ESSA BANCORP, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)

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Forward-looking statements

This Quarterly Report on Form 10-Q contains forward-looking statements, which can be identified by the use of words such as estimate, project, believe, intend, anticipate, plan, seek, expect similar expressions. These forward-looking statements include:

• statements of our objectives, intentions and expectations;

• statements regarding our business plans, prospects and growth and

      operating strategies;


   •  statements regarding the asset quality of our loan and investment
      portfolios; and


  • estimates of our risks and future costs and benefits.


By identifying these forward-looking statements for you in this manner, we are
alerting you to the possibility that our actual results and financial condition
may differ, possibly materially, from the anticipated results and financial
condition indicated in these forward-looking statements. Important factors that
could cause our actual results and financial condition to differ from those
indicated in the forward-looking statements include, among others, those
discussed under "Risk Factors" in Part I, Item 1A of the Company's Annual Report
on Form 10-K and Part II, Item 1A of this and any previous Quarterly Report on
Form 10-Q filed since our most recent Annual Report on Form 10-K, as well as the
following factors:

• significantly increased competition between custodians and other

establishments;

• inflation and changes in the interest rate environment that reduce our

margins or reduce the fair value of financial instruments;

• general economic conditions, either nationally or in our market areas, which

      are worse than expected;


  • adverse changes in the securities markets;


  • legislative or regulatory changes that adversely affect our business;

• our ability to successfully enter new markets and take advantage of growth

opportunities, and the potential short-term dilutive effect of

      acquisitions or de novo branches, if any;


  • changes in consumer spending, borrowing and savings habits;

• changes in accounting policies and practices, as adopted by the bank

      regulatory agencies and the FASB; and


  • changes in our organization, compensation and benefit plans.


Further, the COVID-19 pandemic has caused local and national economic disruption
and has had and may continue to have an impact on the Company's operations and
financial results. Given its ongoing and dynamic nature, it is difficult to
predict what effects the pandemic will have on our business and results of
operations in the future.

These risks and uncertainties should be considered when evaluating forward-looking statements and undue reliance should not be placed on such statements.

Comparison of the financial situation at June 30, 2022 and September 30, 2021

Total Assets. Total assets decreased by $15.0 million, or 0.8%, to $1.85 billion
at June 30, 2022 from $1.86 billion at September 30, 2021 due primarily to
decreases in cash and due from banks and investments securities available for
sale partially offset by increases in investment securities held to maturity,
loans receivable, and other assets. At the onset of the pandemic, the Company
moved quickly to build its liquidity as an offset to the economic uncertainty
caused by the resulting economic slowdown.  The Company has and will continue to
maintain a strong liquidity position against the changing economic forecasts
through daily monitoring.

Total Cash and Cash Equivalents. Total cash and cash equivalents decreased $75.8
million, or 47.7%, to $83.1 million at June 30, 2022 from $158.9 million at
September 30, 2021. Decreases in cash and due from banks accounted for the
majority of the decrease. Increases in loans receivable of $39.3 million,
investments securities held to maturity of $37.3 million and FHLB stock of $9.4
million along with a decrease in deposits of $264.8 million were the primary
reasons for the decrease in cash and due from banks. Increases in FHLB
borrowings of $225.0 million and a decline in investments securities available
for sale of $39.7 million partially offset the decline in cash and due from
banks.

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Net Loans. Net loans increased $39.3 million, or 2.9%, to $1.38 billion during
the nine month period ended June 30, 2022. During this period, residential loans
increased $17.3 million to $597.6 million, construction loans increased $5.8
million to $19.8 million, commercial real estate loans increased $58.1 million
to $649.3 million, commercial loans decreased $20.8 million to $42.7 million
partially due to the repayment and forgiveness of $20.7 million in PPP loans
carried in the commercial loan portfolio, obligations of states and political
subdivisions decreased $15.7 million to $40.5 million, home equity loans and
lines of credit increased $3.4 million to $41.8 million, auto loans decreased
$8.6 million to $5.3 million reflecting expected runoff of the portfolio
following the Company's previously announced discontinuation of indirect auto
lending in July 2018, and other loans decreased $33,000 to $1.5 million. The
Company sold $13.6 million in residential mortgage loans to the Federal Home
Loan Bank of Pittsburgh during the nine month period ended June 30, 2022,
recording gains on the sale of these loans in noninterest income.

Investment Securities Available for Sale. Investment securities available for
sale decreased $39.7 million, or 16.5%, to $200.9 million at June 30, 2022 from
$240.6 million at September 30, 2021 due primarily to the maturity of securities
in the portfolio.

