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MALVERN BANCORP, INC. - Quarter Report: 2021 December (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 December 31, 2021

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 East 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:  N/A

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

 

Common Stock, par value $0.01:

7,621,100 shares

(Title of Class)

(Outstanding as of February 14, 2022)

 

 

 


 

 

Table of Contents

 

 

 

Page

 

 

 

PART I – FINANCIAL INFORMATION

3

 

 

 

Item  1.

Financial Statements

4

 

Consolidated Statements of Financial Condition at December 31, 2021 (unaudited) and September 30, 2021

4

 

Consolidated Statements of Operations for the three months ended December 31, 2021 and 2020 (unaudited)

5

 

Consolidated Statements of Comprehensive Income for the three months ended December 31, 2021 and 2020 (unaudited)

6

 

Consolidated Statements of Changes in Shareholders’ Equity for the three months ended December 31, 2021 and 2020 (unaudited)

7

 

Consolidated Statements of Cash Flows for the three months ended December 31, 2021 and 2020 (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

60

 

 

 

Item  4.

Controls and Procedures

60

 

 

 

PART II – OTHER INFORMATION.

61

 

 

 

Item  1.

Legal Proceedings

61

 

 

 

Item  1A.

Risk Factors

61

 

 

 

Item  2.

Unregistered Sales of Equity Securities and Use of Proceeds

61

 

 

 

Item  3.

Default Upon Senior Securities

61

 

 

 

Item  4.

Mine Safety Disclosure

61

 

 

 

Item  5.

Other Information

61

 

 

 

Item  6.

Exhibits

61

 

 

 

SIGNATURES

62

 

 

 


 

 

PART I – FINANCIAL INFORMATION

The following (a) consolidated statement of financial condition as of September 30, 2021, which has been derived from audited financial statements, and (b) 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 months ended December 31, 2021 are not necessarily indicative of the results that may be expected for the full year ending September 30, 2022, or for any interim period. The Malvern Bancorp, Inc. Annual Report on Form 10-K for the fiscal year ended September 30, 2021, filed with the Securities and Exchange Commission (the “SEC”) on January 10, 2022 (the “2021 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

 

 

 

December 31,

2021

 

 

September 30,

2021

 

 

 

(Unaudited)

 

 

 

 

 

 

 

(In thousands, except share data)

 

ASSETS

 

 

 

 

 

 

 

 

Cash and due from depository institutions

 

 

104,568

 

 

 

99,670

 

Interest bearing deposits in depository institutions

 

 

30,336

 

 

 

36,920

 

Cash and Cash Equivalents

 

 

134,904

 

 

 

136,590

 

Investment securities available for sale, at fair value (amortized cost of $41,810

   and $40,756 at December 31, 2021 and September 30, 2021, respectively)

 

 

41,718

 

 

 

40,813

 

Equity Securities

 

 

1,491

 

 

 

1,500

 

Investment securities held to maturity (fair value of $39,316 and $28,913 at

   December 31, 2021 and September 30, 2020, respectively)

 

 

39,045

 

 

 

28,507

 

Restricted stock, at cost

 

 

6,294

 

 

 

7,776

 

Loans Held-for-sale

 

 

13,616

 

 

 

33,199

 

Loans receivable, net of allowance for loan losses of $10,037 and $11,472

   respectively

 

 

858,203

 

 

 

902,981

 

Other real estate owned

 

 

4,961

 

 

 

4,961

 

Accrued interest receivable

 

 

3,394

 

 

 

3,512

 

Operating lease right-of-use assets

 

 

1,663

 

 

 

1,796

 

Property and equipment, net

 

 

5,635

 

 

 

5,777

 

Deferred income taxes

 

 

3,461

 

 

 

3,530

 

Bank-owned life insurance

 

 

26,224

 

 

 

26,056

 

Other assets

 

 

12,591

 

 

 

12,145

 

Total Assets

 

$

1,153,200

 

 

$

1,209,143

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

Deposits-non-interest-bearing

 

 

60,320

 

 

 

53,849

 

Deposits-interest-bearing

 

 

852,368

 

 

 

884,310

 

Total Deposits

 

 

912,688

 

 

 

938,159

 

FHLB advances

 

 

60,000

 

 

 

90,000

 

Other short-term borrowing

 

 

 

 

Subordinated debt

 

 

24,974

 

 

 

24,934

 

Advances from borrowers for taxes and insurance

 

 

1,583

 

 

 

1,022

 

Accrued interest payable

 

779

 

 

572

 

Operating lease liabilities

 

 

1,691

 

 

 

1,830

 

Other liabilities

 

 

6,928

 

 

 

10,458

 

Total Liabilities

 

 

1,008,643

 

 

 

1,066,975

 

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; 7,815,616 and

   7,621,100 shares issued and outstanding, respectively, at December 31, 2021

   and 7,816,832 and 7,622,316 shares issued and outstanding, respectively, at

   September 30, 2021

 

 

76

 

 

 

76

 

Additional paid-in-capital

 

 

85,599

 

 

 

85,524

 

Retained earnings

 

 

62,313

 

 

 

60,296

 

Unearned Employee Stock Ownership Plan (ESOP) shares

 

 

(865

)

 

 

(901

)

Accumulated other comprehensive income

 

 

297

 

 

 

36

 

Treasury stock, at cost: 194,516 shares at December 31, 2021 and September 30,

   2021

 

 

(2,863

)

 

 

(2,863

)

Total Shareholders’ Equity

 

 

144,557

 

 

 

142,168

 

Total Liabilities and Shareholders’ Equity

 

$

1,153,200

 

 

$

1,209,143

 

 

See accompanying notes to unaudited consolidated financial statements.

-4-


 

MALVERN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

 

Three Months Ended December 31,

 

 

 

 

2021

 

 

2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands, except share data)

Interest and Dividend Income

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

8,228

 

 

$

10,076

 

 

Investment securities, taxable

 

 

455

 

 

 

347

 

 

Investment securities, tax-exempt

 

 

36

 

 

 

24

 

 

Dividends, restricted stock

 

 

91

 

 

 

141

 

 

Interest-bearing cash accounts

 

 

13

 

 

 

8

 

 

Total Interest and Dividend Income

 

 

8,823

 

 

 

10,596

 

 

Interest Expense

 

 

 

 

 

 

 

 

 

Deposits

 

 

1,045

 

 

 

2,257

 

 

Short-term borrowings

 

 

-

 

 

 

45

 

 

Long-term borrowings

 

 

237

 

 

 

607

 

 

Subordinated debt

 

 

383

 

 

 

383

 

 

Total Interest Expense

 

 

1,665

 

 

 

3,292

 

 

Net Interest Income

 

 

7,158

 

 

 

7,304

 

 

Provision for Loan Losses

 

 

-

 

 

 

550

 

 

Net Interest Income after Provision for Loan losses

 

 

7,158

 

 

 

6,754

 

 

Other Income

 

 

 

 

 

 

 

 

 

Service charges and other fees

 

 

454

 

 

 

247

 

 

Rental income

 

 

52

 

 

 

54

 

 

Net gains on sale and call of investments

 

 

-

 

 

 

355

 

 

Net gains on sale of loans

 

 

52

 

 

 

404

 

 

Earnings on bank-owned life insurance

 

 

169

 

 

 

164

 

 

Total Other Income

 

 

727

 

 

 

1,224

 

 

Other Expenses

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

2,295

 

 

 

2,272

 

 

Occupancy expense

 

 

515

 

 

 

542

 

 

Federal deposit insurance premium

 

 

76

 

 

 

76

 

 

Advertising

 

 

32

 

 

 

32

 

 

Data processing

 

 

320

 

 

 

328

 

 

Professional fees

 

 

1,055

 

 

 

663

 

 

Other real estate owned expense, net

 

 

5

 

 

 

28

 

 

Pennsylvania shares tax

 

 

170

 

 

 

170

 

 

Other operating expenses

 

 

760

 

 

 

861

 

 

Total Other Expenses

 

 

5,228

 

 

 

4,972

 

 

Income before income tax expense

 

 

2,657

 

 

 

3,006

 

 

Income tax expense

 

 

640

 

 

 

733

 

 

Net Income

 

$

2,017

 

 

$

2,273

 

 

Earnings Per Common Share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.27

 

 

$

0.30

 

 

Diluted

 

$

0.27

 

 

$

0.30

 

 

Weighted Average Common Shares Outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

 

7,551,606

 

 

 

7,525,808

 

 

Diluted

 

 

7,553,208

 

 

 

7,526,376

 

 

 

See accompanying notes to unaudited consolidated financial statements.

-5-


 

MALVERN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

 

 

Three Months Ended December 31,

 

 

 

 

2021

 

 

2020

 

 

 

 

(In thousands)

Net Income

 

$

2,017

 

 

$

2,273

 

 

Other Comprehensive Income, Net of Tax:

 

 

 

 

 

 

 

 

 

Unrealized holding (losses) gains on available-for-sale securities

 

 

(149

)

 

 

457

 

 

Tax effect

 

 

31

 

 

 

(96

)

 

Net of tax amount

 

 

(118

)

 

 

361

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

-

 

 

 

(355

)

 

Tax effect

 

 

-

 

 

 

74

 

 

Net of tax amount

 

 

-

 

 

 

(281

)

 

 

 

 

 

 

 

 

 

 

 

  Adjustment for loss recorded on replacement of derivative

 

 

-

 

 

 

(2

)

 

 

 

 

 

 

 

 

 

 

 

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

 

 

2

 

 

 

1

 

 

Tax effect

 

 

(1

)

 

 

-

 

 

Net of tax amount

 

 

1

 

 

 

1

 

 

Fair value adjustments on derivatives

 

 

479

 

 

 

273

 

 

Tax effect

 

 

(101

)

 

 

(57

)

 

Net of tax amount

 

 

378

 

 

 

216

 

 

Total other comprehensive income

 

 

261

 

 

 

295

 

 

Total comprehensive income

 

$

2,278

 

 

$

2,568

 

 

 

 

(1)

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

 

(2)

Amounts are included in interest and dividends on investment securities on the Consolidated Statements 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, 2020

 

 

76

 

 

 

85,127

 

 

 

60,388

 

 

 

(1,047

)

 

 

(1,088

)

 

 

(2,863

)

 

 

140,593

 

Net Income

 

 

-

 

 

 

-

 

 

 

2,273

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,273

 

Other comprehensive income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

295

 

 

 

-

 

 

 

295

 

Committed to be released ESOP

   shares (3,600 shares)

 

 

-

 

 

 

16

 

 

 

-

 

 

 

37

 

 

 

-

 

 

 

-

 

 

 

53

 

Stock based compensation

 

 

-

 

 

 

52

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

52

 

Balance, December 31, 2020

 

 

76

 

 

 

85,195

 

 

 

62,661

 

 

 

(1,010

)

 

 

(793

)

 

 

(2,863

)

 

 

143,266

 

Balance, October 1, 2021

 

 

76

 

 

 

85,524

 

 

 

60,296

 

 

 

(901

)

 

 

36

 

 

 

(2,863

)

 

 

142,168

 

Net Income

 

 

-

 

 

 

-

 

 

 

2,017

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,017

 

Other comprehensive income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

261

 

 

 

-

 

 

 

261

 

Committed to be released ESOP

   shares (3,600 shares)

 

 

-

 

 

 

23

 

 

 

-

 

 

 

36

 

 

 

-

 

 

 

-

 

 

 

59

 

Stock based compensation

 

 

-

 

 

 

52

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

52

 

Balance, December 31, 2021

 

$

76

 

 

$

85,599

 

 

$

62,313

 

 

$

(865

)

 

$

297

 

 

$

(2,863

)

 

$

144,557

 

 

See accompanying notes to unaudited consolidated financial statements.

 

-7-


 

 

MALVERN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Three Months Ended December 31,

 

 

 

2021

 

 

2020

 

 

 

(In thousands)

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

 

Net income

 

$

2,017

 

 

$

2,273

 

Adjustments to reconcile net income to net cash (used in) provided by

   operating activities:

 

 

 

 

 

 

 

 

Depreciation expense

 

 

159

 

 

 

170

 

Provision for loan losses

 

 

-

 

 

 

550

 

Deferred income tax expense

 

 

69

 

 

 

79

 

ESOP expense

 

 

59

 

 

 

53

 

Stock based compensation

 

 

52

 

 

 

52

 

Amortization of premiums and discounts on investments securities, net

 

 

66

 

 

 

95

 

(Accretion) Amortization of loan origination fees and costs

 

 

(23

)

 

 

1,218

 

(Accretion) Amortization of mortgage servicing rights

 

 

(3

)

 

 

24

 

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

 

 

-

 

 

 

(355

)

Net gain on sale of secondary market loans

 

 

(52

)

 

 

(404

)

Proceeds from sale of secondary market loans

 

 

2,285

 

 

 

6,632

 

Originations of  secondary market loans

 

 

(2,233

)

 

 

(6,228

)

Earnings on bank-owned life insurance

 

 

(169

)

 

 

(164

)

Decrease (increase) in accrued interest receivable

 

 

118

 

 

 

(374

)

Increase in accrued interest payable

 

 

207

 

 

 

350

 

Operating lease liability payments

 

 

(149

)

 

 

(172

)

Decrease in other liabilities

 

 

(3,670

)

 

 

(888

)

Decrease in other assets

 

 

261

 

 

 

1,846

 

Amortization of subordinated debt

 

 

40

 

 

 

40

 

Net Cash (Used in) Provided by Operating Activities

 

 

(966

)

 

 

4,797

 

 

 

 

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

 

Investment securities available-for-sale:

 

 

 

 

 

 

 

 

Purchases

 

 

(2,000

)

 

 

(10,500

)

Sales

 

 

-

 

 

 

6,830

 

Maturities, calls and principal repayments

 

 

945

 

 

 

428

 

Investment securities held-to-maturity:

 

 

 

 

 

 

 

 

Purchases

 

 

(13,711

)

 

 

-

 

Maturities, calls and principal repayments

 

 

3,109

 

 

 

730

 

Net decrease in loans

 

 

64,383

 

 

 

34,779

 

Net decrease in restricted stock

 

 

1,482

 

 

 

295

 

Purchase of property and equipment

 

 

(18

)

 

 

(50

)

Net Cash Provided by Investing Activities

 

 

54,190

 

 

 

32,512

 

Cash Flows from Financing Activities

 

 

 

 

 

 

 

 

Net (decrease) increase in deposits

 

 

(25,471

)

 

 

9,559

 

Proceeds for long-term borrowings

 

 

-

 

 

 

90,000

 

Repayment of long-term borrowings

 

 

(30,000

)

 

 

(90,000

)

Repayment of secured borrowings

 

 

-

 

 

 

(4,225

)

Proceeds of other borrowed money

 

 

-

 

 

 

5,000

 

Increase in advances from borrowers for taxes and insurance

 

 

561

 

 

 

140

 

Net Cash (Used in) Provided by Financing Activities

 

 

(54,910

)

 

 

10,474

 

Net  (Decrease) Increase in Cash and Cash Equivalents

 

 

(1,686

)

 

 

47,783

 

Cash and Cash Equivalents - Beginning

 

 

136,590

 

 

 

61,439

 

Cash and Cash Equivalents - Ending

 

$

134,902

 

 

$

109,222

 

Supplemental Cash Flows Information

 

 

 

 

 

 

 

 

Interest paid

 

$

1,458

 

 

$

2,942

 

 

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 bank holding company registered 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.

The Company’s primary business is the ownership and operation of the Bank.  The Bank’s principal business consists of attracting deposits from businesses and the general public and investing those deposits, together with borrowings and funds generated from operations, in commercial and multi-family real estate loans, one-to-four family residential real estate loans, construction and development loans, commercial business loans, home equity loans, lines of credit, and other consumer loans. The Company also invests in and maintains a portfolio of investment securities, primarily comprised of corporate debt securities, U.S. government agencies, mortgage-backed securities, and state and municipal obligations. Malvern Bank is 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’s primary market niche is providing personalized service to its client base.  

