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MALVERN BANCORP, INC. - Quarter Report: 2023 March (Form 10-Q)

mlvf20230331_10q.htm
 

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

 

For the Quarterly Period Ended March 31, 2023

 

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:

7,644,765 shares

(Title of Class)

(Outstanding as of May11, 2023)

 



 

 

 

Table of Contents

 

   

Page

     

PART I  FINANCIAL INFORMATION

3

     

Item  1.

Unaudited Financial Statements

4

 

Consolidated Statements of Financial Condition at March 31, 2023 and September 30, 2022

4

 

Consolidated Statements of Net Income for the three and six months ended March 31, 2023 and 2022

5

 

Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended March 31, 2023 and 2022

6

 

Consolidated Statements of Changes in Shareholders’ Equity for the three and six months ended March 31, 2023 and 2022

7

 

Consolidated Statements of Cash Flows for the six months ended March 31, 2023 and 2022

8

 

Notes to Unaudited Consolidated Financial Statements

9

     

Item  2.

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

43

     

Item  3.

Qualitative and Quantitative Disclosures about Market Risk

57

     

Item  4.

Controls and Procedures

57

     

PART II  OTHER INFORMATION.

58

     

Item  1.

Legal Proceedings

58

     

Item  1A.

Risk Factors

58

     

Item  2.

Unregistered Sales of Equity Securities and Use of Proceeds

58

     

Item  3.

Default Upon Senior Securities

58

     

Item  4.

Mine Safety Disclosure

58

     

Item  5.

Other Information

58

     

Item  6.

Exhibits

58

     

SIGNATURES

59

 

 

PART I FINANCIAL INFORMATION

 

The following (a) consolidated statement of financial condition as of September 30, 2022, 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 and six months ended March 31, 2023 are not necessarily indicative of the results that may be expected for the full fiscal year ending September 30, 2023, or for any interim period. The Malvern Bancorp, Inc. Annual Report on Form 10-K for the fiscal year ended September 30, 2022, filed with the Securities and Exchange Commission (the “SEC”) on December 27, 2022 (the “2023 Annual Report”), should be read in conjunction with these financial statements.

 

 

  

 

Item 1. Financial Statements

 

MALVERN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)

 

  

March 31,

  

September 30,

 
  

2023

  

2022

 
  

(In thousands, except share data)

 

ASSETS

        

Cash and due from depository institutions

 $1,828  $4,677 

Interest-bearing deposits in depository institutions

  29,627   48,590 

Cash and Cash Equivalents

  31,455   53,267 

Investment securities available for sale, at fair value

  48,199   49,844 

Equity securities, at fair value

  1,390   1,374 

Investment securities held to maturity, at amortized cost

  56,242   58,767 

Restricted stock, at cost

  6,815   7,104 

Loans held-for-sale

  13,232   13,780 

Loans receivable, net of allowance for loan losses

  786,000   801,854 

Other real estate owned

  200   259 

Accrued interest receivable

  4,829   4,252 

Property and equipment, net

  4,684   5,231 

Fixed asset held-for-sale

  375    

Deferred income taxes

  4,045   3,722 

Bank-owned life insurance

  26,241   26,233 

Other assets

  12,593   18,673 

Total Assets

 $996,300  $1,044,360 

LIABILITIES AND SHAREHOLDERS’ EQUITY

        

Liabilities

        

Deposits:

        

Non-interest-bearing

 $49,662  $58,014 

Interest-bearing

  690,520   727,309 

Total Deposits

  740,182   785,323 

FHLB advances

  75,000   80,000 

Subordinated debt

  25,000   25,000 

Advances from borrowers for taxes and insurance

  1,668   1,002 

Accrued interest payable

  1,246   543 

Other liabilities

  5,278   6,047 

Total Liabilities

  848,374   897,915 

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; 7,839,281 and 7,644,765 shares issued and outstanding, respectively, at March 31, 2023 and 7,828,344 and 7,633,828 shares issued and outstanding, respectively, at September 30, 2022

  76   76 

Additional paid-in-capital

  86,061   85,917 

Retained earnings

  69,726   67,247 

Unearned Employee Stock Ownership Plan (ESOP) shares

  (683)  (756)

Accumulated other comprehensive loss

  (4,391)  (3,176)

Treasury stock, at cost: 194,516 shares at March 31, 2023 and September 30, 2022

  (2,863)  (2,863)

Total Shareholders’ Equity

  147,926   146,445 

Total Liabilities and Shareholders’ Equity

 $996,300  $1,044,360 

 

See accompanying notes to unaudited consolidated financial statements.

 

 

 

 MALVERN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF NET INCOME

(Unaudited)

 

   

Three Months Ended March 31,

   

Six Months Ended March 31,

 
   

2023

   

2022

   

2023

   

2022

 
   

(In thousands, except share data)

 

Interest and Dividend Income

                               

Loans, including fees

  $ 9,354     $ 7,628     $ 18,504     $ 15,856  

Investment securities, taxable

    664       521       1,333       976  

Investment securities, tax-exempt

    147       64       298       100  

Dividends, restricted stock

    146       75       259       166  

Interest-bearing deposits

    200       16       467       29  

Total Interest and Dividend Income

    10,511       8,304       20,861       17,127  

Interest Expense

                               

Deposits

    2,644       828       4,474       1,873  

Short-term borrowings

    40             49        

Long-term borrowings

    547       183       874       420  

Subordinated debt

    706       339       1,136       722  

Total Interest Expense

    3,937       1,350       6,533       3,015  

Net Interest Income

    6,574       6,954       14,328       14,112  

Provision for Loan Losses

    -       -       -       -  

Net Interest Income after Provision for Loan losses

    6,574       6,954       14,328       14,112  

Other Income

                               

Service charges and other fees

    256       219       433       673  

Rental income

    48       48       97       100  

Net gains on sale of loans

    6       11       14       63  

Earnings on bank-owned life insurance

    373       283       546       452  

Other real estate owned income, net

                10        

Total Other Income

    683       561       1,100       1,288  

Other Expenses

                               

Salaries and employee benefits

    2,567       2,347       5,149       4,642  

Occupancy expense

    556       546       1,093       1,061  

Federal deposit insurance premium

    119       71       183       147  

Advertising

    33       32       65       64  

Data processing

    299       359       574       679  

Professional fees

    894       868       1,657       1,923  

Other real estate owned expense, net

    69                   5  

Pennsylvania shares tax

    193       169       320       339  

Merger related expense

    492             1,003        

Non-recurring expense

    550             550        

Other operating expenses

    684       2,453       1,556       3,213  

Total Other Expenses

    6,456       6,845       12,150       12,073  

Income before income tax expense

    801       670       3,278       3,327  

Income tax expense

    230       148       799       788  

Net Income

  $ 571     $ 522     $ 2,479     $ 2,539  

Earnings Per Common Share:

                               

Basic

  $ 0.08     $ 0.07     $ 0.33     $ 0.34  

Diluted

  $ 0.08     $ 0.07     $ 0.33     $ 0.34  

Weighted Average Common Shares Outstanding:

                               

Basic

    7,589,945       7,554,955       7,584,348       7,553,262  

Diluted

    7,594,224       7,556,194       7,587,127       7,554,459  

 

See accompanying notes to unaudited consolidated financial statements.

 

 

 

MALVERN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

   

Three Months Ended March 31,

   

Six Months Ended March 31,

 
   

2023

   

2022

   

2023

   

2022

 
   

(In thousands)

 

Net Income

   

$ 571

     

$ 522

     

$ 2,479

     

$ 2,539

 

Other Comprehensive Income, Net of Tax:

                               

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

   

(1,135)

     

(2,588)

     

(541)

     

(2,737)

 

Tax effect

   

239

     

543

     

114

     

574

 

Net of tax amount

   

(896)

     

(2,045)

     

(427)

     

(2,163)

 

Amortization of unrealized holding losses on securities transferred from available-for-sale to held-to-maturity (1)

   

1

     

2

     

2

     

4

 

Tax effect

   

(1)

     

(2)

     

(2)

     

(3)

 

Net of tax amount

   

     

     

     

1

 

Fair value adjustments on derivatives (2)

   

(747)

     

1,773

     

(994)

     

2,252

 

Tax effect

   

155

     

(372)

     

206

     

(473)

 

Net of tax amount

   

(592)

     

1,401

     

(788)

     

1,779

 

Total other comprehensive loss

   

(1,488)

     

(644)

     

(1,215)

     

(383)

 

Total comprehensive (loss) income

   

$ (917)

     

$ (122)

     

$ 1,264

     

$ 2,156

 

 

 

 

(1)

Amounts are included in interest and dividends on investment securities on the consolidated Statement of Net Income.

  (2) See footnote 9 for additional details on amount of gains on derivatives reclassified to interest expense.

See accompanying notes to unaudited consolidated financial statements.

 

 

 

MALVERN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY

(Unaudited)

 

  

Three Months Ended March 31, 2023 and 2022

 
                  

Accumulated

         
      

Additional

      

Unearned

  

Other

      

Total

 
  

Common

  

Paid-In

  

Retained

  

ESOP

  

Comprehensive

  

Treasury

  

Shareholders'

 
  

Stock

  

Capital

  

Earnings

  

Shares

  

Income (Loss)

  

Stock

  

Equity

 
  

(In thousands, except share data)

 

Balance, January 1, 2022

 $76  $85,599  $62,313  $(865) $297  $(2,863) $144,557 

Net income

        522            522 

Other comprehensive income (loss)

              (644)     (644)

Committed to be released ESOP shares (3,600 shares)

     22      36         58 

Stock based compensation

     57               57 

Balance, March 31, 2022

 $76  $85,678  $62,835  $(829) $(347) $(2,863) $144,550 
                             

Balance, January 1, 2023

 $76  $85,988  $69,155  $(718) $(2,903) $(2,863) $148,735 

Net income

        571            571 

Other comprehensive income (loss)

              (1,488)     (1,488)

Committed to be released ESOP shares (3,600 shares)

     26      35         61 

Stock based compensation

     47               47 

Balance, March 31, 2023

 $76  $86,061  $69,726  $(683) $(4,391) $(2,863) $147,926 

 

See accompanying notes to unaudited consolidated financial statements.

 

  

Six Months Ended March 31, 2023 and 2022

 
                  

Accumulated

         
      

Additional

      

Unearned

  

Other

      

Total

 
  

Common

  

Paid-In

  

Retained

  

ESOP

  

Comprehensive

  

Treasury

  

Shareholders'

 
  

Stock

  

Capital

  

Earnings

  

Shares

  

Income (Loss)

  

Stock

  

Equity

 
  

(In thousands, except share data)

 

Balance, October 1, 2021

 $76  $85,524  $60,296  $(901) $36  $(2,863) $142,168 

Net income

        2,539            2,539 

Other comprehensive loss

              (383)     (383)

Committed to be released ESOP shares (7,200 shares)

     45      72         117 

Stock based compensation

     109               109 

Balance, March 31, 2022

 $76  $85,678  $62,835  $(829) $(347) $(2,863) $144,550 
                             

Balance, October 1, 2022

 $76  $85,917  $67,247  $(756) $(3,176) $(2,863) $146,445 

Net income

        2,479            2,479 

Other comprehensive loss

              (1,215)     (1,215)

Committed to be released ESOP shares (7,200 shares)

     43      73         116 

Stock based compensation

     101               101 

Balance, March 31, 2023

 $76  $86,061  $69,726  $(683) $(4,391) $(2,863) $147,926 

 

See accompanying notes to unaudited consolidated financial statements.

 

 

 

MALVERN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   

Six Months Ended March 31,

 
   

2023

   

2022

 
   

(In thousands)

 

Cash Flows from Operating Activities

               

Net income

  $ 2,479     $ 2,539  

Adjustments to reconcile net income to net cash provided by operating activities:

               

Depreciation expense

    288       316  

Valuation allowance for loan held for sale

          1,683  

Deferred income tax benefit

    (396 )     (102 )

ESOP expense

    116       117  

Stock based compensation

    101       109  

Amortization of premiums and discounts on investments securities, net

    238       144  

Amortization (accretion) of loan origination fees and costs

    (45 )     64  

(Accretion) amortization of mortgage servicing rights

    7       (13 )

Net gain on sale of secondary market loans

    (14 )     (63 )

Proceeds from sale of secondary market loans

    1,774       3,108  

Originations of secondary market loans

    (1,212 )     (3,045 )

Write down of other real estate owned

    59        

Earnings on bank-owned life insurance

    (546 )     (452 )

(Increase) decrease in accrued interest receivable

    (577 )     34  

Increase (decrease) in accrued interest payable

    703       (220 )

Operating lease liability payments

    259       (293 )

Increase (decrease) in other liabilities

    (769 )     3,816  

Decrease in other assets

    5,728       2,307  

Amortization of subordinated debt issuance costs

          66  

Net cash provided by operating activities

    8,193       10,115  

Cash Flows from Investing Activities

               

Investment securities available-for-sale:

               

Purchases

          (17,569 )

Maturities, calls and principal repayments

    1,065       1,455  

Investment securities held-to-maturity:

               

Purchases

          (23,783 )

Maturities, calls and principal repayments

    2,332       3,640  

Proceeds from sale of loans held for sale

          18,900  

Net decrease in loans held for investment

    15,899       104,290  

Net decrease in restricted stock

    289       1,314  

Purchase of property and equipment

    (115 )     (26 )

Net cash provided by investing activities

    19,470       88,221  

Cash Flows from Financing Activities

               

Net decrease in deposits

    (45,141 )     (83,722 )

Repayment of borrowings

    (5,000 )     (30,000 )

Increase in advances from borrowers for taxes and insurance

    666       819  

Net cash used in financing activities

    (49,475 )     (112,903 )

Net Decrease in Cash and Cash Equivalents

    (21,812 )     (14,567 )

Cash and Cash Equivalents - Beginning

    53,267       136,590  

Cash and Cash Equivalents - Ending

  $ 31,455     $ 122,023  

Supplemental Cash Flows Information

               

Interest paid

  $ 5,830     $ 3,235  

Income taxes paid

  $     $  

Non-cash investing activities:

               

Transfer of property and equipment to held-for-sale

  $ 375     $  

Bank owned life insurance death benefit proceeds receivable

  $ 539     $ 612  

 

See accompanying notes to unaudited consolidated financial statements.

 

 

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 bonds, mortgage-backed securities, U.S. agency 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 a representative office in 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, the valuation of derivative positions and the evaluation of contingent liability.  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 March 31, 2023 and the results of operations for the three and six months ended March 31, 2023 and 2022, and cash flows for the six months ended March 31, 2023 and 2022. The consolidated statement of financial condition as of September 30, 2022 was derived from the audited consolidated statement of financial condition as of that date.

 

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 2022 Annual Report filed with the SEC. The consolidated statements of net income for the three and six months ended March 31, 2023 and the consolidated statements of cash flows for the three and six months ended March 31, 2023 are not necessarily indicative of the results of operations or cash flows for the full fiscal year ending September 30, 2023 or any interim period. Subsequent events have been evaluated through the date of the issuance of the unaudited consolidated financial statements. 

 

- 9-

 

Recent Accounting Pronouncements Yet to Be Adopted

 

Credit Losses. In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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.  As amended, ASU is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company is currently evaluating the effects that the adoption of this amendment will have on its consolidated financial statements. Although no financial impacts have been determined the Company expects this ASU to have a significant impact on the methodology for calculating the ALLL.

