds from sales and calls of investment and mortgage-backed securities totaling of $169.0 million. By comparison, net cash provided by investing activities was $129.3 million for the year ended September 30, 2020 primarily due to proceeds from the sale of investment and mortgage-backed securities totaling $142.1 million as compared to $26.1 million for the year ended September 30, 2021. Net cash used in financing activities was $121.3 million for the year ended September 30, 2021 primarily due to a decrease in deposits of $59.4 million combined with a $53.2 million decrease in borrowings from the FHLB of Pittsburgh. Net cash provided by financing activities was $82.4 million for the year ended September 30, 2020 primarily due to the repayment of $91.6 million in FHLB advances, partially offset by an increase in deposits of $25.5 million. In both fiscal periods, the Bank made a concerted effort to reduce the level of certificates of deposit which are generally higher costing than demand deposits, NOW accounts and savings accounts
The Company is a separate legal entity from the Bank and must provide for its own liquidity and pay its own operating expenses. Sources of capital and liquidity for the Company include distributions from the Bank and the issuance of debt or equity securities. At September 30, 2021, the Company (on an unconsolidated basis) had liquid assets of $854,000.We anticipate that we will continue to have sufficient funds and alternative funding sources to meet our current commitments for at least the next 12 months.
Capital Resources
At September 30, 2021, the Bank exceeded all of its regulatory capital requirements with a Tier 1 leverage capital level of $123.8 million, or 11.5% of adjusted total assets, which is above the well-capitalized required level of $54.8 million, or 5.0%; and total risk-based capital of $132.7 million, or 17.6% of risk-weighted assets, which is above the well-capitalized required level of $75.6 million, or 10.0%. Management is not aware of any conditions or events that would change our category. The Company is not subject to regulatory capital requirements imposed by Basel III on bank holding companies because it is deemed to be a small bank holding company.
Exposure to Changes in Interest Rates
Gap Analysis. The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are “interest rate sensitive” and by monitoring the Bank’s interest rate sensitivity “gap.” An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that same time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. During a period of rising interest rates, a negative gap would tend to affect adversely net interest income while a positive gap would tend to result in an increase in net interest income. Conversely, during a period of falling interest rates, a negative gap would tend to result in an increase in net interest income while a positive gap would tend to affect adversely net interest income.
The table on the next page sets forth the amounts of our interest-earning assets and interest-bearing liabilities outstanding at September 30, 2021, which we expect, based upon certain assumptions, to reprice or mature in each of the future time periods shown (the “GAP Table”). Except as stated below, the amounts of assets and liabilities shown which reprice or mature during a particular period were determined in accordance with the earlier of term to repricing or the contractual maturity of the asset or liability. The table sets forth an approximation of the projected repricing of assets and liabilities at September 30, 2021, on the basis of contractual maturities, anticipated prepayments, and scheduled rate adjustments within a three-month period and subsequent selected time intervals. The loan amounts in the table reflect principal balances expected to be redeployed and/or repriced as a result of contractual amortization and anticipated prepayments of adjustable-rate loans and fixed-rate loans, and as a result of contractual rate adjustments on adjustable-rate loans. Annual prepayment rates for adjustable-rate and fixed-rate single-family and multi-family residential and commercial mortgage loans are assumed to range from 11.9% to 27.9%. The annual prepayment rate for mortgage-backed
64
securities is assumed to range from 0.5% to 24.4%. Money market deposit accounts, savings accounts and interest-bearing checking accounts are assumed to have annual rates of withdrawal, or “decay rates,” based on information from an internal analysis of our accounts up to a maximum of ten years.
| | | | | | | | | | | | | | | | | | |
| | | | | More than | | More than | | More than | | | | | | | |||
| | 3 Months | | 3 Months | | 1 Year | | 3 Years | | More than | | Total | ||||||
|
| or Less |
| to 1 Year |
| to 3 Years |
| to 5 Years |
| 5 Years |
| Amount | ||||||
| | (Dollars in Thousands) | ||||||||||||||||
Interest-earning assets(1): |
| |
|
| |
|
| |
|
| ��� |
|
| |
|
| |
|
Investment and mortgage-backed securities | | $ | 18,752 | | $ | 28,121 | | $ | 52,039 | | $ | 78,427 | | $ | 140,964 | | $ | 318,303 |
Loans receivable(2) | |
| 159,903 | |
| 115,346 | |
| 169,928 | |
| 93,013 | |
| 88,813 | |
| 627,003 |
Other interest-earning assets (3) | |
| 90,556 | |
| 249 | |
| 747 | |
| 110 | |
| — | |
| 91,662 |
Total interest-earning assets | | $ | 269,211 | | $ | 143,716 | | $ | 222,714 | | $ | 171,550 | | $ | 229,777 | | $ | 1,036,968 |
| | | | | | | | | | | | | | | | | | |
Interest-bearing liabilities: | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Savings accounts | | $ | 2,964 | | $ | 8,902 | | $ | 113,092 | | $ | 10,999 | | $ | 94,032 | | $ | 229,989 |
Checking and money market accounts | |
| 7,480 | |
| 22,428 | |
| 51,992 | |
| 29,830 | |
| 87,510 | |
| 199,240 |
Certificate accounts | |
| 30,225 | |
| 77,502 | |
| 128,247 | |
| 8,903 | |
| — | |
| 244,877 |
Advances from Federal Home Loan Bank | |
| 24,197 | |
| 43,108 | |
| 164,720 | |
| — | |
| — | |
| 232,025 |
Real estate tax escrow accounts | |
| 1,698 | |
| — | |
| — | |
| — | |
| — | |
| 1,698 |
Total interest-bearing liabilities | | $ | 66,564 | | $ | 151,940 | | $ | 458,051 | | $ | 49,732 | | $ | 181,542 | | $ | 907,829 |
| | | | | | | | | | | | | | | | | | |
Interest-earning assets less interest-bearing liabilities | | $ | 202,647 | | $ | (8,224) | | $ | (235,337) | | $ | 121,818 | | $ | 48,235 | | $ | 129,139 |
| | | | | | | | | | | | | | | | | | |
Cumulative interest-rate sensitivity gap(4) | | $ | 202,647 | | $ | 194,423 | | $ | (40,914) | | $ | 80,904 | | $ | 129,139 | |
|
|
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Cumulative interest-rate gap as a percentage of total assets at September 30, 2021 | |
| 16.56 | % |
| 15.89 | % |
| (3.34) | % |
| 6.61 | % |
| 10.56 | % |
|
|
| | | | | | | | | | | | | | | | | | |
Cumulative interest-earning assets as a percentage of cumulative interest-bearing liabilities at September 30, 2021 | |
| 404.44 | % |
| 188.98 | % |
| 93.95 | % |
| 111.14 | % |
| 114.23 | % |
|
|
Certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate loans, have features which restrict changes in interest rates both on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the table. Finally, the ability of many borrowers to service their adjustable-rate loans may decrease in the event of an interest rate increase.
Net Portfolio Value Analysis. Our interest rate sensitivity also is monitored by management through the use of a model which generates estimates of the changes in our net portfolio value (“NPV”) over a range of interest rate scenarios. NPV is the present value of expected cash flows from assets, liabilities and off-balance sheet contracts. The NPV ratio, under any interest rate scenario, is defined as the NPV in that scenario divided by the market value of assets in the same
65
scenario. The following table sets forth our NPV as of September 30, 2021 and reflects the changes to NPV as a result of immediate and sustained changes in interest rates as indicated.
| | | | | | | | | | | | | |
Change in | | | | | | | | | | | | |
|
Interest Rates | | | | | | | | | | NPV as % of Portfolio | | ||
In Basis Points | | Net Portfolio Value | | Value of Assets |
| ||||||||
(Rate Shock) |
| Amount |
| $Change |
| % Change |
| NPV Ratio |
| Change |
| ||
| | (Dollars in Thousands) |
| ||||||||||
| | | | | | | | | | | | | |
300 | | $ | 128,307 | | $ | (27,968) |
| (17.90) | % | 12.51 | % | (1.84) | % |
200 | | $ | 138,035 | | $ | (18,240) |
| (11.67) | % | 13.20 | % | (1.15) | % |
100 | | $ | 148,006 | | $ | (8,269) |
| (5.29) | % | 13.86 | % | (0.49) | % |
Static | | $ | 156,275 | | $ | — |
| — |
| 14.35 | % | — | |
(100) | | $ | 159,625 | | $ | 3,350 |
| 2.14 | % | 14.47 | % | 0.12 | % |
(200) | | $ | 165,437 | | $ | 9,162 |
| 5.86 | % | 14.86 | % | 0.51 | % |
(300) | | $ | 184,143 | | $ | 27,868 |
| 17.83 | % | 16.23 | % | 1.88 | % |
At September 30, 2020, the Company’s NPV was $152.4 million or 12.3% of the market value of assets. Following a 200 basis point increase in interest rates, the Company’s “post shock” NPV would have been $160.9 million or 13.6% of the market value of assets, an increase of approximately 5.5%. The change in the NPV ratio or Company’s sensitivity measure was a decrease of 111 basis points.
As is the case with the GAP Table, certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in NPV require the making of certain assumptions which may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the models presented assume that the composition of our interest sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities. Accordingly, although the NPV model provides an indication of interest rate risk exposure at a particular point in time, such model is not intended to and does not provide a precise forecast of the effect of changes in market interest rates on net interest income and will differ from actual results.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Exposure to Changes in Interest Rates.”
Item 8. Financial Statements and Supplementary Data
66
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Prudential Bancorp, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial condition of Prudential Bancorp, Inc. and subsidiaries (the “Company”) as of September 30, 2021 and 2020; the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended September 30, 2021; and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2021, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent, with respect to the Company, in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements; and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter, in any way, our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
67
Allowance for Loan Losses (ALL)
Description of the Matter
The Company’s loan portfolio totaled $707.6 million as of September 30, 2021, and the associated ALL was $8.5 million. As discussed in Note 6 to the consolidated financial statements, determining the amount of the ALL requires significant judgment about the collectability of loans, which includes an assessment of quantitative factors such as historical loss experience within each risk category of loans and testing of certain commercial loans for impairment. Management applies additional qualitative adjustments to reflect the inherent losses that exist in the loan portfolio at the statement of financial condition date that are not reflected in the historical loss experience. Qualitative adjustments are made based upon changes in lending policies and procedures, economic conditions, changes in the loan portfolio mix, trends in loan delinquencies and classified loans, loan review quality and board oversight, and concentrations of credit risk for the commercial loan portfolios.
We identified these qualitative adjustments within the ALL as critical audit matters because they involve a high degree of subjectivity. In turn, auditing management’s judgments regarding the qualitative factors applied in the ALL calculation involved a high degree of subjectivity.
How We Addressed the Matter in Our Audit
We gained an understanding of the Company’s process for establishing the ALL, including the qualitative adjustments made to the ALL. We evaluated the design and tested the operating effectiveness of controls over the Company’s ALL process, which included, among others, management’s review and approval controls designed to assess the need and level of qualitative adjustments to the ALL, as well as the reliability of the data utilized to support management’s assessment.
To test the qualitative adjustments, we evaluated the appropriateness of management’s methodology and assessed whether all relevant risks were reflected in the ALL.
Regarding the measurement of the qualitative adjustments, we evaluated the completeness, accuracy, and relevance of the data and inputs utilized in management’s estimate. For example, we compared the inputs and data to the Company’s historical loan performance data, and considered the existence of new or contrary information. Furthermore, we analyzed the changes in the components of the qualitative reserves relative to changes in external market factors, the Company’s loan portfolio, and asset quality trends, which included the evaluation of management’s ability to capture and assess relevant data from both external sources and internal reports on loan customers and the supporting documentation for substantiating revisions to qualitative factors.
We also utilized internal credit review specialists with knowledge to evaluate the appropriateness of management’s risk-rating processes, to ensure that the risk ratings applied to the commercial loan portfolio were reasonable.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company's auditor since 2009.
Cranberry Township, Pennsylvania
December 17, 2021
68
PRUDENTIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
| | | | | | |
| | September 30, | ||||
| | 2021 |
| 2020 | ||
| | (Dollars in Thousands) | ||||
ASSETS | | |
| | |
|
| | | | | | |
Cash and amounts due from depository institutions | | $ | 2,233 | | $ | 2,781 |
Interest-bearing deposits | |
| 80,465 | |
| 114,300 |
| |
|
| |
|
|
Total cash and cash equivalents | |
| 82,698 | |
| 117,081 |
| | | | | | |
Certificates of deposit | |
| 1,106 | |
| 2,102 |
Investment and mortgage-backed securities available for sale at fair value | |
| 305,947 | |
| 420,364 |
Investment and mortgage-backed securities held to maturity (fair value—September 30, 2021, $21,161; September 30, 2020, $24,330) | |
| 20,074 | |
| 22,860 |
Equity securities | | | 22 | | | 51 |
Loans receivable—net of allowance for loan losses (September 30, 2021, $8,517; September 30, 2020, $8,303) | |
| 618,206 | |
| 588,300 |
Accrued interest receivable | |
| 4,326 | |
| 4,699 |
Real estate owned | |
| 4,109 | |
| — |
Restricted bank stock—at cost | |
| 10,091 | |
| 12,532 |
Office properties and equipment—net | |
| 6,850 | |
| 7,129 |
Bank owned life insurance (BOLI) | |
| 33,116 | |
| 32,498 |
Deferred income taxes, net | |
| 3,021 | |
| 3,902 |
Goodwill | |
| 6,102 | |
| 6,102 |
Core deposit intangible | |
| 246 | |
| 340 |
Prepaid expenses and other assets | |
| 4,554 | |
| 5,393 |
TOTAL ASSETS | | $ | 1,100,468 | | $ | 1,223,353 |
| |
| | |
| |
LIABILITIES AND STOCKHOLDERS’ EQUITY | |
|
| |
|
|
| |
| | |
| |
LIABILITIES: | |
|
| |
|
|
Deposits: | |
|
| |
|
|
Non-interest-bearing | | $ | 37,409 | | $ | 30,002 |
Interest-bearing | |
| 674,106 | |
| 740,947 |
Total deposits | |
| 711,515 | |
| 770,949 |
Advances from Federal Home Loan Bank - Short Term | |
| — | |
| 25,000 |
Advances from Federal Home Loan Bank - Long Term | |
| 232,025 | |
| 260,253 |
Accrued interest payable | |
| 2,558 | |
| 3,374 |
Advances from borrowers for taxes and insurance | |
| 1,698 | |
| 2,798 |
Interest rate swap contracts | |
| 12,834 | |
| 20,960 |
Accounts payable and accrued expenses | |
| 9,382 | |
| 10,902 |
| | | | | | |
Total liabilities | |
| 970,012 | |
| 1,094,236 |
| | | | | | |
STOCKHOLDERS’ EQUITY: | |
|
| |
|
|
Preferred stock, $.01 par value, 10,000,000 shares authorized; NaN issued | |
| — | |
| — |
Common stock, $.01 par value, 40,000,000 shares authorized; 10,819,006 issued and 7,769,387 outstanding at September 30, 2021; 10,819,006 issued and 8,138,675 outstanding at September 30, 2020 | |
| 108 | |
| 108 |
Additional paid-in capital | |
| 118,424 | |
| 118,270 |
Treasury stock, at cost: 3,049,619 shares at September 30, 2021 and 2,680,331 shares at September 30, 2020 | |
| (44,351) | |
| (39,207) |
Retained earnings | |
| 58,450 | |
| 52,889 |
Accumulated other comprehensive loss | |
| (2,175) | |
| (2,943) |
Total stockholders’ equity | |
| 130,456 | |
| 129,117 |
| | | | | | |
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | | $ | 1,100,468 | | $ | 1,223,353 |
See notes to consolidated financial statements.
69
PRUDENTIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
| | | | | | | | | |
| | Years Ended September 30, | |||||||
| | 2021 |
| 2020 |
| 2019 | |||
| | (Dollars in Thousands Except Per Share Amounts) | |||||||
INTEREST INCOME: | | | | | | | | | |
Interest and fees on loans | | $ | 25,661 | | $ | 25,141 | | $ | 26,737 |
Interest on mortgage-backed securities | |
| 5,445 | |
| 9,197 | |
| 9,561 |
Interest and dividends on investments | |
| 6,816 | |
| 6,942 | |
| 6,782 |
Interest on interest-bearing deposits | |
| 115 | |
| 947 | |
| 960 |
| | | | | | | | | |
Total interest income | |
| 38,037 | |
| 42,227 | |
| 44,040 |
| | | | | | | | | |
INTEREST EXPENSE: | |
|
| |
|
| |
|
|
Interest on deposits | |
| 8,277 | |
| 10,902 | |
| 13,160 |
Interest on advances from FHLB - short term | |
| 39 | |
| 1,056 | |
| 790 |
Interest on advances from FHLB - long term | |
| 6,482 | |
| 7,467 | |
| 5,339 |
| | | | | | | | | |
Total interest expense | |
| 14,798 | |
| 19,425 | |
| 19,289 |
| | | | | | | | | |
NET INTEREST INCOME | |
| 23,239 | |
| 22,802 | |
| 24,751 |
| | | | | | | | | |
PROVISION FOR LOAN LOSSES | |
| 200 | |
| 3,025 | |
| 100 |
| | | | | | | | | |
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES | |
| 23,039 | |
| 19,777 | |
| 24,651 |
| | | | | | | | | |
NON-INTEREST INCOME: | |
|
| |
|
| |
|
|
Fees and other service charges | |
| 573 | |
| 540 | |
| 661 |
Gain on sale of investment and mortgage-backed securities available for sale | |
| 1,644 | |
| 5,993 | |
| 1,057 |
Holding (loss) gain on equity securities | |
| (29) | |
| (44) | |
| 58 |
Gain on sale of loans | |
| 110 | |
| 488 | |
| 9 |
Swap income (loss) | |
| 384 | |
| (56) | |
| 158 |
Earnings from bank owned life insurance | |
| 616 | |
| 656 | |
| 645 |
Other | |
| 341 | |
| 526 | |
| 506 |
| | | | | | | | | |
Total non-interest income | |
| 3,639 | |
| 8,103 | |
| 3,094 |
| | | | | | | | | |
NON-INTEREST EXPENSES: | |
|
| |
|
| |
|
|
Salaries and employee benefits | |
| 10,558 | |
| 9,562 | |
| 8,857 |
Data processing | |
| 923 | |
| 857 | |
| 789 |
Professional services | |
| 1,634 | |
| 1,698 | |
| 1,460 |
Office occupancy | |
| 954 | |
| 856 | |
| 968 |
Depreciation | |
| 435 | |
| 484 | |
| 619 |
Director compensation | |
| 231 | |
| 246 | |
| 255 |
Federal Deposit Insurance Corporation deposit insurance premiums | |
| 860 | |
| 701 | |
| 472 |
Real estate owned expense | |
| 10 | |
| 165 | |
| 81 |
Advertising | |
| 100 | |
| 186 | |
| 279 |
Core deposit amortization | |
| 94 | |
| 108 | |
| 123 |
Other | |
| 1,830 | |
| 1,862 | |
| 2,162 |
| | | | | | | | | |
Total non-interest expenses | |
| 17,629 | |
| 16,725 | |
| 16,065 |
| | | | | | | | | |
INCOME BEFORE INCOME TAXES | |
| 9,049 | |
| 11,155 | |
| 11,680 |
| | | | | | | | | |
INCOME TAXES: | |
|
| |
|
| |
|
|
Current | |
| 592 | |
| 2,045 | |
| 2,338 |
Deferred expense (benefit) | |
| 677 | |
| (445) | |
| (188) |
| | | | | | | | | |
Total income tax expense | |
| 1,269 | |
| 1,600 | |
| 2,150 |
| | | | | | | | | |
NET INCOME | | $ | 7,780 | | $ | 9,555 | | $ | 9,530 |
| | | | | | | | | |
BASIC EARNINGS PER SHARE | | $ | 0.98 | | $ | 1.12 | | $ | 1.09 |
| | | | | | | | | |
DILUTED EARNINGS PER SHARE | | $ | 0.98 | | $ | 1.12 | | $ | 1.07 |
| | | | | | | | | |
See notes to consolidated financial statements.
70
PRUDENTIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| | | | | | | | | |
| | Years Ended September 30, | |||||||
| | 2021 |
| 2020 |
| 2019 | |||
| | (Dollars in Thousands) | |||||||
| | | | | | | | | |
Net income | | $ | 7,780 | | $ | 9,555 | | $ | 9,530 |
| |
|
| |
|
| |
|
|
Unrealized (loss) holding gain on available-for-sale securities | | | (4,035) | | | 9,141 | | | 21,871 |
| | | | | | | | | |
Tax effect | | | 847 | | | (1,920) | | | (4,593) |
| | | | | | | | | |
Reclassification adjustment for net securities gains realized in net income | | | (1,644) | | | (5,993) | | | (1,057) |
| | | | | | | | | |
Tax effect | | | 345 | | | 1,259 | | | 222 |
| |
| | |
| | |
| |
Unrealized holding gain (loss) on interest rate swaps | |
| 6,652 | |
| (8,382) | |
| (8,952) |
| |
|
| |
|
| |
|
|
Tax effect | |
| (1,397) | |
| 1,760 | |
| 1,880 |
| |
|
| |
|
| |
|
|
Total other comprehensive income (loss) | |
| 768 | |
| (4,135) | |
| 9,371 |
| |
|
| |
|
| |
|
|
Total comprehensive income | | $ | 8,548 | | $ | 5,420 | | $ | 18,901 |
See notes to consolidated financial statements
71
PRUDENTIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | Accumulated | | | |||
| | | | | Additional | | | | | | | | Other | | Total | |||
| | Common | | Paid-In | | Treasury | | Retained | | Comprehensive | | Stockholders’ | ||||||
|
| Stock |
| Capital |
| Stock |
| Earnings |
| Income (Loss) |
| Equity | ||||||
| | (Dollars in Thousands) | ||||||||||||||||
BALANCE, September 30, 2018 | | $ | 108 | | $ | 118,345 | | $ | (27,744) | | $ | 45,854 | | $ | (8,154) | | $ | 128,409 |
| | | | | | | | | | | | | | | | | | |
Net income | |
| | |
| | |
| | |
| 9,530 | |
|
| |
| 9,530 |
Other comprehensive income | |
| | |
| | |
|
| |
|
| |
| 9,371 | |
| 9,371 |
Dividends paid ($0.65 per share) | |
| | |
| | |
| | |
| (5,784) | |
|
| |
| (5,784) |
Purchase of treasury stock (207,543 shares) | |
| | |
| | |
| (3,648) | |
|
| |
|
| |
| (3,648) |
Treasury stock used for employee benefit plan (109,634 shares) | |
| | |
| (1,154) | |
| 1,694 | |
|
| |
|
| |
| 540 |
Stock option expense | |
| | |
| 573 | |
|
| |
|
| |
|
| |
| 573 |
Restricted share awards expense | | | | |
| 620 | |
|
| |
|
| |
|
| | | 620 |
Reclassification for adoption of ASU 2016-01 | | | | | | | |
|
| |
| 25 | |
| (25) | | | — |
| | | | | | | | | | | | | | | | | | |
BALANCE, September 30, 2019 | |
| 108 | |
| 118,384 | |
| (29,698) | |
| 49,625 | |
| 1,192 | |
| 139,611 |
| | | | | | | | | | | | | | | | | | |
Net income | |
| | | | | |
|
| |
| 9,555 | |
|
| |
| 9,555 |
Other comprehensive loss | |
| | | | | |
|
| |
|
| |
| (4,135) | |
| (4,135) |
Dividends paid ($0.71 per share) | |
| | | | | |
|
| |
| (6,216) | |
|
| |
| (6,216) |
Purchase of treasury stock (829,388 shares) | |
| | | | | |
| (10,534) | |
|
| |
|
| |
| (10,534) |
Treasury stock used for employee benefit plan (78,616 shares) | |
| | |
| (811) | |
| 1,025 | |
|
| |
|
| |
| 214 |
Stock option expense | |
| | |
| 353 | |
|
| |
|
| |
|
| |
| 353 |
Restricted share awards expense | |
| | |
| 344 | |
| | |
|
| |
|
| |
| 344 |
Reclassification for adoption of ASC Topic 842 | | | | | | | |
|
| |
| (75) | |
| | | | (75) |
BALANCE, September 30, 2020 | |
| 108 | |
| 118,270 | |
| (39,207) | |
| 52,889 | |
| (2,943) | |
| 129,117 |
| | | | | | | | | | | | | | | | | | |
Net income | | | | | | | |
|
| |
| 7,780 | |
|
| |
| 7,780 |
Other comprehensive income | | | | | | | |
|
| |
|
| |
| 768 | |
| 768 |
Dividends paid ($0.28 per share) | | | | | | | |
|
| |
| (2,219) | |
|
| |
| (2,219) |
Purchase of treasury stock (386,883 shares) | | | | | | | |
| (5,391) | |
|
| |
|
| |
| (5,391) |
Treasury stock used for employee benefit plan (17,595 shares) | | | | |
| (185) | |
| 247 | |
|
| |
|
| |
| 62 |
Stock option expense | | | | |
| 169 | |
|
| |
|
| |
|
| |
| 169 |
Restricted share awards expense | | | | |
| 170 | |
| | |
|
| |
|
| |
| 170 |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
BALANCE, September 30, 2021 | | $ | 108 | | $ | 118,424 | | $ | (44,351) | | $ | 58,450 | | $ | (2,175) | | $ | 130,456 |
See notes to consolidated financial statements.
