PCSB FINANCIAL CORPORATION General
Management's discussion and analysis of financial condition atMarch 31, 2022 andJune 30, 2021 , and results of operations for the three and nine months endedMarch 31, 2022 and 2021 is intended to assist in understanding the consolidated financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the unaudited consolidated financial statements and the notes thereto appearing in Part I, Item 1, of this quarterly report on Form 10-Q and with the audited consolidated financial statements included in the annual report on Form 10-K for the fiscal year endedJune 30, 2021 .
Cautionary Note Regarding Forward-Looking Statements
This quarterly report contains forward-looking statements, which can be identified by the use of words such as "estimate," "project," "believe," "intend," "anticipate," "plan," "seek," "expect," "will," "may" and words of similar meaning. These forward-looking statements include, but are not limited to:
•
statements of our goals, intentions and expectations;
•
statements regarding our business plans, prospects, growth and operating strategies;
•
statements regarding the quality of our loan and investment portfolios; and
•
estimates of our risks and future costs and benefits.
These forward-looking statements are based on current beliefs and expectations of our management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.
The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:
•
extent, duration and severity of the COVID-19 pandemic and government action in response to the pandemic, including their impact on our business and operations, including the impact on lost fee revenue and operating expenses, as well as their effects on our customers and issuers of securities, including their ability to make timely payments on obligations, service providers, and on economies and markets more generally;
•
general economic conditions, either nationally or in our market areas, that are worse than expected;
•
changes in the level and direction of loan delinquencies and charge-offs and changes in estimates of the adequacy of the allowance for loan losses;
•
our ability to access cost-effective funding;
•
fluctuations in real estate values and both residential and commercial real estate market conditions;
•
demand for loans and deposits in our market area;
•
our ability to continue to implement our business strategies;
•
competition among depository and other financial institutions;
•
inflation and changes in the interest rate environment that reduce our margins and yields, reduce the fair value of financial instruments or reduce the origination levels in our lending business, or increase the level of defaults, losses and prepayments on loans we have made and make whether held in portfolio or sold in the secondary markets;
•
adverse changes in the securities or credit markets;
•
changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;
•
our ability to manage market risk, credit risk and operational risk in the current economic conditions;
•
our ability to enter new markets successfully and capitalize on growth opportunities;
31
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our ability to successfully integrate any assets, liabilities, customers, systems and management personnel we may acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto;
•
changes in consumer spending, borrowing and savings habits;
•
changes in accounting policies and practices, as may be adopted by the bank
regulatory agencies, the
•
our ability to retain key employees;
•
our compensation expense associated with equity allocated or awarded to our employees; and
•
changes in the financial condition, results of operations or future prospects of issuers of securities that we own.
Additional factors that may affect our results are discussed in the annual
report on Form 10-K for the fiscal year ended
Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. The Company assumes no obligation to update any forward-looking statements except as may be required by applicable law or regulation.
Critical Accounting Policies and Critical Accounting Estimates
Critical accounting estimates are necessary in the application of certain accounting policies and procedures and are particularly susceptible to significant change. Critical accounting policies are defined as those involving significant judgments, estimates and assumptions by management that could have a material impact on the carrying value of certain assets or on income under different assumptions or conditions. For additional information regarding critical accounting policies, refer to the section captioned "Critical Accounting Policies" in Management's Discussion and Analysis of Financial Condition and Results of Operations included in theJune 30, 2021 Form 10-K. There have been no significant changes in our application of critical accounting policies for the three or nine months endedMarch 31, 2022 .