 

In March 2022, the FASB issued ASU 2022-02, Financial InstrumentsCredit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures.  These amendments eliminate the TDR recognition and measurement guidance and, instead, require that an entity evaluate (consistent with the accounting for other loan modifications) whether the modification represents a new loan or a continuation of an existing loan. The amendments also enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty.  For public business entities, these amendments require that an entity disclose current-period gross writeoffs by year of origination for financing receivables and net investment in leases within the scope of Subtopic 326-20.  This ASU is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.  The Company is currently evaluating the effects that the adoption of this amendment will have on its consolidated financial statements.

 

Derivatives and Hedging. In March 2022, FASB ASU No. 2022-01, Derivatives and Hedging (Topic 815): Fair Value HedgingPortfolio Layer Method.  This update will allow non-prepayable financial assets to be included in a closed portfolio hedge using the portfolio method, rather than only prepayable assets. It also allows entities to hedge multiple layers rather than just a single layer of closed portfolio of financial assets or one or more beneficial interests secured by a portfolio of financial instruments. The guidance is effective for public business entities for fiscal years and interim periods within those fiscal years, beginning after December 15, 2022. The Company is currently evaluating the effects, if any, that the adoption of this amendment will have on its consolidated financial statements.

 

- 10-

 
 

Note 3 - Business Combinations

 

Pending Business Combination First Bank

 

On December 13, 2022, Malvern Bancorp, Malvern Bank and First Bank (“First Bank”) entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which and subject to the terms and conditions of the Merger Agreement, Malvern Bancorp will merge with and into First Bank (through a newly created merger subsidiary of First Bank) immediately followed by the merger of Malvern Bank with and into First Bank, with First Bank continuing as the surviving corporation in each case (collectively, the “Merger”). At the effective time of the Merger each share of common stock of Malvern Bancorp will be converted into the right to receive $7.80 in cash and 0.7733 shares of common stock, par value $5.00 per share, of First Bank, subject to adjustment in accordance with the terms of the Merger Agreement if Malvern’s adjusted shareholders’ equity as of the tenth day prior to the closing of the Merger does does not equal or exceed $140,000,000.

 

The Merger Agreement was unanimously approved by the board of directors of each of First Bank, Malvern Bancorp and Malvern Bank.  On April 28, 2023, Malvern Bancorp held a special meeting of shareholders related to the Merger, primarily for purposes of the Malvern Bancorp shareholders voting on the proposal to adopt the Merger Agreement.  At the special meeting, the Malvern Bancorp shareholders voted to approve the proposal to adopt the Merger Agreement, and also approved the related shareholder proposals with respect to executive compensation that will or may be paid in connection with the Merger. Also on April 28, 2023, First Bank held its annual meeting of shareholders to vote upon, among other things, the proposal for First Bank to adopt the Merger Agreement.  The First Bank shareholders voted to approve the proposal to adopt the Merger Agreement.  Accordingly, both Malvern Bancorp and First Bank have obtained the necessary shareholder approval to consummate the Merger in accordance with the terms of the Merger Agreement. 

 

The Merger is anticipated to be completed in the second quarter of 2023, but remains subject to regulatory approval and other customary closing conditions.

 

Malvern Bancorp recorded $1.0 million of merger-related expenses for the six months ended March 31, 2023 related to the pending merger with First Bank. These expenses primarily consisted of legal and professional fees.

 

 

Note 4 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 and six months ended March 31, 2023 , the Company granted 4,200 and 6,958 restricted shares, respectively. The Company also granted 3,979 unrestricted shares during the three and six months ended March 31, 2023. During the three and six months ended March 31, 2023 the Company granted 6,000 stock options. During the three and six months ended March 31, 2023 the Company granted 5,131 restricted shares and 2,336 shares were forfeited for the six months ended March 31, 2023. There were no unrestricted shares or stock options granted during the three and six months ended March 31, 2022. There were 1,120 and 1,216 restricted shares forfeited during the three and six months ended March 31, 2022, respectively. During the three and six months ended March 31, 2023, there were 4,560 and 5,394 shares considered anti-dilutive and excluded from diluted weighted average shares outstanding while during the same period in 2022, there were 4,356 and 5,306 anti-dilutive shares.

 

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

 

  

Three Months Ended March 31,

  

Six Months Ended March 31,

 
  

2023

  

2022

  

2023

  

2022

 
  

(In thousands, except share and per share data)

 

Net Income

 $571  $522  $2,479  $2,539 

Weighted average shares outstanding

  7,641,690   7,621,100   7,637,913   7,621,227 

Average unearned ESOP shares

  (51,745)  (66,145)  (53,565)  (67,965)

Basic weighted average shares outstanding

  7,589,945   7,554,955   7,584,348   7,553,262 

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

  4,279   1,239   2,779   1,197 

Diluted weighted average common shares outstanding

  7,594,224   7,556,194   7,587,127   7,554,459 

Earnings per common share:

                

Basic

 $0.08  $0.07  $0.33  $0.34 

Diluted

 $0.08  $0.07  $0.33  $0.34 

 

 

Note 5 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 the ESOP shares during the periods in which they become committed to be released. To the extent that the fair value of the ESOP shares released differs from the cost of such shares, the difference is charged or credited to additional paid-in capital. During the period from May 20, 2008 to September 30, 2008, the ESOP purchased 241,178 shares of Company common stock for approximately $2.6 million, at an average price of $10.86 per share, which was funded by a loan from Malvern Federal Bancorp, Inc. (the Company’s predecessor). The ESOP loan, 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 the three and six months ended March 31, 2023 and 2022, there were 3,600 and 7,200 shares, respectively, committed to be released. At March 31, 2023, there were 46,943 unallocated shares held by the ESOP. The unallocated shares had an aggregate fair value of approximately $714,000 at March 31, 2023.

 

- 11-

 
 

Note 6 - Investment Securities

 

The Company’s investment in debt securities are classified as available-for-sale or held-to-maturity. Investment securities available-for-sale are reported at fair value with unrealized gains or losses included in shareholder’s 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 other 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.

 

The following tables present information related to the Company’s investment securities at March 31, 2023 and September 30, 2022:

 

  

March 31, 2023

 
      

Gross

  

Gross

     
  

Amortized

  

Unrealized

  

Unrealized

  

Fair

 
  

Cost

  

Gains

  

Losses

  

Value

 
  

(In thousands)

 

Investment Securities Available-for-Sale:

                

U.S. government agencies

 $5,000  $  $(1,283) $3,717 

State and municipal obligations

  11,951      (1,635)  10,316 

Single issuer trust preferred security

  1,000      (54)  946 

Corporate debt securities

  35,000      (5,330)  29,670 

Mortgage Backed Security ("MBS")

  2,347      (255)  2,092 

U.S. Treasury Note

  1,492      (34)  1,458 

Total

  56,790      (8,591)  48,199 

Investment Securities Held-to-Maturity:

                

U.S. government agencies

  27,690      (4,328)  23,362 

State and municipal obligations

  17,625      (1,326)  16,299 

Corporate debt securities

  3,202      (86)  3,116 

Mortgage-backed securities:

                

MBS

  2,229      (434)  1,795 

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

  5,496      (402)  5,094 

Total

  56,242      (6,576)  49,666 

Equity Securities:

                

Mutual Funds

  1,500      (110)  1,390 

Total

  1,500      (110)  1,390 

Total investment securities

 $114,532  $  $(15,277) $99,255 

 

- 12-

 
  

September 30, 2022

 
      

Gross

  

Gross

     
  

Amortized

  

Unrealized

  

Unrealized

  

Fair

 
  

Cost

  

Gains

  

Losses

  

Value

 
  

(In thousands)

 

Investment Securities Available-for-Sale:

                

U.S. government agencies

 $5,000     $(1,420) $3,580 

State and municipal obligations

  12,014      (2,354)  9,660 

Single issuer trust preferred security

  1,000      (54)  946 

Corporate debt securities

  35,990      (3,862)  32,128 

MBS

  2,403      (316)  2,087 

U.S. Treasury

  1,488      (45)  1,443 

Total

  57,895      (8,051)  49,844 

Investment Securities Held-to-Maturity:

                

U.S. government agencies

  29,190      (4,907)  24,283 

State and municipal obligations

  18,017      (2,526)  15,491 

Corporate debt securities

  3,264      (96)  3,168 

Mortgage-backed securities:

                

MBS

  2,278      (489)  1,789 

CMO

  6,018      (483)  5,535 

Total

  58,767      (8,501)  50,266 

Equity Securities:

                

Mutual Funds

  1,500      (126)  1,374 

Total

  1,500      (126)  1,374 

Total investment securities

 $118,162  $  $(16,678) $101,484 

 

For the six months ended March 31, 2023 there was one 1.0 million available-for-sale investment security called, one $10,000 available-for-sale investment security partially called, and three held-to-maturity investment securities totaling $2.0 million matured. There were no sales or called investment securities during the same period.  For the six months ended March 31, 2022, $945,000 and $2.5 million of available-for-sale and held-to-maturity investment securities, respectively, were called, one $10,000 available-for-sale investment security partially called, and one $250,000 mutual fund equity security matured. No purchases were made for during the three and six months ended March 31, 2023. 

             

The following tables indicate gross unrealized losses not recognized in income and fair value, aggregated by investment category and the length of time individual securities have been in a continuous unrealized loss position, at March 31, 2023 and September 30, 2022:

 

  

March 31, 2023

 
  

Less than 12 Months

  

12 Months or more

  

Total

 
  

Fair

  

Unrealized

  

Fair

  

Unrealized

  

Fair

  

Unrealized

 
  

Value

  

Losses

  

Value

  

Losses

  

Value

  

Losses

 
  

(In thousands)

 

Investment Securities Available for Sale:

                        

U.S. government agencies

 $  $  $3,717  $(1,283) $3,717  $(1,283)

State and municipal obligations

  1,209   (11)  9,107   (1,624)  10,316   (1,635)

Single issuer trust preferred security

        946   (54)  946   (54)

Corporate debt securities

  1,829   (171)  27,841   (5,159)  29,670   (5,330)

MBS

        2,092   (255)  2,092   (255)

U.S. Treasury Note

        1,458   (34)  1,458   (34)

Total

 $3,038  $(182) $45,161  $(8,409) $48,199  $(8,591)

Investment Securities Held-to-Maturity:

                        

U.S. government agencies

 $4,161  $(29) $19,201  $(4,299) $23,362  $(4,328)

State and municipal obligations

  3,020   (22)  13,279   (1,304)  16,299   (1,326)

Corporate securities

        3,116   (86)  3,116   (86)

Mortgage-backed securities:

                        

MBS

        1,795   (434)  1,795   (434)

CMO

  1,071   (21)  4,023   (381)  5,094   (402)

Total

 $8,252  $(72) $41,414  $(6,504) $49,666  $(6,576)

Equity Securities

                        

Mutual funds

  1,390   (110)        1,390   (110)

Total Mutual funds

  1,390   (110)        1,390   (110)

Total investment securities

 $12,680  $(364) $86,575  $(14,913) $99,255  $(15,277)

 

- 13-

 
  

September 30, 2022

 
  

Less than 12 Months

  

12 Months or more

  

Total

 
  

Fair

  

Unrealized

  

Fair

  

Unrealized

  

Fair

  

Unrealized

 
  

Value

  

Losses

  

Value

  

Losses

  

Value

  

Losses

 
  

(In thousands)

 

Investment Securities Available for Sale:

                        

U.S. government agencies

 $  $  $3,580  $(1,420) $3,580  $(1,420)

State and municipal obligations

  9,660   (2,354)        9,660   (2,354)

Single issuer trust preferred security

        946   (54)  946   (54)

Corporate debt securities

  26,717   (3,273)  5,411   (589)  32,128   (3,862)

MBS

  2,087   (316)        2,087   (316)

U.S. Treasury Note

  1,443   (45)        1,443   (45)

Total investment securities

 $39,907  $(5,988) $9,937  $(2,063) $49,844  $(8,051)

Investment Securities Held-to-Maturity:

                        

U.S. government agencies

 $18,662  $(3,028) $5,621  $(1,879) $24,283  $(4,907)

State and municipal obligations

  15,491   (2,526)        15,491   (2,526)

Corporate securities

  3,167   (96)        3,167   (96)

Mortgage-backed securities:

                        

MBS

        1,789   (489)  1,789   (489)

CMO

  5,536   (483)        5,536   (483)

Total

 $42,856  $(6,133) $7,410  $(2,368) $50,266  $(8,501)

Equity Securities

                        

Mutual funds

  1,500   (126)        1,374   (126)

Total Mutual funds

  1,500   (126)        1,374   (126)

Total investment securities

 $84,263  $(12,247) $17,347  $(4,431) $101,484  $(16,678)

 

As of March 31, 2023, 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 the market interest rates move, management believes that these fair values will recover as the underlying portfolios mature and are reinvested in market rate yielding investments. As of March 31, 2023, the Company held 13 corporate debt securities, 11 municipal bonds, one U.S. government agency, one U.S. Treasury note, one mortgage-backed security, and one single issuer trust preferred security which were all in an unrealized loss position. The Company does not intend to sell, and expects that it is not more likely than not that it will be required to sell, these securities until such time as the value recovers or the securities mature. Management does not believe any individual unrealized loss as of March 31, 2023 represents an other-than-temporary impairment. The decrease in market value is primarily due to an increase in overall in interest rates, primarily the recent Federal Reserve interest rate hikes.

 

Investment securities having a carrying value of $33.8 million and $11.9 million at March 31, 2023 and September 30, 2022, respectively, were pledged to secure public funds deposits, prospective Federal Reserve Board discount window borrowings, and prospective Federal Reserve Board Bank Term Funding Program borrowings. No investment securities were pledged to secure hedges at March 31, 2023 or September 30, 2022. No investment securities were pledged to secure short-term borrowings at March 31, 2023 and September 30, 2022.  

 

- 14-

 

The following table presents information for investment securities at March 31, 2023, based on scheduled maturities. Actual maturities can be expected to differ from scheduled maturities due to prepayment or early call options of the issuer.