72
PRUDENTIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | | |
| | Years Ended September 30, | |||||||
| | 2021 |
| 2020 |
| 2019 | |||
| | (Dollars in Thousands) | |||||||
OPERATING ACTIVITIES: | | |
| | | | | | |
Net income | | $ | 7,780 | | $ | 9,555 | | $ | 9,530 |
Adjustments to reconcile net income to net cash provided by operating activities: | |
|
| |
|
| |
|
|
Depreciation | |
| 435 | |
| 484 | |
| 619 |
Net amortization/accretion of premiums/discounts and other amortization | |
| (780) | |
| (1,934) | |
| (2,407) |
Earnings from BOLI | |
| (616) | |
| (656) | |
| (645) |
Provision for loan losses | | | 200 | | | 3,025 | | | 100 |
Accretion of deferred loan fees and costs | |
| (299) | |
| (76) | |
| (136) |
(Gain) loss on sale of real estate owned | |
| — | |
| (99) | |
| 46 |
Gain on sale of investment and mortgage-backed securities | |
| (1,644) | |
| (5,993) | |
| (1,057) |
Write-down of real estate owned | |
| — | |
| 125 | |
| 75 |
Gain on sale of loans | |
| (110) | |
| (488) | |
| (9) |
Proceeds from the sale of loans | |
| 6,500 | |
| 31,774 | |
| 612 |
Originations of loans held for sale | |
| (6,390) | |
| (12,192) | |
| (603) |
Share-based compensation expense | |
| 339 | |
| 697 | |
| 1,193 |
Holding losses (gains) on equity securities | | | 29 | |
| 45 | |
| (58) |
Deferred income tax expense (benefit) | |
| 677 | |
| (445) | |
| (188) |
Changes in assets and liabilities which provided (used) cash: | |
|
| |
|
| |
|
|
Accrued interest receivable | |
| 373 | |
| (150) | |
| (724) |
Accrued interest payable | |
| (816) | |
| (954) | |
| 1,096 |
Other, net | |
| (628) | |
| (430) | |
| 543 |
Net cash provided by operating activities | |
| 5,050 | |
| 22,288 | |
| 7,987 |
INVESTING ACTIVITIES: | |
|
| |
|
| |
|
|
Purchase of investment and mortgage-backed securities available for sale | |
| (55,146) | |
| (175,710) | |
| (280,303) |
Purchase of investment and mortgage-backed securities held to maturity | |
| (1,737) | |
| (2,500) | |
| (11,849) |
Loans originated or acquired | |
| (280,330) | |
| (138,272) | |
| (100,371) |
Principal collected on loans | |
| 246,802 | |
| 113,170 | |
| 118,404 |
Principal payments received on investment and mortgage-backed securities: | |
|
| |
|
| |
|
|
Held-to-maturity | |
| 4,439 | |
| 48,216 | |
| 3,002 |
Available-for-sale | |
| 138,522 | |
| 138,074 | |
| 24,091 |
Redemption (purchase) of certificates of deposit | |
| 996 | |
| 249 | |
| (747) |
Proceeds from sale of investment and mortgage-backed securities | |
| 26,059 | |
| 142,055 | |
| 75,639 |
Proceeds from redemption of FHLB stock | |
| 3,461 | |
| 10,905 | |
| 5,145 |
Purchase of FHLB stock | |
| (1,020) | |
| (7,031) | |
| (13,966) |
Purchase of BOLI | |
| — | |
| — | |
| (2,500) |
Proceeds from sale of real estate owned | |
| — | |
| 505 | |
| 557 |
Purchases of equipment | |
| (156) | |
| (407) | |
| (386) |
Net cash provided by (used in) investing activities | |
| 81,890 | |
| 129,254 | |
| (183,284) |
73
PRUDENTIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
| | | | | | | | | |
| | Year Ended September 30, | |||||||
| | 2021 |
| 2020 |
| 2019 | |||
| | (Dollars in thousands) | |||||||
FINANCING ACTIVITIES: | | | | | | | | | |
Net (decrease) increase in demand deposits, NOW accounts, and savings accounts | | | (34,701) |
| | 269,078 |
| | 11,816 |
Net decrease in certificates of deposit | | | (24,727) |
| | (243,573) |
| | (50,501) |
Net (decrease) increase in FHLB short-term advances | | | (25,000) |
| | (65,000) |
| | 80,000 |
Proceeds from FHLB advances - long term | | | — |
| | — |
| | 175,997 |
Repayment of FHLB advances - long term | | | (28,185) |
| | (26,650) |
| | (33,575) |
(Decrease) increase in advances from borrowers for taxes and insurance | | | (1,100) | | | 466 | | | 249 |
Cash dividends paid | | | (2,219) |
| | (6,216) |
| | (5,784) |
Purchase treasury stock | | | (5,391) |
| | (10,534) |
| | (3,108) |
Net cash (used in) provided by financing activities | | | (121,323) |
| | (82,429) |
| | 175,094 |
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | | | (34,383) |
| | 69,113 |
| | (203) |
CASH AND CASH EQUIVALENTS—Beginning of period | | | 117,081 |
| | 47,968 |
| | 48,171 |
| | | | | | | | | |
CASH AND CASH EQUIVALENTS—End of period | | $ | 82,698 | | $ | 117,081 | | $ | 47,968 |
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | |
|
| |
|
| |
|
|
Cash paid during the period for: | | | | | | | | | |
Interest paid on deposits and advances from FHLB | | $ | 15,614 | | $ | 20,379 | | $ | 18,531 |
| | | | | | | | | |
Income taxes paid | | $ | 70 | | $ | 3,070 | | $ | 2,409 |
| | | | | | | | | |
SUPPLEMENTAL DISCLOSURES OF NONCASH ITEMS: | |
|
| |
|
| |
|
|
Loans transferred to other real estate owned | | $ | 4,109 | | $ | 183 | | $ | — |
Lease adoption: | | | | | | | | | |
Right of use lease asset | | | — | | | 1,415 | | | — |
Lease liability | | | — | | | 1,536 | | | — |
| | | | | | | | | |
See notes to consolidated financial statements.
74
PRUDENTIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2020 AND 2019
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Prudential Bancorp, Inc. (the “Company”) is a Pennsylvania corporation that was incorporated in June 2013 to be the successor corporation of Prudential Bancorp, Inc. of Pennsylvania (“Old Prudential Bancorp”), the former stock holding company for Prudential Bank (the “Bank”), a Pennsylvania-chartered, FDIC-insured savings bank with 10 full service branches in the Philadelphia area. The Bank’s primary federal banking regulator is the Federal Deposit Insurance Corporation (the “FDIC”). The Bank is also regulated by the Pennsylvania Department of Banking and Securities ( the “Department”). The Bank is principally in the business of attracting deposits from its community through its branch offices and investing those deposits, together with funds from borrowings, primarily in loans and investments. The Bank’s sole subsidiary as of September 30, 2021 was PSB Delaware, Inc. (“PSB”), a Delaware-chartered corporation established to hold certain investments. As of September 30, 2021, PSB had total assets of $275.5 million primarily consisting of investment and mortgage-backed securities.
Most of the Company’s business activities are conducted within a few hours’ drive from Philadelphia and include eastern Pennsylvania, Delaware, New Jersey and southern New York.
|
|
Consolidation –The accompanying consolidated financial statements include the accounts of the Company and the Bank. All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates in the Preparation of Financial Statements—The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The most significant estimates and assumptions in the consolidated financial statements are recorded in the allowance for loan losses, the fair value of financial instruments, other than temporary impairment of securities, goodwill and valuation of deferred tax assets. Actual results could differ from those estimates.
Cash and Cash Equivalents—For purposes of reporting cash flows, cash and cash equivalents include cash and amounts due from depository institutions and interest-bearing deposits with original maturities of less than 90 days.
Certificates of Deposit—The Bank purchases, on occasion, certificates of deposit issued by FDIC-insured banks in amounts of up to $249,000 and with maturities of between one to five years.
Investment Securities and Mortgage-Backed Securities—Management classifies and accounts for debt securities as follows:
Held to Maturity—Debt securities that management has the positive intent and ability to hold until maturity are classified as held to maturity and are carried at their remaining unpaid principal balance, net of unamortized premiums or unaccreted discounts. Premiums are amortized and discounts are accreted using the interest method over the estimated remaining term of the underlying security.
Available for Sale—Debt securities that will be held for indefinite periods of time, including securities that may be sold in response to changes in market interest or prepayment rates, needs for liquidity, and changes in the availability and the yield of alternative investments, are classified as available for sale. These assets are carried at fair value. Fair value is determined using public market prices, dealer quotes, and prices obtained from independent pricing services that may be derivable from observable and unobservable market inputs. Unrealized gains and losses are excluded from earnings and
75
are reported net of tax as a separate component of stockholders’ equity until realized. Realized gains or losses on the sale of investment and mortgage-backed securities are reported in earnings as of the trade date and determined using the adjusted cost of the specific security sold. Premiums are amortized and discounts are accreted using the interest method over the estimated remaining term of the underlying security.
Equity Securities— Equity securities are held at fair value. Holding gains and losses and dividends are recorded as components of non-interest income.
Other-than-temporary impairment—Management evaluates debt and equity securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. For all securities that are in an unrealized loss position for an extended period of time and for all securities whose fair value is significantly below amortized cost, management performs an evaluation of the specific events attributable to the market decline of the security. Management considers the length of time and extent to which the security’s fair value has been below cost as well as the general market conditions, industry characteristics, and the fundamental operating results of the issuer to determine if the decline is other-than-temporary. Management also considers as part of the evaluation its intention whether or not to sell the security until its market value has recovered to a level at least equal to the amortized cost. When management determines that a security’s unrealized loss is other-than-temporary, a realized loss is recognized in the period in which the decline in value is determined to be other-than-temporary. The write-down is measured based on the fair value of the security at the time the Company determines the decline in value is other-than-temporary.
Loans Receivable— Lending consists of various loan types including single-family residential mortgage loans, multi-family residential mortgage loans, construction and land development loans, non-residential or commercial real estate mortgage loans, home equity loans and lines of credit, commercial business loans, and consumer loans. Loans are stated at their unpaid principal balances, net of unamortized net fees/costs.Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding unpaid principal balance adjusted for unearned income, the allowance for loan losses and any unamortized deferred fees or costs.
Loan Origination and Commitment Fees—Management defers loan origination and commitment fees, net of certain direct loan origination costs. The balance of such fees are accreted into income as a yield adjustment over the life of the loan using the level-yield method.
Interest on Loans—Management recognizes interest on loans on the accrual basis. Income recognition is discontinued when a loan becomes 90 days or more delinquent as to interest and/or principal. Any interest previously accrued is deducted from interest income. Such previously accrued interest ultimately collected is credited to income when loans are no longer 90 days or more delinquent.
Allowance for Loan Losses— The allowance for loan losses represents the amount which management estimates is adequate to provide for probable losses inherent in its loan portfolio as of the Consolidated Statement of Financial Condition date. The allowance method is used in providing for loan losses. Accordingly, all loan losses are charged to the allowance, and all recoveries are credited to it. The allowance for loan losses is established through a provision for loan losses charged to operations. The provision for loan losses is based on management’s periodic evaluation of individual loans, economic factors, past loan loss experience, changes in the composition and volume of the portfolio, and other relevant factors, both qualitative and quantitative. The estimates used in determining the adequacy of the allowance for loan losses, including the amounts and timing of future cash flows expected on impaired loans, are particularly susceptible to changes in the near term.
Impaired loans are loans for which it is not probable to collect all amounts due according to the contractual terms of the loan agreements. Management individually evaluates such loans for impairment and does not aggregate loans by major risk classifications. Factors considered by management in determining impairment include payment status and collateral value. The amount of impairment for impaired loans is determined by the difference between the present value of the expected cash flows related to the loans, using the original interest rate, and their recorded value, or as a practical expedient in the case of collateralized loans, the difference between the fair value of the collateral and the recorded amount of the loans. When foreclosure is probable, impairment is measured based on the then fair value of the collateral.
76
Mortgage loans and consumer loans are comprised of large groups of smaller balance homogeneous loans which are evaluated for impairment collectively. Loans that experience insignificant payment delays, which are defined as delays of less than 90 days, generally are not classified as impaired. Management determines the significance of payment delays on a case-by-case basis taking into consideration all of the circumstances surrounding the loan and the borrower including the length of the delay, the borrower’s prior payment record, and the amount of shortfall in relation to the principal and interest owed.
Real Estate Owned—Real estate acquired through, or in lieu of, loan foreclosure is recorded at fair value at the date of acquisition, less estimated selling costs, establishing a new basis. Costs related to the development and improvement of real estate owned properties are capitalized and those relating to holding the properties are charged to expense. After foreclosure, a valuation is periodically performed by management and a write-down is recorded, if necessary, by a charge to operations if the carrying value of a property exceeds its fair value less estimated costs to sell.
Restricted Bank Stock – Restricted bank stock consists of Federal Home Loan Bank of Pittsburgh (“FHLB”) and Atlantic Community Bankers Bank (“ACBB”) stock and is classified as a restricted equity security because ownership is restricted and there is no established market for its resale, and thus no readily determinable fair value. FHLB and ACBB stock is carried at cost and is evaluated for impairment when certain conditions warrant further consideration.
The Bank is a member of the FHLB of Pittsburgh and as such, is required to maintain a minimum investment in stock of the FHLB that varies with the level of advances outstanding with the FHLB. The stock is bought from and sold to the FHLB based upon its $100 par value. The stock does not have a readily determinable fair value and as such is classified as restricted stock, carried at cost and evaluated for impairment by management. The stock’s value is determined by the ultimate recoverability of the par value rather than by recognizing temporary declines. The determination of whether the par value will ultimately be recovered is influenced by criteria such as the following: (a) the significance of the decline in net assets of the FHLB as compared to the capital stock amount and the length of time this situation has persisted; (b) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance; (c) the impact of legislative and regulatory changes on the customer base of the FHLB; and (d) the liquidity position of the FHLB.
The FHLB of Pittsburgh continues to report net income, continues to declare quarterly cash dividends and had its Aaa bond rating affirmed by Moody’s and its AA+ rating affirmed by Standard and Poor’s, which ratings during 2021 remained unchanged as of September 30, 2021. With consideration given to these factors, management concluded that the stock was not impaired at September 30, 2021 or 2020.
In 2018, the Bank purchased $90,000 of stock in ACBB to support a $12.5 million line of credit. The line has not been drawn on.
Office Properties and Equipment—Land is carried at cost. Office properties and equipment are recorded at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the expected useful lives of the assets. The costs of maintenance and repairs are expensed as they are incurred, and renewals and betterments are capitalized and depreciated over their useful lives. The estimated useful life is generally 10-39 years for office properties and 1-7 years for furniture and equipment.
Cash Surrender Value of Life Insurance—The Company funds the policy premiums for life insurance covering the lives of certain employees of the Bank. The bank owned life insurance policies (“BOLI”) provide an attractive tax-exempt return to the Company and is being used by the Company to fund various employee benefit plans and arrangements. The BOLI is recorded at its cash surrender value.
Dividend Payable – Upon declaration of a dividend, a payable is established with a corresponding reduction to retained earnings at the declaration date. There was 0 dividend payable as of September 30, 2021 or 2020. The Company paid $2.2 million, $6.2 million, and $5.8 million in cash dividends during the fiscal years ended September 30, 2021, 2020 and 2019, respectively.
77
Goodwill – Goodwill represents the excess of cost over the identifiable net assets of businesses acquired. Goodwill is recognized as an asset and is to be reviewed for impairment annually as of each September 30 and between annual tests when events and circumstances indicate that impairment may have occurred. The Company’s goodwill and intangible assets are related to the acquisition of Polonia Bancorp, Inc. (“Polonia Bancorp”) on January 1, 2017.
Share-Based Compensation – The Company accounts for stock-based compensation issued to employees, directors, and where appropriate non-employees, in accordance with U.S. GAAP. Under fair value provisions, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the appropriate vesting period using the straight-line method. The amount of stock-based compensation recognized at any date must at least equal the portion of the grant date fair value of the award that is vested at that date and as a result it may be necessary to recognize the expense using a ratable method. Determining the fair value of stock-based awards at the date of grant requires judgment, including estimating the expected term of the stock options and the expected volatility of the Company’s stock. In addition, judgment is required in estimating the amount of stock-based awards that are expected to be forfeited. If actual results differ significantly from these estimates or different key assumptions were used, it could have a material effect on the Company’s Consolidated Financial Statements. See Note 13 of the Notes to Consolidated Financial Statements for additional information regarding stock-based compensation.
Treasury Stock – Common stock held in treasury is accounted for using the cost method, which treats stock held in treasury as a reduction to total stockholders’ equity. During the year ended September 30, 2021, the Company repurchased 386,883 shares of common stock at an average price per share of $13.93. The shares may be purchased in the open market or in privately negotiated transactions from time to time depending upon market conditions and other factors over a one-year period or such longer period of time as may be necessary to complete such repurchases.
Comprehensive Income—Management presents in the consolidated statements of comprehensive income those amounts arising from transactions and other events which currently are excluded from the statements of operations and are recorded directly to stockholders’ equity. For the fiscal years ended September 30, 2021, 2020 and 2019, the components of comprehensive income were net income, unrealized holding (loss) gain, net of income tax (benefit) expense, on available for sale securities and reclassifications related to realized gains on sale of securities recognized in earnings, net of tax, and unrealized holdings (loss) gain, net of tax, on the fair value of interest rate swaps. Reclassifications are made to avoid double counting in comprehensive income items which are displayed as part of net income for the period.
Income Taxes— Management records deferred income taxes that reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Management exercises significant judgment in the evaluation of the amount and timing of the recognition of the resulting tax assets and liabilities. The judgments and estimates required for the evaluation are updated based upon changes in business factors and the tax laws. If actual results differ from the assumptions and other considerations used in estimating the amount and timing of tax recognized, there can be no assurance that additional expense will not be required in future periods.
In evaluating the Company’s ability to recover deferred tax assets, management considers all available positive and negative evidence, including past operating results and forecast of future taxable income. In determining future taxable income, management makes assumptions for the amount of taxable income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require management to make judgments about future taxable income and are consistent with the plans and estimates the Company uses to manage the business. Any reduction in estimated future taxable income may require management to record an additional valuation allowance against the deferred tax assets. An increase in the valuation allowance would result in additional income tax expense in the period and could have a significant impact on our future earnings.
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities—Management recognizes the financial and servicing assets it controls and the liabilities it has incurred, and will derecognize financial assets when control has been surrendered, and derecognize liabilities when extinguished. Servicing assets and other retained interests in the transferred assets are measured by allocating the previous carrying amount between the assets sold, if any, and retained interests, if any, based on their relative fair values at the date of transfer.
78
Interest Rate Swap Agreement - For asset/liability management purposes, the Company uses interest rate swap agreements to hedge various exposures or to modify interest rate characteristics of assets and liabilities. Interest rate swaps are contracts in which a series of interest rate flow is exchanged over a prescribed period. The notional amount on which the interest payments are based is not exchanged. These swap agreements are derivative instruments and generally convert a portion of the Company’s variable-rate debt to a fixed-rate (cash flow hedge) and convert a portion of its fixed-rate loans to a variable rate (fair value hedge).
For the fair value hedges, changes in the fair value of the interest rate swap are expected to be “perfectly effective” in offsetting changes in the fair value of the hedged item, thus no portion of the change in market value is anticipated to be recognized in earnings.
For cash flow hedges, the net settlement (upon close-out or termination) that offsets changes in the value of the hedged debt is deferred and amortized into net interest income over the life of the hedged debt. For fair value hedges, the net settlement (upon close-out or termination) that offsets changes in the value of the loans adjusts the basis of the loans and is deferred and amortized to loan interest income over the life of the loans. The portion, if any, of the net settlement amount that did not offset changes in the value of the hedged asset or liability is recognized immediately in non-interest income.
Interest rate derivative financial instruments receive hedge accounting treatment only if they are designated as a hedge and are expected to be, and are, effective in substantially reducing interest rate risk arising from the assets and liabilities identified as exposing the Company to risk. Those derivative financial instruments that do not meet specified hedging criteria would be recorded at fair value, with changes in fair value recorded in income. If periodic assessment indicates derivatives no longer provide an effective hedge, the derivative contracts would be closed out and settled, or classified as a trading activity.
Loans Acquired - Loans acquired including loans that have evidence of deterioration of credit quality since origination and for which it is probable, at acquisition, that the Company will be unable to collect all contractually required payments receivable, are initially recorded at fair value (as determined by the present value of expected future cash flows) with no valuation allowance. Loans are evaluated individually to determine if there is evidence of deterioration of credit quality since origination. The difference between the undiscounted cash flows expected at acquisition and the investment in the loan, or the “accretable yield,” is recognized as interest income on a level-yield method over the life of the loan. Contractually required payments for interest and principal that exceed the undiscounted cash flows expected at acquisition, or the “non-accretable difference,” are not recognized as a yield adjustment, a loss accrual or a valuation allowance. Increases in expected cash flows subsequent to the initial investment are recognized prospectively through adjustment of the yield on the loan over its remaining estimated life. Decreases in expected cash flows are recognized immediately as impairment. Any valuation allowances on these impaired loans reflect only losses incurred after acquisition. Loans acquired with evidence of deterioration of credit quality since origination were not material.
For purchased loans acquired that are not deemed impaired at acquisition, credit discounts representing the principal losses expected over the life of the loan are a component of the initial fair value. Loans are aggregated and accounted for as a pool of loans if the loans being aggregated have common risk characteristics. Subsequent to the purchase date, the methods utilized to estimate the required allowance for credit losses for these loans is similar to originated loans; however, the Company records a provision for loan losses only when the required allowance exceeds any remaining credit discounts. The remaining differences between the purchase price and the unpaid principal balance at the date of acquisition are recorded in interest income over the life of the loans.
Revenue Recognition -Management determined that since the guidance does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under other GAAP, the new guidance did not have a material impact on revenue most closely associated with financial instruments including interest income and expense along with non interest revenue resulting from non interest security gains, loan servicing, commitment fees and fees from financial guarantees. As a result, no changes were made during the period related to these sources of revenue which cumulatively comprise 91.3% of the total revenue of the Company. The main types of non interest income within the scope of the standard are:
79
Service charges on deposit accounts consist of account analysis fees (i.e. net fees earned on analyzed business and public checking accounts), monthly service fees, check orders, and other deposit account related fees. The Company’s performance obligation for account analysis fees and monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Check orders and other deposit account related fees are largely transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts.
Fees, interchange, and other service charges are primarily comprised of debit card income, ATM fees, cash management income, and other services charges. Debit card income is primarily comprised of interchange fees earned whenever the Company’s debit cards are processed through card payment networks such as Mastercard. ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a company ATM. Other service charges include revenue from processing wire transfers, bill pay service, cashier’s checks, and other services. The Company’s performance obligation for fees, exchange, and other service charges are largely satisfied, and related revenue recognized when the services are rendered or upon completion. Payment is typically received immediately or in the following month.
Reclassification of Comparative Amounts - Certain items previously reported have been reclassified to conform to the current year’s reporting format. Such reclassifications did not affect the consolidated statements of operations or consolidated statements of changes in stockholders’ equity.