Overview
PCSB Financial Corporation (the "Holding Company" and together with its direct and indirect subsidiaries, the "Company") is aMaryland corporation organized byPCSB Bank (the "Bank") for the purpose of acquiring all of the capital stock of the Bank issued in the Bank's conversion to stock ownership onApril 20, 2017 . AtMarch 31, 2022 , the significant assets of the Holding Company were the capital stock of the Bank, cash deposited in the Bank, and a loan to the PCSB Bank Employee Stock Ownership Plan ("ESOP"). The liabilities of the Holding Company were insignificant. The Company is subject to the financial reporting requirements of the Securities Exchange Act of 1934, as amended, and regulation and examination by theBoard of Governors of theFederal Reserve System (the "Federal Reserve Board") and theNew York State Department of Financial Services (the "NYSDFS").PCSB Bank is a community-oriented financial institution that provides financial services to individuals and businesses within its market area ofPutnam ,Southern Dutchess ,Rockland andWestchester Counties inNew York . The Bank is a state-chartered commercial bank, and its deposits are insured up to applicable limits by theDeposit Insurance Fund of theFederal Deposit Insurance Corporation ("FDIC"). The Bank's primary regulators are theFDIC and the NYSDFS. The Company's primary market area encompasses all ofPutnam andWestchester Counties and parts ofDutchess andRockland Counties inNew York , which are the counties in which our offices are located, and the surrounding areas. It is considered a primary area for growth, particularly for commercial lending and deposit opportunities.Westchester County includes a high concentration of office, medical, retail, industrial, mixed use and multi-family real estate buildings and businesses. Our primary focus in this marketplace is small to middle market businesses in these segments. Rising real estate values and lack of available commercial space inBrooklyn andManhattan have caused businesses to migrate to central and lowerWestchester County , which has increased the demand for flex-industrial and multi-family property loans in our market area.Dutchess ,Putnam andRockland Counties offer similar commercial opportunities toWestchester County , but on a significantly smaller scale, and provide greater opportunities in residential mortgage lending and consumer lending and in retail deposit gathering. The close proximity ofBronx County, New York City,Fairfield County, Connecticut , andBergen County, New Jersey , to our market area also creates a secondary area of opportunity for office, industrial and multi-family property loans. 32 --------------------------------------------------------------------------------
Selected Financial Ratios
The summary information presented below as of and for the three and nine months endedMarch 31, 2022 and 2021 is derived in part from and should be read in conjunction with the consolidated financial statements of the Company presented in Part I (Dollars in thousands, except share and per share data). Three Months Ended Nine Months Ended March 31, March 31, March 31, March 31, 2022 2021 2022 2021 Performance Ratios (1): Return on average assets 0.73 % 0.80 % 0.81 % 0.67 % Return on average equity 5.02 % 5.32 % 5.51 % 4.41 % Interest rate spread 2.69 % 2.53 % 2.76 % 2.51 % Net interest margin 2.80 % 2.69 % 2.86 % 2.70 % Efficiency ratio 65.66 % 70.10 % 63.98 % 70.56 %
Noninterest income to average assets 0.19 % 0.13 %
0.19 % 0.14 % Noninterest expense to average assets 1.87 % 1.90 %
1.87 % 1.92 %
Average interest-earning assets to
average interest-bearing liabilities 131.20 % 131.31 % 131.24 % 131.40 %
Average equity to average assets 14.50 % 14.99 % 14.62 % 15.18 %
Dividend payout ratio (2) 24.61 % 16.65 % 22.84 % 20.37 %
As of and for the three
months ended
March 31, March 31,
2022 2021
Loans to deposits 79.15 % 86.72 %
Share Data:
Shares outstanding 15,334,857 15,966,216
Book value per common share $ 18.02 $ 16.99
Tangible book value per common share (3) $ 17.62 $ 16.60
Asset Quality Ratios: Non-performing loans receivable$ 7,858 $
2,054
Non-performing assets$ 7,858 $
2,054
Allowance for loan losses as a percent of total loans receivable (4) 0.68 % 0.65 % Allowance for loan losses as a percent of non-performing loans receivable 110.86 % 382.91 % Non-performing loans as a percent of total loans receivable, net (4) 0.61 % 0.17 % Non-performing assets as a percent of total assets 0.40 % 0.11 % Net charge-offs (recoveries) $ 4 $
(82 ) Net charge-offs (recoveries) to average outstanding loans during the period (1)
0.00 % (0.03 %)
Capital Ratios (5): Tier 1 capital (to adjusted total assets) 12.86 % 12.76 % Common equity Tier 1 capital (to risk-weighted assets) 17.22 % 17.72 % Tier 1 capital (to risk-weighted assets) 17.22 % 17.72 % Total capital (to risk-weighted assets) 17.83 %
18.33 %
(1) Performance ratios are annualized. (2) Dividends declared per share divided by net income per share. (3) Tangible book value per share is a non-GAAP measure and equals total shareholders' equity, less goodwill and other intangible assets, divided by shares outstanding. We believe this disclosure may be meaningful to those investors who seek to evaluate our equity without giving effect to goodwill and other intangible assets. Reconciliations of GAAP to non-GAAP measures appear below this table. (4) Total loans receivable excludes PPP loans. (5)Represents Bank ratios. 33
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Non-GAAP Financial Measures
The following table is a reconciliations of book value per share (GAAP measure) to tangible book value per share (non-GAAP measure) (Dollars in thousands, except share and per share data).