 

  

March 31, 2023

 
  

Amortized Cost

  

Fair Value

 
  

(In thousands)

 

Available-for-Sale:

        

Over 1 year through 5 years

 $6,212  $6,019 

After 5 years through 10 years

  31,812   26,828 

Over 10 years

  16,419   13,260 

Mortgage-backed securities:

        

MBS

  2,347   2,092 

Total Available-for-sale securities

  56,790   48,199 

Held-to-Maturity:

        

Within 1 year

  5,044   5,008 

Over 1 year through 5 years

  8,978   8,759 

After 5 years through 10 years

  3,111   2,709 

Over 10 years

  31,384   26,301 

Mortgage-backed securities:

        

MBS

  2,229   1,795 

CMO

  5,496   5,094 

Total Held-to-maturity securities

  56,242   49,666 

Equity Securities:

        

Within 1 year

  1,000   890 

After 5 years through ten years

  500   500 

Total Equity securities

  1,500   1,390 

Total investment securities

 $114,532  $99,255 

 

- 15-

 
 

Note 7 Loans Receivable and Related Allowance for Loan Losses  

 

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

 

  

March 31, 2023

  

September 30, 2022

 
  

(In thousands)

 

Residential Mortgage

 $163,734  $175,957 

Construction and Development:

        

Residential and commercial

  18,966   24,362 

Land

  540   550 

Total Construction and Development

  19,506   24,912 

Commercial:

        

Commercial real estate

  402,503   406,914 

Farmland

  13,560   11,506 

Multi-family

  61,272   55,295 

Commercial and industrial

  104,781   102,703 

Other

  10,417   13,356 

Total Commercial

  592,533   589,774 

Consumer:

        

Home equity lines of credit

  13,002   13,233 

Second mortgages

  3,577   4,395 

Other

  2,210   2,136 

Total Consumer

  18,789   19,764 

Total loans

  794,562   810,407 

Deferred loan fees and costs, net

  536   537 

Allowance for loan losses

  (9,098)  (9,090)

Total loans receivable, net of allowance for loan losses

 $786,000  $801,854 

 

- 16-

 

The following tables summarize the primary classes of the allowance for loan losses (“ALLL”), segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment, as of March 31, 2023 and September 30, 2022.  Activity in the ALLL is presented for the three and six months ended March 31, 2023 and 2022 and the fiscal year ended September 30, 2022:

 

      

Construction and

                                         
      

Development

  

Commercial

  

Consumer

         
  

Residential

  

Residential and

      

Commercial

      

Multi-

  

Commercial and

      

Home Equity Lines of

  

Second

             
  

Mortgage

  

Commercial

  

Land

  

Real Estate

  

Farmland

  

Family

  

Industrial

  

Other

  

Credit

  

Mortgages

  

Other

  

Unallocated

  

Total

 

Allowance for loan losses:

 

(In thousands)

 

Three Months Ended March 31, 2023

                                                    

Beginning balance

 $795  $123  $3  $5,976  $57  $270  $996  $54  $65  $16  $15  $729  $9,099 

Charge-offs

                             (8)        (8)

Recoveries

  1         1         1      1   3         7 

Provisions

  (59)  (21)     (55)  12   61   (37)  (11)  (3)  4   (3)  112    

Ending balance

 $737  $102  $3  $5,922  $69  $331  $960  $43  $63  $15  $12  $841  $9,098 

 

      

Construction and

                                         
      

Development

  

Commercial

  

Consumer

         
  

Residential

  

Residential and

      

Commercial

      

Multi-

  

Commercial and

      

Home Equity Lines of

  

Second

             
  

Mortgage

  

Commercial

  

Land

  

Real Estate

  

Farmland

  

Family

  

Industrial

  

Other

  

Credit

  

Mortgages

  

Other

  

Unallocated

  

Total

 

Allowance for loan losses:

 

(In thousands)

 

Three Months Ended March 31, 2022

                                                    

Beginning balance

 $935  $428  $15  $7,118  $56  $450  $791  $54  $76  $6  $20  $88  $10,037 

Charge-offs

  -   -   -   -   -   -   (764)  -   -   (21)  -   -   (785)

Recoveries

  -   -   -   1   -   -   1   -   -   47   -   -   49 

Provisions

  (121)  (276)  12   (914)  218   (123)  1,169   (54)  2   69   (3)  21   - 

Ending balance

 $814  $152  $27  $6,205  $274  $327  $1,197  $  $78  $101  $17  $109  $9,301 

 

      

Construction and

                                         
      

Development

  

Commercial

  

Consumer

         
  

Residential

  

Residential and

      

Commercial

      

Multi-

  

Commercial and

      

Home Equity Lines of

  

Second

             
  

Mortgage

  

Commercial

  

Land

  

Real Estate

  

Farmland

  

Family

  

Industrial

  

Other

  

Credit

  

Mortgages

  

Other

  

Unallocated

  

Total

 

Allowance for loan losses:

 

(In thousands)

 

Six Months Ended March 31, 2023

                                                    

Beginning balance

 $708  $131  $3  $6,040  $57  $298  $1,158  $55  $67  $21  $15  $537  $9,090 

Charge-offs

                             (8)        (8)

Recoveries

  6         3         1      1   5         16 

Provisions

  23   (29)     (121)  12   33   (199)  (12)  (5)  (3)  (3)  304    

Ending balance

 $737  $102  $3  $5,922  $69  $331  $960  $43  $63  $15  $12  $841  $9,098 

Ending balance: individually evaluated for impairment

    $  $  $  $  $  $  $  $  $  $  $    

Ending balance: collectively evaluated for impairment

  737   102   3   5,922   69   331   960   43   63   15   12   841   9,098 
                                                     

Loans receivable:

                                                    

Ending balance

 $163,734  $18,966  $540  $402,503  $13,560  $61,272  $104,781  $10,417  $13,002  $3,577  $2,210     $794,562 

Ending balance: individually evaluated for impairment

 $  $  $  $  $  $  $  $  $  $  $     $ 

Ending balance: collectively evaluated for impairment

 $163,734  $18,966  $540  $402,503  $13,560  $61,272  $104,781  $10,417  $13,002  $3,577  $2,210     $794,562 

 

      

Construction and

                                         
      

Development

  

Commercial

  

Consumer

         
  

Residential

  

Residential and

      

Commercial

      

Multi-

  

Commercial and

      

Home Equity Lines of

  

Second

             
  

Mortgage

  

Commercial

  

Land

  

Real Estate

  

Farmland

  

Family

  

Industrial

  

Other

  

Credit

  

Mortgages

  

Other

  

Unallocated

  

Total

 

Allowance for loan losses:

 

(In thousands)

 

Six Months Ended March 31, 2022

                                                    

Beginning balance

 $934  $428  $15  $7,043  $56  $450  $2,221  $54  $76  $87  $20  $88  $11,472 

Charge-offs

                    (2,194)        (105)        (2,299)

Recoveries

  1         76         1         50         128 

Provisions

  (121)  (276)  12   (914)  218   (123)  1,169   (54)  2   69   (3)  21    

Ending balance

 $814  $152  $27  $6,205  $274  $327  $1,197  $  $78  $101  $17  $109  $9,301 

Ending balance: individually evaluated for impairment

  58  $  $  $  $180  $  $5  $  $  $  $  $  $243 

Ending balance: collectively evaluated for impairment

 $756  $152  $27  $6,205  $94  $327  $1,192  $  $78  $101  $17  $109  $9,058 
                                                     

 

- 17-

 

      

Construction and

                                         
      

Development

  

Commercial

  

Consumer

         
  

Residential

  

Residential and

      

Commercial

      

Multi-

  

Commercial and

      

Home Equity Lines of

  

Second

             
  

Mortgage

  

Commercial

  

Land

  

Real Estate

  

Farmland

  

Family

  

Industrial

  

Other

  

Credit

  

Mortgages

  

Other

  

Unallocated

  

Total

 

Allowance for loan losses:

 

(In thousands)

 

Year Ended September 30, 2022

                                                    

Ending balance

 $708  $131  $3  $6,040  $57  $298  $1,158  $55  $67  $21  $15  $537  $9,090 

Ending balance: individually evaluated for impairment

 $54  $  $  $  $  $  $  $  $  $  $  $  $54 

Ending balance: collectively evaluated for impairment

 $654  $131  $3  $6,040  $57  $298  $1,158  $55  $67  $21  $15  $537  $9,036 
                                                     

Loans receivable:

                                                    

Ending balance

 $175,957  $24,362  $550  $406,914  $11,506  $55,295  $102,703  $13,356  $13,233  $4,395  $2,136     $810,407 

Ending balance: individually evaluated for impairment

 $477  $  $  $  $  $  $  $  $  $  $     $477 

Ending balance: collectively evaluated for impairment

 $175,480  $24,362  $550  $406,914  $11,506  $55,295  $102,703  $13,356  $13,233  $4,395  $2,136     $809,930 

 

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. At present, reduction of the commercial loan portfolio and increased historical loss levels are factored in assessing the portfolio. 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.

 

- 18-

 

Total impaired loans increased $4.8 million from $19.7 million at  September 30, 2022 to $24.5 million at March 31, 2023, primarily due to the additional impairment of one commercial and industrial loan at a carrying value of $4.8 million.

 

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 March 31, 2023 and September 30, 2022:

 

          

Impaired

         
          

Loans

         
          

with No

         
  

Impaired Loans with

  

Specific

         
  

Specific Allowance

  

Allowance

  

Total Impaired Loans

 
                  

Unpaid

 
  

Recorded

  

Related

  

Recorded

  

Recorded

  

Principal

 
  

Investment

  

Allowance

  

Investment

  

Investment

  

Balance

 
  

(In thousands)

 

March 31, 2023

                    

Residential mortgage

 $  $  $2,965  $2,965  $3,190 

Commercial:

                    

Commercial real estate

        13,803   13,803   15,384 

Farmland

        2,210   2,210   2,210 

Commercial and industrial

        5,381   5,381   5,381 

Consumer:

                    

Home equity lines of credit

        18   18   24 

Second mortgages

        99   99   112 

Total impaired loans

 $  $  $24,476  $24,476  $26,301 

September 30, 2022

                    

Residential mortgage

 $477  $54  $2,342  $2,819  $3,029 

Commercial:

                    

Commercial real estate

        13,826   13,826   15,475 

Farmland

        2,213   2,213   2,213 

Commercial and industrial

        684   684   684 

Consumer:

                    

Home equity lines of credit

        20   20   25 

Second mortgages

        152   152   191 

Total impaired loans

 $477  $54  $19,237  $19,714  $21,617 

 

The following table presents the average recorded investment in impaired loans in the loan portfolio and related interest income recognized for the three and six months ended March 31, 2023 and 2022:

 

  

Three Months Ended March 31, 2023

  

Six Months Ended March 31, 2023

 
      

Interest Income

      

Interest Income

 
  

Average

  

Recognized on

  

Average

  

Recognized on

 
  

Impaired Loans

  

Impaired Loans

  

Impaired Loans

  

Impaired Loans

 
  

(In thousands)

 

Residential mortgage

 $2,910  $21  $2,546  $40 

Commercial:

                

Commercial real estate

  13,862   6   13,878   13 

Farmland

  2,209   19   2,207   39 

Commercial and industrial

  5,435   68   3,822   95 

Consumer:

                

Home equity lines of credit

  19      19    

Second mortgages

  130   1   441   1 

Total

 $24,565  $115  $22,913  $188 

 

  

Three Months Ended March 31, 2022

  

Six Months Ended March 31, 2022

 
      

Interest Income

      

Interest Income

 
  

Average

  

Recognized on

  

Average

  

Recognized on

 
  

Impaired Loans

  

Impaired Loans

  

Impaired Loans

  

Impaired Loans

 
  

(In thousands)

 

Residential mortgage

 $2,610  $25  $1,727  $47 

Commercial:

                

Commercial real estate

  12,757   7   8,626   9 

Farmland

  2,236   20   1,494   40 

Commercial and industrial

  1,476   5   1,381   10 

Consumer:

                

Home equity lines of credit

  22      10    

Second mortgages

  685      528    

Total

 $19,786  $57  $13,766  $106 

 

- 19-

 

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 March 31, 2023 and September 30, 2022:

 

  

Pass

  

Special Mention

  

Substandard

  

Doubtful

  

Total

 
  

(In thousands)

 

March 31, 2023:

                    

Residential mortgage

 $160,724  $  $3,010  $  $163,734 

Construction and Development:

                    

Residential and commercial

  18,696            18,966 

Land

  540            540 

Commercial:

                    

Commercial real estate

  374,900   27,100   503      402,503 

Farmland

  11,350      2,210      13,560 

Multi-family

  61,272            61,272 

Commercial and industrial

  99,400      5,381      104,781 

Other

  10,417            10,417 

Consumer:

                    

Home equity lines of credit

  12,916      86      13,002 

Second mortgages

  3,375   53   149      3,577 

Other

  2,210            2,210 

Total

 $756,070  $27,153  $11,339  $  $794,562 

 

- 20-

 
  

Pass

  

Special Mention

  

Substandard

  

Doubtful

  

Total

 
  

(In thousands)

 

September 30, 2022:

                    

Residential mortgage

 $173,083  $  $2,874  $  $175,957 

Construction and Development:

                    

Residential and commercial

  24,362            24,362 

Land

  550            550 

Commercial:

                    

Commercial real estate

  373,729   32,682   504      406,914 

Farmland

  9,293      2,213      11,506 

Multi-family

  55,295            55,295 

Commercial and industrial

  97,219      5,484      102,703 

Other

  13,356            13,356 

Consumer:

                    

Home equity lines of credit

  13,143      90      13,233 

Second mortgages

  4,110   58   227      4,395 

Other

  2,136            2,136 

Total

 $766,276  $32,740  $11,391  $  $810,407 

 

The following table presents loans that are no longer accruing interest as of March 31, 2023 and September 30, 2022, by portfolio class:

 

  

March 31,

  

September 30,

 
  

2023

  

2022

 
  

(In thousands)

 

Non-accrual loans:

        

Residential mortgage

 $929  $585 

Consumer:

        

Home equity lines of credit

  18   20 

Second mortgages

  60   148 

Total non-accrual loans

 $1,007  $753 

 

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. The increase in non-accrual loans was attributable to two new residential loans moving to non-accrual status with a combined carrying value of $561,000, which was offset in part by two residential loans moving out of non-accrual status as they were sold through foreclosure. One consumer loan returned to accrual status during the six months ended March 31, 2023.

 

Interest income that would have been recognized on non-accrual loans had they been current in accordance with their original terms was$8,000for the six months ended March 31, 2023 and $20,000 for the six months ended March 31, 2022

 

- 21-

 

Management monitors the performance and credit quality of the loan portfolio by analyzing the age of the loans in 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 March 31, 2023 and September 30, 2022:

 

                          

Loans

 
              

90 Days

      

Total

  

Receivable >

 
      

30-59 Days

  

60-89 Days

  

and More

  

Total Past

  

Loans

  

90 Days and

 
  

Current

  

Past Due

  

Past Due

  

Past Due

  

Due

  

Receivable

  

Accruing

 
  

(In thousands)

 

March 31, 2023:

                            

Residential mortgage

 $162,882  $121  $  $731  $852  $163,734  $170 

Construction and Development:

                            

Residential and commercial

  18,966               18,966    

Land

  540               540    

Commercial:

                            

Commercial real estate

  402,000         503   503   402,503   503 

Farmland

  13,560               13,560    

Multi-family

  61,272               61,272    

Commercial and industrial

  104,781               104,781    

Other

  10,417               10,417    

Consumer:

                           

Home equity lines of credit

  12,883   119         119   13,002    

Second mortgages

  3,577               3,577    

Other

  2,186   24         24   2,210    

Total

 $793,064  $264  $  $1,234  $1,498  $794,562  $673 

 

                          

Loans

 
              

90 Days

      

Total

  

Receivable >

 
      

30-59 Days

  

60-89 Days

  

and More

  

Total Past

  

Loans

  

90 Days and

 
  

Current

  

Past Due

  

Past Due

  

Past Due

  

Due

  

Receivable

  

Accruing

 
  

(In thousands)

 

September 30, 2022:

                            

Residential mortgage

 $173,852  $1,198  $477  $430  $2,105  $175,957  $243 

Construction and Development:

                            

Residential and commercial

  24,362               24,362    

Land

  550               550    

Commercial:

                            

Commercial real estate

  406,809   105         105   406,914    

Farmland

  9,293   2,213         2,213   11,506    

Multi-family

  55,295               55,295    

Commercial and industrial

  101,328   1,375         1,375   102,703    

Other

  13,356               13,356    

Consumer:

                            

Home equity lines of credit

  13,160   53   20      73   13,233    

Second mortgages

  4,384   3      8   11   4,395    

Other

  2,132   4         4   2,136    

Total

 $804,521  $4,951  $497  $438  $5,886  $810,407  $243 

 

 

- 22-

 

The Company had 23 and 20 loans classified as troubled debt restructures (“TDRs”) at March 31, 2023 and September 30, 2022, respectively, with an aggregate outstanding balance of $11.0 million and $6.1 million, respectively. At March 31, 2023, these loans were also classified as impaired. The $4.9 million increase in aggregate outstanding balances is primarily related to the addition of one TDR commercial and industrial loan of $4.8 million. 13 of the TDR loans continue to perform under the restructured terms through March 31, 2023 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 relieve some of their overall cash flow burden, including but not limited to making interest only payments for a period of time. Some loan modifications classified as TDRs may not ultimately result in the full collection of principal and interest, as modified, and could result in potential incremental losses. These potential incremental losses have been factored into our overall estimate of the ALLL. The level of any defaults will likely be affected by future economic conditions. A default on a TDR loan for purposes of this disclosure occurs when the borrower is 90 days past due or a foreclosure or repossession of the applicable collateral has occurred.  