Recently Adopted Accounting Pronouncements
In August 2021, the FASB issued ASU 2021-06, Presentation of Financial Statements (Topic 205), Financial Services – Depository and Lending (Topic 942), and Financial Services – Investment Companies (Topic 946): Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants (SEC Update), to amend SEC paragraphs in the Accounting Standards Codification to reflect the issuance of SEC Release No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants. This ASU was effective upon issuance and did not have a significant impact on the Company’s financial statements.
In January 2020, the FASB issued ASU 2020-4, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, March 2020, to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate. Entities can elect not to apply certain modification accounting requirements to contracts affected by what the guidance calls reference rate reform, if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. Also, entities can elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform, if certain criteria are met, and can make a one-time election to sell and/or reclassify held-to-maturity debt securities that reference an interest rate affected by reference rate reform. The amendments in this ASU are effective for all entities upon issuance through June 30, 2022. The update has not had a significant impact on the Company’s financial position and/or results of operations.
In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848), which provides optional temporary guidance for entities transitioning away from LIBOR and other interbank offered rates (IBORs) to new reference rates so that derivatives affected by the discounting transition are explicitly eligible for certain optional expedients and exceptions within Topic 848. ASU 2021-01 clarifies that the derivatives affected by the discounting transition are explicitly eligible for certain optional expedients and exceptions in Topic 848. ASU 2021-01 is effective immediately for all entities. Entities may elect to apply the amendments on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to December 12, 2020, or on a prospective basis to new modifications from any date within an interim period that includes or is subsequent to the date of the issuance of a final update, up to the date that financial statements are available to be issued. The amendments in this update do not apply to contract modifications made, as well as new hedging relationships entered into, after December 31, 2022, and to existing
80
hedging relationships evaluated for effectiveness for periods after December 31, 2022, except for certain hedging relationships existing as of December 31, 2022, that apply certain optional expedients in which the accounting effects are recorded through the end of the hedging relationship. The update has not had a significant impact on the Company’s financial position and/or results of operations.
Recent Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets. This Update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of the Update is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be affected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. This Update becomes applicable for SEC filers that are eligible to be smaller reporting companies, non-SEC filers, and all other companies for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements.
In May 2019, the FASB issued ASU 2019-05, Financial Instruments – Credit Losses, Topic 326, which allows entities to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost upon adoption of the new credit losses standard. To be eligible for the transition election, the existing financial asset must otherwise be both within the scope of the new credit losses standard and eligible for the applying the fair value option in ASC 825-10-3. The election must be applied on an instrument-by-instrument basis and is not available for either available-for-sale or held-to-maturity debt securities. For entities that elect the fair value option, the difference between the carrying amount and the fair value of the financial asset would be recognized through a cumulative-effect adjustment to opening retained earnings as of the date an entity adopted ASU 2016-13. Changes in fair value of that financial asset would subsequently be reported in current earnings. For entities that have not yet adopted ASU 2016-13, the effective dates and transition requirements are the same as those in ASU 2016-13. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position and or results of operations.
In November 2019, the FASB issued ASU 2019-10, Financial Instruments ‒ Credit Losses (Topic 326),Derivatives and Hedging (Topic 815), and Leases (Topic 842). The Update defers the effective dates of ASU 2016-13 for SEC filers that are eligible to be smaller reporting companies, non-SEC filers, and all other companies to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. This Update also amends the mandatory effective date for the elimination of Step 2 from the goodwill impairment test under ASU No. 2017-04, Intangibles ‒ Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (Goodwill), to align with the effective date used for credit losses. Furthermore, the ASU provides a one-year deferral of the effective dates of the two ASUs on derivatives and hedging and leases for companies that are not public business entities. The Company qualifies as a smaller reporting company and does not expect to early adopt either of these ASUs.
In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt – Modifications and Extinguishments (Subtopic 470-50), Compensation – Stock Compensation (Topic 718), and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40), which requires an entity to treat a modification of an equity-classified warrant that does not cause the warrant to become liability-classified as an exchange of the original warrant for a new warrant. This guidance applies whether the modification is structured as an amendment to the terms and conditions of the warrant or as termination of the original warrant and issuance of a new warrant. An entity should measure the effect of a modification as the difference between the fair value of the modified warrant and the fair value of that warrant immediately before modification. The amendments in this Update are effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. An entity should apply the amendments prospectively to modifications or exchanges occurring on or after the effective date of the amendments. Early adoption is permitted for all
81
entities, including adoption in an interim period. If an entity elects to early adopt the amendments in this Update in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes that interim period. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.
3. EARNINGS PER SHARE
Basic earnings per share is computed based on the weighted average number of common shares outstanding. Diluted earnings per share is computed based on the weighted average number of common shares outstanding and common share equivalents (“CSEs”) that would arise from the exercise of dilutive shares.
The calculated basic and diluted earnings per share are as follows:
| | | | | | | | | | | | | | | | | | |
| | Year Ended September 30, | ||||||||||||||||
| | 2021 | | 2020 | | 2019 | ||||||||||||
| | (Dollars in Thousands Except Per Share Data) | ||||||||||||||||
| | Basic |
| Diluted |
| Basic |
| Diluted |
| Basic |
| Diluted | ||||||
| | | | | | | | | | | | | | | | | | |
Net income | | $ | 7,780 | | $ | 7,780 | | $ | 9,555 | | $ | 9,555 | | $ | 9,530 | | $ | 9,530 |
| | | | | | | | | | | | | | | | | | |
Weighted average common shares outstanding | |
| 7,935,143 | |
| 7,935,143 | |
| 8,538,006 | |
| 8,538,006 | |
| 8,777,794 | |
| 8,777,794 |
| | | | | | | | | | | | | | | | | | |
Effect of CSEs | |
| 0 | |
| 17,794 | |
| 0 | |
| 24,470 | |
| 0 | |
| 158,083 |
| | | | | | | | | | | | | | | | | | |
Adjusted weighted average common shares used in earnings per share computation | |
| 7,935,143 | |
| 7,952,937 | |
| 8,538,006 | |
| 8,562,476 | |
| 8,777,794 | |
| 8,935,877 |
| | | | | | | | | | | | | | | | | | |
Earnings per share | | $ | 0.98 | | $ | 0.98 | | $ | 1.12 | | $ | 1.12 | | $ | 1.09 | | $ | 1.07 |
As of September 30, 2021, 2020, and 2019, there were 267,728, 282,728 and 550,833 shares, respectively, of common stock subject to options with an exercise price less than the then current market value, as of such dates and which were included in the computation of diluted earnings per share. At September 30, 2021, 2020 and 2019, there were 253,530, 288,530 and 242,201 shares, respectively, that had exercise prices greater than the average market value during the period and are considered anti-dilutive and not included in diluted earnings per share.
4. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table presents the changes in accumulated other comprehensive (loss) income by component net of tax:
| | | | | | | | | | | | | | | | | | |
| | Year Ended September 30, | ||||||||||||||||
| | 2021 | | 2021 | | 2021 | | 2020 | | 2020 | | 2020 | ||||||
| | (Dollars in Thousands) | ||||||||||||||||
| | | | | | | | Total | | | | | | | | Total | ||
| | | | | | | | accumulated | | | | | | | | accumulated | ||
| | Unrealized gain | | Unrealized gain (loss) | | other | | Unrealized gain | | Unrealized loss | | other | ||||||
| | (loss) on AFS | | on interest rate swaps | | comprehensive | | (loss) on AFS | | on interest rate | | comprehensive | ||||||
| | securities (a) |
| (a) |
| income (loss) |
| securities (a) |
| swaps (a) |
| income (loss) | ||||||
Beginning Balance, October 1 | | $ | 10,585 | | $ | (13,528) | | $ | (2,943) | | $ | 8,098 | | $ | (6,906) | | $ | 1,192 |
Other comprehensive (loss) income before reclassification | |
| (3,188) | |
| 5,255 | |
| 2,067 | |
| 7,221 | |
| (6,622) | |
| 599 |
Amount reclassified from accumulated other comprehensive income | |
| (1,299) | |
| 0 | |
| (1,299) | |
| (4,734) | |
| 0 | |
| (4,734) |
Ending Balance, September 30 | | $ | 6,098 | | $ | (8,273) | | $ | (2,175) | | $ | 10,585 | | $ | (13,528) | | $ | (2,943) |
82
| | | | | | | | | |
| | Year Ended September 30, | |||||||
| | 2019 | | 2019 | | 2019 | |||
| | (Dollars in Thousands) | |||||||
| | | | | | | | Total | |
| | | | | | | | accumulated | |
| | Unrealized gain | | Unrealized gain (loss) | | other | |||
| | (loss) on AFS | | on interest rate swaps | | comprehensive | |||
|
| securities (a) |
| (a) |
| income (loss) | |||
Beginning Balance, October 1 | | $ | (8,320) | | $ | 166 | | $ | (8,154) |
Other comprehensive (loss) income before reclassification | |
| 17,278 | |
| (7,072) | |
| 10,206 |
Amount reclassified from accumulated other comprehensive income | |
| (835) | |
| — | |
| (835) |
Reclassification for net gains recorded in net income | |
| (25) | |
| — | |
| (25) |
Ending Balance, September 30 | | $ | 8,098 | | $ | (6,906) | | $ | 1,192 |
The following table presents significant amounts reclassified out of each component of accumulated other comprehensive (loss) income for the years ended September 30, 2021, 2020 and 2019.
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended September 30, | ||||||||||||||||||
| | 2021 | | | 2021 | | | 2021 | | 2020 | | 2020 | | 2020 | ||||||
| | | (Dollars in Thousands) | |||||||||||||||||
|
| Securities | |
| Swaps | |
| Total |
| Securities |
| Swaps |
| Total | ||||||
Unrealized gain | | $ | 1,644 | (1) | | $ | 0 | | | $ | 1,644 | | $ | 5,993 | (1) | $ | 0 | | $ | 5,993 |
Income taxes | |
| (345) | (2) | |
| 0 | | |
| (345) | |
| (1,259) | (2) |
| 0 | | | (1,259) |
| | $ | 1,299 | | | $ | 0 | | | $ | 1,299 | | $ | 4,734 | | $ | 0 | | $ | 4,734 |
| | | | | | | | | |
| | Year Ended September 30, | |||||||
| | 2019 | | 2019 | | 2019 | |||
| | (Dollars in Thousands) | |||||||
|
| Securities |
| Swaps |
| Total | |||
Unrealized gain | | $ | 1,057 | (1) | $ | — | | $ | 1,057 |
Income taxes | |
| (222) | (2) |
| — | |
| (222) |
| | $ | 835 | | $ | — | | $ | 835 |
5. INVESTMENT AND MORTGAGE-BACKED SECURITIES
The amortized cost and fair value of securities, with gross unrealized gains and losses, are as follows:
| | | | | | | | | | | | |
| | September 30, 2021 | ||||||||||
| | | | | Gross | | Gross | | | | ||
| | Amortized | | Unrealized | | Unrealized | | Fair | ||||
|
| Cost |
| Gains |
| Losses |
| Value | ||||
| | (Dollars in Thousands) | ||||||||||
Securities Available for Sale: | | |
| | |
| | |
| | |
|
U.S. government and agency obligations | | $ | 3,117 | | $ | 77 | | $ | — | | $ | 3,194 |
State and political subdivisions | |
| 70,625 | |
| 1,793 | |
| (159) | |
| 72,259 |
Mortgage-backed securities - U.S. government agencies | | | 131,842 | | | 4,267 | | | (756) | | | 135,353 |
Corporate debt securities | |
| 92,645 | |
| 2,683 | |
| (187) | |
| 95,141 |
Total debt securities available for sale | | $ | 298,229 | | $ | 8,820 | | $ | (1,102) | | $ | 305,947 |
| | | | | | | | | | | | |
Securities Held to Maturity: | |
|
| |
|
| |
|
| |
|
|
U.S. government and agency obligations | | $ | 1,000 | | $ | 173 | | $ | — | | $ | 1,173 |
State and political subdivisions | |
| 14,983 | |
| 727 | |
| — | |
| 15,710 |
Mortgage-backed securities - U.S. government agencies | |
| 4,091 | |
| 211 | |
| (24) | |
| 4,278 |
Total securities held to maturity | | $ | 20,074 | | $ | 1,111 | | $ | (24) | | $ | 21,161 |
| | | | | | | | | | | | |
83
| | | | | | | | | | | | |
| | September 30, 2020 | ||||||||||
| | | | | Gross | | Gross | | | | ||
| | Amortized | | Unrealized | | Unrealized | | Fair | ||||
|
| Cost |
| Gains |
| Losses |
| Value | ||||
| | (Dollars in Thousands) | ||||||||||
Securities Available for Sale: | | |
| | |
| | |
| | |
|
U.S. government and agency obligations | | $ | 22,241 | | $ | 153 | | $ | 0 | | $ | 22,394 |
State and political subdivisions | | | 79,099 | |
| 1,940 | |
| (1,418) | |
| 79,621 |
Mortgage-backed securities - U.S. government agencies | |
| 226,863 | | | 9,774 | | | (71) | | | 236,566 |
Corporate debt securities | |
| 78,764 | |
| 3,564 | |
| (545) | |
| 81,783 |
Total debt securities available for sale | | $ | 406,967 | | $ | 15,431 | | $ | (2,034) | | $ | 420,364 |
| | | | | | | | | | | | |
Securities Held to Maturity: | |
|
| |
|
| |
|
| |
|
|
U.S. government and agency obligations | | $ | 1,000 | | $ | 236 | | $ | — | | $ | 1,236 |
State and political subdivisions | |
| 18,076 | |
| 925 | |
| — | |
| 19,001 |
Mortgage-backed securities - U.S. government agencies | |
| 3,784 | |
| 309 | |
| — | |
| 4,093 |
Total securities held to maturity | | $ | 22,860 | | $ | 1,470 | | $ | — | | $ | 24,330 |
As of September 30, 2021, the Bank maintained securities with a fair value of $106.8 million in a safekeeping account at the FHLB of Pittsburgh used for collateral and convenience. The Bank is only required to hold $94.2 million as specific collateral for its borrowings; therefore the $12.6 million in excess securities are not restricted and could be sold or transferred if needed.
The following table shows the gross unrealized losses and related fair values of the Company’s available for sale investment securities, aggregated by investment category and the length of time that individual securities had been in a continuous loss position at September 30, 2021:
| | | | | | | | | | | | | | | | | | |
| | Less than 12 months | | More than 12 months | | Total | ||||||||||||
| | Gross | | | | | Gross | | | | | Gross | | | | |||
| | Unrealized | | Fair | | Unrealized | | Fair | | Unrealized | | Fair | ||||||
|
| Losses |
| Value |
| Losses |
| Value |
| Losses |
| Value | ||||||
| (Dollars in Thousands) | |||||||||||||||||
Securities Available for Sale: | | | | | | | | | | | | | | | | | | |
State and political subdivisions | | $ | (93) | | $ | 14,383 | | $ | (66) | | $ | 4,417 | | $ | (159) | | $ | 18,800 |
Mortgage-backed securities -U.S. government agencies | |
| (487) | |
| 18,493 | |
| (269) | |
| 7,849 | |
| (756) | |
| 26,342 |
Corporate debt securities | |
| (187) | |
| 24,816 | |
| — | |
| — | |
| (187) | |
| 24,816 |
| | | | | | | | | | | | | | | | | | |
Total securities available for sale | | $ | (767) | | $ | 57,692 | | $ | (335) | | $ | 12,266 | | $ | (1,102) | | $ | 69,958 |
| | | | | | | | | | | | | | | | | | |
Securities Held to Maturity: | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Mortgage-backed securities -U.S. government agencies | | $ | (24) | | $ | 1,269 | | $ | — | | $ | — | | $ | (24) | | $ | 1,269 |
| | | | | | | | | | | | | | | | | | |
Total securities held to maturity | | $ | (24) | | $ | 1,269 | | $ | — | | $ | — | | $ | (24) | | $ | 1,269 |
| | | | | | | | | | | | | | | | | | |
Total | | $ | (791) | | $ | 58,961 | | $ | (335) | | $ | 12,266 | | $ | (1,126) | | $ | 71,227 |
Management evaluates securities for other-than-temporary impairment (“OTTI”) at least once per quarter, and more frequently when economic or market conditions warrant such evaluation. The evaluation is based upon factors such
84
as the creditworthiness of the issuers/guarantors, the underlying collateral, if applicable, and the continuing performance of the securities. Management also evaluates other facts and circumstances that may be indicative of an OTTI condition. This includes, but is not limited to, an evaluation of the type of security, the length of time and extent to which the fair value of the security has been less than cost, and the near-term prospects of the issuer.
The Company assesses the credit loss by considering whether (1) the Company has the intent to sell the security, (2) it is more likely than not that it will be required to sell the security before recovery, or (3) it does not expect to recover the entire amortized cost basis of the security. The Company bifurcates the OTTI impact on impaired securities where impairment in value was deemed to be other than temporary between the component representing credit loss and the component representing loss related to other factors. The portion of the fair value decline attributable to credit loss must be recognized through a charge to earnings. The credit component is determined by comparing the present value of the cash flows expected to be collected, discounted at the rate in effect before recognizing any OTTI with the amortized cost basis of the debt security. The Company uses the cash flow expected to be realized from the security, which includes assumptions about interest rates, timing and severity of defaults, estimates of potential recoveries, the cash flow distribution from the bond indenture and other factors, then applies a discount rate equal to the effective yield of the security. The difference between the present value of the expected cash flows and the amortized book value is considered a credit loss. The fair value of the security is determined using the same expected cash flows; the discount rate is a rate the Company determines from the open market and other sources as appropriate for the security. The difference between the fair value and the security’s remaining amortized cost is recognized in other comprehensive income (loss).
For the years ended September 30, 2021, 2020 and 2019, the Company determined that 0 OTTI had occurred within the investment and mortgage-backed securities portfolios.
U.S. Government and agency obligations–The Company’s investments reflected in the tables above in U.S. Government sponsored enterprise obligations consist of debt obligations of the FHLB and Federal Farm Credit System (“FFCS”). These securities are typically rated AAA by at best one of the internationally recognized credit rating services. There were 0 securities in a gross unrealized loss position at September 30, 2021. In addition, the Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell the securities. As such, the Company anticipates it will recover the entire amortized cost basis of the securities.
Mortgage-backed securities – U.S. government agencies — At September 30, 2021, the gross unrealized loss in U.S. Government agency issued mortgage-backed securities in the category of experiencing a gross unrealized loss was $780,000 or 0.5% from the Company’s amortized cost basis and consisted of 15 securities. These securities represent asset-backed issues that are issued or guaranteed by a U.S. Government sponsored agency or carry the full faith and credit of the United States through a government agency and are currently rated AAA by at least one bond credit rating agency. The unrealized losses on these debt securities relate principally to the changes in market interest rates in the financial markets and are not as a result of projected shortfall of cash flows. The Company anticipates it will recover the entire amortized cost basis of the securities. As a result, the Company did not consider these investments to be other-than-temporarily impaired at September 30, 2021.
Corporate debt securities — At September 30, 2021, the gross unrealized loss in corporate debt securities in the category of experiencing a gross unrealized loss was $187,000 or 0.2% from the Company’s amortized cost basis and consisted of 7 securities. The unrealized losses on these debt securities relates principally to the changes in market interest rates in the financial markets and are not as a result of projected shortfall of cash flows. In addition, the Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell the securities. As such, the Company anticipates it will recover the entire amortized cost basis of the securities. As a result, the Company did not consider these investments to be other-than-temporarily impaired at September 30, 2021.
State and political subdivision debt securities — At September 30, 2021, the gross unrealized loss in state and political subdivision debt securities was $159,000 or 0.1% from the Company’s amortized cost basis and consisted of 7 securities. The unrealized losses on these debt securities relate principally to the changes in market interest rates in the financial markets and are not as a result of projected shortfall of cash flows. In addition, the Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell the securities. As such,
85
the Company anticipates it will recover the entire amortized cost basis of the securities. As a result, the Company did not consider these investments to be other-than-temporarily impaired at September 30, 2021.
The following table shows the gross unrealized losses and related fair values of the investment securities, aggregated by investment category and length of time that individual securities have been in a continuous loss position at September 30, 2020:
| | | | | | | | | | | | | | | | | | |
| | Less than 12 months | | More than 12 months | | Total | ||||||||||||
| | Gross | | | | | Gross | | | | | Gross | | | | |||
|
| Unrealized |
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| Fair | ||||||
| | Losses | | Value | | Losses | | Value | | Losses | | Value | ||||||
| | (Dollars in Thousands) | ||||||||||||||||
Securities Available for Sale: |
| |
|
| |
|
| |
|
| |
|
| |
| | | |
State and political subdivisions | | $ | (126) | | $ | 10,735 | | $ | (1,292) | | $ | 24,510 | | $ | (1,418) | | $ | 35,245 |
Mortgage-backed securities - US government agencies | |
| (66) | |
| 10,025 | |
| (5) | |
| 584 | |
| (71) | |
| 10,609 |
Corporate debt securities | |
| (545) | |
| 16,472 | |
| — | |
| — | |
| (545) | |
| 16,472 |
| | | | | | | | | | | | | | | | | | |
Total securities available for sale | | $ | (737) | | $ | 37,232 | | $ | (1,297) | | $ | 25,094 | | $ | (2,034) | | $ | 62,326 |
| | | | | | | | | | | | | | | | | | |
The amortized cost and fair value of debt securities by contractual maturity are shown below. Expected maturities as of September 30, 2021 will differ from contractual maturities because of call provisions in the securities. Mortgage-backed securities were not included as the contractual maturity is generally irrelevant due to the borrowers’ right to prepay without pre-payment penalty which results in significant prepayments.
| | | | | | | | | | | | |
| | September 30, 2021 | ||||||||||
| | Held to Maturity | | Available for Sale | ||||||||
|
| Amortized |
| Fair |
| Amortized |
| Fair | ||||
| | Cost | | Value | | Cost | | Value | ||||
| | (Dollars in Thousands) | ||||||||||
Due within one year | | $ | 1,035 | | $ | 1,049 | | $ | — | | $ | — |
Due after one through five years | | | 4,444 | | | 4,792 | | | 40,137 | | | 41,330 |
Due after five through ten years | |
| 6,465 | |
| 6,730 | |
| 54,223 | |
| 55,628 |
Due after ten years | |
| 4,039 | |
| 4,312 | |
| 72,027 | |
| 73,636 |
| | | | | | | | | | | | |
Total | | $ | 15,983 | | $ | 16,883 | | $ | 166,387 | | $ | 170,594 |
During the fiscal years ended September 30, 2021, 2020 and 2019, the Company recorded realized gross gains of $1.6 million, $6.1 million and $1.3 million, respectively. The Company recorded gross losses of $-0-, $68,000 and $280,000, respectively, for the same periods. Gross proceeds from the sale of investment and mortgage-backed securities totaled $26.1 million, $142.1 million and $75.6 million, for the respective fiscal years.
The Company recognized holding losses on equity securities of $29,000 for the year ended September 30, 2021 and $44,000 for the year ended September 30, 2020. A holding gain of $58,000 was recognized during the year ended September 30, 2019.
86
6. LOANS RECEIVABLE
Loans receivable consist of the following:
| | | | | | | |
| | September 30, | | September 30, | | ||
|
| 2021 |
| 2020 | | ||
| | (Dollars in Thousands) | | ||||
One-to-four family residential | | $ | 202,330 | | $ | 233,872 | |
Multi-family residential | |
| 76,122 | |
| 31,100 | |
Commercial real estate | |
| 165,992 | |
| 139,943 | |
Construction and land development | |
| 205,413 | |
| 260,648 | |
Loans to financial institutions | |
| — | |
| 6,000 | |
Commercial business | |
| 57,236 | |
| 12,916 | |
Leases | |
| — | |
| 176 | |
Consumer | |
| 530 | |
| 604 | |
| | | | | | | |
Total loans | |
| 707,623 | |
| 685,259 | |
| | | | | | | |
Undisbursed portion of loans-in-process | |
| (80,620) | |
| (86,862) | |
Deferred loan fees | |
| (280) | |
| (1,794) | |
Allowance for loan losses | |
| (8,517) | |
| (8,303) | |
| | | | | | | |
Net loans | | $ | 618,206 | | $ | 588,300 | |
The Company originates loans to customers located primarily in its market area of eastern Pennsylvania, Delaware, New Jersey and southern New York. The ultimate repayment of these loans at September 30, 2021 is dependent, to a certain degree, on the state of the economy and real estate market in these areas.