As of
March 31 , March 31,
2022 2021Computation of Tangible Book Value per Common Share Total shareholders' equity (GAAP)
$ 276,392 $ 271,297 Adjustments: Goodwill (6,106 ) (6,106 ) Other intangible assets (102 )
(168 )
Tangible common shareholders' equity (Non-GAAP)
Common shares outstanding 15,334,857 15,966,216 Book value per share (GAAP)$ 18.02 $
16.99
Adjustments:
Effects of intangible assets (0.40 )
(0.39 )
Tangible book value per common share (Non-GAAP)
Financial Condition
Cash and Cash Equivalents. Cash and cash equivalents decreased
Investment Securities Portfolio
The following table is a summary of the Company's investment securities portfolio, at carrying value, as ofMarch 31, 2022 andJune 30, 2021 (Dollars in thousands): Increase / (Decrease) March 31, 2022 June 30, 2021 $ % Available for sale debt securitiesU.S. Government and agency obligations $ 10,229$ 21,816 $ (11,587 ) -53.1 % Corporate 4,978 8,189 (3,211 ) -39.2 % State and municipal 5,533 7,115 (1,582 ) -22.2 % Mortgage-backed securities - residential 14,042 17,654 (3,612 ) -20.5 % Mortgage-backed securities - commercial 2,403 2,613 (210 ) -8.0 % Total available for sale debt securities $ 37,185$ 57,387 $ (20,202 ) -35.2 % Held to maturity debt securitiesU.S. Government and agency obligations $ 49,995$ 33,994 $ 16,001 47.1 % Corporate 52,083 43,605 8,478 19.4 % State and municipal 87,407 57,625 29,782 51.7 % Mortgage-backed securities - residential 106,302 96,181 10,121 10.5 % Mortgage-backed securities - collateralized mortgage obligations 26,076 33,300 (7,224 ) -21.7 % Mortgage-backed securities - commercial 89,033 72,879 16,154 22.2 % Total held to maturity debt securities$ 410,896 $ 337,584 $ 73,312 21.7 %
The increase in investment securities was the result of the Company deploying excess liquidity.
34
--------------------------------------------------------------------------------Loans Receivable Portfolio
The following table is a summary of the Company's loan portfolio, as of
Increase / (Decrease)
March 31, 2022 June 30, 2021 $ %
Mortgage loans
Residential $ 215,431 $ 224,305 $ (8,874 ) -4.0 %
Commercial 897,424 826,624 70,800 8.6 %
Construction 16,894 10,151 6,743 66.4 %
Net deferred loan origination
(fees) costs (23 ) 196 (219 ) -111.7 %
Total mortgage loans 1,129,726 1,061,276 68,450 6.4 %
Commercial and consumer loans:
Commercial loans 141,427 150,658 (9,231 ) -6.1 %
Home equity lines of credit 22,557 25,439 (2,882 ) -11.3 %
Consumer and overdrafts 348 345 3 0.9 %
Net deferred loan origination
costs (fees) 539 (386 ) 925 -239.6 %
Total commercial and consumer
loans 164,871 176,056 (11,185 ) -6.4 %
Total loans receivable 1,294,597 1,237,332 57,265 4.6 %
Allowance for loan losses (8,711 ) (7,881 ) (830 ) 10.5 %
Loans receivable, net $ 1,285,886 $ 1,229,451 $ 56,435 4.6 %
The increase in loans receivable was primarily the result of increases in
commercial mortgage loans and construction loans, partially offset by decreases
in commercial loans, residential mortgage loans and home equity lines of credit.
The decrease in commercial loans includes a decrease in PPP loans of $32.3
million , driven by loan forgiveness and paydowns, largely offset by a net
increase of $23.0 million in all other commercial loans.
Allowance for Loan Losses. The allowance for loan losses is maintained at levels
considered adequate by management to provide for probable incurred loan losses
inherent in the loan portfolio at the consolidated balance sheet reporting
dates. The allowance for loan losses is based on management's assessment of
various factors affecting the loan portfolio, including portfolio composition,
delinquent and non-accrual loans, national and local business conditions, loss
experience and an overall evaluation of the quality of the underlying
collateral.