Investment Securities Held to Maturity. Investment securities held to maturity
increased to $58.8 million at June 30, 2022 from $21.5 million at September 30,
2021. The Company carries some investment as held to maturity to manage
fluctuations in comprehensive loss caused by interest rate changes.

Deposits. Deposits decreased $264.8 million, or 16.2%, to $1.37 billion at June
30, 2022 from $1.64 billion at September 30, 2021. Decreases in interest bearing
demand accounts of $239.8 million, money market accounts of $19.4 million and
certificates of deposit of $66.2 million were offset in part by increases in
savings and club accounts of $13.0 million and non-interest bearing demand
accounts of $47.7 million. The decline in interest bearing demand accounts was
primarily due to the Company shifting $225.0 million from brokered deposits to
short term FHLB advances as part of the Company's balance sheet hedge
strategy. The decrease in certificates of deposit reflected in part a decrease
in brokered certificates of $15.0 million.

Short Term Borrowings. Short term borrowings increased to $225.0 million at June
30, 2022 as the Company shifted $225.0 million from brokered deposits to FHLB
advances to take advantage of lower borrowing rates.

Stockholders' Equity. Stockholders' equity increased by $11.4 million, or 5.7%,
to $213.3 million at June 30, 2022 from $201.8 million at September 30, 2021.
The increase in stockholders' equity was primarily due to net income of $14.3
million and other comprehensive income of $295,000 partially offset by regular
cash dividends of $0.39 per share which reduced stockholders' equity by $3.8
million. Unrealized losses due to rising interest rates in the Company's
available for sale investment portfolio were more than offset by unrealized
gains in the Company's derivative balance sheet hedges.



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Average balance sheets for the three and nine months ended June 30, 2022 and 2021

The following tables set forth average balance sheets, average yields and costs,
and certain other information for the periods indicated. All average balances
are daily average balances, the yields set forth below include the effect of
deferred fees and discounts and premiums that are amortized or accreted to
interest income.

                                                                                    For the Three Months Ended June 30,
                                                                    2022                                                           2021
                                                                Interest Income/                                               Interest Income/
                                          Average Balance           Expense            Yield/Cost        Average Balance           Expense            Yield/Cost
                                                                                          (dollars in thousands)
Interest-earning assets:
Loans(1)                                 $       1,378,788     $           13,615              3.96 %   $       1,397,096     $           13,377              3.84 %
Investment securities
Taxable(2)                                          85,799                    722              3.38 %              69,111                    548              3.18 %
Exempt from federal income
  tax(2)(3)                                          2,262                     12              2.69 %               8,419                     40              2.41 %
Total investment securities                         88,061                    734              3.36 %              77,530                    588              3.10 %
Mortgage-backed securities                         155,522                    821              2.12 %              89,869                    346              1.54 %
Federal Home Loan Bank stock                         6,098                     70              4.60 %               3,908                     49              5.03 %
Other                                              137,728                    259              0.75 %             245,800                     43              0.07 %
Total interest-earning assets                    1,766,197                 15,499              3.52 %           1,814,203                 14,403              3.19 %
Allowance for loan losses                          (18,269 )                                                      (17,491 )
Noninterest-earning assets                         119,196                                                        110,582
Total assets                             $       1,867,124                                              $       1,907,294
Interest-bearing liabilities:
NOW accounts                             $         338,103     $               45              0.05 %   $         276,093     $               63              0.09 %
Money market accounts                              411,879                    142              0.14 %             406,211                    148              0.15 %
Savings and club accounts                          200,515                     26              0.05 %             186,267                     25              0.05 %
Certificates of deposit                            353,915                    293              0.32 %             530,191                  1,015              0.77 %
Borrowed funds                                      29,722                     35              0.61 %                   -                      -                 -
Total interest-bearing liabilities               1,334,134                    541              0.16 %           1,398,762                  1,251              0.36 %
Non-interest-bearing NOW
  accounts                                         284,467                                                        276,919
Non-interest-bearing liabilities                    33,545                                                         31,521
Total liabilities                                1,652,146                                                      1,707,202
Equity                                             214,978                                                        200,092
Total liabilities and equity             $       1,867,124                                              $       1,907,294
Net interest income                                            $           14,958                                             $           13,152
Interest rate spread                                                                           3.36 %                                                         2.83 %
Net interest-earning assets              $         432,063                                              $         415,441
Net interest margin(4)                                                                         3.40 %                                                         2.91 %
Average interest-earning assets to
  average interest-bearing liabilities                                     132.39 %                                                       129.70 %




