ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our unaudited consolidated financial statements included elsewhere in this Form 10-Q and with our Annual Report on Form 10-K for the year ended September 30, 2013 (the “Form 10-K”).
Overview.
Prudential Bancorp, Inc. (the “Company”) was formed by Prudential Bancorp, Inc. of Pennsylvania to become the successor holding company for Prudential Savings Bank (the “Bank”) as a result of the second-step conversion completed in October 2013. The Company’s results of operations are primarily dependent on the results of the Bank, which is a wholly owned subsidiary of the Company. The Company’s results of operations depend to a large extent on net interest income, which primarily is the difference between the income earned on its loan and securities portfolios and the cost of funds, which is the interest paid on deposits and borrowings. Results of operations are also affected by our provisions for loan losses, non-interest income (which includes impairment charges) and non-interest expense. Non-interest expense principally consists of salaries and employee benefits, office occupancy expense, depreciation, data processing expense, payroll taxes and other expense. Our results of operations are also significantly affected by general economic and competitive conditions, particularly changes in interest rates, government policies and actions of regulatory authorities. Future changes in applicable laws, regulations or government policies may materially impact our financial condition and results of operations. The Bank is subject to regulation by the Federal Deposit Insurance Corporation (“FDIC”) and the Pennsylvania Department of Banking and Securities (the “Department”). The Bank’s main office is in Philadelphia, Pennsylvania, with six additional full-service banking offices located in Philadelphia and Delaware Counties in Pennsylvania. The Bank’s primary business consists of attracting deposits from the general public and using those funds together with borrowings to originate loans and to invest primarily in U.S. Government and agency securities and mortgage-backed securities. In November 2005, the Bank formed PSB Delaware, Inc., a Delaware corporation, as a subsidiary of the Bank. In March 2006, all mortgage-backed securities then owned by the Company were transferred to PSB Delaware, Inc. PSB Delaware, Inc.’s. activities are included as part of the consolidated financial statements.
Critical Accounting Policies.
In reviewing and understanding financial information for the Company, you are encouraged to read and understand the significant accounting policies used in preparing our financial statements. These policies are described in Note 1 of the notes to our unaudited consolidated financial statements included in Item 1 hereof as well as in Note 2 to our audited consolidated financial statements included in the Form 10-K. The accounting and financial reporting policies of the Company 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.
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:
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Levels of past due, classified, criticized and non-accrual loans, troubled debt restructurings and loan modifications;
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●
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Nature and volume of loans;
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●
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Changes in lending policies and procedures, underwriting standards, collections, charge-offs and recoveries and for commercial loans, the level of loans being approved with exceptions to lending policy;
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●
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Experience, ability and depth of management and staff;
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●
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National and local economic and business conditions, including various market segments;
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●
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Quality of the Company’s loan review system and degree of Board oversight;
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●
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Concentrations of credit and changes in levels of such concentrations; and
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●
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Effect of external factors on the level of estimated credit losses in the current portfolio.
|
In determining the allowance for loan losses, management has established a general pooled allowance. 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 (the general pooled allowance) and those 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 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 examination. 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 June 30, 2014 or September 30, 2013.
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. The Company determines whether the unrealized losses are temporary in accordance with U.S. GAAP. The evaluation is based upon factors such as the 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 because of regulatory concerns , 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, investment securities, FHLB stock 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.
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.
Forward-looking Statements
. In addition to historical information, this Quarterly Report on Form 10-Q includes certain “forward-looking statements” based on management’s current expectations. The Company’s actual results could differ materially, as such term is defined in the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, from management’s expectations. Such forward-looking statements include statements regarding management’s current intentions, beliefs or expectations as well as the assumptions on which such statements are based. These forward-looking statements are subject to significant business, economic and competitive uncertainties and contingencies, many of which are not subject to the Company’s control. You are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements. Factors that could cause future results to vary from current management expectations include, but are not limited to, general economic conditions, legislative and regulatory changes, monetary and fiscal policies of the federal government, changes in tax policies, rates and regulations of federal, state and local tax authorities, changes in interest rates, deposit flows, the cost of funds, demand for loan products, demand for financial services, competition, changes in the quality or composition of the Company’s loan and investment portfolios, changes in accounting principles, policies or guidelines and other economic, competitive, governmental and technological factors affecting the Company’s operations, markets, products, services and fees.
The Company undertakes no obligation to update or revise any forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results that occur subsequent to the date such forward-looking statements are made unless required by law or regulations.
Market Overview.
Although the economy slowly improved during 2012 and 2013 and the beginning of 2014, we still view the current environment as challenging.
The Company continues to focus on the credit quality of its customers, closely monitoring the financial status of borrowers throughout the Company’s markets, gathering information, working on early detection of potential problems, taking pre-emptive steps where necessary and performing the analysis required to maintain adequate reserves for loan losses.