The allowance for loan losses increased $830,000 , or 10.5%, to $8.7 million at
March 31, 2022 from $7.9 million at June 30, 2021 . The increase is primarily due
to loan portfolio growth. Non-performing loans as a percent of total loans
receivable (excluding PPP loans) were 0.61% as of March 31, 2022 , an increase
from 0.48% as of June 30, 2021 .
The COVID-19 pandemic has created extensive disruptions to the local economy and
our customers. From March 2020 to December 2021 , the Company has granted loan
payment deferrals on 331 commercial and consumer loans totaling $220.3 million
for borrowers experiencing financial hardship due to the pandemic. Loans on a
COVID-19 related payment deferral totaled $3.6 million (1 loan), or 0.28% of
gross loans, as of March 31, 2022 , compared to $27.3 million (19 loans) , or
2.21% of gross loans, as of June 30, 2021 .
Deposits
Deposits have traditionally been our primary source of funds for our lending and investment activities. The substantial majority of our deposits are from depositors who reside in our primary market area. Deposits are attracted through the offering of a broad selection of deposit instruments for both individuals and businesses.
The following table is a summary of the Company's deposits, as of
Increase / (Decrease)
March 31, 2022 June 30, 2021 $ %
Demand $ 243,908 $ 219,072 $ 24,836 11.3 %
NOW Accounts 221,386 177,223 44,163 24.9 %
Money market accounts 396,358 332,843 63,515 19.1 %
Savings 417,975 387,529 30,446 7.9 %
Time deposits 345,092 375,015 (29,923 ) -8.0 %
Total deposits $ 1,624,719 $ 1,491,682 $ 133,037 8.9 %
35-------------------------------------------------------------------------------- Federal Home Loan Bank Advances. FHLB advances decreased$17.6 million to$48.4 million atMarch 31, 2022 as compared to$66.0 million atJune 30, 2021 . This decrease is due to maturities and principal paydowns of$17.6 million . Total Shareholder's Equity. Total shareholders' equity increased$1.8 million , or 0.7%, to$276.4 million atMarch 31, 2022 from$274.6 million atJune 30, 2021 . This increase was primarily due to net income of$11.4 million and$3.8 million of stock-based compensation and reduction in unearned ESOP shares for plan shares earned during the period, partially offset by the repurchase of$8.2 million (435,788 shares) of common stock,$2.5 million of other comprehensive losses related primarily to unrealized losses on available for sale investment securities driven by higher market interest rates and$2.6 million of cash dividends declared and paid. We would expect that further increases in market interest rates would lead to additional unrealized losses on available for sale investment securities. OnFebruary 3, 2021 , a repurchase plan was authorized to repurchase up to 801,856 shares, or 5% of the Company's then outstanding common stock. As ofMarch 31, 2022 , the Company repurchased 682,561 shares of common stock at an average cost of$18.23 per share under this plan. AtMarch 31, 2022 , the Bank was considered "well capitalized" under applicable regulatory guidelines.
Results of Operations for the Three and Nine Months Ended
Net Income. Net income decreased$118,000 , or 3.3%, to$3.5 million for the three months endedMarch 31, 2022 compared to$3.6 million for the three months endedMarch 31, 2021 . The decrease was primarily due to increases of$1.2 million in provision for loan losses and$384,000 in noninterest expense, largely offset by increases of$1.1 million in net interest income and$331,000 in noninterest income, and a$35,000 decrease in income tax expense. Net income increased$2.4 million , or 26.2%, to$11.4 million for the nine months endedMarch 31, 2022 compared to$9.0 million for the nine months endedMarch 31, 2021 . The increase was primarily due to increases of$3.7 million in net interest income and$802,000 in noninterest income, partially offset by increases of$1.2 million in provision for loan losses,$498,000 in noninterest expense and$450,000 in income tax expense.
Net Interest Income.
The following tables present information regarding average balances of assets
and liabilities, the total dollar amounts of interest income and dividends from
average interest-earning assets, the total dollar amounts of interest expense on
average interest-bearing liabilities, and the resulting annualized average tax
equivalent yields and costs. The yields and costs for the periods indicated are
derived by dividing income or expense by the average balances of assets or
liabilities, respectively, for the periods presented. Average balances have been
calculated using daily balances. Nonaccrual loans are included in average
balances only. Loan fees are included in interest income on loans and are not
material (Dollars in thousands).