The Bank conducts business from its headquarters in Paoli, Pennsylvania, a suburb of Philadelphia, and through its nine other banking locations in Chester and Delaware counties, Pennsylvania, Morristown, New Jersey, its New Jersey regional headquarters, and Palm Beach, Florida. The Bank also maintains representative offices in Wellington, Florida and Allentown, Pennsylvania.  

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.

As used in this Quarterly Report on Form 10-Q, the terms “Malvern”, “the Company”, “registrant”, “we”, “us”, and “our” mean Malvern Bancorp, Inc. and its subsidiaries, on a consolidated basis, unless the context indicates otherwise.

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 December 31, 2021 and September 30, 2021 and the results of operations for the three months ended December 31, 2021 and 2020, and cash flows for the three months ended December 31, 2021 and 2020. 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 2021 Annual Report filed with the SEC. The consolidated statements of operations for the three months ended December 31, 2021 and the consolidated statements of cash flows for the three months ended December 31, 2021 are not necessarily indicative of the results of operations or cash flows for the full year ending September 30, 2022 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.

 

 

Operating, Accounting and Reporting Considerations related to COVID-19

 

The COVID-19 pandemic has and continues to negatively impact 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, as expanded by the Economic Aid to Hard-Hit Small Business, Nonprofits and Venues Act, enacted December 27, 2020 and the American Rescue Plan Act, enacted March 11, 2021, provided more than $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.  Under Section

-9-


 

4013 of the CARES Act, as amended, and based upon regulatory guidance promulgated by federal banking regulators, qualifying short-term loan modifications resulting in payment deferrals that are attributable to the adverse impact of COVID-19 are not considered to be troubled debt restructurings (“TDRs”).  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 TDR and (2) any determination that such loan modifications would be considered a TDR, including the related impairment for accounting purposes.  The suspension is applicable for the term of the loan modification that occurs during the applicable period for a loan that was not more than 30 days past due as of December 31, 2019. The suspension is not applicable to any adverse impact on the credit of a borrower that is not related to the COVID-19 pandemic.

 

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

 

 

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 the Financial Accounting Standards Board (“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.  Loan modifications were made in accordance with Section 4013 of the CARES Act and the Interagency Statement on Loan Modifications and Reporting for Financial Institutions working with customers affected by COVID-19 and therefore were not classified as TDRs.

 

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.

 

 On December 27, 2020, the 2021 Consolidated Appropriations Act was signed into law. The $900 billion relief package included legislation that extends certain relief provisions of the CARES Act that were set to expire on December 31, 2020. This legislation extended this relief to the earlier of 60 days after the national emergency declared by the President is terminated or January 1, 2022.

 

Recent Accounting Pronouncements Yet to Be Adopted

 

Reference Rate Reform. In March 2020, the FASB issued Accounting Standards Update (“ASU”) No. 2020-04, Reference Rate Reform (Topic 848). The guidance allows for companies to: (1) account for certain contract modifications as a continuation of the existing contract without additional analysis; (2) continue hedge accounting when certain critical terms of a hedging relationship change and assess effectiveness in ways that disregard certain potential sources of ineffectiveness; and (3) make a one-time sale and/or transfer of certain debt securities from held-to-maturity to available-for-sale or trading. This ASU is available for adoption by the Company and applies prospectively to contract modifications and hedging relationships.  The one-time election to sell and/or transfer debt securities classified as held-to-maturity may be made at any time. ASU 2020-04 is effective March 12, 2020, through December 31, 2022.  The Company anticipates adopting this ASU and will continue to analyze the provisions of the ASU in connection with ongoing procedures to monitor the work of the Alternative Rates Committee of the FRB and Federal Reserve Bank of New York in identifying an alternative U.S. dollar reference interest rate. It is too early to predict a new rate index replacement, but we anticipate that it will be the Secured Overnight Financing Rate (“SOFR”).

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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 Company plans to adopt ASU 2019-12 during the current fiscal year and does not expect it to have a material impact on its consolidated financial statements or disclosure.

 

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”).  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.  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 impact on the consolidated earnings, financial position, and cash flows of the Company upon adoption of this ASU are currently unknown. 

   

 

 

 


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Note 3 – Risks and Uncertainties

 

On March 11, 2020, the World Health Organization declared the outbreak of COVID-19 a global pandemic. Since then, the COVID-19 pandemic has continued to evolve and mutate, including through its variants, and has adversely affected, and may continue to adversely affect, local, national and global economic activity. Actions taken to help mitigate the spread of COVID-19 include restrictions on travel, localized quarantines, and government-mandated closures of certain businesses. While certain of these restrictions have been loosened, these same or new restrictions may be implemented again. Although vaccines for COVID-19 have largely been made available in the U.S., the ultimate efficacy of the vaccines will depend on various factors, including, without limitation, the number of people who receive the vaccines as well as the vaccines’ effectiveness against contracting and spreading COVID-19 and any of its existing or new variants. The spread of the outbreak has caused significant disruptions to the U.S. economy and has disrupted the financial industry and real estate markets in the areas in which the Company operates, and it may continue to do so.

 

On March 3, 2020, the Federal Open Market Committee reduced the targeted federal funds interest rate range by 50 basis points to 1.00 percent to 1.25 percent. This range was further reduced to 0 percent to 0.25 percent on March 16, 2020, and as of September 30, 2021 the range was 0 percent to 0.25 percent. As mentioned in further detail in this report, our net interest income is influenced by both the pricing and mix of our interest-earning assets and our interest-bearing liabilities which, in turn, are impacted by such external factors as the monetary policy of the Federal Open Market Committee.  We are unable to predict changes in market interest rates, including the targeted federal funds interest rate, which are affected by many factors beyond our control.

 

On March 27, 2020, the CARES Act was enacted to, among other things, provide emergency assistance for individuals, families and businesses affected by the COVID-19 pandemic. Although the CARES Act provided some relief to individuals, families and businesses, the negative impact of COVID-19 remains. These reductions in interest rates and other effects of the COVID-19 pandemic may materially and adversely affect the Company’s financial condition and results of operations in future periods. It is unknown how long the adverse conditions associated with the COVID-19 pandemic will last and what the complete financial effect will be to the Company. It is possible that estimates made in the financial statements could be materially and adversely impacted as a result of these conditions, including, without limitation, estimates regarding expected loan losses on loans receivable, market values of loans held-for-sale, and other-than-temporary impairment of investment securities.  

 

         On December 27, 2020, the 2021 Consolidated Appropriations Act was signed into law. The $900 billion relief package included legislation that extended certain relief provisions of the CARES Act that were set to expire on December 31, 2020. This legislation extended this relief to the earlier of 60 days after the national emergency declared by the President is terminated or January 1, 2022.     

 

 

 

 


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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 revenue 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 non-interest income for the periods presented:

 

 

 

Three Months Ended December 31,

 

 

 

2021

 

 

2020

 

 

 

(In thousands)

 

Rental income

 

$

52

 

 

$

54

 

Net gains on sale and call of investments

 

 

-

 

 

 

355

 

Net gains on sale of loans

 

 

52

 

 

 

404

 

Earnings on bank-owned life insurance

 

 

169

 

 

 

164

 

Non-interest income within the scope of other GAAP topics

 

$

273

 

 

$

977

 

ATM fees

 

$

2

 

 

$

3

 

Credit card fee income

 

 

7

 

 

 

5

 

DDA fee income

 

 

26

 

 

 

22

 

DDA service fees

 

 

25

 

 

 

24

 

Debit card fees

 

 

73

 

 

 

64

 

Other loan fee income

 

 

263

 

 

 

72

 

Other fee income

 

 

56

 

 

 

55

 

Other non-interest income

 

 

2

 

 

 

2

 

Non-interest income from contracts with customers

 

$

454

 

 

$

247

 

Total Non-interest Income

 

$

727

 

 

$

1,224

 

 

 

 


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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 that would arise from the exercise of dilutive securities, reduced by unearned ESOP shares.  During the three months ended December 31, 2021, there were no restricted shares issued or stock options granted. There were no restricted shares or stock options granted during the three months ended December 31, 2020.   

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

 

 

 

Three Months Ended December 31,

 

 

 

2021

 

 

2020

 

 

 

(In thousands, except share and per share data)

 

Net Income

 

$

2,017

 

 

$

2,273

 

Weighted average shares outstanding

 

 

7,621,351

 

 

 

7,609,953

 

Average unearned ESOP shares

 

 

(69,745

)

 

 

(84,145

)

Basic weighted average shares outstanding

 

 

7,551,606

 

 

 

7,525,808

 

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

 

 

1,602

 

 

 

568

 

Diluted weighted average common shares outstanding

 

 

7,553,208

 

 

 

7,526,376

 

Earnings per common share:

 

 

 

 

 

 

 

 

Basic

 

$

0.27

 

 

$

0.30

 

Diluted

 

$

0.27

 

 

$

0.30

 

 

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 compensation expense equal to the fair value of he 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, which bears an interest rate of 5%, is being repaid in quarterly installments through 2026 principally from the Bank’s contributions to the ESOP.  Shares are released to participants proportionately as the ESOP loan is repaid. During each of the three months ended December 31, 2021 and 2020, there were 3,600 shares  committed to be released. At December 31, 2021, there were 67,965 unallocated shares and 191,253 allocated shares held by the ESOP. The unallocated shares had an aggregate fair value of approximately $1.1 million at December 31, 2021.

Note 7 - Investment Securities

The Company’s investment securities are classified as available-for-sale or held-to-maturity at December 31, 2021 and at September 30, 2021. 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.  Equity securities are stated at fair value with any changes in fair value reported in non-interest income.

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 December 31, 2021 and September 30, 2021:

 

 

 

December 31, 2021

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

 

 

(In thousands)

 

Investment Securities Available-for-Sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

5,000

 

 

$

-

 

 

$

(42

)

 

$

4,958

 

State and municipal obligations

 

 

1,821

 

 

 

20

 

 

 

-

 

 

 

1,841

 

Single issuer trust preferred security

 

 

1,000

 

 

 

-

 

 

 

(122

)

 

 

878

 

Corporate debt securities

 

 

33,989

 

 

 

214

 

 

 

(162

)

 

 

34,041

 

Total

 

$

41,810

 

 

$

234

 

 

$

(326

)

 

$

41,718

 

Investment Securities Held-to-Maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

17,500

 

 

$

-

 

 

$

(70

)

 

$

17,430

 

State and municipal obligations

 

 

9,737

 

 

 

113

 

 

 

-

 

 

 

9,850

 

Corporate debt securities

 

 

3,353

 

 

 

210

 

 

 

-

 

 

 

3,563

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage Backed Security ("MBS"), fixed-rate

 

 

2,405

 

 

 

-

 

 

 

(22

)

 

 

2,383

 

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

 

 

6,050

 

 

 

42

 

 

 

(2

)

 

 

6,090

 

        Total

 

$

39,045

 

 

$

365

 

 

$

(94

)

 

$

39,316

 

Equity Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mutual Funds

 

$

1,500

 

 

$

-

 

 

$

(9

)

 

$

1,491

 

Total equity securities

 

$

1,500

 

 

$

-

 

 

$

(9

)

 

$

1,491

 

Total investment securities

 

$

82,355

 

 

$

599

 

 

$

(429

)

 

$

82,525

 

 

 

 

September 30, 2021

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

 

 

Fair

Value

 

 

 

(In thousands)

 

Investment Securities Available-for-Sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

5,000

 

 

$

-

 

 

$

(7

)

 

 

 

$

4,993

 

State and municipal obligations

 

 

2,767

 

 

 

1

 

 

 

(3

)

 

 

 

 

2,765

 

Single issuer trust preferred security

 

 

1,000

 

 

 

-

 

 

 

(125

)

 

 

 

 

875

 

Corporate debt securities

 

 

31,989

 

 

 

243

 

 

 

(52

)

 

 

 

 

32,180

 

Total

 

$

40,756

 

 

$

244

 

 

$

(187

)

 

 

 

$

40,813

 

Investment Securities Held-to-Maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

10,000

 

 

$

11

 

 

$

-

 

 

 

 

$

10,011

 

State and municipal obligations

 

$

6,062

 

 

$

104

 

 

$

(49

)

 

 

 

$

6,117

 

Corporate debt securities

 

 

3,383

 

 

 

224

 

 

 

-

 

 

 

 

 

3,607

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities:

 

 

2,461

 

 

 

-

 

 

 

(13

)

 

 

 

 

2,448

 

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

 

 

6,601

 

 

 

129

 

 

 

-

 

 

 

 

 

6,730

 

        Total

 

$

28,507

 

 

$

468

 

 

$

(62

)

 

 

 

$

28,913

 

Equity Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mutual Funds

 

$

1,500

 

 

$

-

 

 

$

-

 

 

#

 

$

1,500

 

Total equity securities

 

$

1,500

 

 

$

-

 

 

$

-

 

 

 

 

$

1,500

 

Total investment securities

 

$

70,763

 

 

$

712

 

 

$

(249

)

 

 

 

$

71,226

 

 

For the three months ended December 31, 2020, proceeds of available-for-sale investment securities sold amounted to approximately $6.8 million.  There were gains of approximately $355,000 associated with these sales.  There were no sales of available for sale securities for the three months ended December 31, 2021.           

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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 December 31, 2021 and September 30, 2021:

 

 

 

December 31, 2021

 

 

 

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

 

$

4,957

 

 

$

(42

)

 

$

-

 

 

$

-

 

 

$

4,957

 

 

$

(42

)

Single issuer trust preferred security

 

 

-

 

 

 

-

 

 

 

878

 

 

 

(122

)

 

 

878

 

 

 

(122

)

Corporate debt securities

 

 

12,873

 

 

 

(127

)

 

 

1,465

 

 

 

(35

)

 

 

14,338

 

 

 

(162

)

Total investment securities

 

$

17,830

 

 

$

(169

)

 

$

2,343

 

 

$

(157

)

 

$

20,173

 

 

$

(326

)

 

 

 

September 30, 2021

 

 

 

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

 

$

4,993

 

 

$

(7

)

 

$

-

 

 

$

-

 

 

$

4,993

 

 

$

(7

)

State and municipal obligations

 

 

1,819

 

 

 

(3

)

 

 

-

 

 

 

-

 

 

 

1,819

 

 

 

(3

)

Single issuer trust preferred security                

 

 

             -

 

 

 

             -

 

 

 

         875

 

 

 

        (125

)

 

 

          875

 

 

 

       (125

)

Corporate debt securities

 

 

8,475

 

 

 

(25

)

 

 

2,973

 

 

 

(27

)

 

 

11,448

 

 

 

(52

)

Total investment securities

 

$

15,287

 

 

$

(35

)

 

$

3,848

 

 

$

(152

)

 

$

19,135

 

 

$

(187

)

 

As of December 31, 2021, 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 December 31, 2021, the Company held six corporate debt securities, one U.S. government agency, 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 December 31, 2021 represents an other-than-temporary impairment.

Investment securities having a carrying value of approximately $2.7 million and $2.9 million at December 31, 2021 and September 30, 2021, respectively, were pledged to secure deposits. No investment securities were pledged to secure hedges at December 31, 2021 or September 30, 2021. No investment securities were pledged to secure short-term borrowings at December 31, 2021 and September 30, 2021.  

-16-


 

The following table presents information for investment securities at December 31, 2021, based on scheduled maturities. Actual maturities can be expected to differ from scheduled maturities due to prepayment or early call options of the issuer.