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                                                                                    For the Nine Months Ended June 30,
                                                                    2022                                                           2021
                                                                Interest Income/                                               Interest Income/
                                          Average Balance           Expense            Yield/Cost        Average Balance           Expense            Yield/Cost
                                                                                          (dollars in thousands)
Interest-earning assets:
Loans(1)                                 $       1,363,832     $           40,464              3.95 %   $       1,402,415     $           40,808              3.88 %
Investment securities
Taxable(2)                                         102,601                  1,966              2.55 %              78,353                  1,705              2.90 %
Exempt from federal income
  tax(2)(3)                                          3,294                     50              2.56 %               8,449                    121              2.41 %
Total investment securities                        105,895                  2,016              2.55 %              86,802                  1,826              2.85 %
Mortgage-backed securities                         126,875                  1,757              1.84 %              93,463                  1,068              1.52 %
Federal Home Loan Bank stock                         5,242                    179              4.55 %               4,304                    163              5.04 %
Other                                              167,126                    399              0.32 %             215,719                    113              0.07 %
Total interest-earning assets                    1,768,970                 44,815              3.38 %           1,802,703                 43,978              3.25 %
Allowance for loan losses                          (18,126 )                                                      (16,561 )
Noninterest-earning assets                         115,332                                                        117,664
Total assets                             $       1,866,176                                              $       1,903,806
Interest-bearing liabilities:
Interest bearing demand accounts         $         316,156     $              123              0.05 %   $         262,171     $              234              0.12 %
Money market accounts                              432,068                    421              0.13 %             406,423                    521              0.17 %
Savings and club accounts                          196,329                     77              0.05 %             175,247                     69              0.05 %
Certificates of deposit                            395,180                  1,424              0.47 %             545,653                  3,788              0.92 %
Borrowed funds                                       9,907                     35              0.86 %              24,414                    271              1.48 %
Total interest-bearing liabilities               1,349,640                  2,080              0.21 %           1,413,908                  4,883              0.46 %
Non-interest-bearing NOW
  accounts                                         276,958                                                        261,565
Non-interest-bearing liabilities                    29,024                                                         30,930
Total liabilities                                1,655,622                                                      1,706,403
Equity                                             210,554                                                        197,403
Total liabilities and equity             $       1,866,176                                              $       1,903,806
Net interest income                                            $           42,735                                             $           39,095
Interest rate spread                                                                           3.17 %                                                         2.79 %
Net interest-earning assets              $         419,330                                              $         388,795
Net interest margin(4)                                                                         3.22 %                                                         2.89 %
Average interest-earning assets to
  average interest-bearing liabilities                                     131.07 %                                                       127.50 %


_____________________

(1) Unmatured loans are included in outstanding loans.

(2) Securities available for sale are recognized at fair value.

(3) Returns on tax-exempt securities were calculated on an entirely

equivalent basis assuming a tax rate of 21.00% for the three and nine months

ended June 30, 2022 and 2021.

(4) Represents the difference between interest earned and interest paid, divided

by the average total of interest-earning assets.

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Comparison of operating results for the three months ended June 30, 2022 and
June 30, 2021

Net Income. Net income increased $1.0 million, or 25.2%, to $5.0 million for the
three months ended June 30, 2022 compared to net income of $4.0 million for the
comparable period in 2021. The increase was primarily due to an increase in net
interest income and a decline in the provision for loan losses partially offset
by increases in non-interest expense and income tax provision and a decrease in
non-interest income.

Net Interest Income. Net interest income increased $1.8 million, or 13.7%, to
$15.0 million for the three months ended June 30, 2022 compared to $13.2 million
for the comparable period in 2021.

Interest Income. Total interest income was $15.5 million for the three months
ended June 30, 2022 compared with $14.4 million for the three months ended June
30, 2021 reflecting increases in interest rates and total yield on average
interest earning assets from 3.19% for the quarter ended June 30, 2021 to 3.52%
for the quarter ended June 30, 2022. A decline of $48.0 million in average
interest earning assets partially offset the increase in interest income.

Interest Expense. Interest expense was $541,000 for the quarter ended June 30,
2022 compared to $1.3 million for the same period in 2021. The cost of
interest-bearing liabilities declined to 0.16% for the quarter ended June 30,
2022 from 0.36% a year earlier, reflecting lower interest rates, timely
repricing of deposits and roll-off of higher-cost borrowings. Average
interest-bearing liabilities decreased $64.6 million year-over-year.