36
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Three Months Ended March 31,
2022 2021
Average Interest/ Average Average Interest/ Average
Balance Dividends Rate Balance Dividends Rate
Assets:
Loans receivable (1) $ 1,255,117 $ 11,943 3.81 % $ 1,252,492 $ 12,116 3.88 %
Investment securities (1) 436,702 2,152 2.06 319,239 1,700 2.18
Other interest-earning assets 141,677 105 0.30 162,193 109 0.27
Total interest-earning assets 1,833,496 14,200 3.12
1,733,924 13,925 3.23
Non-interest-earning assets 77,202 68,748
Total assets $ 1,910,698 $ 1,802,672
Liabilities and equity:
NOW accounts $ 215,021 94 0.18 $ 161,049 59 0.15
Money market accounts 360,131 144 0.16 274,516 208 0.31
Savings accounts and escrow 415,850 113 0.11 368,791 132 0.15
Time deposits 349,266 866 1.00 411,500 1,383 1.36
Total interest-bearing
deposits 1,340,268 1,217 0.37 1,215,856 1,782 0.59
FHLB advances 57,185 266 1.89 104,604 506 1.96
Total interest-bearing
liabilities 1,397,453 1,483 0.43 1,320,460 2,288 0.70
Non-interest-bearing deposits 220,809 187,778
Other non-interest-bearing
liabilities 15,370 24,272
Total liabilities 1,633,632 1,532,510
Total shareholders' equity 277,066 270,162
Total liabilities and
shareholders' equity $ 1,910,698 $ 1,802,672
Net interest income $ 12,717 $ 11,637
Interest rate spread - tax
equivalent (2) 2.69 2.53
Net interest margin - tax
equivalent (3) 2.80 2.69
Average interest-earning
assets to interest-bearing
liabilities 131.20 % 131.31 %
(1)
Tax exempt yield is shown on a tax equivalent basis for proper comparison using
statutory federal income tax rate of 21% for all periods presented. See
reconciliation of GAAP to non-GAAP measures in the table below.
(2)
Net interest rate spread represents the difference between the average yield on
average interest-earning assets and the average cost of average interest-bearing
liabilities.
(3)
Net interest margin represents annualized net interest income divided by average
interest-earning assets. See reconciliation of GAAP to non-GAAP measures in the
table below.
37--------------------------------------------------------------------------------
Nine Months Ended March 31,
2022 2021
Average Interest/ Average Average Interest/ Average
Balance Dividends Rate Balance Dividends Rate
Assets:
Loans receivable (1) $ 1,240,253 $ 36,701 3.95 % $ 1,245,881 $ 36,845 3.95 %
Investment securities (1) 423,062 6,294 2.07 316,114 5,489 2.36
Other interest-earning assets 142,974 302 0.28 162,946 344 0.28
Total interest-earning assets 1,806,289 43,297 3.22
1,724,941 42,678 3.31
Non-interest-earning assets 77,027 70,364
Total assets $ 1,883,316 $ 1,795,305
Liabilities and equity:
NOW accounts $ 196,803 254 0.17 $ 153,378 227 0.20
Money market accounts 355,471 499 0.19 260,258 657 0.34
Savings accounts and escrow 403,740 334 0.11 363,768 502 0.18
Time deposits 358,050 2,776 1.03 429,811 4,986 1.54
Total interest-bearing
deposits 1,314,064 3,863 0.39 1,207,215 6,372 0.70
FHLB advances 62,309 924 1.98 105,569 1,545 1.95
Total interest-bearing
liabilities 1,376,373 4,787 0.46 1,312,784 7,917 0.80
Non-interest-bearing deposits 214,391 183,467
Other non-interest-bearing
liabilities 17,186 26,570
Total liabilities 1,607,950 1,522,821
Total shareholders' equity 275,366 272,484
Total liabilities and
shareholders' equity $ 1,883,316 $ 1,795,305
Net interest income $ 38,510 $ 34,761
Interest rate spread - tax
equivalent (2) 2.76 2.51
Net interest margin - tax
equivalent (3) 2.86 2.70
Average interest-earning
assets to interest-bearing
liabilities 131.24 % 131.40 %
(1)
Tax exempt yield is shown on a tax equivalent basis for proper comparison using
statutory federal income tax rate of 21% for all periods presented. See
reconciliation of GAAP to non-GAAP measures in the table below.