Despite the current market and economic conditions, the Company continues to maintain capital well in excess of regulatory requirements.
The following discussion provides further details on the financial condition of the Company at June 30, 2014 and September 30, 2013, and the results of operations for the three and nine months ended June 30, 2014 and 2013.
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2014 AND SEPTEMBER 30, 2013
At June 30, 2014, we had total assets of $511.9 million, as compared to $607.9 million at September 30, 2013, a decrease of $96.0 million or 15.8%. The primary reason for the $96.0 million decrease in assets was the return to subscribers of $74.3 million in excess subscription funds received in connection with the second-step conversion offering which was completed in October 2013. Cash and cash equivalents decreased $129.3 million to $29.7 million at June 30, 2014 compared to $159.0 million at September 30, 2013. This decrease was attributable to the $74.3 million returned to subscribers, the use of cash and cash equivalents to fund the $15.2 million increase in outstanding net loan balances and a $20.1 million reduction in deposits (excluding $145.7 million of subscription funds held in escrow related to the second-step stock offering). Loans receivable increased to $321.7 million at June 30, 2014 from $306.5 million at September 30, 2013. The loan growth primarily consisted of the origination of single-family residential loans and short-term construction loans secured by properties located within our immediate market area. During the third quarter, the Company purchased approximately $9.0 million of mortgage-backed securities guaranteed by the U.S. Government with short effective lives to improve earnings, while mitigating the Company’s interest rate risk position.
Total liabilities decreased to $382.5 million at June 30, 2014 from $548.0 million at September 30, 2013. The $165.5 million decrease in total liabilities was primarily due to the return of $74.3 million to subscribers due to the oversubscription in the second-step conversion offering as well as the transfer to equity of $69.4 million of net proceeds from the offering. In addition, the Company continued its strategy to allow certain higher costing certificates of deposit to run-off as part of its asset/liability management strategy. The deposit outflows experienced during the third quarter of fiscal 2014 were funded from cash and cash equivalents.
Total stockholders’ equity increased by $69.6 million to $129.5 million at June 30, 2014 from $59.9 million at September 30, 2013. The increase reflected the receipt of net proceeds of approximately $69.4 million from the Company’s second-step conversion offering which closed October 9, 2013. Other items that affected stockholders’ equity during the nine months ended June 30, 2014 were the recognition of net income of approximately $1.4 million, the receipt of $847,000 of cash transferred from the mutual holding company as part of the second-step conversion, a reduction in other comprehensive loss due to a slight increase in the market value of the remaining available for sale securities held in the investment portfolio due to the improvement in market rates since September 30, 2013 and the payment of the Company’s first cash dividend subsequent to the completion of the second-step conversion.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2014 AND 2013
Net income.
The Company recognized net income of $521,000, or $0.06 per basic and diluted share, for the quarter ended June 30, 2014 as compared to $685,000, or $0.08 per basic and diluted share, for the quarter ended June 30, 2013. For the nine months ended June 30, 2014, the Company recognized net income of $1.4 million, or $0.15 per basic and diluted share, as compared to net income of $971,000, or $0.11 per basic and diluted share for the comparable period in fiscal 2013. The level of earnings for the three month period ended June 30, 2013 was higher than the same quarter in fiscal 2014 primarily due to gains on the sale of investments and mortgage-back securities recognized during the 2013 period. With regard to the nine month period ended June 30, 2014, the $423,000 increase, or $0.05 per basic share, was primarily due to an increase in net interest income combined with reductions in non-operating expenses as well as federal income tax expense.
Net interest income.
For the three months ended June 30, 2014, net interest income increased $221,000 or 7.2% to $3.3 million as compared to $3.1 million for the same period in 2013 primarily as a result of a decline of $211,000 or 20.3% in interest expense. The decrease in interest expense resulted primarily from a 15 basis point decrease to 0.87% in the weighted average rate paid on interest-bearing liabilities, reflecting the continued repricing downward of interest-bearing liabilities during the past year combined with a $28.1 million or 6.9% decrease in the average balance of interest-bearing liabilities, primarily certificates of deposit, for the three months ended June 30, 2014 as compared to the same period in fiscal 2013. The Company also experienced a slight increase in interest income resulting from an increase of the average balance of interest-earning assets of $35.8 million or 7.8% to $493.5 million, substantially offset by a decline in the weighted average yield earned of 25 basis points. The increase in the average balance of interest-earning assets reflected the Company’s efforts to grow the loan portfolio in a controlled manner. The decrease in the weighted average yield earned was primarily due to the origination of new loans at lower current market rates of interest combined with the reinvestment at lower current market rates of the proceeds received mortgage-backed securities.