 

 

 

December 31, 2021

 

 

 

Amortized Cost

 

 

Fair Value

 

 

 

(In thousands)

 

Available-for-Sale:

 

 

 

 

 

 

 

 

Within 1 year

 

$

-

 

 

$

-

 

Over 1 year through five years

 

 

3,500

 

 

 

3,448

 

After 5 years through ten years

 

 

29,989

 

 

 

29,966

 

Over 10 years

 

 

8,321

 

 

 

8,304

 

Total

 

$

41,810

 

 

$

41,718

 

Held-to-Maturity:

 

 

 

 

 

 

 

 

Within 1 year

 

$

-

 

 

$

-

 

Over 1 year through five years

 

 

5,103

 

 

 

5,408

 

After 5 years through ten years

 

 

2,500

 

 

 

2,483

 

Over 10 years

 

 

22,987

 

 

 

22,952

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

Mortgage Backed Security ("MBS"), fixed-rate

 

 

2,405

 

 

 

2,383

 

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

 

 

6,050

 

 

 

6,090

 

Total

 

$

39,045

 

 

$

39,316

 

Equity Securities:

 

 

 

 

 

 

 

 

Within 1 year

 

$

500

 

 

$

500

 

After 5 years through ten years

 

 

1,000

 

 

 

991

 

 

 

$

1,500

 

 

$

1,491

 

Total investment securities

 

$

82,355

 

 

$

82,525

 

 

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:

 

 

 

December 31, 2021

 

 

September 30, 2021

 

 

 

(In thousands)

 

Residential mortgage

 

$

187,516

 

 

$

198,710

 

Construction and Development:

 

 

 

 

 

 

 

 

Residential and commercial

 

 

56,876

 

 

 

61,492

 

Land

 

 

2,138

 

 

 

2,204

 

Total Construction and Development

 

 

59,014

 

 

 

63,696

 

Commercial:

 

 

 

 

 

 

 

 

Commercial real estate

 

 

416,248

 

 

 

426,915

 

Farmland

 

 

15,582

 

 

 

10,297

 

Multi-family

 

 

54,448

 

 

 

66,332

 

   Commercial and industrial

 

 

106,493

 

 

 

115,246

 

Other

 

 

7,433

 

 

 

10,954

 

Total Commercial

 

 

600,204

 

 

 

629,744

 

Consumer:

 

 

 

 

 

 

 

 

Home equity lines of credit

 

 

13,174

 

 

 

13,491

 

Second mortgages

 

 

5,384

 

 

 

5,884

 

Other

 

 

2,282

 

 

 

2,299

 

Total Consumer

 

 

20,840

 

 

 

21,674

 

Total loans

 

 

867,574

 

 

 

913,824

 

Deferred loan costs, net

 

 

666

 

 

 

629

 

Allowance for loan losses

 

 

(10,037

)

 

 

(11,472

)

Total loans receivable, net

 

$

858,203

 

 

$

902,981

 

 

 

 

-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 December 31, 2021 and September 30, 2021.  Activity in the ALLL is presented for the three months ended December 31, 2021 and 2020 and the fiscal year ended September 30, 2021:

 

 

 

 

 

 

 

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 December 31,

2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

934

 

 

$

428

 

 

$

15

 

 

$

7,043

 

 

$

56

 

 

$

450

 

 

$

2,221

 

 

$

54

 

 

$

76

 

 

$

87

 

 

$

20

 

 

$

88

 

 

$

11,472

 

Charge-offs

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,430

)

 

 

-

 

 

 

-

 

 

 

(85

)

 

 

-

 

 

 

-

 

 

 

(1,515

)

Recoveries

 

 

1

 

 

 

-

 

 

 

-

 

 

 

75

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

4

 

 

 

-

 

 

 

-

 

 

 

80

 

Provisions

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Ending balance

 

$

935

 

 

$

428

 

 

$

15

 

 

$

7,118

 

 

$

56

 

 

$

450

 

 

$

791

 

 

$

54

 

 

$

76

 

 

$

6

 

 

$

20

 

 

$

88

 

 

$

10,037

 

Ending balance: individually evaluated

   for impairment

 

$

35

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

12

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

47

 

Ending balance: collectively evaluated

   for impairment

 

$

900

 

 

$

428

 

 

$

15

 

 

$

7,118

 

 

$

44

 

 

$

450

 

 

$

791

 

 

$

54

 

 

$

76

 

 

$

6

 

 

$

20

 

 

$

88

 

 

$

9,990

 

Loans receivable:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

187,516

 

 

$

56,876

 

 

$

2,138

 

 

$

416,248

 

 

$

15,582

 

 

$

54,448

 

 

$

106,493

 

 

$

7,433

 

 

$

13,174

 

 

$

5,384

 

 

$

2,282

 

 

 

 

 

 

$

867,574

 

Ending balance: individually evaluated

   for impairment

 

$

482

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

589

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

 

 

 

 

$

1,071

 

Ending balance: collectively evaluated

   for impairment

 

$

187,034

 

 

$

56,876

 

 

$

2,138

 

 

$

416,248

 

 

$

14,993

 

 

$

54,448

 

 

$

106,493

 

 

$

7,433

 

 

$

13,174

 

 

$

5,384

 

 

$

2,282

 

 

 

 

 

 

$

866,503

 

 

-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)

 

Three Months Ended December 31,

2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

1,667

 

 

$

465

 

 

$

23

 

 

$

8,682

 

 

$

47

 

 

$

511

 

 

 

 

$

578

 

 

$

51

 

 

$

130

 

 

$

196

 

 

$

29

 

 

$

54

 

 

$

12,433

 

Charge-offs

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1

)

 

 

-

 

 

 

(1

)

Recoveries

 

 

1

 

 

 

-

 

 

 

-

 

 

 

1

 

 

 

-

 

 

 

-

 

 

 

 

 

1

 

 

 

-

 

 

 

-

 

 

 

50

 

 

 

-

 

 

 

-

 

 

 

53

 

Provisions

 

 

(65

)

 

 

43

 

 

 

1

 

 

 

(710

)

 

 

305

 

 

 

(3

)

 

 

 

 

21

 

 

 

(1

)

 

 

(5

)

 

 

(67

)

 

 

(3

)

 

 

1,034

 

 

 

550

 

Ending balance

 

$

1,603

 

 

$

508

 

 

$

24

 

 

$

7,973

 

 

$

352

 

 

$

508

 

 

 

 

$

600

 

 

$

50

 

 

$

125

 

 

$

179

 

 

$

25

 

 

$

1,088

 

 

$

13,035

 

Ending balance: individually evaluated

   for impairment

 

$

-

 

 

$

-

 

 

$

-

 

 

$

209

 

 

$

317

 

 

$

-

 

 

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

78

 

 

$

-

 

 

$

-

 

 

$

604

 

Ending balance: collectively evaluated

   for impairment

 

$

1,603

 

 

$

508

 

 

$

24

 

 

$

7,764

 

 

$

35

 

 

$

508

 

 

 

 

$

600

 

 

$

50

 

 

$

125

 

 

$

101

 

 

$

25

 

 

$

1,088

 

 

$

12,431

 

Loans receivable:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

232,481

 

 

$

73,000

 

 

$

3,648

 

 

$

478,808

 

 

$

7,378

 

 

$

67,457

 

 

 

 

$

101,852

 

 

$

10,010

 

 

$

16,389

 

 

$

9,097

 

 

$

2,388

 

 

 

 

 

 

$

1,002,508

 

Ending balance: individually evaluated

   for impairment

 

$

3,721

 

 

$

-

 

 

$

-

 

 

$

25,547

 

 

$

2,287

 

 

$

-

 

 

 

 

$

549

 

 

$

-

 

 

$

73

 

 

$

365

 

 

$

-

 

 

 

 

 

 

$

32,542

 

Ending balance: collectively evaluated

   for impairment

 

$

228,760

 

 

$

73,000

 

 

$

3,648

 

 

$

453,261

 

 

$

5,091

 

 

$

67,457

 

 

 

 

$

101,303

 

 

$

10,010

 

 

$

16,316

 

 

$

8,732

 

 

$

2,388

 

 

 

 

 

 

$

969,966

 

 

 

-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)

 

Year Ended September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

1,667

 

 

$

465

 

 

$

23

 

 

$

8,682

 

 

$

47

 

 

$

511

 

 

$

578

 

 

$

51

 

 

$

130

 

 

$

196

 

 

$

29

 

 

$

54

 

 

$

12,433

 

Charge-offs

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(11,930

)

 

 

-

 

 

 

-

 

 

 

(379

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(4

)

 

 

-

 

 

 

(12,313

)

Recoveries

 

 

41

 

 

 

4

 

 

 

-

 

 

 

1

 

 

 

-

 

 

 

-

 

 

 

2

 

 

 

-

 

 

 

17

 

 

 

108

 

 

 

2

 

 

 

-

 

 

 

176

 

Provisions

 

 

(774

)

 

 

(41

)

 

 

(8

)

 

 

10,290

 

 

 

9

 

 

 

(61

)

 

 

2,020

 

 

 

3

 

 

 

(71

)

 

 

(217

)

 

 

(7

)

 

 

34

 

 

 

11,176

 

Ending balance

 

$

934

 

 

$

428

 

 

$

15

 

 

$

7,043

 

 

$

56

 

 

$

450

 

 

$

2,221

 

 

$

54

 

 

$

76

 

 

$

87

 

 

$

20

 

 

$

88

 

 

$

11,472

 

Ending balance: individually evaluated

   for impairment

 

$

-

 

 

$

-

 

 

$

-

 

 

$

18

 

 

$

-

 

 

$

-

 

 

$

1,488

 

 

$

-

 

 

$

-

 

 

$

38

 

 

$

-

 

 

$

-

 

 

$

1,544

 

Ending balance: collectively evaluated

   for impairment

 

$

934

 

 

$

428

 

 

$

15

 

 

$

7,025

 

 

$

56

 

 

$

450

 

 

$

733

 

 

$

54

 

 

$

76

 

 

$

49

 

 

$

20

 

 

$

88

 

 

$

9,928

 

Loans receivable:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

198,710

 

 

$

61,492

 

 

$

2,204

 

 

$

426,915

 

 

$

10,297

 

 

$

66,332

 

 

$

115,246

 

 

$

10,954

 

 

$

13,491

 

 

$

5,884

 

 

$

2,299

 

 

 

 

 

 

$

913,824

 

Ending balance: individually evaluated

   for impairment

 

$

-

 

 

$

-

 

 

$

-

 

 

$

286

 

 

$

-

 

 

$

-

 

 

$

2,517

 

 

$

-

 

 

$

-

 

 

$

102

 

 

$

-

 

 

 

 

 

 

$

2,905

 

Ending balance: collectively evaluated

   for impairment

 

$

198,710

 

 

$

61,492

 

 

$

2,204

 

 

$

426,629

 

 

$

10,297

 

 

$

66,332

 

 

$

112,729

 

 

$

10,954

 

 

$

13,491

 

 

$

5,782

 

 

$

2,299

 

 

 

 

 

 

$

910,919

 

 

 

 


-20-


 

 

 

 

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.

 

During the three months ended December 31, 2021, the Company recorded net charge-offs of $1.4 million compared to a net recovery of $52,000 for the three months ended December 31, 2020. Net loan charge-offs increased during the three months ended December 31, 2021 due to one $2.5 million commercial and industrial loan classified as non-accrual, partially written down in the amount of $1.4 million. This credit had a specific allocation of $1.5 million as of September 30, 2021. The partial write-down was the result of the ongoing monitoring and evaluation of classified loan values and is reflective of changes in current economic conditions.

 

-21-


 

 

The decrease in impaired loans with no specific allowance from $39.7 million at September 30, 2021  to $20.8 million at December 31, 2021 is primarily due to three commercial real estate loans totaling $18.9 million that were sold during the period, as part of the note sale, previously announced. The following table presents impaired loans in the 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 December 31, 2021 and September 30, 2021:

 

 

 

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)

 

December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

 

$

482

 

 

$

35

 

 

$

2,818

 

 

 

 

$

3,300

 

 

$

3,492

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

-

 

 

 

-

 

 

 

14,212

 

 

 

 

 

14,212

 

 

 

15,477

 

Farmland

 

 

589

 

 

 

12

 

 

 

2,243

 

 

 

 

 

2,832

 

 

 

2,243

 

   Commercial and industrial

 

 

-

 

 

 

-

 

 

 

1,135

 

 

 

 

 

1,135

 

 

 

3,618

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity lines of credit

 

 

-

 

 

 

-

 

 

 

22

 

 

 

 

 

22

 

 

 

27

 

Second mortgages

 

 

-

 

 

 

-

 

 

 

324

 

 

 

 

 

324

 

 

 

380

 

Total impaired loans

 

$

1,071

 

 

$

47

 

 

$

20,754

 

 

 

 

$

21,825

 

 

$

25,237

 

September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

 

$

-

 

 

$

-

 

 

$

2,594

 

 

 

 

$

2,594

 

 

$

2,766

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

286

 

 

 

18

 

 

 

33,543

 

 

 

 

 

33,829

 

 

 

33,368

 

Farmland

 

 

 

 

 

 

 

 

 

 

2,254

 

 

 

 

 

2,254

 

 

 

2,254

 

   Commercial and industrial

 

 

2,517

 

 

 

1,488

 

 

 

630

 

 

 

 

 

3,147

 

 

 

3,584

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity lines of credit

 

 

-

 

 

 

-

 

 

 

23

 

 

 

 

 

23

 

 

 

28

 

Second mortgages

 

 

102

 

 

 

38

 

 

 

696

 

 

 

 

 

798

 

 

 

874

 

Total impaired loans

 

$

2,905

 

 

$

1,544

 

 

$

39,740

 

 

 

 

$

42,645

 

 

$

42,874

 

 

The following table presents the average recorded investment in impaired loans in the loan portfolio and related interest income recognized for the three months ended December 31, 2021 and 2020:

 

 

 

Three Months Ended December 31, 2021

 

 

 

Average

Impaired Loans

 

 

Interest Income

Recognized on

Impaired Loans

 

 

 

(In thousands)

 

Residential mortgage

 

$

2,782

 

 

$

29

 

Commercial:

 

 

 

 

 

 

 

 

Commercial real estate

 

 

13,283

 

 

 

8

 

Farmland

 

 

2,247

 

 

 

20

 

Commercial and industrial

 

 

2,655

 

 

 

6

 

Consumer:

 

 

 

 

 

 

 

 

Home equity lines of credit

 

 

15

 

 

 

-

 

Second mortgages

 

 

678

 

 

 

-

 

Total

 

$

21,660

 

 

$

63

 

-22-


 

 

 

 

 

Three Months Ended December 31, 2020

 

 

 

Average

Impaired Loans

 

 

Interest Income

Recognized on

Impaired Loans

 

 

 

(In thousands)

 

Residential mortgage

 

$

3,483

 

 

$

15

 

Commercial:

 

 

 

 

 

 

 

 

Commercial real estate

 

 

25,727

 

 

 

105

 

Farmland

 

 

771

 

 

 

-

 

Commercial and industrial

 

 

185

 

 

 

2

 

Consumer:

 

 

 

 

 

 

 

 

Home equity lines of credit

 

 

74

 

 

 

-

 

Second mortgages

 

 

700

 

 

 

1

 

Total

 

$

30,940

 

 

$

123

 

 

No additional funds are committed to be advanced in connection with impaired loans.]