Provision for Loan Losses. In evaluating the level of the allowance for loan
losses, management considers historical loss experience, the types of loans and
the amount of loans in the loan portfolio, adverse situations that may affect a
borrower's ability to repay, the estimated value of any underlying collateral,
peer group information and prevailing economic conditions. This evaluation is
inherently subjective as it requires estimates that are subject to
interpretation and revision as more information becomes available or as future
events occur. After an evaluation of these factors, management made no provision
for loan losses for the three month period ended June 30, 2022 compared to
$600,000 for the three month period ended June 30, 2021. The allowance for loan
losses was $18.3 million, or 1.31% of loans outstanding, at June 30, 2022,
compared to $18.1 million, or 1.33% of loans outstanding, at September 30,
2021. As the economic impact of the COVID-19 pandemic continues to evolve, our
customers may experience decreased cash flows, which may correlate to an
inability to make timely loan payments. This, in turn may require increases in
our allowance for loan losses and increases in the level of charge-offs in our
loan portfolio.

Non-interest Income. Noninterest income decreased 6.4% to $2.1 million for the
three months ended June 30, 2022, compared with $2.3 million for the three
months ended June 30, 2021. Decreases in trust and investment fees of $12,000,
earnings on bank-owned life insurance of $4,000, other income of $6,000, gain on
sale of investments, net of $42,000, insurance commissions of $13,000 and gains
on sales of residential mortgages of $250,000 were partially offset by an
increase in loan swap fees of $57,000, service fees on deposit accounts of
$2,000 and service charges and fee on loans of $121,000 for the quarter ended
June 30, 2022 compared with the comparable period in 2021.

Non-interest Expense. Noninterest expense increased $741,000 or 7.4% to $10.8
million for the three months ended June 30, 2022 compared with the comparable
period a year earlier primarily reflecting increases in compensation and
employee benefits of $141,000, professional fees of $233,000, occupancy and
equipment of $53,000, data processing of $38,000, gains on foreclosed real
estate of $474,000 and advertising of $36,000 which were partially offset by
decreases in Federal Deposit Insurance Corporation premiums of $132,000, and
other expenses of $93,000. Gain on foreclosed real estate in the fiscal third
quarter of 2021 also included a credit of $534,000 to other expense, reflecting
a deferred income credit related to a prior sale of a foreclosed real estate
property.

Income taxes. Income tax expense increased $505,000 at $1.3 million for the three months ended June 30, 2022 of $801,000 for the comparable period of 2021. The effective tax rate for the three months ended June 30, 2022 was 20.6% compared to 16.6% for the 2021 period.

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Comparison of operating results for the nine months ended June 30, 2022 and June 30, 2021

Net Income. Net income increased $1.7 million, or 13.9%, to $14.2 million for
the nine months ended June 30, 2022 compared to net income of $12.5 million for
the comparable period in 2021. The increase was primarily due to an increase in
net interest income and a decline in the provision for loan losses partially
offset by an increase in non-interest expenses, the income tax provision and a
decrease in non-interest income.

Net Interest Income. Net interest income increased $3.6 million, or 9.3%, to
$42.7 million for the nine months ended June 30, 2022 compared to $39.1 million
for the comparable period in 2021.

Interest Income. Total interest income was $44.8 million for the nine months
ended June 30, 2022 compared with $44.0 million for the nine months ended June
30, 2021 reflecting an increase in the total yield on average interest earning
assets from 3.25% for the nine months ended June 30, 2021 to 3.38% for the nine
months ended June 30, 2022 which was partially offset by a decline of $33.7
million in average interest earning assets.

Interest Expense. Interest expense was $2.1 million for the nine months ended
June 30, 2022 compared to $4.9 million for the same period in 2021. The cost of
interest-bearing liabilities declined to 0.21% for the nine months ended June
30, 2022 from 0.46% a year earlier, reflecting lower interest rates, timely
repricing of deposits and roll-off of higher-cost borrowings. Average
interest-bearing liabilities decreased $64.3 million year-over-year.