For the nine months ended June 30, 2014, net interest income increased $327,000 or 3.5% to $9.7 million as compared to $9.4 million for the same period in 2013. Interest expense declined by $813,000 or 23.9% and was partially offset by a decrease of $486,000 or 3.8% in interest income. The decrease in interest expense resulted primarily from a 21 basis point decrease to 0.89% in the weighted average rate paid on interest-bearing liabilities, reflecting the continued repricing downward of interest-bearing liabilities during the past year combined with a $26.3 million or 6.4% decrease in the average balance of interest-bearing liabilities, primarily certificates of deposit, for the nine months ended June 30, 2014 as compared to the same period in fiscal 2013. The decrease in interest income resulted from a 44 basis point decrease to 3.26% in the weighted average yield earned on interest-earning assets offset in part by a $43.7 million or 9.5% increase to $504.7 million in the average balance of interest-earning assets for the nine months ended June 30, 2014 as compared to the same period in fiscal 2013. The decrease in the weighted average yield earned was primarily due to the origination of new loans at lower current market rates of interest combined with the reinvestment at lower current market rates of the proceeds from called investment and mortgage-backed securities. The increase in the average balance of interest-earning assets reflects the Company’s efforts to grow primarily the loan portfolio in a controlled manner.
For the three months ended June 30, 2014, the net interest margin was 2.69% as compared to 2.71% for the same period in fiscal 2013. For the nine months ended June 30, 2014, the net interest margin was 2.57% as compared to 2.72% for the same period in fiscal 2013.
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 earned from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities and the resulting costs, expressed both in dollars and rates, the interest rate spread and the net interest margin. Average yields and rates have been annualized. Tax-exempt income and yields have not been adjusted to a tax-equivalent basis. 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.
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Three Months
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Ended June 30,
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2014
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|
2013
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Average
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Average
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Average
|
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|
|
|
Average
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Yield/Rate (1)
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|
Balance
|
|
|
Interest
|
|
|
Yield/Rate (1)
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(Dollars in Thousands)
|
|
Interest-earning assets:
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|
|
|
|
|
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|
|
|
|
|
|
Investment securities
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|
$
|
87,985
|
|
|
$
|
551
|
|
|
|
2.51
|
%
|
|
$
|
92,209
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$
|
566
|
|
|
|
2.46
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%
|
Mortgage-backed securities
|
|
|
49,624
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|
|
|
378
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|
|
|
3.06
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|
|
|
46,862
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|
|
|
405
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|
|
|
3.47
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|
Loans receivable(2)
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|
320,060
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|
3,185
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|
|
|
3.99
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|
|
|
279,172
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|
|
|
3,134
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|
|
|
4.50
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|
Other interest-earning assets
|
|
|
35,875
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|
|
|
22
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|
|
|
0.25
|
|
|
|
39,458
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|
|
|
21
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|
|
|
0.21
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|
Total interest-earning assets
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|
|
493,544
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|
|
|
4,136
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|
|
|
3.36
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|
|
|
457,701
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|
|
|
4,126
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|
|
|
3.62
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Cash and non-interest-bearing balances
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|
|
2,426
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|
|
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|
|
|
|
|
2,639
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|
|
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|
|
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Other non-interest-earning assets
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|
17,908
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|
|
|
|
|
15,922
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|
|
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Total assets
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$
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513,878
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|
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$
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476,262
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|
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Interest-bearing liabilities:
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Savings accounts
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$
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78,404
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|
|
62
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|
|
0.32
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$
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76,571
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|
|
|
63
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|
|
|
0.33
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|
Money market deposit and NOW accounts
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|
101,031
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|
|
|
88
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|
|
|
0.35
|
|
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|
100,623
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|
|
|
88
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|
|
|
0.35
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Certificates of deposit
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199,399
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|
|
|
675
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|
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|
1.36
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|
|
|
229,933
|
|
|
|
885
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|
|
|
1.54
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Total deposits
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|
378,834
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|
|
825
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|
|
|
0.87
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|
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407,127
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|
|
|
1,036
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|
|
|
1.02
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Advances from Federal Home Loan Bank
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|
|
340
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|
|
|
-
|
|
|
|
0.00
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|
|
|
340
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|
|
|
-
|
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|
|
0.00
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Advances from borrowers for taxes and
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insurance
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1,865
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|
|
|
1
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|
|
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0.22
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|
|
1,692
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|
1
|
|
|
|
0.24
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|
Total interest-bearing liabilities
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|
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381,039
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|
|
|
826
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|
|
|
0.87
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409,159
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|
1,037
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|
|
|
1.02
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|
Non-interest-bearing liabilities:
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|
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|
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|
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|
|
|
|
|
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|
|
|
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Non-interest-bearing demand accounts
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2,552
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|
|
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|
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|
|
|
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|
3,449
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|
|
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|
|
|
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Other liabilities
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|
4,665
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|
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|
|
|
|
|
3,946
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|
|
|
|
|
|
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|
Total liabilities
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|
388,256
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|
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|
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|
|
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416,554
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|
|
|
|
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|
Stockholders
’
equity
|
|
|
125,622
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|
|
|
|
|
|
|
|
|
|
|
59,708
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|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
513,878
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|
|
|
|
|
|
|
|
|
|
$
|
476,262
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|
|
|
|
|
|
|
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|
Net interest-earning assets
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|
$
|
112,505
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|
|
|
|
|
|
|
|
|
|
$
|
48,542
|
|
|
|
|
|
|
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Net interest income; interest rate spread
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|
|
|
|
|
$
|
3,310
|
|
|
|
2.49
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%
|
|
|
|
|
|
$
|
3,089
|
|
|
|
2.60
|
%
|
Net interest margin(3)
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|
|
|
|
|
|
|
|
|
|
2.69
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%
|
|
|
|
|
|
|
|
|
|
|
2.71
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average interest-earning assets to average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
interest-bearing liabilities
|
|
|
|
|
|
|
129.53
|
%
|
|
|
|
|
|
|
|
|
|
|
111.86
|
%
|
|
|
|
|
(1) Yields and rates for the three month periods are annualized.