(2)
Net interest rate spread represents the difference between the average yield on
average interest-earning assets and the average cost of average interest-bearing
liabilities.
(3)
Net interest margin represents annualized net interest income divided by average
interest-earning assets. See reconciliation of GAAP to non-GAAP measures in the
table below.
The following table presents information regarding tax equivalent adjustment used in the calculation of certain financial metrics (in thousands).
Three Months Ended Nine Months Ended
March 31, March 31,
2022 2021 2022 2021
Total interest income $ 14,200 $ 13,925 $ 43,297 $ 42,678
Total interest expense 1,483 2,288 4,787 7,917
Net interest income (GAAP) 12,717 11,637 38,510 34,761
Tax equivalent adjustment 101 51 289 130
Net interest income - tax
equivalent (non-GAAP) $ 12,818 $ 11,688 $ 38,799 $ 34,891
38
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Rate/Volume Analysis. The following table sets forth the effects of changing
rates and volumes on our net interest income. The rate column shows the effects
attributable to changes in rate (changes in rate multiplied by prior volume).
The volume column shows the effects attributable to changes in volume (changes
in volume multiplied by prior rate). The net column represents the sum of the
prior columns. Changes attributable to changes in both rate and volume that
cannot be segregated have been allocated proportionally based on the changes due
to rate and the changes due to volume (in thousands).
Three Months Ended March 31 ,
Nine Months Ended
2022 versus 2021 2022 versus 2021
Rate Volume Net Rate Volume Net
Interest income:
Loans receivable $ (304 ) $ 131 $ (173 ) $ (272 ) $ 128 $ (144 )
Investment securities (118 ) 570 452 (865 ) 1,670 805
Other
interest-earning
assets 12 (16 ) (4 ) 6 (48 ) (42 )
Total
interest-earning
assets (410 ) 685 275 (1,131 ) 1,750 619 Interest expense: NOW accounts 13 22 35 (32 ) 59 27 Money market accounts (117 ) 53 (64 ) (350 ) 192 (158 ) Savings and escrow accounts (32 ) 13 (19 ) (212 ) 44 (168 ) Time deposits (328 ) (189 ) (517 ) (1,469 ) (741 ) (2,210 ) FHLB advances (18 ) (222 ) (240 ) 21 (642 ) (621 ) Total interest-bearing liabilities (482 ) (323 ) (805 )
(2,042 ) (1,088 ) (3,130 )
Net increase in net interest income$ 72 $ 1,008 $ 1,080 $
911
Provision for Loan Losses. The provision for loan losses increased for the three and nine months endedMarch 31, 2022 , compared to the same periods last year. The increase is primarily due to higher loan portfolio growth in the current year as well as a$944,000 benefit for loan losses in the prior year quarter associated with the release of qualitative reserves established in the prior fiscal year associated with the COVID-19 pandemic. Charge-offs net of recoveries were$4,000 and recoveries, net of charge-offs were$267,000 for the three and nine months endedMarch 31, 2022 , respectively, compared to recoveries net of charge-offs were$82,000 and charge-offs, net of recoveries were$96,000 , respectively, for the same periods last year.
Noninterest Income
The following table displays noninterest income for the three and nine months
ended
Three Months Ended Nine Months Ended
March 31, Net Change March 31, Net Change
2022 2021 $ % 2022 2021 $ %
Fees and service $ 390 $ 353 $ 37 10.5 % $ 1,198 $ 1,038 $ 160 15.4 %
charges
Bank-owned life 185 120 65 54.2 % 568 381 187 49.1 %
insurance
Gain on sale of - - - 0.0 % 548 - 548 100.0 %
premises
Gain on sale of - 113 (113 ) -100.0 % - 113 (113 ) -100.0 %
securities
Net gains on sales of 9 - 9 100.0 % 56 - 56 100.0 %
loans receivable
Swap income 333 - 333 100.0 % 333 367 (34 ) -9.3 %
Other 6 6 - 0.0 % 28 30 (2 ) -6.7 %
Total noninterest $ 923 $ 592 $ 331 55.9 % $ 2,731 $ 1,929 $ 802 41.6 %
income
During the nine months ended March 31, 2022 , the Company sold a parcel of unused
land, resulting in the gain on sale of premises. The increase in fees and
service charges compared to the same period last year was primarily the result
of increases in debit card and interchange income, as well as increases in
overdraft, ATM and wire fees which declined substantially during the beginning
of the COVID-19 pandemic and have since recovered to near pre-pandemic levels.