Provision for Loan Losses. In evaluating the level of the allowance for loan
losses, management considers historical loss experience, the types of loans and
the amount of loans in the loan portfolio, adverse situations that may affect a
borrower's ability to repay, the estimated value of any underlying collateral,
peer group information and prevailing economic conditions. This evaluation is
inherently subjective as it requires estimates that are subject to
interpretation and revision as more information becomes available or as future
events occur. After an evaluation of these factors, management made no provision
for loan losses for the nine month period ended June 30, 2022 compared to $2.4
million for the nine month period ended June 30, 2021. The allowance for loan
losses was $18.3 million, or 1.31% of loans outstanding, at June 30, 2022,
compared to $18.1 million, or 1.33% of loans outstanding, at September 30,
2021. As the economic impact of the COVID-19 pandemic continues to evolve, our
customers may experience decreased cash flows, which may correlate to an
inability to make timely loan payments. This, in turn may require increases in
our allowance for loan losses and increases in the level of charge-offs in our
loan portfolio.

Non-interest Income. Noninterest income decreased 28.1% to $6.4 million for the
nine months ended June 30, 2022, compared with $8.9 million for the nine months
ended June 30, 2021. Decreases in loan swap fees of $415,000, earnings on
bank-owned life insurance of $158,000, other income of $104,000, gain on sale of
investments, net of $459,000 and gains on sales of residential mortgages of $1.5
million were partially offset by an increase in trust and investment fees of
$158,000 for the quarter ended June 30, 2022 compared with the comparable period
in 2021.

Non-interest Expense. Noninterest expense increased $830,000 or 2.7% to $31.5
million for the nine months ended June 30, 2022 compared with $30.6 million for
the comparable period a year earlier primarily reflecting increases in
professional fees of $616,000, occupancy and equipment of $124,000, advertising
of $156,000, compensation and employee benefits of $12,000, gains on foreclosed
real estate of $459,000 and data processing of $148,000 which were partially
offset by decreases in Federal Deposit Insurance Corporation premiums of
$402,000 and other expenses of $271,000. Gain on foreclosed real estate in the
fiscal third quarter of 2021 also included a credit of $534,000 to other
expense, reflecting a deferred income credit related to a prior sale of a
foreclosed real estate property.

Income Taxes. Income tax expense increased $950,000 to $3.5 million for the nine
months ended June 30, 2022 from $2.5 million for the comparable 2021 period. The
effective tax rate for the nine months ended June 30, 2022 was 19.5% compared to
16.7% for the 2021 period.






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The following table provides information on the Bank’s non-performing assets as of the dates indicated (in thousands of dollars).

                                                                            September 30,
                                                         June 30, 2022           2021
Non-performing assets:
Non-accruing loans                                      $         8,027     $       15,864
Non-accruing purchased credit impaired loans                          -                  3
Total non-performing loans                                        8,027             15,867
Foreclosed real estate                                               75                461
Total non-performing assets                             $         8,102     $       16,328
Ratio of non-performing loans to total loans                       0.57 %             1.17 %
Ratio of non-performing loans to total assets                      0.43 %             0.85 %
Ratio of non-performing assets to total assets                     0.44 %             0.88 %
Ratio of allowance for loan losses to total loans                  1.31 %   

1.33%



Loans are reviewed on a regular basis and are placed on non-accrual status when
they become 90 days delinquent. When loans are placed on non-accrual status,
unpaid accrued interest is fully reserved, and further income is recognized only
to the extent received. Non-performing assets decreased $8.2 million from
September 30, 2021 to June 30, 2022. The primary reason for the decrease in
nonperforming assets at June 30, 2022 as compared to September 30, 2021 was the
repayment of two non-performing commercial loan relationships. The $8.0 million
of non-accruing loans at June 30, 2022 included 27 residential loans with an
aggregate outstanding balance of $2.1 million, 18 commercial and commercial real
estate loans with aggregate outstanding balances of $5.6 million and 23 consumer
loans with aggregate balances of $351,000. Within the residential loan balance
were $448,000 of loans past due less than 90 days. In the quarter ended June 30,
2022, the Company identified nine residential loans which, although paying as
agreed, have a high probability of default. Foreclosed real estate decreased
$386,000 to $75,000 at June 30, 2022. Foreclosed real estate consists of three
residential properties.

At June 30, 2022, the principal balance of troubled debt restructures ("TDRs")
was $2.6 million compared to $9.7 million at September 30, 2021. Of the $2.6
million of TDRs at June 30, 2022 $2.2 million were non-accrual loans.

As of June 30, 2022, TDRs were comprised of eight residential loans totaling
$870,000, six commercial and commercial real estate loans totaling $1.7 million
and four consumer loans (home equity loans, home equity lines and credit,
indirect auto and other loans) totaling $42,000.

For the nine month period ended June 30, 2022, three loans were removed from TDR
status due to completion of one year of consecutive on time payments and two
were removed for paying off.