The following table summarizes the loans individually and collectively evaluated for impairment by loan segment at September 30, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| One to |
| | |
| | |
| | |
| | |
| | | | | | | | | | |
| | | ||
| | four | | Multi-family | | Commercial | | Construction and | | Commercial | | | | | | | | | | | | | | | ||||||
| | family residential | | residential | | real estate | | land development | | business | | Consumer | | Unallocated | | Total |
| | | | | | ||||||||
| | (Dollars in Thousands) | ||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for loan losses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Individually evaluated for impairment | | $ | — | | $ | 0 | | $ | — | | $ | — | | $ | — | | $ | 0 | | $ | 0 | | $ | 0 | | | | | | |
Collectively evaluated for impairment | | | 1,665 | | | 1,051 | | | 2,220 | | | 1,968 | | | 799 | | | 15 | | | 799 | | | 8,517 | | | | | | |
Total ending allowance balance | | $ | 1,665 | | $ | 1,051 | | $ | 2,220 | | $ | 1,968 | | $ | 799 | | $ | 15 | | $ | 799 | | $ | 8,517 | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Individually evaluated for impairment | | $ | 3,006 | | $ | 0 | | $ | 1,280 | | $ | 4,093 | | $ | — | | $ | 0 | | | | | $ | 8,379 | | | | | | |
Collectively evaluated for impairment | |
| 199,324 | |
| 76,122 | |
| 164,712 | |
| 201,320 | |
| 57,236 | |
| 530 | | | | |
| 699,244 | | | | | | |
Total loans | | $ | 202,330 | | $ | 76,122 | | $ | 165,992 | | $ | 205,413 | | $ | 57,236 | | $ | 530 | | | | | $ | 707,623 | | | | | | |
The following table summarizes the loans individually and collectively evaluated for impairment by loan segment at September 30, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | One to | | | | | | | | | | | | | | Loans to | | | | | | | | | | | | | ||
| | four | | Multi-family | | Commercial | | Construction and | | Commercial | | financial | | | | | | | | | | | | | ||||||
|
| family residential |
| residential |
| real estate |
| land development |
| business |
| institutions | | Leases |
| Consumer | | Unallocated |
| Total | ||||||||||
| | (Dollars in Thousands) | ||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for loan losses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Individually evaluated for impairment | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 0 | | $ | 0 | | $ | — | | $ | — | | $ | — |
Collectively evaluated for impairment | | | 1,877 | | | 460 | | | 1,989 | | | 2,888 | | | 194 | | | 89 | | | 3 | | | 6 | | | 797 | | | 8,303 |
Total ending allowance balance | | $ | 1,877 | | $ | 460 | | $ | 1,989 | | $ | 2,888 | | $ | 194 | | $ | 89 | | $ | 3 | | $ | 6 | | $ | 797 | | $ | 8,303 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Individually evaluated for impairment | | $ | 3,095 | | $ | 0 | | $ | 1,417 | | $ | 8,525 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | | | | $ | 13,037 |
Collectively evaluated for impairment | |
| 230,777 | |
| 31,100 | |
| 138,526 | |
| 252,123 | |
| 12,916 | |
| 6,000 | |
| 176 | |
| 604 | | | | |
| 672,222 |
Total loans | | $ | 233,872 | | $ | 31,100 | | $ | 139,943 | | $ | 260,648 | | $ | 12,916 | | $ | 6,000 | | $ | 176 | | $ | 604 | | | | | $ | 685,259 |
87
The loan portfolio is segmented at a level that allows management to monitor risk and performance. Management evaluates all loans classified as substandard or lower and loans delinquent 90 or more days for potential impairment. Loans are considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.
Once the determination is made that a loan is impaired, the determination of whether a specific allocation of the allowance, or charge off, is necessary is generally measured by comparing the recorded investment in the loan to the fair value of the loan using one of the following three methods: (a) the present value of the expected future cash flows discounted at the loan’s effective interest rate; (b) the loan’s observable market price; or (c) the fair value of the collateral less selling costs. Management primarily utilizes the fair value of collateral method as a practically expedient alternative.
The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary as of September 30, 2021:
| | | | | | | | | | | | | | | |
| | | | | | | | Impaired | | | | | | | |
| | | | | | | | Loans with | | | | | | | |
| | Impaired Loans with | | No Specific | |
| | |
| | |||||
| | Specific Allowance | | Allowance | | Total Impaired Loans | |||||||||
| | (Dollars in Thousands) | |||||||||||||
| | | | | | | | | | | | | | Unpaid | |
| | Recorded | | Related | | Recorded | | Recorded | | Principal | |||||
|
| Investment |
| Allowance |
| Investment |
| Investment |
| Balance | |||||
One-to-four family residential | | $ | 0 | | $ | 0 | | $ | 3,006 | | $ | 3,006 | | $ | 3,304 |
Commercial real estate | |
| 0 | |
| 0 | |
| 1,280 | |
| 1,280 | |
| 1,457 |
Construction and land development | |
| 0 | |
| 0 | |
| 4,093 | |
| 4,093 | |
| 4,340 |
| | | | | | | | | | | | | | | |
Total | | $ | 0 | | $ | 0 | | $ | 8,379 | | $ | 8,379 | | $ | 9,101 |
The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary as of September 30, 2020:
| | | | | | | | | | | | | | | |
| | | | | | | | Impaired | | | | | | | |
| |
| | | | | | Loans with | |
| | |
| | |
| | Impaired Loans with | | No Specific | | | | | | | |||||
| | Specific Allowance |
| Allowance |
| Total Impaired Loans | |||||||||
| | (Dollars in Thousands) | |||||||||||||
| | | | | | | | | | | | | | Unpaid | |
| | Recorded |
| Related |
| Recorded |
| Recorded |
| Principal | |||||
|
| Investment |
| Allowance |
| Investment |
| Investment |
| Balance | |||||
One-to-four family residential | | $ | 0 | | $ | 0 | | $ | 3,095 | | $ | 3,095 | | $ | 3,482 |
Commercial real estate | |
| 0 | |
| 0 | |
| 1,417 | |
| 1,417 | |
| 1,600 |
Construction and land development | |
| 0 | |
| 0 | |
| 8,525 | |
| 8,525 | |
| 10,906 |
Total | | $ | 0 | | $ | 0 | | $ | 13,037 | | $ | 13,037 | | $ | 15,988 |
88
The following tables present the average investment in impaired loans and related interest income recognized for the periods indicated:
| | | | | | | | | |
| | Year Ended September 30, 2021 | |||||||
| | Average | | | | | Income | ||
| | Recorded | | Income Recognized | | Recognized on | |||
|
| Investment |
| on Accrual Basis |
| Cash Basis | |||
| | (Dollars in Thousands) | |||||||
One-to-four family residential | | $ | 3,212 | | $ | 18 | | $ | 13 |
Commercial real estate | |
| 1,336 | |
| 0 | |
| 0 |
Construction and land development | |
| 6,697 | |
| 0 | |
| 0 |
Total impaired loans | | $ | 11,245 | | $ | 18 | | $ | 13 |
| | | | | | | | | |
| | Year Ended September 30, 2020 | |||||||
| | Average | | | | | Income | ||
| | Recorded | | Income Recognized | | Recognized on | |||
|
| Investment |
| on Accrual Basis |
| Cash Basis | |||
| | (Dollars in Thousands) | |||||||
One-to-four family residential | | $ | 3,825 | | $ | 13 | | $ | 26 |
Multi-family residential | |
| 56 | |
| — | |
| — |
Commercial real estate | |
| 1,549 | |
| — | |
| 1 |
Construction and land development | |
| 8,685 | |
| — | |
| — |
Commercial business | |
| 2 | |
| — | |
| — |
Consumer | |
| 24 | |
| — | |
| — |
Total impaired loans | | $ | 14,141 | | $ | 13 | | $ | 27 |
| | | | | | | | | |
| | Year Ended September 30, 2019 | |||||||
| | Average | | | | | Income | ||
| | Recorded | | Income Recognized | | Recognized on | |||
|
| Investment |
| on Accrual Basis |
| Cash Basis | |||
| | (Dollars in Thousands) | |||||||
One-to-four family residential | | $ | 4,685 | | $ | 77 | | $ | 22 |
Multi-family residential | | | 145 | |
| 10 | |
| 0 |
Commercial real estate |
| | 2,139 | |
| 36 | |
| 4 |
Construction and land development |
| | 8,751 | |
| 0 | |
| 0 |
Total | | $ | 15,720 | | $ | 123 | | $ | 26 |
Federal banking regulations and our policies require that the Bank utilize an internal asset classification system as a means of reporting problem and potential problem assets. The Bank has incorporated an internal asset classification system, consistent with Federal banking regulations, as a part of the credit monitoring system. Management currently classifies problem and potential problem assets as “special mention,” “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 insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” 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. Assets which do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are required to be designated “special mention.”
The following tables present the classes of the loan portfolio in which a formal risk weighting system is utilized summarized by the aggregate “Pass” and the criticized category of “special mention”, and the classified categories of
89
“substandard” and “doubtful” within the Bank’s risk rating system. The Bank had no loans classified as “doubtful” or “loss” at either of the dates presented.
| | | | | | | | | | | | | | | |
| | September 30, 2021 | |||||||||||||
| | | | Special | | | | | | | | | |||
|
| Pass |
| Mention |
| Substandard |
| Doubtful |
| Total | |||||
| | (Dollars in Thousands) | |||||||||||||
One-to-four residential | | $ | 197,920 | | $ | 1,404 | | $ | 3,006 | | $ | 0 | | $ | 202,330 |
Multi-family residential | |
| 71,497 | |
| 4,625 | |
| 0 | |
| 0 | |
| 76,122 |
Commercial real estate | |
| 162,657 | |
| 2,055 | |
| 1,280 | |
| 0 | |
| 165,992 |
Construction and land development | |
| 201,320 | |
| 0 | |
| 4,093 | |
| 0 | |
| 205,413 |
Loans to financial institutions | |
| — | |
| 0 | |
| 0 | |
| 0 | |
| — |
Commercial business | |
| 57,236 | |
| 0 | |
| 0 | |
| 0 | |
| 57,236 |
Total | | $ | 690,630 | | $ | 8,084 | | $ | 8,379 | | $ | 0 | | $ | 707,093 |
| | | | | | | | | | | | | | | |
| | September 30, 2020 | |||||||||||||
|
| |
| Special |
| | | | | |
| | | ||
|
| Pass |
| Mention |
| Substandard |
| Doubtful |
| Total | |||||
| | (Dollars in Thousands) | |||||||||||||
One-to-four residential | | $ | 229,361 | | $ | 1,416 | | $ | 3,095 | | $ | 0 | | $ | 233,872 |
Multi-family residential | |
| 31,100 | |
| 0 | |
| 0 | |
| 0 | |
| 31,100 |
Commercial real estate | |
| 128,527 | |
| 9,999 | |
| 1,417 | |
| 0 | |
| 139,943 |
Construction and land development | |
| 252,123 | |
| 0 | |
| 8,525 | |
| 0 | |
| 260,648 |
Loans to financial institutions | | | 6,000 | |
| 0 | |
| 0 | |
| 0 | |
| 6,000 |
Commercial business | |
| 12,916 | |
| 0 | |
| 0 | |
| 0 | |
| 12,916 |
Total | | $ | 660,027 | | $ | 11,415 | | $ | 13,037 | | $ | 0 | | $ | 684,479 |
The following tables present loans in which a formal risk rating system is not utilized, but loans are segregated between performing and non-performing based primarily on delinquency status:
| | | | | | | | | |
| | September 30, 2021 | |||||||
|
| |
| Non- |
| | |||
| | Performing | | Performing | | Total | |||
| | (Dollars in Thousands) | |||||||
Consumer | | $ | 530 | | $ | 0 | | $ | 530 |
| | | | | | | | | |
| | September 30, 2020 | |||||||
|
| | |
| Non- |
| | ||
| | Performing | | Performing | | Total | |||
| | (Dollars in Thousands) | |||||||
Leases | | $ | 176 | | $ | 0 | | $ | 176 |
Consumer | |
| 604 | |
| 0 | |
| 604 |
Total | | $ | 780 | | $ | 0 | | $ | 780 |
90
Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is due. The following tables present the classes of the loan portfolio summarized by the aging categories of performing loans and non-accrual loans:
| | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2021 | |||||||||||||||||||
|
| | |
| | |
| | |
| | |
| | |
| | |
| 90 Days+ | |
| | | | | 30‑89 Days | | 90 Days + | | Total | | Total | | Non- | | Past Due | ||||||
| | Current | | Past Due | | Past Due | | Past Due | | Loans | | Accrual | | and Accruing | |||||||
| | (Dollars in Thousands) | |||||||||||||||||||
One-to-four family residential |
| $ | 199,799 | | $ | 487 | | $ | 2,044 | | $ | 2,531 | | $ | 202,330 | | $ | 3,006 | | $ | 0 |
Multi-family residential | |
| 76,122 | |
| 0 | |
| 0 | |
| 0 | |
| 76,122 | |
| 0 | |
| 0 |
Commercial real estate | |
| 164,712 | |
| 0 | |
| 1,280 | |
| 1,280 | |
| 165,992 | |
| 1,280 | |
| 0 |
Construction and land development | |
| 201,320 | |
| 0 | |
| 4,093 | |
| 4,093 | |
| 205,413 | |
| 4,093 | |
| 0 |
Commercial business | |
| 57,236 | |
| 0 | |
| 0 | |
| 0 | |
| 57,236 | |
| 0 | |
| 0 |
Consumer | |
| 493 | |
| 37 | |
| 0 | |
| 37 | |
| 530 | |
| 0 | |
| 0 |
Total Loans | | $ | 699,682 | | $ | 524 | | $ | 7,417 | | $ | 7,941 | | $ | 707,623 | | $ | 8,379 | | $ | 0 |
| | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2020 | |||||||||||||||||||
|
| | |
| | |
| | |
| | |
| | |
| | |
| 90 Days+ | |
| | | | | 30‑89 Days | | 90 Days + | | Total | | Total | | Non- | | Past Due | ||||||
| | Current | | Past Due | | Past Due | | Past Due | | Loans | | Accrual | | and Accruing | |||||||
| | (Dollars in Thousands) | |||||||||||||||||||
One-to-four family residential | | $ | 231,196 | | $ | 523 | | $ | 2,153 | | $ | 2,676 | | $ | 233,872 | | $ | 3,095 | | $ | 0 |
Multi-family residential | |
| 31,100 | |
| 0 | |
| 0 | |
| 0 | |
| 31,100 | |
| 0 | |
| 0 |
Commercial real estate | |
| 136,225 | |
| 2,301 | |
| 1,417 | |
| 3,718 | |
| 139,943 | |
| 1,417 | |
| 0 |
Construction and land development | |
| 252,123 | |
| 0 | |
| 8,525 | |
| 8,525 | |
| 260,648 | |
| 8,525 | |
| 0 |
Commercial business | |
| 12,916 | |
| 0 | |
| 0 | |
| 0 | |
| 12,916 | |
| 0 | |
| 0 |
Loans to financial institutions | | | 6,000 | |
| 0 | |
| 0 | |
| 0 | |
| 6,000 | |
| 0 | |
| 0 |
Leases | |
| 176 | |
| 0 | |
| 0 | |
| 0 | |
| 176 | |
| 0 | |
|
|
Consumer | |
| 604 | |
| 0 | |
| 0 | |
| 0 | |
| 604 | |
| 0 | |
| 0 |
Total Loans | | $ | 670,340 | | $ | 2,824 | | $ | 12,095 | | $ | 14,919 | | $ | 685,259 | | $ | 13,037 | | $ | 0 |
Interest income on non-accrual loans would have increased by approximately $513,000, $748,000, and $786,000, during fiscal years ended September 30, 2021, 2020, and 2019, respectively, if these loans had performed in accordance with their original terms.
The allowance for loan losses is established through a provision for loan losses charged to expense. Management maintains the allowance at a level believed to cover all known and inherent losses in the portfolio that are both probable and reasonable to estimate at each reporting date. Management reviews the allowance for loan losses no less than quarterly in order to identify those inherent losses and to assess the overall collection probability for the loan portfolio in view of these inherent losses. For each primary type of loan, a loss factor is established reflecting an estimate of the known and inherent losses in such loan type using both a quantitative analysis as well as consideration of qualitative factors. The evaluation process includes, among other things, an analysis of delinquency trends, nonperforming loan trends, the level of charge-offs and recoveries, prior loss experience, total loans outstanding, the volume of loan originations, the type, size and geographic concentration of our loans, the value of collateral securing the loans, the borrowers’ ability to repay and repayment performance, the number of loans requiring heightened management oversight, local economic conditions and industry experience.
Commercial real estate loans entail significant additional credit risks compared to one-to-four family residential mortgage loans, as they generally involve large loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment experience on loans secured by income-producing properties typically depends on the successful operation of the related real estate project and/or business of the borrower who is also the primary occupant, and thus may be subject to a greater extent to the effects of adverse conditions in the real estate market and in the economy in general. Commercial business loans typically involve a higher risk of default than residential loans of like duration since their repayment is generally dependent on the successful operation of the borrower’s business and the sufficiency of
91
collateral, if any. Land acquisition, development and construction lending exposes us to greater credit risk than permanent mortgage financing. The repayment of land acquisition, development and construction loans depends upon the sale of the property to third parties or the availability of permanent financing upon completion of all improvements. These events may adversely affect the borrower and the value of the collateral property.
The following tables summarize the primary segments of the allowance for loan losses, segmented into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of September 30, 2021, 2020 and 2019. Activity in the allowance is presented for the years ended September 30, 2021, 2020 and 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended September 30, 2021 | ||||||||||||||||||||||||||||
|
| One to |
| Multi- |
| | |
| Construction |
| | |
| Loans to |
| | |
| | |
| | |
| | | ||||
| | four family | | family | | Commercial | | and land | | Commercial | | financial | | | | | | | | | | | | | ||||||
| | residential | | residential | | real estate | | development | | business | | institutions | | Leases | | Consumer | | Unallocated | | Total | ||||||||||
| | (In Thousands) | ||||||||||||||||||||||||||||
ALLL balance at September 30, 2020 | | $ | 1,877 | | $ | 460 | | $ | 1,989 | | $ | 2,888 | | $ | 194 | | $ | 89 | | $ | 3 | | $ | 6 | | $ | 797 | | $ | 8,303 |
Charge-offs | | | — | | | — | | | — | | | (40) | | | — | | | — | | | — | | | — | | | — | | | (40) |
Recoveries | | | 5 | | | — | | | — | | | — | | | 14 | | | — | | | — | | | 35 | | | — | | | 54 |
Provision | | | (217) | | | 591 | | | 231 | | | (880) | | | 591 | | | (89) | | | (3) | | | (26) | | | 2 | | | 200 |
ALLL balance at September 30, 2021 | | $ | 1,665 | | $ | 1,051 | | $ | 2,220 | | $ | 1,968 | | $ | 799 | | $ | — | | $ | — | | $ | 15 | | $ | 799 | | $ | 8,517 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended September 30, 2020 | ||||||||||||||||||||||||||||
|
| One to |
| Multi- |
| | |
| Construction |
| | |
| Loans to |
| | |
| | |
| | |
| | | ||||
| | four family | | family | | Commercial | | and land | | Commercial | | financial | | | | | | | | | | | | | ||||||
| | residential | | residential | | real estate | | development | | business | | institutions | | Leases | | Consumer | | Unallocated | | Total | ||||||||||
| | (In Thousands) | | | | |||||||||||||||||||||||||
ALLL balance at September 30, 2019 | | $ | 1,002 | | $ | 315 | | $ | 1,257 | | $ | 2,034 | | $ | 206 | | $ | 63 | | $ | 5 | | $ | 13 | | $ | 498 | | $ | 5,393 |
Charge-offs | | | (3) | | | — | | | — | | | — | | | (15) | | | — | | | — | | | (126) | | | — | | | (144) |
Recoveries | | | 14 | | | — | | | — | | | — | | | — | | | — | | | 9 | | | 6 | | | — | | | 29 |
Provision | | | 864 | | | 145 | | | 732 | | | 854 | | | 3 | | | 26 | | | (11) | | | 113 | | | 299 | | | 3,025 |
ALLL balance at September 30, 2020 | | $ | 1,877 | | $ | 460 | | $ | 1,989 | | $ | 2,888 | | $ | 194 | | $ | 89 | | $ | 3 | | $ | 6 | | $ | 797 | | $ | 8,303 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2019 | | | | |||||||||||||||||||||||||
|
| One to |
| Multi- |
| | |
| Construction |
| | |
| Loans to | | | |
| | |
| | |
| | | ||||
| | four family | | family | | Commercial | | and land | | Commercial | | financial | | | | | | | | | | | | | ||||||
| | residential | | residential | | real estate | | development | | business | | institutions | | Leases | | Consumer | | Unallocated | | Total | ||||||||||
| | (In Thousands) | | | | |||||||||||||||||||||||||
ALLL balance at September 30, 2018 | | $ | 1,325 | | $ | 347 | | $ | 1,154 | | $ | 1,554 | | $ | 187 | | $ | 64 | | $ | 18 | | $ | 17 | | $ | 501 | | $ | 5,167 |
Charge-offs | | | (7) | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | (31) | | | 0 | | | — | | | (38) |
Recoveries | | | 164 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | — | | | 164 |
Provision | | | (480) | | | (32) | | | 103 | | | 480 | | | 19 | | | (1) | | | 18 | | | (4) | | | (3) | | | 100 |
ALLL balance at September 30, 2019 | | $ | 1,002 | | $ | 315 | | $ | 1,257 | | $ | 2,034 | | $ | 206 | | $ | 63 | | $ | 5 | | $ | 13 | | $ | 498 | | $ | 5,393 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The provision credit for the fiscal year ended September 30, 2021 applicable to one to four family residential loans and construction and land development loans was commensurate with the decrease in the applicable portfolio. The increase in provision expense for fiscal year ended September 30, 2020 was primarily applicable to the uncertainties surrounding the COVID-19 pandemic. The increase in provision expense for fiscal year ended September 30, 2019 applicable to the increase in construction and land development was due to the increase in the portfolio, while the provision credit for the one to four family residential loans decreased due to the decrease in the portfolio.
Loans acquired in the merger with Polonia Bancorp were recorded at fair value with no carryover of the related allowance for loan losses. Management measured loan fair values based on loan file reviews, appraised collateral values, expected cash flows, and historical loss factors of Polonia Bank. The fair value of the loans acquired was $160.8 million net of a $4.6 million discount of which $2.1 million of the discount remained as of September 30, 2021. The discount is
92
accreted to interest income over the remaining contractual life of the loans acquired. All loans that had a loan-to-value ratio of greater than 80% were determined to have sufficient collateral to recover the carrying amount. Thus, none of the loans acquired were considered to be purchased credit-impaired loans and any possible loss would be considered immaterial.