 

TDRs may arise in cases 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 $265,000 and $359,000 of residential real estate properties in the process of foreclosure at March 31, 2023 and September 30, 2022, respectively. The Company also has one commercial real estate loan held for sale at a carrying value of $13.3 million in process of foreclosure at March 31, 2023. The court entered into a Judgment of Foreclosure with respect to the commercial real estate loan held for sale (i) directing the sale of the property at public auction prior to December 13, 2023, (ii) upon sale of the property, directing the payment to the Company in the sum of approximately $17.2 million plus interest at the note rate from  September 16, 2022 through December 14, 2022 and at the statutory rate of 9% thereafter through the date of the foreclosure sale, (iii) directing that the Company pay for the transfer of the foreclosure sale and (iv) if Malvern is the successful bidder, directing that the Company must place the property back on the market for sale or leasing within 180 days of the foreclosure sale.

 

The following table presents total TDRs as of March 31, 2023 and September 30, 2022:

 

          

Troubled Debt Restructured

 
          

Loans That Have Defaulted on

 
  

Total Troubled Debt

  

Modified Terms Within The Past

 
  

Restructurings

  

12 Months

 
  

Number of

  

Recorded

  

Number of

  

Recorded

 
  

Loans

  

Investment

  

Loans

  

Investment

 
  

(Dollars in thousands)

 

March 31, 2023:

                

Residential mortgage

  16  $2,869   1  $465 

Commercial:

                

Commercial real estate

  2   503       

Farmland

  1   2,210       

Commercial and industrial

  2   5,381       

Consumer:

                

Second mortgages

  2   39       

Total

  23  $11,002   1  $465 

September 30, 2022:

                

Residential mortgage

  14   2,632       

Commercial:

                

Commercial real estate

  3   594       

Farmland

  1   2,213       

Commercial and industrial

  1   625       

Consumer:

                

Second mortgages

  1   4       

Total

  20  $6,068     $ 

 

- 23-

 

The following table reports the performing status of all TDR loans as of March 31, 2023 and September 30, 2022. The performing status is determined by a loan’s compliance with the modified terms:

 

  

March 31, 2023

  

September 30, 2022

 
      

Non-

      

Non-

 
  

Performing

  

Performing

  

Performing

  

Performing

 
  

(In thousands)

 

Residential mortgage

 $1,866  $1,003  $1,543  $1,089 

Commercial:

                

Commercial real estate

     503   594    

Farmland

  2,210      2,213    

Commercial and industrial

  5,381      625    

Consumer:

                

Second mortgages

  39      4    

Total

 $9,496  $1,506  $4,979  $1,089 

 

The following table shows the new TDRs for the six months ended March 31, 2023 and 2022:

 

  

For the Six Months Ended March 31,

 
  

2023

  

2022

 
      

Pre-

  

Post-

      

Pre-

  

Post-

 
      

Modifications

  

Modification

      

Modifications

  

Modification

 
      

Outstanding

  

Outstanding

      

Outstanding

  

Outstanding

 
  

Number of

  

Recorded

  

Recorded

  

Number of

  

Recorded

  

Recorded

 
  

Contracts

  

Investment

  

Investment

  

Contracts

  

Investment

  

Investment

 
  

(Dollars in thousands)

 

Troubled Debt Restructurings:

                        

Residential mortgage

  2  $304  $306   1  $482  $482 

Commercial:

                        

Commercial real estate

        -   -   -   - 

Farmland

        -   -   -   - 

Commercial and industrial

  1   4,802   4,802   1   504   504 

Consumer:

                        

Second mortgages

  1   38   39          

Total troubled debt restructurings

  4  $5,144  $5,147   2  $986  $986 

 

Under Section 4013 of the CARES Act, and separately based upon regulatory guidance promulgated by federal banking regulators (collectively, the “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 March 31, 2023, there were two such loan modifications totaling $26.6 million all rated “special mention”. At September 30, 2022, the Company had three COVID-19 modified loans totaling $32.0 million, all of which were rated “special mention”. 

 

- 24-

 

The following tables set forth the composition of these loans by loan segments as of March 31, 2023 and September 30, 2022:

 

  

March 31, 2023

 
  

Number of

  

Loan Modified

  

Gross

  

Percentage of Gross Loans

 
  Loans  Exposure  Loans  Modified 
      

(Dollars in thousands)

     

Residential mortgage

    $  $163,734   0.00%
                 

Construction and Development:

                

Residential and commercial

        18,966   0.00%

Land loans

        540   0.00%

Total Construction and Development

        19,506   0.00%
                 

Commercial:

                

Commercial real estate

  2   26,560   402,503   6.60%

Farmland

        13,560   0.00%

Multi-family

        61,272   0.00%

Commercial and industrial

        104,781   0.00%

Other

        10,417   0.00%

Total Commercial

  2   26,560   592,533   4.48%
                 

Consumer:

                

Home equity lines of credit

        13,002   0.00%

Second mortgages

        3,577   0.00%

Other

        2,210   0.00%

Total Consumer

        18,789   0.00%

Total loans

  2  $26,560  $794,562   3.34%

 

  

September 30, 2022

 
  

Number of

  

Loan Modified

  

Gross

  

Percentage of Gross Loans

 
  Loans  Exposure  Loans  Modified 
      

(Dollars in thousands)

     

Residential mortgage

    $  $175,957   0.00%

Construction and Development:

                

Residential and commercial

        24,362   0.00%

Land loans

        550   0.00%

Total Construction and Development

        24,912   0.00%

Commercial:

                

Commercial real estate

  3   32,041   406,914   7.87%

Farmland

        11,506   0.00%

Multi-family

        55,295   0.00%

Commercial and industrial

        102,703   0.00%

Other

        13,356   0.00%

Total Commercial

  3   32,041   589,774   5.74%

Consumer:

                

Home equity lines of credit

        13,233   0.00%

Second mortgages

        4,395   0.00%

Other

        2,136   0.00%

Total Consumer

        19,764   0.00%

Total loans

  3  $32,041  $810,407   3.95%

 

- 25-

 
 

Note 8 - 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 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.

       

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 both  March 31, 2023 and  September 30, 2022, 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. The Company is not subject to regulatory capital requirements imposed by Basel III on bank holding companies because it is deemed to be a small bank holding company.

  

 

 

- 26-

 

The following table summarizes the Bank’s compliance with applicable regulatory capital requirements as of March 31, 2023 and September 30, 2022:

 

                  

Minimum To be Well

 
                  

Capitalized

 
                  

Under Prompt

 
          

Minimum For Capital

  

Corrective

 
  

Actual

  

Adequacy Purposes

  

Action Provisions

 
  

Amount

  

Ratio

  

Amount

  

Ratio

  

Amount

  

Ratio

 
  

(Dollars in thousands)

 

As of March 31, 2023

                        

Tier 1 Leverage (Core) Capital (to adjusted assets)

 $170,015   17.01% $39,977   4.00% $49,971   5.00%

Common Equity Tier 1 Capital (to risk weighted assets)

  170,015   20.05%  38,160   4.50%  55,119   6.50%

Tier 1 Capital (to risk weighted assets)

  170,015   20.05%  50,879   6.00%  67,839   8.00%

Total Risk Based Capital (to risk weighted assets)

  179,195   21.13%  67,839   8.00%  84,799   10.00%

As of September 30, 2022

                        

Tier 1 Leverage (Core) Capital (to adjusted assets)

 $166,340   16.30% $40,820   4.00% $51,025   5.00%

Common Equity Tier 1 Capital (to risk weighted assets)

  166,340   19.27%  38,836   4.50%  56,096   6.50%

Tier 1 Capital (to risk weighted assets)

  166,340   19.27%  51,751   6.00%  69,042   8.00%

Total Risk Based Capital (to riskweighted assets)

  175,512   20.34%  69,042   8.00%  86,302   10.00%

   

 Failure to meet any of the capital requirements could result in enforcement actions by the regulators, including a capital directive, a cease and desist order, civil money penalties, the establishment of restrictions on the institution’s operations, termination of federal deposit insurance and the appointment of a conservator or receiver.

 

 

Note 9 Derivatives and Hedging Activities

 

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

 

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

 

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income (loss) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings.  At March 31, 2023, 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 12 months, the Company estimates approximately $2.3 million 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 20 months (excluding forecasted transactions related to the payment of variable interest on existing financial instruments).

 

- 27-

 

The Company also 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 March 31, 2023 and September 30, 2022:

 

  

March 31, 2023

  

Asset derivatives

 

Liability derivatives

         

Statement of

        

Statement of

  

Notional

     

Financial Condition

 

Notional

     

Financial Condition

  

Amount

  

Fair Value

 

Location

 

Amount

  

Fair Value

 

Location

  

(In thousands)

Derivatives designated as a hedging instrument:

                  

Interest rate swap agreements

 $60,000  $3,023 

Other assets

 $  $ 

Other liabilities

Derivatives not designated as a hedging instrument:

                  

Interest rate swap agreements

 $43,727  $2,393 

Other assets

 $43,727  $2,394 

Other liabilities

 

  

September 30, 2022

  

Asset derivatives

 

Liability derivatives

         

Statement of

        

Statement of

  

Notional

     

Financial Condition

 

Notional

     

Financial Condition

  

Amount

  

Fair Value

 

Location

 

Amount

  

Fair Value

 

Location

  

(In thousands)

Derivatives designated as a hedging instrument:

                  

Interest rate swap agreements

 $60,000  $4,017 

Other assets

 $  $ 

Other liabilities

Derivatives not designated as a hedging instrument:

                  

Interest rate swap agreements

 $44,132  $3,711 

Other assets

 $44,132  $3,712 

Other liabilities

 

- 28-

 

The tables below present the derivative assets and liabilities offsetting as of March 31, 2023 and September 30, 2022:

 

Offsetting of Derivative Assets

 

(In thousands)

 

as of March 31, 2023

                        
              

Gross Amounts Not Offset in the Statements of

 
              

Financial Condition

 
      

Gross

  

Net Amounts

             
      

Amounts

  

of Assets

             
  

Gross

  

Offset in the

  

presented in

             
  

Amounts

  

Statement of

  

the Statement

      

Cash

     
  

of Recognized

  

Financial

  

of Financial

  

Financial

  

Collateral

     
  

Assets

  

Condition

  

Condition

  

Instruments

  

Received

  

Net Amount

 
                         

Derivatives

 $5,416  $  $5,416  $  $3,670  $1,746 

 

Offsetting of Derivative Liabilities

 

(In thousands)

 

as of March 31, 2023

                        
              

Gross Amounts Not Offset in the Statements of

 
              

Financial Condition

 
      

Gross

  

Net Amounts

             
      

Amounts

  

of Liabilities

             
  

Gross

  

Offset in the

  

presented in

             
  

Amounts

  

Statement of

  

the Statement

      

Cash

     
  

of Recognized

  

Financial

  

of Financial

  

Financial

  

Collateral

     
  

Liabilities

  

Condition

  

Condition

  

Instruments

  

Posted

  

Net Amount

 
                         

Derivatives

 $2,394  $  $2,394  $  $  $2,394 

 

Offsetting of Derivative Assets

 

(In thousands)

 

as of September 30, 2022

                        
              

Gross Amounts Not Offset in the Statements of

 
              

Financial Condition

 
      

Gross

  

Net Amounts

             
      

Amounts

  

of Assets

             
  

Gross

  

Offset in the

  

presented in

             
  

Amounts

  

Statement of

  

the Statement

      

Cash

     
  

of Recognized

  

Financial

  

of Financial

  

Financial

  

Collateral

     
  

Assets

  

Condition

  

Condition

  

Instruments

  

Received

  

Net Amount

 
                         

Derivatives

 $7,728  $-  $7,728  $  $4,210  $3,518 

 

 

Offsetting of Derivative Liabilities

 

(In thousands)

 

as of September 30, 2022

                        
              

Gross Amounts Not Offset in the Statements of

 
              

Financial Condition

 
      

Gross

  

Net Amounts

             
      

Amounts

  

of Liabilities

             
  

Gross

  

Offset in the

  

presented in

             
  

Amounts

  

Statement of

  

the Statement

      

Cash

     
  

of Recognized

  

Financial

  

of Financial

  

Financial

  

Collateral

     
  

Liabilities

  

Condition

  

Condition

  

Instruments

  

Posted

  

Net Amount

 
                         

Derivatives

 $3,712  $-  $3,712  $  $  $3,712 

 

- 29-

 

The tables below present the net gains (losses) recorded in accumulated other comprehensive income (loss) and the Consolidated Statements of Net Income relating to the cash flow derivative instruments for the three and six months ended March 31, 2023 and 2022:

 

  

Three Months Ended March 31, 2023

 
  

Amount of Gain (Loss) Recognized

  

Amount of Gain Reclassified from OCI to

 
  

in OCI on Derivative

  

Interest Expense

 
  

(In thousands)

 

Interest rate swap agreements

 $(182) $565 

Total derivatives

 $(182) $565 

 

  

Three Months Ended March 31, 2022

 
  

Amount of Loss Recognized

  

Amount of Loss Reclassified from OCI to

 
  

in OCI on Derivative

  

Interest Expense

 
  

(In thousands)

 

Interest rate swap agreements

 $1,748  $(26)

Total derivatives

 $1,748  $(26)

 

  

Six Months Ended March 31, 2023

 
  

Amount of Loss Recognized

  

Amount of Gain Reclassified from OCI to

 
  

in OCI on Derivative

  

Interest Expense

 
  

(In thousands)

 

Interest rate swap agreements

 $22  $1,016 

Total derivatives

 $22  $1,016 

 

  

Six Months Ended March 31, 2022

 
  

Amount of Loss Recognized

  

Amount of Loss Reclassified from OCI to

 
  

in OCI on Derivative

  

Interest Expense

 
  

(In thousands)

 

Interest rate swap agreements

 $2,142  $(111)

Total derivatives

 $2,142  $(111)

 

The tables below present the effect of the Company’s derivative financial instruments on the Consolidated Statements of net Income for the three and six months ended March 31, 2023 and 2022:

 

  

Three Months Ended March 31, 2023

 
  

Consolidated Statements of Net Income

 

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 March 31, 2022

 
  

Consolidated Statements of Net Income

 

Amount of Loss Recognized in Income on derivatives

 
  

(In thousands)

 

Derivatives not designated as a hedging instrument:

      

Interest rate swap agreement

 

Other income

 $1 

Total

   $1 

 

  

Six Months Ended March 31, 2023

 
  

Consolidated Statements of Income

  

Amount of Loss Recognized in Income on derivatives

 
  

(In thousands)

 

Derivatives not designated as a hedging instrument:

       

Interest rate swap agreement

 

Other income

  $ 

Total

  $ 

 

  

Six Months Ended March 31, 2022

 
  

Consolidated Statements of Income

  

Amount of Loss Recognized in Income on derivatives

 
  

(In thousands)

 

Derivatives not designated as a hedging instrument:

       

Interest rate swap agreement

 

Other income

  $2 

Total

    $2 

 

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

 

At March 31, 2023 and September 30, 2022, the fair value of derivatives was in a net asset position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements. There were no adjustments for nonperformance risk at March 31, 2023 and September 30, 2022. At March 31, 2023 and  September 30, 2022, the Company had no collateral posting requirement against its obligations under these agreements.  If the Company had breached any of these provisions of its contracts, 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.