|
(2) Includes non-accrual loans. Calculated net of unamortized deferred fees, undisbursed portion of loans-in-process and the allowance for loan losses.
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(3) Equals net interest income divided by average interest-earning assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
Ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Yield/Rate (1)
|
|
|
Balance
|
|
|
Interest
|
|
|
Yield/Rate (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in Thousands)
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
|
|
$
|
86,972
|
|
|
$
|
1,639
|
|
|
|
2.52
|
%
|
|
$
|
83,415
|
|
|
$
|
1,594
|
|
|
|
2.55
|
%
|
Mortgage-backed securities
|
|
|
44,100
|
|
|
|
1,054
|
|
|
|
3.20
|
|
|
|
57,820
|
|
|
|
1,583
|
|
|
|
3.66
|
|
Loans receivable(2)
|
|
|
318,410
|
|
|
|
9,489
|
|
|
|
3.98
|
|
|
|
273,416
|
|
|
|
9,522
|
|
|
|
4.66
|
|
Other interest-earning assets
|
|
|
55,234
|
|
|
|
108
|
|
|
|
0.26
|
|
|
|
46,411
|
|
|
|
77
|
|
|
|
0.22
|
|
Total interest-earning assets
|
|
|
504,716
|
|
|
|
12,290
|
|
|
|
3.26
|
|
|
|
461,062
|
|
|
|
12,776
|
|
|
|
3.70
|
|
Cash and non-interest-bearing balances
|
|
|
2,470
|
|
|
|
|
|
|
|
|
|
|
|
2,571
|
|
|
|
|
|
|
|
|
|
Other non-interest-earning assets
|
|
|
14,557
|
|
|
|
|
|
|
|
|
|
|
|
16,214
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
521,743
|
|
|
|
|
|
|
|
|
|
|
$
|
479,847
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings accounts
|
|
$
|
79,420
|
|
|
|
197
|
|
|
|
0.33
|
|
|
$
|
72,050
|
|
|
|
182
|
|
|
|
0.34
|
|
Money market deposit and NOW accounts
|
|
|
100,196
|
|
|
|
260
|
|
|
|
0.35
|
|
|
|
100,780
|
|
|
|
269
|
|
|
|
0.36
|
|
Certificates of deposit
|
|
|
205,667
|
|
|
|
2,123
|
|
|
|
1.38
|
|
|
|
238,965
|
|
|
|
2,941
|
|
|
|
1.65
|
|
Total deposits
|
|
|
385,283
|
|
|
|
2,580
|
|
|
|
0.90
|
|
|
|
411,795
|
|
|
|
3,392
|
|
|
|
1.10
|
|
Advances from Federal Home Loan Bank
|
|
|
340
|
|
|
|
-
|
|
|
|
0.00
|
|
|
|
353
|
|
|
|
-
|
|
|
|
0.00
|
|
Advances from borrowers for taxes and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
insurance
|
|
|
2,044
|
|
|
|
3
|
|
|
|
0.20
|
|
|
|
1,798
|
|
|
|
4
|
|
|
|
0.30
|
|
Total interest-bearing liabilities
|
|
|
387,667
|
|
|
|
2,583
|
|
|
|
0.89
|
|
|
|
413,946
|
|
|
|
3,396
|
|
|
|
1.10
|
|
Non-interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing demand accounts
|
|
|
2,528
|
|
|
|
|
|
|
|
|
|
|
|
3,362
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
5,496
|
|
|
|
|
|
|
|
|
|
|
|
3,192
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
395,691
|
|
|
|
|
|
|
|
|
|
|
|
420,500
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
126,052
|
|
|
|
|
|
|
|
|
|
|
|
59,347
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
521,743
|
|
|
|
|
|
|
|
|
|
|
$
|
479,847
|
|
|
|
|
|
|
|
|
|
Net interest-earning assets
|
|
$
|
117,049
|
|
|
|
|
|
|
|
|
|
|
$
|
47,116
|
|
|
|
|
|
|
|
|
|
Net interest income; interest rate spread
|
|
|
|
|
|
$
|
9,707
|
|
|
|
2.36
|
%
|
|
|
|
|
|
$
|
9,380
|
|
|
|
2.60
|
%
|
Net interest margin(3)
|
|
|
|
|
|
|
|
|
|
|
2.57
|
%
|
|
|
|
|
|
|
|
|
|
|
2.72
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average interest-earning assets to average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
interest-bearing liabilities
|
|
|
|
|
|
|
130.19
|
%
|
|
|
|
|
|
|
|
|
|
|
111.38
|
%
|
|
|
|
|
(1) Yields and rates for the nine month periods are annualized.