The following table presents the classes of the loan portfolio categorized as pass, special mention, substandard and doubtful within the Company’s internal risk rating system as of December 31, 2021 and September 30, 2021:

 

 

 

Pass

 

 

Special Mention

 

 

Substandard

 

 

Doubtful

 

 

Total

 

 

 

(In thousands)

 

December 31, 2021:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

 

$

184,773

 

 

$

-

 

 

$

2,743

 

 

$

-

 

 

$

187,516

 

Construction and Development:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential and commercial

 

 

56,876

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

56,876

 

Land

 

 

2,138

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,138

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

366,969

 

 

 

48,572

 

 

 

707

 

 

 

-

 

 

 

416,248

 

Farmland

 

 

13,339

 

 

 

-

 

 

 

2,243

 

 

 

-

 

 

 

15,582

 

Multi-family

 

 

54,448

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

54,448

 

Commercial and industrial

 

 

99,661

 

 

 

-

 

 

 

6,832

 

 

 

-

 

 

 

106,493

 

Other

 

 

7,433

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

7,433

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity lines of credit

 

 

13,077

 

 

 

-

 

 

 

97

 

 

 

-

 

 

 

13,174

 

Second mortgages

 

 

4,334

 

 

 

-

 

 

 

1,050

 

 

 

-

 

 

 

5,384

 

Other

 

 

2,282

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,282

 

Total

 

$

805,330

 

 

$

48,572

 

 

$

13,672

 

 

$

-

 

 

$

867,574

 

 

 

 

Pass

 

 

Special Mention

 

 

Substandard

 

 

Doubtful

 

 

Total

 

 

 

(In thousands)

 

September 30, 2021:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

 

$

195,658

 

 

$

-

 

 

$

3,052

 

 

$

-

 

 

$

198,710

 

Construction and Development:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential and commercial

 

 

61,492

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

61,492

 

Land

 

 

2,204

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,204

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

376,721

 

 

 

48,705

 

 

 

1,489

 

 

 

-

 

 

 

426,915

 

Farmland

 

 

8,043

 

 

 

-

 

 

 

2,254

 

 

 

-

 

 

 

10,297

 

Multi-family

 

 

57,052

 

 

 

9,280

 

 

 

-

 

 

 

-

 

 

 

66,332

 

Commercial and industrial

 

 

106,910

 

 

 

-

 

 

 

8,336

 

 

 

-

 

 

 

115,246

 

Other

 

 

10,954

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

10,954

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity lines of credit

 

 

13,390

 

 

 

-

 

 

 

101

 

 

 

-

 

 

 

13,491

 

Second mortgages

 

 

4,908

 

 

 

68

 

 

 

908

 

 

 

-

 

 

 

5,884

 

Other

 

 

2,299

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,299

 

Total

 

$

839,631

 

 

$

58,053

 

 

$

16,140

 

 

$

-

 

 

$

913,824

 

-23-


 

 

 

The following table presents loans that are no longer accruing interest as of December 31, 2021 and September 30, 2021, by portfolio class:

 

 

 

December 31,

2021

 

 

September 30,

2021

 

 

 

(In thousands)

 

Non-accrual loans:

 

 

 

 

 

 

 

 

Residential mortgage

 

$

491

 

 

$

879

 

Commercial:

 

 

 

 

 

 

 

 

Commercial real estate

 

 

-

 

 

 

-

 

Commercial and industrial

 

 

1,060

 

 

 

2,517

 

Consumer:

 

 

 

 

 

 

 

 

Home equity lines of credit

 

 

22

 

 

 

23

 

Second mortgages

 

 

217

 

 

 

278

 

Total non-accrual loans

 

$

1,790

 

 

$

3,697

 

 

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. Total non-accrual loans exclude loans held-for-sale. Non-accrual loans totaled $1.8 million at December 31, 2021, and $3.7 million at September 30, 2021. The decrease in non-accrual loans was primarily due a partial charge down of $1.4 million related to one non-accrual commercial and industrial loan. This loan had a specific allocation of $1.5 million previously reported at September 30, 2021. The partial charge-off was the result of the ongoing monitoring and evaluation of classified loan values and is reflective of the change in current market and economic conditions of the borrower. 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 for the three months ended December 31, 2021, and approximately $138,000 for the three months ended December 31, 2020. At December 31, 2021 and September 30, 2021, there were no loans past due 90 days or more and still accruing interest.

Management monitors the performance and credit quality of the loan portfolio by analyzing the age of the loan portfolio and categorizing each loan as “current”, meaning payment is received from a borrower by the scheduled due date, or by the length of time a scheduled payment is past due. The following table presents the classes of the loan portfolio categorized by the following aging categories as of December 31, 2021 and September 30, 2021:

 

 

 

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)

 

December 31, 2021:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

 

$

185,188

 

 

$

1,981

 

 

$

176

 

 

$

171

 

 

$

2,328

 

 

$

187,516

 

 

$

-

 

Construction and Development:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential and commercial

 

 

56,876

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

56,876

 

 

 

-

 

Land

 

 

2,138

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,138

 

 

 

-

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

416,248

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

416,248

 

 

 

-

 

Farmland

 

 

15,582

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

15,582

 

 

 

-

 

Multi-family

 

 

54,448

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

54,448

 

 

 

-

 

Commercial and industrial

 

 

106,493

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

106,493

 

 

 

-

 

Other

 

 

7,433

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

7,433

 

 

 

-

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity lines of credit

 

 

13,174

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

13,174

 

 

 

-

 

Second mortgages

 

 

5,327

 

 

 

6

 

 

 

-

 

 

 

51

 

 

 

57

 

 

 

5,384

 

 

 

-

 

Other

 

 

2,282

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,282

 

 

 

-

 

Total

 

$

865,189

 

 

$

1,987

 

 

$

176

 

 

$

222

 

 

$

2,385

 

 

$

867,574

 

 

$

-

 

-24-


 

 

 

 

 

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, 2021:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

 

$

197,062

 

 

$

796

 

 

$

241

 

 

$

611

 

 

$

1,648

 

 

$

198,710

 

 

$

-

 

Construction and Development:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential and commercial

 

 

61,492

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

61,492

 

 

 

-

 

Land

 

 

2,204

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,204

 

 

 

-

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

426,915

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

426,915

 

 

 

-

 

Farmland

 

 

10,297

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

10,297

 

 

 

-

 

Multi-family

 

 

66,332

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

66,332

 

 

 

-

 

Commercial and industrial

 

 

115,246

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

115,246

 

 

 

-

 

Other

 

 

10,954

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

10,954

 

 

 

-

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity lines of credit

 

 

13,394

 

 

 

97

 

 

 

-

 

 

 

-

 

 

 

97

 

 

 

13,491

 

 

 

-

 

Second mortgages

 

 

5,697

 

 

 

4

 

 

 

83

 

 

 

100

 

 

 

187

 

 

 

5,884

 

 

 

-

 

Other

 

 

2,296

 

 

 

3

 

 

 

-

 

 

 

-

 

 

 

3

 

 

 

2,299

 

 

 

-

 

Total

 

$

911,889

 

 

$

900

 

 

$

324

 

 

$

711

 

 

$

1,935

 

 

$

913,824

 

 

$

-

 

 

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 restructuring.

The Company had 23 and 26 loans classified as TDRs at December 31, 2021 and September 30, 2021, respectively, with an aggregate outstanding balance of $6.7 million and $18.2 million, respectively. At December 31, 2021, these loans were also classified as impaired. The decrease is primarily related to two TDR commercial real estate loans totaling $11.4 million that were sold during the period, with no gains or losses recognized on the sale, as part of the note sale previously announced. 20 of the TDR loans continue to perform under the restructured terms through December 31, 2021 and the Company continued to accrue interest on such loans through such date.   

 

Loans that have been classified as TDRs have modified payment terms and in some cases modified interest rates from the original agreements, which allow 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.  

-25-


 

TDRs may arise in cases where, 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 zero and $185,000 of residential real estate properties in the process of foreclosure at December 31, 2021 and September 30, 2021, respectively. The following table presents total TDRs as of December 31, 2021 and September 30, 2021:

 

 

 

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)

 

December 31, 2021:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

 

 

15

 

 

$

3,245

 

 

 

-

 

 

$

-

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

3

 

 

 

596

 

 

 

2

 

 

 

504

 

Farmland

 

 

1

 

 

 

2,243

 

 

 

-

 

 

 

-

 

Commercial and industrial

 

 

1

 

 

 

589

 

 

 

-

 

 

 

-

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Second mortgages

 

 

3

 

 

 

73

 

 

 

-

 

 

 

-

 

Total

 

 

23

 

 

$

6,746

 

 

 

2

 

 

$

504

 

September 30, 2021:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

 

 

16

 

 

$

3,180

 

 

 

4

 

 

$

640

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-

 

Commercial real estate

 

 

5

 

 

 

12,180

 

 

 

-

 

 

 

-

 

Farmland

 

 

1

 

 

 

2,254

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

1

 

 

 

549

 

 

 

 

 

 

 

 

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Second mortgages

 

 

3

 

 

 

78

 

 

 

-

 

 

 

-

 

Total

 

 

26

 

 

$

18,241

 

 

 

4

 

 

$

640

 

 

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:

 

 

 

December 31, 2021

 

 

September 30, 2021

 

 

 

Performing

 

 

Non-Performing

 

 

Performing

 

 

Non-Performing

 

 

 

(In thousands)

 

Residential mortgage

 

$

2,809

 

 

$

436

 

 

$

2,540

 

 

$

640

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

596

 

 

 

-

 

 

 

12,180

 

 

 

-

 

Farmland

 

 

2,243

 

 

 

-

 

 

 

2,254

 

 

 

-

 

Commercial and industrial

 

 

589

 

 

 

-

 

 

 

549

 

 

 

-

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Second mortgages

 

 

73

 

 

 

-

 

 

 

78

 

 

 

-

 

Total

 

$

6,310

 

 

$

436

 

 

$

17,601

 

 

$

640

 

-26-


 

 

 

There were two new TDRs for the three months ended December 31, 2021. The following tables show the new TDRs for the three months ended December 31, 2021 compared to the three months ended December 31, 2020:

 

 

 

 

For the Three Months Ended December 31,

 

 

 

2021

 

 

2020

 

 

 

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

 

 

 

(In thousands)

 

Troubled Debt Restructurings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

 

 

1

 

 

$

482

 

 

$

482

 

 

 

-

 

 

$

-

 

 

$

-

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

-

 

 

$

-

 

 

$

-

 

 

 

-

 

 

$

-

 

 

$

-

 

Farmland

 

 

-

 

 

$

-

 

 

$

-

 

 

 

1

 

 

$

2,287

 

 

$

2,287

 

Commercial and industrial

 

 

1

 

 

$

504

 

 

$

504

 

 

 

1

 

 

$

549

 

 

$

549

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Second mortgages

 

 

-

 

 

$

-

 

 

$

-

 

 

 

-

 

 

$

-

 

 

$

-

 

Total troubled debt restructurings

 

 

2

 

 

$

986

 

 

$

986

 

 

 

2

 

 

$

2,836

 

 

$

2,836

 

 

Under Section 4013 of the CARES Act, and separately based upon regulatory guidance promulgated by federal banking regulators (collectively, “Interagency Statement”), qualifying short-term loan modifications resulting in payment deferrals that are attributable to the adverse impact of COVID-19 are not considered to be TDRs. As such, the applicable loans are reported as current with regard to payment status and continue to accrue interest during the payment deferral period. At December 31, 2021, the Company had five COVID-19 modified loans totaling approximately $47.9 million.  Of the $47.9 million of COVID-19 modified loans at December 31, 2021, all were rated “special mention”.  At September 30, 2021, the Company had eight COVID-19 modified loan deferrals totaling approximately $61.2 million. Of the $61.2 million of COVID-19 modified loans at September 30, 2021, all were rated “special mention”.


-27-


 

 

The following tables set forth the composition of these loans by loan segments as of December 31, 2021 and September 30, 2021:

 

 

December 31, 2021

 

 

Number of Loans

 

 

Loan Modified Exposure

 

 

Gross Loans        December 31, 2021

 

 

Percentage of Gross Loans Modified

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

Residential mortgage

 

-

 

 

$

-

 

 

$

187,516

 

 

 

0.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction and Development:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential and commercial

 

-

 

 

 

-

 

 

 

56,876

 

 

 

0.00

%

Land loans

 

-

 

 

 

-

 

 

 

2,138

 

 

 

0.00

%

Total Construction and Development

 

-

 

 

 

-

 

 

 

59,014

 

 

 

0.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

5

 

 

 

47,916

 

 

 

416,248

 

 

 

5.52

%

Farmland

 

-

 

 

 

-

 

 

 

15,582

 

 

 

0.00

%

Multi-family

 

-

 

 

 

-

 

 

 

54,448

 

 

 

0.00

%

Commercial and industrial

 

-

 

 

 

-

 

 

 

106,493

 

 

 

0.00

%

Other

 

-

 

 

 

-

 

 

 

7,433

 

 

 

0.00

%

Total Commercial

 

5

 

 

 

47,916

 

 

 

600,204

 

 

 

5.52

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity lines of credit

 

-

 

 

 

-

 

 

 

13,174

 

 

 

0.00

%

Second mortgages

 

-

 

 

 

-

 

 

 

5,384

 

 

 

0.00

%

Other

 

-

 

 

 

-

 

 

 

2,282

 

 

 

0.00

%

Total Consumer

 

-

 

 

 

-

 

 

 

20,840

 

 

 

0.00

%

Total loans

 

5

 

 

$

47,916

 

 

$

867,574

 

 

 

5.52

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2021

 

 

Number of Loans

 

 

Loan Modified Exposure

 

 

Gross Loans September 30, 2021

 

 

Percentage of Gross Loans Modified

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

Residential mortgage

 

2

 

 

$

667

 

 

$

198,710

 

 

 

0.07

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction and Development:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential and commercial

 

-

 

 

 

-

 

 

 

61,492

 

 

 

0.00

%

Land loans

 

-

 

 

 

-

 

 

 

2,204

 

 

 

0.00

%

Total Construction and Development

 

-

 

 

 

-

 

 

 

63,696

 

 

 

0.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

6

 

 

 

60,567

 

 

 

426,915

 

 

 

6.63

%

Farmland

 

-

 

 

 

-

 

 

 

10,297

 

 

 

0.00

%

Multi-family

 

-

 

 

 

-

 

 

 

66,332

 

 

 

0.00

%

Commercial and industrial

 

-

 

 

 

-

 

 

 

115,246

 

 

 

0.00

%

Other

 

-

 

 

 

-

 

 

 

10,954

 

 

 

0.00

%

Total Commercial

 

6

 

 

 

60,567

 

 

 

629,744

 

 

 

6.63

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity lines of credit

 

-

 

 

 

-

 

 

 

13,491

 

 

 

0.00

%

Second mortgages

 

-

 

 

 

-

 

 

 

5,884

 

 

 

0.00

%

Other

 

-

 

 

 

-

 

 

 

2,299

 

 

 

0.00

%

Total Consumer

 

-

 

 

 

-

 

 

 

21,674

 

 

 

0.00

%

Total loans

 

8

 

 

$

61,234

 

 

$

913,824

 

 

 

6.70

%

 

 

-28-


 

 

Note 9 - Regulatory Matters

 

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.

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 the 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 in the regulations) and of risk-based capital (as defined in the regulations) to risk-weighted assets (as defined in the regulations).  

As of December 31, 2021 and as of September 30, 2021, the Company’s and the Bank’s current capital levels exceeded the required capital amounts to be considered “well capitalized” and they also met the fully-phased in minimum capital requirements, including the related capital conservation buffers, as required by the Basel III capital rules.   

-29-


 

The following table summarizes the Company’s compliance with applicable regulatory capital requirements as of December 31, 2021 and September 30, 2021:

 

 

 

Actual

 

 

For Capital

Adequacy Purposes

 

 

To be Well

Capitalized

Under Prompt

Corrective Action

Provisions (1)

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

Amount

 

Ratio

 

 

(Dollars in thousands)

As of December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 Leverage (Core) Capital (to

   adjusted assets)

 

$

144,260

 

 

 

12.25

%

 

$

47,098

 

 

 

4.00

%

 

N/A

 

N/A

Common Equity Tier 1 Capital (to risk

   weighted assets)

 

 

144,260

 

 

 

15.39

%

 

 

42,185

 

 

 

4.50

%

 

N/A

 

N/A

Tier 1 Capital (to risk weighted assets)

 

 

144,260

 

 

 

15.39

%

 

 

56,246

 

 

 

6.00

%

 

N/A

 

N/A

Total Risk Based Capital (to risk

   weighted assets)

 

 

179,352

 

 

 

19.13

%

 

 

74,994

 

 

 

8.00

%

 

N/A

 

N/A

As of September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 Leverage (Core) Capital (to

   adjusted assets)

 

$

142,132

 

 

 

11.84

%

 

$

48,020

 

 

 

4.00

%

 

N/A

 

N/A

Common Equity Tier 1 Capital (to risk

   weighted assets)

 

 

142,132

 

 

 

14.53

%

 

 

44,024

 

 

 

4.50

%

 

N/A

 

N/A

Tier 1 Capital (to risk weighted assets)

 

 

142,132

 

 

 

14.53

%

 

 

58,699

 

 

 

6.00

%

 

N/A

 

N/A

Total Risk Based Capital (to risk

   weighted assets)

 

 

178,620

 

 

 

18.26

%

 

 

78,265

 

 

 

8.00

%

 

N/A

 

N/A

 

(1) The Company is not subject to the regulatory capital ratios imposed by Basel III on bank holding companies because the Company was deemed to be a small bank holding company as of December 31, 2021 and September 20, 2021.