  

 

Note 10 - 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 and equity securities 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, OREO 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.

 

- 30-

 

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 affects the valuation method chosen. There were no changes in valuation techniques or transfers between levels at March 31, 2023 or September 30, 2022.

 

The tables below present the balances of assets measured at fair value on a recurring basis as of March 31, 2023 and September 30, 2022:

 

  

March 31, 2023

 
  

Total

  

Level 1

  

Level 2

  

Level 3

 
  

(In thousands)

 

Assets:

                

Investment securities available for sale:

                

Debt securities:

                

U.S. government agencies

 $3,717  $  $3,717  $ 

State and municipal obligations

  10,316      10,316    

Single issuer trust preferred security

  946      946    

Corporate debt securities

  29,670      29,670    

Mortgage backed securities

  2,092      2,092    

U.S. treasury note

  1,458      1,458    

Total investment Securities available -for-sale

 $48,199  $   48,199  $ 

Equity Securities:

                

Mutual Funds

  1,390   890      500 

Total equity investment securities

  1,390   890      500 
                 

Derivative instruments

 $5,416  $  $5,416  $ 

Liabilities:

                

Derivative instruments

 $2,394  $  $2,394  $ 

 

- 31-

 
  

September 30, 2022

 
  

Total

  

Level 1

  

Level 2

  

Level 3

 
  

(In thousands)

 

Assets:

                

Investment securities available for sale:

                

Debt securities:

                

U.S. government agencies

 $3,580  $  $3,580  $ 

State and municipal obligations

  9,660      9,660    

Single issuer trust preferred security

  946      946    

Corporate debt securities

  32,128      32,128    

Mortgage backed securities

  2,087      2,087    

U.S. treasury note

  1,443      1,443    

Total investment Securities available -for-sale

 $49,844  $   49,844  $ 

Equity Securities:

                

Mutual Funds

  1,374   874      500 

Total equity investment securities

  1,374   874      500 
                 

Derivative instruments

 $7,728  $  $7,728  $ 

Liabilities:

                

Derivative instruments

 $3,712  $  $3,712  $ 

 

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 six months ended March 31, 2023 and March 31, 2022

 

  

Fair value measurements

 
  

using significant

 
  

unobservable inputs

 
  

(Level 3)

 
  

(In thousands)

 

Balance, October 1, 2022

 $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, March 31, 2023

 $500 

 

  

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, March 31, 2022

 $500 

 

- 32-

 

All of the Company’s available for sale investment securities and derivative instruments are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the securities’ terms and conditions, among other things.  From time to time, the Company validates prices supplied by the independent pricing service by comparison to prices obtained from third-party sources or derived using internal models.

 

For assets measured at fair value on a nonrecurring basis that were still held at the end of the period, the following tables provide the level of valuation assumptions used to determine each adjustment and the carrying value of the related individual assets or portfolios at March 31, 2023 and September 30, 2022:

 

  

March 31, 2023

 
  

Total

  

Level 1

  

Level 2

  

Level 3

 
  

(In thousands)

 

Other real estate owned

 $200  $  $  $200 

Impaired loans(1)

  13,300         13,300 

Total

 $13,500  $  $  $13,500 

 

 

  

March 31, 2023

 
  

Fair Value at

     

Range/(Weighted

 
  

March 31, 2023

 

Valuation Technique

 

Unobservable Input

 

Average)

 
  

(Dollars in thousands)

 

Other real estate owned

 $200 

Appraisal of Collateral(2)

 

Collateral discount(3)

  33.6%/(33.6%) 

Impaired loans(1)

  13,300 

Appraisal of Collateral(2)

 

Collateral discount(3)

  (10%-12%)/(10.5%) 

Total

 $13,500        

 

(1)

There was no specific loan loss allowance related to impaired loans.  

(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, 2022

 
  

Total

  

Level 1

  

Level 2

  

Level 3

 
  

(In thousands)

 

Other real estate owned

 $259  $  $  $259 

Impaired loans(1)

  13,722         13,722 

Total

 $13,981  $  $  $13,981 

 

 

  

September 30, 2022

 
  

Fair Value at

      

Range/(Weighted

 
  

September 30, 2022

 

Valuation Technique

 

Unobservable Input

  

Average)

 
  

(Dollars in thousands)

 

Other real estate owned

 $259 

Appraisal of Collateral(2)

 

Collateral discount(3)

  33.6%/(33.6%) 

Impaired loans(1)

  13,722 

Appraisal of Collateral(2)

 

Collateral discount(3)

  (10.4%) – (12%)/(10.5%) 

Total

 $13,981        

 


(1)

Consisted of three loans with an aggregate balance of $13.7 million and with $54,000 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.

 

- 33-

 

At March 31, 2023 and September 30, 2022, the Company did not have any additions to our mortgage servicing assets.  At March 31, 2023 and September 30, 2022, the Company only sold loans with servicing released.  

 

The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of FASB ASC 825.  The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methods. However, considerable judgment is necessarily required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company would realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. FASB ASC 825 excludes certain financial instruments and all non-financial instruments from its disclosure requirements.  Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

 

The fair value estimates presented herein are based on pertinent information available to management as of March 31, 2023 and September 30, 2022. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since  March 31, 2023 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—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 March 31, 2023, one of the Company’s real estate loans totaling $13.3 million classified as held-for-sale was deemed impaired. This loan is fair valued at Level 3 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 are equity interests in the Federal Reserve Bank, FHLB and ACBB, they are carried at cost because they do 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.

 

- 34-

 

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.

 

Deposits—Deposit 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.

 

- 35-

 

The carrying amount and estimated fair value of the Company’s financial instruments as of March 31, 2023 and  September 30, 2022 are presented below:

 

  

March 31, 2023

 
  

Carrying Amount

  

Fair Value

  

Level 1

  

Level 2

  

Level 3

 
  

(In thousands)

 

Financial assets:

                    

Cash and cash equivalents

 $31,455  $31,455  $31,455  $  $ 

Investment securities available-for-sale

  48,199   48,199      48,199    

Investment securities held-to-maturity

  56,242   49,666      49,666    

Equity investment securities

  1,390   1,390   890      500 

Loans held for sale

  13,232   13,232         13,232 

Loans receivable, net

  786,000   745,771         745,771 

Accrued interest receivable

  4,829   4,829      4,829    

Restricted stock

  6,815   6,815      6,815    

Mortgage servicing rights (included in Other Assets)

  80   106      106    

Derivatives (included in Other Assets)

  5,416   5,416      5,416    

Financial liabilities:

                    

Savings accounts

  52,905   52,905      52,905    

Checking and NOW accounts

  276,890   276,890      276,890    

Money market accounts

  253,672   253,672      253,672    

Certificates of deposit

  156,715   158,594      158,594    

Borrowings (excluding sub debt)

  75,000   75,135      75,135    

Subordinated debt

  25,000   27,075      27,075    

Derivatives (included in Other Liabilities)

  2,394   2,394      2,394    

Accrued interest payable

  1,246   1,246      1,246    

 

  

September 30, 2022

 
  

Carrying Amount

  

Fair Value

  

Level 1

  

Level 2

  

Level 3

 
  

(In thousands)

 

Financial assets:

                    

Cash and cash equivalents

 $53,267  $53,267  $53,267  $  $ 

Investment securities available-for-sale

  49,844   49,844      49,844    

Investment securities held-to-maturity

  58,767   50,266      50,266    

Equity investment securities

  1,374   1,374   874      500 

Loans receivable, net

  801,854   763,311         763,311 

Loans held for sale

  13,780   13,780         13,780 

Accrued interest receivable

  4,252   4,252      4,252    

Restricted stock

  7,104   7,104      7,104    

Mortgage servicing rights (included in Other Assets)

  87   117      117    

Derivatives (included in Other Assets)

  7,728   7,728      7,728    

Financial liabilities:

                 

Savings accounts

  55,288   55,288      55,288    

Checking and NOW accounts

  298,833   298,833      298,833    

Money market accounts

  279,699   279,699      279,699    

Certificates of deposit

  151,503   153,087      153,087    

Borrowings (excluding sub debt)

  80,000   80,022      80,022    

Subordinated debt

  25,000   25,045      25,045    

Derivatives (included in Other Liabilities)

  3,712   3,712      3,712    

Accrued interest payable

  543   543      543    

 

- 36-

 
 

Note 11 Comprehensive Income

 

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

 

  

Three Months Ended March 31,

  

Six Months Ended March 31,

 
  

2023

  

2022

  

2023

  

2022

 
  

(In thousands)

 

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

 $(1,135) $(2,588) $(541) $(2,737)

Amortization of unrealized holding losses on securities transferred from available-for-sale to held-to-maturity (1)

  1   2   2   4 

Fair value adjustments on derivatives

  (747)  1,773   (994)  2,252 

Other comprehensive loss before taxes

  (1,881)  (813)  (1,533)  (481)

Tax effect

  393   169   318   98 

Total other comprehensive loss

 $(1,488) $(644) $(1,215) $(383)

 

 

(1)

Amounts are included in interest and dividends on investment securities on the Consolidated Statements of Net Income.

 

 

Note 12 Equity Based Incentive Compensation Plan

 

The Company maintains the Malvern Bancorp, Inc. 2014 Long-Term Incentive Compensation Plan (the “2014 Plan”), which permits the grant of long-term incentive and other stock and cash awards. The purpose of the 2014 Plan is to promote the success of the Company and the Bank by providing incentives to officers, employees and directors of the Company and the Bank that will link their personal interests to the financial success of the Company and to growth in shareholder value.  The maximum total number of shares of the Company’s common stock available for grants under the 2014 Plan is 400,000.  As of March 31, 2023, there were 266,839 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 granted 6,000 stock options during the six months ended March 31, 2023. The Company did not grant any stock options during the six months ended March 31, 2022. There were no stock options forfeited or expired for the three and six month periods ended March 31, 2023. During the six months ended March 31, 2022, 2,000 stock options were forfeited. Total compensation expense related to stock options granted under the 2014 Plan was $7,000 and $16,000 for the three and six months ended March 31, 2023 respectively, and $9,000 and $18,000 for the three and six months ended March 31, 2022, respectively.

 

     The Company awarded 10,937 shares of restricted stock during the six months ended March 31, 2023 and 5,131 shares of restricted stock during the six months ended March 31, 2022. There were zero and 2,336 restricted shares forfeited for the six months ended March 31, 2023 and 2022, respectively. The compensation expense related to restricted stock awards was $43,000 and $86,000 for the three and six months ended March 31, 2023, and $47,000 and $86,000 for the three and six months ended March 31, 2022. 3,979 unrestricted shares were issued at a cost of $71,000 for the six months ended March 31, 2023.

 

- 37-

 

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.

 

Stock Options

 

The following is a summary of stock option activity for the six months ended March 31, 2023

 

          

Weighted

     
      

Weighted

  

Average

     
      

Average

  

Remaining

  

Aggregate

 
      

Exercise

  

Contractual

  

Intrinsic

 
  

Shares

  

Price

  

Term (In Years)

  

Value

 

Outstanding, beginning of year

  36,830  $20.24     $ 

Granted

  6,000  $17.86     $720 

Exercised

    $     $ 

Forfeited/cancelled/expired

    $     $ 

Outstanding, at March 31, 2023

  42,830  $19.90   6.835  $ 

Exercisable, at March 31, 2023

  22,430  $21.65   5.194  $ 

Nonvested, at March 31, 2023

  20,400  $17.99   8.639  $ 

 

- 38-

 

The following is a summary of stock option activity for the six months ended March 31, 2022

 

          

Weighted

     
          

Average

     
      

Weighted

  

Remaining

  

Aggregate

 
      

Average

  

Contractual

  

Intrinsic

 
  

Shares

  

Exercise Price

  

Term (In Years)

  

Value

 

Outstanding, beginning of year

  32,830  $20.96     $1,940 

Granted

    $     $ 

Exercised

    $     $ 

Forfeited/cancelled/expired

  2,000  $19.49     $ 

Outstanding, at March 31, 2022

  30,830  $21.05   6.792  $180 

Exercisable, at March 31, 2022

  17,680  $21.70   5.866  $180 

Nonvested, at March 31, 2022

  13,150  $20.19   8.037  $ 

 

As of March 31, 2023, there was $68,000 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 3.10 years.

 

Restricted Stock Awards

 

The table below summarizes the activity for the Company’s stock awards outstanding during the six months ended March 31, 2023 and 2022:

 

      

Weighted Average

 
  

Shares

  

Fair Value

 

Outstanding, beginning of year

  27,417  $19.34 

Granted

  10,937  $17.69 

Vested

  8,252  $19.32 

Forfeited/cancelled/expired

    $ 

Outstanding, at March 31, 2023

  30,102  $18.75 

 

      

Weighted Average

 
  

Shares

  

Fair Value

 

Outstanding, beginning of year

  31,486  $21.10 

Granted

  5,131  $15.50 

Vested

  (6,711) $22.17 

Forfeited/cancelled/expired

  (2,336) $20.54 

Outstanding, at March 31, 2022

  27,570  $19.82 

 

As of March 31, 2023, there was $453,000 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 3.28 years.