Management established a provision for loan losses of $200,000, $3.0 million and $100,000 for the years ended September 30, 2021, 2020 and 2019, respectively. The provision for loan losses was deemed necessary for fiscal 2021 primarily to maintain the allowance at a level sufficient to cover all inherent and probable losses in the current portfolio. Minimal delinquencies have occurred as of September 30, 2021 due to the effects of the COVID-19 pandemic. There were no loan deferments outstanding as of September 30, 2021 and all previously existing COVID-19 deferrals had ended by September 30, 2020. NaN participation interests in commercial real estate loans aggregating $10.0 million, or 1.5% of total loans, each entered into a subsequent deferral period during October 2020 and returned to normal payment status upon expiration of the deferral period. These deferments were not considered to be TDRs as of September 30, 2020 as all applicable borrowers were current as of December 31, 2019 and the request for the deferments were related to the current economic conditions caused by the COVID-19 pandemic, and not by underlying weaknesses within the respective loans. The Company believes that the allowance for loan losses at September 30, 2021 was sufficient to cover all inherent and probable losses associated with the loan portfolio at such date. At September 30, 2021, the Company’s non-performing assets totaled $12.5 million or 1.1% of total assets as compared to $13.0 million or 1.1% of total assets at September 30, 2020. Non-performing assets at September 30, 2021 included 3 construction loans aggregating $4.1 million, 18 one-to-four family residential loans aggregating $3.0 million, 2 commercial real estate loans aggregating $1.3 million and 2 construction loans aggregating $4.1 million that were foreclosed during the third quarter of fiscal 2021 and are held as other real estate owned. At September 30, 2021, the Company had 2 loans totaling $1.1 million that were classified as troubled debt restructurings (“TDRs”). NaN TDR is on non-accrual and consists of a $390,000 loan secured by a single-family residential property and is performing in accordance with the restructured terms. The remaining TDR is a $705,000 commercial real estate loan classified as non-accrual and is part of a lending relationship totaling $6.0 million (after taking into account the previously disclosed $1.9 million write-down recognized during the quarter ending March 31, 2017 related to this borrowing relationship and the 2 construction loans noted above that became other real estate owned during fiscal 2021).The primary project of the borrower (the development of a 169-unit townhouse project in Bristol Borough, Pennsylvania) is the subject of litigation between the Bank and the borrower. As previously disclosed, subsequent to the commencement of the litigation, the borrower filed for bankruptcy under Chapter 11 (Reorganization) of the federal bankruptcy code in June 2017. The Bank has moved the underlying litigation noted above with the borrower and the Bank from state court to the federal bankruptcy court in which the bankruptcy proceeding is being heard. The state litigation is stayed pending the resolution of the bankruptcy proceedings. As of September 30, 2021, 33 units have been sold in the project resulting in $825,000 being applied against the outstanding debt owed the Bank.Management will continue to monitor and modify the allowance for loan losses as conditions dictate. No assurances can be given that the level of the allowance for loan losses will cover all of the inherent losses on the loans or that future adjustments to the allowance for loan losses will not be necessary if economic and other conditions differ substantially from the economic and other conditions used by management to determine, in part, the current level of the allowance for loan losses.
There were 0 TDRs approved in 2021, 2020 or 2019. All of the existing TDRs involved changes in the interest rates on the loans; no debt was forgiven. At September 30, 2021, both of the 2 then-existing TDR loans were classified as non-performing.
At September 30, 2021, the Company had 5 one-to-four family residential loans with a carrying amount of $613,000 that are secured by residential real estate property for which foreclosure proceedings are in process according to local jurisdictions.
93
7.OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are summarized by major classifications as follows:
| | | | | | |
| | September 30, | ||||
|
| 2021 |
| 2020 | ||
| | (Dollars in Thousands) | ||||
Land | | $ | 1,437 | | $ | 1,437 |
Buildings and improvements | |
| 7,449 | |
| 7,449 |
Furniture and equipment | |
| 4,202 | |
| 4,046 |
| | | | | | |
Total | |
| 13,088 | |
| 12,932 |
Accumulated depreciation | |
| (6,238) | |
| (5,803) |
| | | | | | |
Total office properties and equipment, net of accumulated depreciation | | $ | 6,850 | | $ | 7,129 |
For the years ended September 30, 2021, 2020 and 2019, depreciation expense amounted to $435,000, $484,000 and $619,000, respectively.
.
8. DEPOSITS
Deposits consist of the following major classifications:
| | | | | | | | | | | | |
| | September 30, | | September 30, |
| | ||||||
| | 2021 | | 2020 |
| | ||||||
|
| Amount |
| Percent |
| Amount |
| Percent |
| | ||
| | (Dollars in Thousands) |
| | ||||||||
Non-interest-bearing checking accounts | | $ | 37,409 |
| 5.3 | % | $ | 30,002 |
| 3.9 | % | |
Interest-bearing checking accounts | |
| 87,752 |
| 12.3 | |
| 135,797 |
| 17.6 | | |
Money market deposit accounts | |
| 111,488 |
| 15.7 | |
| 111,105 |
| 14.4 | | |
Passbook, club and statement savings | |
| 229,989 |
| 32.3 | |
| 224,435 |
| 29.1 | | |
Certificates maturing in six months or less | |
| 143,767 |
| 20.2 | |
| 125,165 |
| 16.2 | | |
Certificates maturing in more than six months | |
| 101,110 |
| 14.2 | |
| 144,445 |
| 18.8 | | |
| | | | | | | | | | | | |
Total | | $ | 711,515 |
| 100.0 | % | $ | 770,949 |
| 100.0 | % | |
The amount of scheduled maturities of certificate accounts was as follows:
| | | |
| | September 30, 2021 | |
|
| (Dollars in Thousands) | |
One year or less | | $ | 182,719 |
One through two years | |
| 33,547 |
Two through three years | |
| 19,700 |
Three through four years | |
| 6,073 |
Four through five years | |
| 2,838 |
| | | |
Total | | $ | 244,877 |
Certificates of deposit of $250,000 or more at September 30, 2021 and 2020 totaled $95.3 million and $76.6 million, respectively. Included in certificates of deposit at September 30, 2021 and 2020 are brokered deposits totaling $91.7 million and $63.4 million, respectively.
94
Interest expense on deposits was comprised of the following:
| | | | | | | | | |
| | Year Ended September 30, | |||||||
|
| 2021 |
| 2020 |
| 2019 | |||
| | (Dollars in Thousands) | |||||||
Checking and money market deposit accounts | | $ | 3,580 | | $ | 2,045 | | $ | 899 |
Passbook, club and statement savings accounts | |
| 10 | |
| 38 | |
| 124 |
Certificate accounts | |
| 4,687 | |
| 8,819 | |
| 12,137 |
Total | | $ | 8,277 | | $ | 10,902 | | $ | 13,160 |
9. ADVANCES FROM FEDERAL HOME LOAN BANK – SHORT TERM
The years ended September 30, 2021 and 2020 outstanding balances and related information regarding short-term borrowings from the FHLB of Pittsburgh are summarized follows:
| | | | | | | | | | |
|
| At or For the Year Ended September 30, |
| |||||||
|
| 2021 |
| 2020 |
| 2019 |
| |||
| | (Dollars in Thousands) |
| |||||||
FHLB advances: | | | | | | | | | | |
Average balance outstanding | | $ | 9,932 | | $ | 66,735 | | $ | 31,158 | |
Maximum amount outstanding at any month-end during the period | |
| 25,000 | |
| 115,000 | |
| 90,000 | |
Balance outstanding at end of period | |
| — | |
| 25,000 | |
| 90,000 | |
Average interest rate during the period | |
| 0.39 | % |
| 1.58 | % |
| 2.53 | % |
Weighted average interest rate at end of period | |
| — | % |
| 0.39 | % |
| 2.32 | % |
As of September 30, 2020, the $25.0 million borrowing consisted of 1 90-day FHLB advance associated with an interest rate swap contract.
The Bank maintains borrowing facilities with the FHLB of Pittsburgh, ACBB and the Federal Reserve Bank of Philadelphia and the terms and interest rates are subject to change on the date of execution of borrowings. Available borrowings are based on collateral with the facility. The Company maintains unsecured borrowing facilities with ACBB and PNC for $12.5 million and $10.0 million, respectively. Neither line has been drawn upon to date.
10. ADVANCES FROM FEDERAL HOME LOAN BANK – LONG TERM
Pursuant to collateral agreements with the FHLB of Pittsburgh, advances are secured by a blanket collateral pledge
of loans held by the Bank and qualifying fixed-income securities and FHLB stock. The long-term advances outstanding as of September 30, 2021 are as follows:
| | | | | | | | | | | | | | | | | |
Lomg-term FHLB advances: | | Maturity range | | Weighted average | | Stated interest rate range | | | | | | | |||||
Description |
| from |
| to |
| interest rate |
| from |
| to |
| 2021 |
| 2020 | |||
| | | | | | | | | | | | | (Dollars in Thousands) | ||||
Fixed Rate - Amortizing |
| 1‑Oct‑20 |
| 30‑Sep‑21 |
| | 2.77 | % | 1.94 | % | 2.83 | % |
| 0 | |
| 5,179 |
Fixed Rate - Amortizing |
| 1‑Oct‑21 |
| 30‑Sep‑22 |
| | 2.96 | % | 1.99 | % | 3.05 | % |
| 2,227 | |
| 5,523 |
Fixed Rate - Amortizing |
| 1‑Oct‑22 |
| 30‑Sep‑23 |
| | 2.89 | % | 1.94 | % | 3.11 | % |
| 3,551 | |
| 5,265 |
Total |
|
|
|
|
| | 2.92 | % |
|
|
| | $ | 5,778 | | $ | 15,967 |
| | | | | | | | | | | | | | | | | |
Fixed Rate - Advances |
| 1‑Oct‑20 |
| 30‑Sep‑21 | |
| 2.37 | % | 1.42 | % | 2.92 | % |
| 0 | |
| 17,996 |
Fixed Rate - Advances |
| 1‑Oct‑21 |
| 30‑Sep‑22 | |
| 2.31 | % | 1.94 | % | 3.23 | % |
| 63,250 | |
| 63,293 |
Fixed Rate - Advances |
| 1‑Oct‑22 |
| 30‑Sep‑23 | |
| 2.52 | % | 2.00 | % | 3.22 | % |
| 94,999 | |
| 94,999 |
Fixed Rate - Advances |
| 1‑Oct‑23 |
| 30‑Sep‑24 | |
| 2.88 | % | 2.38 | % | 3.20 | % |
| 67,998 | |
| 67,998 |
Total |
|
|
|
| |
| 2.57 | % |
|
|
| | $ | 226,247 | | $ | 244,286 |
| | | | | | | | | | | | | | | | | |
| | | | | |
| 2.58 | % | |
| Total | | $ | 232,025 | | $ | 260,253 |
95
| | | | | | |
| | | | | Weighted Average |
|
Maturity in Fiscal |
| Amount |
| Coupon Rate |
| |
| | (Dollars in Thousands) |
| |||
2022 | | $ | 65,477 |
| 2.33 | % |
2023 | |
| 98,550 |
| 2.54 | |
2024 | |
| 67,998 |
| 2.88 | |
| | $ | 232,025 |
| 2.58 | |
The Bank maintains a blanket collateral pledge agreement using qualifying loans with the FHLB of Pittsburgh for future borrowing needs. At September 30, 2021, the Bank had the ability to obtain $101.7 million of additional FHLB advances.
11. INCOME TAXES
The Company files a consolidated federal income tax return. The Company uses the specific charge-off method for computing reserves for bad debts. Generally this method allows the Company to deduct an annual addition to the reserve for bad debts equal to its net charge-offs.
The provision for income taxes for the fiscal years ended September 30, 2021, 2020 and 2019 consists of the following:
| | | | | | | | | |
| | Year Ended September 30, | |||||||
|
| 2021 |
| 2020 |
| 2019 | |||
| | (Dollars in Thousands) | |||||||
Current: |
| |
|
| |
|
| |
|
Federal expense | | $ | 564 | | $ | 1,952 | | $ | 2,133 |
State expense | | | 28 | |
| 93 | |
| 205 |
Total current taxes | |
| 592 | | | 2,045 | | | 2,338 |
| |
|
| |
|
| |
|
|
Deferred income tax expense (benefit) | |
| 677 | |
| (445) | |
| (188) |
Total income tax provision | | $ | 1,269 | | $ | 1,600 | | $ | 2,150 |
96
Items that gave rise to significant portions of deferred income taxes are as follows:
| | | | | | | |
| | September 30, | | September 30, | | ||
|
| 2021 |
| 2020 | | ||
| | (Dollars in Thousands) | | ||||
Deferred tax assets: |
| |
|
| |
| |
Allowance for loan losses | | $ | 1,716 | | $ | 2,071 | |
Nonaccrual interest | |
| 395 | |
| 561 | |
Accrued vacation | |
| 14 | |
| 16 | |
Capital loss carryforward | |
| 4 | |
| 4 | |
Split dollar life insurance | |
| 9 | |
| 9 | |
Post-retirement benefits | |
| 67 | |
| 72 | |
Realized loss on equity securities | | | — | |
| 3 | |
Unrealized losses on interest rate swaps | | | 2,199 | | | 3,596 | |
Deferred compensation | |
| 767 | |
| 781 | |
Goodwill | |
| 47 | |
| 58 | |
Lease liability | |
| 256 | |
| — | |
Other | |
| 79 | |
| 48 | |
Employee benefit plans | |
| 242 | |
| 187 | |
Total deferred tax assets | |
| 5,795 | |
| 7,406 | |
Valuation allowance | |
| (4) | |
| (4) | |
Total deferred tax assets, net of valuation allowance | |
| 5,791 | |
| 7,402 | |
| |
|
| |
|
| |
Deferred tax liabilities: | |
|
| |
|
| |
Property | |
| 127 | |
| 137 | |
Right of Use | | | 233 | | | — | |
Realized gain on equity securities | | | 3 | | | — | |
Unrealized gains on available for sale securities | | | 1,621 | | | 2,813 | |
Purchase accounting adjustments | |
| 394 | |
| 321 | |
Deferred loan fees | |
| 392 | |
| 229 | |
Total deferred tax liabilities | |
| 2,770 | |
| 3,500 | |
Net deferred tax assets | | $ | 3,021 | | $ | 3,902 | |
The Company establishes a valuation allowance for deferred tax assets when management believes that the deferred tax assets are not likely to be realized either through a carry back to taxable income in prior years, future reversals of existing taxable temporary differences, and, to a lesser extent, future taxable income. The valuation allowance totaled $4,000 and $4,000 at September 30, 2021 and 2020, respectively.
97
The income tax expense differs from that computed at the statutory federal corporate tax rate as follows:
| | | | | | | | | | | | | | | | |
| | Year Ended September 30, | | |||||||||||||
| | 2021 | | 2020 | | 2019 | | |||||||||
|
| | |
| Percentage |
| | |
| Percentage |
| | |
| Percentage |
|
| | | | | of Pretax | | | | | of Pretax | | | | | of Pretax |
|
| | Amount | | Income | | Amount | | Income | | Amount | | Income (Loss) |
| |||
| | (Dollars in Thousands) |
| |||||||||||||
Tax at statutory rate | | $ | 1,900 | | 21.0 | % | $ | 2,343 | | 21.0 | % | $ | 2,453 |
| 21.0 | % |
Adjustments resulting from: | |
|
| |
| |
|
| |
| |
|
|
|
| |
State tax expense | | | 28 | | 0.3 | | | 93 | | 0.8 | | | 162 | | 1.3 | |
Tax exempt interest income | |
| (553) | | (6.1) | |
| (537) | | (4.8) | |
| (313) |
| (2.7) | |
Capital gain from sale of securities | |
| 0 | | 0 | |
| (117) | | (1.0) | |
| 0 |
| 0 | |
Earnings from bank owned life insurance | |
| (130) | | (1.4) | |
| (138) | | (1.2) | |
| (135) |
| (1.1) | |
Employee benefit plans | |
| 24 | | 0.2 | |
| (27) | | (0.3) | |
| (27) |
| (0.2) | |
Other | |
| 0 | | 0 | |
| (17) | | (0.2) | |
| 10 |
| 0.1 | |
| | | | | | | | | | | | | | | | |
Income tax expense | | $ | 1,269 | | 14.0 | % | $ | 1,600 |
| 14.3 | % | $ | 2,150 |
| 18.4 | % |
There is currently no liability for uncertain tax positions and no known unrecognized tax benefits. The Company recognizes, when applicable, interest and penalties related to unrecognized tax benefits in the provision for income taxes in the Consolidated Statements of Operations as a component of income tax expense. The Company’s federal and state income tax returns for taxable years through September 30, 2017 have been closed for purposes of examination by the Internal Revenue Service and the Pennsylvania Department of Revenue.
12. REGULATORY CAPITAL REQUIREMENTS
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory – and possibly additional discretionary – actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s and the Bank’s capital amounts and the Bank’s classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of Tier 1 capital (as defined in the regulations) to average assets (as defined) and risk-weighted assets (as defined), Tier 1 common capital (as defined) to risk-weighted assets and total capital (as defined) to risk-weighted assets. Management believes, as of September 30, 2021 and 2020, that the Bank met all regulatory capital adequacy requirements to which it is subject.
To be categorized as well capitalized, the Bank must maintain the minimum Tier 1 capital, Tier 1 common equity, Tier 1 risk-based and total risk-based ratios as set forth in the table below.The Company is not subject to the regulatory capital ratios imposed by Basel III on bank holding companies because the Company is deemed to be a small bank holding company.
98
The Company’s and the Bank’s actual capital amounts and ratios are also presented in the following table:
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | To Be |
| ||
| | | | | | | | | | | | | Well Capitalized |
| ||
| | | | | | | | | | | | | Under Prompt |
| ||
| | | | | | | Required for Capital | | | Corrective Action |
| |||||
| | Actual | | Adequacy Purposes | | | Provisions |
| ||||||||
|
| Amount |
| Ratio |
| Amount |
| Ratio | |
| Amount |
| Ratio |
| ||
|
| (Dollars in Thousands) | | |||||||||||||
September 30, 2021: |
| |
|
|
|
| |
|
|
| |
|
| | |
|
Tier 1 capital (to average assets) |
| |
|
|
|
| |
|
|
| |
|
| | |
|
Company | | $ | 126,281 |
| 11.48 | % |
| N/A |
| N/A | | | N/A | | N/A |
|
Bank | |
| 123,840 |
| 11.30 | | $ | 43,855 |
| 4.0 | % | $ | 54,819 | | 5.0 | % |
Tier 1 Common (to risk-weighted assets) | |
|
|
| | |
|
|
|
| | |
| | |
|
Company | |
| 126,281 |
| 16.70 | |
| N/A |
| N/A | | | N/A | | N/A |
|
Bank | |
| 123,840 |
| 16.37 | |
| 34,033 |
| 4.5 | | | 49,159 | | 6.5 |
|
Tier 1 capital (to risk-weighted assets) | |
|
|
|
| |
|
|
|
| | |
| | |
|
Company | |
| 126,281 |
| 16.70 | |
| N/A |
| N/A | | | N/A | | N/A |
|
Bank | |
| 123,840 |
| 16.37 | |
| 45,377 |
| 6.0 | | | 60,503 | | 8.0 |
|
Total capital (to risk-weighted assets) | |
|
|
|
| |
|
|
|
| | |
| | |
|
Company | |
| 135,167 |
| 17.87 | |
| N/A |
| N/A | | | N/A | | N/A |
|
Bank | |
| 132,726 |
| 17.55 | |
| 60,503 |
| 8.0 | | | 75,629 | | 10.0 |
|
| |
|
|
|
| |
|
|
|
| | |
| | |
|
September 30, 2020: | |
|
|
|
| |
|
|
|
| | |
| | |
|
Tier 1 capital (to average assets) | |
|
|
|
| |
|
|
|
| | |
| | |
|
Company | | $ | 125,618 |
| 10.34 | % |
| N/A |
| N/A | | | N/A | | N/A |
|
Bank | |
| 123,185 |
| 10.51 | | $ | 46,867 |
| 4.0 | % | $ | 58,584 | | 5.0 | % |
Tier 1 Common (to risk-weighted assets) | |
|
|
| | |
|
|
|
| | |
| | |
|
Company | |
| 125,618 |
| 17.21 | |
| N/A |
| N/A | | | N/A | | N/A |
|
Bank | |
| 123,185 |
| 16.88 | |
| 32,841 |
| 4.5 | | | 47,437 | | 6.5 |
|
Tier 1 capital (to risk-weighted assets) | |
|
|
|
| |
|
|
|
| | |
| | |
|
Company | |
| 125,618 |
| 17.21 | |
| N/A |
| N/A | | | N/A | | N/A |
|
Bank | |
| 123,185 |
| 16.88 | |
| 43,788 |
| 6.0 | | | 58,384 | | 8.0 |
|
Total capital (to risk-weighted assets) | |
|
|
|
| |
|
|
|
| | |
| | |
|
Company | |
| 134,389 |
| 18.41 | |
| N/A |
| N/A | | | N/A | | N/A |
|
Bank | |
| 131,956 |
| 18.08 | |
| 58,384 |
| 8.0 | | | 72,980 | | 10.0 |
|
13. EMPLOYEE BENEFITS
The Bank is a member of a multi-employer (under the provisions of the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code of 1986) defined benefit pension plan covering all employees meeting certain eligibility requirements. The Bank’s policy is to fund pension costs accrued. The expense relating to this plan for the years ended September 30, 2021, 2020 and 2019 was $780,000, $743,000 and $632,000, respectively. There are no collective bargaining agreements in place that require contributions to the plan. Additional information regarding the plan as of September 30, 2021 is noted below:
| | | | |
| | Pentegra Defined |
| |
Legal Name of Plan |
| Financial Institutions | | |
Plan Employer Identification Number |
| | 13-5645888 | |
The Company's Contribution for the year ended September 30, 2021 | | $ | 780,000 | |
Are Company's Contributions more than 5% of total contributions? | |
| No | |
Funded Status | |
| 96.49 | % |
The Pentegra Defined Benefits Plan for Financial Institutions is a single plan under Internal Revenue Code Section 413(c) and, as a result, all of the assets of the Plan stand behind all of the liabilities of the Plan. Accordingly, under
99
the Plan, contributions made by a participating employer may be used to provide benefits to participants of other participating employers. In November 2017, participation in the plan by Bank employees was frozen in an effort to reduce expenses on a going forward basis.
The Bank also has a defined contribution plan for employees meeting certain eligibility requirements. The defined contribution plan may be terminated at any time at the discretion of the Bank. There were expenses relating to this plan for the fiscal years ended September 30, 2021, 2020 and 2019 of $254,000, $231,000 and $126,000, respectively.
The Company maintains the 2008 Recognition and Retention Plan (“2008 RRP”) which is administered by a committee of the Board of Directors of the Company. The RRP provides for the grant of shares of common stock of the Company to officers, employees and directors of the Company. Grants can no longer be made pursuant to the 2008 RRP even if previously awarded grants are forfeited. During February 2015, shareholders approved the 2014 Stock Incentive Plan (the “2014 SIP”). As part of the 2014 SIP, a maximum of 285,655 shares of common stock can be awarded as restricted stock awards or units, of which 233,500 shares were awarded during February 2015. In March 2019, the Company granted 8,209 shares under the 2008 RRP and 18,291 shares under the 2014 SIP. There were no shares awarded during 2020 and 2021. Shares subject to awards under either plan generally vest at the rate of 20% per year over five years.
A summary of the Company’s non-vested stock award activity for the year ended September 30, 2021 is presented in the following table:
| | | | | |
| | Year Ended | |||
| | September 30, 2021 | |||
| | Number of | | Weighted Average | |
|
| Shares |
| Grant Date Fair Value | |
Non-vested stock awards at October 1, 2020 |
| 23,056 | | $ | 17.78 |
Granted |
| — | |
| — |
Forfeited |
| 0 | |
| 0 |
Vested |
| (11,085) | |
| 17.30 |
Non-vested stock awards at September 30, 2021 |
| 11,971 | | $ | 18.24 |
The Company maintains the 2008 Stock Option Plan (the “Option Plan”) which authorizes the grant of stock options to officers, employees and directors of the Company to acquire shares of common stock with an exercise price at least equal to the fair market value of the common stock on the grant date. Options generally become vested and exercisable at the rate of 20% per year over five years and are generally exercisable for a period of ten years after the grant date. A total of 533,808 (on a converted basis) shares of common stock were approved for future issuance pursuant to the Option Plan. As of September 30, 2019, all of the options had been awarded under the Option Plan and no grants can be made in the future by the Option Plan even if previously awarded grants are forfeited. The 2014 SIP reserved up to 714,145 shares for issuance pursuant to options. In July 2019, the Company granted 39,702 shares under the 2014 SIP. In September 2020, the Company granted 12,500 shares under the 2014 SIP. In June 2021, the Company granted 4,500 shares under the 2014 SIP.
100
A summary of the status of the Company’s stock options under the Option Plan and the 2014 SIP as of September 30, 2021 and changes during the year ended September 30, 2021 are presented below:
| | | | | |
| | Year Ended | |||
| | September 30, 2021 | |||
|
| Number of |
| Weighted Average | |
| | Shares | | Exercise Price | |
Options outstanding at October 1, 2020 |
| 571,258 | | $ | 14.58 |
Granted |
| 4,500 | |
| 13.86 |
Exercised |
| (15,000) | |
| 12.23 |
Forfeited |
| (39,500) | |
| 18.42 |
Outstanding at September 30, 2021 |
| 521,258 | | $ | 14.23 |
Exercisable at September 30, 2021 |
| 418,471 | | $ | 13.74 |
The weighted average remaining contractual term of the outstanding options was approximately 5.1 years for options outstanding as of September 30, 2021.