|
(2) Includes non-accrual loans. Calculated net of unamortized deferred fees, undisbursed portion of loans-in-process and the allowance for loan losses.
|
(3) Equals net interest income divided by average interest-earning assets.
|
Provision for loan losses.
The allowance is maintained at a level sufficient to provide for estimated probable losses in the loan portfolio at each reporting date. At least quarterly, management performs an analysis to identify the inherent risk of loss in the Company’s loan portfolio. This analysis includes a qualitative evaluation of concentrations of credit, past loss experience, current economic conditions, amount and composition of the loan portfolio (including loans being specifically monitored by management), estimated fair value of underlying collateral, delinquencies, and other factors.
The Company’s methodology for assessing the adequacy of the allowance establishes both specific and general pooled allocations of the allowance. Loans are assigned ratings, either individually for larger credits or in homogeneous pools, based on an internally developed grading system. The resulting determinations are reviewed and approved by senior management.
The Company determined that a provision for loan loss was not necessary for both the three and the nine month periods ended June 30, 2014. During the quarter, the Company recorded a charge-off in the amount of $205,000 related to two single-family loans and there were no recoveries during the period. For the nine month period, the Company recorded total charge-offs of $215,000 which were partially offset by recoveries of $47,000. The Company believes that the allowance for loan losses at June 30, 2014 was sufficient to cover all inherent and known losses associated with the loan portfolio at such date. At June 30, 2014, the Company’s non-performing assets totaled $7.7 million or 1.5% of total assets as compared to $7.0 million or 1.2% of total assets at September 30, 2013. Non-performing assets at June 30, 2014 included $7.3 million in non-performing loans consisting of 11 one-to- four family residential mortgage loans aggregating $3.5 million, three single-family residential investment property mortgage loans aggregating $1.9 million and seven commercial real estate mortgage loans aggregating $1.9 million. Non-performing assets also included three one-to four-family residential real estate owned properties with an aggregate carrying value of $460,000. During the quarter, one commercial real estate loan in the amount of $880,000 was added to the Company’s non-performing assets. An impairment analysis was performed resulting in management’s determination that as of June 30, 2014 no additional reserve was required as a result of the impairment of this credit.
The allowance for loan losses totaled $2.2 million, or 0.7% of total loans and 30.0% of total non-performing loans at June 30, 2014 as compared to $2.4 million, or 0.8% of total loans and 35.5% of total non-performing loans at September 30, 2013.
At June 30, 2014, we had $1.4 million of loans delinquent 30-89 days as to interest and/or principal. Such amount consisted of 12 one-to-four family residential mortgage loans.
Our
total classified loans and real estate owned at June 30, 2014 amounted to $22.4 million as compared to $15.5 million
at September 30, 2013. All of such assets were classified “substandard” and consisted of 54 loans and three
real estate owned properties. We did not have any assets classified as “doubtful” or “loss” at either
of such dates. During the quarter, the Company downgraded seven loans aggregating $9.0 million to one borrower
from “special mention” to “substandard”, as a result of an investor terminating a commitment to
the borrower that would have provided sufficient cash flow to allow the borrower to continue to make payments in
accordance with applicable loan agreements. All of such loans were current as of June 30, 2014. As of August 14, 2014,
another investor has agreed to provide $1.0 million to the borrower for the borrower’s primary project if certain
sales targets are reached. The borrower has reached the specified sales targets and expects to receive the agreed upon
infusion from the investor. If the funds are received from the investor, management will re-evaluate the classification
of the loan relationship in subsequent periods. An impairment analysis was performed resulting in management’s
determination that as of June 30, 2014, the applicable loans were sufficiently collateralized and no additional reserve was
required as a result of the impairment of this credit. At June 30, 2014, we also had a total of eight loans aggregating $2.6
million that had been designated “special mention.” These consist of four loans totaling $1.1 million
related to a single borrower which used to purchase a mixed use property and three loans totaling $1.5
million also related to a single borrower are secured by real estate. All of the loans were designated “special
mention” due to concerns with regard to the borrowers’ cash flow situations. At September 30, 2013, we had a
total of six loans aggregating $8.9 million to one borrower whose loans were criticized as
“special mention”.