The Company continues to closely monitor all customer credit positions,
particularly loans requesting payment relief. As of June 30, 2022, three of our
commercial clients had requested loan payment deferrals or payments of interest
only on loans totaling $9.0 million. In accordance with interagency guidance
issued in March 2020, these short-term deferrals are not considered TDRs unless
the borrower was previously experiencing financial difficulty. As the economic
impact of the COVID-19 pandemic continues to evolve, our customers may
experience decreased cash flows, which may correlate to an inability to make
timely loan payments. This, in turn may require increases in our allowance for
loan losses and increases in the level of chargeoffs in our loan portfolio.

Cash and capital resources

We maintain liquid assets at levels we consider adequate to meet both our
short-term and long-term liquidity needs. We adjust our liquidity levels to fund
deposit outflows, repay our borrowings and to fund loan commitments. We also
adjust liquidity as appropriate to meet asset and liability management
objectives.

Our primary sources of liquidity are deposits, prepayment and repayment of loans
and mortgage-backed securities, maturities of investment securities and other
short-term investments, and earnings and funds provided from operations, as well
as access to FHLB advances and other borrowing sources. While scheduled
principal repayments on loans and mortgage-backed securities are a relatively
predictable source of funds, deposit flows and loan prepayments are greatly
influenced by market interest rates, economic conditions, and rates offered by
our competition. We set the interest rates on our deposits to maintain a desired
level of total deposits.

A portion of our liquidity consists of cash and cash equivalents and borrowings,
which are a product of our operating, investing and financing activities. At
June 30, 2022, $83.1 million of our assets were invested in cash and cash
equivalents. Our primary sources

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of cash are principal repayments on loans, proceeds from the maturities of
investment securities, principal repayments of mortgage-backed securities and
increases in deposit accounts and borrowings. As of June 30, 2022, we had $225
million of borrowings outstanding from the Pittsburgh FHLB. We have access to
total FHLB advances of up to approximately $731.9 million.

At June 30, 2022, we had $411.7 million in loan commitments outstanding, which
included, in part, $199.0 million in undisbursed construction loans and land
development loans, $52.2 million in unused home equity lines of credit, $114.4
million in commercial lines of credit and commitments to originate commercial
loans, $15.2 million in performance standby letters of credit and $30.9 million
in other unused commitments which are primarily to originate residential
mortgage loans and multifamily loans. Certificates of deposit due within one
year of June 30, 2022 totaled $92.7 million, or 64.5% of certificates of
deposit. If these maturing deposits do not remain with us, we will be required
to seek other sources of funds, including other certificates of deposit and
borrowings. Depending on market conditions, we may be required to pay higher
rates on such deposits or other borrowings than we currently pay on the
certificates of deposit due on or before June 30, 2023. We believe, however,
based on past experience that a significant portion of our certificates of
deposit will remain with us. We have the ability to attract and retain deposits
by adjusting the interest rates offered.

As reported in the Consolidated Statements of Cash Flow, our cash flows are
classified for financial reporting purposes as operating, investing or financing
cash flows. Net cash provided by operating activities was $15.9 million and
$14.1 million for the nine months ended June 30, 2022 and 2021, respectively.
These amounts differ from our net income because of a variety of cash receipts
and disbursements that did not affect net income for the respective periods. Net
cash (used for) provided by investing activities was $(57.2) million and $96.8
million for the nine months ended June 30, 2022 and 2021, respectively,
principally reflecting our loan and investment security activities. Deposit and
borrowing cash flows have comprised most of our financing activities, which
resulted in net cash used for of $34.5 million and $81.4 million for the nine
months ended June 30, 2022 and 2021, respectively.

Critical accounting policies

We consider accounting policies that require management to exercise significant
judgment or discretion or make significant assumptions that have, or could have,
a material impact on the carrying value of certain assets or on income, to be
critical accounting policies. We consider the following to be our critical
accounting policies:

Allowance for Loan Losses. The allowance for loan losses is the estimated amount
considered necessary to cover credit losses inherent in the loan portfolio at
the balance sheet date. The allowance is established through the provision for
loan losses which is charged against income. In determining the allowance for
loan losses, management makes significant estimates and has identified this
policy as one of our most critical. The methodology for determining the
allowance for loan losses is considered a critical accounting policy by
management due to the high degree of judgment involved, the subjectivity of the
assumptions utilized and the potential for changes in the economic environment
that could result in changes to the amount of the recorded allowance for loan
losses.