The estimated fair value of options granted during fiscal 2019 was $3.38 per share, $2.31 for options granted in fiscal 2020 and $3.91 for options granted in fiscal 2021. The fair value for grants made in fiscal 2019 was estimated on the date of grant using the Black-Scholes pricing model with the following assumptions: an exercise and fair value of $18.16, term of seven years, volatility rate of 17.76%, interest rate of 1.87% and a yield rate of 1.10%. The fair value for grants made in fiscal 2020 was estimated on the date of grant using the Black-Scholes pricing model with the following assumptions: an exercise and fair value of $10.00, term of seven years, volatility rate of 33.22%, interest rate of 0.41% and a yield rate of 2.80%. The fair value for grants made in fiscal 2021 was estimated on the date of grant using the Black-Scholes pricing model with the following assumptions: an exercise and fair value of $13.86, term of seven years, volatility rate of 34.46%, interest rate of 1.19% and a yield rate of 2.02%.
During the year ended September 30, 2021, $169,000 was recognized in aggregate compensation expense for the Option Plan and the 2014 SIP. During the year ended September 30, 2020, $353,000 was recognized in aggregate compensation expense for the Option Plan and the 2014 SIP. During the year ended September 30, 2019, $573,000 was recognized in aggregate compensation expense for the Option Plan and the 2014 SIP. At September 30, 2021, approximately $271,000 of additional compensation expense for awarded options remained unrecognized. The weighted average period over which this expense will be recognized is approximately 2.0 years.
14. INTEREST RATE SWAP AGREEMENTS
The Company uses interest rate swaps and caps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the payment of either fixed or variable-rate amounts in exchange for the receipt of variable or fixed-rate amounts from a counterparty, respectively. The Company uses interest rate swaps to manage its exposure to changes in fair value. Interest rate swaps designated as fair value hedges involve the receipt of variable-rate payments from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without the exchange of the underlying notional amount.
The Company has contracted with a third party to participate in interest rate swap contracts. There are thirteen additional cash flow hedges tied to wholesale funding at September 30, 2021. These interest rate swaps involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments. During the fiscal year ended September 30, 2021, $5,000 of income was recognized as ineffectiveness through earnings, while $4,000 of expense was recognized as ineffectiveness through earnings during fiscal 2020. $12,000 of income was recognized as ineffectiveness through earnings during fiscal 2019. There were 9 interest rate swaps designated as fair value hedges involving the receipt of variable-rate payments from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements that were applicable to 4 loans and 7 investment securities as of September 30, 2021 and there were 9 interest rate swaps designated as fair value hedges involving the receipt of variable-rate payments from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements
101
that were applicable to 3 loans and 7 investment securities 3 loans and 7 investments at September 30, 2020. The fair value of the swaps is recorded in the other liabilities section of the Consolidated Statements of Financial Condition.
Below is a summary of the interest rate swap agreements and the terms as of September 30, 2021 and 2020.
| | | | | | | | | | | | | | | | |
2021 | ||||||||||||||||
Hedged | | Notional | | Pay Rate | | Receive | | Maturity Date | | Unrealized | ||||||
Item |
| Amount |
| from |
| to |
| Rate |
| from |
| to | | Loss | ||
(Dollars in thousands) | ||||||||||||||||
State and political subdivisions | | $ | 21,570 |
| 3.06 | % | 3.07 | % | 3 Mth Libor | | 1-Feb-27 | | 1-May-28 | | $ | (2,365) |
Commercial loans | |
| 23,656 |
| 4.10 | % | 5.74 | % | 1 Mth Libor +225 to 276 bp | | 13-Jun-25 | | 1-Aug-26 | |
| — |
30 day wholesale funding | | | 90,000 | | 1.36 | % | 2.70 | % | 1 Mth Libor | | 15-Feb-24 | | 12-Jun-26 | | | (3,495) |
90 day wholesale funding | | | 135,000 | | 2.51 | % | 2.78 | % | 3 Mth Libor | | 11-Jan-24 | | 27-Mar-24 | | | (6,974) |
| | | | | | | | | | | | | | | | |
| |
|
|
| | |
|
|
| | | |
| | $ | (12,834) |
| | | | | | | | | | | | | | | | |
2020 | ||||||||||||||||
Hedged | | Notional | | Pay Rate | | Receive | | Maturity Date | | Unrealized | ||||||
Item |
| Amount |
| from |
| to |
| Rate |
| from |
| to |
| Loss | ||
(Dollars in thousands) | ||||||||||||||||
State and political subdivisions | | $ | 21,570 |
| 3.06 | % | 3.07 | % | 3 Mth Libor | | 1-Feb-27 | | 1-May-28 | | $ | (3,834) |
Commercial loans | |
| 23,656 |
| 4.10 | % | 5.74 | % | 1 Mth Libor +225 to 276 bp | | 13-Jun-25 | | 1-Aug-26 | |
| — |
30 day wholesale funding | | | 90,000 | | 1.36 | % | 2.70 | % | 1 Mth Libor | | 15-Feb-24 | | 12-Jun-26 | | | (6,157) |
90 day wholesale funding | | | 135,000 | | 2.51 | % | 2.78 | % | 3 Mth Libor | | 11-Jan-24 | | 27-Mar-24 | | | (10,969) |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | $ | (20,960) |
15. COMMITMENTS AND CONTINGENT LIABILITIES
At September 30, 2021, the Company had $34.9 million in outstanding commitments to originate fixed and variable-rate loans with market interest rates ranging from 2.99% to 5.00%. At September 30, 2020, the Company had $29.9 million in outstanding commitments to originate fixed and variable-rate loans with market interest rates ranging from 3.25% to 4.75%. The aggregate undisbursed portion of loans-in-process amounted to $80.6 million and $86.9 million, respectively, at September 30, 2021 and 2020.
The Company also had commitments under unused lines of credit of $68.1 million as of September 30, 2021 and $40.1 million as of September 30, 2020 and letters of credit outstanding of $1.2 million as of September 30, 2021 and $1.1 million as of September 30, 2020.
The Company is subject to various pending claims and contingent liabilities arising in the normal course of business which are not reflected in the accompanying consolidated financial statements. Management considers that the aggregate liability, if any, resulting from such matters will not be material.
Among the Company’s contingent liabilities are exposures to limited recourse arrangements with respect to the Company’s sales of whole loans and participation interests. At September 30, 2021, the exposure, which represents a portion of credit risk associated with the sold interests, amounted to $600,000. This exposure is for the life of the related loans and payables, on the Company’s proportionate share, as actual losses are incurred.
The Company is involved in various legal proceedings occurring in the ordinary course of business. Management of the Company, based on discussions with litigation counsel, does not believe that such proceedings will have a material adverse effect on the financial condition or operations of the Company. However, there can be no assurance that any of the outstanding legal proceedings to which the Company is party will not be decided adversely to the Company’s interest and have a material adverse effect on the financial condition and results of operations of the Company.
102
16. FAIR VALUE MEASUREMENT
The fair value estimates presented herein are based on pertinent information available to management as of September 30, 2021 and 2020, respectively. Although management is not aware of any factors that would significantly affect the fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.
Generally accepted accounting principles used in the United States establish a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value.
The three broad levels of hierarchy are as follows:
Level 1Quoted prices in active markets for identical assets or liabilities.
Level 2Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
Those assets as of September 30, 2021 which are measured at fair value on a recurring basis are as follows:
| | | | | | | | | | | | |
| | Category Used for Fair Value Measurement | ||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||
| | (Dollars in Thousands) | ||||||||||
| | | | | | | | | | | | |
Assets: | | |
| | |
| | |
| | |
|
Securities available for sale: | | |
| | |
| | |
| | |
|
U.S. Government and agency obligations | | $ | — | | $ | 3,194 | | $ | — | | $ | 3,194 |
State and political subdivisions | |
| — | |
| 72,259 | |
| — | |
| 72,259 |
Mortgage-backed securities - U.S. Government agencies | |
| — | |
| 135,353 | |
| — | |
| 135,353 |
Corporate bonds | |
| — | |
| 95,141 | |
| — | |
| 95,141 |
Equity security - FHLMC preferred stock | |
| 22 | |
| — | |
| — | |
| 22 |
Total | | $ | 22 | | $ | 305,947 | | $ | — | | $ | 305,969 |
| | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | |
Interest rate swap contracts | | $ | — | | $ | 12,834 | | $ | — | | $ | 12,834 |
Total | | $ | — | | $ | 12,834 | | $ | — | | $ | 12,834 |
103
Those assets as of September 30, 2020 which are measured at fair value on a recurring basis are as follows:
| | | | | | | | | | | | |
| | Category Used for Fair Value Measurement | ||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||
| | (Dollars in Thousands) | ||||||||||
| | | | | | | | | | | | |
Assets: | | |
| | |
| | |
| | |
|
Securities available for sale: | | |
| | |
| | |
| | |
|
U.S. Government and agency obligations | | $ | — | | $ | 22,394 | | $ | — | | $ | 22,394 |
State and political subdivisions | | | — | |
| 79,621 | |
| — | |
| 79,621 |
Mortgage-backed securities - U.S. Government agencies | |
| — | |
| 236,566 | |
| — | |
| 236,566 |
Corporate bonds | |
| — | |
| 81,783 | |
| — | |
| 81,783 |
Equity security - FHLMC preferred stock | |
| 51 | |
| — | |
| — | |
| 51 |
Total | | $ | 51 | | $ | 420,364 | | $ | — | | $ | 420,415 |
| | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | |
Interest rate swap contracts | | $ | — | | $ | 20,960 | | $ | — | | $ | 20,960 |
Total | | $ | — | | $ | 20,960 | | $ | — | | $ | 20,960 |
Certain assets are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The Company measures impaired loans and real estate owned at fair value on a non-recurring basis.
Investments and Mortgage-Backed Securities
The fair value of investment and mortgage-backed securities is based on quoted market prices, dealer quotes, and prices obtained from independent pricing services.
Collateral dependent impaired loans are based on the fair value of the collateral which is based on appraisals and would be categorized as Level 2 measurement. In some cases, adjustments are made to the appraised values for various factors including the age of the appraisal, age of the comparable included in the appraisal, and known changes in the market and in the collateral. These adjustments are based upon unobservable inputs, and therefore, the fair value measurement of these assets has been categorized as a Level 3 measurement. These loans are reviewed for impairment and written down to their net realizable value by charges against the allowance for loan losses. The collateral underlying these loans had a fair value of $8.4 million and $13.0 million at September 30, 2021 and 2020, respectively.
Real Estate Owned
Once an asset is determined to be uncollectible, the underlying collateral is generally repossessed and reclassified to foreclosed real estate and repossessed assets. These repossessed assets are carried at the lower of cost or fair value of the collateral, based on independent appraisals, less cost to sell and would be categorized as Level 3 measurement. In some cases, adjustments are made to the appraised values for various factors including the age of the appraisal, the age of the comparables included in the appraisal, and known changes in the market and in the collateral. Thus the evaluations are based upon unobservable inputs, and therefore, the fair value measurement of these assets has been categorized as a Level 3 measurement.
104
| | | | | | | | | | | | |
Summary of Non-Recurring Fair Value Measurements | | At September 30, 2021 | ||||||||||
| | (Dollars in Thousands) | ||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||
Other real estate owned | | $ | — | | $ | — | | $ | 4,109 | | $ | 4,109 |
Total | | $ | — | | $ | — | | $ | 4,109 | | $ | 4,109 |
The following table provides information describing the valuation process used to determine nonrecurring fair value measurements categorized within level 3 of the fair value hierarchy:
| | | | | | | | | |
| | At September 30, 2021 | | | |||||
| | (Dollars in Thousands) | | | |||||
| | | | | Valuation | | | | Range/ |
|
| Fair Value |
| Technique |
| Unobservable Input |
| Weighted Ave. | |
Other real estate owned | | $ | 4,109 |
| Property appraisals (1) (3) |
| Management discount for selling costs, property type and market volatility (2) |
| 2% discount |
The fair value of financial instruments has been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The estimated fair values of the Company’s financial instruments that are not required to be measured or reported at fair value were as follows at September 30, 2021 and September 30, 2020.
| | | | | | | | | | | | | | | |
| | | | | | | | Fair Value Measurements at | |||||||
| | Carrying | | Fair | | September 30, 2021 | |||||||||
|
| Amount |
| Value |
| (Level 1) |
| (Level 2) |
| (Level 3) | |||||
| | (Dollars in Thousands) | | | | ||||||||||
Assets: |
| |
|
| |
|
| |
|
| |
|
| |
|
Investment and mortgage-backed securities held to maturity | | $ | 20,074 | | $ | 21,161 | | $ | — | | $ | 21,161 | | $ | — |
Loans receivable, net | | | 618,206 | | | 620,017 | | | — | | | — | | | 620,017 |
| | | | | | | | | | | | | | | |
Liabilities: | | |
| | |
| | |
| | |
| | |
|
Certificates of deposit | | | 244,877 | | | 252,510 | | | — | | | — | | | 252,510 |
Advances from FHLB -long-term | | | 232,025 | | | 239,301 | | | — | | | — | | | 239,301 |
105
| | | | | | | | | | | | | | | |
| | | | | | | | Fair Value Measurements at | |||||||
| | Carrying | | Fair | | September 30, 2020 | |||||||||
|
| Amount |
| Value |
| (Level 1) |
| (Level 2) |
| (Level 3) | |||||
| | (Dollars in Thousands) | | | | ||||||||||
Assets: |
| |
|
| |
|
| |
|
| |
|
| |
|
Investment and mortgage-backed securities held to maturity | | $ | 22,860 | | $ | 24,330 | | $ | — | | $ | 24,330 | | $ | — |
Loans receivable, net | | | 588,300 | | | 593,768 | | | — | | | — | | | 593,768 |
| | | | | | | | | | | | | | | |
Liabilities: | | |
| | |
| | |
| | |
| | |
|
Certificates of deposit | | | 269,610 | | | 278,224 | | | — | | | — | | | 278,224 |
Advances from FHLB -long-term | | | 260,253 | | | 274,172 | | | — | | | — | | | 274,172 |
17. GOODWILL AND OTHER INTANGIBLE ASSETS
The Company’s goodwill and intangible assets are related to the acquisition of Polonia Bancorp completed as of January 1, 2017.
| | | | | | | | | | | | | | |
| | Balance | | | | | | | | Balance | | | ||
| | October 1, | | Additions/ | | | | | September 30, | | Amortization | |||
|
| 2020 |
| Adjustments |
| Amortization |
| 2021 |
| Period | ||||
| | | | | | | | (Dollars in Thousands) | | | ||||
Goodwill | | $ | 6,102 | | $ | 0 | | $ | — | | $ | 6,102 |
|
|
Core deposit intangible | |
| 340 | |
| 0 | |
| (94) | |
| 246 |
| 10 years |
| | $ | 6,442 | | $ | 0 | | $ | (94) | | $ | 6,348 |
|
|
As of September 30, 2021, the future fiscal periods amortization expense for the core deposit intangible is:
| | | |
(Dollars In Thousands) | | | |
|
| | |
2022 | | $ | 78 |
2023 | |
| 64 |
2024 | |
| 49 |
2025 | |
| 34 |
2026 | |
| 18 |
Thereafter | |
| 3 |
| | $ | 246 |
18. LEASES
Operating leases in which the Company is the lessee are recorded as operating lease Right of Use ("ROU") assets and operating lease liabilities, included in other assets and other liabilities, respectively, on the Consolidated Statements of Financial Condition. The Company does not currently have any finance leases. Operating lease ROU assets represent the right to use an underlying asset during the lease term and operating lease liabilities represent the obligation to make lease payments arising from the lease. ROU assets and operating lease liabilities were recognized as of the date of adoption of ASU 2017-02 based on the present value of the remaining lease payments using a discount rate that represented the then Company's incremental borrowing rate at the date of initial application.
Operating lease expense, which is comprised of amortization of the ROU assets and the implicit interest accreted on the operating lease liability, is recognized on a straight line basis over the remaining lease term of the operating lease, and is recorded in office occupancy expense in the Consolidated Statements of Operations. The leases relate to Bank branches with remaining lease terms of generally five to nine years.
106
Lease expense was $239,000, $236,000 and $304,000 for the years ended September 30, 2021, 2020 and 2019, respectively. The Company has executed certain lease commitments and is, as a result, obligated to pay the following amounts: $246,000 for fiscal year 2022, $249,000 for fiscal year 2023, $252,000 for fiscal year 2024, $266,000 for fiscal 2025, $169,000 for fiscal 2026 and $309,000 thereafter
As of September 30, 2021, operating lease ROU assets were $1.1 million and operating lease liabilities were $1.2 million.
The following table summarizes other information related to our operating leases:
|
|
|
|
|
|
| |
|
|
| |
|
|
|
The following table presents aggregate lease maturities and obligations as of September 30, 2021:
| | | |
(Dollars in Thousands) | | | |
|
| | |
2022 | | $ | 213 |
2023 | |
| 216 |
2024 | |
| 220 |
2025 | |
| 231 |
2026 | |
| 126 |
2027 and thereafter | | | 291 |
Total lease payments | | | 1,297 |
Less: interest | |
| 77 |
Present value of lease liabilities | | $ | 1,220 |
19. PRUDENTIAL BANCORP, INC. (PARENT COMPANY ONLY)
STATEMENT OF FINANCIAL CONDITION
September 30,
| | | | | | |
|
| 2021 |
| 2020 | ||
| | (Dollars in Thousands) | ||||
Assets: |
| |
|
| |
|
Cash | | $ | 854 | | $ | 955 |
Investment in Bank | |
| 128,014 | |
| 126,684 |
Other assets | |
| 1,588 | |
| 1,478 |
Total assets | | $ | 130,456 | | $ | 129,117 |
| | | | | | |
Stockholders' equity: | |
|
| |
|
|
Preferred stock | | $ | — | | $ | — |
Common stock | |
| 108 | |
| 108 |
Additional paid-in-capital | |
| 118,424 | |
| 118,270 |
Treasury stock | |
| (44,351) | |
| (39,207) |
Retained earnings | |
| 58,450 | |
| 52,889 |
Accumulated other comprehensive loss | |
| (2,175) | |
| (2,943) |
| | | | | | |
Total stockholders' equity | | $ | 130,456 | | $ | 129,117 |
107
STATEMENT OF OPERATIONS
For the year ended September 30,
| | | | | | | | | |
|
| 2021 |
| 2020 |
| 2019 | |||
| | (Dollars in Thousands) | | | | ||||
| | | | | | | | | |
Equity in the earnings of the Bank | | $ | 8,221 | | $ | 9,959 | | $ | 9,954 |
Total income | |
| 8,221 | |
| 9,959 | |
| 9,954 |
| | | | | | | | | |
Professional services | |
| 180 | |
| 168 | |
| 168 |
Other expense | |
| 378 | |
| 344 | |
| 369 |
| | | | | | | | | |
Total expense | |
| 558 | |
| 512 | |
| 537 |
| | | | | | | | | |
Income before income taxes | |
| 7,663 | |
| 9,447 | |
| 9,417 |
| | | | | | | | | |
Income tax benefit | |
| (117) | |
| (108) | |
| (113) |
| | | | | | | | | |
Net income | | $ | 7,780 | | $ | 9,555 | | $ | 9,530 |
CASH FLOWS
For the year ended September 30,
| | | | | | | | | |
|
| 2021 |
| 2020 |
| 2019 | |||
| | (Dollars in Thousands) | | | | ||||
Operating activities: |
| |
|
| |
|
| |
|
Net income | | $ | 7,780 | | $ | 9,555 | | $ | 9,530 |
Other, net | |
| (50) | |
| 52 | |
| (115) |
Equity in the undistributed earnings of the Bank | |
| (8,221) | |
| (9,959) | |
| (9,954) |
Net cash used in operating activities | |
| (491) | |
| (352) | |
| (539) |
| |
|
| |
|
| |
|
|
Financing activities: | |
|
| |
|
| |
|
|
Purchase of treasury stock | |
| (5,391) | |
| (10,481) | |
| (3,108) |
Cash dividends paid | |
| (2,219) | |
| (6,216) | |
| (5,784) |
Dividends from the Bank | |
| 8,000 | |
| 17,000 | |
| 5,000 |
Net cash provided by (used in) financing activities | |
| 390 | |
| 303 | |
| (3,892) |
| |
|
| |
|
| |
|
|
Net decrease in cash and cash equivalents | |
| (101) | |
| (49) | |
| (4,431) |
| |
|
| |
|
| |
|
|
Cash and cash equivalents, beginning of year | |
| 955 | |
| 1,004 | |
| 5,435 |
| |
|
| |
|
| |
|
|
Cash and cash equivalents, end of year | | $ | 854 | | $ | 955 | | $ | 1,004 |
108
20. CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)
Unaudited quarterly financial data for the years ended September 30, 2021, 2020, and 2019 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2021 | | September 30, 2020 | ||||||||||||||||||||
| | 1st | | 2nd | | 3rd | | 4th | | 1st | | 2nd | | 3rd | | 4th | ||||||||
|
| Qtr |
| Qtr |
| Qtr |
| Qtr |
| Qtr |
| Qtr |
| Qtr |
| Qtr | ||||||||
| | (Dollars in Thousands, Except Per Share Data) | ||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |
Interest income | | $ | 9,689 | | $ | 9,464 | | $ | 9,339 | | $ | 9,544 | | $ | 11,827 | | $ | 11,010 | | $ | 9,791 | | $ | 9,599 |
Interest expense | |
| 4,006 | |
| 3,740 | |
| 3,566 | |
| 3,486 | |
| 5,484 | |
| 5,222 | |
| 4,486 | |
| 4,233 |
Net interest income | |
| 5,683 | |
| 5,724 | |
| 5,773 | |
| 6,058 | |
| 6,343 | |
| 5,788 | |
| 5,305 | |
| 5,366 |
Provision for loan losses | |
| — | |
| — | |
| — | |
| 200 | |
| 125 | |
| 500 | |
| 750 | |
| 1,650 |
Net interest income after provision for loan losses | |
| 5,683 | |
| 5,724 | |
| 5,773 | |
| 5,858 | |
| 6,218 | |
| 5,288 | |
| 4,555 | |
| 3,716 |
Non-interest income | |
| 537 | |
| 575 | |
| 1,395 | |
| 1,132 | |
| 832 | |
| 2,668 | |
| 3,762 | |
| 841 |
Non-interest expense | |
| 4,097 | |
| 4,350 | |
| 4,543 | |
| 4,638 | |
| 4,021 | |
| 4,460 | |
| 3,996 | |
| 4,248 |
Income before income tax expense (benefit) | |
| 2,123 | |
| 1,949 | |
| 2,625 | |
| 2,352 | |
| 3,029 | |
| 3,496 | |
| 4,321 | |
| 309 |
Income tax expense (benefit) | |
| 286 | |
| 235 | |
| 387 | |
| 361 | |
| 566 | |
| 572 | |
| 701 | |
| (239) |
Net income | | $ | 1,837 | | $ | 1,714 | | $ | 2,238 | | $ | 1,991 | | $ | 2,463 | | $ | 2,924 | | $ | 3,620 | | $ | 548 |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Per share: | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Earnings per share - basic | | $ | 0.23 | | $ | 0.22 | | $ | 0.28 | | $ | 0.25 | | $ | 0.28 | | $ | 0.33 | | $ | 0.44 | | $ | 0.07 |
Earnings per share - diluted | | $ | 0.23 | | $ | 0.22 | | $ | 0.28 | | $ | 0.25 | | $ | 0.28 | | $ | 0.32 | | $ | 0.44 | | $ | 0.07 |
Dividends per share | | $ | 0.07 | | $ | 0.07 | | $ | 0.07 | | $ | 0.07 | | $ | 0.07 | | $ | 0.50 | | $ | 0.07 | | $ | 0.07 |
| | | | | | | | | | | | |
| | September 30, 2019 | ||||||||||
| | 1st | | 2nd | | 3rd | | 4th | ||||
|
| Qtr |
| Qtr |
| Qtr |
| Qtr | ||||
| | (Dollars in Thousands, Except Per Share Data) | ||||||||||
| | | | | | | | | | | | |
Interest income | | $ | 10,002 | | $ | 11,134 | | $ | 11,273 | | $ | 11,631 |
Interest expense | |
| 3,986 | |
| 4,811 | |
| 5,058 | |
| 5,434 |
Net interest income | |
| 6,016 | |
| 6,323 | |
| 6,215 | |
| 6,197 |
Provision for loan losses | |
| — | |
| — | |
| — | |
| 100 |
Net interest income after provision for loan losses | |
| 6,016 | |
| 6,323 | |
| 6,215 | |
| 6,097 |
Non-interest income | |
| 380 | |
| 542 | |
| 1,187 | |
| 985 |
Non-interest expense | |
| 4,033 | |
| 4,146 | |
| 4,190 | |
| 3,696 |
Income before income tax expense | |
| 2,363 | |
| 2,719 | |
| 3,212 | |
| 3,386 |
Income tax expense | |
| 389 | |
| 380 | |
| 582 | |
| 799 |
Net income | | $ | 1,974 | | $ | 2,339 | | $ | 2,630 | | $ | 2,587 |
| | |
| |
|
| |
|
| |
|
|
Per share: | |
|
| |
|
| |
|
| |
|
|
Earnings per share - basic | | $ | 0.22 | | $ | 0.27 | | $ | 0.30 | | $ | 0.30 |
Earnings per share - diluted | | $ | 0.22 | | $ | 0.26 | | $ | 0.29 | | $ | 0.29 |
Dividends per share | | $ | 0.05 | | $ | 0.05 | | $ | 0.50 | | $ | 0.05 |
Due to rounding, the sum of the earnings per share in individual quarters may differ from reported amounts.