 

- 39-

 
 

Note 13 Deposits

 

Deposits classified by type with percentages to total deposits at March 31, 2023 and September 30, 2022 consisted of the following:

 

  

March 31,

  

September 30,

 
  

2023

  

2022

 
  

(Dollars in thousands)

 

Balances by types of deposit:

                

Savings

 $52,905   7.15% $55,288   7.04%

Money market accounts

  253,672   34.27   279,699   35.62 

Interest-bearing demand

  227,228   30.70   240,819   30.66 

Non-interest-bearing demand

  49,662   6.71   58,014   7.39 
   583,467   78.83   633,820   80.71 

Certificates of deposit

  156,715   21.17   151,503   19.29 

Total Deposits

 $740,182   100% $785,323   100%

 

The total amount of certificates of deposit greater than or equal to $250,000 at March 31, 2023 and September 30, 2022 was $57.8 million and $63.0 million, respectively.  The Company had brokered deposits totaling $21.6 and $19.1 million at March 31, 2023 and September 30, 2022, respectively. Estimated uninsured deposits (in excess of the Federal Deposit Insurance Corporation limit) were $193.1 million and $169.8 million at March 31, 2023 and September 30, 2022 respectively. 

 

Interest expense on deposits consisted of the following:

 

  

Three Months Ended March 31,

  

Six Months Ended March 31,

 
  

2023

  

2022

  

2023

  

2022

 
  

(In thousands)

 

Savings accounts

 $19  $12  $34  $24 

Money market accounts

  698   219   1,100   497 

Interest-bearing demand

  1,032   323   1,743   780 

Certificates of deposit

  895   274   1,597   572 

Total

 $2,644  $828  $4,474  $1,873 

 

As of March 31, 2023, the scheduled maturities of certificates of deposits are as follows:

 

  

Scheduled Maturities

 
  

(In thousands)

 

Period Ending March 31,

    

2024

 $101,864 

2025

  42,638 

2026

  6,955 

2027

  2,849 

2028

  829 

Thereafter

  1,580 

Total

 $156,715 

 

- 40-

 

As of March 31, 2023, the scheduled maturities of certificates of deposits in amounts greater than $250,000 are as follows:

 

  

Scheduled Maturities

 
  

(In thousands)

 

Three months or less

 $22,818 

Over three through six months

  5,901 

Over six through twelve months

  16,929 

Over twelve months

  12,155 

Total

 $57,803 

 

 

Note 14 Subordinated Debt

 

On February 7, 2017, the Company issued $25.0 million in aggregate principal amount of its 6.125% fixed-to-floating rate subordinated notes (the “Notes”).  From February 7, 2017 to February 15, 2022, the Notes had a fixed rate of 6.125%.  During the period ended March 31, 2022, the rate on the Notes converted from fixed to a variable interest rate. The rate at March 31, 2023 was 9.01%. All costs related to the issuance of the Notes have been amortized. As of March 31, 2023, the Notes bear interest until the maturity date or early redemption date at a variable rate equal to the then current three-month LIBOR rate plus 414.5 basis points. The Notes were structured to qualify as Tier 2 capital for regulatory purposes, subject to limitations. Per applicable Federal Reserve Rules and regulations, the amount of the subordinated notes qualifying as Tier 2 regulatory capital is phased out by 20% of the original amount of the subordinated notes in each of the five years beginning on the fifth anniversary preceding the maturity date of the subordinated notes. The Company’s subordinated debt totaled $25.0 million at March 31, 2023.

 

 

- 41-

 
 

Note 15 - Contingencies

 

On January 25, 2021, the Company received notice that the Securities and Exchange Commission (“SEC”) was conducting a non-public investigation (the “Non-Public Investigation”).  As part of the Non-Public Investigation, the SEC subpoenaed documents relating to five commercial loans extended by Malvern Bank in July 2016, July 2017, March 2017, and April 2017, two of which were previously subject to prior period restatements made by the Company in 2020 and 2021.  

 

In April 2023, the Company and its Chief Financial Officer (“CFO”) reached agreements in principle with the SEC Staff to settle, without admitting or denying, potential charges against the Company arising out of the Non-Public Investigation and to pay civil money penalties of $350,000 and $40,000, respectively.  The Company, the CFO, and the SEC Staff are working to document the proposed settlements, which are subject to approval by the SEC Commissioners.  There can be no assurance that the settlements will be finalized and approved by the SEC Commissioners or that any final settlements will not have different terms.  No formal charges have been issued against the Company or its officers in connection with the Non-Public Investigation, nor have the Company or the CFO received a “Wells” notice.  The Company has recorded a $350,000 contingent liability, referred to as a non-recurring expense in the accompanying unaudited financial statements, as of March 31, 2023, related to this Non-Public Investigation.

 

In addition to the foregoing, the Company and its subsidiaries are from time to time parties to lawsuits and involved in ongoing routine legal proceedings related to their operations. When the Company has determined that a loss is both probable and reasonably estimable, a liability representing the best estimate of the Company’s financial exposure based on known facts will be recorded. Actual losses may materially differ from the amounts recorded.

 

 

Note 16 - Subsequent Events

 

On May 5, 2023, the Bank took action to reduce overall exposure to a $4.0 million corporate debt security of a regional bank held in its available-for-sale portfolio, which had been impacted by recent market volatility. The security was carried at fair market value at the March 31, 2023 quarter end with an unrealized loss of $1,110,000. The Bank sold $2.0 million worth of the $4.0 million corporate debt security, which resulted in an after-tax loss of $912,000 that will be reflected in the June 30, 2023 financial statements. The remaining unrealized loss still held will be evaluated for other than temporary impairment  as of June 30, 2023. 

 

 

 

- 42-

 
 

Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations

 

The purpose of this analysis is to provide the reader with information relevant to understanding and assessing the Company’s results of operations for the periods presented herein and financial condition as of March 31, 2023 and September 30, 2022. 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 experience and beliefs concerning current conditions and 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 impact on our business, operations, financial condition, liquidity, results of operations, prospects and trading prices of our shares arising out of or resulting from the COVID-19 pandemic, and the related increase in FDIC premiums, 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 undersupply or oversupply of inventory and deterioration in values of real estate in the markets in which the Company operates, including residential and commercial; changes in the value of real estate held-for-sale; 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 and retain 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 or prolonged litigation or other matters before regulatory agencies, whether currently existing or commencing in the future, that delay the occurrence or non-occurrence of events or results in elevated expenses or unexpected outcomes; changes in the interest rate environment may reduce interest margins or the fair value of financial instruments, or increase the cost of our subordinated debt securities; unexpected loss of key personnel and future to attract and retain talent; 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; the impact on our business, operations, results of operations and prospects resulting from our pending merger with First Bank could be significant, including the Company’s ability to retain talent in connection with the pendency of the merger; the ability of the Company and First Bank to obtain regulatory approvals and meet other closing conditions to the pending merger on the expected terms and schedule; 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; the impact of any change in the FDIC insurance assessment rate or the rules and regulations related to the calculation of the FDIC insurance assessment amount; 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 2023 Annual Report filed with the SEC and available at the SEC’s Internet site (http://www.sec.gov).

 

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 financial condition and for the periods indicated in the statements of net income. 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, loans held for sale, 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 2023 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 2023 Annual Report. 

 

 

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 March 31, 2023, the Company had adequate sources of liquidity. 

 

 

Capital Strength

 

The Bank’s capital ratios continued to exceed the highest required regulatory benchmark levels. As of March 31, 2023, common equity Tier 1 capital ratio was 20.05%, Tier 1 leverage ratio was 17.01%, Tier 1 risk-based capital ratio was 20.05% and the total risk-based capital ratio was 21.13%.  

 

 

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 March 31, 2023, the Company had two COVID-19 modified loans totaling $26.6 million, representing 3.34 percent of loans outstanding as of such date. 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.

 

   

March 31, 2023

 
   

Number of

   

Loan Modified

   

Gross

   

Percentage of Gross

 
   

Loans

   

Exposure

   

Loans

   

Loans Modified

 
           

(Dollars in thousands)

         

Residential mortgage

        $     $ 163,734       0.00 %
                                 

Construction and Development:

                               

Residential and commercial

                18,966       0.00 %

Land loans

                540       0.00 %

Total Construction and Development

                19,506       0.00 %
                                 

Commercial:

                               

Commercial real estate

    2       26,560       402,503       6.60 %

Farmland

                13,560       0.00 %

Multi-family

                61,272       0.00 %

Commercial and industrial

                104,781       0.00 %

Other

                10,417       0.00 %

Total Commercial

    2       26,560       592,533       4.48 %
                                 

Consumer:

                               

Home equity lines of credit

                13,002       0.00 %

Second mortgages

                3,577       0.00 %

Other

                2,210       0.00 %

Total Consumer

                18,789       0.00 %

Total loans

    2     $ 26,560     $ 794,562       3.34 %

 

 

   

September 30, 2022

 
   

Number of

   

Loan Modified

   

Gross

   

Percentage of Gross

 
   

Loans

   

Exposure

   

Loans

   

Loans Modified

 
           

(Dollars in thousands)

         

Residential mortgage

        $     $ 175,957       0.00 %

Construction and Development:

                               

Residential and commercial

                24,362       0.00 %

Land loans

                550       0.00 %

Total Construction and Development

                24,912       0.00 %

Commercial:

                               

Commercial real estate

    3       32,041       406,914       7.87 %

Farmland

                11,506       0.00 %

Multi-family

                55,295       0.00 %

Commercial and industrial

                102,703       0.00 %

Other

                13,356       0.00 %

Total Commercial

    3       32,041       589,774       5.74 %

Consumer:

                               

Home equity lines of credit

                13,233       0.00 %

Second mortgages

                4,395       0.00 %

Other

                2,136       0.00 %

Total Consumer

                19,764       0.00 %

Total loans

    3     $ 32,041     $ 810,407       3.95 %

 

 

Certain industries included within our commercial real estate loans were particularly impacted by social distancing, quarantines, and the economic impact of the COVID-19 pandemic. All the three COVID-19 modified commercial real estate loans were hotels.

 

Results of Operations

 

Net income available to common shareholders for the three months ended March 31, 2023 amounted to $571,000, or $0.08 per fully diluted common share, an increase of $49,000, or 9.5%, as compared with net income of $522,000, or $0.07 per fully diluted common share, for the three month period ended March 31, 2022. This increase in net income and diluted earnings per share was due to an increase of $122,000, or 21.7%, in total other income, driven by higher earnings on bank owned life insurance of $90,000, and higher service charges and other fees of $37,000. Also impacting net income was a $389,000 reduction in total other expense, driven by a reduction of $1.8 million, or 72.1%, in other operating expense, for the three months ended March 31, 2022, the Company recorded a $395,000 valuation allowance and $1.3 million in real estate tax expense on loans held for sale. These were offset by $550,000 of nonrecurring expenses, $492,000 of merger related expenses and an increase of $220,000 in salaries and employee benefit expenses.  These expense items were offset by $380,000 decrease in net interest income, driven by a higher average cost of total interest bearing liabilities of $2.6 million partially offset by a higher yield on total interest earning assets of $2.2 million. Annualized return on average assets (“ROAA”) was 0.23 percent for the quarter ended March 31, 2023, compared to 0.18 percent for the quarter ended March 31, 2022, and annualized return on average equity (“ROAE”) was 1.53 percent for the quarter ended March 31, 2023, compared with 1.43% for the quarter ended March 31, 2022.

 

Net income available to common shareholders for the six months ended March 31, 2023 amounted to $2.5 million, or $0.33 per fully diluted common share, a decrease of $60,000, or 2.4%, as compared with net income of $2.5 million, or $0.34 per fully diluted common share, for the six months ended March 31, 2022. This decrease in net income and diluted earnings per share was due to a decrease in other income of $188,000, or 14.6%, combined with an increase in other operating expenses of $77,000, or 0.6%, primarily due to decreased prepayment penalties and service charges on loans during the six months ended March 31, 2023. Offsetting these items was a $216,000, or 1.5%, increase in net interest income income for the six months ended March 31, 2023 driven by higher average yields on interest earning assets of $3.7 million, or 21.8%, partially offset by a $3.5 million, or 116.7%, increase in average cost of total interest bearing liabilities. The annualized ROAA was 0.49% for the six months ended March 31, 2023, compared to annualized ROAA of 0.45% for six months ended March 31, 2022.

 

 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 primarily support the loans and investments comprising these assets.

 

 

Net Interest Income

 

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

 

   

For the Three Months Ended March 31,

   

For the Six Months Ended March 31,

 
                   

Increase

   

Percent

                   

Increase

   

Percent

 
   

2023

   

2022

   

(Decrease)

   

Change

   

2023

   

2022

   

(Decrease)

   

Change

 
   

(Dollars in thousands)

                                 

Interest income:

                                                               

Loans, including fees

  $ 9,354     $ 7,628     $ 1,726       22.63 %   $ 18,504     $ 15,856     $ 2,648       16.70 %

Investment securities

    811       585       226       38.63       1,631       1,076       555       51.58  

Dividends, restricted stock

    146       16       130       812.50       259       29       230       793.10  

Interest-bearing cash accounts

    200       75       125       166.67       467       166       301       181.33  

Total interest income

    10,511       8,304       2,207       26.58       20,861       17,127       3,734       21.80  

Interest expense:

                                                               

Deposits

    2,644       828       1,816       219.32       4,474       1,873       2,601       138.87  

Short-term borrowings

    40             40             49             49        

Long-term borrowings

    547       183       364       198.91       874       420       454       108.10  

Subordinated debt

    706       339       367       108.26       1,136       722       414       57.34  

Total interest expense

    3,937       1,350       2,587       191.63       6,533       3,015       3,518       116.68  

Net interest income

  $ 6,574     $ 6,954     $ (380 )     (5.46 )%   $ 14,328     $ 14,112     $ 216       1.53 %

 

Net interest income for the three months ended March 31, 2023 amounted to $6.6 million, a decrease of $380,000, or 5.5%, from $7.0 million for the three months ended March 31, 2022. The decrease was primarily due to increase in average cost of interest- bearing liabilities which was partially offset by an improvement in rate related factors in interest earning assets. The average yield on interest-earning assets increased 104 basis points for the quarter ended March 31, 2023, to 4.39%, when compared to the same period in 2022, primarily due to rising interest rates resulting in additional interest income from net loans and investment securities, which was partially offset by lower average loans. The average rate on interest-bearing liabilities for the quarter ended March 31, 2023 increased 140 basis points to 1.99% compared to the quarter ended March 31, 2022, due to higher interest rates on deposits and borrowings. Net interest margin decreased 6 basis points to 2.75% for the quarter ended March 31, 2023, from 2.81% for the same period in 2022, as a result of the rising interest rate environment.  

 

Net interest income for the six months ended March 31, 2023 amounted to $14.3 million, an increase of $216,000, or 1.5 percent, from $14.1 million for the six months ended March 31, 2022. The increase was primarily due to an improvement in rate related factors in interest earning assets which was partially offset by an increase in average rates in interest bearing liabilities. The average yield on interest-earning assets increased 94 basis points for the six months ended March 31, 2023, to 4.33%, when compared to the same period in 2022, primarily due to rising interest rates resulting in additional interest income from net loans and investment securities, which was partially offset by lower average loans. The average rate on interest-bearing liabilities for the quarter ended March 31, 2023 increased 99 basis points to 1.63% compared to the six months ended March 31, 2022, due to higher interest rates on deposits and borrowings. Net interest margin increased to 2.97% for the six months ended March 31, 2023, from 2.79% for the same period in 2022, as a result of the rising interest rate environment.  