As a substantial amount of our loan portfolio is collateralized by real estate,
appraisals of the underlying value of property securing loans and discounted
cash flow valuations of properties are critical in determining the amount of the
allowance required for specific loans. Assumptions for appraisals and discounted
cash flow valuations are instrumental in determining the value of properties.
Overly optimistic assumptions or negative changes to assumptions could
significantly impact the valuation of a property securing a loan and the related
allowance determined. The assumptions supporting such appraisals and discounted
cash flow valuations are carefully reviewed by management to determine that the
resulting values reasonably reflect amounts realizable on the related loans.

Management performs a quarterly evaluation of the adequacy of the allowance for
loan losses. Consideration is given to a variety of factors in establishing this
estimate including, but not limited to, current economic conditions, delinquency
statistics, geographic and industry concentrations, the adequacy of the
underlying collateral, the financial strength of the borrower, results of
internal and external loan reviews and other relevant factors. This evaluation
is inherently subjective, as it requires material estimates that may be
susceptible to significant revision based on changes in economic and real estate
market conditions.

The analysis of the allowance for loan losses has two components: specific and
general allocations. Specific allocations are made for loans that are determined
to be impaired. Impairment is measured by determining the present value of
expected future cash flows or, for collateral-dependent loans, the fair value of
the collateral adjusted for market conditions and selling expenses. The general
allocation is determined by segregating the remaining loans by type of loan,
risk weighting (if applicable) and payment history. We also analyze historical
loss experience, delinquency trends, general economic conditions and geographic
and industry concentrations. This analysis establishes factors that are applied
to the loan groups to determine the amount of the general allocations. Actual
loan losses may be significantly more than the allowance for loan losses we have
established which could have a material negative effect on our financial
results.

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Goodwill and Intangible Assets. Goodwill is not amortized, but it is tested at
least annually for impairment in the fourth quarter, or more frequently if
indicators of impairment are present. If the estimated current fair value of a
reporting unit exceeds its carrying value, no additional testing is required and
an impairment loss is not recorded. The Company uses market capitalization and
multiples of tangible book value methods to determine the estimated current fair
value of its reporting unit. Based on this analysis, no impairment was recorded
in 2022 or 2021.

The other intangibles assets are assigned useful lives, which are amortized on
an accelerated basis over their weighted-average lives. The Company periodically
reviews the intangible assets for impairment as events or changes in
circumstances indicate that the carrying amount of such asset may not be
recoverable. Based on these reviews, no impairment was recorded in 2022 or 2021.

Derivative Instruments and Hedging Activities. The Company records all
derivatives on the balance sheet at fair value.  The accounting for changes in
the fair value of derivatives depends on the intended use of the derivative,
whether the Company has elected to designate a derivative in a hedging
relationship and apply hedge accounting and whether the hedging relationship has
satisfied the criteria necessary to apply hedge accounting. Derivatives
designated and qualifying as a hedge of the exposure to changes in the fair
value of an asset, liability, or firm commitment attributable to a particular
risk, such as interest rate risk, are considered fair value hedges. Derivatives
designated and qualifying as a hedge of the exposure to variability in expected
future cash flows, or other types of forecasted transactions, are considered
cash flow hedges. Derivatives may also be designated as hedges of the foreign
currency exposure of a net investment in a foreign operation. Hedge accounting
generally provides for the matching of the timing of gain or loss recognition on
the hedging instrument with the recognition of the changes in the fair value of
the hedged asset or liability that are attributable to the hedged risk in a fair
value hedge or the earnings effect of the hedged forecasted transactions in a
cash flow hedge. The Company may enter into derivative contracts that are
intended to economically hedge certain of its risk, even though hedge accounting
does not apply or the Company elects not to apply hedge accounting.

Fair value valuations. We group our assets at fair value into three levels, depending on the markets in which the assets are traded and the reliability of the assumptions used to determine fair value. These levels are:

• Level I – Valuation is based on quoted prices for identical instruments

traded in active markets.

• Level II – Valuation is based on quoted prices for similar instruments in

active markets, quoted prices for identical or similar instruments in

markets that are not active and model-based valuation techniques for which

all material assumptions are observable in the market.

• Level III – The valuation is generated from model-based techniques that use

significant assumptions not observable in the market. These unobservables

assumptions reflect the Company’s own estimates of assumptions that

participants would use to set the price of the asset.


We base our fair values on the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date. It is our policy to maximize the use of
observable inputs and minimize the use of unobservable inputs when developing
fair value measurements, in accordance with the fair value hierarchy in
generally accepted accounting principles.