109
Item 9. Changes11. Executive Compensation
Summary Compensation Table
The following table summarizes the total compensation paid by Prudential Bank (including amounts deferred, if any, to future periods by the officers) for services rendered in and Disagreements With Accountants on Accounting and Financial Disclosure
Not Applicable.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. Management evaluated, withall capacities during the participation of the Chief Executive Officer and Chief Financial Officer, the effectiveness of the disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as offiscal years ended September 30, 2021. Based on such evaluation,2021 and 2020 to the Chief Executive Officerprincipal executive officer and Chief Financial Officer have concluded that the disclosure controls and procedures are designedtwo other most highly compensated executive officers of Prudential Bank during fiscal 2021 whose total compensation exceeded $100,000, collectively referred to ensure that information requiredas our “named executive officers.” The Company has not paid separate cash compensation to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and regulations and are operating in an effective manner.our officers.
Management's Report of Internal Control over Financial Reporting. Management is responsible for designing, implementing, documenting, and maintaining an adequate system of internal control over financial reporting, as such term is defined in the Securities Exchange Act of 1934. An adequate system of internal control over financial reporting encompasses the processes and procedures that have been established by management to:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | Non-Equity | | | | | | | |
Name and Principal | | Fiscal | | | | | | | | Stock | | Option | | Incentive Plan | | All Other | | | | ||||
Position |
| Year | | Salary | | Bonus(1) | | Awards | | Awards | | Compensation(2) | | Compensation(3) | | Total | |||||||
| | | | | | | | | | | | | | | | | | | | | | | |
Dennis Pollack | | 2,021 | | $ | 485,385 | | $ | 275,000 | | $ | — | | $ | — | | $ | — | | $ | 48,381 | | $ | 808,766 |
President and Chief Executive Officer | | 2,020 | | | 462,289 | | | 275,000 | | | — | | | — | | | — | | | 43,072 | | | 780,361 |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
Anthony V. Migliorino | | 2,021 | | | 367,692 | | | 200,000 | | | — | | | — | | | — | | | 17,732 | | | 585,424 |
Executive Vice President and Chief Operating | | 2,020 | | | 347,668 | | | 200,000 | | | — | | | — | | | — | | | 12,740 | | | 560,408 |
Officer | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
Matthew Graham | | 2,021 | | | 177,596 | | | 5,000 | | | — | | | — | | | 200,511 | | | — | | | 383,107 |
Senior Vice President and Chief Lending Officer | | 2,020 | | | 144,327 | | | 29,470 | | | — | | | — | | | 27,763 | | | — | | | 201,560 |
Management conducted an evaluationNarrative to Summary Compensation Table
Base salaries as well as bonuses, if any, for our named executive officers (as well as all other executive officers) are determined and approved by the Compensation Committee. The Compensation Committee, in its role as the administrator of the effectivenessCompany’s stock benefit plans, also determines whether to award equity incentive awards and if so, the amount and form of such awards (stock options and/or restricted share awards). In accordance with the Committee’s practices and procedures, the Committee annually reviews executive officers’ compensation in order to address appropriate adjustments, if any, to such persons’ base compensation as well as to consider awarding bonuses to such officers. Consistent with the methodology initially adopted in connection with the annual compensation reviews conducted in fiscal year 2016, the analysis of potential bonuses consists of an assessment by the Compensation Committee both of the Company's internal controlCompany’s consolidated financial performance over financial reporting basedthe past year or more, as appropriate, as well as the performance of the individual officer under consideration. With respect to executive officers, especially the named executive officers, the Committee determined that individual performance and its effect on the criteriaCompany’s performance is still the most relevant factor to be considered in Internal Control-Integrated Framework issued bydetermining both salary adjustments and bonus awards. Consistent with the revised methodology the Committee initially adopted in August 2016, the Committee reaffirmed its determination that years of Sponsoring Organizationsservice is not considered a relevant factor for purposes of analyzing potential adjustments to the compensation of executive officers’ salaries and bonuses. In addition, in connection with its deliberations, the Committee considered a number of factors including the previous salary adjustments effected in prior fiscal years, especially 2018, 2019 and 2020, and the level of bonuses awarded in such years, in particular with respect to bonuses, the level of bonuses awarded in both fiscal 2019 and fiscal 2020. The Committee also analyzed the appropriateness of the Treadway Commission (COSO). Based on this evaluation under the criteria in Internal Control-Integrated Framework, management concluded that internal control over financial reporting was effective aslevel of September 30, 2021. Furthermore, during the conduct of its assessment, management identified no material weakness in its financial reporting control system.
The Board of Directors of Prudential Bancorp, through its Audit Committee, provides oversight to management’s conductcurrent salaries of the financial reporting process. The Audit Committee, which is composed entirelyCompany’s executive officers, especially when reviewed in light of independent directors, is also responsible for the appointment of the independent registered public accounting firm. The Audit Committee also meets with management, the internal audit staff, and the independent registered public accounting firm throughout the year to provide assurance as to the adequacy of the financial reporting process and to monitor the overall scope of the work performed by the internal audit staff and the independent public accountants.
Because of its inherent limitations, the disclosure controls and procedures may not prevent or detect misstatements. A control system, no matter how well conceived and operated, can only provide reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.peer group data.
1109
|
| |
|
| |
|
| |
|
Changes in Internal Controls over Financial Reporting. No changeAs a result of the foregoing considerations, modest adjustments to each of the named executive officer’s salary in the internal controlrange of 2.6% to 4.2% (except for Mr. Graham’s whose increase of 25.9% was larger since it reflected his promotion to Senior Vice President and Chief Lending Officer) were deemed appropriate in light of both such officers’ performances over financial reporting (as definedthe past fiscal year and the role they played in Rules 13a-15(f)the Company’s continued strong operational performance especially in light of the ongoing challenges created by the COVID-19 pandemic. Furthermore, in keeping with the Committee’s philosophy to maintain flexibility with regard to compensation and 15(d)-15(f) underto reward exceptional performance, the Securities Exchange ActCommittee determined to recognize and reward the various executive officers’ roles in the Company’s continued favorable performance through the use of 1934) occurred duringbonuses rather than significant upward adjustments of salaries. Consequently, the fourth quarter ofCompensation Committee established salaries for fiscal 2021 for Messrs. Pollack, Migliorino and Graham of $450,000, $375,000 and $185,000, respectively, which amounted to increases of 14.3%, 14.1% and 1.6%, respectively, for such officers. In addition, discretionary bonuses amounting to $275,000, $200,000 and $5,000 were awarded to Messrs. Pollack, Migliorino and Graham, respectively, based on Prudential Bancorp’s continued favorable performance during fiscal 2021 and the individual officer’s roles in producing such performance. Mr. Graham’s bonus was modest due to the significant level of non-equity compensation earned by him during fiscal 2021 as a senior loan officer prior to being promoted to Chief Lending Officer.
The Compensation Committee determined to not grant any equity awards (stock options or restricted stock awards) to named executive officers during fiscal year 2020 and 2021, in light of, among other things, the challenges facing Prudential Bancorp in light of the ongoing COVID-19 pandemic as well as the level of prior equity grants. During fiscal years 2019 and 2018, the Compensation Committee granted equity awards to the named executive officers (other than Mr. Graham who was not a named executive at such period) as well as to other officers. Until fiscal 2018, after the initial grant of equity awards in February 2015 shortly after receipt of shareholder approval of the 2014 Stock Incentive Plan (“2014 SIP”), subsequent equity awards had been used on a case-specific basis generally to reflect either the recent hiring of an executive officer or in connection with the promotion of an executive officer.
At the annual meeting of shareholders of Prudential Bancorp held on February 20, 2019, the shareholders recommended, on an advisory basis, that future advisory votes on executive compensation should be held every three years. Consistent with the shareholder recommendation, the Board of Directors of the Company determined that it will hold an advisory vote on executive compensation every three years. The next advisory vote on the compensation of the named executive officers will be presented at the next annual meeting. Prudential Bancorp is required to hold shareholder advisory votes on the frequency interval every six years.
Compensation Policies and Practices as They Relate to Risk Management
The Compensation Committee of the Board of Directors has materially affected, or isreviewed the Company’s policies and practices applicable to employees, including the Company’s benefit plans, arrangements and agreements, and does not believe that they are reasonably likely to materially affect,have a material adverse effect on the internal control over financial reporting.Company. The Committee does not believe that the Company’s policies and practices encourage officers or employees to take unnecessary or excessive risks or behavior focused on short-term results rather than the creation of long-term value.
Compensation Committee Interlocks and Insider Participation.
Item 9B. Other Information
Not applicable.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Determinations regarding compensation of our President and Chief Executive Officer, our senior management and our employees are reviewed and approved by Prudential Bancorp’s Compensation Committee. Messrs. Fanelli, Hosier, who is the Committee’s Chairman, and Miller currently serve as members of the Compensation Committee.
Not applicable.No person who served as a member of the Compensation Committee during fiscal 2021 was a current or former officer or employee of Prudential Bancorp or Prudential Bank or engaged in certain transactions with Prudential Bancorp or Prudential Bank required to be disclosed by regulations of the Securities and Exchange Commission. Additionally, there were no Compensation Committee “interlocks” during fiscal 2021, which generally means that no executive officer of Prudential Bancorp served as a director or member of the compensation committee of another entity, one of whose executive officers served as a director or member of Prudential Bancorp’s Compensation Committee.
Equity Compensation Plans
Grants of Plan-Based Awards for the Year Ended September 30, 2021. No grants of restricted stock awards or stock options were made to any of the named executive officers during fiscal 2021.
11110
PART III
Item 10. Directors, Executive OfficersOutstanding Equity Awards at Fiscal Year-End. The table below sets forth outstanding equity awards at September 30, 2021 held by our named executive officers named in the Summary Compensation Table above, which grants were made in fiscal years 2015, 2016, 2018 and Corporate Governance2019. Mr. Graham has not been awarded any equity compensation since in prior years his incentive compensation was provided through loan officer incentive programs.
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | Stock Awards | |||||
| | Option Awards | | | | | Market Value of | |||||||||||
| | Number of Securities Underlying | | | | | | | | Number of Shares or | | Shares or Units of | ||||||
| | Unexercised Options | | | Exercise | | Option | | Units of Stock That | | Stock That Have | |||||||
Name |
| Exercisable |
| Unexercisable |
| Price |
| Expiration Date |
| Have Not Vested |
| Not Vested(1) | ||||||
Dennis Pollack | | 30,000(2) |
| | — |
| | $ | 12.23 | | 2/18/2025 | | 5,000(4) |
| | $ | 76,300 |
|
| | 10,000(3) | | | — | | | | 14.42 | | 8/17/2026 | | | | | | | |
| | 48,000(4) | | | 32,000 | | | | 18.46 | | 3/21/2028 | | | | | | | |
| | 4,470(5) | | | 7,111 | | | | 18.16 | | 7/17/2029 | | | | | | | |
Anthony V. Migliorino | | 15,000(3) | | | — | | | | 14.42 | | 8/17/2026 | | 3,000(4) | | | | 45,780 | |
| | 27,000(4) | | | 18,000 | | | | 18.46 | | 3/21/2028 | | | | | | | |
| | 4,470(5) | | | 7,111 | | | | 18.16 | | 7/17/2029 | | | | | | | |
| (1) | Calculated by multiplying the closing market price per share of our common stock on September 30, 2021, which was $15.26, by the applicable number of shares of common stock underlying the named executive officer’s unvested stock awards. |
| (2) | Granted pursuant to our 2014 Stock Incentive Program (“2014 SIP”) and vest at a rate of 20% per year commencing on February 18, 2016. |
| (3) | Granted pursuant to our 2008 Stock Option Plan (“2008 SOP”) and our 2014 SIP, as applicable, and vest at a rate of 20% per year commencing on August 17, 2017. |
| (4) | Granted pursuant to our 2014 SIP and our 2008 SOP, as applicable, and vest at a rate of 20% per year commencing March 21, 2019. |
| (5) | Granted pursuant to our 2014 SIP and vest at a rate of 20% per year commencing on July 17, 2020. |
Option Exercises and Stock Vested. The following table sets forth certain information with respect to restricted stock awards which vested for the named executive officers during the fiscal year ended September 30, 2021. No stock options were exercised by any of the named executive officers during the 2021 fiscal year.
| | | | | |
| | Stock Awards | |||
| | Number of Shares | | Value Realized On | |
Name |
| Acquired On Vesting (1) |
| Vesting (2) | |
| | | | | |
Dennis Pollack | | 2,500 | | $ | 35,750 |
| | 500 | | | 7,050 |
| | | | | |
Anthony V. Migliorino | | 1,500 | | | 21,420 |
| | 1,500 | | | 21,150 |
| (1) | Does not reflect the sale or withholding of shares to satisfy income tax withholding obligations. |
| (2) | Based upon the fair market value of a share of Company common stock on the date of vesting. Value is calculated by multiplying the number of shares of Company common stock that vested by the fair market value on the date of vesting. |
Employment and Change in Control Agreements
Employment Agreements. Prudential Bank and Prudential Bancorp entered into an amended and restated employment agreement in December 2016 with Mr. Pollack as well as an employment agreement with Mr. Migliorino. The amended and restated agreement with Mr. Pollack increased the term of the agreement and the severance benefits (as discussed below) as well as his compensation in view of the Compensation Committee’s determination that his performance and value to the Company warranted such enhanced provisions. The employment agreement with Mr. Migliorino superseded the change in control agreement he had previously entered into with the Bank in November 2015 and reflected the Compensation Committee’s determination that his continued employment was critical to the Bank’s and Company’s ongoing performance.
The information required hereinemployment agreements have a term of three years, with respect to Mr. Pollack, and two years, with respect to Mr. Migliorino with the initial terms expiring, if the agreements are not extended, on December 31, 2019 and December 31, 2018, respectively. The term of each agreement is incorporatedextended annually for one year on each December 31st,
11
starting December 31, 2017 unless either the Company and the Bank or the executive gives notice at least 30 days prior to the annual anniversary date that the agreement shall not be extended. The Compensation Committee determined in June 2021 to extend the terms of the executives’ employment agreements for an additional year. The agreements are automatically extended for one year upon a change in control. The terms of the employment agreements provide for an initial annual base salary, which is reviewed annually by referencethe Compensation Committee of the Board of Directors. Each of the employment agreements is terminable with or without cause by the Company or the Bank. The executives have no right to compensation or other benefits pursuant to the employment agreements for any period after voluntary termination by the executive without good reason, as defined in the agreements and which includes, among other things, a material change in the officer’s position, salary or entities without the officer’s consent, or termination by the Company and the Bank for cause, disability, retirement or death.
In the event that the executive terminates his employment because of failure to comply with any material provision of the employment agreement by the Company or the Bank or the employment agreement is terminated by the Company or the Bank other than for cause, disability, retirement or death, Messrs. Pollack and Migliorino will be entitled to (i) the payment of two times (Mr. Pollack) and one times (Mr. Migliorino), respectively, the executive’s respective average annual cash compensation (salary and cash bonuses) based upon the five calendar years preceding the date of termination as cash severance, (ii) the maintenance until the earlier to occur of the passage of two years and one year, respectively, from the sections captioned "Informationdate of termination or until the executive’s full-time employment with Respectanother employer (which provides substantially similar benefits), of the executive’s continued participation in all group insurance, life insurance, health, dental and accident insurance and disability insurance plans at no cost to Nomineesthe officer and (iii) a lump sum cash payment equal to the projected cost of providing the executive with benefits for Director, Continuing Directors and Executive Officers" and "Beneficial Ownership of Common Stock by Certain Beneficial Owners and Management – Section 16(a) Beneficial Ownership Reporting Compliance"two years, or one year in the Company’s Definitive Proxy Statementcase of Mr. Migliorino, pursuant to other employee benefit plans (excluding retirement plans and stock compensation plans) in which the executive was entitled to participate. In the event the executive’s continued participation in any group insurance plan is barred or would trigger the payment of an excise tax under Section 4980D of the Internal Revenue Code of 1986, as amended (the “Code”), or if any such group insurance plan is discontinued, then the Company or the Bank shall either (1) provide substantially similar benefits under an alternative plan or (2) pay a lump sum cash amount to the executive equal to the projected cost of providing continued coverage to the executive until the two-year, or one-year in the case of Mr. Migliorino, anniversary of the executive’s date of termination.
In the event that the executive’s employment is terminated in connection with a change in control, as defined in the employment agreements, for other than cause, disability, retirement or death or the executive terminates his employment as a result of certain adverse actions which are taken with respect to the executive’s employment (i.e., good reason) following a change in control, as defined, the executive will be entitled to a cash severance payment equal to three times (Mr. Pollack), or two times (Mr. Migliorino) their respective average annual cash compensation, the maintenance, as described above, of the group insurance plans for three years (Mr. Pollack) or two years (Mr. Migliorino), respectively, or until the executive’s full-time employment with another employer that provides similar benefits plus the aforementioned lump sum cash payment for the Annual Meetingprojected cost of Shareholders currently expectedproviding the other employee benefits as noted above until the third anniversary (Mr. Pollack) or second anniversary (Mr. Migliorino) of the executive’s termination.
The employment agreements with respect to Pollack and Migliorino previously provided that in the event any of the payments to be heldmade thereunder or otherwise upon termination of employment are deemed to constitute “parachute payments” within the meaning of Section 280G of the Code, then such payments and benefits received thereunder shall be reduced by the minimum amount necessary to result in Februaryno portion of the payments and benefits being non-deductible by the Company or the Bank for federal income tax purposes. In November 2017, the Company and the Bank entered into amendments to each of the employment agreements with Messrs. Pollack and Migliorino addressing the applicability of Sections 4999 and 280G of the Code. The agreements were revised to provide that if the payments that were otherwise payable to Mr. Pollack or Mr. Migliorino, as applicable, in connection with a termination after the occurrence of a change in control would trigger the imposition of an excise tax under Section 4999 of the Code, such amounts would be required to be reduced only if doing so would result in a greater tax amount to be retained by Mr. Pollack or Mr. Migliorino, as applicable.
Change in Control Agreement. The Bank entered into a change in control severance agreement in July 2021 with Mr. Graham. The change in control agreement is intended to assist the Bank (and indirectly the Company) in maintaining a stable and competent management base. The change in control severance agreement has an initial term ending December 31, 2022 if the term of the agreement is not extended. The term is extended annually for one year on each December 31st starting December 31, 2022 unless either the Bank or the executive gives notice at least 30 days prior to the annual anniversary date that the agreement shall not be extended. The agreement automatically extends for
12
one year upon a change in control. The Bank has entered into substantially identical change in control severance agreements with four other senior officers.
Mr. Graham’s agreement provides that in the event of an involuntary termination of employment without cause and other than for retirement, death or disability following a change in control (including a termination by the executive for “good reason,” which includes a material change in the executive’s position, salary or duties without his consent), the executive will be entitled to (i) the payment of one times his average annual cash compensation (salary and cash bonuses) based upon the five calendar years preceding the date of termination as cash severance, (ii) the maintenance until the earlier to occur of the passage of one year from the date of termination or until his full-time employment with another employer (which provides substantially similar benefits) of the executive’s continued participation in all group insurance, life insurance, health, dental, accident insurance and disability insurance plans at no cost to the officer and (iii) a lump sum cash payment equal to the projected cost of providing him with benefits for one year pursuant to other employee benefit plans (excluding retirement plans and stock compensation plans) in which he was entitled to participate. In the event Mr. Graham’s continued participation in any group insurance plan is barred or would trigger the payment of an excise tax under Section 4980D of the Code, or if any such group insurance plan is discontinued, then the Bank shall either (1) provide substantially similar benefits under an alternative plan or (2) pay a lump sum cash amount to him equal to the projected cost of providing continued coverage to him until the one-year anniversary of his date of termination.
The change in control severance agreement provides that in the event any of the payments to be made thereunder or otherwise upon termination of employment are deemed to constitute “parachute payments” within the meaning of Section 280G of the Code, then such payments and benefits received thereunder shall be reduced by the minimum amount necessary to result in no portion of the payments and benefits being non-deductible by the Bank for federal income tax purposes.
Benefit Plans
Retirement Plan. Prudential Bank participates in the Financial Institutions Retirement Fund, a multiple employer defined benefit plan intended to satisfy the tax-qualification requirements of Section 401(a) of the Code. In November 2015, the retirement plan was frozen such that no new participants can be added and existing participants will receive no further benefit service credit, compensation credit or other accrued benefit increases except for additional service credits which may affect a participant’s vesting or early vesting retirement eligibility or as otherwise required by law to maintain the tax-qualified status of such plan.
The retirement plan provides for a monthly benefit upon a participant’s retirement at or after the age of 65, or if later, the fifth anniversary of the participant’s initial participation in the retirement plan (i.e., the participant’s “normal retirement date”). A participant may also receive a benefit on his early retirement date, which is the date on which he attains age 45 and is partially or fully vested under the terms of the retirement plan. Benefits received prior to a participant’s normal retirement date are reduced by certain factors set forth in the retirement plan. The retirement plan provides a benefit of 1.50% of a participant’s highest 5-year average earnings, multiplied by the participant’s years of benefit service. Earnings are defined as base salary, subject to an annual Internal Revenue Service limit of $265,000 on earnings for 2015. Annual benefits provided under the retirement plan also are subject to Internal Revenue Service limits, which vary by age and benefit payment type. Participants become fully vested in their benefits under the retirement plan upon the completion of five years of vesting service as well as upon the attainment of normal retirement age (age 65).
No named executive officer is a participant in the retirement plan.
401(k) and Profit Sharing Plan. The Bank also provides its employees, including the named executive officers, with tax-qualified retirement benefits through the Prudential Savings Bank Employees Savings and Profit Sharing Plan and Trust (the “401(k) Plan”). The Company previously provided additional benefits through two additional tax-qualified retirement plans: the ESOP and the aforementioned retirement plan. The determination was made to terminate the ESOP effective December 31, 2016. In addition, as noted above, the retirement plan was frozen during November 2015. Such actions were taken as part of the Company’s efforts to effect significant cost savings while still providing a competitive compensation structure. All employees who meet the age and service requirements participate in the 401(k) Plan, on a non-discriminatory basis. The Bank did not provide a 401(k) match to employee contributions for the past several years due to the existence of the benefits provided by the ESOP. However, as a result of the termination of the ESOP, the Bank initiated a 401(k) match commencing in January 2018.