39
--------------------------------------------------------------------------------Noninterest Expense
The following table displays noninterest expense for the three and nine months
ended
Three Months Ended Nine Months Ended
March 31, Net Change March 31, Net Change
2022 2021 $ % 2022 2021 $ %
Salaries and employee $ 5,737 $ 5,595 $ 142 2.5 % $ 17,353 $ 16,722 $ 631 3.8 %
benefits
Occupancy and equipment 1,414 1,359 55 4.0 % 4,115 4,051 64 1.6 %
Communication and data 573 517 56 10.8 % 1,626 1,539 87 5.7 %
processing
Professional fees 543 382 161 42.1 % 1,356 1,285 71 5.5 %
Postage, printing, 153 146 7 4.8 % 478 452 26 5.8 %
stationery and supplies
FDIC assessment 125 115 10 8.7 % 371 350 21 6.0 %
Advertising 100 100 - 0.0 % 300 300 - 0.0 %
Amortization of 17 21 (4 ) -19.0 % 49 61 (12 ) -19.7 %
intangible assets
Other operating 294 337 (43 ) -12.8 % 737 1,127 (390 ) -34.6 %
expenses
Total noninterest $ 8,956 $ 8,572 $ 384 4.5 % $ 26,385 $ 25,887 $ 498 1.9 %
expense
The increase in professional fees in the current quarter ended March 31, 2022
compared to the same period last year is primarily due to higher legal and
consulting fees. The decrease in other operating expenses for the nine months
ended March 31, 2022 compared to the same period last year is primarily due to
lower pension costs in the current year.
Income Tax Expense. The effective income tax rate was 21.0% and 20.4% for the
three and nine months ended March 31, 2022 as compared to 21.1% and 21.5% for
the same periods last year, with the decrease largely driven by an increase in
tax-exempt interest income on municipal investments and bank-owned life
insurance income.
Management of Market Risk
General. The majority of our assets and liabilities are monetary in nature.
Consequently, our most significant form of market risk is interest rate risk.
Our assets, consisting primarily of loans, have longer maturities than our
liabilities, consisting primarily of deposits. As a result, a principal part of
our business strategy is to manage our exposure to changes in market interest
rates. Accordingly, we have established a management-level Asset/Liability
Management Committee, which takes initial responsibility for developing an
asset/liability management process and related procedures, establishing and
monitoring reporting systems and developing asset/liability strategies. On at
least a quarterly basis, the Asset/Liability Management Committee reviews
asset/liability management with the Investment Asset/Liability Committee of the
Board of Directors. This Committee also reviews any changes in strategies as
well as the performance of any specific asset/liability management actions that
have been implemented previously. On a quarterly basis, an outside consulting
firm provides us with detailed information and analysis as to asset/liability
management, including our interest rate risk profile. Ultimate responsibility
for effective asset/liability management rests with our Board of Directors.
We have sought to manage our interest rate risk in order to minimize the
exposure of our earnings and capital to changes in interest rates. We have
implemented the following strategies to manage our interest rate risk:
originating loans with adjustable interest rates; utilizing interest rate swaps,
promoting core deposit products; and adjusting the interest rates and maturities
of funding sources, as necessary. By following these strategies, we believe that
we are better positioned to react to changes in market interest rates.
Net Portfolio Value Simulation. We analyze our sensitivity to changes in
interest rates through a net portfolio value of equity ("NPV") model. NPV
represents the present value of the expected cash flows from our assets less the
present value of the expected cash flows arising from our liabilities. The NPV
ratio represents the dollar amount of our NPV divided by the present value of
our total assets for a given interest rate scenario. NPV attempts to quantify
our economic value using a discounted cash flow methodology while the NPV ratio
reflects that value as a form of equity ratio. We estimate what our NPV would be
at a specific date. We then calculate what the NPV would be at the same date
throughout a series of interest rate scenarios representing immediate and
permanent, parallel shifts in the yield curve. We currently calculate NPV under
the assumptions that interest rates increase 100 and 200 basis points from
current market rates and that interest rates decrease 50 and 100 basis points
from current market rates.
