Provision for income taxes:
An income tax provision of $209,000 was recorded in the first quarter of 2022 compared to a tax provision of $71,000 recorded in the first quarter of 2021, primarily due to higher taxable income recorded in the 2022 period.
The Company qualifies for a federal tax credit for low-income housing project investments, and the tax provisions for each period reflect the application of the tax credit. For the first quarters of both 2022 and 2021, the tax credit was $225,000, offsetting $434,000 and $296,000 in tax expense in the 2022 and 2021 periods, respectively. For the first quarter of 2022, the tax credit lowered the effective tax rate from 18.7% to 9.0% compared to the same period in 2021, when the tax credit lowered the effective tax rate from 17.4% to 4.2%.
Liquidity:
The objective of liquidity management is to ensure that sufficient funding is available, at a reasonable cost, to meet the ongoing operational cash needs of the Company and to take advantage of income producing opportunities as they arise. While the desired level of liquidity will vary depending upon a variety of factors, it is the primary goal of the Company to maintain a high level of liquidity in all economic environments. Principal sources of asset liquidity are provided by loans and securities maturing in one year or less, and other short-term investments, such as federal funds sold and cash and due from banks. Liability liquidity, which is more difficult to measure, can be met by attracting deposits and maintaining the core deposit base. The Company is a member of the Federal Home Loan Bank of Pittsburgh for the purpose of providing short-term liquidity when other sources are unable to fill these needs. During the three months ended March 31, 2022, overnight borrowings from the Federal Home Loan Bank averaged $211,000. As of March 31, 2022, the Company had no short-term borrowings, but had $20,000,000 in long-term debt with the Federal Home Loan Bank with a remaining unused borrowing capacity with the Federal Home Loan Bank of $165,268,000.
The Company may use brokered deposits as an additional funding alternative. Brokered deposits of $30,004,000 and $30,003,000 were included in total interest-bearing deposits as of March 31, 2022 and December 31, 2021, respectively.
Funding derived from securities sold under agreements to repurchase (accounted for as collateralized financing transactions) is available through corporate cash management accounts for business customers. This product provides the Company with the ability to pay interest on corporate checking accounts.
In view of the sources previously mentioned, management believes that the Company’s liquidity can provide the funds needed to meet operational cash needs.
Off-Balance Sheet Arrangements:
The Company’s consolidated financial statements do not reflect various off-balance sheet arrangements that are made in the normal course of business, which may involve some liquidity risk, credit risk, and interest rate risk. These commitments consist mainly of loans approved but not yet funded, unused lines of credit and outstanding letters of credit. Letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a first-party. Generally, financial and performance letters of credit have expiration dates within one year of issuance, while commercial letters of credit have longer term commitments. The credit risk involved in issuing letters of credit is essentially the same as the risks that are involved in extending loan facilities to customers. The Company generally holds collateral and/or personal guarantees supporting these commitments. The Company had $3,636,000 and $5,724,000 of financial and performance letters of credit commitments outstanding as of March 31, 2022 and December 31, 2021, respectively. Commercial letters of credit as of March 31, 2022 and December 31, 2021 totaled $9,409,000 and $9,475,000, respectively.