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MALVERN BANCORP, INC. - Quarter Report: 2020 March (Form 10-Q)

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2020

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                to

Commission File Number:  000-54835

 

MALVERN BANCORP, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Pennsylvania

45-5307782

(State or Other Jurisdiction of

Incorporation or Organization)

(IRS Employer

Identification No.)

42 Lancaster Avenue, Paoli, Pennsylvania 19301

(Address of Principal Executive Offices) (Zip Code)

(610) 644-9400

(Registrant’s Telephone Number, Including Area Code)

 

Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.01 per share

MLVF

Nasdaq Stock Market, LLC

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes       No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer 

 

Accelerated filer 

Non-accelerated filer 

 

Smaller reporting company 

Emerging growth company

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.      Yes     No  

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

Common Stock, par value $0.01:

7,633,871 shares

(Title of Class)

(Outstanding as of May 8, 2020)

 

 

 


 

Table of Contents

 

 

 

Page

 

 

 

PART I – FINANCIAL INFORMATION

3

 

 

 

Item  1.

Financial Statements

4

 

Consolidated Statements of Financial Condition at March 31, 2020 (unaudited) and September 30, 2019

4

 

Consolidated Statements of Operations for the three and six months ended March 31, 2020 and 2019 (unaudited)

5

 

Consolidated Statements of Comprehensive Income for the three and six months ended March 31, 2020 and 2019 (unaudited)

6

 

Consolidated Statements of Changes in Shareholders’ Equity for the six months ended March 31, 2020 and 2019 (unaudited)

7

 

Consolidated Statements of Cash Flows for the six months ended March 31, 2020 and 2019 (unaudited)

8

 

Notes to Unaudited Consolidated Financial Statements

9

 

 

 

Item  2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

46

 

 

 

Item  3.

Qualitative and Quantitative Disclosures about Market Risk

61

 

 

 

Item  4.

Controls and Procedures

61

 

 

 

PART II – OTHER INFORMATION.

62

 

 

 

Item  1.

Legal Proceedings

62

 

 

 

Item  1A.

Risk Factors

62

 

 

 

Item  2.

Unregistered Sales of Equity Securities and Use of Proceeds

64

 

 

 

Item  3.

Default Upon Senior Securities

64

 

 

 

Item  4.

Mine Safety Disclosure

64

 

 

 

Item  5.

Other Information

64

 

 

 

Item  6.

Exhibits

64

 

 

 

SIGNATURES

66

 

 

 


 

PART I – FINANCIAL INFORMATION

The following (a) consolidated balance sheet as of September 30, 2019, which has been derived from audited financial statements, and (b) the unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X, and, accordingly, do not include all of the information and footnotes required by GAAP for complete financial statements. However, in the opinion of management, all adjustments (consisting only of normal and recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the full year ending September 30, 2020, or for any interim period. The Malvern Bancorp, Inc. Annual Report on Form 10-K for the fiscal year ended September 30, 2019 (the “2019 Annual Report”) should be read in conjunction with these financial statements.

 

-3-


 

Item 1. Financial Statements

MALVERN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

 

 

 

March 31,

2020

 

 

September 30,

2019

 

 

 

(Unaudited)

 

 

 

 

 

 

 

(In thousands, except share data)

 

ASSETS

 

 

 

 

 

 

 

 

Cash and due from depository institutions

 

$

1,829

 

 

$

1,400

 

Interest bearing deposits in depository institutions

 

 

124,239

 

 

 

152,143

 

Cash and Cash Equivalents

 

 

126,068

 

 

 

153,543

 

Investment securities available for sale, at fair value (amortized cost of

   $21,994 and $18,522, respectively)

 

 

21,839

 

 

 

18,411

 

Investment securities held to maturity (fair value of $18,434 and $22,609,

   respectively)

 

 

18,046

 

 

 

22,485

 

Restricted stock, at cost

 

 

10,913

 

 

 

11,129

 

Loans receivable, net of allowance for loan losses of $10,556 and $10,095,

   respectively

 

 

1,002,907

 

 

 

1,007,714

 

Other real estate owned

 

 

5,796

 

 

 

5,796

 

Accrued interest receivable

 

 

4,121

 

 

 

4,253

 

Operating lease right-of-use assets

 

 

2,959

 

 

 

-

 

Property and equipment, net

 

 

6,476

 

 

 

6,678

 

Deferred income taxes

 

 

2,974

 

 

 

2,840

 

Bank-owned life insurance

 

 

20,144

 

 

 

19,891

 

Other assets

 

 

13,869

 

 

 

12,482

 

Total Assets

 

$

1,236,112

 

 

$

1,265,222

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

Deposits-non-interest-bearing

 

 

42,874

 

 

 

55,684

 

Deposits-interest-bearing

 

 

873,026

 

 

 

898,127

 

Total Deposits

 

 

915,900

 

 

 

953,811

 

FHLB advances

 

 

133,000

 

 

 

133,000

 

Subordinated debt

 

 

24,697

 

 

 

24,619

 

Advances from borrowers for taxes and insurance

 

 

2,593

 

 

 

1,761

 

Accrued interest payable

 

 

873

 

 

 

978

 

Operating lease liabilities

 

 

2,976

 

 

 

-

 

Other liabilities

 

 

12,923

 

 

 

8,545

 

Total Liabilities

 

 

1,092,962

 

 

 

1,122,714

 

Commitments and Contingencies

 

 

-

 

 

 

-

 

Shareholders’ Equity

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value, 10,000,000 shares authorized, none issued

 

 

-

 

 

 

-

 

Common stock, $0.01 par value, 50,000,000 shares authorized; 7,798,769 and

   7,668,571 shares issued and outstanding, respectively, at March 31, 2020

   and 7,782,258 and 7,765,395 shares issued and outstanding, respectively, at September 30, 2019

 

 

77

 

 

 

78

 

Additional paid-in-capital

 

 

84,939

 

 

 

84,783

 

Retained earnings

 

 

62,437

 

 

 

59,744

 

Unearned Employee Stock Ownership Plan (ESOP) shares

 

 

(1,120

)

 

 

(1,192

)

Accumulated other comprehensive loss

 

 

(1,071

)

 

 

(569

)

    Treasury stock, at cost: 130,198 shares and 16,863 shares at March 31, 2020 and September 30, 2019, respectively

 

 

(2,112

)

 

 

(336

)

Total Shareholders’ Equity

 

 

143,150

 

 

 

142,508

 

Total Liabilities and Shareholders’ Equity

 

$

1,236,112

 

 

$

1,265,222

 

 

See accompanying notes to unaudited consolidated financial statements.

-4-


 

MALVERN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

Six Months Ended March 31,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

(In thousands, except share data)

 

Interest and Dividend Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

10,587

 

 

$

10,661

 

 

$

21,468

 

 

$

20,756

 

Investment securities, taxable

 

 

231

 

 

 

250

 

 

 

446

 

 

 

501

 

Investment securities, tax-exempt

 

 

34

 

 

 

57

 

 

 

73

 

 

 

118

 

Dividends, restricted stock

 

 

182

 

 

 

158

 

 

 

370

 

 

 

291

 

Interest-bearing cash accounts

 

 

550

 

 

 

475

 

 

 

1,022

 

 

 

847

 

Total Interest and Dividend Income

 

 

11,584

 

 

 

11,601

 

 

 

23,379

 

 

 

22,513

 

Interest Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

3,623

 

 

 

3,395

 

 

 

7,360

 

 

 

6,339

 

Short-term borrowings

 

 

-

 

 

 

2

 

 

 

-

 

 

 

7

 

Long-term borrowings

 

 

785

 

 

 

572

 

 

 

1,572

 

 

 

1,205

 

Subordinated debt

 

 

383

 

 

 

383

 

 

 

766

 

 

 

766

 

Total Interest Expense

 

 

4,791

 

 

 

4,352

 

 

 

9,698

 

 

 

8,317

 

Net Interest Income

 

 

6,793

 

 

 

7,249

 

 

 

13,681

 

 

 

14,196

 

Provision for Loan Losses

 

 

625

 

 

 

870

 

 

 

2,775

 

 

 

2,323

 

Net Interest Income after Provision for Loan losses

 

 

6,168

 

 

 

6,379

 

 

 

10,906

 

 

 

11,873

 

Other Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service charges and other fees

 

 

604

 

 

 

238

 

 

 

863

 

 

 

1,178

 

Rental income

 

 

55

 

 

 

64

 

 

 

109

 

 

 

131

 

Net gains on sale of investments

 

 

180

 

 

 

-

 

 

 

180

 

 

 

-

 

Net gains on sale of loans

 

 

-

 

 

 

19

 

 

 

3

 

 

 

37

 

Earnings on bank-owned life insurance

 

 

125

 

 

 

120

 

 

 

252

 

 

 

241

 

Total Other Income

 

 

964

 

 

 

441

 

 

 

1,407

 

 

 

1,587

 

Other Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

2,271

 

 

 

2,213

 

 

 

4,396

 

 

 

4,221

 

Occupancy expense

 

 

591

 

 

 

577

 

 

 

1,173

 

 

 

1,116

 

Federal deposit insurance premium

 

 

3

 

 

 

73

 

 

 

-

 

 

 

142

 

Advertising

 

 

32

 

 

 

30

 

 

 

54

 

 

 

60

 

Data processing

 

 

272

 

 

 

251

 

 

 

550

 

 

 

505

 

Professional fees

 

 

502

 

 

 

455

 

 

 

943

 

 

 

954

 

Other real estate owned expense, net

 

 

(1

)

 

 

28

 

 

 

70

 

 

 

49

 

Pennsylvania shares tax

 

 

170

 

 

 

92

 

 

 

340

 

 

 

92

 

Other operating expenses

 

 

798

 

 

 

724

 

 

 

1,534

 

 

 

1,398

 

Total Other Expenses

 

 

4,638

 

 

 

4,443

 

 

 

9,060

 

 

 

8,537

 

Income before income tax expense

 

 

2,494

 

 

 

2,377

 

 

 

3,253

 

 

 

4,923

 

Income tax expense

 

 

586

 

 

 

411

 

 

 

560

 

 

 

946

 

Net Income

 

$

1,908

 

 

$

1,966

 

 

$

2,693

 

 

$

3,977

 

Earnings Per Common Share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.25

 

 

$

0.26

 

 

$

0.35

 

 

$

0.52

 

Diluted

 

$

0.25

 

 

$

0.26

 

 

$

0.35

 

 

$

0.52

 

Weighted Average Common Shares Outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

7,663,771

 

 

 

7,667,518

 

 

 

7,664,813

 

 

 

7,611,051

 

Diluted

 

 

7,663,771

 

 

 

7,667,518

 

 

 

7,664,813

 

 

 

7,611,051

 

 

See accompanying notes to unaudited consolidated financial statements.

-5-


 

MALVERN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

Six Months Ended March 31,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

(In thousands)

 

Net Income

 

$

1,908

 

 

$

1,966

 

 

$

2,693

 

 

$

3,977

 

Other Comprehensive Income (Loss), Net of Tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding gains on available-for-sale securities

 

 

62

 

 

 

154

 

 

 

133

 

 

 

121

 

Tax effect

 

 

(13

)

 

 

(32

)

 

 

(28

)

 

 

(25

)

Net of tax amount

 

 

49

 

 

 

122

 

 

 

105

 

 

 

96

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reclassification adjustment for net gains arising during the period (1)

 

 

(180

)

 

 

-

 

 

 

(180

)

 

 

-

 

Tax effect

 

 

38

 

 

 

-

 

 

 

38

 

 

 

-

 

Net of tax amount

 

 

(142

)

 

 

-

 

 

 

(142

)

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of unrealized holding losses on securities transferred from available-for-sale to held-to-maturity (2)

 

 

1

 

 

 

1

 

 

 

2

 

 

 

3

 

Tax effect

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1

)

Net of tax amount

 

 

1

 

 

 

1

 

 

 

2

 

 

 

2

 

Fair value adjustments on derivatives

 

 

(682

)

 

 

(393

)

 

 

(591

)

 

 

(1,103

)

Tax effect

 

 

143

 

 

 

81

 

 

 

124

 

 

 

231

 

Net of tax amount

 

 

(539

)

 

 

(312

)

 

 

(467

)

 

 

(872

)

Total other comprehensive loss

 

 

(631

)

 

 

(189

)

 

 

(502

)

 

 

(774

)

Total comprehensive income

 

$

1,277

 

 

$

1,777

 

 

$

2,191

 

 

$

3,203

 

 

 

(1)

Amounts are included in net gains on sale of investments on the Consolidated Statement of Operations in total other income.

 

(2)

Amounts are included in interest and dividends on investment securities on the Consolidated Statement of Operations.

See accompanying notes to unaudited consolidated financial statements.

-6-


 

MALVERN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

 

 

 

Common

Stock

 

 

Additional

Paid-In

Capital

 

 

Retained

Earnings

 

 

Unearned

ESOP

Shares

 

 

Accumulated

Other

Comprehensive

Income (Loss)

 

 

Treasury Stock

 

 

Total

Shareholders'

Equity

 

 

 

(In thousands, except share data)

 

Balance, October 1, 2018

 

 

66

 

 

 

61,099

 

 

 

50,412

 

 

 

(1,338

)

 

 

584

 

 

 

-

 

 

 

110,823

 

Net Income

 

 

-

 

 

 

-

 

 

 

3,977

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,977

 

Other comprehensive loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(774

)

 

 

-

 

 

 

(774

)

Treasury stock activity

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(3

)

 

 

(3

)

Stock issuance (net of issuance of proceeds of $25,000)

 

 

12

 

 

 

23,332

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

23,344

 

Committed to be released ESOP

   shares (7,200 shares)

 

 

-

 

 

 

65

 

 

 

-

 

 

 

73

 

 

 

-

 

 

 

-

 

 

 

138

 

Stock based compensation

 

 

-

 

 

 

63

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

63

 

Balance, March 31, 2019

 

 

78

 

 

 

84,559

 

 

 

54,389

 

 

 

(1,265

)

 

 

(190

)

 

 

(3

)

 

 

137,568

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, October 1, 2019

 

 

78

 

 

 

84,783

 

 

 

59,744

 

 

 

(1,192

)

 

 

(569

)

 

 

(336

)

 

 

142,508

 

Net Income

 

 

-

 

 

 

-

 

 

 

2,693

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,693

 

Other comprehensive loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(502

)

 

 

-

 

 

 

(502

)

Treasury stock activity

 

 

(1

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,776

)

 

 

(1,777

)

Committed to be released ESOP

   shares (7,200 shares)

 

 

-

 

 

 

78

 

 

 

-

 

 

 

72

 

 

 

-

 

 

 

-

 

 

 

150

 

Stock based compensation

 

 

-

 

 

 

78

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

78

 

Balance, March 31, 2020

 

$

77

 

 

$

84,939

 

 

$

62,437

 

 

$

(1,120

)

 

$

(1,071

)

 

$

(2,112

)

 

$

143,150

 

 

See accompanying notes to unaudited consolidated financial statements.

 

-7-


 

MALVERN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Six Months Ended March 31,

 

 

 

2020

 

 

2019

 

 

 

(In thousands)

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

 

Net income

 

$

2,693

 

 

$

3,977

 

Adjustments to reconcile net income to net cash provided by

   operating activities:

 

 

 

 

 

 

 

 

Depreciation expense

 

 

374

 

 

 

382

 

Provision for loan losses

 

 

2,775

 

 

 

2,323

 

Deferred income tax benefit

 

 

(134

)

 

 

(363

)

ESOP expense

 

 

150

 

 

 

138

 

Stock based compensation

 

 

78

 

 

 

63

 

Amortization of premiums and discounts on investments securities, net

 

 

97

 

 

 

130

 

Amortization (accretion) of loan origination fees and costs

 

 

1,519

 

 

 

(154

)

Amortization of mortgage servicing rights

 

 

33

 

 

 

21

 

Net gain on sale of investments securities available-for-sale

 

 

(180

)

 

 

-

 

Net loss on sale of fixed assets

 

 

4

 

 

 

-

 

Net gain on sale of secondary market loans

 

 

(3

)

 

 

(37

)

Proceeds from sale of secondary market loans

 

 

73

 

 

 

2,866

 

Originations of  secondary market loans

 

 

(70

)

 

 

(2,829

)

Earnings on bank-owned life insurance

 

 

(252

)

 

 

(241

)

Decrease (increase) in accrued interest receivable

 

 

132

 

 

 

(544

)

(Decrease) increase in accrued interest payable

 

 

(105

)

 

 

75

 

Operating lease liability payments

 

 

(332

)

 

 

-

 

Increase in other liabilities

 

 

7,354

 

 

 

2,740

 

Increase in other assets

 

 

(4,506

)

 

 

(3,348

)

Amortization of subordinate debt

 

 

78

 

 

 

79

 

Net Cash Provided by Operating Activities

 

 

9,778

 

 

 

5,278

 

 

 

 

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

 

Investment securities available-for-sale:

 

 

 

 

 

 

 

 

Purchases

 

 

(12,100

)

 

 

(5,000

)

        Sales

 

 

5,045

 

 

 

25

 

Maturities, calls and principal repayments

 

 

3,740

 

 

 

10,000

 

Investment securities held-to-maturity:

 

 

 

 

 

 

 

 

Maturities, calls and principal repayments

 

 

4,364

 

 

 

3,200

 

Net decrease (increase) in loans

 

 

514

 

 

 

(102,943

)

Net decrease (increase) in restricted stock

 

 

216

 

 

 

(415

)

Purchase of property and equipment

 

 

(176

)

 

 

(150

)

Net Cash Provided by (Used in) Investing Activities

 

 

1,603

 

 

 

(95,283

)

Cash Flows from Financing Activities

 

 

 

 

 

 

 

 

Net (decrease) increase  in deposits

 

 

(37,911

)

 

 

168,211

 

Proceeds for long-term borrowings

 

 

-

 

 

 

30,000

 

Repayment of long-term borrowings

 

 

-

 

 

 

(50,000

)

Repayment of other borrowed money

 

 

-

 

 

 

(2,500

)

Increase in advances from borrowers for taxes and insurance

 

 

832

 

 

 

939

 

Net proceeds from issuance of common stock

 

 

-

 

 

 

23,344

 

Acquisition of treasury stock

 

 

(1,777

)

 

 

(3

)

Net Cash (Used in) Provided by Financing Activities

 

 

(38,856

)

 

 

169,991

 

Net (Decrease) Increase in Cash and Cash Equivalents

 

 

(27,475

)

 

 

79,986

 

Cash and Cash Equivalents - Beginning

 

 

153,543

 

 

 

30,834

 

Cash and Cash Equivalents - Ending

 

$

126,068

 

 

$

110,820

 

Supplemental Cash Flows Information

 

 

 

 

 

 

 

 

Interest paid

 

$

9,803

 

 

$

8,242

 

Income taxes paid

 

$

902

 

 

$

769

 

    Non-cash transfer to other real estate owned

 

$

-

 

 

$

5,796

 

See accompanying notes to unaudited consolidated financial statements.

-8-


 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – The Company

Malvern Bancorp, Inc. (the “Company” or “Malvern Bancorp”), a Pennsylvania corporation, is a registered bank holding company under the Bank Holding Company Act of 1956, as amended (the “Holding Company Act”).  Malvern Bancorp is the holding company for Malvern Bank, National Association (“Malvern Bank” or the “Bank”), a national bank that was originally organized in 1887 as a federally-chartered savings bank.  Malvern Bank now serves as one of the oldest banks headquartered on the Philadelphia Main Line.  For more than a century, the Bank has been committed to helping people build prosperous communities as a trusted financial partner, forging lasting relationships through teamwork, respect and integrity.     

The Bank conducts business from its headquarters in Paoli, Pennsylvania, a suburb of Philadelphia, and through its twelve other banking locations in Chester, Delaware and Bucks counties, Pennsylvania, Morristown, New Jersey, its New Jersey regional headquarters, Palm Beach, Florida, and Montchanin, Delaware. The Bank also maintains representative offices in Wellington, Florida and Allentown, Pennsylvania. The Bank’s primary market niche is providing personalized service to its client base.  

In preparing the unaudited consolidated financial statements, management has made estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the unaudited consolidated statements of condition and that affect the results of operations for the periods presented. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to change in the near term relate to the determination of the allowance for loan losses, other real estate owned, the evaluation of deferred tax assets, the other-than-temporary impairment evaluation of securities, and the valuation of derivative positions.  The unaudited consolidated financial statements have been prepared in conformity with GAAP.

Note 2 – Summary of Significant Accounting Policies

Basis of financial statement presentation. The unaudited condensed consolidated financial statements of the Company include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

The accompanying unaudited condensed consolidated financial statements present the Company’s financial condition at March 31, 2020 and September 30, 2019 and the results of operations for the three and six months ended March 31, 2020 and 2019, and cash flows for the six months ended March 31, 2020 and 2019. In management’s opinion, the unaudited condensed consolidated financial statements contain all adjustments, which include normal and recurring adjustments, necessary for a fair presentation of the financial position and results of operations as of the dates and for the interim periods presented. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and note disclosures included in the 2019 Annual Report filed with the Securities and Exchange Commission (“SEC”) on December 16, 2019. The consolidated statements of operations for the three and six months ended March 31, 2020 and the consolidated statements of cash flows for the six months ended March 31, 2020 are not necessarily indicative of the results of operations or cash flows for the full year ending September 30, 2020 or any interim period. Subsequent events have been evaluated through the date of the issuance of the unaudited Consolidated Financial Statements. No significant subsequent events have occurred through this date requiring adjustment to the financial statements or disclosures.

   There have been no significant changes to the Critical Accounting Policies as described in the 2019 Annual Report. Those significant accounting policies remain unchanged at March 31, 2020, except as described below:

 

Leases

 

           The Company accounts for its leases in accordance with Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) 842 - Leases. Most of our leases are recognized on the balance sheet by recording a right-of-use asset and lease liability for each lease. The right-of-use asset represents the right to use the asset under lease for the lease term, and the lease liability represents the contractual obligation to make lease payments. The right-of-use asset is tested for impairment whenever events or changes in circumstances indicate the carrying amount may not be recoverable.

 

As a lessee, the Company enters into operating leases for certain bank branches, office space, and office equipment. The right-of-use assets and lease liabilities are initially recognized based on the net present value of the remaining lease payments which include renewal options where management is reasonably certain they will be exercised. The net present value is determined using the incremental borrowing rate based on the Federal Home Loan Bank (“FHLB”) liquidity and funding rates at commencement date. The

-9-


 

right-of-use asset is measured at the amount of the lease liability adjusted for any prepaid rent, lease incentives and initial direct costs incurred. The right-of-use asset and lease liability is amortized over the individual lease terms. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

 

 

Operating, Accounting and Reporting Considerations related to COVID-19

 

The COVID-19 pandemic has negatively impacted the global economy.  In response to the crisis, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was passed by congress and signed into law on March 27, 2020.  The CARES Act provides an estimated $2.2 Trillion to fight the COVID-19 pandemic and stimulate the economy by supporting individuals and businesses through loans, grants, tax changes, and other types of relief.  Some of the provisions applicable to the Company include, but are not limited to:

 

 

Accounting for Loan Modifications – The CARES act provides that a financial institution may elect to suspend (1) the requirements under GAAP for certain loan modifications that would otherwise be categorized as a troubled debt restructure (“TDR”) and (2) any determination that such loan modifications would be considered a TDR, including the related impairment for accounting purposes.

 

Pay Protection Program – The CARES act established the Paycheck Protection Program (“PPP”), an expansion of the Samll Business Administration’s 7(a) loan program and the Economic Injury Disaster Loan Program (“EIDL”), administrated directly by the Small Business Administration (“SBA”).

 

Mortgage Forbearance – Under the CARES Act, through the earlier of December 31, 2020, and is experiencing financial hardship due to COVID-19 may request forbearance on the loan for up to 30 days, with up to two additional 30-day periods at the borrower’s request.  

 

Also in response to the COVID-19 pandemic, the Board of Governors of the Federal Reserve System (“FRB”), the Federal Deposit Insurance Corporation (“FDIC”), the National Credit Union Administration (“NCUA”), the Office of the Comptroller of the Currency (“OCC”), and the Consumer Financial Protection Bureau (“CFPB”), in consultation with the state financial regulators (collectively, the “agencies”) issued a joint interagency statement (issued March 22, 2020; revised statement issued April 7, 2020).  Some of the provisions applicable to the Company include, but are not limited to:

 

 

Accounting for Loan Modifications – Loan modifications that do not meet the conditions of the CARES Act may still qualify as a modification that does not need to be accounted for as a TDR.  The agencies confirmed with FASB staff that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who are current prior to any relief are not TDRs.  This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or insignificant delays in payments.  