 

The following table summarizes the Bank’s compliance with applicable regulatory capital requirements as of December 31, 2021 and September 30, 2021:

 

 

 

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 December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 Leverage (Core) Capital (to

   adjusted assets)

 

$

160,029

 

 

 

13.61

%

 

$

47,020

 

 

 

4.00

%

 

$

58,775

 

 

 

5.00

%

Common Equity Tier 1 Capital (to risk

   weighted assets)

 

 

160,029

 

 

 

17.14

%

 

 

42,015

 

 

 

4.50

%

 

 

60,689

 

 

 

6.50

%

Tier 1 Capital (to risk weighted assets)

 

 

160,029

 

 

 

17.14

%

 

 

56,020

 

 

 

6.00

%

 

 

74,694

 

 

 

8.00

%

Total Risk Based Capital (to risk

   weighted assets)

 

 

170,148

 

 

 

18.22

%

 

 

74,693

 

 

 

8.00

%

 

 

93,367

 

 

 

10.00

%

As of September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 Leverage (Core) Capital (to

   adjusted assets)

 

$

157,518

 

 

 

13.14

%

 

$

47,946

 

 

 

4.00

%

 

$

59,933

 

 

 

5.00

%

Common Equity Tier 1 Capital (to risk

   weighted assets)

 

 

157,518

 

 

 

16.13

%

 

 

43,934

 

 

 

4.50

%

 

 

63,460

 

 

 

6.50

%

Tier 1 Capital (to risk weighted assets)

 

 

157,518

 

 

 

16.13

%

 

 

58,579

 

 

 

6.00

%

 

 

78,105

 

 

 

8.00

%

Total Risk Based Capital (to risk

   weighted assets)

 

 

169,072

 

 

 

17.32

%

 

 

78,105

 

 

 

8.00

%

 

 

97,632

 

 

 

10.00

%

 

-30-


 

 

 

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 December 31, 2021, such derivatives were used to hedge the variable cash flows associated with advances from the Federal Home Loan Bank of Pittsburgh.    

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 $10,000 to be reclassified to earnings as a decrease 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).

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. 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 December 31, 2021 and September 30, 2021:

 

`

 

December 31, 2021

 

 

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

 

$

40,000

 

 

448

 

 

Other assets

 

$

 

 

$

 

 

Other liabilities

Derivatives not designated as a hedging instrument:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap agreement

 

$

44,641

 

 

$

4,393

 

 

Other assets

 

$

44,641

 

 

$

4,396

 

 

Other liabilities

-31-


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2021

 

 

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

 

$

40,000

 

 

$

14

 

 

Other assets

 

$

30,000

 

 

$

47

 

 

Other liabilities

Derivatives not designated as a hedging instrument:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap agreement

 

$

44,748

 

 

$

4,671

 

 

Other assets

 

$

44,748

 

 

$

4,673

 

 

Other liabilities

 

-32-


 

 

The tables below present the derivative assets and liabilities offsetting as of December 31, 2021 and September 30, 2021:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Offsetting of Derivative Assets

(In thousands)

 

as of December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

$

4,841

 

$

-

 

$

4,841

 

$

-

 

$

-

 

$

4,841

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Offsetting of Derivative Liabilities

(In thousands)

 

as of December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

$

4,396

 

$

-

 

$

4,396

 

$

(419

)

$

6,507

 

$

(1,692

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Offsetting of Derivative Assets

(In thousands)

 

as of September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

$

4,685

 

$

-

 

$

4,685

 

$

-

 

$

-

 

$

4,685

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Offsetting of Derivative Liabilities

(In thousands)

 

as of September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

$

4,720

 

$

-

 

$

4,720

 

$

221

 

$

8,257

 

$

(3,758

)

 

 

-33-


 

 

The tables below present the net gains (losses) recorded in accumulated other comprehensive income (loss) and the Consolidated Statements of Operations relating to the cash flow derivative instruments for the three months ended December 31, 2021 and 2020:

 

 

 

Three Months Ended December 31, 2021

 

 

 

 

Amount of Gain  Recognized

in OCI on Derivative

 

 

Amount of Loss

Reclassified

from OCI to

Interest Expense

 

 

 

 

(In thousands)

 

 

Interest rate swap agreements

 

$

394

 

 

$

(85

)

 

Total derivatives

 

 

394

 

 

 

(85

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended December 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

 

$

(8

)

 

$

(280

)

 

Total derivatives

 

 

(8

)

 

 

(280

)

 

 

 

 

 

 

 

 

 

 

 

 

    

          

 

 

The tables below present the effect of the Company’s derivative financial instruments on the Consolidated Statements of Operations for the three months ended December 31, 2021 and 2020:

 

 

 

 

Three Months Ended December 31, 2021

 

 

 

 

Consolidated Statements of Operations

 

Amount of Gain Recognized in Income on derivatives

 

 

 

 

(In thousands)

 

Derivatives not designated as a hedging instrument:

 

 

 

Interest rate swap agreement

 

 

Other income

 

$

-

 

Total

 

 

 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended Decemer 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

 

$

1

 

Total

 

 

 

 

$

1

 

 

 

 

 

 

 

 

 

 

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 December 31, 2021 and September 30, 2021, 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 December 31, 2021 and September 30, 2021. At December 31, 2021 and September 30, 2021, the Company has minimum collateral posting thresholds with certain of its derivative counterparties and has posted cash collateral of $6.5 million  and $8.3 million, respectively, against its obligations under these agreements.  If the Company had breached any of these provisions at December 31, 2021, 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 the Company’s 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 December 31, 2021 or September 30, 2021.

The tables below present the balances of assets measured at fair value on a recurring basis as of December 31, 2021 and September 30, 2021:

 

 

 

December 31, 2021

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(In thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

4,958

 

 

$

-

 

 

$

4,958

 

 

$

-

 

State and municipal obligations

 

 

1,841

 

 

 

-

 

 

 

1,841

 

 

 

-

 

Single issuer trust preferred security

 

 

878

 

 

 

-

 

 

 

878

 

 

 

-

 

Corporate debt securities

 

 

34,041

 

 

 

-

 

 

 

34,041

 

 

 

-

 

Total investment Securities available -for-sale

 

 

41,718

 

 

 

-

 

 

 

41,718

 

 

 

-

 

Equity Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mutual Funds

 

 

1,491

 

 

 

991

 

 

 

-

 

 

 

500

 

Total equity investment securities

 

 

1,491

 

 

 

991

 

 

 

-

 

 

 

500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative instruments

 

$

4,841

 

 

$

-

 

 

$

4,841

 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative instruments

 

$

4,396

 

 

$

-

 

 

$

4,396

 

 

$

-

 

-35-


 

 

 

 

 

September 30, 2021

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(In thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

4,993

 

 

$

-

 

 

$

4,993

 

 

$

-

 

State and municipal obligations

 

 

2,765

 

 

 

-

 

 

 

2,765

 

 

 

-

 

Single issuer trust preferred security

 

 

875

 

 

 

-

 

 

 

875

 

 

 

-

 

Corporate debt securities

 

 

32,180

 

 

 

-

 

 

 

32,180

 

 

 

-

 

Total investment Securities available -for-sale

 

 

40,813

 

 

 

-

 

 

 

40,813

 

 

 

-

 

Equity Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mutual Funds

 

 

1,500

 

 

 

1,000

 

 

 

-

 

 

 

500

 

Total equity investment securities

 

 

1,500

 

 

 

1,000

 

 

 

-

 

 

 

500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative instruments

 

$

4,685

 

 

$

-

 

 

$

4,685

 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative instruments

 

$

4,720

 

 

$

-

 

 

$

4,720

 

 

$

-

 

 

The following tables present additional information about the equity securities 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 three months ended December 31, 2021 and December 31, 2020

 

 

Fair value measurements

 

 

 

using significant

 

 

 

unobservable inputs

 

 

 

(Level 3)

 

 

 

(In thousands)

    Balance, October 1, 2021

$

500

 

 

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, December 31, 2021

$

500

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value measurements

 

 

 

using significant

 

 

 

unobservable inputs

 

 

 

(Level 3)

 

 

 

(In thousands)

    Balance, October 1, 2020

$

500

 

 

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, December 31, 2020

$

500

 

 

All 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

-36-


 

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 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 December 31, 2021 and September 30, 2021:

 

 

 

December 31, 2021

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(In thousands)

 

Other real estate owned

 

$

4,961

 

 

$

-

 

 

$

-

 

 

$

4,961

 

Impaired loans(1)

 

 

15,700

 

 

 

-

 

 

 

-

 

 

 

15,700

 

Total

 

$

20,661

 

 

$

-

 

 

$

-

 

 

$

20,661

 

 

 

 

 

December 31, 2021

 

 

Fair Value at

December 31, 2021

 

 

Valuation Technique

 

Unobservable Input

 

Range/(Weighted

Average)

 

 

(Dollars in thousands)

Other real estate owned

 

$

4,961

 

 

Appraisal of Collateral(2)

 

Collateral discount(3)

 

6.4%/(6.4%)

Impaired loans(1)

 

 

15,700

 

 

Appraisal of Collateral(2)

 

Collateral discount(3)

 

0.0% – 12%/(10%)

Total

 

$

20,661

 

 

 

 

 

 

 

 

(1)

Consisted of four loans with an aggregate balance of $15.7 million and with $47,000 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, 2021

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(In thousands)

 

Other real estate owned

 

$

4,961

 

 

$

-

 

 

$

-

 

 

$

4,961

 

Impaired loans(1)

 

 

33,876

 

 

 

18,900

 

 

 

-

 

 

 

14,976

 

Total

 

$

38,837

 

 

$

18,900

 

 

$

-

 

 

$

19,937

 

 

 

 

September 30, 2021

 

 

Fair Value at

September 30, 2021

 

 

Valuation Technique

 

Unobservable Input

 

Range/(Weighted

Average)

 

 

(Dollars in thousands)

Other real estate owned

 

$

4,961

 

 

Appraisal of Collateral(2)

 

Collateral discount(3)

 

6.4%/(6.4%)

Impaired loans(1)

 

 

33,876

 

 

Appraisal of Collateral(2)

 

Collateral discount(3)

 

(4.0%) - 12.0%/(8%)

Total

 

$

38,837

 

 

 

 

 

 

 

 

(1)

Consisted of eight loans with an aggregate balance of $35.4 million and with $1.5 million 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 December 31, 2021 and September 30, 2021, the Company did not have any additions to our mortgage servicing assets.  At December 31, 2021 and September 30, 2021, 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

-37-


 

appropriate valuation methods. However, considerable judgment is necessarily required to interpret market data to develop the 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 December 31, 2021 and September 30, 2021. 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 December 31, 2021 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, and mutual funds(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 the Company has engaged for this purpose. When available, the Company, or its 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—The Company does 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. At September 30, 2021, four of the Company’s real estate loans totaling $32.5 million classified as held-for-sale were deemed impaired. Three of the commercial real estate loans totaling $18.9 million were fair valued at level 1 input as based off of a subsequent sale, and the other commercial real estate loan totaling $13.6 million was fair valued at level 3 is based off an appraisal.

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 Federal Reserve Bank, FHLB and ACBB, 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 time deposits of similar maturities. Fair value approximates book value for saving accounts, checking and negotiable order of withdrawal accounts (“NOW accounts”), and money market accounts.

Borrowings—Advances from the FHLB are carried at amortized cost. However, the Company is 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). The Company’s 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.

-39-


 

The carrying amount and estimated fair value of the Company’s financial instruments as of December 31, 2021 and September 30, 2021 are presented below:

 

 

 

December 31, 2021

 

 

 

Carrying Amount

 

 

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(In thousands)

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

134,904

 

 

$

134,904

 

 

$

134,904

 

 

$

-

 

 

$

-

 

Investment securities available-for-sale

 

 

41,718

 

 

 

41,718

 

 

 

-

 

 

 

41,718

 

 

 

-

 

Investment securities held-to-maturity

 

 

39,045

 

 

 

39,316

 

 

 

-

 

 

 

39,316

 

 

 

-

 

Equity investment securities

 

 

1,491

 

 

 

1,491

 

 

 

991

 

 

 

-

 

 

 

500

 

Loans held for sale

 

 

13,616

 

 

 

13,616

 

 

 

-

 

 

 

-

 

 

 

13,616

 

Loans receivable, net (including impaired loans)

 

 

858,203

 

 

 

852,962

 

 

 

-

 

 

 

-

 

 

 

852,962

 

Accrued interest receivable

 

 

3,394

 

 

 

3,394

 

 

 

-

 

 

 

3,394

 

 

 

-

 

Restricted stock

 

 

6,294

 

 

 

6,294

 

 

 

-

 

 

 

6,294

 

 

 

-

 

Mortgage servicing rights (included in Other Assets)

 

 

86

 

 

 

86

 

 

 

-

 

 

 

86

 

 

 

-

 

Derivatives (included in Other Assets)

 

 

4,841

 

 

 

4,841

 

 

 

-

 

 

 

4,841

 

 

 

-

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings accounts

 

 

56,342

 

 

 

56,342

 

 

 

-

 

 

 

56,342

 

 

 

-

 

Checking and NOW accounts

 

 

395,731

 

 

 

395,731

 

 

 

-

 

 

 

395,731

 

 

 

-

 

Money market accounts

 

 

346,023

 

 

 

346,023

 

 

 

-

 

 

 

346,023

 

 

 

-

 

Certificates of deposit

 

 

114,592

 

 

 

116,169

 

 

 

-

 

 

 

116,169

 

 

 

-

 

Borrowings (excluding sub debt)

 

 

60,000

 

 

 

60,135

 

 

 

-

 

 

 

60,135

 

 

 

-

 

Subordinated debt

 

 

24,974

 

 

 

25,027

 

 

 

-

 

 

 

25,027

 

 

 

-

 

Derivatives (included in Other Liabilities)

 

 

4,396

 

 

 

4,396

 

 

 

-

 

 

 

4,396

 

 

 

-

 

Accrued interest payable

 

 

779

 

 

 

779

 

 

 

-

 

 

 

779

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2021

 

 

 

Carrying Amount

 

 

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(In thousands)

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

136,590

 

 

$

136,590

 

 

$

136,590

 

 

$

-

 

 

$

-

 

Investment securities available-for-sale

 

 

40,813

 

 

 

40,813

 

 

 

-

 

 

 

40,813

 

 

 

-

 

Investment securities held-to-maturity

 

 

28,507

 

 

 

28,913

 

 

 

-

 

 

 

28,913

 

 

 

-

 

Equity investment securities

 

 

1,500

 

 

 

1,500

 

 

 

1,000

 

 

 

-

 

 

 

500

 

Loans receivable, net (including impaired loans)

 

 

902,981

 

 

 

900,357

 

 

 

-

 

 

 

-

 

 

 

900,357

 

Loans held for sale

 

 

33,199

 

 

 

33,199

 

 

 

19,583

 

 

 

 

 

 

 

13,616

 

Accrued interest receivable

 

 

3,512

 

 

 

3,512

 

 

 

-

 

 

 

3,512

 

 

 

-

 

Restricted stock

 

 

7,776

 

 

 

7,776

 

 

 

-

 

 

 

7,776

 

 

 

-

 

Mortgage servicing rights (included in Other Assets)

 

 

83

 

 

 

83

 

 

 

-

 

 

 

83

 

 

 

-

 

Derivatives (included in Other Assets)

 

 

4,685

 

 

 

4,685

 

 

 

-

 

 

 

4,685

 

 

 

-

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings accounts

 

 

50,582

 

 

 

50,582

 

 

 

-

 

 

 

50,582

 

 

 

-

 

Checking and NOW accounts

 

 

390,494

 

 

 

390,494

 

 

 

-

 

 

 

390,494

 

 

 

-

 

Money market accounts

 

 

385,480

 

 

 

385,480

 

 

 

-

 

 

 

385,480

 

 

 

-

 

Certificates of deposit

 

 

111,603

 

 

 

113,323

 

 

 

-

 

 

 

113,323

 

 

 

-

 

Borrowings (excluding sub debt)

 

 

90,000

 

 

 

90,215

 

 

 

-

 

 

 

90,215

 

 

 

-

 

Subordinated debt

 

 

24,934

 

 

 

25,027

 

 

 

-

 

 

 

25,027

 

 

 

-

 

Derivatives (included in Other Liabilities)

 

 

4,720

 

 

 

4,720

 

 

 

-

 

 

 

4,720

 

 

 

-

 

Accrued interest payable

 

 

572

 

 

 

572

 

 

 

-

 

 

 

572

 

 

 

-

 

 

-40-


 

 

Note 12 – Comprehensive Income

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

 

 

 

Three Months Ended December 31,

 

 

 

2021

 

 

2020

 

 

 

(In thousands)

 

Net unrealized holding (losses) on available-for-sale securities

 

$

(149

)

 

$

457

 

 

 

 

 

 

 

 

 

 

Net realized gain on securities available-for-sale

 

 

-

 

 

 

(355

)

 

 

 

 

 

 

 

 

 

Amortization of unrealized holding losses on securities transferred

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

 

 

2

 

 

 

1

 

 

 

 

 

 

 

 

 

 

Adjustment for loss recorded on replacement of derivative

 

 

-

 

 

 

(2

)

 

 

 

 

 

 

 

 

 

Fair value adjustments on derivatives

 

 

479

 

 

 

273

 

Other comprehensive income before taxes

 

 

332

 

 

 

374

 

Tax effect

 

 

(71

)

 

 

(79

)

Total other comprehensive income

 

$

261

 

 

$

295

 

 

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 December 31, 2021, there were $299,288 remaining shares available for future grants.