Fair value measurements for most of our assets are obtained from independent
pricing services that we have engaged for this purpose. When available, we, or
our independent pricing service, use quoted market prices to measure fair value.
If market prices are not available, fair value measurement is based upon models
that incorporate available trade, bid, and other market information.
Subsequently, all of our financial instruments use either of the foregoing
methodologies to determine fair value adjustments recorded to our financial
statements. In certain cases, however, when market observable inputs for
model-based valuation techniques may not be readily available, we are required
to make judgments about assumptions market participants would use in estimating
the fair value of financial instruments. The degree of management judgment
involved in determining the fair value of a financial instrument is dependent
upon the availability of quoted market prices or observable market parameters.
For financial instruments that trade actively and have quoted market prices or
observable market parameters, there is minimal subjectivity involved in
measuring fair value. When observable market prices and parameters are not fully
available, management judgment is necessary to estimate fair value. In addition,
changes in the market conditions may reduce the availability of quoted prices or
observable data. When market data is not available, we use valuation techniques
requiring more management judgment to estimate the appropriate fair value
measurement. Therefore, the results cannot be determined with precision and may
not be realized in an actual sale or immediate settlement of the asset.
Additionally, there may be inherent weaknesses in any calculation technique, and
changes in the underlying assumptions used, including discount rates and
estimates of future cash flows, that could significantly affect the results of
current or future valuations.

Other-than-Temporary Investment Security Impairment. Securities are evaluated
periodically to determine whether a decline in their value is
other-than-temporary. Management utilizes criteria such as the magnitude and
duration of the decline, in addition to the reasons underlying the decline, to
determine whether the loss in value is other-than-temporary. The term
"other-than-temporary" is

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not intended to indicate that the decline is permanent, but indicates that the
prospect for a near-term recovery of value is not necessarily favorable, or that
there is a lack of evidence to support a realizable value equal to or greater
than the carrying value of the investment. Once a decline in value is determined
to be other-than-temporary, the value of the security is reduced and a
corresponding charge to earnings is recognized.

Deferred Income Taxes. We use the asset and liability method of accounting for
income taxes. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. If
current available information raises doubt as to the realization of the deferred
tax assets, a valuation allowance is established. We consider the determination
of this valuation allowance to be a critical accounting policy because of the
need to exercise significant judgment in evaluating the amount and timing of
recognition of deferred tax liabilities and assets, including projections of
future taxable income. These judgments and estimates are reviewed on a continual
basis as regulatory and business factors change. A valuation allowance for
deferred tax assets may be required if the amount of taxes recoverable through
loss carryback declines, or if we project lower levels of future taxable income.
Such a valuation allowance would be established through a charge to income tax
expense that would adversely affect our operating results.

Off-balance sheet arrangements

We do not have any off-balance sheet arrangements (as such term is defined in
applicable Securities and Exchange Commission rules) that are reasonably likely
to have a current or future material effect on our financial condition, results
of operations, liquidity, capital expenditures or capital resources.
Item 3. Quantitative and Qualitative Disclosures About Market Risk


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 mortgage loans, have longer maturities than our
liabilities, consisting primarily of deposits and borrowings. As a result, a
principal part of our business strategy is to manage interest rate risk and
reduce the exposure of our net interest income to changes in market interest
rates. Accordingly, our Board of Directors has approved guidelines for managing
the interest rate risk inherent in our assets and liabilities, given our
business strategy, operating environment, capital, liquidity and performance
objectives. Senior management monitors the level of interest rate risk on a
regular basis and the asset/liability committee meets quarterly to review our
asset/liability policies and interest rate risk position.

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. The net
proceeds from the Company's stock offering increased our capital and provided
management with greater flexibility to manage our interest rate risk. In
particular, management used the majority of the capital we received to increase
our interest-earning assets. There have been no material changes in our interest
rate risk since September 30, 2021.
Item 4. Controls and Procedures


Under the supervision and with the participation of our management, including
our Principal Executive Officer and Principal Financial Officer, we evaluated
the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934) as of the end of the period covered by this Report. Based
upon that evaluation, the Principal Executive Officer and Principal Financial
Officer concluded that, as of the end of the period covered by this Report, our
disclosure controls and procedures were effective.

There were no changes made in the Company's internal controls over financial
reporting (as defined by Rule 13a-15(f) and 15d-15(f) under the Securities
Exchange Act of 1934) or in other factors that have materially affected, or are
reasonably likely to materially affect, the Company's internal controls over
financial reporting during the period covered by this Quarterly Report on Form
10-Q.

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