 

Past Due Reporting – With regard to loans not otherwise reportable as past due, financial institutions are not expected to designate loans with deferrals granted due to COVID-19 as past due because of the deferral.  A loan’s payment date is governed by the due date stipulated in the legal agreements.  If a financial institution agrees to a payment deferral, these loans would not be considered past due during the period of the deferral.

 

Nonaccrual Status and Charge-offs – During short-term COVID-19 modifications, these loans generally should not be reported as nonaccrual or as classified.

 

Recently Issued Accounting Pronouncements

 

Reference Rate Reform. In March 2020, the FASB issued Accounting Standards Update (“ASU”) No. 2020-04, Reference Rate Reform (Topic 848). This ASU provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendment only applies to contracts, hedging relationships, and other transactions that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued because of reference rate reform. The ASU is effective as of March 12, 2020 through December 31, 2022. The Company is in the process of evaluating the impact of this standard but does not expect this standard to have a material impact on the consolidated earnings, financial position or cash flows of the Company.

Income Taxes. In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740). This ASU identifies, evaluates, and improves areas of GAAP for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements. The ASU is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. The adoption of this new requirement is not expected to have a material impact on the consolidated earnings, financial position or cash flows of the Company.

-10-


 

 

Credit Losses. In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied currently will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. Additionally, this ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration.  In April 2019, the FASB issued ASU 2019-04, Codification Improvements, which provides guidance on accounting for credit losses on accrued interest receivable balances and guidance on including recoveries when estimating the allowance. In May 2019, the FASB issued ASU 2019-05, Targeted Transition Relief, which allows entities with an option to elect fair value for certain instruments upon adoption of Topic 326. This ASU will be effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted.  The Bank has a software system in place to assist with the calculation of Current Expected Credit Losses (“CECL”).  The Company formed a cross functional implementation team to review the requirements of ASU 2016-13 and contracted with a third-party provider to assist in the development and implementation of the revised credit loss methodology. The impacts on the consolidated earnings, financial position and cash flows of the Company, upon adoption of this ASU are currently unknown.  On October 16, 2019, the FASB approved its August 2019 proposal to delay the effective date for adopting the CECL standard for certain small reporting companies and private companies/ not-for-profit organizations to January 2023. In November 2019, the FASB issued ASU No. 2019-10, Financial Instruments-Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842) making this ASU effective for interim and annual periods beginning after December 15, 2022. As such the Company would be required to implement the ASU on October 1, 2023. In November 2019, the FASB issued ASU No. 2019-11, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, which provides guidance on stakeholders’ specific issues about certain aspects of the amendments in ASU 2016-13.

Leases. In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) to increase transparency and comparability among organizations recognizing lease assets and lease liabilities on the balance sheet. This ASU requires lessees to recognize a right-of-use (“ROU”) asset for its right to use the underlying asset and a lease liability for the corresponding lease obligation for leases with terms of more than twelve months. Accounting by lessors remains largely unchanged from current GAAP. This ASU also requires expanded quantitative and qualitative disclosures for both lessees and lessors. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which provides entities with an additional (and optional) transition method in which the entity applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company has applied the new transition method upon adoption. In December 2018, the FASB issued ASU 2018-20, Leases (Topic 842): Narrow Scope Improvements for Lessors, which clarifies the treatment of sales taxes and other taxes collected from lessees, lessor costs paid directly by lessees, and recognition of variable payments for contracts with lease and non-lease components. In March 2019, the FASB issued ASU 2019-01, Leases (Topic 842): Codification Improvements, which aligned the new lease guidance with the existing guidance for fair value of the underlying asset by lessors that are not manufacturers or dealers. It also clarified an exemption for lessors and lessees from a certain interim disclosure requirement associated with adopting the board’s new lease accounting standard. The Company adopted the guidance in these ASUs on October 1, 2019 and will not restate comparative periods. As a result, the Company recorded ROU assets and related lease liabilities of $3.3 million at October 1, 2019. At March 31, 2020 the Company had ROU assets and related lease liabilities of $3.0 million.

 


-11-


 

 

Note 3 – Significant Events

 

On March 11, 2020, the World Health Organization declared COVID-19, the disease caused by the novel coronavirus, a pandemic as a result of the global spread of the coronavirus illness. In response to the outbreak, federal and state authorities in the U.S. introduced various measures to try to limit or slow the spread of the virus, including travel restrictions, nonessential business closures, stay-at-home orders, and strict social distancing. The Company activated its Pandemic Plan to protect the health of employees and clients, which includes temporarily limiting lobby hours and transitioning some of the Company’s workforce to remote work. Nonetheless, the Company has not incurred any significant disruptions to its business activities.

 

The full impact of COVID-19 is unknown and rapidly evolving. It has caused substantial disruption in international and U.S. economies, markets, and employment. The outbreak may have a significant adverse impact on certain industries the Company serves. Based on management’s current assessment of the increased inherit risk in the loan portfolio, fiscal second quarter 2020 results included an additional $625,000 in provision for loan losses, pre-tax. Because of the significant uncertainties related to the ultimate duration of the COVID-19 pandemic and its potential effects on clients and prospects, and on the national and local economy as a whole, there can be no assurances as to how the crisis may ultimately affect the Company’s loan portfolio.

 

To work with clients impacted by COVID-19, the Company began providing financial hardship relief in the form of payment deferrals and forbearances to consumers and business customers across several lending products, as well as suspension of home foreclosures.  The payment deferrals and forbearances are currently expected to cover periods of three months.  These offers are not classified as TDRs, will not be reported as past due during the deferral period, and do not result in loans being placed on nonaccrual status. As of April 30, 2020, the Company entered into 137 loan modification agreements with respect to $312.6 million of loans outstanding. For loans subject to the program, each borrower is required to resume making regularly scheduled loan payment at the end of the modification period and the deferred amounts will be moved to the end of the loan term.

 

         On March 27, 2020, the CARES Act was signed into law. The CARES Act is a $2.0 trillion stimulus package to provide relief to U.S. businesses and consumers struggling as a result of the pandemic. A provision in the CARES Act includes a $349.0 billion fund for the creation of the PPP through the SBA and Treasury Department. The PPP is intended to provide loans to small businesses to pay their employees, rent, mortgage interest, and utilities. The loans may be forgiven, conditioned upon the client providing payroll documentation evidencing their compliant use of funds and otherwise complying with the terms of the program. In response to the economic hardships associated with the COVID-19 pandemic, as of April 30, 2020, the Company has obtained approval from the SBA for 172 loans totaling $17.1 million for existing and new customers, assisting local small businesses to retain an estimated 1,769 employees. The Company is continually monitoring the PPP and making the necessary adjustments to its own operations.  Management expects to fund these short-term loans through a combination of short-term FHLB advances, and participation in the Federal Reserve’s Paycheck Protection Program Liquidity Facility (“PPPLF”).

 

 

 


-12-


 

 

Note 4 – Non-Interest Income

On October 1, 2018, the Company adopted the amendments of ASU 2014-09 - Revenue from Contracts with Customers (Topic 606) and all subsequent ASUs that modified Topic 606. A significant amount of the Company’s revenues is derived from net interest income on financial assets and liabilities, which are excluded from the scope of the amended guidance. Some sources of revenue included within non-interest income fall within the scope of Topic 606, while other sources do not. The Company recognizes revenue when the performance obligations related to the transfer of goods or services under the terms of the contract are satisfied. Some obligations are satisfied at a point in time while others are satisfied over a period of time. Revenue is recognized as the amount of consideration to which the Company expects to be entitled in exchange for transferring goods or services to a customer. When consideration includes a variable component, the amount of consideration attributable to variability is included in the transaction price only to the extent it is probable that significant revenue recognized will not be reversed when uncertainty associated with the variable consideration is subsequently resolved. The Company’s contracts generally do not contain terms that require significant judgement to determine the variability impacting the transaction price. The Company has included the following table regarding the Company’s other income for the periods presented:

 

 

 

Three Months Ended March 31,

 

 

Six Months Ended March 31,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

(In thousands)

 

Rental income

 

$

55

 

 

$

64

 

 

$

109

 

 

$

131

 

Net gains on sales of investments

 

 

180

 

 

 

-

 

 

 

180

 

 

 

-

 

Net gains on sale of loans

 

 

-

 

 

 

19

 

 

 

3

 

 

 

37

 

Earnings on bank-owned life insurance

 

 

125

 

 

 

120

 

 

 

252

 

 

 

241

 

Non-interest income within the scope of other GAAP topics

 

$

360

 

 

$

203

 

 

$

544

 

 

$

409

 

ATM fees

 

$

1

 

 

$

1

 

 

$

3

 

 

$

2

 

Credit card fee income

 

 

5

 

 

 

6

 

 

 

11

 

 

 

11

 

DDA fee income

 

 

26

 

 

 

32

 

 

 

56

 

 

 

69

 

DDA service fees

 

 

19

 

 

 

17

 

 

 

38

 

 

 

36

 

Debit card fees

 

 

61

 

 

 

57

 

 

 

127

 

 

 

117

 

Other loan fee income

 

 

429

 

 

 

65

 

 

 

506

 

 

 

829

 

Other fee income

 

 

61

 

 

 

59

 

 

 

118

 

 

 

111

 

Other non-interest income

 

 

2

 

 

 

1

 

 

 

4

 

 

 

3

 

Non-interest income from contracts with customers

 

$

604

 

 

$

238

 

 

$

863

 

 

$

1,178

 

Total Non-interest Income

 

$

964

 

 

$

441

 

 

$

1,407

 

 

$

1,587

 

 

The increase in other loan fee income during the quarter ended March 31, 2020 is primarily due to the recognition of approximately $371,000 of net swap fees through the Bank’s commercial loan hedging program.

 

The decrease in other loan fee income during the six months ended March 31, 2020 is primarily due to the recognition of approximately $337,000 less of net swap fees through the Bank’s commercial loan hedging program. 

 

Note 5 – Earnings Per Share

Basic earnings per common share is computed based on the weighted average number of shares outstanding reduced by unearned Employee Stock Ownership Plan (“ESOP”) shares. Diluted earnings per share is computed based on the weighted average number of shares outstanding and common stock equivalents (“CSEs”) that would arise from the exercise of dilutive securities, reduced by unearned ESOP shares.  During the three and six months ended March 31, 2020, the Company issued 16,357 and 18,121 restricted shares, respectively, which are considered CSEs. During the three and six months ended March 31, 2020, stock options covering a total of 7,000 shares of common stock were granted. During the three and six months ended March 31, 2019, the Company granted  6,045 and 9,283 restricted shares , respectively, which are considered CSEs. During the three and six months ended March 31, 2019, stock options covering a total of 7,000 shares of common stock were granted.       

-13-


 

The following table sets forth the composition of the weighted average shares (denominator) used in the earnings per share computations:

 

 

 

Three Months Ended March 31,

 

 

Six Months Ended March 31,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

(In thousands, except share data)

 

Net Income

 

$

1,908

 

 

$

1,966

 

 

$

2,693

 

 

$

3,977

 

Weighted average shares outstanding

 

 

7,758,718

 

 

 

7,776,870

 

 

 

7,761,566

 

 

 

7,722,217

 

Average unearned ESOP shares

 

 

(94,947

)

 

 

(109,352

)

 

 

(96,753

)

 

 

(111,166

)

Basic weighted average shares outstanding

 

 

7,663,771

 

 

 

7,667,518

 

 

 

7,664,813

 

 

 

7,611,051

 

Plus: effect of potential dilutive common stock equivalents - stock options

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Diluted weighted average common shares outstanding

 

 

7,663,771

 

 

 

7,667,518

 

 

 

7,664,813

 

 

 

7,611,051

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.25

 

 

$

0.26

 

 

$

0.35

 

 

$

0.52

 

Diluted

 

$

0.25

 

 

$

0.26

 

 

$

0.35

 

 

$

0.52

 

 

Note 6 – Employee Stock Ownership Plan

The Company maintains an ESOP for substantially all of its full-time employees. The current ESOP trustee is Pentegra.  Shares of the Company’s common stock purchased by the ESOP are held until released for allocation to participants.  Shares released are allocated to each eligible participant based on the ratio of each such participant’s base compensation to the total base compensation of all eligible plan participants. As the unearned shares are committed to be released and allocated among participants, the Company recognizes a compensation expense equal to the fair value of the ESOP shares during the periods in which they become committed to be released.  To the extent that the fair value of the ESOP shares released differs from the cost of such shares, the difference is charged or credited to additional paid-in capital.  During the period from May 20, 2008 to September 30, 2008, the ESOP purchased 241,178 shares of Company common stock for approximately $2.6 million, at an average price of $10.86 per share, which was funded by a loan from Malvern Federal Bancorp, Inc. (the Company’s predecessor).  The ESOP loan is being repaid principally from the Bank’s contributions to the ESOP.  The loan, which bears an interest rate of 5%, is being repaid in quarterly installments through 2026.  Shares are released to participants proportionately as the loan is repaid. During each of the three and six months ended March 31, 2020 and 2019, there were  7,200 shares committed to be released.  At March 31, 2020, there were 93,165 unallocated shares and 166,053 allocated shares held by the ESOP. The unallocated shares had an aggregate fair value of approximately $1.1 million at March 31, 2020.

Note 7 - Investment Securities

The Company’s investment securities are classified as available-for-sale or held-to-maturity at March 31, 2020 and at September 30, 2019. Investment securities available-for-sale are reported at fair value with unrealized gains or losses included in equity, net of tax. Accordingly, the carrying value of such securities reflects their fair value at the balance sheet date. Fair value is based upon either quoted market prices, or in certain cases where there is limited activity in the market for a particular instrument, assumptions are made to determine their fair value.   Held-to-maturity securities, which are carried at amortized cost, are investments where there is positive intent and ability to hold to maturity.

Transfers of debt securities from the available-for-sale category to the held-to-maturity category are made at fair value at the date of transfer. The unrealized holding gain or loss at the date of transfer remains in accumulated other comprehensive income and in the carrying value of the held-to-maturity investment security. Premiums or discounts on investment securities are amortized or accreted using the effective interest method over the life of the security as an adjustment of yield. Unrealized holding gains or losses that remain in accumulated other comprehensive income are amortized or accreted over the remaining life of the security as an adjustment of yield, offsetting the related amortization of the premium or accretion of the discount.

-14-


 

The following tables present information related to the Company’s investment securities at March 31, 2020 and September 30, 2019:

 

 

 

March 31, 2020

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

 

 

(In thousands)

 

Investment Securities Available-for-Sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

3,814

 

 

$

-

 

 

$

(2

)

 

$

3,812

 

State and municipal obligations

 

 

4,205

 

 

 

12

 

 

 

-

 

 

 

4,217

 

Single issuer trust preferred security

 

 

1,000

 

 

 

-

 

 

 

(69

)

 

 

931

 

Corporate debt securities

 

 

11,475

 

 

 

147

 

 

 

(257

)

 

 

11,365

 

Mutual fund

 

 

1,500

 

 

 

14

 

 

 

-

 

 

 

1,514

 

Total

 

$

21,994

 

 

$

173

 

 

$

(328

)

 

$

21,839

 

Investment Securities Held-to-Maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

State and municipal obligations

 

$

2,817

 

 

$

71

 

 

$

(1

)

 

$

2,887

 

Corporate debt securities

 

 

3,554

 

 

 

119

 

 

 

-

 

 

 

3,673

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collateralized mortgage obligations (“CMO”), fixed-rate

 

 

11,675

 

 

 

199

 

 

 

-

 

 

 

11,874

 

        Total

 

$

18,046

 

 

$

389

 

 

$

(1

)

 

$

18,434

 

Total investment securities

 

$

40,040

 

 

$

562

 

 

$

(329

)

 

$

40,273

 

 

 

 

September 30, 2019

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

 

 

(In thousands)

 

Investment Securities Available-for-Sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

3,000

 

 

$

-

 

 

$

-

 

 

$

3,000

 

State and municipal obligations

 

 

4,715

 

 

 

17

 

 

 

-

 

 

 

4,732

 

Single issuer trust preferred security

 

 

1,000

 

 

 

-

 

 

 

(77

)

 

 

923

 

Corporate debt securities

 

 

9,557

 

 

 

181

 

 

 

(232

)

 

 

9,506

 

Mutual fund

 

 

250

 

 

 

-

 

 

 

-

 

 

 

250

 

Total

 

$

18,522

 

 

$

198

 

 

$

(309

)

 

$

18,411

 

Investment Securities Held-to-Maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

1,000

 

 

$

-

 

 

$

-

 

 

$

1,000

 

State and municipal obligations

 

 

4,515

 

 

 

75

 

 

 

-

 

 

 

4,590

 

Corporate debt securities

 

 

3,608

 

 

 

182

 

 

 

-

 

 

 

3,790

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CMO, fixed-rate

 

 

13,362

 

 

 

3

 

 

 

(136

)

 

 

13,229

 

        Total

 

$

22,485

 

 

$

260

 

 

$

(136

)

 

$

22,609

 

Total investment securities

 

$

41,007

 

 

$

458

 

 

$

(445

)

 

$

41,020

 

 

  For the three and six months ended March 31, 2020, proceeds of available-for-sale investment securities sold amounted to approximately $5.0 million. There were gains of approximately $180,000 with these sales. For the three and six months ended March 31, 2019, proceeds of available-for-sale investment securities sold amounted to approximately $25,000. There was no gain or loss with this sale.

-15-


 

The following tables indicate gross unrealized losses not recognized in income and fair value, aggregated by investment category, and the length of time individual securities have been in a continuous unrealized loss position at March 31, 2020 and September 30, 2019:

 

 

 

March 31, 2020

 

 

 

Less than 12 Months

 

 

More than 12 Months

 

 

Total

 

 

 

Fair Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

 

(In thousands)

 

Investment Securities Available for Sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

3,812

 

 

$

(2

)

 

$

-

 

 

$

-

 

 

$

3,812

 

 

$

(2

)

Single issuer trust preferred security

 

 

-

 

 

 

-

 

 

 

931

 

 

 

(69

)

 

 

931

 

 

 

(69

)

Corporate debt securities

 

 

1,915

 

 

 

(85

)

 

 

3,328

 

 

 

(172

)

 

 

5,243

 

 

 

(257

)

Total

 

$

5,727

 

 

$

(87

)

 

$

4,259

 

 

$

(241

)

 

$

9,986

 

 

$

(328

)

Investment Securities Held-to-Maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

State and municipal obligations

 

$

1,005

 

 

$

(1

)

 

$

-

 

 

$

-

 

 

$

1,005

 

 

$

(1

)

Total

 

$

1,005

 

 

$

(1

)

 

$

-

 

 

$

-

 

 

$

1,005

 

 

$

(1

)

Total investment securities

 

$

6,732

 

 

$

(88

)

 

$

4,259

 

 

$

(241

)

 

$

10,991

 

 

$

(329

)

 

 

 

September 30, 2019

 

 

 

Less than 12 Months

 

 

More than 12 Months

 

 

Total

 

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

 

(In thousands)

 

Investment Securities Available for Sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Single issuer trust preferred security

 

$

-

 

 

$

-

 

 

$

923

 

 

$

(77

)

 

$

923

 

 

$

(77

)

Corporate debt securities

 

 

-

 

 

 

-

 

 

 

3,268

 

 

 

(232

)

 

 

3,268

 

 

 

(232

)

Total

 

$

-

 

 

$

-

 

 

$

4,191

 

 

$

(309

)

 

$

4,191

 

 

$

(309

)

Investment Securities Held-to-Maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CMO, fixed-rate

 

$

1,315

 

 

$

(4

)

 

$

10,894

 

 

$

(132

)

 

$

12,209

 

 

$

(136

)

Total

 

$

1,315

 

 

$

(4

)

 

$

10,894

 

 

$

(132

)

 

$

12,209

 

 

$

(136

)

Total investment securities

 

$

1,315

 

 

$

(4

)

 

$

15,085

 

 

$

(441

)

 

$

16,400

 

 

$

(445

)

 

As of March 31, 2020, the estimated fair value of the securities disclosed above was primarily dependent upon the movement in market interest rates, particularly given the inherent credit risk associated with these securities. These investment securities are comprised of securities that are rated investment grade by at least one bond credit rating service. Although the fair value will fluctuate as market interest rates move, management believes that these fair values will recover as the underlying portfolios mature and are reinvested in market rate yielding investments. As of March 31, 2020, the Company held one government agency security, one municipal bond, three corporate debt securities,   and one single issuer trust preferred security which were in an unrealized loss position. The Company does not intend to sell and expects that it is unlikely that it will be required to sell these securities until such time as the value recovers or the securities mature. Management does not believe any individual unrealized loss as of March 31, 2020 represents other-than-temporary impairment.

Investment securities having a carrying value of approximately $5.8 million and $6.4 million at March 31, 2020 and September 30, 2019, respectively, were pledged to secure deposits. No investment securities were pledged to secure hedges at March 31, 2020. Investment securities having a carrying value of  $4.0 million at September 30, 2019 were pledged to secure hedges. No investment securities were pledged to secure short-term borrowings at March 31, 2020 and September 30, 2019.  