Restricted stock and option awards granted typically vest annually 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 the Company or is terminated prior to the awards vesting.  Shares of restricted stock have the same dividend and voting rights as common stock, while stock options do not have such rights.

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.

 The Company did not grant any stock options during the three months ended December 31, 2021 and December 31, 2020 and no stock options were forfeited during either such period Total compensation expense related to stock options granted under the 2014 Plan was approximately $9,000 and $8,000 for the three months ended December 31, 2021 and December 31, 2020, respectively. 

The Company did not award any restricted shares during the three months ended December 31, 2021 and December 31, 2020.  There were 1,216 shares of restricted stock forfeited during the three months ended December 31, 2021 and there were no shares forefeited during the three months ended December 31, 2020. The compensation expense related to restricted stock awards was approximately $43,000 and $44,000 for the three months ended December 31, 2021 and December 31, 2020, respectively.        

Stock-based compensation expense for the cost of the restricted stock 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.

-41-


 

Stock Options

 

The following is a summary of stock option activity for the three months ended December 31, 2021:

 

 

 

Shares

 

 

Weighted

Average

Exercise

Price

 

 

Weighted

Average

Remaining

Contractual

Term (In Years)

 

Aggregate

Intrinsic

Value

 

Outstanding, beginning of year

 

 

32,830

 

 

$

20.96

 

 

 

 

$

1,940

 

Granted

 

 

-

 

 

$

-

 

 

 

 

$

-

 

Exercised

 

 

-

 

 

$

-

 

 

 

 

$

-

 

Forfeited/cancelled/expired

 

 

-

 

 

$

-

 

 

 

 

$

-

 

Outstanding, at December 31, 2021

 

 

32,830

 

 

$

20.96

 

 

7.139

 

$

-

 

Exercisable, at December 31, 2021

 

 

14,480

 

 

$

21.91

 

 

5.945

 

$

-

 

Nonvested, at December 31, 2021

 

 

18,350

 

 

$

20.21

 

 

 

 

 

 

 

 

As of December 31, 2021, there was approximately 82,000 of total unrecognized compensation cost related to unvested stock options under the 2014 Plan.  The cost is expected to be recognized over a weighted average period of 3.16 years.

 

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

 

 

 

Shares

 

 

Weighted

Average

Exercise

Price

 

 

Weighted

Average

Remaining

Contractual

Term

(In Years)

 

Aggregate

Intrinsic

Value

 

Outstanding, beginning of year

 

 

25,830

 

 

$

21.57

 

 

 

 

$

-

 

Granted

 

 

-

 

 

$

-

 

 

 

 

$

-

 

Exercised

 

 

-

 

 

$

-

 

 

 

 

$

-

 

Forfeited/ can called/expired

 

 

-

 

 

$

-

 

 

 

 

$

-

 

Outstanding, at December 31, 2020

 

 

25,830

 

 

$

21.57

 

 

6.599

 

$

-

 

Exercisable, at December 31, 2020

 

 

9,310

 

 

$

22.09

 

 

8.113

 

$

-

 

Nonvested, at December 31, 2020

 

 

16,520

 

 

$

21.28

 

 

 

 

 

 

 

 

Restricted Stock Awards

The table below summarizes the activity for the Company’s restricted stock outstanding during the three months ended December 31, 2021:

 

 

 

Shares

 

 

Weighted Average

Fair Value

 

Outstanding, beginning of year

 

 

31,486

 

 

$

21.10

 

Granted

 

 

-

 

 

$

-

 

Vested

 

 

(1,907

)

 

$

23.83

 

Forfeited/cancelled/expired

 

 

(1,216

)

 

$

20.63

 

Outstanding, at December 31, 2021

 

 

28,363

 

 

$

20.94

 

 

 

 

Shares

 

 

Weighted Average

Fair Value

 

Outstanding, beginning of year

 

 

30,653

 

 

$

21.98

 

Granted

 

 

-

 

 

$

-

 

Vested

 

 

(859

)

 

$

21.01

 

Forfeited/cancelled/expired

 

 

-

 

 

$

-

 

Outstanding, at December 31, 2020

 

 

29,794

 

 

$

22.00

 

-42-


 

 

 

As of December 31, 2021, there was approximately 447,000 of total unrecognized compensation cost related to unvested shares of restricted stock granted under the 2014 Plan.  The cost is expected to be recognized over a weighted average period of 3.09 years.

        

 

Note 14 – Deposits

Deposits classified by type with percentages to total deposits at December 31, 2021 and September 30, 2021 consisted of the following:

 

 

 

December 31,

 

 

September 30,

 

 

 

2021

 

 

2021

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances by types of deposit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings

 

$

56,342

 

 

 

6.17

%

 

$

50,582

 

 

 

5.39

%

Money market accounts

 

 

346,023

 

 

 

37.91

 

 

 

385,480

 

 

 

41.09

 

Interest-bearing demand

 

 

335,411

 

 

 

36.75

 

 

 

336,645

 

 

 

35.88

 

Non-interest-bearing demand

 

 

60,320

 

 

 

6.61

 

 

 

53,849

 

 

 

5.74

 

 

 

 

798,096

 

 

 

87.44

%

 

 

826,556

 

 

 

88.10

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

 

114,592

 

 

 

12.56

%

 

 

111,603

 

 

 

11.90

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Deposits

 

$

912,688

 

 

 

100.00

%

 

$

938,159

 

 

 

100.00

%

 

The total amount of certificates of deposit greater than or equal to $250,000 at December 31, 2021 and September 30, 2021 was $20.1 million and $16.5 million, respectively.  The Company had brokered deposits totaling $9.0 million and $6.1 million at December 31, 2021 and September 30, 2021, respectively.

 

Interest expense on deposits consisted of the following:

 

 

 

Three Months Ended December 31,

 

 

 

2021

 

 

2020

 

 

 

(In thousands)

 

Savings accounts

 

$

11

 

 

$

18

 

Money market accounts

 

 

278

 

 

 

791

 

Interest-bearing demand

 

 

444

 

 

 

547

 

Certificates of deposit

 

 

312

 

 

 

901

 

Total

 

$

1,045

 

 

$

2,257

 

 

As of December 31, 2021, the scheduled maturities of certificates of deposits are as follows:

 

 

 

Scheduled Maturities

 

 

 

(In thousands)

 

Period Ending December 31,

 

 

 

 

2022

 

$

60,507

 

2023

 

 

31,309

 

2024

 

 

9,802

 

2025

 

 

5,721

 

2026

 

 

6,239

 

Thereafter

 

 

1,014

 

Total

 

$

114,592

 

 

 

 

 

 

 

-43-


 

 

As of December 31, 2021, the scheduled maturities of certificates of deposits in amounts greater than $100,000 are as follows:

 

 

 

Scheduled Maturities

 

 

 

(In thousands)

 

 

 

 

 

 

Three months or less

 

$

8,270

 

Over three through six months

 

 

9,808

 

Over six through twelve months

 

 

16,798

 

Over twelve months

 

 

28,925

 

Total

 

$

63,801

 

 

 

 

 

 

 

Note 15 – Leases

          The Company determines if an arrangement is a lease at inception. The Company adopted the guidance of ASC 842 Leases and recorded right of use (“ROU”) assets and related lease liabilities of $3.3 million at October 1, 2019. Operating leases are included in operating lease ROU assets and operating lease liabilities on our consolidated statements of financial condition. 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. The Company’s lease terms may include options to extend when it is reasonably certain that we will exercise an option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.

           The Company currently leases one financial center in Glen Mills, Pennsylvania; one private banking office located in Villanova, Pennsylvania; one private banking office located in Morristown, New Jersey; one private banking office located in Palm Beach, Florida; one representative office located in Wellington, Florida; one representative office located in Allentown, Pennsylvania; and one administrative office in Quakertown, Pennsylvania. The Company has elected not to recognize ROU assets and lease liabilities for one private banking office lease and two representative office leases whose terms are twelve months or less and are considered short-term leases. The financial center lease, two private banking office leases, and one administrative office lease 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 December 31,

 

 

 

2021

 

 

2020

 

 

 

(In thousands)

 

Operating lease cost

 

$

95

 

 

$

171

 

Finance lease cost

 

 

-

 

 

 

-

 

Short-term lease cost

 

 

23

 

 

 

22

 

Total

 

$

118

 

 

$

193

 

 

 

-44-


 

 

Supplemental information at December 31, 2021 and September 30, 2021 and for the three months ended December 31, 2021 and 2020 related to leases was as follows:

 

 

 

December 31, 2021

 

 

September 30, 2021

 

 

 

(Dollars in thousands)

 

 

(Dollars in thousands)

 

Supplemental balance sheet information

 

 

 

 

 

 

 

 

Operating lease right-of-use assets

 

$

1,663

 

 

$

1,796

 

Operating lease liabilities

 

$

1,691

 

 

$

1,830

 

Weighted average remaining lease term

 

4.28 years

 

 

4.50 years

 

Weighted average discount rate

 

 

1.99

%

 

 

1.99

%

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended December 31, 2021

 

 

Three Months Ended December 31, 2020

 

 

 

(In thousands)

 

 

(In thousands)

 

Supplemental cash flow information

 

 

 

 

 

 

 

 

Operating cash flows from operating leases

 

$

149

 

 

$

172

 

ROU assets obtained in exchange for lease obligations

 

$

3,279

 

 

$

3,279

 

 

 

 

 

 

 

 

 

 

Maturities of lease liabilities were as follows:

 

 

 

Operating Leases

 

 

 

(In thousands)

 

Period Ending September 30,

 

 

 

 

2022

 

 

438

 

2023

 

 

431

 

2024

 

 

431

 

2025

 

 

374

 

2026

 

 

135

 

Thereafter

 

 

20

 

Total lease payments

 

$

1,830

 

    Less: imputed interest

 

 

(138

)

Total

 

$

1,691

 

 

 

 

 

 

 

             

 

-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 December 31, 2021 and September 30, 2021. 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

This report contains certain forward-looking statements with respect to the financial condition, results of operations, plans, objectives, future performance and business of the Company and its subsidiaries, including statements preceded by, followed by or that include words or phrases such as “believes,” “expects,” “anticipates,” “plans,” “trend,” “objective,” “continue,” “remain,” “pattern” or similar expressions or future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” “may” or similar expressions. 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 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 SEC, the Public Company Accounting Oversight Board, the FASB or other accounting standards setters; possible other-than-temporary impairment of securities held by the Company; 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 and banks; unanticipated regulatory or judicial proceedings; changes in the interest rate environment may reduce interest margins; prepayment speeds, loan origination and sale volumes, charge-offs and loan loss provisions may vary substantially from period to period; general economic conditions and real estate valuations may be less favorable than expected; political developments, wars or other hostilities may disrupt or increase volatility in securities markets or other economic conditions; legislative or regulatory changes or actions may adversely affect the businesses in which the Company is engaged; changes and trends in the securities markets may adversely impact the Company; difficulties in integrating any businesses that we may acquire, which may increase our expenses and delay the achievement of any benefits that we may expect from such acquisitions; the impact of reputational risk created by the developments discussed above on such matters as business generation and retention, funding and liquidity could be significant; the outcome of any regulatory or legal investigations and proceedings may not be anticipated; 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 2021 Annual Report 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 and continuing impact of the COVID-19 outbreak, including the outbreak of its variants, on the Company’s business. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus and its variants can be controlled and abated and when and how the economy may be fully reopened, and for how long it will remain as such. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we are subject to the following risks, any of which could continue to 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 continue to substantially reopen, and there are high levels of unemployment for an extended period of time, inflation continues to expand, or there are continued disruptions in global and domestic supply chains, 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 net income; the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us; due to fluctuation in interest rates, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing net interest margin and spread and reducing net income; 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.

 

-46-


 

 

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.

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 2021 Annual Report and Note 2 of the Notes to the Unaudited Consolidated Financial Statements. There have been no significant changes to the Company’s Critical Accounting Policies as described in its 2021 Annual Report. 

 

Paycheck Protection Program

 

The CARES Act established the PPP, an expansion of the EIDL, administrated directly by the SBA.

 

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 CARES Act. The Company sold the entirety of its PPP loan portfolio in December 2020 and have not participated directly in new activiey after the sale.

 

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 such sources based on available capacity, term flexibility, and cost. As of December 31, 2021, the Company had adequate sources of liquidity.

 

Capital Strength

The Company’s capital ratios continued to exceed the highest required regulatory benchmark levels. As of December 31, 2021, common equity Tier 1 capital ratio was 15.39 percent, Tier 1 leverage ratio was 12.25 percent, Tier 1 risk-based capital ratio was 15.39 percent and the total risk-based capital ratio was 19.13 percent.  

 

Deferral and Modification Requests

 

The CARES Act provided guidance around the modification of loans as a result of the COVID-19 pandemic, which outlined, among other criteria, that short-term modifications made on a good faith basis to borrowers who were current as defined under the CARES Act prior to any relief, are not TDRs. This includes short-term modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers are considered current under the CARES Act and related regulatory guidance if they are less than 30 days past due on their contractual payments at the time a modification program is implemented.  As of December 31, 2021, the Company had five COVID-19 modified loans totaling $47.9 million, representing 5.52 percent of loans outstanding. The COVID-19 loan modifications do not classify as TDRs as they fall under Section 4013 of the CARES Act, as amended, and further details regarding these modifications are provided in the table below. For loans subject to the program, each borrower is required to resume making regularly scheduled loan payments at the end of the modification period and the deferred amounts will be moved to the end of the loan term.