The following table shows the amounts of non-performing assets (defined as non-accruing loans, accruing loans 90 days or more past and real estate owned) as of June 30, 2014 and September 30, 2013. At neither date did the Company have any accruing loans 90 days or more past due.
|
|
|
|
|
|
|
|
|
June 30,
2014
|
|
|
September 30,
2013
|
|
|
|
(Dollars in Thousands)
|
|
Non-accruing loans:
|
|
|
|
|
|
|
One-to-four family residential
|
|
$
|
6,5367
|
|
|
$
|
4,259
|
|
Commercial real estate
|
|
|
1,907
|
|
|
|
2,375
|
|
Total non-accruing loans
|
|
|
7,274
|
|
|
|
6,634
|
|
Real estate owned, net: (1)
|
|
|
460
|
|
|
|
406
|
|
Total non-performing assets
|
|
$
|
7,734
|
|
|
$
|
7,040
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans as a percentage of loans, net
|
|
|
2.26
|
%
|
|
|
2.15
|
%
|
Total non-performing loans as a percentage of total assets
|
|
|
1.42
|
%
|
|
|
1.09
|
%
|
Total non-performing assets as a percentage of total assets
|
|
|
1.51
|
%
|
|
|
1.12
|
%
|
|
(1)
|
Real estate owned balances are shown net of related loss allowances and consist solely of real property.
|
The Company currently
has one loan of approximately $10 million classified as a TDR which has performed in accordance with the new terms for more
than six consecutive months and is reported as a performing loan.
Non-interest income
. Non-interest income amounted to $194,000 and $768,000 for the three and nine month periods ended June 30, 2014, respectively, compared to $1.1 million and $1.5 million for the same periods in 2013. The level of non-interest income in the 2013 periods was primarily due to an $852,000 gain recorded from the sale of securities from the available-for-sale portfolio which occurred during the third fiscal quarter of 2013.
Non-interest expense.
For the three and nine month periods ended June 30, 2014, non-interest expense increased $39,000 or 1.4% and decreased $86,000 or 1.0%, respectively, compared to the same periods in the prior year. For the three month period ended June 30, 2014, the increase was primarily due to an increase in salary and benefits, partially offset by a reduction in FDIC deposit insurance premiums and professional services. With respect to the nine month period ended June 30, 2014, the primary reasons for the decreases were a reduction of FDIC deposit insurance premiums combined with decreased expenses related to real estate owned and advertising, partially offset by an increase in salary and benefits expense.
Income tax expense
. The Company recorded income tax expense for the three and nine months ended June 30, 2014 of $227,000 and $568,000, respectively, compared to income tax expense of $764,000 and $1.3 million, respectively, for the three and nine months ended June 30, 2013. The effective tax rates for the three and nine months ended June 30, 2014 were 30.3% and 29.0%, respectively. Income tax expense for the 2013 periods was adversely impacted by the decline in the amount of available unrealized capital gains which resulted in an increase in the valuation allowance recognized during the 2013 period related to the deferred tax asset for the capital loss carryforward created in connection with the redemption in kind of our entire investment in a mutual fund. As of June 30, 2013, the valuation allowance related to the capital loss carryforward was increased by $154,000 to become fully reserved. As a result, for subsequent periods the Company’s effective tax rate has been less volatile and within a more normalized range.
LIQUIDITY AND CAPITAL RESOURCES
The Company’s liquidity, represented by cash and cash equivalents, is a product of its operating, investing and financing activities. 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 and securities prepayments can be greatly influenced by market rates of interest, economic conditions and competition. We also maintain excess funds in short-term, interest-earning assets that provide additional liquidity. At June 30, 2014, our cash and cash equivalents amounted to $29.7 million. In addition, our available for sale investment and mortgage-backed securities amounted to an aggregate of $56.5 million at such date.
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 June 30, 2014, the Company had $8.6 million in outstanding commitments to originate fixed and variable-rate loans, not including loans in process. The Company also had commitments under unused lines of credit of $5.2 million and letters of credit outstanding of $109,000 at June 30, 2014. Certificates of deposit at June 30, 2014 maturing in one year or less totaled $88.3 million. Based upon historical experience, we anticipate that a significant portion of the maturing certificates of deposit will be redeposited with us.