40
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The following table presents the estimated changes in our NPV that would result
from changes in market interest rates at March 31, 2022 and June 30, 2021
(Dollars in thousands). All estimated changes presented in the table are within
the policy limits approved by our Board of Directors.
NPV as Percent of Portfolio
NPV Value of Assets
Basis Point Change in Dollar Dollar Percent NPV Change
Interest Rates Amount Change Change Ratio (in bps)
March 31, 2022 :
200 $ 271,985 $ (59,081 ) (17.8 ) % 15.06 % (222 )
100 305,840 (25,226 ) (7.6 ) 16.43 (85 )
- 331,066 - - 17.28 -
(50) 355,547 24,481 7.4 18.20 92
(100) 373,059 41,993 12.7 18.87 159
June 30, 2021:
200 $ 270,679 $ (37,814 ) (12.3 ) % 15.21 % (122 )
100 291,715 (16,778 ) (5.4 ) 15.95 (48 )
- 308,493 - - 16.43 -
(50) 324,999 16,506 5.4 17.06 63
(100) 346,539 38,046 12.3 17.94 151
Certain shortcomings are inherent in the methodologies used in the above
interest rate risk measurements. Modeling changes require making certain
assumptions that may or may not reflect the manner in which actual yields and
costs respond to changes in market interest rates. The above table assumes that
the composition of our interest-sensitive assets and liabilities existing at the
date indicated remains constant uniformly across the yield curve regardless of
the duration or repricing of specific assets and liabilities. Accordingly,
although the table provides an indication of our interest rate risk exposure at
a particular point in time, such measurements are not intended to and do not
provide a precise forecast of the effect of changes in market interest rates on
our NPV and will differ from actual results.
Liquidity and Capital Resources
Liquidity. Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, loan repayments and maturities and sales of securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. We regularly review the need to adjust our investments in liquid assets based upon our assessment of: (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities, and (4) the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning deposits and short- and intermediate-term securities. Our most liquid assets are cash and cash equivalents. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. AtMarch 31, 2022 , cash and cash equivalents totaled$158.9 million , a decrease from$159.3 million as ofJune 30, 2021 . Unpledged securities classified as available for sale, which provide an additional source of liquidity, totaled$19.5 million atMarch 31, 2022 , a decrease from$28.9 million as ofJune 30, 2021 . We had the ability to borrow up to$319.4 million from the FHLB ofNew York , atMarch 31, 2022 of which$48.4 million was outstanding as ofMarch 31, 2022 . Additionally, as ofMarch 31, 2022 , we had an available line of credit with the FRB ofNew York's discount window program of$96.1 million , and$25.0 million of fed funds lines of credit, neither of which had outstanding balances as ofMarch 31, 2022 . We have no material commitments or demands that are likely to affect our liquidity other than as set forth below. If loan demand was to increase faster than expected, or any unforeseen demand or commitment was to occur, we could access our borrowing sources detailed above. We had$83.2 million of loan commitments outstanding as ofMarch 31, 2022 and$155.2 million of approved, but unadvanced, funds to borrowers. We also had$2.9 million in outstanding letters of credit atMarch 31, 2022 . 41
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Time deposits due within one year ofMarch 31, 2022 totaled$219.5 million . If these deposits do not remain with us, we will be required to seek other sources of funds, including other time deposits and FHLB ofNew York advances. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the time deposits atMarch 31, 2022 . We believe, however, based on past experience that a significant portion of our time deposits will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.The Holding Company is a separate legal entity from the Bank and must provide for its own liquidity to pay any dividends to its shareholders, to repurchase shares of its common stock and for other corporate purposes.The Holding Company's primary source of liquidity is dividend payments it may receive from the Bank. The Bank's ability to pay dividends to the Holding Company is governed by applicable law and regulations. AtMarch 31, 2022 , the Holding Company (on an unconsolidated, stand-alone basis) had liquid assets of$19.7 million . Capital Resources. The Bank is subject to various regulatory capital requirements administered by the NYSDFS and theFDIC . AtMarch 31, 2022 , the Bank exceeded all applicable regulatory capital requirements, and the Bank was considered "well capitalized" under applicable regulatory guidelines. See Note 8 to the accompanying unaudited consolidated financial statements.
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