-16-


 

The following table presents information for investment securities at March 31, 2020, based on scheduled maturities. Actual maturities can be expected to differ from scheduled maturities due to prepayment or early call options of the issuer:

 

 

 

Amortized Cost

 

 

Fair Value

 

 

 

(In thousands)

 

Available-for-Sale:

 

 

 

 

 

 

 

 

Within 1 year

 

$

1,030

 

 

$

1,036

 

Over 1 year through five years

 

 

6,676

 

 

 

6,509

 

After 5 years through ten years

 

 

7,974

 

 

 

7,969

 

Over 10 years

 

 

6,314

 

 

 

6,325

 

Total

 

$

21,994

 

 

$

21,839

 

Held-to-Maturity:

 

 

 

 

 

 

 

 

Over 1 year through five years

 

$

3,554

 

 

$

3,673

 

After 5 years through ten years

 

 

1,811

 

 

 

1,882

 

Over 10 years

 

 

1,006

 

 

 

1,005

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

CMO, fixed-rate

 

 

11,675

 

 

 

11,874

 

Total

 

$

18,046

 

 

$

18,434

 

Total investment securities

 

$

40,040

 

 

$

40,273

 

 

Note 8 - Loans Receivable and Related Allowance for Loan Losses  

Loans receivable in the Company’s portfolio consisted of the following at the dates indicated below:

 

 

 

March 31, 2020

 

 

September 30, 2019

 

 

 

(In thousands)

 

Residential mortgage

 

$

240,633

 

 

$

220,011

 

Construction and Development:

 

 

 

 

 

 

 

 

Residential and commercial

 

 

52,313

 

 

 

40,346

 

Land

 

 

3,579

 

 

 

3,420

 

Total Construction and Development

 

 

55,892

 

 

 

43,766

 

Commercial:

 

 

 

 

 

 

 

 

Commercial real estate

 

 

511,467

 

 

 

543,452

 

Farmland

 

 

7,537

 

 

 

7,563

 

Multi-family

 

 

59,978

 

 

 

62,884

 

   Commercial and industrial

 

 

96,574

 

 

 

99,747

 

Other

 

 

7,604

 

 

 

4,450

 

Total Commercial

 

 

683,160

 

 

 

718,096

 

Consumer:

 

 

 

 

 

 

 

 

Home equity lines of credit

 

 

18,441

 

 

 

19,506

 

Second mortgages

 

 

12,393

 

 

 

13,737

 

Other

 

 

2,112

 

 

 

2,030

 

Total Consumer

 

 

32,946

 

 

 

35,273

 

Total loans

 

 

1,012,631

 

 

 

1,017,146

 

Deferred loan fees and costs, net

 

 

832

 

 

 

663

 

Allowance for loan losses

 

 

(10,556

)

 

 

(10,095

)

Total loans receivable, net

 

$

1,002,907

 

 

$

1,007,714

 

 

 

             

 

 

-17-


 

The following tables summarize the primary classes of the allowance for loan losses (“ALLL”), segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment, as of March 31, 2020 and September 30, 2019.  Activity in the ALLL is presented for the three and six months ended March 31, 2020 and 2019 and the fiscal year ended September 30, 2019:

 

 

 

 

 

 

 

Construction and

Development

 

 

Commercial

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

Residential

Mortgage

 

 

Residential

and

Commercial

 

 

Land

 

 

Commercial

Real Estate

 

 

Farmland

 

 

Multi-

Family

 

 

Commercial and Industrial

 

 

Other

 

 

Home Equity

Lines of Credit

 

 

Second

Mortgages

 

 

Other

 

 

Unallocated

 

 

Total

 

Allowance for loan losses:

 

(In thousands)

 

Three Months Ended March 31,

2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

1,282

 

 

$

585

 

 

$

18

 

 

$

6,194

 

 

$

38

 

 

$

196

 

 

$

464

 

 

$

33

 

 

$

101

 

 

$

235

 

 

$

23

 

 

$

793

 

 

$

9,962

 

Charge-offs

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(62

)

 

 

(1

)

 

 

-

 

 

 

-

 

 

 

(63

)

Recoveries

 

 

23

 

 

 

-

 

 

 

-

 

 

 

1

 

 

 

-

 

 

 

-

 

 

 

1

 

 

 

-

 

 

 

-

 

 

 

6

 

 

 

1

 

 

 

-

 

 

 

32

 

Provisions

 

 

187

 

 

 

(231

)

 

 

6

 

 

 

1,087

 

 

 

4

 

 

 

248

 

 

 

51

 

 

 

2

 

 

 

88

 

 

 

(28

)

 

 

(3

)

 

 

(786

)

 

 

625

 

Ending balance

 

$

1,492

 

 

$

354

 

 

$

24

 

 

$

7,282

 

 

$

42

 

 

$

444

 

 

$

516

 

 

$

35

 

 

$

127

 

 

$

212

 

 

$

21

 

 

$

7

 

 

$

10,556

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction and

Development

 

 

Commercial

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

Residential

Mortgage

 

 

Residential

and

Commercial

 

 

Land

 

 

Commercial

Real Estate

 

 

Farmland

 

 

Multi-

Family

 

 

Commercial and Industrial

 

 

Other

 

 

Home Equity

Lines of Credit

 

 

Second

Mortgages

 

 

Other

 

 

Unallocated

 

 

Total

 

Allowance for loan losses:

(In thousands)

 

Three Months Ended March 31,

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

1,164

 

 

$

439

 

 

$

45

 

 

$

5,344

 

 

$

64

 

 

$

274

 

 

$

432

 

 

$

30

 

 

$

79

 

 

$

391

 

 

$

44

 

 

$

941

 

 

$

9,247

 

Charge-offs

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(153

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1

)

 

 

(36

)

 

 

-

 

 

 

(190

)

Recoveries

 

 

79

 

 

 

-

 

 

 

-

 

 

 

1

 

 

 

-

 

 

 

-

 

 

 

1

 

 

 

-

 

 

 

1

 

 

 

6

 

 

 

1

 

 

 

-

 

 

 

89

 

Provisions

 

 

(113

)

 

 

162

 

 

 

(12

)

 

 

575

 

 

 

(2

)

 

 

145

 

 

 

19

 

 

 

3

 

 

 

21

 

 

 

(37

)

 

 

15

 

 

 

94

 

 

 

870

 

Ending balance

 

$

1,130

 

 

$

601

 

 

$

33

 

 

$

5,767

 

 

$

62

 

 

$

419

 

 

$

452

 

 

$

33

 

 

$

101

 

 

$

359

 

 

$

24

 

 

$

1,035

 

 

$

10,016

 

-18-


 

 

 

 

 

 

 

 

Construction and

Development

 

 

Commercial

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

Residential

Mortgage

 

 

Residential

and

Commercial

 

 

Land

 

 

Commercial

Real Estate

 

 

Farmland

 

 

Multi-

Family

 

 

Commercial and Industrial

 

 

Other

 

 

Home Equity

Lines of Credit

 

 

Second

Mortgages

 

 

Other

 

 

Unallocated

 

 

Total

 

Allowance for loan losses:

 

(In thousands)

 

Six Months Ended March 31,

2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

1,364

 

 

$

523

 

 

$

20

 

 

$

5,903

 

 

$

49

 

 

$

369

 

 

$

615

 

 

$

21

 

 

$

122

 

 

$

267

 

 

$

23

 

 

$

819

 

 

$

10,095

 

Charge-offs

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2,288

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(62

)

 

 

(3

)

 

 

-

 

 

 

-

 

 

 

(2,353

)

Recoveries

 

 

23

 

 

 

-

 

 

 

-

 

 

 

2

 

 

 

-

 

 

 

-

 

 

 

1

 

 

 

-

 

 

 

-

 

 

 

12

 

 

 

1

 

 

 

-

 

 

 

39

 

Provisions

 

 

105

 

 

 

(169

)

 

 

4

 

 

 

3,665

 

 

 

(7

)

 

 

75

 

 

 

(100

)

 

 

14

 

 

 

67

 

 

 

(64

)

 

 

(3

)

 

 

(812

)

 

 

2,775

 

Ending balance

 

$

1,492

 

 

$

354

 

 

$

24

 

 

$

7,282

 

 

$

42

 

 

$

444

 

 

$

516

 

 

$

35

 

 

$

127

 

 

$

212

 

 

$

21

 

 

$

7

 

 

$

10,556

 

Ending balance: individually evaluated

   for impairment

 

$

3

 

 

$

-

 

 

$

-

 

 

$

110

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

90

 

 

$

-

 

 

$

-

 

 

$

203

 

Ending balance: collectively evaluated

   for impairment

 

$

1,489

 

 

$

354

 

 

$

24

 

 

$

7,172

 

 

$

42

 

 

$

444

 

 

$

516

 

 

$

35

 

 

$

127

 

 

$

122

 

 

$

21

 

 

$

7

 

 

$

10,353

 

Loans receivable:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

240,633

 

 

$

52,313

 

 

$

3,579

 

 

$

511,467

 

 

$

7,537

 

 

$

59,978

 

 

$

96,574

 

 

$

7,604

 

 

$

18,441

 

 

$

12,393

 

 

$

2,112

 

 

 

 

 

 

$

1,012,631

 

Ending balance: individually evaluated

   for impairment

 

$

3,469

 

 

$

-

 

 

$

-

 

 

$

18,193

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

29

 

 

$

841

 

 

$

-

 

 

 

 

 

 

$

22,532

 

Ending balance: collectively evaluated

   for impairment

 

$

237,164

 

 

$

52,313

 

 

$

3,579

 

 

$

493,274

 

 

$

7,537

 

 

$

59,978

 

 

$

96,574

 

 

$

7,604

 

 

$

18,412

 

 

$

11,552

 

 

$

2,112

 

 

 

 

 

 

$

990,099

 

 

 

 

 

 

 


-19-


 

 

 

 

 

 

 

Construction and

Development

 

 

Commercial

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

Residential

Mortgage

 

 

Residential

and

Commercial

 

 

Land

 

 

Commercial

Real Estate

 

 

Farmland

 

 

Multi-

Family

 

 

Commercial and Industrial

 

 

Other

 

 

Home Equity

Lines of Credit

 

 

Second

Mortgages

 

 

Other

 

 

Unallocated

 

 

Total

 

Allowance for loan losses:

 

(In thousands)

 

Six Months Ended March 31,

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

1,062

 

 

$

393

 

 

$

49

 

 

$

5,031

 

 

$

66

 

 

$

232

 

 

$

443

 

 

$

24

 

 

$

82

 

 

$

326

 

 

$

51

 

 

$

1,262

 

 

$

9,021

 

Charge-offs

 

 

(17

)

 

 

-

 

 

 

-

 

 

 

(1,376

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1

)

 

 

(37

)

 

 

-

 

 

 

(1,431

)

Recoveries

 

 

79

 

 

 

-

 

 

 

-

 

 

 

4

 

 

 

-

 

 

 

-

 

 

 

3

 

 

 

-

 

 

 

1

 

 

 

14

 

 

 

2

 

 

 

-

 

 

 

103

 

Provisions

 

 

6

 

 

 

208

 

 

 

(16

)

 

 

2,108

 

 

 

(4

)

 

 

187

 

 

 

6

 

 

 

9

 

 

 

18

 

 

 

20

 

 

 

8

 

 

 

(227

)

 

 

2,323

 

Ending balance

 

$

1,130

 

 

$

601

 

 

$

33

 

 

$

5,767

 

 

$

62

 

 

$

419

 

 

$

452

 

 

$

33

 

 

$

101

 

 

$

359

 

 

$

24

 

 

$

1,035

 

 

$

10,016

 

Ending balance: individually evaluated

   for impairment

 

$

-

 

 

$

-

 

 

$

-

 

 

$

95

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

175

 

 

$

1

 

 

$

-

 

 

$

271

 

Ending balance: collectively evaluated

   for impairment

 

$

1,130

 

 

$

601

 

 

$

33

 

 

$

5,672

 

 

$

62

 

 

$

419

 

 

$

452

 

 

$

33

 

 

$

101

 

 

$

184

 

 

$

23

 

 

$

1,035

 

 

$

9,745

 

Loans receivable:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

202,655

 

 

$

44,014

 

 

$

5,696

 

 

$

550,933

 

 

$

12,041

 

 

$

64,328

 

 

$

82,731

 

 

$

8,111

 

 

$

18,466

 

 

$

15,773

 

 

$

1,904

 

 

 

 

 

 

$

1,006,652

 

Ending balance: individually evaluated

   for impairment

 

$

3,592

 

 

$

-

 

 

$

67

 

 

$

10,155

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

32

 

 

$

685

 

 

$

1

 

 

 

 

 

 

$

14,532

 

Ending balance: collectively evaluated

   for impairment

 

$

199,063

 

 

$

44,014

 

 

$

5,629

 

 

$

540,778

 

 

$

12,041

 

 

$

64,328

 

 

$

82,731

 

 

$

8,111

 

 

$

18,434

 

 

$

15,088

 

 

$

1,903

 

 

 

 

 

 

$

992,120

 

-20-


 

 

 

 

 

 

 

 

Construction and

Development

 

 

Commercial

 

 

Consumer

 

 

 

 

 

 

 

 

 

Residential

Mortgage

 

 

Residential

and

Commercial

 

 

Land

 

 

Commercial

Real Estate

 

 

Farmland

 

 

Multi-

Family

 

 

Commercial and Industrial

 

 

Other

 

 

Home Equity

Lines of Credit

 

 

Second

Mortgages

 

 

Other

 

 

Unallocated

 

 

Total

 

Allowance for loan losses:

(In thousands)

 

Year Ended September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

1,062

 

 

$

393

 

 

$

49

 

 

$

5,031

 

 

$

66

 

 

$

232

 

 

$

443

 

 

$

24

 

 

$

82

 

 

$

326

 

 

$

51

 

 

$

1,262

 

 

$

9,021

 

Charge-offs

 

 

(17

)

 

 

-

 

 

 

-

 

 

 

(1,418

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(45

)

 

 

(37

)

 

 

-

 

 

 

(1,517

)

Recoveries

 

 

79

 

 

 

-

 

 

 

-

 

 

 

23

 

 

 

-

 

 

 

-

 

 

 

4

 

 

 

-

 

 

 

1

 

 

 

94

 

 

 

11

 

 

 

-

 

 

 

212

 

Provisions

 

 

240

 

 

 

130

 

 

 

(29

)

 

 

2,267

 

 

 

(17

)

 

 

137

 

 

 

168

 

 

 

(3

)

 

 

39

 

 

 

(108

)

 

 

(2

)

 

 

(443

)

 

 

2,379

 

Ending balance

 

$

1,364

 

 

$

523

 

 

$

20

 

 

$

5,903

 

 

$

49

 

 

$

369

 

 

$

615

 

 

$

21

 

 

$

122

 

 

$

267

 

 

$

23

 

 

$

819

 

 

$

10,095

 

Ending balance: individually evaluated

   for impairment

 

$

-

 

 

$

-

 

 

$

-

 

 

$

57

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

100

 

 

$

-

 

 

$

-

 

 

$

157

 

Ending balance: collectively evaluated

   for impairment

 

$

1,364

 

 

$

523

 

 

$

20

 

 

$

5,846

 

 

$

49

 

 

$

369

 

 

$

615

 

 

$

21

 

 

$

122

 

 

$

167

 

 

$

23

 

 

$

819

 

 

$

9,938

 

Loans receivable:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

220,011

 

 

$

40,346

 

 

$

3,420

 

 

$

543,452

 

 

$

7,563

 

 

$

62,884

 

 

$

99,747

 

 

$

4,450

 

 

$

19,506

 

 

$

13,737

 

 

$

2,030

 

 

 

 

 

 

$

1,017,146

 

Ending balance: individually evaluated

   for impairment

 

$

3,526

 

 

$

-

 

 

$

-

 

 

$

9,707

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

30

 

 

$

728

 

 

$

-

 

 

 

 

 

 

$

13,991

 

Ending balance: collectively evaluated

   for impairment

 

$

216,485

 

 

$

40,346

 

 

$

3,420

 

 

$

533,745

 

 

$

7,563

 

 

$

62,884

 

 

$

99,747

 

 

$

4,450

 

 

$

19,476

 

 

$

13,009

 

 

$

2,030

 

 

 

 

 

 

$

1,003,155

 

 

In assessing the adequacy of the ALLL, it is recognized that the process, methodology and underlying assumptions require a significant degree of judgment. The estimation of loan losses is not precise; the range of factors considered is wide and is significantly dependent upon management’s judgment, including the outlook and potential changes in the economic environment.    Any unallocated portion of the ALLL in conjunction with the quarterly review and changes to the qualitative factors to adjust for the risk due to current economic conditions reflects management’s estimate of probable inherent but undetected losses within the portfolio due to uncertainties in economic conditions, regulatory requirements, delays in obtaining information, including unfavorable information about a borrower’s financial condition, the difficulty in identifying triggering events that correlate perfectly to subsequent loss rates, and risk factors that have not yet manifested themselves in loss allocation factors.

 

The impact of COVID-19 on companies is evolving rapidly and its future effects are uncertain. Although several of the Company’s asset quality metrics have not significantly been adversely affected during the second fiscal quarter of 2020, management determined it is prudent to increase its loan loss reserves through the adjustment in its qualitative factors, such as changes in current business and economic conditions, nature and volume, concentration of credit and the value of the underlying collateral. All of these factors are likely to be affected by the COVID-19 pandemic.

 

            As previously disclosed in the Company’s 10-Q/A filed on April 16, 2020, subsequent to the Company’s submission on February 10, 2020 of the original Form 10-Q for the quarter ended December 31, 2019, additional information was received concerning a certain $9.1 million collateral dependent commercial loan relationship (the “Loan”), which was classified as an accruing TDR as of December 31, 2019.  In determining the ALLL and impairment on the Loan as of December 31, 2019, the Company followed guidance under ASC 310-10-35. When measuring impairment on an individual basis under ASC 310-10-35, the Company considered the fair value of the Loan’s collateral, given that, based on available information, the Loan was collateral dependent.  Accordingly, the Company charged-off $2.3 million of the Loan, placed the Loan on non-accrual status, recorded an additional $2.2 million provision for loan losses for the three months ended December 31, 2019 and reversed approximately $24,000 of interest income (related to the December 31, 2019 principal and interest payment), crediting it to principal. 

-21-


 

In addition, one commercial real estate loan in the amount of $10.6 million previously classified as management’s attention, moved to substandard impaired and remained accruing during the second fiscal quarter 2020.  Subsequent to March 31, 2020 management has restructured this loans and reclassified it as performing TDR.

 

 

 

.

 

-22-


 

The increase in impaired loans with no specific allowance is primarily due to two commercial real estate loans noted above. The following table presents impaired loans in portfolio by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary, as of March 31, 2020 and September 30, 2019:

 

 

 

Impaired Loans with

Specific Allowance

 

 

Impaired

Loans

with No

Specific

Allowance

 

 

Total Impaired Loans

 

 

 

Recorded

Investment

 

 

Related

Allowance

 

 

Recorded

Investment

 

 

Recorded

Investment

 

 

Unpaid

Principal

Balance

 

 

 

(In thousands)

 

March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

 

$

196

 

 

$

3

 

 

$

3,273

 

 

$

3,469

 

 

$

3,653

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

293

 

 

 

110

 

 

 

17,900

 

 

 

18,193

 

 

 

20,505

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity lines of credit

 

 

-

 

 

 

-

 

 

 

29

 

 

 

29

 

 

 

31

 

Second mortgages

 

 

105

 

 

 

90

 

 

 

736

 

 

 

841

 

 

 

904

 

Total impaired loans

 

$

594

 

 

$

203

 

 

$

21,938

 

 

$

22,532

 

 

$

25,093

 

September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

 

$

-

 

 

$

-

 

 

$

3,526

 

 

$

3,526

 

 

$

3,713

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

9,176

 

 

 

57

 

 

 

531

 

 

 

9,707

 

 

 

9,707

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity lines of credit

 

 

-

 

 

 

-

 

 

 

30

 

 

 

30

 

 

 

32

 

Second mortgages

 

 

123

 

 

 

100

 

 

 

605

 

 

 

728

 

 

 

790

 

Total impaired loans

 

$

9,299

 

 

$

157

 

 

$

4,692

 

 

$

13,991

 

 

$

14,242

 

 

The following table presents the average recorded investment in impaired loans in portfolio and related interest income recognized for the three and six months ended March 31, 2020 and 2019:

 

 

 

Three Months Ended March 31, 2020

 

 

Six Months Ended March 31, 2020

 

 

 

Average

Impaired Loans

 

 

Interest Income

Recognized on

Impaired Loans

 

 

Average

Impaired Loans

 

 

Interest Income

Recognized on

Impaired Loans

 

 

 

(In thousands)

 

Residential mortgage

 

$

3,481

 

 

$

25

 

 

$

3,507

 

 

$

47

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

11,222

 

 

 

5

 

 

 

10,153

 

 

 

20

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity lines of credit

 

 

29

 

 

 

-

 

 

 

29

 

 

 

-

 

Second mortgages

 

 

879

 

 

 

3

 

 

 

862

 

 

 

12

 

Total

 

$

15,611

 

 

$

33

 

 

$

14,551

 

 

$

79

 

 

-23-


 

 

 

Three Months Ended March 31, 2019

 

 

Six Months Ended March 31, 2019

 

 

 

Average

Impaired Loans

 

 

Interest Income

Recognized on

Impaired Loans

 

 

Average

Impaired Loans

 

 

Interest Income

Recognized on

Impaired Loans

 

 

 

(In thousands)

 

Residential mortgage

 

$

3,605

 

 

$

21

 

 

$

3,584

 

 

$

48

 

Construction and Development:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Land

 

 

69

 

 

 

1

 

 

 

71

 

 

 

2

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

10,222

 

 

 

75

 

 

 

12,646

 

 

 

151

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity lines of credit

 

 

32

 

 

 

-

 

 

 

39

 

 

 

-

 

Second mortgages

 

 

663

 

 

 

3

 

 

 

644

 

 

 

5

 

Other

 

 

1

 

 

 

-

 

 

 

13

 

 

 

-

 

Total

 

$

14,592

 

 

$

100

 

 

$

16,997

 

 

$

206

 

 

The following table presents the classes of the loan portfolio summarized by loans considered to be rated as pass and the categories of special mention, substandard and doubtful within the Company’s internal risk rating system as of March 31, 2020 and September 30, 2019:

 

 

 

Pass

 

 

Special Mention

 

 

Substandard

 

 

Doubtful

 

 

Total

 

 

 

(In thousands)

 

March 31, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

 

$

237,063

 

 

$

-

 

 

$

3,570

 

 

$

-

 

 

$

240,633

 

Construction and Development:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential and commercial

 

 

52,313

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

52,313

 

Land

 

 

3,579

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,579

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

468,266

 

 

 

25,008

 

 

 

18,193

 

 

 

-

 

 

 

511,467

 

Farmland

 

 

7,537

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

7,537

 

Multi-family

 

 

50,399

 

 

 

9,579

 

 

 

-

 

 

 

-

 

 

 

59,978

 

Commercial and industrial

 

 

96,450

 

 

 

-

 

 

 

124

 

 

 

-

 

 

 

96,574

 

Other

 

 

7,604

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

7,604

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity lines of credit

 

 

18,324

 

 

 

-

 

 

 

117

 

 

 

-

 

 

 

18,441

 

Second mortgages

 

 

11,287

 

 

 

82

 

 

 

1,024

 

 

 

-

 

 

 

12,393

 

Other

 

 

2,111

 

 

 

-

 

 

 

1

 

 

 

-

 

 

 

2,112

 

Total

 

$

954,933

 

 

$

34,669

 

 

$

23,029

 

 

$

-

 

 

$

1,012,631

 

 

-24-


 

 

 

Pass

 

 

Special Mention

 

 

Substandard

 

 

Doubtful

 

 

Total

 

 

 

(In thousands)

 

September 30, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

 

$

216,376

 

 

$

-

 

 

$

3,635

 

 

$

-

 

 

$

220,011

 

Construction and Development:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential and commercial

 

 

40,346

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

40,346

 

Land

 

 

3,420

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,420

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

518,848

 

 

 

14,601

 

 

 

10,003

 

 

 

-

 

 

 

543,452

 

Farmland

 

 

7,563

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

7,563

 

Multi-family

 

 

62,483

 

 

 

401

 

 

 

-

 

 

 

-

 

 

 

62,884

 

Commercial and industrial

 

 

99,613

 

 

 

-

 

 

 

134

 

 

 

-

 

 

 

99,747

 

Other

 

 

4,450

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

4,450

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity lines of credit

 

 

19,385

 

 

 

-

 

 

 

121

 

 

 

-

 

 

 

19,506

 

Second mortgages

 

 

12,727

 

 

 

85

 

 

 

925

 

 

 

-

 

 

 

13,737

 

Other

 

 

2,030

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,030

 

Total

 

$

987,241

 

 

$

15,087

 

 

$

14,818

 

 

$

-

 

 

$

1,017,146

 

 

The following table presents loans that are no longer accruing interest by portfolio class:

 

 

 

March 31,

2020

 

 

September 30,

2019

 

 

 

(In thousands)

 

Non-accrual loans:

 

 

 

 

 

 

 

 

Residential mortgage

 

$

1,687

 

 

$

1,532

 

Commercial:

 

 

 

 

 

 

 

 

Commercial real estate

 

 

6,743

 

 

 

-

 

Consumer:

 

 

 

 

 

 

 

 

Home equity lines of credit

 

 

29

 

 

 

30

 

Second mortgages

 

 

196

 

 

 

259

 

Total non-accrual loans

 

$

8,655

 

 

$

1,821

 

 

As noted above, the Company charged-off $2.3 million of a $9.1 million commercial real estate loan, and placed the loan on non-accrual status. Under the Bank’s loan policy, once a loan has been placed on non-accrual status, we do not resume interest accruals until the loan has been brought current and has maintained a current payment status for not less than six consecutive months. Interest income that would have been recognized on non-accrual loans had they been current in accordance with their original terms was approximately $3,000 and $4,000 for the three and six months ended March 31, 2020, respectively, and approximately $10,000 and $20,000 for the three and six months ended March 31, 2019, respectively.  At March 31, 2020 and September 30, 2019, there were approximately $168,000 and $502,000, respectively, of loans past due 90 days or more and still accruing interest.    