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 needs should the need arise. Our borrowings consist solely of advances from the Federal Home Loan Bank of Pittsburgh (“FHLB”), of which we are a member. Under terms of the collateral agreement with the FHLB, we pledge residential mortgage loans as well as our stock in the FHLB as collateral for such advances. However, use of FHLB advances has been modest. At June 30, 2014, we had $340,000 in outstanding FHLB advances and had the ability to obtain an additional $193.9 million in FHLB advances. Additional borrowing capacity with the FHLB could be obtained with the pledging of certain investment securities. The Bank has also obtained approval to borrow from the Federal Reserve Bank discount window.
We anticipate that we will continue to have sufficient funds and alternative funding sources to meet our current commitments.
The following table summarizes the Company’s and Bank’s regulatory capital ratios as of June 30, 2014 and September 30, 2013 and compares them to current regulatory guidelines.
|
|
|
|
|
|
|
|
To Be
|
|
|
|
|
|
|
|
|
|
Well Capitalized
|
|
|
|
|
|
|
Required for
|
|
|
Under Prompt
|
|
|
|
|
|
|
Capital Adequacy
|
|
|
Corrective Action
|
|
|
|
Actual Ratio
|
|
|
Purposes
|
|
|
Provisions
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014:
|
|
|
|
|
|
|
|
|
|
Tier 1 capital (to average assets)
|
|
|
|
|
|
|
|
|
|
The Company
|
|
|
25.32
|
%
|
|
|
4.0
|
%
|
|
|
N/A
|
|
The Bank
|
|
|
17.82
|
%
|
|
|
4.0
|
%
|
|
|
5.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company
|
|
|
54.27
|
%
|
|
|
4.0
|
%
|
|
|
N/A
|
|
The Bank
|
|
|
38.25
|
%
|
|
|
4.0
|
%
|
|
|
6.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company
|
|
|
55.18
|
%
|
|
|
8.0
|
%
|
|
|
N/A
|
|
The Bank
|
|
|
39.16
|
%
|
|
|
8.0
|
%
|
|
|
10.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 capital (to average assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
12.54
|
%
|
|
|
4.0
|
%
|
|
|
N/A
|
|
Bank
|
|
|
11.81
|
%
|
|
|
4.0
|
%
|
|
|
5.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
26.69
|
%
|
|
|
4.0
|
%
|
|
|
N/A
|
|
Bank
|
|
|
25.69
|
%
|
|
|
4.0
|
%
|
|
|
6.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
27.72
|
%
|
|
|
8.0
|
%
|
|
|
N/A
|
|
Bank
|
|
|
26.18
|
%
|
|
|
8.0
|
%
|
|
|
10.0
|
%
|
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements, accompanying notes, and related financial data of the Company presented herein have been prepared in accordance with generally accepted accounting principles which require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation.
Unlike most industrial companies, substantially all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution’s performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the price of goods and services, since such prices are affected by inflation to a larger extent than interest rates. In the current interest rate environment, liquidity and the maturity structure of the Company’s assets and liabilities are critical to the maintenance of acceptable performance levels.
How We Manage Market Risk
. Market risk is the risk of loss from adverse changes in market prices and rates. Our market risk arises primarily from interest rate risk which is inherent in our lending, investment and deposit gathering activities. To that end, management actively monitors and manages interest rate risk exposure. In addition to market risk, our primary risk is credit risk on our loan portfolio. We attempt to manage credit risk through our loan underwriting and oversight policies.
The principal objective of our interest rate risk management function is to evaluate the interest rate risk embedded in certain balance sheet accounts, determine the level of risk appropriate given our business strategy, operating environment, capital and liquidity requirements and performance objectives, and manage the risk consistent with approved guidelines. We seek to manage our exposure to risks from changes in interest rates while at the same time trying to improve our net interest spread. We monitor interest rate risk as such risk relates to our operating strategies. We have established an Asset/Liability Committee which is comprised of our President and Chief Executive Officer, Chief Financial Officer, Chief Lending Officer, Treasurer and Controller. The Asset/Liability Committee meets on a regular basis and is responsible for reviewing our asset/liability policies and interest rate risk position. Both the extent and direction of shifts in interest rates are uncertainties that could have a negative impact on future earnings.
In
recent years, we primarily have reduced our investment in longer term fixed-rate callable agency bonds, originated
hybrid adjustable-rate single family Residential Mortgage loans and increased our portfolio of step-up callable agency bonds
and agency issued collaterized mortgage-backed securities (“CMO’s”) with short effective
life. However, notwithstanding the foregoing steps, we remain subject to a significant level of interest rate risk in a
low interest rate environment due to the high proportion of our loan portfolio that consists of fixed-rate loans as well as
our decision to invest a significant amount of our assets in long-term, fixed-rate investment and mortgage-backed securities
held to maturity.