13
Endorsement Split Dollar Agreements. The Bank has purchased insurance policies on the lives of certain of its executive officers named in the Summary Compensation Table as well as other officers, and has entered into Endorsement Split Dollar Agreements with each of those officers. The policies are owned by the Bank. Under the agreements with the named executive officers, upon an officer’s death while he or she remains employed by the Bank, the officer’s beneficiary will receive two times the officer’s salary as of the date of death. Pursuant to the terms of the agreements, the Bank has elected generally to not extend such benefits after a termination of employment. Such amounts will be funded from the receipt of the death benefits under the insurance policies on such officer’s life in excess of the cash surrender value. The Bank will receive the full cash surrender value, which is expected to be filed withreimburse the Securities and Exchange Commission within 120 days of September 30, 2021 ("Definitive Proxy Statement").
The Company has adopted a code of ethics policy, which applies toBank in full for its principal executive officer, principal financial officer, principal accounting officer,life insurance investment as well as its directorsthe remainder, if any, in excess of the net proceeds after payments to the officer’s beneficiaries pursuant to the Endorsement Split Dollar Agreements.
The Endorsement Split Dollar Agreements may be terminated at any time by the Bank or the officer or by the Bank upon the officer’s termination of service to Prudential Bank and employees generally. typically are terminated upon the cessation of employment of the covered officers with the Bank. Upon termination, the Bank may surrender the policy and collect the cash surrender value.
Long-Term Incentive Compensation
The Company willlong-term incentive compensation portion of the Company’s compensation program consists of grants of stock options and restricted stock awards under the Company’s 2008 SOP, the 2008 RRP and the 2014 SIP (the 2008 SOP, the 2008 RRP and the 2014 SIP are collectively referred to as the “Equity Plans”). Under the Equity Plans, the Compensation Committee has discretion in determining grants of stock options and restricted stock awards to executive officers, including the timing, amounts and types of awards. The level of an individual’s grants typically has been based in large part on the officer’s position within the organization, his or her individual performance and the length of his or her service. Grants of new options or restricted stock awards are no longer permitted under the terms of the 2008 SOP and the 2008 RRP due to the age of the plans.
The exercisability of options and the vesting of restricted stock awards generally depend upon the executive officer continuing to render services to the Company. In addition, although not granted to date, the Company’s 2008 RRP (although no new grants are permitted) and 2014 SIP provide a copythat stock awards may be made based upon specified performance goals. All options granted under the Company’s stock option plans must have an exercise price at least equal to the market value of its codethe common stock on the date of ethics to any person, free of charge, upon request. Any requestsgrant. Options may be exercised only for a copy should belimited period of time after the optionee’s departure from the Company in most cases. Under the terms of the Equity Plans, the grants cannot vest more rapidly than 20% per year except in certain specified circumstances, such as the death or disability of the award holder or in the event of a change in control (as defined in the Equity Plans) of the Company. To date, all the awards have been granted with five-year vesting schedules.
Under the Company’s 2014 SIP, the Compensation Committee is also authorized to grant share awards, which are a right to receive a distribution of shares of common stock. Shares of common stock granted pursuant to a share award are in the form of restricted stock which vests upon such terms and conditions as established by the Committee. For specific information regarding equity compensation awarded the named executive officers, see “-Equity Compensation Plans.”
Directors’ Compensation
The following table sets forth certain information regarding the compensation paid to our non-employee directors during fiscal year 2021. Mr. Pollack, our President and Chief Executive Officer, is included in the Summary Compensation Table set forth in the Summary Compensation Table.
| | | | | | | | | | | | | | | |
| | Fees Earned or | | Stock | | Option | | All Other | | | | ||||
Name |
| Paid in Cash |
| Awards |
| Awards |
| Compensation |
| Total | |||||
A. J. Fanelli | | $ | 63,150 | | $ | — | | $ | — | | $ | — | | $ | 63,150 |
John C. Hosier | | | 58,150 | | | — | | | — | | | — | | | 58,150 |
Bruce E. Miller | | | 88,150 | | | — | | | — | | | — | | | 88,150 |
Raymond J. Vanaria | | | 20,000 | | | — | | | — | | | — | | | 20,000 |
We do not pay separate compensation to directors for their service on the Board of Directors of Prudential Bancorp. Directors who are employees do not receive compensation for service on the Board. For fiscal 2021, members of Prudential Bank’s Board of Directors received an annual retainer of $30,000 paid pro rata quarterly. For fiscal 2022,
14
the annual retainer will remain the same. Mr. Vanaria initially received a retainer of $10,000 per year for service on the Board of Directors of Prudential Bancorp since he did not serve as a director of Prudential Bank. However, as a result of his appointment to Prudential Bank’s Board of Directors in the third quarter of fiscal 2021, he started to receive the same retainer as the other Prudential Bank directors beginning with the quarter ended June 30, 2021 and no longer receives a separate retainer for serving on Prudential Bancorp’s Board. Members also received $2,350 per special meeting attended. For fiscal 2022, special meeting fees will remain the same as for fiscal 2021. For fiscal 2021, members of the Audit Committee, the Executive Committee (other than Mr. Pollack) and the Compensation Committee received fees of $1,200 per meeting attended. Such fees will remain the same for fiscal 2022. As Chairman of the Audit Committee, Mr. Fanelli received an annual retainer of $20,000 for fiscal 2021, which retainer will remain the same for fiscal 2022. As Chairman of the Compensation Committee for fiscal 2021, Mr. Hosier received an annual retainer of $15,000. The Compensation Committee chair retainer will remain the same for fiscal 2022. Mr. Miller, as Chairman of the Board, received an annual retainer for such service for fiscal 2021 in the amount of $45,000. For fiscal 2022, Mr. Miller’s retainer will remain the same. Board fees are subject to periodic adjustment by the Board of Directors.
No equity awards were made to the shareholder relations administrator, Prudential Bancorp, Inc., 1834 West Oregon Avenue, Philadelphia, Pennsylvania 19145. In addition, a copy of the Code of Ethics is available at the Company’s website at www.prudentialbanker.com under the Investor Relations menu.
There have been no material changes to the procedures by which shareholders may recommend nominees to the Company’s Board of Directors.
Item 11. Executive Compensation
The information required herein is incorporated by reference from the sections captioned "Management Compensation", “Information with Respect to Nominees for Director, Continuing Directors and Executive Officers – Director’s Compensation” and "Compensation Committee Interlocks and Insider Participation" in the Company’s Definitive Proxy Statement.non-employee directors during fiscal 2021.
15
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Security Ownership of Certain Beneficial Owners and Management. Information regarding security ownershipThe following table sets forth information as to Prudential Bancorp common stock beneficially owned, as of December 31, 2021, by (i) the only persons or entities, including any “group” as that term is used in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, who or which was known to Prudential Bancorp to be the beneficial owner of more than 5% of the issued and outstanding Prudential Bancorp common stock, based on filings made with the Securities and Exchange Commission, (ii) each director of Prudential Bancorp, (iii) certain beneficial ownersexecutive officers of Prudential Bancorp and management is incorporated by reference to “Beneficial Ownership(iv) all directors and executive officers of Common Stock by Certain Beneficial Owners and Management” in the Definitive Proxy Statement.Prudential Bancorp as a group.
| | | | |
| | Amount and Nature of Beneficial | | |
| | Ownership as of | | Percent of |
Name and Address of Beneficial Owner |
| December 31, 2021(1)(2) |
| Common Stock |
| | | | |
Warren A. Mackey | | 871,204(3) | | 11.2% |
40 Worth Street, 10th Floor | | | | |
New York, New York 10013 | | | | |
Lawrence B. Seidman | | 711,666(4) | | 9.2% |
100 Misty Lane, 1st Floor | | | | |
Parsippany, New Jersey 07054 | | | | |
Directors: | | | | |
A. J. Fanelli | | 47,068(6) | | * |
John C. Hosier | | 89,917(5)(7) | | 1.2% |
Bruce E. Miller | | 103,083(5)(8) | | 1.3% |
Dennis Pollack | | 175,356(5)(9) | | 2.2% |
Raymond J. Vanaria | | 26,500(10) | | * |
Certain Executive Officers | | | | |
Anthony V. Migliorino | | 84,287(5)(11) | | 1.1% |
Matthew E. Graham | | —(5) | | * |
All Directors and Executive Officers as a Group (9 persons) | | 622,659(5) | | 7.7% |
*Represents less than one percent of Prudential Bancorp’s outstanding common stock.
| (1) | Based upon filings made pursuant to the Securities Exchange Act of 1934 and information furnished by the respective individuals. In addition, due to share repurchases by the Company, the ownership percentages reflected in the filings may differ from the percentages reflected in the table above. Furthermore, share ownership reflected on Schedules 13D, 13G and/or 13F may differ from what is actually held by the reporting persons as of December 31, 2021 due to changes in ownership which were not required to be reported prior to such date. Under regulations promulgated pursuant to the Securities Exchange Act of 1934, shares of common stock are deemed to be beneficially owned by a person if he or she directly or indirectly has or shares (i) voting power, which includes the power to vote or to direct the voting of the shares, or (ii) investment power, which includes the power to dispose or to direct the disposition of the shares. Unless otherwise indicated, the named beneficial owner has sole voting and dispositive power with respect to the shares. |
| (2) | Each beneficial owner’s percentage ownership is determined by assuming that options held by such person (but not those held by any other person) and that are exercisable within 60 days of December 31, 2021 have been exercised. |
| (3) | Based on a Schedule 13D/A filed with the Securities and Exchange Commission on February 12, 2014 by Warren A. Mackey, Homestead Partners LP, a Delaware limited partnership, Arles Partners LP, a New York limited partnership, and Arles Advisors Inc., a New York corporation. Arles Advisors is the general partner of Homestead Partners and Arles Partners. The sole shareholder, director and executive officer of Arles Advisors is Warren A. Mackey. By virtue of his position with Arles Advisors, Mr. Mackey has the shared investment discretion and voting authority with respect to the 838,676 shares owned by Homestead Partners and Arles Partners. Arles Advisors, as general partner of Homestead Partners and Arles Partners, may be deemed to beneficially own the 838,976 shares owned by these partnerships. Mr. Mackey individually has the sole investment discretion and voting authority with respect to the 32,228 shares held for himself. Additional shares of Prudential Bancorp common stock may have been received in connection with the merger with Polonia Bancorp, Inc. (“Polonia Bancorp”) as of January 1, 2017. |
(Footnotes continued on following page)
16
| (4) | Based on a Schedule 13D/A filed on December 10, 2020 by Lawrence B. Seidman, Seidman and Associates L.L.C. (“SAL”), Seidman Investment Partnership, L.P. (“SIP”), Seidman Investment Partnership II, L.P. (“SIPII”), Seidman Investment Partnership III, L.P. (“SIPIII”), LSBK06-08 (“LSBK”), Broad Park Investors (“Broad Park”), CBPS, LLC (“CBPS”), JBRC I, LLC (“JBRC”), 2514 Multi-Strategy Fund, L.P. (“2514 MSF”), Veteri Place Corporation (“Veteri”), Chewy Gooey Cookies, L.P. (“CGC”), and Sonia Seidman (collectively, the “Seidman Group”). Pursuant to the Schedule 13D/A, Mr. Seidman (i) as the manager of SAL, may be deemed the beneficial owner of the 156,328 shares owned by SAL, (ii) as the sole officer of Veteri, the corporate general partner of each of SIP and SIPII, may be deemed the beneficial owner of the 122,037 shares owned by SIP and the 171,234 shares owned by SIPII, (iii) as the managing member of JBRC I, LLC, the co-general partner of SIPIII, may be deemed the beneficial owner of the 25,708 shares owned by SIPIII, (iv) as the sole officer of Veteri, the Trading Advisor of LSBK and CBPS, may be deemed the beneficial owner of the 82,872 shares owned by LSBK, (v) as the investment manager for each of Broad Park and CGC, may be deemed the beneficial owner of the 99,768 shares owned by Broad Park and the 21,719 shares owned by CGC, and (vi) as the husband of Sonia Seidman, may be deemed the beneficial owner of the 32,000 shares owned by Sonia Seidman. Accordingly, Seidman may be deemed the beneficial owner of an aggregate of 711,666 shares. In the foregoing capacities, Seidman has sole and exclusive investment discretion and voting authority with respect to all such shares. |
| (5) | Includes shares (i) granted pursuant to the 2014 SIP which have been awarded to the directors and officers and (ii) stock options which have been granted to the directors and executive officers under Prudential Bancorp’s 2008 SOP or under the 2014 SIP and which are exercisable within 60 days of December 31, 2021 as follows: |
| | | | | | |
Name |
| Restricted Stock |
| Stock Options | ||
A.J. Fanelli | | 857 |
| | 10,707 |
|
John C. Hosier | | 857 | | | 49,052 | |
Bruce E. Miller | | 857 | | | 62,397 | |
Dennis Pollack | | 5,000 | | | 92,740 | |
Anthony V. Migliorino | | 3,000 | | | 46,790 | |
Matthew Graham | | — | | | — | |
All directors and executive officers as a group (9 persons) | | 10,576 | | | 320,437 | |
| (6) | (Includes 8,813 shares held jointly with Mr. Fanelli’s spouse. |
| (7) | Includes 6,528 shares held in Mr. Hosier’s account in his 401(k) retirement plan. |
| (8) | Includes 9,010 shares held in Mr. Miller’s account in his 401(k) retirement plan. |
| (9) | 10,158 shares held in Mr. Pollack’s individual retirement account and 11,050 shares allocated to Mr. Pollack in the Prudential Bank 401(k) Plan. |
| (10) | Includes 20,000 shares held by Mr. Vanaria’s spouse. |
| (11) | Includes 10,031 shares allocated to Mr. Migliorino in the Prudential Bank 401(k) Plan and 9,796 shares held in Mr. Migliorino’s individual retirement account. |
17
Equity Compensation Plan Information. The following table provides information as of September 30, 2021 with respect to shares of common stock that may be issued under the existing equity compensation plans, which consist of the 2008 Stock Option Plan, the 2008 Recognition and Retention Plan and the 2014 Stock Incentive Plan, all of which were approved by the Company’s shareholders. The share amounts set forth below with respect to the 2008 Stock Option Plan and the 2008 Recognition and Retention Plan have been adjusted for the exchange of shares in connection with the second-step conversion completed on October 9, 2013, at an exchange ratio of 0.9442 of a share of Company common stock for each share of Old Prudential Bancorp common stock held by other than Prudential Mutual Holding Company. Grants may no longer be made pursuant to the 2008 Stock Option Plan and the 2008 Recognition and Retention Plan.
| | | | | | | |
|
| |
| | |
| Number of |
| | | | | | | securities remaining |
| | Number of | | | | | available for |
| | securities to be | | Weighted- | | future issuance | |
| | issued upon | | average | | under equity | |
| | exercise of | | exercise price of | | compensation | |
| | outstanding | | outstanding | | plans (excluding | |
| | options, | | options, | | securities | |
| | warrants | | warrants and | | reflected in | |
| | and rights | | rights | | column (a)) | |
Plan Category | | (a) | | (b) | | (c) | |
Equity compensation plans approved by security holders | | 533,229 | (1) | $ | 14.32 | (1) | 515,827 |
Equity compensation plans not approved by security holders | | — | | | — | | — |
Total | | 533,229 | | $ | 14.32 | | 515,827 |
112
| (1) | Includes 23,056 shares subject to restricted stock grants which were not vested as of September 30, 2021. The weighted average exercise price excludes such restricted stock grants. |
| (2) | Grants can only be made pursuant to the 2014 Stock Incentive Plan. |
The Company is not aware of any arrangements, including any pledge by any person of securities of the Company, the operation of which may at a subsequent date result in a change in control of the Company.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Board Leadership Structure
Mr. Pollack serves as our President and Chief Executive Officer and Mr. Bruce E. Miller serves as Chairman of the Board. The information required hereinboard of directors has determined that the separation of the offices of Chairman of the Board and President enhances board independence and oversight. Further, the separation of the Chairman of the Board permits the President and Chief Executive Officer to better focus on his responsibilities on managing the daily operations of the Company, enhancing shareholder value and expanding and strengthening our franchise while allowing the Chairman to lead the board of directors in its fundamental role of providing independent oversight and advice to management. The Chairman also serves as a liaison between the Board of Directors and executive management. Mr. Miller is incorporatedan independent director under the rules of the Nasdaq Stock Market.
Board’s Role in Risk Oversight
Risk is inherent with every business, particularly financial institutions. We face a number of risks, including credit risk, interest rate risk, liquidity risk, operational risk, strategic risk and reputational risk. Management is responsible for the day-to-day management of the risks that Prudential Bancorp faces, while the Board of Directors, as a whole and through its committees, has responsibility for the oversight of risk management. In its risk oversight role, the Board of Directors ensures that the risk management processes designed and implemented by reference frommanagement are adequate and functioning as designed.
One of our current senior executive officers, Mr. Pollack, serves on our Board of Directors. Other members of our senior management regularly attend meetings of the sections captioned "Management Compensation – Board of Directors and are available to address any questions or concerns raised by the Board of Directors on risk management or other matters. Prudential Bank has established an Asset-Liability Committee, a Loan Quality Committee, a Management Loan Committee and an Investment Committee composed of members of senior management. The independent directors work together to provide strong, independent oversight of Prudential Bancorp’s management and affairs.
18
Director Independence
A majority of our directors are “independent” as defined in the rules of the Nasdaq Stock Market. Our Board of Directors has determined that Messrs. Fanelli, Hosier, Miller and Vanaria are independent directors.
Related Party Transactions"Transactions
In accordance with applicable federal laws and “Informationregulations, Prudential Bank offers mortgage loans to its directors, officers and employees as well as members of their immediate families for the financing of their primary residences and certain other loans. These loans are made on substantially the same terms as those prevailing at the time for comparable loans with Respectpersons not related to NomineesPrudential Bank except that Prudential Bank provides for Director, Continuing Directorsa reduced interest rate of one hundred basis points to all employees, officers and Executive Officers” indirectors for a first mortgage on their primary residence and waives the Definitive Proxy Statement.origination fees, other than appraisal and document review fees. It is the belief of management that these loans neither involve more than the normal risk of collectability nor present other unfavorable features.
The table below lists the outstanding loans made by Prudential Bank to related persons, where the amount involved exceeds $120,000 and the interest rate was reduced and loan origination fee was waived.
| | | | | | | | | | | | | | | | |
| | | | Largest Principal | | Amount | | Amounts Paid | | | ||||||
| | Year ended | | Amount Outstanding | | Outstanding at | | During Year | | | ||||||
Name |
| September 30, |
| During Year |
| Year-End |
| Principal |
| Interest |
| Interest Rate | ||||
John C. Hosier | | 2021 | | $ | 328,554 | | $ | 317,589 | | $ | 10,965 | | $ | 10,111 | | 3.125% |
| | 2020 | | | 339,182 | | | 328,554 | | | 10,628 | | | 10,448 | | 3.125% |
| | | | | | | | | | | | | | | | |
Jack E. Rothkopf | | 2021 | | | 137,032 | | | 130,916 | | | 6,116 | | | 4,194 | | 3.125% |
| | 2020 | | | 147,285 | | | 137,032 | | | 10,253 | | | 4,474 | | 3.125% |
Item 14. Principal Accounting Fees and Services
The information required hereinAudit Committee of the Board of Directors of Prudential Bancorp has appointed S.R. Snodgrass, P.C. (“S.R. Snodgrass”), an independent registered public accounting firm, to perform the audit of our financial statements for the year ending September 30, 2022, and further directed that the appointment of S.R. Snodgrass as our auditors be submitted for ratification by the shareholders at the annual meeting for 2022.
We have been advised by S.R. Snodgrass that neither that firm nor any of its associates has any relationship with Prudential Bancorp or its subsidiaries other than the usual relationship that exists between an independent registered public accounting firm and its clients. We anticipate that S.R. Snodgrass will have one or more representatives virtually at the annual meeting for 2022 who will have an opportunity to make a statement, if they so desire, and will be available to respond to appropriate questions.
In determining whether to appoint S.R. Snodgrass as our independent registered public accounting firm, the Audit Committee considered whether the provision of services, other than auditing services, by S.R. Snodgrass is incorporatedcompatible with maintaining its independence. In addition to performing auditing services, our independent registered public accounting firm reviewed our public filings. The Audit Committee believes that S.R. Snodgrass’s performance of these other services is compatible with maintaining the independent registered public accounting firm’s independence.
19
Audit Fees
The following table sets forth the aggregate fees paid by reference fromus to S.R. Snodgrass for professional services in connection with the section captioned "Ratificationaudit of AppointmentPrudential Bancorp’s consolidated financial statements for fiscal 2021 and 2020 and the fees paid by us to S.R. Snodgrass for audit-related services, tax services and all other services during fiscal 2021 and 2020.
| | | | | | |
| | Year Ended September 30, | ||||
|
| 2021 |
| 2020 | ||
Audit fees (1) | | $ | 198,687 | | $ | 189,148 |
Audit-related fees (2) | | | 12,500 | | | — |
Tax fees (3) | | | 22,275 | | | 22,525 |
All other fees (4) | | | 1,000 | | | — |
Total | | $ | 234,462 | | $ | 211,673 |
| (1) | Audit fees consist of fees incurred in connection with the audit of our annual financial statements and the review of the interim financial statements included in our quarterly reports filed with the Securities and Exchange Commission, as well as work generally only the independent auditor can reasonably be expected to provide, such as statutory audits, consents and assistance with and review of documents filed with the Securities and Exchange Commission. |
| (2) | Audited-related fees include fees associated with the audit during fiscal 2021 of Prudential Bank’s 401(k) Plan for the plan year ended December 31, 2020. |
| (3) | Tax fees consist of compliance fees for the preparation of tax returns during fiscal 2021 and 2020. |
| (4) | Consists of fees related to the filing during fiscal 2021 of an amendment to Prudential Bancorp’s Annual Report on Form 10-K for the year ended September 30, 2020. |
The Audit Committee selects our independent registered public accounting firm and pre-approves all audit services to be provided by it to Prudential Bancorp. The Audit Committee also reviews and pre-approves all audit-related and non-audit related services rendered by our independent registered public accounting firm in accordance with the Audit Committee’s Charter. In its review of Independent Registered Public Accounting Firm (Proposal Two) –these services and related fees and terms, the Audit Fees"Committee considers, among other things, the possible effect of the performance of such services on the independence of our independent registered public accounting firm. The Audit Committee pre-approves certain audit-related services and certain non-audit related tax services which are specifically described by the Audit Committee on an annual basis and separately approves other individual engagements as necessary. The Chairman of the Audit Committee has been delegated the authority to approve non-audit related services in lieu of the full Audit Committee. On a quarterly basis, the Chairman of the Audit Committee presents any previously approved engagements to the full Audit Committee.
Each new engagement of S.R. Snodgrass was approved in advance by the Audit Committee or its Chairman, and none of those engagements made use of the de minimis exception to pre-approval contained in the Definitive Proxy Statement.
Securities and Exchange Commission’s rules.
11320
PART IV
Item 15. Exhibits, Financial Statement Schedules
Part IV of the Original Report is hereby amended solely to provide the exhibits required to be filed in connection with this Form 10-K/A.
| |
| |
|
|
| |
| |
|
| The following exhibits are filed as part of this Form 10-K, and this list includes the Exhibit Index. |
Exhibit No. |
| Description | |||||
|---|---|---|---|---|---|---|---|
| | ||||||
| |||||||
| |||||||
| | ||||||
| |||||||
| |||||||
|
| ||||||
|
| ||||||
| |||||||
|
| ||||||
| |||||||
|
| ||||||
| |||||||
| |||||||
|
| ||||||
| |||||||
| |||||||
| |||||||
| |||||||
| |||||||
114
|
| ||
|---|---|---|---|
| |||
| |||
| |||
| |||
|
|
| |
| |||
|
| ||
| |||
31.2 | | ||
| |||
|
| ||
|
| ||
|
| ||
|
| ||
|
| ||
|
| ||
104 | | Cover Page Interactive Data (formatted as Inline XBRL and contained in Exhibit 101. | |
|
|
115
|
|
The exhibits listed under (a)(3) of this Item 15 are filed herewith.
|
|
Item 16. Form 10-K Summary
None
11621
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
| Prudential Bancorp, Inc. | |
|
| ||
| By: | /S/ Dennis Pollack | |
|
| Dennis Pollack | |
|
| President and Chief Executive Officer | |
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
|
| |
| ||
| ||
|
| |
| ||
| ||
|
| |
| ||
| ||
|
| |
| ||
| ||
|
| |
| ||
| ||
|
| |
| ||
| ||
|
11722