-25-


 

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by whether a loan payment is “current;” that is, it is received from a borrower by the scheduled due date, or the length of time a scheduled payment is past due. The following table presents the classes of the loan portfolio summarized by the aging categories as of March 31, 2020 and September 30, 2019:

 

 

 

Current

 

 

30-59 Days

Past Due

 

 

60-89 Days

Past Due

 

 

90 Days

and More

Past Due

 

 

Total Past

Due

 

 

Total

Loans

Receivable

 

 

Loans Receivable >

90 Days and

Accruing

 

 

 

(In thousands)

 

March 31, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

 

$

235,514

 

 

$

3,136

 

 

$

1,399

 

 

$

584

 

 

 

5,119

 

 

$

240,633

 

 

$

-

 

Construction and Development:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential and commercial

 

 

52,313

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

52,313

 

 

 

-

 

Land

 

 

3,579

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,579

 

 

 

-

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

510,825

 

 

 

475

 

 

 

-

 

 

 

167

 

 

 

642

 

 

 

511,467

 

 

 

167

 

Farmland

 

 

7,537

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

7,537

 

 

 

-

 

Multi-family

 

 

59,978

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

59,978

 

 

 

-

 

Commercial and industrial

 

 

96,574

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

96,574

 

 

 

-

 

Other

 

 

7,604

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

7,604

 

 

 

-

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity lines of credit

 

 

18,412

 

 

 

-

 

 

 

-

 

 

 

29

 

 

 

29

 

 

 

18,441

 

 

 

-

 

Second mortgages

 

 

11,739

 

 

 

334

 

 

 

196

 

 

 

124

 

 

 

654

 

 

 

12,393

 

 

 

-

 

Other

 

 

2,099

 

 

 

11

 

 

 

1

 

 

 

1

 

 

 

13

 

 

 

2,112

 

 

 

1

 

Total

 

$

1,006,174

 

 

$

3,956

 

 

$

1,596

 

 

$

905

 

 

$

6,457

 

 

$

1,012,631

 

 

$

168

 

 

 

 

Current

 

 

30-59 Days

Past Due

 

 

60-89 Days

Past Due

 

 

Greater than

90 Days

Past Due

 

 

Total Past

Due

 

 

Total

Loans

Receivable

 

 

Loans Receivable >

90 Days and

Accruing

 

 

 

(In thousands)

 

September 30, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

 

$

219,062

 

 

$

62

 

 

$

381

 

 

$

506

 

 

$

949

 

 

$

220,011

 

 

$

207

 

Construction and Development:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential and commercial

 

 

40,346

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

40,346

 

 

 

-

 

Land

 

 

3,420

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,420

 

 

 

-

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

543,157

 

 

 

-

 

 

 

-

 

 

 

295

 

 

 

295

 

 

 

543,452

 

 

 

295

 

Farmland

 

 

7,563

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

7,563

 

 

 

-

 

Multi-family

 

 

62,884

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

62,884

 

 

 

-

 

Commercial and industrial

 

 

99,247

 

 

 

500

 

 

 

-

 

 

 

-

 

 

 

500

 

 

 

99,747

 

 

 

-

 

Other

 

 

4,450

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

4,450

 

 

 

-

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity lines of credit

 

 

19,506

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

19,506

 

 

 

-

 

Second mortgages

 

 

13,102

 

 

 

379

 

 

 

112

 

 

 

144

 

 

 

635

 

 

 

13,737

 

 

 

-

 

Other

 

 

2,030

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,030

 

 

 

-

 

Total

 

$

1,014,767

 

 

$

941

 

 

$

493

 

 

$

945

 

 

$

2,379

 

 

$

1,017,146

 

 

$

502

 

 

Restructured loans deemed to be TDRs are typically the result of an extension of the loan maturity date or a reduction of the interest rate of the loan to a rate that is below market, a combination of rate and maturity extension, or by other means, including covenant modifications, forbearance and other concessions. However, the Bank generally restructures loans by modifying the payment structure to require payments of interest only for a specified period or by reducing the actual interest rate. Once a loan becomes a TDR, it will continue to be reported as a TDR during the term of the restructure.

The Company had twenty-five and twenty-four loans classified as TDRs at March 31, 2020 and September 30, 2019, respectively, with an aggregate outstanding balance of $11.2 million and $13.3 million, respectively. At March 31, 2020, these loans were also classified as impaired. Nineteen of the TDR loans continue to perform under the restructured terms through March 31, 2020 and we continued to accrue interest on such loans through such date.   

 

-26-


 

Loans that have been classified as TDRs have modified payment terms and in some cases interest rate from the original agreements and allowed the borrowers, who were experiencing financial difficulty, to make interest only payments for a period of time in order to relieve some of their overall cash flow burden. Some loan modifications classified as TDRs may not ultimately result in the full collection of principal and interest, as modified, and could result in potential incremental losses. These potential incremental losses have been factored into our overall estimate of the ALLL. The level of any defaults will likely be affected by future economic conditions. A default on a TDR loan for purposes of this disclosure occurs when the borrower is 90 days past due or a foreclosure or repossession of the applicable collateral has occurred.  

TDRs may arise in cases which, due to financial difficulties experienced by the borrower, the Company obtains through physical possession one or more collateral assets in satisfaction of all or part of an existing credit. Once possession is obtained, the Company reclassifies the appropriate portion of the remaining balance of the credit from loans to other real estate owned (“OREO”), which is included within other assets in the Consolidated Statements of Financial Condition. For any residential real estate property collateralizing a consumer mortgage loan, the Company is considered to possess the related collateral only if legal title is obtained upon completion of foreclosure, or the borrower conveys all interest in the residential real estate property to the Company through completion of a deed in lieu of foreclosure or similar legal agreement. Excluding OREO, the Company had $172,000 and $111,000 of residential real estate properties in the process of foreclosure at March 31, 2020 and September 30, 2019, respectively. The following table presents total TDRs as of March 31, 2020 and September 30, 2019:

 

 

 

Total Troubled Debt

Restructurings

 

 

Troubled Debt Restructured

Loans That Have Defaulted on

Modified Terms Within The Past

12 Months

 

 

 

Number of

Loans

 

 

Recorded

Investment

 

 

Number of

Loans

 

 

Recorded

Investment

 

 

 

(Dollars in thousands)

 

March 31, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

 

 

17

 

 

$

3,500

 

 

 

5

 

 

$

1,246

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

4

 

 

 

7,559

 

 

 

1

 

 

 

6,743

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Second mortgages

 

 

4

 

 

 

173

 

 

 

-

 

 

 

-

 

Total

 

 

25

 

 

$

11,232

 

 

$

6

 

 

$

7,989

 

September 30, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

 

 

17

 

 

$

3,372

 

 

 

4

 

 

$

1,090

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

3

 

 

 

9,707

 

 

 

-

 

 

 

-

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Second mortgages

 

 

4

 

 

 

181

 

 

 

-

 

 

 

-

 

Total

 

 

24

 

 

$

13,260

 

 

 

4

 

 

$

1,090

 

 

The following table reports the performing status of all TDR loans. The performing status is determined by a loan’s compliance with the modified terms:

 

 

 

March 31, 2020

 

 

September 30, 2019

 

 

 

Performing

 

 

Non-Performing

 

 

Performing

 

 

Non-Performing

 

 

 

(In thousands)

 

Residential mortgage

 

$

2,254

 

 

$

1,246

 

 

$

2,282

 

 

$

1,090

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

816

 

 

 

6,743

 

 

 

9,707

 

 

 

-

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Second mortgages

 

 

173

 

 

 

-

 

 

 

181

 

 

 

-

 

Total

 

$

3,243

 

 

$

7,989

 

 

$

12,170

 

 

$

1,090

 

-27-


 

 

There were no new TDRs for the three months ended March 31, 2020 and 2019. The following table shows the new TDRs for the six months ended March 31, 2020 and 2019:

 

 

 

 

For the Six Months Ended March 31,

 

 

 

2020

 

 

2019

 

 

 

Number of Contracts

 

 

Pre-

Modifications

Outstanding

Recorded

Investment

 

 

Post-

Modification

Outstanding

Recorded

Investment

 

 

Number of Contracts

 

 

Pre-

Modifications

Outstanding

Recorded

Investment

 

 

Post-

Modification

Outstanding

Recorded

Investment

 

 

 

(Dollars in thousands)

 

Troubled Debt Restructurings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

 

 

1

 

 

$

207

 

 

$

207

 

 

 

4

 

 

$

732

 

 

$

719

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

1

 

 

$

295

 

 

$

293

 

 

 

-

 

 

$

-

 

 

$

-

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Second mortgages

 

 

-

 

 

$

-

 

 

$

-

 

 

 

1

 

 

$

80

 

 

$

78

 

Total troubled debt restructurings

 

 

2

 

 

$

502

 

 

$

500

 

 

 

5

 

 

$

812

 

 

$

797

 

 

Note 9 - Regulatory Matters

 

Shareholders’ Equity

On March 14, 2019, the Company’s Board of Directors approved a stock repurchase plan under which the Company is authorized to repurchase up to 194,516 shares, or approximately 2.5 percent of the Company’s current outstanding common stock. On February 28, 2020, the Company’s Board of Directors extended the timeframe for its current stock repurchase program from March 31, 2020 to December 31, 2020. Repurchase authority may be exercised from time to time and in such amounts as market conditions warrant. The repurchases may be made on the open market, in block trades or otherwise. The program may be suspended or discontinued at any time.  During the three and six months ended March 31, 2020, the Company purchased 113,335 shares of its common stock in the open market under the repurchase plan at an average cost of $15.68 per share.     

 

Regulatory Capital Requirements

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk-weightings and other factors.

-28-


 

In July 2013, the respective U.S. federal banking agencies issued final rules implementing Basel III and the Dodd-Frank Act capital requirements to be fully phased in on a global basis on January 1, 2019. The regulations establish a new tangible common equity capital requirement, increase the minimum requirement for the current Tier 1 risk-weighted asset (“RWA”) ratio, phase out certain kinds of intangibles treated as capital and certain types of instruments and change the risk weightings of certain assets used to determine required capital ratios. The new common equity Tier 1 capital component requires capital of the highest quality predominantly composed of retained earnings and common stock instruments. For community banks, such as Malvern Bank, a common equity Tier 1 capital ratio of 4.5% became effective on January 1, 2015. The new capital rules also increased the minimum Tier 1 capital ratio from 4.0% to 6.0% beginning on January 1, 2015. The rules also establish a capital conservation buffer of 2.5% above the new regulatory minimum capital requirements, which must consist entirely of common equity Tier 1 capital and would result in the following minimum ratios: (1) a common equity Tier 1 capital ratio of 7.0%, (2) a Tier 1 capital ratio of 8.5%, and (3) a total capital ratio of 10.5%. The new capital conservation buffer requirement began to be phased in on January 1, 2016 at 0.625% of risk-weighted assets and increased by that amount each year until it became fully implemented at 2.5% on January 1, 2019. An institution is also subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of tangible and core capital (as defined in the regulations) to total adjusted tangible assets (as defined) and of risk-based capital (as defined) to risk-weighted assets (as defined).  

As of March 31, 2020, the Company’s and the Bank’s current capital levels exceed the required capital amounts to be considered “well capitalized” and they also meet the fully-phased in minimum capital requirements, including the related capital conservation buffers, as required by the Basel III capital rules.   

The following table summarizes the Company’s compliance with applicable regulatory capital requirements as of March 31, 2020 and September 30, 2019:

 

 

 

Actual

 

 

For Capital

Adequacy Purposes

 

 

To be Well

Capitalized

Under Prompt

Corrective Action

Provisions

 

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

 

(Dollars in thousands)

 

As of March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 Leverage (Core) Capital (to

   adjusted assets)

 

$

144,221

 

 

 

11.51

%

 

$

50,128

 

 

 

4.00

%

 

$

62,660

 

 

 

5.00

%

Common Equity Tier 1 Capital (to risk

   weighted assets)

 

 

144,221

 

 

 

14.40

%

 

 

45,062

 

 

 

4.50

%

 

 

65,089

 

 

 

6.50

%

Tier 1 Capital (to risk weighted assets)

 

 

144,221

 

 

 

14.40

%

 

 

60,082

 

 

 

6.00

%

 

 

80,110

 

 

 

8.00

%

Total Risk Based Capital (to risk

   weighted assets)

 

 

179,548

 

 

 

17.93

%

 

 

80,110

 

 

 

8.00

%

 

 

100,137

 

 

 

10.00

%

As of September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 Leverage (Core) Capital (to

   adjusted assets)

 

$

142,508

 

 

 

11.38

%

 

$

50,091

 

 

 

4.00

%

 

$

62,614

 

 

 

5.00

%

Common Equity Tier 1 Capital (to risk

   weighted assets)

 

 

142,508

 

 

 

14.30

%

 

 

44,838

 

 

 

4.50

%

 

 

64,766

 

 

 

6.50

%

Tier 1 Capital (to risk weighted assets)

 

 

142,508

 

 

 

14.30

%

 

 

59,784

 

 

 

6.00

%

 

 

79,713

 

 

 

8.00

%

Total Risk Based Capital (to risk

   weighted assets)

 

 

177,923

 

 

 

17.79

%

 

 

79,713

 

 

 

8.00

%

 

 

99,641

 

 

 

10.00

%

 

-29-


 

The following table summarizes the Bank’s compliance with applicable regulatory capital requirements as of March 31, 2020 and September 30, 2019:

 

 

 

Actual

 

 

For Capital

Adequacy Purposes

 

 

To be Well

Capitalized

Under Prompt

Corrective

Action Provisions

 

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

 

(Dollars in thousands)

 

As of March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 Leverage (Core) Capital (to

   adjusted assets)

 

$

156,721

 

 

 

12.52

%

 

$

50,082

 

 

 

4.00

%

 

$

62,602

 

 

 

5.00

%

Common Equity Tier 1 Capital (to risk

   weighted assets)

 

 

156,721

 

 

 

15.67

%

 

 

45,001

 

 

 

4.50

%

 

 

65,001

 

 

 

6.50

%

Tier 1 Capital (to risk weighted assets)

 

 

156,721

 

 

 

15.67

%

 

 

60,001

 

 

 

6.00

%

 

 

80,002

 

 

 

8.00

%

Total Risk Based Capital (to risk

   weighted assets)

 

 

167,350

 

 

 

16.73

%

 

 

80,002

 

 

 

8.00

%

 

 

100,002

 

 

 

10.00

%

As of September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 Leverage (Core) Capital (to

   adjusted assets)

 

$

153,086

 

 

 

12.23

%

 

$

50,055

 

 

 

4.00

%

 

$

62,569

 

 

 

5.00

%

Common Equity Tier 1 Capital (to risk

   weighted assets)

 

 

153,086

 

 

 

15.38

%

 

 

44,788

 

 

 

4.50

%

 

 

64,694

 

 

 

6.50

%

Tier 1 Capital (to risk weighted assets)

 

 

153,086

 

 

 

15.38

%

 

 

59,717

 

 

 

6.00

%

 

 

79,623

 

 

 

8.00

%

Total Risk Based Capital (to risk

   weighted assets)

 

 

163,253

 

 

 

16.40

%

 

 

79,623

 

 

 

8.00

%

 

 

99,529

 

 

 

10.00

%

 

 

Note 10 – Derivatives and Hedging Activities

The Company is exposed to certain risks arising from both its business operations and economic conditions.  The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its debt funding and the use of derivative financial instruments.  Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the payment of future uncertain cash amounts, the value of which are determined by interest rates.

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy.  Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income (loss) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings.  At March 31, 2020, such derivatives were used to hedge the variable cash flows associated with FHLB advances.  

Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. During the next twelve months, the Company estimates approximately $776,000 to be reclassified to earnings as an increase to interest expense. The Company is hedging its exposure to the variability in future cash flows for forecasted transactions over a maximum period of twenty months (excluding forecasted transactions related to the payment of variable interest on existing financial instruments).

-30-


 

The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting interest rate swaps that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions.  These derivatives are not designated as hedges and are not speculative.  Rather, these derivatives result from a service the Company provides to certain customers, initially implemented by the Comapny during the first quarter of fiscal 2019. As the interest rate swaps associated with this program do not meet the hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings. 

The tables below present the fair value of the Company’s derivative financial instruments as well as their classification on the Consolidated Statements of Financial Condition as of March 31, 2020 and September 30, 2019:

 

`

 

March 31, 2020

 

 

Asset derivatives

 

Liability derivatives

 

 

Notional Amount

 

 

Fair Value

 

 

Statement of Financial Condition Location

 

Notional Amount

 

 

Fair Value

 

 

Statement of Financial Condition Location

 

 

(In thousands)

Derivatives designated as a hedging instrument:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap agreement

 

$

-

 

 

$

-

 

 

Other assets

 

$

65,000

 

 

$

1,201

 

 

Other liabilities

Derivatives not designated as a hedging instrument:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap agreement

 

$

45,365

 

 

$

8,984

 

 

Other assets

 

$

45,365

 

 

$

8,989

 

 

Other liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

 

 

Asset derivatives

 

Liability derivatives

 

 

Notional Amount

 

 

Fair Value

 

 

Statement of Financial Condition Location

 

Notional Amount

 

 

Fair Value

 

 

Statement of Financial Condition Location

 

 

(In thousands)

Derivatives designated as a hedging instrument:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap agreement

 

$

35,000

 

 

$

126

 

 

Other assets

 

$

30,000

 

 

$

736

 

 

Other liabilities

Derivatives not designated as a hedging instrument:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap agreement

 

$

29,916

 

 

$

5,019

 

 

Other assets

 

$

29,916

 

 

$

5,018

 

 

Other liabilities

 

 

 

-31-


 

The tables below present the derivative assets and liabilities offsetting as of March 31, 2020 and September 30, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Offsetting of Derivative Assets

(In thousands)

 

as of March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Amounts Not Offset in the Statements of Financial Condition

 

 

Gross Amounts of Recognized Assets

 

Gross Amounts Offset in the Statement of Financial Condition

 

Net Amounts of Assets presented in the Statement of Financial Condition

 

Financial Instruments

 

Cash Collateral Received

 

Net Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives

$

8,984

 

$

-

 

$

8,984

 

$

-

 

$

-

 

$

8,984

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Offsetting of Derivative Liabilities

(In thousands)

 

as of March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Amounts Not Offset in the Statements of Financial Condition

 

 

Gross Amounts of Recognized Liabilities

 

Gross Amounts Offset in the Statement of Financial Condition

 

Net Amounts of Liabilities presented in the Statement of Financial Condition

 

Financial Instruments

 

Cash Collateral Posted

 

Net Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives

$

10,190

 

$

-

 

$

10,190

 

$

1,251

 

$

11,527

 

$

(2,588

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Offsetting of Derivative Assets

(In thousands)

 

as of September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Amounts Not Offset in the Statements of Financial Condition

 

 

Gross Amounts of Recognized Assets

 

Gross Amounts Offset in the Statement of Financial Condition

 

Net Amounts of Assets presented in the Statement of Financial Condition

 

Financial Instruments

 

Cash Collateral Received

 

Net Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives

$

5,145

 

$

-

 

$

5,145

 

$

173

 

$

-

 

$

4,972

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Offsetting of Derivative Liabilities

(In thousands)

 

as of September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Amounts Not Offset in the Statements of Financial Condition

 

 

Gross Amounts of Recognized Liabilities

 

Gross Amounts Offset in the Statement of Financial Condition

 

Net Amounts of Liabilities presented in the Statement of Financial Condition

 

Financial Instruments

 

Cash Collateral Posted

 

Net Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives

$

5,754

 

$

-

 

$

5,754

 

$

767

 

$

2,754

 

$

2,233

 

 

 

-32-


 

The tables below present the net gains (losses) recorded in accumulated other comprehensive income and the Consolidated Statements of Operations relating to the cash flow derivative instruments for the three and six months ended March 31, 2020 and 2019:

 

 

 

Three Months Ended March 31, 2020

 

 

 

 

Amount of Loss Recognized

in OCI on Derivative

 

 

Amount of Loss

Reclassified

from OCI to

Interest Expense

 

 

 

 

(In thousands)

 

 

Interest rate swap agreements

 

$

(730

)

 

$

(47

)

 

Total derivatives

 

 

(730

)

 

 

(47

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended March 31, 2020

 

 

 

 

Amount of Loss Recognized

in OCI on Derivative

 

 

Amount of Loss

Reclassified

from OCI to

Interest Expense

 

 

 

 

(In thousands)

 

 

Interest rate swap agreements

 

$

(653

)

 

$

(61

)

 

Total derivatives

 

 

(653

)

 

 

(61

)

 

 

 

 

Three Months Ended March 31, 2019

 

 

 

 

Amount of Loss

Recognized

in OCI on Derivative

 

 

Amount of Gain

Reclassified

from OCI to

Interest Expense

 

 

 

 

(In thousands)

 

 

Interest rate swap agreements

 

$

(297

)

 

$

96

 

 

Total derivatives

 

 

(297

)

 

 

96

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended March 31, 2019

 

 

 

 

Amount of Loss

Recognized

in OCI on Derivative

 

 

Amount of Gain

Reclassified

from OCI to

Interest Expense

 

 

 

 

(In thousands)

 

 

Interest rate swap agreements

 

$

(936

)

 

$

167

 

 

Total derivatives

 

 

(936

)

 

 

167

 

 

 

    

          

 

 

The tables below present the effect of the Company’s derivative financial instruments on the Consolidated Statements of Operations for the three and six months ended March 31, 2020 and 2019:

 

-33-


 

 

 

 

Three Months Ended March 31, 2020

 

 

 

Consolidated Statements of Operations

 

Amount of Loss Recognized in Income on derivatives

 

 

 

(In thousands)

Derivatives not designated as a hedging instrument:

 

 

Interest rate swap agreement

 

 

Other income

 

$                                (3)

Total

 

 

 

 

$                                (3)

 

 

 

 

 

 

 

 

 

Six Months Ended March 31, 2020

 

 

 

Consolidated Statements of Operations

 

Amount of Loss Recognized in Income on derivatives

 

 

 

(In thousands)

Derivatives not designated as a hedging instrument:

 

 

Interest rate swap agreement

 

 

Other income

 

$                                (6)

Total

 

 

 

 

$                                (6)

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2019

 

 

 

Consolidated Statements of Operations

 

Amount of Loss Recognized in Income on derivatives

 

 

 

(In thousands)

Derivatives not designated as a hedging instrument:

 

 

Interest rate swap agreement

 

 

Other income

 

$                                (1)

Total

 

 

 

 

$                                (1)

 

 

 

 

 

 

 

 

 

Six Months Ended March 31, 2019

 

 

 

Consolidated Statements of Operations

 

Amount of Loss Recognized in Income on derivatives

 

 

 

(In thousands)

Derivatives not designated as a hedging instrument:

 

 

Interest rate swap agreement

 

 

Other income

 

$                                (2)

Total

 

 

 

 

$                                (2)

 

The Company has agreements with each of its derivative counterparties that contain a provision providing that if the Company defaults on any of its indebtedness, including defaults where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations.

 

At March 31, 2020 and September 30, 2019, the fair value of derivatives was in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements. There were no adjustments for nonperformance risk at March 31, 2020 and September 30, 2019. At March 31, 2020 and September 30, 2019, the Company has minimum collateral posting thresholds with certain of its derivative counterparties and has posted collateral of $0 and $6.4 million, respectively, against its obligations under these agreements.  If the Company had breached any of these provisions at March 31, 2020, it could have been required to settle its obligations under the agreements at the termination value and would have been required to pay any additional amounts due in excess of amounts previously posted as collateral with the respective counterparty.

-34-


 

Note 11 - Fair Value Measurements

The Company follows FASB ASC Topic 820 Fair Value Measurement to record fair value adjustments to certain assets and to determine fair value disclosures for the Company’s financial instruments. Investment and mortgage-backed securities available for sale are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as impaired loans, real estate owned and certain other assets. These nonrecurring fair value adjustments typically involve application of lower-of-cost-or-market accounting or write-downs of individual assets.

The Company groups its assets at fair value in three levels, based on the markets in which the assets are traded and the reliability of the assumptions used to determine fair value. These levels are:

Level 1— valuation is based upon quoted prices for identical instruments traded in active markets.

Level 2—valuation is based upon 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 significant assumptions are observable in the market.

Level 3—valuation is generated from model-based techniques that use significant assumptions not observable in the market.  These unobservable assumptions reflect the Company’s own estimates of assumptions that market participants would use in pricing the asset.

The Company bases its 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.

Fair value measurements for assets where there exists limited or no observable market data and, therefore, are based primarily upon the Company’s or other third-party’s estimates, are often calculated based on the characteristics of the asset, the economic and competitive environment and other factors. 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, could significantly affect the results of current or future valuations.

The Company monitors and evaluates available data to perform fair value measurements on an ongoing basis and recognizes transfers among the levels of the fair value hierarchy as of the date event or a change in circumstances that affects the valuation method chosen. There were no changes in valuation technique or transfers between levels at March 31, 2020 or September 30, 2019.