-47-


 

 

 

December 31, 2021

 

 

Number of Loans

 

 

Loan Modified Exposure

 

 

Gross Loans        December 31, 2021

 

 

Percentage of Gross Loans Modified

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

Residential mortgage

 

-

 

 

$

-

 

 

$

187,516

 

 

 

0.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction and Development:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential and commercial

 

-

 

 

 

-

 

 

 

56,876

 

 

 

0.00

%

Land loans

 

-

 

 

 

-

 

 

 

2,138

 

 

 

0.00

%

Total Construction and Development

 

-

 

 

 

-

 

 

 

59,014

 

 

 

0.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

5

 

 

 

47,916

 

 

 

416,248

 

 

 

5.52

%

Farmland

 

-

 

 

 

-

 

 

 

15,582

 

 

 

0.00

%

Multi-family

 

-

 

 

 

-

 

 

 

54,448

 

 

 

0.00

%

Commercial and industrial

 

-

 

 

 

-

 

 

 

106,493

 

 

 

0.00

%

Other

 

-

 

 

 

-

 

 

 

7,433

 

 

 

0.00

%

Total Commercial

 

5

 

 

 

47,916

 

 

 

600,204

 

 

 

5.52

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity lines of credit

 

-

 

 

 

-

 

 

 

13,174

 

 

 

0.00

%

Second mortgages

 

-

 

 

 

-

 

 

 

5,384

 

 

 

0.00

%

Other

 

-

 

 

 

-

 

 

 

2,282

 

 

 

0.00

%

Total Consumer

 

-

 

 

 

-

 

 

 

20,840

 

 

 

0.00

%

Total loans

 

5

 

 

$

47,916

 

 

$

867,574

 

 

 

5.52

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2021

 

 

Number of Loans

 

 

Loan Modified Exposure

 

 

Gross Loans September 30, 2021

 

 

Percentage of Gross Loans Modified

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

Residential mortgage

 

2

 

 

$

667

 

 

$

198,710

 

 

 

0.07

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction and Development:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential and commercial

 

-

 

 

 

-

 

 

 

61,492

 

 

 

0.00

%

Land loans

 

-

 

 

 

-

 

 

 

2,204

 

 

 

0.00

%

Total Construction and Development

 

-

 

 

 

-

 

 

 

63,696

 

 

 

0.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

6

 

 

 

60,567

 

 

 

426,915

 

 

 

6.63

%

Farmland

 

-

 

 

 

-

 

 

 

10,297

 

 

 

0.00

%

Multi-family

 

-

 

 

 

-

 

 

 

66,332

 

 

 

0.00

%

Commercial and industrial

 

-

 

 

 

-

 

 

 

115,246

 

 

 

0.00

%

Other

 

-

 

 

 

-

 

 

 

10,954

 

 

 

0.00

%

Total Commercial

 

6

 

 

 

60,567

 

 

 

629,744

 

 

 

6.63

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity lines of credit

 

-

 

 

 

-

 

 

 

13,491

 

 

 

0.00

%

Second mortgages

 

-

 

 

 

-

 

 

 

5,884

 

 

 

0.00

%

Other

 

-

 

 

 

-

 

 

 

2,299

 

 

 

0.00

%

Total Consumer

 

-

 

 

 

-

 

 

 

21,674

 

 

 

0.00

%

Total loans

 

8

 

 

$

61,234

 

 

$

913,824

 

 

 

6.70

%

 

 


-48-


 

 

Certain industries included within commercial real estate loans are widely expected to be particularly impacted by social distancing, quarantines, and the economic impact   of the COVID-19 pandemic, including the following:

 

 

December 31, 2021

 

 

September 30, 2021

 

 

Number of Loans

 

 

Loan Modified Exposure

 

 

Percentage of Gross Loans Modified

 

 

Number of Loans

 

 

Loan Modified Exposure

 

 

Percentage of Gross Loans Modified

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

(Dollars in thousands)

 

Industries:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Hotel

 

5

 

 

$

47,916

 

 

 

5.52

%

 

6

 

 

$

60,567

 

 

 

6.70

%

     Retail

 

-

 

 

 

-

 

 

 

0.00

%

 

 

-

 

 

 

-

 

 

 

0.00

%

     Office/Medical Office

 

-

 

 

 

-

 

 

 

0.00

%

 

 

-

 

 

 

-

 

 

 

0.00

%

     Fitness Centers

 

-

 

 

 

-

 

 

 

0.00

%

 

 

-

 

 

 

-

 

 

 

0.00

%

     Restaurants and food service

 

-

 

 

 

-

 

 

 

0.00

%

 

 

-

 

 

 

-

 

 

 

0.00

%

     Other

 

-

 

 

 

-

 

 

 

0.00

%

 

 

-

 

 

 

-

 

 

 

0.00

%

         Total Outstanding Exposure

 

5

 

 

$

47,916

 

 

 

5.52

%

 

6

 

 

$

60,567

 

 

 

6.70

%

 

 

 

Results of Operations

Net income available to common shareholders for the three months ended December 31, 2021 amounted to $2.0 million, or $0.27 per fully diluted common share, a decrease of $256,000, or 11.3 percent, as compared with net income of $2.3 million, or $0.30 per common share, for the three months ended December 31, 2021. This decrease in net income and diluted earnings per share was primarily due to an increase in other expense for the quarter ended December 31, 2021, which other expense increased $256,000 or 5.1 percent, to $5.2 million when compared to the quarter ended December 31, 2020. The increase was primarily due to increases of $392,000 in professional fees associated with additional work related to fiscal year-end September 30, 2021 and the preparation and filing of the Company’s annual report on Form 10K, which was partially off set by a decrease in other operating expense of $101,000 for the three month period ending December 31, 2021.The annualized return on average assets was 0.69 percent for the three months ended December 31, 2021, compared to annualized return on average assets of 0.74 percent for three months ended December 31, 2020. The annualized return on average shareholders’ equity was 5.61 percent for the three month period ended December 31, 2021, compared to 6.38 percent in annualized return on average shareholders’ equity for the three months ended December 31, 2020.    

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.

-49-


 

Net Interest Income

 

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

 

 

 

For the Three Months Ended December 31,

 

 

 

2021

 

 

2020

 

 

Increase

(Decrease)

 

 

Percent

Change

 

 

 

(Dollars in thousands)

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

8,228

 

 

$

10,076

 

 

$

(1,848

)

 

 

(18.34

)%

Investment securities

 

 

491

 

 

 

371

 

 

 

120

 

 

 

32.35

 

Interest-bearing cash accounts

 

 

13

 

 

 

8

 

 

 

5

 

 

 

62.50

 

Dividends, restricted stock

 

 

91

 

 

 

141

 

 

 

(50

)

 

 

(35.46

)

Total interest income

 

 

8,823

 

 

 

10,596

 

 

 

(1,773

)

 

 

(16.73

)

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

1,045

 

 

 

2,257

 

 

 

(1,212

)

 

 

(53.70

)

Short-term borrowings

 

 

-

 

 

 

45

 

 

 

(45

)

 

 

(100.00

)

Long-term borrowings

 

 

237

 

 

 

607

 

 

 

(370

)

 

 

(60.96

)

Subordinated debt

 

 

383

 

 

 

383

 

 

 

-

 

 

 

-

 

Total interest expense

 

 

1,665

 

 

 

3,292

 

 

 

(1,627

)

 

 

(49.42

)

Net interest income

 

$

7,158

 

 

$

7,304

 

 

$

(146

)

 

 

(2.00

)%

 

 

Net interest income was $7.2 million for the three months ended December 31, 2021, a decrease of $146,000 or 2 percent, from $7.3 million for the three months ended December 31, 2020. Net interest margin (“NIM”) increased 16 basis points to 2.78 percent for the quarter ended December 31, 2021, compared to 2.62 percent for the quarter ended December 31, 2020. The increase in net interest income was driven by a reduction in interest expense, partially offset by a decrease in interest-earning assets, and the increase in NIM was primarily driven by the decrease in the cost of interest-bearing deposits, which decreased by 58 basis points for the three months ended December 31, 2021 compared to the three months ended December 31, 2020. The cost of interest-bearing liabilities decreased by 61 basis points for the three months ended December 31, 2021 compared to the three months ended December 31, 2020.

 

Interest Income

For the quarters ended December 31, 2021 and December 31, 2020, total interest income was $8.8 million and $10.6 million, respectively. The average yield on interest-earning assets declined 38 basis points for the three months ended December 31, 2021 when compared to the same period in 2020. This  was primarily due to the decrease in loan balances combined with the overall average yield on loans.

Interest Expense

For the three months ended December 31, 2021, interest expense decreased $1.6 million, or 49.4 percent, to $1.7 million, compared to $3.3 million for the same three month period in 2020. The decrease in interest expense is primarily attributable to rate related factors, as the average rate on interest-bearing deposits fell 58 basis points for the three months ended December 31, 2021 compared to the same period in 2020. This decline is reflected in a 61 basis point decrease in the average rate on interest-bearing liabilities for the three months ended December 31, 2021 compared to the same period in 2020.

Variance in Net Interest Income

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.

-50-


 

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

 

 

 

Three Months Ended December 31,

 

 

 

2021 and 2020

 

 

 

Increase (Decrease) Due to Change in:

 

 

 

Average Volume

 

 

Average Rate

 

 

Net

Change

 

 

 

(In thousands)

 

Interest Earning Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

(1,159

)

 

$

(689

)

 

$

(1,848

)

Investment securities

 

 

191

 

 

 

(71

)

 

 

120

 

Interest-bearing cash accounts

 

 

4

 

 

 

1

 

 

 

5

 

Dividends, restricted stock

 

 

(40

)

 

 

(10

)

 

 

(50

)

Total interest-earning assets

 

$

(1,004

)

 

$

(769

)

 

$

(1,773

)

Interest Bearing Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Money Market deposits

 

$

144

 

 

$

(657

)

 

$

(513

)

Savings deposits

 

 

3

 

 

 

(10

)

 

 

(7

)

Certificates of deposits

 

 

(425

)

 

 

(164

)

 

 

(589

)

Other interest-bearing deposits

 

 

112

 

 

 

(215

)

 

 

(103

)

Total interest-bearing deposits

 

 

(166

)

 

 

(1,046

)

 

$

(1,212

)

Borrowings

 

 

(444

)

 

 

29

 

 

 

(415

)

Total interest-bearing liabilities

 

$

(610

)

 

$

(1,017

)

 

$

(1,627

)

Change in net interest income

 

$

(394

)

 

$

248

 

 

$

(146

)

 

-51-


 

 

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 NIM (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 December 31,

 

 

 

2021

 

 

2020

 

 

 

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)

 

$

913,587

 

 

$

8,228

 

 

 

3.60

%

 

$

1,032,483

 

 

$

10,076

 

 

 

3.90

%

Investment securities

 

 

75,427

 

 

 

491

 

 

 

2.60

%

 

 

49,785

 

 

 

371

 

 

 

2.98

%

Interest-bearing cash accounts

 

 

32,775

 

 

 

13

 

 

 

0.16

%

 

 

21,690

 

 

 

8

 

 

 

0.15

%

Dividends, restricted stock

 

 

6,699

 

 

 

91

 

 

 

5.43

%

 

 

9,350

 

 

 

141

 

 

 

6.03

%

Total interest-earning assets(1)

 

 

1,028,488

 

 

 

8,823

 

 

 

3.43

%

 

 

1,113,308

 

 

 

10,596

 

 

 

3.81

%

Non-interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

 

105,989

 

 

 

 

 

 

 

 

 

 

 

61,426

 

 

 

 

 

 

 

 

 

Bank-owned life insurance

 

 

26,125

 

 

 

 

 

 

 

 

 

 

 

25,468

 

 

 

 

 

 

 

 

 

Other assets

 

 

26,042

 

 

 

 

 

 

 

 

 

 

 

31,229

 

 

 

 

 

 

 

 

 

Other real estate owned

 

 

4,961

 

 

 

 

 

 

 

 

 

 

 

5,796

 

 

 

 

 

 

 

 

 

Allowance for loan losses

 

 

(14,157

)

 

 

 

 

 

 

 

 

 

 

(12,462

)

 

 

 

 

 

 

 

 

Total non-interest-earning assets

 

 

148,960

 

 

 

 

 

 

 

 

 

 

 

111,457

 

 

 

 

 

 

 

 

 

Total assets

 

$

1,177,448

 

 

 

 

 

 

 

 

 

 

$

1,224,765

 

 

 

 

 

 

 

 

 

LIABILITIES & SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-Bearing Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money Market deposits

 

$

367,761

 

 

 

278

 

 

 

0.30

%

 

$

311,103

 

 

 

791

 

 

 

1.02

%

Savings deposits

 

 

53,336

 

 

 

11

 

 

 

0.08

%

 

 

45,621

 

 

 

18

 

 

 

0.16

%

Certificates of deposits

 

 

113,622

 

 

 

312

 

 

 

1.10

%

 

 

214,793

 

 

 

901

 

 

 

1.68

%

Other interest-bearing deposits

 

 

341,550

 

 

 

444

 

 

 

0.52

%

 

 

283,132

 

 

 

547

 

 

 

0.77

%

Total interest-bearing deposits

 

 

876,269

 

 

 

1,045

 

 

 

0.48

%

 

 

854,649

 

 

 

2,257

 

 

 

1.06

%

Borrowings

 

 

91,919

 

 

 

620

 

 

 

2.70

%

 

 

160,712

 

 

 

1,035

 

 

 

2.58

%

Total interest-bearing liabilities

 

 

968,188

 

 

 

1,665

 

 

 

0.69

%

 

 

1,015,361

 

 

 

3,292

 

 

 

1.30

%

Non-interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

 

54,092

 

 

 

 

 

 

 

 

 

 

 

48,152

 

 

 

 

 

 

 

 

 

Other liabilities

 

 

11,408

 

 

 

 

 

 

 

 

 

 

 

18,689

 

 

 

 

 

 

 

 

 

Total non-interest bearing liabilities

 

 

65,500

 

 

 

 

 

 

 

 

 

 

 

66,841

 

 

 

 

 

 

 

 

 

Shareholders' equity

 

 

143,760

 

 

 

 

 

 

 

 

 

 

 

142,563

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders' equity

 

$

1,177,448

 

 

 

 

 

 

 

 

 

 

$

1,224,765

 

 

 

 

 

 

 

 

 

Net interest spread

 

 

 

 

 

 

 

 

 

 

2.74

%

 

 

 

 

 

 

 

 

 

 

2.51

%

Net interest margin

 

 

 

 

 

 

 

 

 

 

2.78

%

 

 

 

 

 

 

 

 

 

 

2.62

%

Net interest income

 

 

 

 

 

$

7,158

 

 

 

 

 

 

 

 

 

 

$

7,304

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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 December 31,

 

 

 

 

 

 

 

 

 

 

 

Increase

 

 

Percent

 

 

 

2021

 

 

2020

 

 

(Decrease)

 

 

Change

 

 

 

(Dollars in thousands)

 

Service charges and other fees

 

$

454

 

 

$

247

 

 

$

207

 

 

 

83.81

%

Rental income-other

 

 

52

 

 

 

54

 

 

 

(2

)

 

 

(3.70

)

Net gains on sale and call of investments

 

 

-

 

 

 

355

 

 

 

(355

)

 

 

(100.00

)

Net gains on sale of loans

 

 

52

 

 

 

404

 

 

 

(352

)

 

 

(87.13

)

Earnings on bank-owned life insurance

 

 

169

 

 

 

164

 

 

 

5

 

 

 

3.05

 

Total other income

 

$

727

 

 

$

1,224

 

 

$

(497

)

 

 

(40.60

)%

 

For the three months ended December 31, 2021, total other income amounted to $727,000, compared to total other income of $1.2 million for the three months ended December 31, 2020. This decrease in total other income was primarily due to decreases in net gains on sale of investments and net gains on sale of loans of $355,000 and $352,000, respectively, for three months ended December 31, 2021 compared to the same period in 2020. This decrease was partially offset by an increase in service charges and other fees of $ 207,000 for the three months ended December 31, 2021. The increase in service charges and other fees was primarily due to approximately $144,000 in prepayment penalties and $54,000 of increased service charges during the three months ended December 31, 2021.