 

Interest Income

 

       For the three month periods ended March 31, 2023 and 2022, total interest income was $10.5 million and $8.3 million, respectively, representing an increase of $2.2 million, or 26.6%, primarily due to rising interest rates resulting in higher interest income on interest earning assets of $2.4 million, partially offset by lower average volume of interest earning assets of $226,000. The average yield on interest-earning assets increased 104 basis points for the quarter ended March 31, 2023, to 4.39%, compared to 3.35% at the quarter ended March 31, 2022. For the six months ended March 31, 2023, and March 31, 2022, total interest income was $20.9 million and $17.1 million, respectively, representing an increase of $3.7 million, or 21.8%. The average yield on interest-earning assets increased 94 basis points for the six months ended March 31, 2023, to 4.33%, when compared to the same period in 2022. Total interest income increased for the six months ended March 31, 2023, compared to the same period in 2022, primarily due to higher interest income on interest earning assets of $4.5 million, partially offset by lower average volume of interest earning assets of $803,000.

 

 

Interest Expense

 

For the three month period ended March 31, 2023, interest expense increased by $2.6 million, or 191.6%, to $3.9 million, compared to $1.4 million for the three month period ended March 31, 2022. The increase in interest expense is attributable to higher interest rates on deposits and borrowings during the comparable period. Total average interest-bearing liabilities for the three month period ended March 31, 2023 declined $124.1 million, or 13.6%, to $789.9 million, compared to the three month period ended March 31, 2022, and the average rate on interest-bearing liabilities for the three month period ended March 31, 2023 increased 140 basis points to 1.99%, compared to 0.59% for the three month period ended March 31, 2022. For the six months ended March 31, 2023, interest expense increased $3.5 million or 116.7%. to $6.5 million, compared to $3.0 million for the six months ended March 31, 2022.  The increase in interest expense is primarily attributable to interest rate related factors, as the average rate on interest-bearing liabilities increased 99 basis points to 1.63% compared to the same period in 2022. 

 

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 to change in rate of each category.

 

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

 

   

Three Months Ended March 31,

   

Six Months Ended March 31,

 
   

2023 and 2022

   

2023 and 2022

 
   

Increase (Decrease) Due to Change in:

   

Increase (Decrease) Due to Change in:

 
   

Average

   

Average

   

Net

   

Average

   

Average

   

Net

 
   

Volume

   

Rate

   

Change

   

Volume

   

Rate

   

Change

 
   

(In thousands)

                         

Interest Earning Assets:

                                               

Loans, including fees

  $ (347 )   $ 2,073     $ 1,726     $ (1,152 )   $ 3,800     $ 2,648  

Investment securities

    112       114       226       337       218       555  

Interest-bearing cash accounts

    (6 )     190       184       (7 )     445       438  

Dividends, restricted stock

    15       56       71       19       74       93  

Total interest-earning assets

  $ (226 )   $ 2,433     $ 2,207     $ (803 )   $ 4,537     $ 3,734  

Interest Bearing Liabilities:

                                               

Money Market deposits

  $ (66 )   $ 545     $ 479     $ (145 )   $ 748     $ 603  

Savings deposits

          7       7             10       10  

Certificates of deposits

    105       516       621       202       823       1,025  

Other interest-bearing deposits

    (102 )     812       710       (235 )     1,198       963  

Total interest-bearing deposits

    (63 )     1,880       1,817       (178 )     2,779       2,601  

Borrowings and Subordinated debt

    232       538       770       331       586       917  

Total interest-bearing liabilities

  $ 169     $ 2,418     $ 2,587     $ 153     $ 3,365     $ 3,518  

Change in net interest income

  $ (395 )   $ 15     $ (380 )   $ (956 )   $ 1,172     $ 216  

 

 

Average Balances, Net Interest Income, and Yields Earned and Rates Paid  

 

The following table shows for the periods indicated the total dollar amount of interest from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and the net interest margin (“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. No tax equivalent adjustments have been made as the amounts are not material.

 

   

Three Months Ended March 31,

 
   

2023

   

2022

 
   

Average

   

Interest

           

Average

   

Interest

         
   

Outstanding

   

Earned/

   

Yield/

   

Outstanding

   

Earned/

   

Yield/

 
   

Balance

   

Paid

   

Rate

   

Balance

   

Paid

   

Rate

 
   

(Dollars in thousands)

 

ASSETS

                                               

Interest Earning Assets:

                                               

Loans, including fees(1)

  $ 817,973     $ 9,354       4.57 %   $ 856,937     $ 7,628       3.56 %

Investment securities

    108,864       811       2.98 %     91,433       585       2.56 %

Interest-bearing cash accounts

    22,399       200       3.57 %     36,452       16       0.18 %

Dividends, restricted stock

    7,544       146       7.74 %     6,263       75       4.79 %

Total interest-earning assets(1)

    956,780       10,511       4.39 %     991,087       8,304       3.35 %

Non-interest-earning assets:

                                               

Cash and due from banks

    1,914                       91,651                  

Bank-owned life insurance

    26,465                       26,282                  

Other assets

    25,476                       25,479                  

Other real estate owned

    256                       4,961                  

Allowance for loan losses

    (9,102 )                     (10,517 )                

Total non-interest-earning assets

    45,009                       137,856                  

Total assets

  $ 1,001,789                     $ 1,128,943                  

LIABILITIES & SHAREHOLDERS’ EQUITY

                                               

Interest-Bearing Liabilities:

                                               

Money Market deposits

  $ 239,188       698       1.17 %   $ 341,138       219       0.26 %

Savings deposits

    52,944       19       0.15 %     54,550       12       0.09 %

Certificates of deposits

    157,718       895       2.27 %     114,115       274       0.96 %

Other interest-bearing deposits

    217,358       1,032       1.90 %     319,246       323       0.40 %

Total interest-bearing deposits

    667,208       2,644       1.59 %     829,049       828       0.40 %

Borrowings

    122,700       1,293       4.22 %     84,991       522       2.46 %

Total interest-bearing liabilities

    789,908       3,937       1.99 %     914,040       1,350       0.59 %

Non-interest-bearing liabilities:

                                               

Demand deposits

    50,789                       54,502                  

Other liabilities

    11,226                       14,249                  

Total non-interest bearing liabilities

    62,015                       68,751                  

Shareholders' equity

    149,866                       146,152                  

Total liabilities and shareholders' equity

  $ 1,001,789                     $ 1,128,943                  

Net interest spread

                    2.40 %                     2.76 %

Net interest margin

                    2.75 %                     2.81 %

Net interest income

          $ 6,574                     $ 6,954          

 

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

 

 

 

   

Six Months Ended March 31,

 
   

2023

   

2022

 
   

Average

   

Interest

           

Average

   

Interest

         
   

Outstanding

   

Earned/

   

Yield/

   

Outstanding

   

Earned/

   

Yield/

 
   

Balance

   

Paid

   

Rate

   

Balance

   

Paid

   

Rate

 
   

(Dollars in thousands)

 

ASSETS

                                               

Interest Earning Assets:

                                               

Loans, including fees(1)

  $ 821,202     $ 18,504       4.51 %   $ 885,573     $ 15,856       3.58 %

Investment securities

    109,455       1,631       2.98 %     83,342       1,076       2.58 %

Interest-bearing cash accounts

    26,570       467       3.52 %     34,594       29       0.17 %

Dividends, restricted stock

    7,243       259       7.15 %     6,484       166       5.12 %

Total interest-earning assets(1)

    964,470       20,861       4.33 %     1,009,993       17,127       3.39 %

Non-interest-earning assets:

                                               

Cash and due from banks

    3,669                       98,899                  

Bank-owned life insurance

    26,378                       26,202                  

Other assets

    16,132                       25,764                  

Other real estate owned

    242                       4,961                  

Allowance for loan losses

    (9,102 )                     (12,357 )                

Total non-interest-earning assets

    37,319                       143,469                  

Total assets

  $ 1,012,358                     $ 1,153,462                  
                                                 

LIABILITIES & SHAREHOLDERS’ EQUITY

                                               

Interest-Bearing Liabilities:

                                               

Money Market deposits

  $ 250,929       1,100       0.88 %   $ 354,596       497       0.28 %

Savings deposits

    53,287       34       0.13 %     53,936       24       0.09 %

Certificates of deposits

    153,839       1,597       2.08 %     113,866       572       1.01 %

Other interest-bearing deposits

    230,543       1,743       1.51 %     330,521       780       0.47 %

Total interest-bearing deposits

    688,598       4,474       1.30 %     852,919       1,873       0.44 %

Borrowings

    114,176       2,059       3.61 %     88,493       1,142       2.58 %

Total interest-bearing liabilities

    802,774       6,533       1.63 %     941,412       3,015       0.64 %

Non-interest-bearing liabilities:

                                               

Demand deposits

    50,648                       54,294                  

Other liabilities

    9,830                       12,813                  

Total non-interest liabilities

    60,478                       67,107                  

Shareholders' equity

    149,106                       144,493                  

Total liabilities and shareholders' equity

  $ 1,012,358                     $ 1,153,462                  
                                                 

Net interest spread

                    2.70 %                     2.75 %

Net interest margin

                    2.97 %                     2.79 %

Net interest income

          $ 14,328                     $ 14,112          

 

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

 

 

 

Other Income

 

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

 

   

Three Months Ended March 31,

   

Six Months Ended March 31,

 
                   

Increase

   

Percent

                   

Increase

   

Percent

 
   

2023

   

2022

   

(Decrease)

   

Change

   

2023

   

2022

   

(Decrease)

   

Change

 
   

(Dollars in thousands)

 

Service charges and other fees

  $ 256     $ 219     $ 37       16.89 %   $ 433     $ 673     $ (240 )     (35.66 )%

Rental income-other

    48       48                   97       100       (3 )     (3.00 )

Net gains on sale and call of investments

                                               

Net gains on sale of loans

    6       11       (5 )     (45.45 )     14       63       (49 )     (77.78 )

Earnings on bank-owned life insurance

    373       283       90       31.80       546       452       94       20.80  

Other real estate owned income, net

                            10             10        

Total other income

  $ 683     $ 561     $ 122       21.75 %   $ 1,100     $ 1,288     $ (188 )     (14.60 )%

 

Other income increased $122,000, or 21.7 percent, to $683,000 for the three month period ended March 31, 2023, compared to $561,000 for the three month period ended March 31, 2022.  The increase in other income was primarily due to an increase in earnings on bank-owned life insurance of approximately $200,000during the quarter ended March 31, 2023.

 

For the six months ended March 31, 2023, total other income amounted to $1.1 million, a decrease of $188,000, or 14.6%, compared to the six months ended March 31, 2022.  The decrease in total other income was primarily due to a decrease of $240,000 in service charges and other fees, primarily made up of prepayments on commercial loans, and a decrease in net gains on sales of loans of $49,000, partially offset by an increase in earnings on bank owned life insurance of $94,000 during the six months ended March 31, 2023 as compared to the six months ended March 31, 2022. 

 

Other Expense

 

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

 

   

Three Months Ended March 31,

   

Six Months Ended March 31,

 
                   

Increase

   

Percent

                   

Increase

   

Percent

 
   

2023

   

2022

   

(Decrease)

   

Change

   

2023

   

2022

   

(Decrease)

   

Change

 
   

(Dollars in thousands)

 

Salaries and employee benefits

  $ 2,567     $ 2,347     $ 220       9.37 %   $ 5,149     $ 4,642     $ 507       10.92 %

Occupancy expense

    556       546       10       1.83       1,093       1,061       32       3.02  

Federal deposit insurance premium

    119       71       48       67.61       183       147       36       24.49  

Advertising

    33       32       1       3.13       65       64       1       1.56  

Data processing

    299       359       (60 )     (16.71 )     574       679       (105 )     (15.46 )

Other real estate owned expense, net

    69             69                   5       (5 )      

Professional fees

    894       868       26       3.00       1,657       1,923       (266 )     (13.83 )

Merger related expense

    492             492             1,003             1,003        

Pennsylvania shares tax

    193       169       24       14.20       320       339       (19 )     (5.60 )

Non-recurring expense

    550             550             550             550        

Other operating expenses

    684       2,453       (1,769 )     (72.12 )     1,556       3,213       (1,657 )     (51.57 )

Total other expense

  $ 6,456     $ 6,845     $ (389 )     (5.68 )%   $ 12,150     $ 12,073     $ 77       0.64 %

 

Other expenses for the three month period ended March 31, 2023 decreased $389,000, or 5.7%, to $6.5 million when compared to the three month period ended March 31, 2022. The decrease was primarily due to a decrease of $1.8 million of other operating expenses for the three months ended March 31, 2023. For the three months ended March 31, 2022, the Company recorded a $395,000 valuation allowance and $1.3 million in real estate tax expense. The decrease in other operating expense was partially offset by non-recurring expenses of $550,000, consisting of a valuation allowance related to an equity investment in a limited liability company of $200,000 and a contingent liability of $350,000, and merger related expenses of $492,000 consisting of legal and professional related expenses. See Note 15 Contingencies in “Item 1. Financial Statements (unaudited)” of Part 1 of this report for more information on the contingent liability.

 

Other expenses remained relatively flat for the six months ended March 31, 2023 compared to the six months ended March 31, 2022. Other expenses amounted to $12.2 million, an increase of $77,000, compared to $12.1 million for the six months ended March 31, 2022. Changes noted during the period were consistent with those noted during the three month periods ending March 31, 2023 and 2022.

 

 

Income Taxes

 

The Company recorded income tax expense of $230,000 during the three month period ended March 31, 2023, compared to $148,000 for the three month period ended March 31, 2022. The effective tax rates for the Company for the three month periods ended March 31, 2023 and March 31, 2022 were 28.7% and 22.1%, respectively. The effective tax rate includes discrete tax items related to non-deductible merger-related expenses and contingent liability recognized in the current three month period ended March 31, 2023.

 

For the six months ended March 31, 2023, the Company recorded income tax expense of $799,000, compared to $788,000 for the six months ended March 31, 2022. The effective tax rates for the Company for the six month periods ended March 31, 2023 and March 31, 2022 were 24.4% and 23.7%, respectively.

 

Investment Portfolio

 

For the three months ended March 31, 2023, the average volume of investment securities increased by $17.4 million to approximately $108.9 million, or 11.4% of average earning assets, from $91.4 million, or 9.2% of average earning assets, for the three months ended March 31, 2022. During the six months ended March 31, 2023, the average volume of investment securities increased by $26.1 million to $109.5 million, or 11.3% of average earning assets, from $83.3 million, or 8.3% of average earning assets for the six months ended March 31, 2022. At March 31, 2023, the total investment portfolio amounted to $105.8 million, a decrease of $4.2 million, or 3.8%, from September 30, 2022. This decrease in the investment portfolio was primarily due to amortization, maturities, calls and partial calls. At March 31, 2023, 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, one U.S. treasury note, corporate bonds and notes, a trust preferred security, and taxable mutual funds.

 

 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. Any growth of the loan portfolio 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.

 

         Net loans, which excludes loans held-for-sale, decreased by $15.9 million,  or 2.0%, to $786.0 million at March 31, 2023, when compared to September 30, 2022.  The decrease was driven by decrease in construction loans by $5.4 million, or 21.7%, residential loans by $12.2 million, or 6.9%, and consumer loans by $974,000, or 4.9%, partially offset by an increase of $2.8 million, or 0.5%, in commercial loans. Loans held-for-sale amounted to $13.2 million at March 31, 2023, compared to $13.8 million at September 30, 2022.