The tables below present the balances of assets measured at fair value on a recurring basis as of March 31, 2020 and September 30, 2019:

 

 

 

March 31, 2020

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(In thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

3,812

 

 

$

-

 

 

$

3,812

 

 

$

-

 

State and municipal obligations

 

 

4,217

 

 

 

-

 

 

 

4,217

 

 

 

-

 

Single issuer trust preferred security

 

 

931

 

 

 

-

 

 

 

931

 

 

 

-

 

Corporate debt securities

 

 

11,365

 

 

 

-

 

 

 

11,365

 

 

 

-

 

Mutual funds

 

 

1,514

 

 

 

1,014

 

 

 

-

 

 

 

500

 

Total investment securities available for sale

 

$

21,839

 

 

$

1,014

 

 

$

20,325

 

 

$

500

 

Derivative instruments

 

$

8,984

 

 

$

-

 

 

$

8,984

 

 

$

-

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative instruments

 

$

10,190

 

 

$

-

 

 

$

10,190

 

 

$

-

 

-35-


 

 

 

 

September 30, 2019

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(In thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

3,000

 

 

$

-

 

 

$

3,000

 

 

$

-

 

State and municipal obligations

 

 

4,732

 

 

 

-

 

 

 

4,732

 

 

 

-

 

Single issuer trust preferred security

 

 

923

 

 

 

-

 

 

 

923

 

 

 

-

 

Corporate debt securities

 

 

9,506

 

 

 

-

 

 

 

9,506

 

 

 

-

 

Mutual funds

 

 

250

 

 

 

-

 

 

 

-

 

 

 

250

 

Total investment securities available for sale

 

$

18,411

 

 

$

-

 

 

$

18,161

 

 

$

250

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative instruments

 

$

5,145

 

 

$

-

 

 

$

5,145

 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative instruments

 

$

5,754

 

 

$

-

 

 

$

5,754

 

 

$

-

 

 

The following tables present additional information about the securities available-for-sale measured at fair value on a recurring basis and for which the Company utilized significant unobservable inputs (Level 3 inputs) to determine fair value for the six months ended March 31, 2020 and March 31, 2019:

 

 

Fair value measurements

 

 

 

using significant

 

 

 

unobservable inputs

 

 

 

(Level 3)

 

 

 

(In thousands)

    Balance, October 1, 2019

$

250

 

 

Payments received

 

-

 

 

Total gains or losses (realized/unrealized)

 

 

 

 

Included in earnings

 

-

 

 

Included in other comprehensive income

 

-

 

 

Purchases

 

250

 

 

Transfers in and/or out of Level 3

 

-

 

 

    Balance, March 31, 2020

$

500

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value measurements

 

 

 

using significant

 

 

 

unobservable inputs

 

 

 

(Level 3)

 

 

 

(In thousands)

    Balance, October 1, 2018

$

250

 

 

Payments received

 

-

 

 

Total gains or losses (realized/unrealized)

 

 

 

 

Included in earnings

 

-

 

 

Included in other comprehensive income

 

-

 

 

Purchases

 

-

 

 

Transfers in and/or out of Level 3

 

-

 

 

    Balance, March 31, 2019

$

250

 

 

The majority of the Company’s available for sale investment securities are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the securities’ terms and conditions, among other

-36-


 

things.  From time to time, the Company validates prices supplied by the independent pricing service by comparison to prices obtained from third-party sources or derived using internal models.

         

For assets measured at fair value on a nonrecurring basis that were still held at the end of the period, the following tables provide the level of valuation assumptions used to determine each adjustment and the carrying value of the related individual assets or portfolios at March 31, 2020 and September 30, 2019:

 

 

 

March 31, 2020

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(In thousands)

 

Other real estate owned

 

$

5,796

 

 

$

-

 

 

$

-

 

 

$

5,796

 

Impaired loans(1)

 

 

7,133

 

 

 

-

 

 

 

-

 

 

 

7,133

 

Total

 

$

12,929

 

 

$

-

 

 

$

-

 

 

$

12,929

 

 

 

 

 

March 31, 2020

 

 

Fair Value at

March 31, 2020

 

 

Valuation Technique

 

Unobservable Input

 

Range/(Weighted

Average)

 

 

(Dollars in thousands)

Other real estate owned

 

$

5,796

 

 

Appraisal of Collateral(2)

 

Collateral discount(3)

 

0%/(0%)

Impaired loans(1)

 

 

7,133

 

 

Appraisal of Collateral(2)

 

Collateral discount(3)

 

9.5%-12.0%/(10.6%)

Total

 

$

12,929

 

 

 

 

 

 

 

 

(1)

Consisted of six loans with an aggregate balance of $7.3 million and with $203,000 in specific loan loss allowance.

(2)

Fair value is generally determined through independent appraisals of the underlying collateral primarily using comparable sales.

(3)

Appraisals may be adjusted by management for qualitative factors such as time, changes in economic conditions and estimated liquidation expense.

 

 

 

September 30, 2019

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(In thousands)

 

Other real estate owned

 

$

5,796

 

 

$

-

 

 

$

-

 

 

$

5,796

 

Impaired loans(1)

 

 

9,142

 

 

 

-

 

 

 

-

 

 

 

9,142

 

Total

 

$

14,938

 

 

$

-

 

 

$

-

 

 

$

14,938

 

 

 

 

September 30, 2019

 

 

Fair Value at

September 30, 2019

 

 

Valuation Technique

 

Unobservable Input

 

Range/(Weighted

Average)

 

 

(Dollars in thousands)

Other real estate owned

 

$

5,796

 

 

Appraisal of Collateral(2)

 

Collateral discount(3)

 

0%/(0%)

Impaired loans(1)

 

 

9,142

 

 

Appraisal of Collateral(2)

 

Collateral discount(3)

 

12%/(12%)

Total

 

$

14,938

 

 

 

 

 

 

 

 

(1)

Consisted of four loans with an aggregate balance of $9.3 million and with $157,000 in specific loan loss allowance.

(2)

Fair value is generally determined through independent appraisals of the underlying collateral primarily using comparable sales.

(3)

Appraisals may be adjusted by management for qualitative factors such as time, changes in economic conditions and estimated liquidation expense.

At March 31, 2020 and September 30, 2019, the Company did not have any additions to our mortgage servicing assets.  At March 31, 2020 the Company sold loans with servicing retained. At September 30, 2019, the Company only sold loans with servicing released.  

The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of FASB ASC 825.  The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methods. However, considerable judgment is necessarily required to interpret market data to develop the

-37-


 

estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company would realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. FASB ASC 825 excludes certain financial instruments and all non-financial instruments from its disclosure requirements.  Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

The fair value estimates presented herein are based on pertinent information available to management as of March 31, 2020 and September 30, 2019. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since March 31, 2020 and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.

The following assumptions were used to estimate the fair value of the Company’s financial instruments:

Cash and Cash Equivalents—These assets are carried at historical cost. The carrying amount is a reasonable estimate of fair value because of the relatively short time between the origination of the instrument and its expected realization.

Investment Securities—Investment and mortgage-backed securities available for sale (carried at fair value) are measured at fair value on a recurring basis. Fair value measurements for these securities are typically 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 and for structured securities, cash flow and, when available, loan performance data. Because many fixed income securities do not trade on a daily basis, our independent pricing service’s applications apply available information through processes such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing to prepare evaluations. For each asset class, pricing applications and models are based on information from market sources and integrate relevant credit information. All of our securities available for sale are valued using either of the foregoing methodologies to determine fair value adjustments recorded to our financial statements.    

Loans Receivable—We do not record loans at fair value on a recurring basis. As such, valuation techniques discussed herein for loans are primarily for estimating fair value for FASB ASC 825 disclosure purposes. However, from time to time, we record nonrecurring fair value adjustments to loans to reflect partial write-downs for impairment or the full charge-off of the loan carrying value. The valuation of impaired loans is discussed below. The fair value estimate for FASB ASC 825 purposes differentiates loans based on their financial characteristics, such as product classification, loan category, pricing features and remaining maturity. Prepayment and credit loss estimates are evaluated by loan type and rate. The fair value of loans is estimated by discounting contractual cash flows using discount rates based on current industry pricing, adjusted for prepayment and credit loss estimates.

Impaired Loans—Impaired loans are valued utilizing independent appraisals that rely upon quoted market prices for similar assets in active markets. These appraisals include adjustments to comparable assets based on the appraisers’ market knowledge and experience. The appraisals are adjusted downward by management, as necessary, for changes in relevant valuation factors subsequent to the appraisal date and are considered Level 3 inputs.

Accrued Interest Receivable—This asset is carried at historical cost. The carrying amount is a reasonable estimate of fair value because of the relatively short time between the origination of the instrument and its expected realization.

Restricted Stock—Although restricted stock is an equity interest in the FHLB, it is carried at cost because it does not have a readily determinable fair value as its ownership is restricted and it lacks a market. The estimated fair value approximates the carrying amount.

Other Real Estate Owned—Assets acquired through foreclosure or deed in lieu of foreclosure are recorded at estimated fair value less estimated selling costs when acquired, thus establishing a new cost basis. Fair value is generally based on independent appraisals. These appraisals include adjustments to comparable assets based on the appraisers’ market knowledge and experience, and are considered Level 3 inputs. When an asset is acquired, the excess of the loan balance over fair value, less estimated selling costs, is charged to the ALLL. If the estimated fair value of the asset declines, a write-down is recorded through expense. The valuation of foreclosed assets is subjective in nature and may be adjusted in the future because of, among other factors, changes in the economic conditions.

-38-


 

DepositsDeposit liabilities are carried at cost. As such, valuation techniques discussed herein for deposits are primarily for estimating fair value for FASB ASC 825 disclosure purposes. The fair value of deposits is discounted based on rates available for borrowings of similar maturities. A decay rate is estimated for non-time deposits. The discount rate for non-time deposits is adjusted for servicing costs based on industry estimates.

Borrowings—Advances from the FHLB are carried at amortized cost. However, we are required to estimate the fair value of long-term debt under FASB ASC 825. The fair value is based on the contractual cash flows discounted using rates currently offered for new notes with similar remaining maturities.

Subordinated Debt—The calculation of fair value in Level 2 is based on observable market values where available.

Derivatives The fair value of derivatives are based on valuation models using observable market data as of the measurement date (Level 2). Our derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rate, and volatility factors to value the position. The majority of market inputs is actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services.

Accrued Interest Payable—This liability is carried at historical cost. The carrying amount is a reasonable estimate of fair value because of the relatively short time between the origination of the instrument and its expected realization.

Commitments to Extend Credit and Letters of Credit— The majority of the Company’s commitments to extend credit and letters of credit carry current market interest rates if converted to loans and are not included in the table below. Because commitments to extend credit and letters of credit are generally unassignable by either the Bank or the borrower, they only have value to the Company and the borrower. The estimated fair value approximates the recorded deferred fee amounts, which are not significant.

Mortgage Servicing Rights—The fair value of mortgage servicing rights is based on observable market prices when available or the present value of expected future cash flows when not available. Assumptions, such as loan default rates, costs to service, and prepayment speeds significantly affect the estimate of future cash flows. Mortgage servicing rights are carried at the lower of cost or fair value.  

-39-


 

The carrying amount and estimated fair value of the Company’s financial instruments as of March 31, 2020 and September 30, 2019 are presented below:

 

 

 

March 31, 2020

 

 

 

Carrying Amount

 

 

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(In thousands)

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

126,068

 

 

$

126,068

 

 

$

126,068

 

 

$

-

 

 

$

-

 

Investment securities available-for-sale

 

 

21,839

 

 

 

21,839

 

 

 

1,014

 

 

 

20,325

 

 

 

500

 

Investment securities held-to-maturity

 

 

18,046

 

 

 

18,434

 

 

 

-

 

 

 

18,434

 

 

 

-

 

Loans receivable, net (including impaired loans)

 

 

1,002,907

 

 

 

1,011,358

 

 

 

-

 

 

 

-

 

 

 

1,011,358

 

Accrued interest receivable

 

 

4,121

 

 

 

4,121

 

 

 

-

 

 

 

4,121

 

 

 

-

 

Restricted stock

 

 

10,913

 

 

 

10,913

 

 

 

-

 

 

 

10,913

 

 

 

-

 

Mortgage servicing rights (included in Other Assets)

 

 

145

 

 

 

145

 

 

 

-

 

 

 

145

 

 

 

-

 

Derivatives (included in Other Assets)

 

 

8,984

 

 

 

8,984

 

 

 

-

 

 

 

8,984

 

 

 

-

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings accounts

 

 

43,550

 

 

 

43,550

 

 

 

-

 

 

 

43,550

 

 

 

-

 

Checking and NOW accounts

 

 

334,065

 

 

 

334,065

 

 

 

-

 

 

 

334,065

 

 

 

-

 

Money market accounts

 

 

280,173

 

 

 

280,173

 

 

 

-

 

 

 

280,173

 

 

 

-

 

Certificates of deposit

 

 

258,112

 

 

 

262,393

 

 

 

-

 

 

 

262,393

 

 

 

-

 

Borrowings (excluding sub debt)

 

 

133,000

 

 

 

134,190

 

 

 

-

 

 

 

134,190

 

 

 

-

 

Subordinated debt

 

 

24,697

 

 

 

24,947

 

 

 

-

 

 

 

24,947

 

 

 

-

 

Derivatives (included in Other Liabilities)

 

 

10,190

 

 

 

10,190

 

 

 

-

 

 

 

10,190

 

 

 

-

 

Accrued interest payable

 

 

873

 

 

 

873

 

 

 

-

 

 

 

873

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

 

 

 

Carrying Amount

 

 

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(In thousands)

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

153,543

 

 

$

153,543

 

 

$

153,543

 

 

$

-

 

 

$

-

 

Investment securities available-for-sale

 

 

18,411

 

 

 

18,411

 

 

 

-

 

 

 

18,161

 

 

 

250

 

Investment securities held-to-maturity

 

 

22,485

 

 

 

22,609

 

 

 

-

 

 

 

22,609

 

 

 

-

 

Loans receivable, net (including impaired loans)

 

 

1,007,714

 

 

 

1,010,442

 

 

 

-

 

 

 

-

 

 

 

1,010,442

 

Accrued interest receivable

 

 

4,253

 

 

 

4,253

 

 

 

-

 

 

 

4,253

 

 

 

-

 

Restricted stock

 

 

11,129

 

 

 

11,129

 

 

 

-

 

 

 

11,129

 

 

 

-

 

Mortgage servicing rights (included in Other Assets)

 

 

178

 

 

 

178

 

 

 

-

 

 

 

178

 

 

 

-

 

Derivatives (included in Other Assets)

 

 

5,145

 

 

 

5,145

 

 

 

-

 

 

 

5,145

 

 

 

-

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings accounts

 

 

41,875

 

 

 

41,875

 

 

 

-

 

 

 

41,875

 

 

 

-

 

Checking and NOW accounts

 

 

357,723

 

 

 

357,723

 

 

 

-

 

 

 

357,723

 

 

 

-

 

Money market accounts

 

 

276,644

 

 

 

276,644

 

 

 

-

 

 

 

276,644

 

 

 

-

 

Certificates of deposit

 

 

277,569

 

 

 

280,024

 

 

 

-

 

 

 

280,024

 

 

 

-

 

Borrowings (excluding sub debt)

 

 

133,000

 

 

 

133,545

 

 

 

-

 

 

 

133,545

 

 

 

-

 

Subordinated debt

 

 

24,619

 

 

 

24,471

 

 

 

-

 

 

 

24,471

 

 

 

-

 

Derivatives (included in Other Liabilities)

 

 

5,754

 

 

 

5,754

 

 

 

-

 

 

 

5,754

 

 

 

-

 

Accrued interest payable

 

 

978

 

 

 

978

 

 

 

-

 

 

 

978

 

 

 

-

 

 

-40-


 

Note 12 Comprehensive Income (Loss)

The components of accumulated other comprehensive loss included in shareholders’ equity are as follows:

 

 

 

March 31,

2020

 

 

September 30,

2019

 

 

 

(In thousands)

 

Net unrealized holding losses on available-for-sale securities

 

$

(155

)

 

$

(111

)

Tax effect

 

 

33

 

 

 

24

 

Net of tax amount

 

 

(122

)

 

 

(87

)

Fair value adjustments on derivatives

 

 

(1,201

)

 

 

(610

)

Tax effect

 

 

252

 

 

 

128

 

Net of tax amount

 

 

(949

)

 

 

(482

)

Total accumulated other comprehensive loss

 

$

(1,071

)

 

$

(569

)

 

Other comprehensive loss and related tax effects are presented in the following table:

 

 

 

Three Months Ended March 31,

 

 

Six Months Ended March 31,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

(In thousands)

 

Net unrealized holding gains on available-for-sale securities

 

$

62

 

 

$

154

 

 

$

133

 

 

$

121

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net realized gain on securities available-for-sale

 

 

(180

)

 

 

-

 

 

 

(180

)

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of unrealized holding losses on securities transferred

   from available-for-sale to held-to-maturity

 

 

1

 

 

 

1

 

 

 

2

 

 

 

3

 

Fair value adjustments on derivatives

 

 

(682

)

 

 

(393

)

 

 

(591

)

 

 

(1,103

)

Other comprehensive loss before taxes

 

 

(799

)

 

 

(238

)

 

 

(636

)

 

 

(979

)

Tax effect

 

 

168

 

 

 

49

 

 

 

134

 

 

 

205

 

Total comprehensive loss

 

$

(631

)

 

$

(189

)

 

$

(502

)

 

$

(774

)

 

Note 13 – Equity Based Incentive Compensation Plan

The Company maintains the Malvern Bancorp, Inc. 2014 Long-Term Incentive Compensation Plan (the “2014 Plan”), which permits the grant of long-term incentive and other stock and cash awards. The purpose of the 2014 Plan is to promote the success of the Company and the Bank by providing incentives to officers, employees and directors of the Company and the Bank that will link their personal interests to the financial success of the Company and to growth in shareholder value.  The maximum total number of shares of the Company’s common stock available for grants under the 2014 Plan is 400,000.  As of March 31, 2020, there were 324,351 remaining shares available for future grants.

Restricted stock and option awards granted vest in 20% increments beginning on the one year anniversary of the grant date, and accelerate upon a change in control of the Company.  The options generally expire ten years from the date of grant.  All issuances are subject to forfeiture if the recipient leaves or is terminated prior to the award’s vesting.  Shares of restricted stock have the same dividend and voting rights as common stock while options do not.

All awards are issued at fair value of the underlying shares at the grant date. The Company expenses the cost of the awards, which is determined to be the fair market value of the awards at the date of grant.

 During the three and six months ended March 31, 2020 and 2019 stock options covering a total of 7,000 shares of common stock were granted.  Total compensation expense related to stock options granted under the 2014 Plan was approximately $6,000 and $12,000 for the three and six months ended March 31, 2020, respectively.   Total compensation expense related to stock options granted under the 2014 Plan was approximately $10,000 and $11,000 for the three and six months ended March 31, 2019, respectively.      

During the three and six months ended March 31, 2020 a total of 16,357 and 18,121 restricted shares were awarded, respectively. During the six months ended March 31, 2020 a total of 1,610 shares were forfeited. No shares were forfeited during the three months and six months ended March 31, 2019.   During the three and six months ended March 31, 2019 a total of 6,045 and

-41-


 

9,283 restricted shares were awarded, respectively. The compensation expense related to restricted stock awards was approximately $40,000 and $66,000 during the three and six months ended March 31, 2020, respectively. The compensation expense related to restricted stock awards was approximately $39,000 and $52,000 during the three and six months ended March 31, 2019,respectively.        

Stock-based compensation expense for the cost of the awards granted is based on the grant-date fair value. For stock option awards, the fair value is estimated at the date of grant using the Black-Scholes option-pricing model. This model requires the input of highly subjective assumptions, changes to which can materially affect the fair value estimate. Additionally, there may be other factors that would otherwise have a significant effect on the value of employee stock options granted but are not considered by the model. Accordingly, while management believes that the Black-Scholes option-pricing model provides a reasonable estimate of fair value, the model does not necessarily provide the best single measure of fair value for the Company’s employee stock options.

Stock Options

 

The assumptions used in determining the fair value of stock option grants for the six months ended March 31, 2020 are as follows:

 

Weighted Average Fair Value of Awards

 

$

4.72

 

Risk Free Rate

 

 

 

1.22

%

Dividend Yield

 

 

-%

 

Volatility

 

 

 

19.86

%

Expected Life

 

 

6.5 years

 

 

The assumptions used in determining the fair value of stock option grants for the six months ended March 31, 2019 are as follows:

 

Weighted Average Fair Value of Awards

 

$

5.72

 

Risk Free Rate

 

 

 

2.50

%

Dividend Yield

 

 

-%

 

Volatility

 

 

 

20.39

%

Expected Life

 

 

6.5 years

 

 

The following is a summary of stock option activity for the six months ended March 31, 2020:

 

 

 

Shares

 

 

Weighted Average

Exercise Price

 

 

Weighted Average Remaining Contractual Term (In Years)

 

 

Aggregate Intrinsic

Value

 

Outstanding, beginning of year

 

 

18,830

 

 

$

22.05

 

 

 

 

 

 

$

21,350

 

Granted

 

 

7,000

 

 

$

20.28

 

 

 

 

 

 

$

-

 

Exercised

 

 

-

 

 

$

-

 

 

 

 

 

 

$

-

 

Forfeited/cancelled/expired

 

 

-

 

 

$

-

 

 

 

 

 

 

$

-

 

Outstanding, end of year

 

 

25,830

 

 

$

21.57

 

 

 

8.320

 

 

$

-

 

Exercisable, end of year

 

 

8,140

 

 

$

21.50

 

 

 

7.295

 

 

$

-

 

Nonvested, at end of year

 

 

17,690

 

 

$

21.60

 

 

 

 

 

 

 

 

 

 

As of March 31, 2020, there was approximately $68,000 of total unrecognized compensation cost related to nonvested options under the 2014 Plan.  The cost is expected to be recognized over a weighted average period of 3.00 years.

-42-


 

Restricted Stock Awards

The table below summarizes the activity for the Company’s restricted stock outstanding during the six months ended March 31, 2020:

 

 

 

Shares

 

 

Weighted Average

Fair Value

 

Outstanding, beginning of year

 

 

18,493

 

 

$

21.78

 

Granted

 

 

18,121

 

 

$

22.11

 

Vested

 

 

3,651

 

 

$

21.78

 

Forfeited/cancelled/expired

 

 

1,610

 

 

$

21.43

 

Outstanding, end of year

 

 

31,353

 

 

$

21.95

 

 

As of March 31, 2020, there was approximately $632,000 of total unrecognized compensation cost related to nonvested shares of restricted stock granted under the 2014 Plan.  The cost is expected to be recognized over a weighted average period of 4.03 years.

        

 

Note 14 – Deposits

Deposits classified by type with percentages to total deposits at March 31, 2020 and September 30, 2019 consisted of the following:

 

 

 

March 31,

 

 

September 30,

 

 

 

2020

 

 

2019

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances by types of deposit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings

 

$

43,550

 

 

 

4.75

%

 

$

41,875

 

 

 

4.39

%

Money market accounts

 

 

280,173

 

 

 

30.59

%

 

 

276,644

 

 

 

29.00

%

Interest-bearing demand

 

 

291,191

 

 

 

31.79

%

 

 

302,039

 

 

 

31.67

%

Non-interest-bearing demand

 

 

42,874

 

 

 

4.68

%

 

 

55,684

 

 

 

5.84

%

 

 

 

657,788

 

 

 

71.81

%

 

 

676,242

 

 

 

70.90

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

 

258,112

 

 

 

28.19

%

 

 

277,569

 

 

 

29.10

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Deposits

 

$

915,900

 

 

 

100.00

%

 

$

953,811

 

 

 

100.00

%

 

The total amount of certificates of deposit of $250,000 and greater at March 31, 2020 and September 30, 2019 was $74.8 million and $63.5 million, respectively.  We had brokered deposits totaling $16.1 million and $73.1 million at March 31, 2020 and September 30, 2019, respectively.

 

Interest expense on deposits consisted of the following:

 

 

 

Three Months Ended March 31,

 

 

Six Months Ended March 31,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

(In thousands)

 

Savings accounts

 

$

12

 

 

$

13

 

 

$

23

 

 

$

23

 

Money market accounts

 

 

1,121

 

 

 

1,111

 

 

 

2,219

 

 

 

2,185

 

Interest-bearing demand

 

 

1,078

 

 

 

1,009

 

 

 

2,259

 

 

 

1,652

 

Certificates of deposit

 

 

1,412

 

 

 

1,262

 

 

 

2,859

 

 

 

2,479

 

Total

 

$

3,623

 

 

$

3,395

 

 

$

7,360

 

 

$

6,339

 

 

As of March 31, 2020, the scheduled maturities of certificates of deposits are as follows:

 

-43-


 

 

 

Scheduled Maturities

 

 

 

(In thousands)

 

Period Ending March 31,

 

 

 

 

2021

 

$

177,318

 

2022

 

 

51,999

 

2023

 

 

7,495

 

2024

 

 

10,186

 

Thereafter

 

 

11,114

 

Total

 

$

258,112

 

 

 

 

 

 

 

 

 

 

 

Note 15 – Leases

          The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease ROU assets and operating lease liabilities on our consolidated balance sheets. ROU assets and operating lease liabilities are recognized based on the present value of the future lease payments over the lease term at commencement date. As our leases do not provide an implicit rate, in order to determine the present value of future payments for office leases we used our incremental borrowing rate based on the FHLB liquidity and funding rates. Our lease terms may include options to extend when it is reasonably certain that we will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.

           As of March 31, 2020, the Company leases a financial center in Glen Mills, Pennsylvania and private banking offices in Villanova, West Chester and Quakertown, Pennsylvania; one private banking office in New Castle County located in Montchanin, Delaware; one private banking office in Morris County located in Morristown, New Jersey; one private banking office in Palm Beach County located in Palm Beach, Florida; one representative office located in Wellington, Florida; and one representative office in Allentown, Pennsylvania. The Company has elected not to recognize ROU assets and lease liabilities for two private banking office leases and two representative office leases whose terms are twelve months or less and are considered short-term leases. All of the financial center leases and two private banking office leases include options to extend for terms of five years. These options have not been recognized as part of our ROU assets and lease liabilities as the Company is not reasonably certain to exercise these options. The Company has also entered into three leases for office equipment for which ROU assets and lease liabilities have been recognized. All the aforementioned leases have been accounted for as operating leases.