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 a company’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 following table sets forth the amounts of our interest-earning assets and interest-bearing liabilities outstanding at June 30, 2014, which we expect, based upon certain assumptions, to reprice or mature during 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 June 30, 2014, 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 variable-rate loans and fixed-rate loans, and as a result of contractual rate adjustments on adjustable-rate loans. Annual prepayment rates for variable-rate and fixed-rate single-family and multi-family residential and commercial mortgage loans are assumed to range from 8.0% to 45.3%. The annual prepayment rate for mortgage-backed securities is assumed to range from 0.4% to 22.7%. For savings accounts, checking accounts and money markets, the decay rates vary on annual basis over a ten year period.
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More than
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More than
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More than
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3 Months
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3 Months
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1 Year
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3 Years
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More than
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Total
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or Less
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to 1 Year
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to 3 Years
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to 5 Years
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5 Years
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Amount
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(Dollars in Thousands)
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Interest-earning assets(1):
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Investment and mortgage-backed securities(2)
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$
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5,317
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$
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7,043
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$
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13,055
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$
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14,153
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$
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101,564
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$
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141,132
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Loans receivable(3)
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23,938
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47,394
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83,963
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61,168
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104,992
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321,455
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Other interest-earning assets(4)
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28,809
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-
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-
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-
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-
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28,809
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Total interest-earning assets
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$
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58,064
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$
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54,437
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$
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97,018
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$
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75,321
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$
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206,556
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$
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491,396
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Interest-bearing liabilities:
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Savings accounts
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$
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2,250
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$
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5,689
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$
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9,646
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$
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9,310
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$
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48,482
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$
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75,377
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Money market deposit and NOW accounts
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3,763
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11,289
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18,626
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15,048
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53,159
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101,885
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Certificates of deposit
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29,714
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58,859
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62,310
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45,951
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-
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196,834
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Advances from Federal Home Loan Bank
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-
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340
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-
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-
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-
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340
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Advances from borrowers for taxes and insurance
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2,369
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-
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-
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-
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-
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2,369
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Total interest-bearing liabilities
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$
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38,096
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$
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76,177
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$
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90,582
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$
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70,309
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$
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101,641
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$
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376,805
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Interest-earning assets
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less interest-bearing liabilities
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$
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19,968
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($
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21,740
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)
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$
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6,436
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$
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5,012
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$
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104,915
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$
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114,591
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Cumulative interest-rate sensitivity gap (5)
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$
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19,968
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($
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1,772
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$
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4,664
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$
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9,676
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$
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114,591
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Cumulative interest-rate gap as a
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percentage of total assets at June 30, 2014
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3.90
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%
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-0.35
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%
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0.91
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%
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1.89
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%
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22.38
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%
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Cumulative interest-earning assets
as a percentage of cumulative interest-bearing liabilities at June 30, 2014
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152.41
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%
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98.45
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%
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102.28
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%
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103.52
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%
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130.41
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%
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(1)
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Interest-earning assets are included in the period in which the balances are expected to be redeployed and/or repriced as a result of anticipated prepayments, scheduled rate adjustments and contractual maturities.
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(2)
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For purposes of the gap analysis, investment securities are reflected at amortized cost.
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(3)
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For purposes of the gap analysis, loans receivable includes non-performing loans and is gross of the allowance for loan losses and unamortized deferred loan fees, but net of the undisbursed portion of loans-in-process.
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(5)
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Cumulative interest-rate sensitivity gap represents the difference between interest-earning assets and interest-bearing liabilities.
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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 variable-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 variable-rate loans may be adversely affected 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 scenario. The “Sensitivity Measure” is the decline in the NPV ratio, in basis points, caused by a 2% increase or decrease in rates, whichever produces a larger decline. The following table sets forth our NPV as of June 30, 2014 and reflects the changes to NPV as a result of immediate and sustained changes in interest rates as indicated.
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Change in
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NPV as % of Portfolio
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Interest Rates
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Net Portfolio Value
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Value of Assets
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In Basis Points
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(Rate Shock)
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Amount
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$ Change
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% Change
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NPV Ratio
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Change
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(Dollars in Thousands)
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300
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$
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105,629
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$
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(38,770
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(26.85
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)%
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23.98
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%
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(4.48
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)%
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200
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118,073
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(26,326
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(18.23
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)%
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25.57
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%
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(2.89
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)%
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100
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131,255
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(13,144
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)
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(9.10
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)%
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27.10
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%
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(1.36
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)%
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Static
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144,399
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-
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-
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28.46
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%
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-
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(100)
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153,219
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8,820
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6.11
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%
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29.11
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%
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0.65
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%
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(200)
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154,024
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9,625
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6.67
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%
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28.75
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%
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0.29
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%
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(300)
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155,510
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11,111
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7.69
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%
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28.57
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%
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0.11
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%
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At September 30, 2013, the Company’s NPV was $80.6 million or 13.26% of the market value of assets. Following a 200 basis point increase in interest rates, the Company’s “post shock” NPV would be $55.4 million or 9.84% of the market value of assets.
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 requires 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.