Other Expense

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

 

 

 

Three Months Ended December 31,

 

 

 

 

 

 

 

 

 

 

 

 

Increase

 

 

Percent

 

 

 

 

2021

 

 

2020

 

 

(Decrease)

 

 

Change

 

 

 

 

(Dollars in thousands)

Salaries and employee benefits

 

$

2,295

 

 

$

2,272

 

 

$

23

 

 

 

1.01

%

 

Occupancy expense

 

 

515

 

 

 

542

 

 

 

(27

)

 

 

(4.98

)

 

Federal deposit insurance premium

 

 

76

 

 

 

76

 

 

 

-

 

 

 

-

 

 

Advertising

 

 

32

 

 

 

32

 

 

 

-

 

 

 

-

 

 

Data processing

 

 

320

 

 

 

328

 

 

 

(8

)

 

 

(2.44

)

 

Professional fees

 

 

1,055

 

 

 

663

 

 

 

392

 

 

 

59.13

 

 

Other real estate owned expense, net

 

 

5

 

 

 

28

 

 

 

(23

)

 

 

(82.14

)

 

Pennsylvania shares tax

 

 

170

 

 

 

170

 

 

 

-

 

 

 

-

 

 

Other operating expenses

 

 

760

 

 

 

861

 

 

 

(101

)

 

 

(11.73

)

 

Total other expense

 

$

5,228

 

 

$

4,972

 

 

$

256

 

 

 

5.15

%

 

 

For the three months ended December 31, 2021, total other expense increased $256,000 or 5.2 percent, from the comparable three months ended December 31, 2020. The increase was primarily due to increases of $392,000 in professional fees associated with additional work related to fiscal year-end September 30, 2021 and the preparation and filing of the Company’s annual report on Form 10K which was partially off set by a decrease in other operating expense of $101,000 for the three month period ending December 31, 2021.

Income Taxes

 

The Company recorded a provision for income taxes of $640,000 and $733,000 during the three months ended December 31, 2021 and December 31, 2020, respectively, reflecting an effective tax rate of 24.0 percent and 24.4 percent, respectively.

Investment Portfolio

 

For the three months ended December 31, 2021, the average volume of investment securities increased by $120 million to approximately $75.4 million, or 51.2 percent of average earning assets, from $49.8 million, or 2.9 percent of average earning assets,

-53-


 

for the three months ended December 31, 2020.At December 31, 2021, the total investment portfolio amounted to $82.3 million, an increase of $11.4 million or 16.2 percent from September 30, 2021. This increase in the investment portfolio was primarily due to purchases of $15.7 million of investment securities, partially offset by payments, maturities, calls, and sales of $4.1 million of investment securities. At December 31, 2021, 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 subdivisions, corporate bonds and notes, a trust preferred security, and taxable mutual funds.

 

During the three month period ended December 31, 2021, rate-related factors decreased investment revenue by approximately $71,000, while volume-related factors increased investment revenue by approximately $191,000 from the three month period ended December 31, 2020. The yield on investments decreased by 38 basis points to 2.60 percent for the three month period ended December 31, 2021, as compared to 2.98 percent for the three month period ended December 31, 2020. 

 

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 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 and limit concentrations in any single industry.

Total gross loans amounted to $867.6 million at December 31, 2021 and $913.8 million at September 30, 2021. The $46.3 million decrease in the gross loan portfolio at December 31, 2021 compared to September 30, 2021 or 5.1 percent, for the period was driven by higher loan payoffs and paydowns during the period primarily in the commercial loan category. Commercial loans declined to $600.2 million at December 31, 2021 from $629.7 at September 30, 2021 or a 4.7 percent decline as compared to September 30, 2021. Residential loans were $59.0 million and $63.7 million at December 31, 2021 and September 30, 2021, respectively.

Loans held-for-sale amounted to $13.6 million at December 31, 2021, compared to $33.2 million at September 30, 2021.  The decline was primarily related to the sale of three commercial loans totaling $18.9 million with no further write down.

At December 31, 2021, the Company had $133.3 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. Average loan balances for the quarter ended December 31, 2021, totaled $913.6 million as compared to $1.0 billion for the quarter ended December 31, 2020, representing a decrease of $118.9 million or 11.5 percent. The decrease in average total loan volume was primarily due to increased paydowns. During the three month period ended December 31, 2021, rate-related factors decreased loan revenue by approximately $689,000 combined with volume-related factors decreased loan revenue by approximately $1.2 million from the three month period ended December 31, 2020. The yield on loans decreased by 30 basis points to 3.60 percent for the three month period ended December 31, 2021, as compared to 3.90 percent for the three month period ended December 31, 2020. 

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

-54-


 

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 December 31, 2021, the ALLL amounted to approximately $10.0 million, or 1.16 percent of total gross loans. At September 30, 2021, the ALLL amounted to approximately $11.5 million, or 1.26 percent of total gross loans, excluding loans held-for-sale. The decrease in the allowance for loan losses of $1.4 million or 12.5 percent is in line with the Company’s improved asset quality and, more specifically, improvement in non-performing loans which declined $1.9 million, or 22.0 percent compared to the period ended September 30, 2021. The Company did not record a provision for loan losses for the quarter ended December 31, 2021, compared to $10.6 million provision for loan losses for the quarter ended September 30, 2021.    The provision expense at the quarter ended September 30, 2021 was directly related to the decision to transfer certain problem loans to held-for-sale and the resultant fair value adjustment required.

The net charge-offs were $1.4 million for the three months ended December 31, 2021, compared to a net recovery of $52,000 for the three months ended December 31, 2020. Net loan charge-offs increased during the three months ended December 31, 2021 due to one non-accrual commercial and industrial loan totaling $2.5 million that was partially charged-off in the amount of $1.4 million . This credit had a specific reserve of $1.5 million as of September 30, 2021. The partial charge-off was primarily the result of the ongoing monitoring and evaluation of classified loan values and is reflective of changes in current economic conditions.

 

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 year 2022 and fiscal year 2021 reflects the credit quality within the loan portfolio, the loan volume recorded or lost 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 December 31, 2021 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.

-55-


 

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

 

 

 

Three Months Ended December 31,

 

 

 

2021

 

 

2020

 

 

 

(Dollars in thousands)

 

Average loans outstanding

 

$

997,156

 

 

$

1,019,716

 

Total gross loans at end of period

 

$

867,574

 

 

$

1,043,047

 

Analysis of the Allowance of Loan Losses:

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

11,472

 

 

$

12,433

 

 

 

 

 

 

 

 

 

 

Charge-offs:

 

 

 

 

 

 

 

 

Commercial:

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

1,430

 

 

 

-

 

Consumer:

 

 

 

 

 

 

 

 

Second mortgages

 

 

85

 

 

 

 

 

Other

 

 

-

 

 

 

1

 

Total charge-offs

 

 

1,515

 

 

 

1

 

Recoveries:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential Mortgage

 

 

1

 

 

 

1

 

Commercial:

 

 

 

 

 

 

 

 

Commercial real estate

 

 

75

 

 

 

1

 

Commercial and industrial

 

 

-

 

 

 

1

 

 

 

 

 

 

 

 

 

 

Consumer:

 

 

 

 

 

 

 

 

Second mortgages

 

 

4

 

 

 

50

 

Total recoveries

 

 

80

 

 

 

53

 

Net charge-offs (recoveries)

 

 

1,435

 

 

 

(52

)

Provision for loan losses

 

 

-

 

 

 

550

 

Balance at end of period

 

$

10,037

 

 

$

13,035

 

Ratios:

 

 

 

 

 

 

 

 

Ratio of allowance for loan losses to non-performing loans

 

 

560.73

%

 

 

76.61

%

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

 

 

0.19

%

 

 

(0.02)

%

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

 

 

14.30

%

 

 

(0.04)

%

 

(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 the loan portfolio’s dynamics and mix of assets. The Company endeavors to identify loans experiencing difficulty early in the process in an attempt 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 only may be restored to an accruing basis when it again becomes well-secured, all past due amounts have been collected and a satisfactory period of ongoing repayments exist. Accruing loans past due 90 days or more are generally well-secured and in the process of collection.

-56-


 

Non-Performing Assets, OREO 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. It is the Company’s general policy 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.

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:

 

 

 

December 31,

2021

 

 

September 30,

2021

 

 

 

(In thousands)

 

Non-accruing loans:

 

 

 

 

 

 

 

 

Non-accrual loans

 

$

1,790

 

 

$

3,697

 

Accruing loans more than 90 days past due

 

 

-

 

 

 

-

 

Total non-performing loans

 

 

1,790

 

 

 

3,697

 

OREO

 

 

4,961

 

 

 

4,961

 

Total non-performing assets

 

$

6,751

 

 

$

8,658

 

TDR loans - performing

 

$

6,310

 

 

$

17,601

 

 

Non-accrual loans totaled $1.8 million at December 31, 2021, and $3.7 million at September 30, 2021. The decrease in non-accrual loans was primarily due a partial charge down of $1.4 million related to one non-accrual commercial and industrial loan. This loan had a specific allocation of $1.5 million previously reported at September 30, 2021. The partial charge-off was the result of the ongoing monitoring and evaluation of classified loan values and is reflective of the change in current market and economic conditions of the borrower.  Performing troubled debt restructured (“TDR”) loans were $6.3 million at December 31, 2021, and $17.6 million at September 30, 2021. The decrease is primarily related to two TDR commercial real estate loans totaling $11.4 million that were sold during the period, as part of the note sale previously announced.

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 Company to sufficient risk to warrant classification as substandard or doubtful but possess certain identified weaknesses are required to be designated as “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 Company 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 December 31, 2021, special mention loans were $48.6 million compared to $58.1 million at September 30, 2021. The decrease was primarily due to one $9.3 million commercial rela estate loan that paid off during the three months ended December 31, 2021. Substandard loans were $13.7 million and $16.1 million at December 31, 2021 and September 30, 2021, respectively. This decrease in substandard lonas is primarly due to $1.4 million charge down of one commercial and indusrial loan.  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.

          

-57-


 

 

Recent Accounting Pronouncements

Note 2 of the Notes to the Unaudited Consolidated Financial Statements 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 Company’s 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, an 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 NIMs in a falling rate environment and reduce NIMs 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 December 31, 2021, the Company reflected a positive interest sensitivity gap with an interest sensitivity ratio of 1.20:1.00 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 loans held for sale, investment securities available-for-sale and loan swaps. 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.

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

-58-


 

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’s primary sources of short-term liquidity consist of cash and cash equivalents, interest bearing deposits with banks (including the FHLB Pittsburgh), investment securities held to maturity that are maturing within 90 days or would otherwise qualify as maturities if sold (i.e., 85 percent of original cost basis has been repaid), investment securities available-for-sale, loans held or sale, and from time to time federal funds sold and receivables related to unsettled securities transactions.

dditionally, liquidity is derived from scheduled loan payments of principal and interest, as well as prepayments received. As a contingency plan for any liquidity constraints, liquidity could also be derived from the sale of conforming residential mortgages from our loan portfolio or alleviated from the temporary curtailment of lending activities. At December 31, 2021, the Company had $134.9 million in cash and cash equivalent compared to $136.6 million at September 30, 2021. In addition, our available for sale investment securities amounted to $41.7 million at December 31, 2021 and $40.8 million at September 30, 2021.

Deposits

Total deposits decreased $25.5 million, or 2.7 percent, from $938.2 million at September 30, 2021 to $912.7 million at December 31, 2021. Total interest-bearing deposits decreased $31.9 million from $884.3 million at September 30, 2021 to $852.4 million at December 31, 2021. Interest-bearing demand, savings, and time deposits under $100,000 increased $1.1 million to a total of $165.8 million at December 31, 2021 as compared to $164.8 million at September 30, 2021. Time deposits $100,000 and over increased $3.8 million as compared to September 30, 2021. Time deposits $100,000 and over represented 7.0 percent of total deposits at December 31, 2021 compared to 6.4 percent at September 30, 2021. We had brokered deposits totaling $9.0 million at December 31, 2021 compared to $6.1 million at September 30, 2021.

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 which in turn will allow the Company to efficiently compete for and retain deposits in its market.

The following table depicts the Company’s deposits classified by type, with percentages to total deposits, at December 31, 2021 and September 30, 2021:

 

 

 

December 31,

2021

 

 

September 30,

2021

 

 

Dollar

 

 

 

Amount

 

 

Percentage

 

 

Amount

 

 

Percentage

 

 

Change

 

Balances by types of deposit:

 

(Dollars in thousands)

 

        Savings

 

$

56,342

 

 

 

6.17

%

 

$

50,582

 

 

 

5.39

%

 

$

5,760

 

        Money market accounts

 

 

346,023

 

 

 

37.91

 

 

 

385,480

 

 

 

41.09

 

 

 

(39,457

)

        Interest bearing demand

 

 

335,411

 

 

 

36.75

 

 

 

336,645

 

 

 

35.88

 

 

 

(1,234

)

        Non-interest bearing demand

 

 

60,320

 

 

 

6.61

 

 

 

53,849

 

 

 

5.74

 

 

 

6,471

 

 

 

$

798,096

 

 

 

87.44

 

 

$

826,556

 

 

 

88.10

 

 

$

(28,460

)

Certificates of deposit

 

 

114,592

 

 

 

12.56

 

 

 

111,603

 

 

 

11.90

 

 

 

2,989

 

Total

 

$

912,688

 

 

 

100.00

%

 

$

938,159

 

 

 

100.00

%

 

$

(25,471

)

 

Borrowings

Advances from FHLB 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 these advances. As of December 31, 2021 and September 30, 2021, the Company’s outstanding balance of FHLB Pittsburgh advances totaled $60.0 million and $90.0 million, respectively.  Of the $60.0 million in advances, all are short-term fixed-rate advances, with $20.0 million maturing in fiscal year 2022 and $40.0 million having a rolling 90 day maturity.

The Company did not purchase any securities sold under agreements to repurchase as a short-term funding source during the first fiscal quarters of 2022 or 2021. 

 

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 three months ended December 31, 2021, cash and cash equivalents decreased by $1.7 million from the balance at September 30, 2021. Net cash of $966,000 was used in operating activities primarily due to net

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income of $2.0 million, partially offset by a decrease of $3.7 million in other liabilities. Net cash provided by investing activities amounted to approximately $54.2 million primarily due to a net decrease in loans of $64.4 million which was partially offset by purchases of $15.7 million of investment securities. The decrease in net cash from financing activities of $54.9 million was primarily from the net decrease of $30.0 million in long term borrowings and $25.5 million in deposits.

Shareholders’ Equity

Total shareholders’ equity amounted to $144.6 million, or 12.5 percent of total assets, at December 31, 2021, compared to $142.2 million, or 11.8 percent of total assets, at September 30, 2021. Book value per common share was $18.97 at December 31, 2021, compared to $18.65 at September 30, 2021.

 

 

 

December 31,

2021

 

 

September 30,

2021

 

 

 

(In thousands, except for per share data)

 

Shareholders’ equity

 

 

144,557

 

 

 

142,168

 

Book value per common share

 

$

18.97

 

 

$

18.68

 

 

Capital

At December 31, 2021, the Bank’s common equity Tier 1 capital ratio was 17.14 percent, Tier 1 leverage ratio was 13.61 percent, Tier 1 risk-based capital ratio was 17.14 percent and the total risk-based capital ratio was 18.22 percent.  At September 30, 2021, the Bank’s common equity Tier 1 capital ratio was 16.13 percent, Tier 1 leverage ratio was 13.14 percent, Tier 1 risk-based capital ratio was 16.13 percent and the total risk-based capital ratio was 17.32 percent. At December 31, 2021, the Bank 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.

Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Based on the evaluation of our disclosure controls and procedures as of December 31, 2021, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of December 31, 2021.

Changes in Internal Controls

There were no changes in the Company’s internal controls over financial reporting during the three months ended December 31, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

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PART II - OTHER INFORMATION

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

For a summary of risk factors relevant to the Company, see Part I, Item 1A, “Risk Factors” in the 2021 Annual Report.  There are no material changes to the risk factors as previously disclosed under the section titled “Risk Factors” in Part I, Item 1A of our 2021 Annual Report.  Additional risks not presently known to the Company, or that the Company currently deems immaterial, may also adversely affect the business, financial condition or results of operatios.

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

           There were no repurchases or unregistered sales of the Company’s stock during the quarter.

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 - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document.

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document.

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase Document.

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document.

101.DEF

 

Inline XBRL Taxonomy Extension Definitions Linkbase Document.

104

 

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

 

(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.

 

 

 

 

 

 

 

 

 

February 14, 2022

By:

/s/ Anthony C. Weagley

 

 

 

Anthony C. Weagley

 

 

 

President and Chief Executive Officer

 

 

 

 

 

 

 

 

 

February 14, 2022

By:

/s/ Joseph D. Gangemi

 

 

 

Joseph D. Gangemi

 

 

 

Executive Vice President and Chief Financial  

 

 

 

Officer

 

 

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