The components of lease expense were as follows:

 

 

 

Three Months Ended March 31,

 

 

Six Months Ended March 31,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

(In thousands)

 

 

(In thousands)

 

Operating lease cost

 

$

173

 

 

$

119

 

 

$

348

 

 

$

235

 

Finance lease cost

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Short-term lease cost

 

 

28

 

 

 

15

 

 

 

53

 

 

 

30

 

Total

 

$

201

 

 

$

134

 

 

$

401

 

 

$

265

 

Supplemental information related to leases was as follows:

-44-


 

 

 

March 31, 2020

 

 

 

(Dollars in thousands)

 

Supplemental balance sheet information

 

 

 

 

Operating lease right-of-use assets

 

$

2,959

 

Operating lease liabilities

 

$

2,976

 

Weighted average remaining lease term

 

5.74 years

 

Weighted average discount rate

 

 

1.98

%

 

 

 

 

 

 

 

Six Months Ended March 31, 2020

 

 

 

(In thousands)

 

Supplemental cash flow information

 

 

 

 

Operating cash flows from operating leases

 

$

332

 

ROU assets obtained in exchange for lease obligations

 

$

3,279

 

 

 

 

 

 

Maturities of lease liabilities were as follows:

 

 

 

Operating Leases

 

 

 

(In thousands)

 

Period Ending September 30,

 

 

 

 

Remainder of 2020

 

$

338

 

2021

 

 

601

 

2022

 

 

492

 

2023

 

 

474

 

2024

 

 

474

 

Thereafter

 

 

746

 

Total lease payments

 

$

3,125

 

    Less: imputed interest

 

 

(149

)

Total

 

$

2,976

 

 

 

 

 

 

 

 

 

 

            

-45-


 

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

The purpose of this analysis is to provide the reader with information relevant to understanding and assessing the Company’s results of operations for the periods presented herein and financial condition as of March 31, 2020 and September 30, 2019. In order to fully understand this analysis, the reader is encouraged to review the consolidated financial statements and accompanying notes thereto appearing elsewhere in this report.

Forward-Looking Statements

           The statements contained herein that are not historical facts are forward-looking statements based on management’s current expectations and beliefs concerning future developments and their potential effects on the Company, including, without limitation, plans, strategies and goals, and statements about the Company’s expectations regarding revenue and asset growth, financial performance and profitability, loan and deposit growth, yields and returns, loan diversification and credit management, and shareholder value creation.

 

Such statements involve inherent risks and uncertainties, many of which are difficult to predict and are generally beyond the control of the Company.  There can be no assurance that future developments affecting the Company will be the same as those anticipated by management.  The Company cautions readers that a number of important factors could cause actual results to differ materially from those expressed in, or implied or projected by, such forward-looking statements.  These risks and uncertainties include, but are not limited to, the following: the effects of, and changes in, trade, monetary and fiscal policies and laws, including recent changes in interest rate policies of the Board of Governors of the Federal Reserve System; inflation, interest rate, market and monetary fluctuations; the impact of competition and the acceptance of the Company’s products and services by new and existing customers; the impact of changes in financial services policies, laws and regulations; technological changes; any oversupply of inventory and deterioration in values of real estate in the markets in which the Company operates, both residential and commercial; the effect of changes in accounting policies and practices, as may be adopted from time-to-time by bank regulatory agencies, the Securities and Exchange Commission (“SEC”), the Public Company Accounting Oversight Board, the Financial Accounting Standards Board or other accounting standards setters; possible other-than-temporary impairment of securities held by us; the effects of the Company’s lack of a widely-diversified loan portfolio, including the risks of geographic and industry concentrations; ability to attract deposits and other sources of liquidity; changes in the competitive environment among financial and bank holding companies and other financial service providers; unanticipated regulatory or judicial proceedings; and the Company’s ability to manage the risk involved in the foregoing.  Additional factors that could cause actual results to differ materially from those expressed in the forward-looking statements are discussed in the Company’s 2019 Annual Report on Form 10-K and Quarterly Reports on Form 10-Q filed with the SEC and available at the SEC’s Internet site (http://www.sec.gov).

 

Further, given its ongoing and dynamic nature, it is difficult to predict the full impact of the COVID-19 outbreak on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated and when and how the economy may be reopened. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations: the demand for our products and services may decline, making it difficult to grow assets and income; if the economy is unable to substantially reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income; collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase; our allowance for loan losses may increase if borrowers experience financial difficulties, which will adversely affect our net income; the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us; as the result of the decline in the Federal Reserve Board’s target federal funds rate to near 0%, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and spread and reducing net income; our cyber security risks are increased as the result of an increase in the number of employees working remotely; and FDIC premiums may increase if the agency experience additional resolution costs.

 

The Company undertakes no obligation to revise or publicly release any revision or update to these forward-looking statements to reflect events or circumstances that occur after the date on which such statements were made, unless required by law.   

 

Critical Accounting Policies

The accounting and reporting policies followed by the Company conform, in all material respects, to GAAP. In preparing the consolidated financial statements, management has made estimates, judgments and assumptions that affect the reported amounts of assets and liabilities as of the dates of the consolidated statements of condition and for the periods indicated in the statements of operations. Actual results could differ significantly from those estimates.

-46-


 

The Company’s accounting policies are fundamental to understanding Management’s Discussion and Analysis (“MD&A”) of financial condition and results of operations. The Company has identified the determination of the ALLL, OREO, fair value measurements, the evaluation of deferred tax assets, the other-than-temporary impairment evaluation of securities, and the valuation of our derivative positions to be critical because management must make subjective and/or complex judgments about matters that are inherently uncertain and could be most subject to revision as new information becomes available. Additional information on these policies can be found in the Company’s 2019 Annual Report.

There have been no significant changes to the Company’s Critical Accounting Policies as described in its 2019 Annual Report other than the adoption of ASU 2016-02

 

COVID -19 Update

 

The Company has taken significant steps to protect the health and well-being of its employees and clients and to assist clients who have been impacted by the COVID-19 pandemic The Company’s work to ensure business continuity and responsive client service includes continued proactive engagement by relationship managers with our clients and prospects to address their needs in the short and medium terms, leveraging our digital banking and service platforms, and enabling some our employees to serve clients remotely from the safety of their homes.

 

Business Continuity Plan

 

During March 2020, management activated its previously developed Pandemic Plan, taking the following actions to protect the health of employees and clients, while continuing to exceed client needs:

 

 

All Financial Centers began operating on an amended hours schedule or by appointment and we began further utilizing our drive thru services, with increased safety measures.

 

We are encouraging clients to utilize the Bank’s electronic banking services, including online and mobile banking, telephone banking, as well as night drops and ATMs.

 

We are engaging in proactive communication with employees and clients via phone, video conferencing, email, and other digital tools, while prohibiting business travel.

 

We implemented a work-from-home policy for over 90% of employees.

 

No furloughs or layoffs have been made to date, nor does management currently anticipate future employee furloughs or layoffs related to COVID-19.

 

Paycheck Protection Program

 

The Company started accepting and processing applications for loans under the PPP in early April 2020, when the program was officially launched by the SBA and Treasury Department under the recently enacted CARES Act. As of April 30, 2020, the Company had received 172 applications fromboth new and existing clients, obtained approval from the SBA for loans totaling over $17.1 million for existing and new customers.

 

Liquidity Sources

 

Management has reviewed all primary and secondary sources of liquidity in preparation for any unforeseen funding needs due to the COVID-19 pandemic and prioritized based on available capacity, term flexibility, and cost. As of March 31, 2020, the Company had adequate sources of liquidity (excluding the Company’s ability to participate in the PPPLF);

 

Capital Strength

The Company’s capital ratios continued to exceed the highest required regulatory benchmark levels.

 

Common equity tier 1 ratio was 14.40 percent, tier 1 leverage ratio was 11.51 percent, tier 1 risk-based capital ratio was 14.40 percent and the total risk-based capital ratio was 17.93 percent.  

 

Deferral Requests

 

-47-


 

As of April 30, 2020, the Company entered into 137 loan modification agreements with respect to $312.6 million of loans outstanding. For loans subject to the program, each borrower is required to resume making regularly scheduled loan payment at the end of the modification period and the deferred amounts will be moved to the end of the loan term. Management anticipates this activity could continue throughout the fiscal third quarter of 2020 and beyond.

 

Exposure to Stressed Industries

 

Certain industries are widely expected to be particularly impacted by social distancing, quarantines, and the economic impact   of the COVID-19 pandemic, such as the following:

 

 

 

 

April 30,

2020

 

 

 

Outstanding Exposure

 

 

Percentage of Gross Loans

 

 

 

(Dollars in thousands)

 

Industries:

 

 

 

 

 

 

 

 

    Retail

 

$

68,120

 

 

6.6%

 

    Hotel

 

 

58,640

 

 

5.7%

 

    Office/Medical Office

 

 

47,163

 

 

4.6%

 

    Fitness Centers

 

 

43,723

 

 

4.3%

 

    Restaurants and food service

 

 

4,591

 

 

0.4%

 

           Total Outstanding Exposure

 

$

222,237

 

 

21.6%

 

 

As of April 30, 2020, the Company had no meaningful direct exposure to the energy or airline industries and does not

participate in shared national credits.

 

Because of the significant uncertainties related to the ultimate duration of the COVID-19 pandemic and its potential effects on our clients and prospects, and on the national and local economy as a whole, there can be no assurances as to how the crisis may ultimately affect the Company’s loan portfolio.

 

Results of Operations

Net income available to common shareholders for the three months ended March 31, 2020 amounted to $1.9 million, or $0.25 per fully diluted common share, a decrease of $58,000, or 3.0 percent, as compared with net income of $2.0 million, or $0.26 per common share, for the three months ended March 31, 2019. The annualized return on average assets was 0.61 percent for the three months ended March 31, 2020, compared to annualized return on average assets of 0.70 percent for three months ended March 31, 2019. The annualized return on average shareholders’ equity was 5.29 percent for the three month period ended March 31, 2020, compared to 5.74 percent in annualized return on average shareholders’ equity for the three months ended March 31, 2019.    

Net income available to common shareholders for the six months ended March 31, 2020 amounted to $2.7 million, or $0.35 per fully diluted common share, a decrease of $1.3 million, or 32.3 percent, as compared with net income of $4.0 million, or $0.52 per common share, for the six months ended March 31, 2019.  The annualized return on average assets was 0.44 percent for the six months ended March 31, 2020, compared to annualized return on average assets of 0.72 percent for the six months ended March 31, 2019.  The annualized return on average shareholders’ equity was 3.74 percent for the six months ended March 31, 2020, compared to 5.87 percent for the six months ended March 31, 2019.

Net Interest Income and Margin

Net interest income is the difference between the interest earned on the portfolio of earning assets (principally loans and investments) and the interest paid for deposits and borrowings, which support these assets.

-48-


 

The following table presents the components of net interest income for the periods indicated:

Net Interest Income

 

 

 

For the Three Months Ended March 31,

 

 

For the Six Months Ended March 31,

 

 

 

2020

 

 

2019

 

 

Increase

(Decrease)

 

 

Percent

Change

 

 

2020

 

 

2019

 

 

Increase

(Decrease)

 

 

Percent

Change

 

 

 

(Dollars in thousands)

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

10,587

 

 

$

10,661

 

 

$

(74

)

 

(0.69)%

 

 

$

21,468

 

 

$

20,756

 

 

$

712

 

 

3.43%

 

Investment securities

 

 

265

 

 

 

307

 

 

 

(42

)

 

(13.68)

 

 

 

519

 

 

 

619

 

 

 

(100

)

 

(16.16)

 

Interest-bearing cash accounts

 

 

550

 

 

 

475

 

 

 

75

 

 

15.79

 

 

 

1,022

 

 

 

847

 

 

 

175

 

 

20.66

 

Dividends, restricted stock

 

 

182

 

 

 

158

 

 

 

24

 

 

15.19

 

 

 

370

 

 

 

291

 

 

 

79

 

 

27.15

 

Total interest income

 

 

11,584

 

 

 

11,601

 

 

 

(17

)

 

(0.15)

 

 

 

23,379

 

 

 

22,513

 

 

 

866

 

 

3.85

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

3,623

 

 

 

3,395

 

 

 

228

 

 

6.72

 

 

 

7,360

 

 

 

6,339

 

 

 

1,021

 

 

16.11

 

Short-term borrowings

 

 

-

 

 

 

2

 

 

 

(2

)

 

(100.00)

 

 

 

-

 

 

 

7

 

 

 

(7

)

 

(100.00)

 

Long-term borrowings

 

 

785

 

 

 

572

 

 

 

213

 

 

37.24

 

 

 

1,572

 

 

 

1,205

 

 

 

367

 

 

30.46

 

Subordinated debt

 

 

383

 

 

 

383

 

 

 

-

 

 

 

-

 

 

 

766

 

 

 

766

 

 

 

-

 

 

 

-

 

Total interest expense

 

 

4,791

 

 

 

4,352

 

 

 

439

 

 

10.09

 

 

 

9,698

 

 

 

8,317

 

 

 

1,381

 

 

16.60

 

Net interest income

 

$

6,793

 

 

$

7,249

 

 

$

(456

)

 

(6.30)%

 

 

$

13,681

 

 

$

14,196

 

 

$

(515

)

 

(3.63)%

 

 

 

Net interest income decreased $456,000, or 6.3 percent, to $6.8 million for the three months ended March 31, 2020 as compared to the three months ended March 31, 2019. For the three months ended March 31, 2020, the net interest margin (which is defined as net interest income as a percentage of total average interest-earnings assets and is presented herein on an annualized basis) decreased forty-one basis points to 2.25 percent from 2.66 percent during the three months ended March 31, 2019. For the three months ended March 31, 2020, a decrease of three basis points in the annualized average cost of interest-bearing liabilities, together with a decrease in the annualized average yield on interest-earning assets of forty-three basis points, resulted in a decrease in the Company’s net interest spread of forty basis points for the period.

 

Net interest income decreased $515,000, or 3.6 percent, to $13.7 million for the six months ended March 31, 2020, as compared to the six months ended March 31, 2019.  For the six months ended six months ended March 31, 2020,  the net interest margin decreased thirty-six basis points to 2.29 percent from 2.65 percent during the six months ended March 31, 2019. For the six months ended March 31, 2020, a decrease in the average yield on interest-earning assets of thirty basis points and an increase in the average cost of interest-bearing liabilities of six basis points, resulted in a decrease in the Company’s net interest spread of thirty-six basis points for the period.

Total Interest Income

For the three months ended March 31, 2020, total interest income decreased by $17,000, or 0.2 percent, to $11.6 million, compared to the three months ended March 31, 2019. The average balance of the loan portfolio increased by $53.9 million, to $1.0 billion, from an average of $956.8 million in the three months ended March 31, 2019, primarily reflecting a net increase in residential loans and construction and development loans. Average loans represented approximately 83.5 percent of average interest-earning assets during the three months ended March 31, 2020, compared to 87.8 percent in the three months ended March 31, 2019. Average investment securities volume decreased during the three months ended March 31, 2020 by $7.6 million, to $40.2 million, compared to the three months ended March 31, 2019.

For the six months ended March 31, 2020 total interest income increased by $866,000, or 3.9 percent, to $23.4 million, compared to the six months ended March 31, 2019.  This increase in interest income was due primarily to a volume increase in loans. The average balance of the loan portfolio increased by $74.4 million, to $1.0 billion during the six months ended March 31, 2020,  from an average of $934.3 million in the six months ended March 31, 2019, primarily reflecting net increases in residential loans and construction and development loans. Average loans represented approximately 84.4 percent of average interest-earning assets during the six months ended March 31, 2020 compared to 87.4 percent in the six months ended March 31, 2019.  The average balance of investment securities decreased during the six months ended March 31, 2020 by $10.3 million, to $40.5 million, compared to the six months ended March 31, 2019.

Interest Expense

For the three months ended March 31, 2020, interest expense increased $439,000, or 10.1 percent, to $4.8 million, compared to the same three month period in fiscal 2019. The annualized average rate of total interest-bearing liabilities decreased three basis points

-49-


 

to 1.82 percent for the three months ended March 31, 2020, from 1.85 percent for the three months ended March 31, 2019. Over the same time period, the average balance of total interest-bearing liabilities increased by $110.3 million. This increase primarily reflects an increase in the average balance of total interest-bearing deposit accounts of $78.2 million and an increase in the average balance of borrowings of $32.1 million For the three months ended March 31, 2020, the Company’s annualized net interest spread decreased to 2.01 percent, from 2.41 percent for the three months ended March 31, 2019.

For the six months ended March 31, 2020, interest expense increased $1.4 million, or 16.6 percent, to $9.7 million, compared to the same six month period in fiscal 2019.  The average rate of total interest-bearing liabilities increased six basis points to 1.87 percent for the six months ended March 31, 2020, from 1.81 percent for the six months ended March 31, 2019. Over the same time period, the average balance of total interest-bearing liabilities increased by $115.8 million. This increase primarily reflects an increase in the average balance of deposits of $92.1 million and an increase in the average balance of borrowings of $23.7 million.  The increase in the average balance of deposits consisted of a $71.0 million increase in the average balance of other interest-bearing deposit accounts, an $11.8 million increase in the average balance of money market accounts , and an $11.2 million increase in the average balance of certificates of deposit accounts, offset by a $2.0 million decrease in the average balance of savings deposits. For the six months ended March 31, 2020, the Company’s net interest spread decreased to 2.04 percent, from 2.40 percent for the six months ended March 31, 2019.

Net Interest Margin

The following table quantifies the impact on net interest income resulting from changes in average balances and average rates during the periods presented. Any change in interest income or expense attributable to both changes in volume and changes in rate has been allocated in proportion to the relationship of the absolute dollar amount of change in each category.

Analysis of Variance in Net Interest Income Due to Changes in Volume and Rates

 

 

 

Three Months Ended March 31,

 

 

Six Months Ended March 31,

 

 

 

2020 and 2019

 

 

2020 and 2019

 

 

 

Increase (Decrease) Due to Change in:

 

 

Increase (Decrease) Due to Change in:

 

 

 

Average Volume

 

 

Average Rate

 

 

Net

Change

 

 

Average Volume

 

 

Average Rate

 

 

Net

Change

 

 

 

(In thousands)

 

Interest Earning Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

601

 

 

$

(675

)

 

$

(74

)

 

$

1,652

 

 

$

(940

)

 

$

712

 

Investment securities

 

 

(49

)

 

 

7

 

 

 

(42

)

 

 

(126

)

 

 

26

 

 

 

(100

)

Interest-bearing cash accounts

 

 

447

 

 

 

(372

)

 

 

75

 

 

 

662

 

 

 

(487

)

 

 

175

 

Dividends, restricted stock

 

 

43

 

 

 

(19

)

 

 

24

 

 

 

75

 

 

 

4

 

 

 

79

 

Total interest-earning assets

 

$

1,042

 

 

$

(1,059

)

 

$

(17

)

 

$

2,263

 

 

$

(1,397

)

 

$

866

 

Interest Bearing Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money Market deposits

 

$

49

 

 

$

(39

)

 

$

10

 

 

$

98

 

 

$

(64

)

 

$

34

 

Savings deposits

 

 

-

 

 

 

(1

)

 

 

(1

)

 

 

(1

)

 

 

1

 

 

 

-

 

Certificates of deposits

 

 

63

 

 

 

87

 

 

 

150

 

 

 

115

 

 

 

265

 

 

 

380

 

Other interest-bearing deposits

 

 

212

 

 

 

(143

)

 

 

69

 

 

 

493

 

 

 

114

 

 

 

607

 

Total interest-bearing deposits

 

 

324

 

 

 

(96

)

 

 

228

 

 

 

705

 

 

 

316

 

 

 

1,021

 

Borrowings

 

 

244

 

 

 

(33

)

 

 

211

 

 

 

350

 

 

 

10

 

 

 

360

 

Total interest-bearing liabilities

 

$

568

 

 

$

(129

)

 

$

439

 

 

$

1,055

 

 

$

326

 

 

$

1,381

 

Change in net interest income

 

$

474

 

 

$

(930

)

 

$

(456

)

 

$

1,208

 

 

$

(1,723

)

 

$

(515

)

 

-50-


 

Average Balances, Net Interest Income, and Yields Earned and Rates Paid.  The following table shows for the periods indicated the total dollar amount of interest from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and the net interest margin (net interest income as a percentage of average interest-earning assets). 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. Quarterly rates, yields, spreads and margins throughout this MD&A are calculated on an annualized basis where appropriate.

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

 

 

Average Outstanding Balance

 

 

Interest

Earned/

Paid

 

 

Yield/

Rate

 

 

Average Outstanding Balance

 

 

Interest

Earned/

Paid

 

 

Yield/

Rate

 

 

 

(Dollars in thousands)

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Earning Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees(1)

 

$

1,010,767

 

 

$

10,587

 

 

 

4.19

%

 

$

956,840

 

 

$

10,661

 

 

 

4.46

%

Investment securities

 

 

40,165

 

 

 

265

 

 

 

2.64

%

 

 

47,761

 

 

 

307

 

 

 

2.57

%

Interest-bearing cash accounts

 

 

148,580

 

 

 

550

 

 

 

1.48

%

 

 

76,486

 

 

 

475

 

 

 

2.48

%

Dividends, restricted stock

 

 

10,427

 

 

 

182

 

 

 

6.98

%

 

 

8,184

 

 

 

158

 

 

 

7.72

%

Total interest-earning assets(1)

 

 

1,209,939

 

 

 

11,584

 

 

 

3.83

%

 

 

1,089,271

 

 

 

11,601

 

 

 

4.26

%

Non-interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

 

1,347

 

 

 

 

 

 

 

 

 

 

 

1,535

 

 

 

 

 

 

 

 

 

Bank-owned life insurance

 

 

20,089

 

 

 

 

 

 

 

 

 

 

 

19,594

 

 

 

 

 

 

 

 

 

Other assets

 

 

25,775

 

 

 

 

 

 

 

 

 

 

 

19,117

 

 

 

 

 

 

 

 

 

Other real estate owned

 

 

5,796

 

 

 

 

 

 

 

 

 

 

 

5,796

 

 

 

 

 

 

 

 

 

Allowance for loan losses

 

 

(9,756

)

 

 

 

 

 

 

 

 

 

 

(9,408

)

 

 

 

 

 

 

 

 

Total non-interest-earning assets

 

 

43,251

 

 

 

 

 

 

 

 

 

 

 

36,634

 

 

 

 

 

 

 

 

 

Total assets

 

$

1,253,190

 

 

 

 

 

 

 

 

 

 

$

1,125,905

 

 

 

 

 

 

 

 

 

LIABILITIES & SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-Bearing Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money Market deposits

 

$

277,926

 

 

 

1,121

 

 

 

1.61

%

 

$

266,233

 

 

 

1,111

 

 

 

1.67

%

Savings deposits

 

 

42,875

 

 

 

12

 

 

 

0.11

%

 

 

43,943

 

 

 

13

 

 

 

0.12

%

Certificates of deposits

 

 

252,973

 

 

 

1,412

 

 

 

2.23

%

 

 

240,955

 

 

 

1,262

 

 

 

2.09

%

Other interest-bearing deposits

 

 

318,809

 

 

 

1,078

 

 

 

1.35

%

 

 

263,281

 

 

 

1,009

 

 

 

1.53

%

Total interest-bearing deposits

 

$

892,583

 

 

 

3,623

 

 

 

1.62

%

 

 

814,412

 

 

 

3,395

 

 

 

1.67

%

Borrowings

 

 

157,955

 

 

 

1,168

 

 

 

2.96

%

 

 

125,800

 

 

 

957

 

 

 

3.04

%

Total interest-bearing liabilities

 

 

1,050,538

 

 

 

4,791

 

 

 

1.82

%

 

 

940,212

 

 

 

4,352

 

 

 

1.85

%

Non-interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

 

41,916

 

 

 

 

 

 

 

 

 

 

 

41,035

 

 

 

 

 

 

 

 

 

Other liabilities

 

 

16,440

 

 

 

 

 

 

 

 

 

 

 

7,728

 

 

 

 

 

 

 

 

 

Total non-interest liabilities

 

 

58,356

 

 

 

 

 

 

 

 

 

 

 

48,763

 

 

 

 

 

 

 

 

 

Shareholders' equity

 

 

144,296

 

 

 

 

 

 

 

 

 

 

 

136,930

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders' equity

 

$

1,253,190

 

 

 

 

 

 

 

 

 

 

$

1,125,905

 

 

 

 

 

 

 

 

 

Net interest spread

 

 

 

 

 

 

 

 

 

 

2.01

%

 

 

 

 

 

 

 

 

 

 

2.41

%

Net interest margin

 

 

 

 

 

 

 

 

 

 

2.25

%

 

 

 

 

 

 

 

 

 

 

2.66

%

Net interest income

 

 

 

 

 

$

6,793

 

 

 

 

 

 

 

 

 

 

$

7,249

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)  Includes non-accrual loans during the respective periods. Calculated net of deferred loan fees and loan discounts.

 

 


-51-


 

 

 

Six Months Ended March 31,

 

 

 

2020

 

 

2019

 

 

 

Average Outstanding Balance

 

 

Interest

Earned/

Paid

 

 

Yield/

Rate

 

 

Average Outstanding Balance

 

 

Interest

Earned/

Paid

 

 

Yield/

Rate

 

 

 

(Dollars in thousands)

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Earning Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees(1)

 

$

1,008,737

 

 

$

21,468

 

 

 

4.26

%

 

$

934,305

 

 

$

20,756

 

 

 

4.44

%

Investment securities

 

 

40,512

 

 

 

519

 

 

 

2.56

%

 

 

50,855

 

 

 

619

 

 

 

2.43

%

Interest-bearing cash accounts

 

 

135,335

 

 

 

1,022

 

 

 

1.51

%

 

 

75,966

 

 

 

847

 

 

 

2.23

%

Dividends, restricted stock

 

 

10,438

 

 

 

370

 

 

 

7.09

%

 

 

8,301

 

 

 

291

 

 

 

7.01

%

Total interest-earning assets(1)

 

 

1,195,022

 

 

 

23,379

 

 

 

3.91

%

 

 

1,069,427

 

 

 

22,513

 

 

 

4.21

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

 

1,397

 

 

 

 

 

 

 

 

 

 

 

1,443

 

 

 

 

 

 

 

 

 

Bank-owned life insurance

 

 

20,028

 

 

 

 

 

 

 

 

 

 

 

19,533

 

 

 

 

 

 

 

 

 

Other assets

 

 

25,225

 

 

 

 

 

 

 

 

 

 

 

18,678

 

 

 

 

 

 

 

 

 

Other real estate owned

 

 

5,796

 

 

 

 

 

 

 

 

 

 

 

3,217

 

 

 

 

 

 

 

 

 

Allowance for loan losses

 

 

(9,926

)

 

 

 

 

 

 

 

 

 

 

(9,018

)

 

 

 

 

 

 

 

 

Total non-interest-earning assets

 

 

42,520

 

 

 

 

 

 

 

 

 

 

 

33,853

 

 

 

 

 

 

 

 

 

Total assets

 

$

1,237,542

 

 

 

 

 

 

 

 

 

 

$

1,103,280

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES & SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-Bearing Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money Market deposits

 

$

274,434

 

 

 

2,219

 

 

 

1.62

%

 

$

262,639

 

 

 

2,185

 

 

 

1.66

%

Savings deposits

 

 

42,255

 

 

 

23

 

 

 

0.11

%

 

 

44,232

 

 

 

23

 

 

 

0.10

%

Certificates of deposits

 

 

252,664

 

 

 

2,859

 

 

 

2.26

%

 

 

241,419

 

 

 

2,479

 

 

 

2.05

%

Other interest-bearing deposits

 

 

309,020

 

 

 

2,259

 

 

 

1.46

%

 

 

238,017

 

 

 

1,652

 

 

 

1.39

%

Total interest-bearing deposits

 

$

878,373

 

 

 

7,360

 

 

 

1.68

%

 

 

786,307

 

 

 

6,339

 

 

 

1.61

%

Borrowings

 

 

157,797

 

 

 

2,338

 

 

 

2.96

%

 

 

134,041

 

 

 

1,978

 

 

 

2.95

%

Total interest-bearing liabilities

 

 

1,036,170

 

 

 

9,698

 

 

 

1.87

%

 

 

920,348

 

 

 

8,317

 

 

 

1.81

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

 

41,816

 

 

 

 

 

 

 

 

 

 

 

40,724

 

 

 

 

 

 

 

 

 

Other liabilities

 

 

15,617

 

 

 

 

 

 

 

 

 

 

 

6,729

 

 

 

 

 

 

 

 

 

Total non-interest liabilities

 

 

57,433

 

 

 

 

 

 

 

 

 

 

 

47,453

 

 

 

 

 

 

 

 

 

Shareholders' equity

 

 

143,939

 

 

 

 

 

 

 

 

 

 

 

135,479

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders' equity

 

$

1,237,542

 

 

 

 

 

 

 

 

 

 

$

1,103,280

 

 

 

 

 

 

 

 

 

Net interest spread

 

 

 

 

 

 

 

 

 

 

2.04

%

 

 

 

 

 

 

 

 

 

 

2.40

%

Net interest margin

 

 

 

 

 

 

 

 

 

 

2.29

%

 

 

 

 

 

 

 

 

 

 

2.65

%

Net interest income

 

 

 

 

 

$

13,681

 

 

 

 

 

 

 

 

 

 

$

14,196

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)  Includes non-accrual loans during the respective periods. Calculated net of deferred loan fees and loan discounts.

 


-52-


 

 

Other Income

The following table presents the principal categories of other income for the periods indicated:

 

 

 

Three Months Ended March 31,

 

Six Months Ended March 31,

 

 

 

 

 

 

 

 

 

 

Increase

 

 

Percent

 

 

 

 

 

 

 

 

 

Increase

 

 

Percent

 

 

2020

 

 

2019

 

 

(Decrease)

 

 

Change

 

2020

 

 

2019

 

 

(Decrease)

 

 

Change

 

 

(Dollars in thousands)

Service charges and other fees

 

$

604

 

 

$

238

 

 

$

366

 

 

153.78%

 

$

863

 

 

$

1,178

 

 

$

(315

)

 

(26.74)%

Rental income-other

 

 

55

 

 

 

64

 

 

 

(9

)

 

(14.06)

 

 

109

 

 

 

131

 

 

 

(22

)

 

(16.79)

Net gains on sales of investments

 

 

180

 

 

 

-

 

 

 

180

 

 

100.00

 

 

180

 

 

 

-

 

 

 

180

 

 

100.00

Net gains on sale of loans

 

 

-

 

 

 

19

 

 

 

(19

)

 

(100.00)

 

 

3

 

 

 

37

 

 

 

(34

)

 

(91.89)

Earnings on bank-owned life insurance

 

 

125

 

 

 

120

 

 

 

5

 

 

4.17

 

 

252

 

 

 

241

 

 

 

11

 

 

4.56

Total other income

 

$

964

 

 

$

441

 

 

$

523

 

 

118.59%

 

$

1,407

 

 

$

1,587

 

 

$

(180

)

 

(11.34)%

 

For the three months ended March 31, 2020, total other income amounted to $964,000, compared to total other income of $441,000 for the same period in fiscal 2019. The increase in total other income was primarily due to a $366,000 increase in service charges and other fees and a $180,000 gain on sale of investments.  The increase in service charges and other fees during the quarter ended March 31, 2020 is primarily due to the recognition of approximately $371,000 of net swap fees through the Bank’s commercial loan hedging program realized during the quarter ending March 31, 2020 in concert with lending activity.

 

For the six months ended March 31, 2020, total other income amounted to $1.4 million, compared to total other income of $1.6 million for the six months ended March 31, 2019. The decrease of $180,000 for the six months ended March 31, 2020 was primarily due to a decrease of $315,000 in service charges and other fees, a $34,000 decrease in net gains on sale of loans, and a $22,000 decrease in rental income, offset by a $180,000 gain on sale of investments and an $11,000 increase in earnings on bank-owned life insurance. The decrease in service charges and other fees during the six months ended March 31, 2020 is primarily due to the recognition of approximately $337,000 less of net swap fees through the Bank’s commercial loan hedging program.  The primary benefit of the loan hedging program is to eliminate the interest rate risk on long term fixed rate loans while allowing the Bank to compete more effectively in our markets.

Other Expense

The following table presents the principal categories of other expense for the periods indicated:

 

 

 

Three Months Ended March 31,

 

 

Six Months Ended March 31,

 

 

 

 

 

 

 

 

 

 

Increase

 

 

Percent

 

 

 

 

 

 

 

 

 

 

Increase

 

 

Percent

 

 

 

2020

 

 

2019

 

 

(Decrease)

 

 

Change

 

 

2020

 

 

2019

 

 

(Decrease)

 

 

Change

 

 

 

(Dollars in thousands)

 

Salaries and employee benefits

 

$

2,271

 

 

$

2,213

 

 

$

58

 

 

2.62%

 

 

$

4,396

 

 

$

4,221

 

 

$

175

 

 

4.15%

 

Occupancy expense

 

 

591

 

 

 

577

 

 

 

14

 

 

2.43

 

 

 

1,173

 

 

 

1,116

 

 

 

57

 

 

5.11

 

Federal deposit insurance premium

 

 

3

 

 

 

73

 

 

 

(70

)

 

(95.89)

 

 

 

-

 

 

 

142

 

 

 

(142

)

 

(100.00)

 

Advertising

 

 

32

 

 

 

30

 

 

 

2

 

 

6.67

 

 

 

54

 

 

 

60

 

 

 

(6

)

 

(10.00)

 

Data processing

 

 

272

 

 

 

251

 

 

 

21

 

 

8.37

 

 

 

550

 

 

 

505

 

 

 

45

 

 

8.91

 

Professional fees

 

 

502

 

 

 

455

 

 

 

47

 

 

10.33

 

 

 

943

 

 

 

954

 

 

 

(11

)

 

(1.15)

 

Other real estate owned expense, net

 

 

(1

)

 

 

28

 

 

 

(29

)

 

(103.57)

 

 

 

70

 

 

 

49

 

 

 

21

 

 

42.86

 

Pennsylvania shares tax

 

 

170

 

 

 

92

 

 

 

78

 

 

84.78

 

 

 

340

 

 

 

92

 

 

 

248

 

 

269.57

 

Other operating expenses

 

 

798

 

 

 

724

 

 

 

74

 

 

10.22

 

 

 

1,534

 

 

 

1,398

 

 

 

136

 

 

9.73

 

Total other expense

 

$

4,638

 

 

$

4,443

 

 

$

195

 

 

4.39%

 

 

$

9,060

 

 

$

8,537

 

 

$

523

 

 

6.13%

 

 

For the three months ended March 31, 2020, total other expense increased $195,000, or 4.4 percent, from the comparable three months ended March 31, 2019. The increase was primarily due to a $78,000 increase in the Pennsylvania shares tax, an increase of $74,000 in other operating expense, an increase of $58,000 in salaries and employee benefits, and an increase of $47,000 in professional fees.  These were partially offset by a decrease of $70,000 in the federal deposit insurance premium and a decrease of $29,000 in OREO expense.  The increase in the Pennsylvania shares tax is due to the tax being based on equity as of January 1st, the estimate for 2020 exceeded 2019. The increase in salaries and employee benefits reflect normal increases to salary and benefits. The increase in professional fees was due to higher legal expense and professional services of approximately $35,000 and $75,000,

-53-


 

respectively, partially offset by lower audit and accounting expense of approximately $64,000. The reduction in the federal deposit insurance premium resulted from the Deposit Insurance Fund reserve ratio exceeding the official required reserve ratio, which in turn generates credits to qualified participating banks.  The Company currently does not have any further credit balance that can be used to offset premiums in future quarters.  

 

For the six months ended March 31, 2020, salaries and employee benefits expense increased $175,000, or 4.2 percent, compared to the six months ended March 31, 2019. The increase in salaries and employee benefits primarily reflects normal increases to salary and benefits to support overall franchise growth consistent with the business plan. Full-time equivalent staffing levels was 89 at each of March 31, 2020 and March 31, 2019. The increase in the Pennsylvania shares tax was due to the Bank not being subject to this tax until the second quarter of 2019 due to a charter change.        

 

Income Taxes

 

The Company recorded a provision for income taxes of $586,000 and $560,000 for the three and six months ended March 31, 2020, respectively, reflecting an effective tax rate of 23.5 percent and 17.2 percent, respectively. The Company recorded a provision for income taxes of $411,000 and $946,000 for the three and six months ended March 31, 2019, respectively, reflecting an effective tax rate of 17.3 percent and 19.2 percent, respectively. During the six months ended March 31, 2020, the Company recorded discrete items that reduced the effective tax rate.  

Investment Portfolio

 

For the three months ended March 31, 2020, the average volume of investment securities decreased by $7.6 million to approximately $40.2 million, or 3.3 percent, of average earning assets, from $47.8 million on average, or 4.4 percent of average earning assets, for the three months ended March 31, 2019. During the six months ended March 31, 2020, the average volume of investment securities decreased by $10.3 million to approximately $40.5 million, or 3.4 percent, of average earning assets, from $50.9 million on average, or 4.8 percent of average earning assets, for the comparable period in fiscal 2019. At March 31, 2020, the total investment portfolio amounted to $39.9 million, a decrease of $1.0 million, or 2.5 percent, from September 30, 2019. The decrease in the investment portfolio was primarily due to maturation, calls, and sales of $11.2 million partially offset by purchases of $12.1 million. At March 31, 2020, the principal components of the investment portfolio were government agency obligations, federal agency obligations, including mortgage-backed securities, obligations of U.S. states and political subdivision, corporate bonds and notes, a trust preferred security and taxable mutual funds.

 

During the three month period ended March 31, 2020, the volume-related factors decreased investment revenue by approximately $49,000, while rate-related factors increased investment revenue by approximately $7,000 from the same period in fiscal 2019. The yield on investments increased by seven basis points to 2.64 percent for the three month period ended March 31, 2020, as compared to 2.57 percent for the three month period ended March 31, 2019. The yield on the portfolio increased due primarily to rate related factors. 

 

During the six months ended March 31, 2020, the volume-related factors decreased investment revenue by approximately $126,000, while rate-related factors increased investment revenue by approximately $26,000 from the same period in fiscal 2019. The yield on investments increased by thirteen basis points to 2.56 percent for the six months ended March 31, 2020, as compared to 2.43 percent for the six months ended March 31, 2019. The increase in the yield on the portfolio in the six months ended March 31, 2020 compared to the same period in fiscal 2019 is due primarily to rate-related factors.

 

Loan Portfolio

The Company’s loan portfolio consists of residential, construction and development, commercial and consumer loans, serving the diverse customer base in its market area. The composition of the Company’s portfolio continues to change due to the local competition. Factors such as the economic climate, interest rates, real estate values and employment all contribute to changes in the composition of the Company’s portfolio. Growth is generated through business development efforts, repeat customer requests for new financings, penetration into existing markets and entry into new markets.

The Company seeks to create growth in commercial lending, which primarily includes commercial real estate, multi-family, farmland, and commercial and industrial lending, by offering customer-focused products and competitive pricing and by capitalizing on the positive trends in its market area. Products offered are designed to meet the financial requirements of the Company’s customers. It is the objective of the Company’s credit policies to diversify the commercial loan portfolio to limit concentrations in any single industry.

-54-


 

Total gross loans amounted to $1.0 billion at both March 31, 2020 and September 30, 2019,.  For the six month period ended March 31, 2020, there was a decrease of $34.9 million in commercial loans, a decrease of $2.3 million in consumer loans, an increase of $20.6 million in residential mortgage loans, and an increase of $12.1 million in construction and development loans. Total gross loans recorded in the quarter ended March 31, 2020 included new loan volume of $61.1 million, which was offset by prepayments totaling $12.2 million, amortization of $5.7 million, loan payoffs of $30.8 million, and participations of $1.5 million.

At March 31, 2020, the Company had $148.8 million in overall undisbursed loan commitments, which consisted primarily of available usage from active construction facilities, unused commercial lines of credit and home equity lines of credit. The Company's current “Approved, Accepted but Unfunded” pipeline, includes approximately $19.8 million in commercial and construction loans and $5.3 million in residential mortgage loans expected to fund over the following quarter.

The average balance of our total loans increased $53.9 million, or 5.6 percent, for the three months ended March 31, 2020, as compared to the same period in fiscal 2019, while the average yield on loans decreased twenty-seven basis points for the three months ended March 31, 2020 compared with the same period in fiscal 2019. The increase in average total loan volume was partially due to the volume of new loan originations. During the second quarter of fiscal 2020 compared to the same period fiscal 2019, the volume-related factors during the period contributed to an increase of interest income on loans of $601,000, while the rate-related factors decreased interest income on loans by $675,000.

Total average loan volume increased $74.4 million, or 8.0 percent, for the six months ended March 31, 2020, while the portfolio yield decreased by eighteen basis points compared to the same period in fiscal 2019. The volume-related factors during the period contributed increased revenue of $1.7 million, while the average rate- related changes decreased revenue by $940,000. The increase in average total loan volume was due to the volume of new loan originations.

Allowance for Loan Losses and Related Provision

The purpose of the ALLL is to absorb the impact of losses inherent in the loan portfolio. Additions to the ALLL are made through provisions charged against current operations and through recoveries made on loans previously charged-off. The ALLL is maintained at an amount considered adequate by management to provide for probable loan losses inherent in the loan portfolio based upon a periodic evaluation of the portfolio’s risk characteristics. In establishing an appropriate ALLL, an assessment of the individual borrowers, a determination of the value of the underlying collateral, a review of historical loss experience and an analysis of the levels and trends of loan categories, delinquencies and problem loans are considered. Such factors as the level and trend of interest rates and current economic conditions and peer group statistics are also reviewed. Given the economic volatility impacting national, regional and local markets, the Company’s analysis of its ALLL takes into consideration the potential impact that current trends may have on the Company’s borrower base.

Although management uses the best information available, the level of the ALLL remains an estimate, which is subject to significant judgment and short-term change. Various regulatory agencies, as an integral part of their examination process, periodically review the Company’s ALLL. Such agencies may require the Company to increase the ALLL based on their analysis of information available to them at the time of their examination. Furthermore, the majority of the Company’s loans are secured by real estate in the State of New Jersey and the State of Pennsylvania. Future adjustments to the ALLL may be necessary due to economic factors impacting New Jersey and Pennsylvania real estate and the economy in general, as well as operating, regulatory and other conditions beyond the Company’s control.

 

At March 31, 2020 the ALLL amounted to approximately $10.6 million, or 1.04 percent of total loans. At September 30, 2019, the ALLL amounted to approximately $10.1 million, or 0.99 percent of total loans. The Company recorded a provision of $625,000 for loan losses during the quarter ended March 31, 2020 compared to $870,000 million for the quarter ended March 31, 2019. For the six months ended March 31, 2020 we recorded $2.8 million in provision for loan losses compared to $2.3 million for the six months ended March 31, 2019. The increase in the ALLL as a percent of gross loans was principally driven by COVID-19 and the economic impact it could have on the Company’s loan portfolio.

As previously disclosed in the Company’s 10-Q/A filed on April 16, 2020, subsequent to the Company’s submission on February 10, 2020 of the original Form 10-Q for the quarter ended December 31, 2019, additional information was received concerning a certain $9.1 million collateral dependent commercial loan relationship (the “Loan”), which was classified as an accruing TDR as of December 31, 2019.  In determining the ALLL and impairment on the Loan as of December 31, 2019, the Company followed guidance under ASC 310-10-35. When measuring impairment on an individual basis under ASC 310-10-35, the Company considered the fair value of the Loan’s collateral, given that, based on available information, the Loan was collateral dependent. The Company internally estimated the fair value of the collateral and recorded a specific reserve of $1.6 million during the three months ended December 31, 2019 pending the receipt of a third-party appraisal. The third-party appraisal was received in March 2020 and indicated that the collateral’s fair value is approximately $700,000 less than the Company’s previous estimate. No other factors were

-55-


 

identified that led the Company to believe the collateral value as of December 31, 2019 had changed. Based upon this additional information, the Company determined that a partial charge-off of the Loan to reflect the collateral’s true fair value was appropriate as of December 31, 2019.  Accordingly, the Company charged-off $2.3 million of the Loan, placed the Loan on non-accrual status, recorded an additional $2.2 million provision for loan losses for the three months ended December 31, 2019 and reversed approximately $24,000 of interest income (related to the December 31, 2019 principal and interest payment), crediting it to principal.

The net charge-offs were $31,000 and $2.3 million for the three and six months ended March 31, 2020, respectively, compared to $101,000 and $1.3 million in net charge-offs for the three and six months ended March 31, 2019, respectively. 

 

We will continue to experience some level of periodic charge-offs in the future as exit strategies are considered and executed, in

particular as it relates to our clients impacted by the COVID-19 pandemic. Loans with previously established specific reserves may ultimately result in a charge-off under a variety of scenarios.

The level of the ALLL for the respective periods of fiscal 2020 and fiscal 2019 reflects the credit quality within the loan portfolio, the loan volume recorded during the periods, the changing composition of the commercial and residential real estate loan portfolios and other related factors. In management’s view, the level of the ALLL at March 31, 2020 was adequate to cover losses inherent in the loan portfolio. Actual results could differ materially from management’s analysis, based principally upon the factors considered by management in establishing the ALLL.

-56-


 

Changes in the ALLL are presented in the following table for the periods indicated:

 

 

 

Six Months Ended March 31,

 

 

 

2020

 

 

2019

 

 

 

(Dollars in thousands)

 

Average loans outstanding

 

$

1,008,737

 

 

$

934,305

 

Total gross loans at end of period

 

$

1,012,631

 

 

$

1,006,652

 

Analysis of the Allowance of Loan Losses:

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

10,095

 

 

$

9,021

 

 

 

 

 

 

 

 

 

 

Charge-offs:

 

 

 

 

 

 

 

 

Residential Mortgage

 

 

-

 

 

 

17

 

Commercial:

 

 

 

 

 

 

 

 

Commercial real estate

 

 

2,288

 

 

 

1,376

 

Consumer:

 

 

 

 

 

 

 

 

Home equity lines of credit

 

 

62

 

 

 

-

 

Second mortgages

 

 

3

 

 

 

1

 

Other

 

 

-

 

 

 

37

 

Total charge-offs

 

 

2,353

 

 

 

1,431

 

Recoveries:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential Mortgage

 

 

23

 

 

 

79

 

Commercial:

 

 

 

 

 

 

 

 

Commercial real estate

 

 

2

 

 

 

4

 

Commercial and industrial

 

 

1

 

 

 

3

 

 

 

 

 

 

 

 

 

 

Consumer:

 

 

 

 

 

 

 

 

Home equity lines of credit

 

 

-

 

 

 

1

 

Second mortgages

 

 

12

 

 

 

14

 

Other

 

 

1

 

 

 

2

 

Total recoveries

 

 

39

 

 

 

103

 

Net charge-offs

 

 

2,314

 

 

 

1,328

 

Provision for loan losses

 

 

2,775

 

 

 

2,323

 

Balance at end of period

 

$

10,556

 

 

$

10,016

 

Ratios:

 

 

 

 

 

 

 

 

Ratio of allowance for loan losses to non-performing loans

 

 

119.64

%

 

 

411.84

%

Ratio of net charge-offs to average loans outstanding (1)

 

 

0.46

%

 

 

0.28

%

Ratio of net charge-offs to total allowance for loan losses

 

 

21.92

%

 

 

13.26

%

 

(1)

Annualized

Asset Quality

The Company manages asset quality and credit risk by maintaining diversification in its loan portfolio and through review processes that include analysis of credit requests and ongoing examination of outstanding loans, delinquencies, and potential problem loans, with particular attention to portfolio dynamics and mix. The Company strives to identify loans experiencing difficulty early enough to correct the problems, to record charge-offs promptly based on realistic assessments of current collateral values and cash flows, and to maintain an adequate ALLL at all times.

It is generally the Company’s policy to discontinue interest accruals once a loan is past due as to interest or principal payments for a period of 90 days. When a loan is placed on non-accrual status, interest accruals cease and uncollected accrued interest is reversed and charged against current income. Payments received on non-accrual loans are applied against principal. A loan may be restored to an accruing basis when it again becomes well-secured, all past due amounts have been collected and the borrower continues to make payments for the next six months on a timely basis. Accruing loans past due 90 days or more are generally well-secured and in the process of collection. For additional information regarding loans, see Note 8 of the Notes to the Unaudited Consolidated Financial Statements.

-57-


 

Non-Performing Assets and Troubled Debt Restructured Loans

Non-performing loans include non-accrual loans and accruing loans that are contractually past due 90 days or more. Non-accrual loans represent loans on which interest accruals have been suspended. In general, it is the policy of management to consider the charge-off of loans at the point they become past due in excess of 90 days, with the exception of loans that are both well-secured and in the process of collection. Non-performing assets include non-performing loans and OREO. TDR loans represent loans to borrowers experiencing financial difficulties on which a concession was granted, such as a reduction in interest rate which is lower than the current market rate for new debt with similar risks, or modified repayment terms, and are performing under the restructured terms. Such loans, as long as they are performing in accordance with their restructured terms, are not included within the Company’s non-performing loans. For additional information regarding loans, see Note 8 of the Notes to the Unaudited Consolidated Financial Statements.

The following table sets forth, as of the dates indicated, the amount of the Company’s non-accrual loans, accruing loans past due 90 days or more, OREO and performing TDR loans:

 

 

 

March 31,

2020

 

 

September 30,

2019

 

 

 

(In thousands)

 

Non-accruing loans:

 

 

 

 

 

 

 

 

Non-accrual loans

 

$

8,655

 

 

$

1,821

 

Accruing loans delinquent more than 90 days past due

 

 

168

 

 

 

502

 

Total non-performing loans

 

 

8,823

 

 

 

2,323

 

OREO

 

 

5,796

 

 

 

5,796

 

Total non-performing assets

 

$

14,619

 

 

$

8,119

 

TDR loans - performing

 

$

3,243

 

 

$

12,170

 

 

Non-accrual loans were $8.7 million at March 31, 2020, $1.8 million at September 30, 2019, and $2.4 million at March 31, 2019.  OREO was $5.8 million at March 31, 2020, September 30, 2019, and March 31, 2019.  Total performing TDR loans were $3.2 million at March 31, 2020, $12.2 million at September 30, 2019 and, $12.1 million at March 31, 2019. See discussion in Note 8 of the Notes to the Unaudited Consolidated Financial Statements for further information. 

At March 31, 2020, non-performing assets totaled $14.6 million, or 1.18 percent of total assets, as compared with $8.1 million, or 0.64 percent, at September 30, 2019 and $8.2 million, or 0.68 percent, at March 31, 2019.  

Overall credit quality in the Bank’s loan portfolio at March 31, 2020 remained relatively strong. Credit quality risk ratings include categories of “pass,” “special mention,” “substandard” and “doubtful.” Assets classified as “pass” are those protected by the current net worth and paying capacity of the obligor or by the value of the underlying collateral. Assets which do not currently expose the insured institution to sufficient risk to warrant classification as substandard or doubtful but possess certain identified weaknesses are required to be designated “special mention.” If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects. An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.”

At March 31, 2020, special mention loans were $34.7 million compared to $15.1 million at September 30, 2019. The increase in special mention loans was primarily due to two commercial loans in the amount of $13.4 million and one multi-family loan in the amount of $9.6 million, previously classified as management attention and moved to special mention during the second fiscal quarter 2020, partially offset by payoffs of one commercial loan and one multi-family loan in the amount of $2.8 million and $400,000, respectively, during the second fiscal quarter 2020. Substandard loans were $23.0 million and $14.8 million at March 31, 2020 and September 30, 2019, respectively. The increase in substandard loans is primarily due to one commercial real estate loan in the amount of $10.6 million, previously classified as management attention and moved to substandard during the second fiscal quarter partially offset by a $2.3 million partial charge-off of a loan that was classified as substandard. Our loans that have been identified as special mention or substandard are considered potential problem loans due to a variety of changing conditions affecting the credits, including general economic conditions and/or conditions applicable to the specific borrowers.  

At March 31, 2020, other than the loans set forth above, the Company is not aware of any loans which present serious doubts as to the ability of its borrowers to comply with present loan repayment terms and which are expected to fall into one of the categories set forth in the tables or descriptions above.

-58-


 

 

          

Recent Accounting Pronouncements

Note 2 discusses the expected impact of accounting pronouncements recently issued or proposed but not yet required to be adopted.

Asset and Liability Management

Asset and liability management encompasses an analysis of market risk, the control of interest rate risk (interest sensitivity management) and the ongoing maintenance and planning of liquidity and capital. The composition of the Company’s statement of condition is planned and monitored by the Asset and Liability Committee (“ALCO”). In general, management’s objective is to optimize net interest income and minimize market risk and interest rate risk by monitoring the components of the statement of condition and the interaction of interest rates.

Short-term interest rate exposure analysis is supplemented with an interest sensitivity gap model. The Company utilizes interest sensitivity analysis to measure the responsiveness of net interest income to changes in interest rate levels. Interest rate risk arises when an earning asset matures or when its interest rate changes in a time period different than that of a supporting interest-bearing liability, or when an interest-bearing liability matures or when its interest rate changes in a time period different than that of an earning asset that it supports. While the Company matches only a small portion of specific assets and liabilities, total earning assets and interest-bearing liabilities are grouped to determine the overall interest rate risk within a number of specific time frames. The difference between interest-sensitive assets and interest-sensitive liabilities is referred to as the interest sensitivity gap. At any given point in time, the Company may be in an asset-sensitive position, whereby its interest-sensitive assets exceed its interest-sensitive liabilities, or in a liability-sensitive position, whereby its interest-sensitive liabilities exceed its interest-sensitive assets, depending in part on management’s judgment as to projected interest rate trends.

The Company’s interest rate sensitivity position in each time frame may be expressed as assets less liabilities, as liabilities less assets, or as the ratio between rate sensitive assets (“RSA”) and rate sensitive liabilities (“RSL”). For example, a short-funded position (liabilities repricing before assets) would be expressed as a net negative position, when period gaps are computed by subtracting repricing liabilities from repricing assets. When using the ratio method, a RSA/RSL ratio of 1 indicates a balanced position, a ratio greater than 1 indicates an asset-sensitive position and a ratio less than 1 indicates a liability-sensitive position.

A negative gap and/or a rate sensitivity ratio less than 1 tends to expand net interest margins in a falling rate environment and reduce net interest margins in a rising rate environment. Conversely, when a positive gap occurs, generally margins expand in a rising rate environment and contract in a falling rate environment. From time to time, the Company may elect to deliberately mismatch liabilities and assets in a strategic gap position.

At March 31, 2020, the Company reflected a positive interest sensitivity gap with an interest sensitivity ratio of 1.49:1.00 at the cumulative one-year position.

Estimates of Fair Value

The estimation of fair value is significant to a number of the Company’s assets, including investment securities available-for-sale. These are all recorded at either fair value or the lower of cost or fair value. Fair values are volatile and may be influenced by a number of factors. Circumstances that could cause estimates of the fair value of certain assets and liabilities to change include a change in prepayment speeds, discount rates, or market interest rates. Fair values for most available-for-sale investment securities are based on quoted market prices. If quoted market prices are not available, fair values are based on judgments regarding future expected loss experience, current economic condition risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature, involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Impact of Inflation and Changing Prices

The financial statements and notes thereto presented elsewhere 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 the change in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of operations; unlike most industrial companies, nearly all of the Company’s assets and liabilities are monetary. As a result, interest rates have a greater impact on performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

-59-


 

Liquidity

The liquidity position of the Company is dependent primarily on successful management of the Bank’s assets and liabilities so as to meet the needs of both deposit and credit customers. Liquidity needs arise principally to accommodate possible deposit outflows and to meet customers’ requests for loans. Scheduled principal loan repayments, maturing investments, short-term liquid assets and deposit inflows, can satisfy such needs. The objective of liquidity management is to enable the Company to maintain sufficient liquidity to meet its obligations in a timely and cost-effective manner.

Management monitors current and projected cash flows, and adjusts positions as necessary to maintain adequate levels of liquidity. Under its liquidity risk management program, the Company regularly monitors correspondent bank funding exposure and credit exposure in accordance with guidelines issued by the banking regulatory authorities. Management uses a variety of potential funding sources and staggering maturities to reduce the risk of potential funding pressure. Management also maintains a detailed contingency funding plan designed to respond adequately to situations which could lead to stresses on liquidity. Management believes that the Company has the funding capacity to meet the liquidity needs arising from potential events. The Company maintains borrowing capacity through the FHLB of Pittsburgh secured with loans and marketable securities.

The Company’s primary sources of short-term liquidity consist of cash and cash equivalents and investment securities available-for-sale. At March 31, 2020, the Company had $126.1 million in cash and cash equivalent compared to $153.5 million at September 30, 2019. In addition, our available for sale investment securities amounted to $21.8 million at March 31, 2020 and $18.4 million at September 30, 2019.

Deposits

Total deposits decreased $37.9 million, or 4.0 percent, from $953.8 million at September 30, 2019 to $915.9 million at March 31, 2020. Total interest-bearing deposits decreased $25.1 million from $898.1 million at September 30, 2019 to $873.0 million at March 31, 2020. Interest-bearing demand, savings and time deposits under $100,000 decreased $6.4 million to a total of $690.2 million at March 31, 2020 as compared to $696.6 million at September 30, 2019. Time deposits $100,000 and over decreased $18.7 million as compared to September 30, 2019. Time deposits $100,000 and over represented 20.0 percent of total deposits at March 31, 2020 compared to 21.1 percent at September 30, 2019. We had brokered deposits totaling $16.1 million at March 31, 2020 compared to $73.1 million at September 30, 2019.

The Company continues to focus on the maintenance, development, and expansion of its deposit base. Management believes that the emphasis on serving the needs of our communities will provide a long-term relationship base that will allow the Company to efficiently compete for business in its market.

The following table depicts the Company’s deposits classified by interest rates, with percentages to total deposits, at March 31, 2020 and September 30, 2019:

 

 

 

March 31,

2020

 

 

September 30,

2019

 

 

Dollar

 

 

 

Amount

 

 

Percentage

 

 

Amount

 

 

Percentage

 

 

Change

 

Balances by types of deposit:

 

(Dollars in thousands)

 

        Savings

 

$

43,550

 

 

 

4.7

%

 

$

41,875

 

 

 

4.4

%

 

$

1,675

 

        Money market accounts

 

 

280,173

 

 

30.6

 

 

 

276,644

 

 

 

29.0

 

 

 

3,529

 

        Interest bearing demand

 

 

291,191

 

 

31.8

 

 

 

302,039

 

 

 

31.7

 

 

 

(10,848

)

        Non-interest bearing demand

 

 

42,874

 

 

4.7

 

 

 

55,684

 

 

 

5.8

 

 

 

(12,810

)

 

 

$

657,788

 

 

71.8

 

 

$

676,242

 

 

 

70.9

 

 

$

(18,454

)

Certificates of deposit

 

 

258,112

 

 

28.2

 

 

 

277,569

 

 

 

29.1

 

 

 

(19,457

)

Total

 

$

915,900

 

 

 

100.0

%

 

$

953,811

 

 

 

100.0

%

 

$

(37,911

)

 

Borrowings

Borrowings from the FHLB of Pittsburgh are available to supplement the Company’s liquidity position and, to the extent that maturing deposits do not remain with the Company, management may replace such funds with advances. As of March 31, 2020 and September 30, 2019, the Company’s outstanding balance of FHLB advances totaled $133.0 million. Of the $133.0 million in advances, $28.0 million represent long-term, fixed-rate advances maturing in 2020. At March 31, 2020, there were five short-term FHLB advances totaling $105.0 million of fixed-rate borrowings with rollover of 90 days.  

The Company did not purchase any securities sold under agreements to repurchase as a short-term funding source during the second fiscal quarter of 2020 or 2019. 

 

-60-


 

Cash Flows

The Consolidated Statements of Cash Flows present the changes in cash and cash equivalents resulting from the Company’s operating, investing and financing activities. During the six months ended March 31, 2020, cash and cash equivalents decreased by $27.5 million from the balance at September 30, 2019. Net cash of $9.8 million was provided by operating activities primarily due to an increase in other liabilities of $7.4 million, and $2.8 million of provision for loan losses.  The increase in other liabilities was primarily due to increased swap loan hedge liability of $4.0 million and increased operating lease liabilities of $3.0 million. Net cash provided by investing activities amounted to approximately $1.6 million. The decrease in net cash from financing activities of $38.9 million was primarily from the decrease in deposits of $37.9 million and the acquisition of treasury stock of $1.8 million.

Shareholders’ Equity

Total shareholders’ equity amounted to $143.2 million, or 11.6 percent of total assets, at March 31, 2020, compared to $142.5 million or 11.3 percent of total assets at September 30, 2019. Book value per common share was $18.67 at March 31, 2020, compared to $18.35 at September 30, 2019.

 

 

 

March 31,

2020

 

 

September 30,

2019

 

 

 

(In thousands, except for per share data)

 

Shareholders’ equity

 

 

143,150

 

 

 

142,508

 

Book value per common share

 

$

18.67

 

 

$

18.35

 

 

Capital

At March 31, 2020, the Bank’s common equity tier 1 ratio was 15.67 percent, tier 1 leverage ratio was 12.52 percent, tier 1 risk-based capital ratio was 15.67 percent and the total risk-based capital ratio was 16.73 percent.  At September 30, 2019, the Bank’s common equity tier 1 ratio was 15.38 percent, tier 1 leverage ratio was 12.23 percent, tier 1 risk-based capital ratio was 15.38 percent and the total risk-based capital ratio was 16.40 percent. At March 31, 2020, the Bank was in compliance with all applicable regulatory capital requirements.

At March 31, 2020, the Company’s common equity tier 1 ratio was 14.40 percent, tier 1 leverage ratio was 11.51 percent, tier 1 risk-based capital ratio was 14.40 percent and the total risk-based capital ratio was 17.93 percent.  At September 30, 2019, the Company’s common equity tier 1 ratio was 14.30 percent, tier 1 leverage ratio was 11.38 percent, tier 1 risk-based capital ratio was 14.30 percent and the total risk-based capital ratio was 17.79 percent.  At March 31, 2020, the Company was in compliance with all applicable regulatory capital requirements.

Information on Stock Repurchases

Information on Stock Repurchases is provided in “Part II. Other Information, Item 2, Unregistered Sales of Equity Securities and Use of Proceeds” herein.

Item 3 - Quantitative and Qualitative Disclosures About Market Risk

This Item has been omitted based on the Company’s status as a smaller reporting company.

 

Item 4.  Controls and Procedures

Our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report.  Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and regulations, and that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures.  Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of March 31, 2020.

Changes in Internal Controls

There were no changes in the Company’s internal controls over financial reporting during the three months ended March 31, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

-61-


 

PART II - OTHER INFORMATION

Item 1 - Legal Proceedings

The Company and its subsidiaries are subject to various legal actions arising in the normal course of business. In the opinion of management, the resolution of these legal actions is not expected to have a material adverse effect on the Company’s financial condition or results of operations.  

Item 1A - Risk Factors

The section titled “Risk Factors” in Part I, Item 1A of our 2019 Annual Report includes a discussion of the many risks and uncertainties we face, any one or more of which could have a material adverse effect on our business, results of operations, financial condition (including capital and liquidity), or prospects or the value of or return on an investment in the Company. The information presented below provides an update to, and should be read in conjunction with, the risk factors and other information contained in our 2019 Annual Report.

The recent global coronavirus (COVID-19) pandemic has led to periods of significant volatility in financial, commodities and other markets and could harm our business and results of operations.

In December 2019, a coronavirus (COVID-19) outbreak was reported in China, and, in March 2020, the World Health Organization declared it a pandemic. Since that time, the coronavirus has spread throughout the United States, including in the regions and communities in which the Company operates. In response, many state and local governments, including the Commonwealth of Pennsylvania and the State of New Jersey, have instituted emergency restrictions that have substantially limited the operation of non-essential businesses and the activities of individuals. These restrictions could result in significant adverse effects on our borrowers and many different types of small and mid-sized businesses within the Company’s client base, particularly those in the retail, hospitality and food and beverage industries, among many others, and has resulted in a significant number of layoffs and furloughs of employees nationwide and in the regions and communities in which we operate. The ultimate effect of COVID-19 on the local or broader economy is not known nor is the ultimate length of the restrictions described and any accompanying effects.

The effect of COVID-19 and related events, including those described above and those not yet known or knowable, could have a negative effect on the stock price, business prospects, financial condition and results of operations of the Company, including as a result of quarantines, market volatility, market downturns, changes in consumer behavior, business closures, deterioration in the credit quality of borrowers or the inability of borrowers to satisfy their obligations to the Company (and any related forbearances or restructurings that may be implemented), declines in the value of collateral securing outstanding loans, branch or office closures and business interruptions.

The outbreak has resulted in authorities implementing numerous measures to try to contain the virus, such as quarantines and shelter in place orders. These measures may remain in place for a significant period of time and adversely affect our business, operations and financial condition as well as the business, operations and financial conditions of our customers and business partners. The spread of the virus has also caused us to modify our business practices (including employee work locations and cancellation of physical participation in meetings) in ways that may be detrimental to our business (including working remotely and its attendant cybersecurity risks). We may take further actions as may be required by government authorities or that we determine are in the best interests of our employees and customers. There is no certainty that such measures will be sufficient to mitigate the risks posed by the virus or otherwise be satisfactory to government authorities.

We are subject to increasing credit risk as a result of the COVID-19 pandemic, which could adversely impact our profitability.

Our business depends on our ability to successfully measure and manage credit risk. As a commercial lender, we are exposed to the risk that the principal of, or interest on, a loan will not be paid timely or at all or that the value of any collateral supporting a loan will be insufficient to cover our outstanding exposure. In addition, we are exposed to risks with respect to the risks resulting from changes in economic and industry conditions and risks inherent in dealing with individual loans and borrowers. As the overall economic climate in the U.S., generally, and in our market areas specifically, experiences material disruption due to the COVID-19 pandemic, our borrowers may experience difficulties in repaying their loans and governmental actions may provide payment relief to borrowers affected by COVID-19 and preclude our ability to initiate foreclosure proceedings in certain circumstances and, as a result, the collateral we hold may decrease in value or become illiquid, and the level of our nonperforming loans, charge-offs and delinquencies could rise and require significant additional provisions for credit losses. Additional factors related to the credit quality of certain commercial real estate and multifamily residential loans include the duration of state and local moratoriums on evictions for non-payment of rent or other fees. The payment on these loans that are secured by income producing properties are typically dependent on the successful operation of the related real estate property and may subject us to risks from adverse conditions in the real estate market or the general economy.

The bank regulatory agencies and various governmental authorities are urging financial institutions to work prudently with

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borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19. We are actively working to support our borrowers to mitigate the impact of the COVID-19 pandemic on them and on our loan portfolio, including through loan modifications that defer payments for those who experienced a hardship as a result of the COVID-19 pandemic. Although recent regulatory guidance provides that such loan modifications are exempt from the calculation and reporting of TDRs and loan delinquencies, we cannot predict whether such loan modifications may ultimately have an adverse impact on our profitability in future periods. Our inability to successfully manage the increased credit risk caused by the COVID-19 pandemic could have a material adverse effect on our business, financial condition and results of operations.

Our participation in the SBA PPP loan program exposes us to risks related to noncompliance with the PPP, which could have a material adverse impact on our business, financial condition and results of operations.

The Company is a participating lender in the PPP, a loan program administered through the SBA, which was created to help eligible businesses, organizations and self-employed persons fund their operational costs during the COVID-19 pandemic. Under this program, the SBA guarantees 100% of the amounts loaned under the PPP. The Company may be exposed to credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced. If a deficiency is identified, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from the Company.

Interest rate volatility stemming from COVID-19 could negatively affect our net interest income, lending activities, deposits and profitability.

Our net interest income, lending activities, deposits and profitability could be negatively affected by volatility in interest rates caused by uncertainties stemming from COVID-19.  In March 2020, the Federal Reserve lowered the target range for the federal funds rate to a range from 0 to 0.25 percent, citing concerns about the impact of COVID-19 on markets and stress in the energy sector. A prolonged period of extremely volatile and unstable market conditions would likely increase our funding costs and negatively affect market risk mitigation strategies. Higher income volatility from changes in interest rates and spreads to benchmark indices could cause a loss of future net interest income and a decrease in current fair market values of our assets. Fluctuations in interest rates will impact both the level of income and expense recorded on most of our assets and liabilities and the market value of all interest-earning assets and interest-bearing liabilities, which in turn could have a material adverse effect on our net income, operating results, or financial condition.

Unpredictable future developments related to or resulting from the COVID-19 pandemic could materially and adversely affect our business and results of operations.

Given the ongoing and dynamic nature of the circumstances, it is not possible to predict the ultimate impact of the coronavirus outbreak on the stock price, business prospects, financial condition or results of operations of the Company. Any future development is highly uncertain and cannot be predicted, including the scope and duration of the pandemic, the effectiveness of our work from home arrangements, third party providers’ ability to support our operation, and any actions taken by governmental authorities and other third parties in response to the pandemic. We are continuing to monitor the COVID-19 pandemic and related risks, although the rapid development and fluidity of the situation precludes any specific prediction as to its ultimate impact on us. However, if the pandemic continues to spread or otherwise results in a continuation or worsening of the current economic and commercial environments, our business, financial condition, results of operations and cash flows as well as our regulatory capital and liquidity ratios could be materially adversely affected and many of the risks described in our 2019 Annual Report will be heightened.

 

 

 

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Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds

Information on Stock Repurchases

           On March 14, 2019, the Company’s Board of Directors approved a stock repurchase plan, under which the Company was authorized to repurchase up to 194,516 shares, or approximately 2.5 percent of the Company’s current outstanding common stock. On February 28, 2020, the Company’s Board of Directors extended the timeframe for its current stock repurchase program from March 31, 2020 to December 31, 2020. This repurchase authority may be exercised from time to time and in such amounts as market conditions warrant. The repurchases may be made on the open market, in block trades or otherwise. The program may be suspended or discontinued at any time. At March 31, 2020, the Company had 64,318 shares remaining in the repurchase plan.

 

 

 

 

 

 

 

 

 

 

Maximum

 

 

 

 

 

 

 

 

 

 

 

Number of Shares that

 

 

 

Number of

 

 

Average Price

 

 

May yet be Purchased

 

 

 

Shares

 

 

Paid Per

 

 

Under the Plan or

 

 

 

Repurchased (1)

 

 

Share (2)

 

 

Program

 

 

 

 

 

January 1, 2020 to

 

 

 

 

 

 

 

 

 

 

 

 

     January 31, 2020

 

 

-

 

 

$

-

 

 

 

177,653

 

February 1, 2020 to

 

 

 

 

 

 

 

 

 

 

 

 

     February 29, 2020

 

 

1,200

 

 

$

19.58

 

 

 

176,453

 

March 1, 2020 to

 

 

 

 

 

 

 

 

 

 

 

 

     March 31, 2020

 

 

112,135

 

 

$

15.64

 

 

 

64,318

 

Total for the quarter ended March 31, 2020

 

 

113,335

 

 

$

15.68

 

 

 

 

 

_____________

(1)

On February 28, 2020, the Company’s Board of Directors approved a stock repurchase plan, under which, the Company was authorized to repurchase up to 194,516 shares, or approximately 2.5 percent of the Company’s current outstanding common stock, as conditions warrant, through December 31, 2020.

(2)

 

Average price paid per share includes commissions and is rounded to the nearest two decimal places.

Item 3 - Defaults Upon Senior Securities

None.

Item 4 - Mine Safety Disclosure

Not applicable.

Item 5 - Other Information

None.

Item 6 - Exhibits

 

3.1

 

Amended and Restated Articles of Incorporation of Malvern Bancorp, Inc.(1)

3.2

 

Amended and Restated Bylaws of Malvern Bancorp, Inc.(2)

31.1

 

Rule 13a-14(a)/15d-14(a) Section 302 Certification

31.2

 

Rule 13a-14(a)/15d-14(a) Section 302 Certification

32.0

 

Section 1350 Certification

 

101.INS

 

XBRL Instance Document.

101.SCH

 

XBRL Taxonomy Extension Schema Document.

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document.

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document.

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document.

101.DEF

 

XBRL Taxonomy Extension Definitions Linkbase Document.

 

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(1)

Incorporated by reference from Exhibit 3.1 to the Current Report on Form 8-K of Malvern Bancorp, Inc. filed with the SEC on February 17, 2017.

(2)

Incorporated by reference from Exhibit 3.2 to the Current Report on Form 8-K of Malvern Bancorp, Inc. filed with the SEC on February 17, 2017

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

MALVERN BANCORP, INC.

 

 

 

 

 

 

 

 

 

May 11, 2020

By:

/s/ Anthony C. Weagley

 

 

 

Anthony C. Weagley

 

 

 

President and Chief Executive Officer

 

 

 

 

 

 

 

 

 

May 11, 2020

By:

/s/ Joseph D. Gangemi

 

 

 

Joseph D. Gangemi

 

 

 

Executive Vice President and Chief Financial

 

 

 

Officer

 

 

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