 

At March 31, 2023 the Company had $136.8 million in overall undisbursed loan commitments, which consisted primarily of available usage from active construction facilities, unused commercial lines of credit, and home equity lines of credit.

 

 

Average loan balances of our total loans decreased $39.0 million or 4.6%, for the three months ended March 31, 2023 as compared to the same period in fiscal year 2022, while the average yield on loans increased by 101 basis points for the three months ended March 31, 2023 compared to the same period in fiscal year 2022. The decrease in average total loan volume was primarily due to increased paydowns and payoff activity. During the three month period ended March 31, 2023 compared to 2022, the rate-related factors increased interest income on loans by $2.4 million while the volume related factors decreased interest income $226,000 during the period.

 

Average loan balances decreased $64.4 million, or 7.3%, for the six months ended March 31, 2023, as compared to the same period in fiscal year 2022, while the average yield on loans increased by 93 basis points for the six months ended March 31, 2023, compared with the same period in fiscal year 2022. The decrease in average total loan volume was primarily due to increased paydowns and payoff activity. During the six month period ended March 31, 2023 compared to 2022, the rate-related factors increased interest income on loans by $3.8 million while the volume related factors decreased interest income $1.2 million during the period. 

 

Allowance for Loan Losses and Related Provision

 

The ALLL provides an estimate of probable but unconfirmed losses in the loan portfolio as of the financial statement date. 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 qualitative factors as changes in lending policies and procedures, economic and business conditions, nature and volume of the portfolio, changes in delinquency, concentration of credit trends, value of underlying collateral, the level and trend of interest rates 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 reasonably available to management, the level of the ALLL remains an estimate, which is subject to significant judgment and short-term change. Our regulators, as an integral part of their examination process, periodically review the Company’s ALLL. Our regulators may require the Company to increase the ALLL based on their analysis of information available to them at the time of their examination. Furthermore, the majority of the Company’s loans are secured by real estate in the State of New Jersey and the State of Pennsylvania. Future adjustments to the ALLL may be necessary due to economic factors impacting New Jersey and Pennsylvania real estate and the economy in general, as well as operating, regulatory and other conditions beyond the Company’s control.

 

The ALLL at March 31, 2023 amounted to $9.1 million, or 1.15% of total gross loans excluding loans held-for-sale, compared to $9.1 million, or 1.12% of total gross loans excluding loans held-for-sale, at September 30, 2022. The Company did not record a provision for loan losses for the quarters ended March 31, 2023 or 2022. Net charge-offs were were $1,000 for the three months ended March 31, 2023 while net recoveries were $8,000 for the six months ended March 31, 2023. Net charge-offs were $736,000 and $2.2 million for the three and six months ended March 31, 2022, respectively. The decrease is reflective of low charge-offs recorded during the March 31, 2023 period.

 

         We may continue to experience periodic charge-offs in the future as exit strategies with respect to certain of our loans are considered and executed. 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 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 March 31, 2023 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.

 

 

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

 

   

Six Months Ended March 31,

 
   

2023

   

2022

 
   

(Dollars in thousands)

 

Average loans outstanding, excluding held for sale

  $ 808,871     $ 856,937  

Total gross loans at end of period

  $ 794,562     $ 808,037  

Analysis of the Allowance of Loan Losses:

               

Balance at beginning of period

  $ 9,090     $ 11,472  
                 

Charge-offs:

               

Commercial:

               

Commercial real estate

           

Commercial and industrial

          2,194  

Consumer:

               

Second mortgages

    8       106  

Other

           

Total charge-offs

    8       2,300  

Recoveries:

               

Residential Mortgage

    6       1  

Commercial:

               

Commercial real estate

    3       76  

Commercial and industrial

    1       1  

Consumer:

               

Home equity lines of credit

    1       1  

Second mortgages

    5       50  

Second mortgages

           

Total recoveries

    16       129  

Net (recoveries) charge-offs

    (8 )     2,171  

Provision for loan losses

           

Balance at end of period

  $ 9,098     $ 9,301  

Ratios:

               

Ratio of allowance for loan losses to non-performing loans

    903.48 %     842.48 %

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

    0.00 %     0.49 %

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

    (0.09 )%     23.34 %

 

 

(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 may only 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 exists. Accruing loans past due 90 days or more are generally well-secured and in the process of collection.

 

 

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 7 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 and OREO:

 

   

March 31,

   

September 30,

 
   

2023

   

2022

 
   

(In thousands)

 

Non-accruing loans:

               

Non-accrual loans

  $ 1,007     $ 753  

Accruing loans more than 90 days past due

    673       243  

Total non-performing loans

    1,680       996  

OREO

    200       259  

Total non-performing assets

  $ 1,880     $ 1,255  

 

Non-accrual loans totaled $1.0 million at March 31, 2023 and $753,000 at September 30, 2022. The increase in non-accrual loans was primarily due to addition of two residential loans with a combined carrying value of  $569,000 during the six months ended March 31, 2023 which was offset in part by two residential loans with a combined carrying value of $187,000 moving out of non-accrual status as they were sold through foreclosure, and one consumer loan with a carrying value of $35,000 returning to accrual status during the quarter. OREO was $200,000 at March 31, 2023 compared to $259,000 at September 30, 2022. The adjustment to the fair value of the OREO was based on a contract for sale of the property that was executed during the three months ended March 31, 2023 and expected to settle during the third fiscal quarter ending June 30, 2023. 

 

Troubled debt restructured (“TDR”) loans were $11.0 million at March 31, 2023, and $6.1 million at September 30, 2022. The increase is primarily related to one new $4.8 million commercial and industrial loan that was modified during the period.

 

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 as “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.”

 

         Special mention loans amounted to $27.1 million and $32.7 million at March 31, 2023 and September 30, 2022 respectively. Substandard loans were $11.3 million and $11.4 million at March 31, 2023 and September 30, 2022, respectively. 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.        

 

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 March 31, 2023, the Company reflected a positive interest sensitivity gap with an interest sensitivity ratio of 1.25:1.00 at the cumulative one-year position. Based on current rising interest rate environment, that at the current time is estimated to continue through the first half of calendar year 2023, emphasis will be on controlling liability costs and duration in our efforts to insulate the net interest spread for a potential future decline in rates. 

 

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 funding sources and staggering maturities to reduce the risk of potential funding pressure. Management also maintains a detailed contingency funding plan designed to adequately respond to situations which could lead to stresses on liquidity. Management believes that the Company has the funding capacity to meet the liquidity needs arising from potential events. The Company maintains borrowing capacity through the Federal Home Loan Bank of Pittsburgh secured with loans and marketable securities.

 

 

The Company’s primary sources of short-term liquidity consist of cash and cash equivalents and investment securities available-for-sale. 

 

Additionally, 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 from the temporary curtailment of lending activities. At March 31, 2023, the Company had $31.5 million in cash and cash equivalents compared to $53.3 million at September 30, 2022. Our available for sale investment securities amounted to $48.2 million at March 31, 2023 compared to $49.8 million at September 30, 2022. In addition, the Company had $150 million FHLB line of credit available for both periods ended March 31, 2023 and September 30, 2022, respectively. 

 

Deposits

 

Total deposits decreased $45.1 million, or 5.7 percent, from $785.3 million at September 30, 2022 to $740.2 million at March 31, 2023. The decrease in deposits was primarily related to a reduction of $26.0 million in money market deposits and $13.6 million in interest-bearing demand deposits, a $8.4 million decline in non-interest-bearing deposits and a decrease of $2.4 million in savings, partially offset by an increase of $5.2 million in time deposits. Non-interest-bearing core deposits; interest-bearing core deposits, savings, money market; and time deposits represent approximately 7%, 72%, and 21% of total deposits, respectively, as of March 31, 2023.

 

Time deposits $250,000 and over decreased $5.2 million as compared to September 30, 2022. Time deposits $250,000 and over represented 7.8% of total deposits at March 31, 2023 compared to 8.0% at September 30, 2022. Brokered deposits were $21.6 million and $19.1 at March 31, 2023 and September 30, 2022

respectively. Estimated uninsured deposits (in excess of the Federal Deposit Insurance Corporation limit) were $193.1 million and $169.8 million at March 31, 2023 and September 30, 2022 respectively. At those dates, the Bank had no deposits that were otherwise uninsured.

 

The Company continues to focus on the maintenance and development of its deposit base to align with its funding requirements and liquidity needs, but with an emphasis on serving the needs of its communities to provide a long-term relationship base 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 March 31, 2023 and September 30, 2022:

 

   

March 31,

   

September 30,

         
   

2023

   

2022

   

Dollar

 
   

Amount

   

Percentage

   

Amount

   

Percentage

   

Change

 

Balances by types of deposit:

 

(Dollars in thousands)

 

Savings

  $ 52,905       7.15 %   $ 55,288       7.04 %   $ (2,383 )

Money market accounts

    253,672       34.27       279,699       35.62       (26,027 )

Interest bearing demand

    227,228       30.70       240,819       30.66       (13,591 )

Non-interest bearing demand

    49,662       6.71       58,014       7.39       (8,352 )
      583,467       78.83       633,820       80.71       (50,353 )

Certificates of deposit

    156,715       21.17       151,503       19.29       5,212  

Total

  $ 740,182       100.00 %   $ 785,323       100.00 %   $ (45,141 )

 

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 March 31, 2023 and September 30, 2022, the Company’s outstanding balance of FHLB Pittsburgh advances totaled $75.0 million and $80.0 million, respectively. Of the $75.0 million in advances, all are short-term fixed-rate advances except $60.0 million of advances that are hedged to terms ranging from 1 - 2 years with a rolling 90-day maturity.

 

The Company did not purchase any securities under agreements to repurchase as a short-term funding source during the quarters ended March 31, 2023 or 2022. 

 

Cash Flows

 

The Consolidated Statements of Cash Flows present the changes in cash and cash equivalents resulting from the Company’s operating, investing, and financing activities. During the six months ended March 31, 2023, cash and cash equivalents decreased by $21.8 million from the balance at September 30, 2022. Net cash of $7.6 million was provided by operating activities. Net cash provided by investing activities amounted to $20.0 million primarily due to decrease in loans of $16.4 million combined with $3.4 million of investment securities. Net cash used in financing activities amounted to $49.5 million, which was primarily attributable to decrease in deposits of $45.1 million combined with repayment of borrowings of $5.0 million.

 

 

Shareholders Equity

 

Total shareholders’ equity amounted to $147.9 million, or 14.8% of total assets, at March 31, 2023, compared to $146.4 million, or 14.0% of total assets, at September 30, 2022. Book value per common share was $19.35 at March 31, 2023, compared to $19.18 at September 30, 2022.

 

   

March 31,

   

September 30,

 
   

2023

   

2022

 
   

(In thousands, except for per share data)

 

Shareholders’ equity

  $ 147,926     $ 146,445  

Book value per common share

  $ 19.35     $ 19.18  

 

Capital

 

At March 31, 2023, the Bank’s common equity Tier 1 capital ratio was 20.05%, Tier 1 leverage ratio was 17.01%, Tier 1 risk-based capital ratio was 20.05% and the total risk-based capital ratio was 21.13%.  At September 30, 2022, the Bank’s common equity Tier 1 capital ratio was 19.27%, Tier 1 leverage ratio was 16.30%, Tier 1 risk-based capital ratio was 19.27% and the total risk-based capital ratio was 20.34%. At March 31, 2023, 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 March 31, 2023, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of March 31, 2023.

 

Changes in Internal Controls

 

There were no changes in the Company’s internal controls over financial reporting during the six months ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

 

 

 

PART II - OTHER INFORMATION

 

Item 1 - Legal Proceedings

 

See Note 15 Contingencies to the condensed consolidated financial statements included in "Item 1. Financial Statements (unaudited)" of Part 1 of this report, which is incorporated by reference into this Item 1 of Part II. 

 

Item 1A - Risk Factors

 

For a summary of risk factors relevant to the Company, see Part I, Item 1A, “Risk Factors” in the 2023 Annual Report.  The following represents a material change in our risk factors from those disclosed in Part I - Item 1A, “ Risk Factors” in the 2023 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 operations.

 

Adverse developments affecting the banking industry, and resulting media coverage, have eroded customer confidence in the banking system and could have a material effect on the Companys operations and/or stock price. 

 

     The recent high-profile bank failures and related negative media attention have generated significant market volatility among publicly-traded bank holding companies and, in particular, regional, as well as community banks like the Company. These market developments have negatively impacted customer confidence in the safety and soundness of regional and community banks. As a result, customers may choose to withdraw their deposits and maintain such deposits with larger financial institutions or invest in higher yielding short-term fixed income securities, all of which could materially adversely impact our liquidity, cost of funding, loan funding capacity, NIM, capital and results of operations. If we were required to sell a portion of our securities portfolio to address liquidity needs, we may incur losses, including as a result of the negative impact of rising interest rates on the value of our securities portfolio, which could negatively affect our earnings and our capital. There is no guarantee that any anticipatory or mitigating actions we may take will be successful or sufficient in the event of sudden liquidity needs. 

 

     In connection with the high-profile bank failures mentioned above, uncertainty and concern have been, and may be in the future, compounded by advances in technology that increase the speed at which deposits can be moved, as well as the speed and reach of media attention, including social media, and its ability to disseminate concerns or rumors, in each case potentially exacerbating liquidity concerns. While the Department of the Treasury, the Federal Reserve, and the FDIC have made statements ensuring that depositors of recently failed banks would have access to their deposits, including uninsured deposit accounts, there is no guarantee that such actions will be successful in restoring customer confidence in regional and community banks and the banking system more broadly, nor is there a guarantee that such regulators will make these same assurances with respect to any additional banks that might fail. In addition, the banking operating environment and public trading prices of banking institutions can be highly correlated, in particular during times of stress, which could adversely impact the trading prices of our common stock and potentially our results of operations. Furthermore, while the Federal Reserve Board has announced a Bank Term Funding Program available to eligible depository institutions secured by U.S. treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral at par, to mitigate the risk of potential losses on the sale of such instruments, there is no guarantee that such programs will be effective in addressing liquidity needs as they arise.

 

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 ended March 31, 2023.

 

Item 3 - Defaults Upon Senior Securities

 

None.

 

Item 4 - Mine Safety Disclosure

 

Not applicable.

 

Item 5 - Other Information

 

None.

 

Item 6 - Exhibits

 

2.1   Agreement and Plan of Merger, dated December 13, 2022, by and among First Bank, Malvern Bancorp, Inc. and Malvern Bank, National Association (1)

3.1

 

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

3.2

 

Amended and Restated Bylaws of Malvern Bancorp, Inc.(3)

10.1   Form of Voting Agreement dated December 13, 2022, by and among First Bank, Malvern Bancorp, Inc. and certain stockholders of Malvern Bancorp, Inc. (4)

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 2.1 to the Current Report on Form 8-K of Malvern Bancorp, Inc. filed with the SEC on December 14, 2022.

(2)

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.

(3) 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.
(4) Incorporated by reference from Exhibit 10.1 to the Current Report on Form 8-K of Malvern Bancorp, Inc. filed with the SEC on December 14, 2022.

 

 

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.

 

May 12, 2023

By:

/s/ Anthony C. Weagley

   

Anthony C. Weagley

   

President and Chief Executive Officer

     
     

May 12, 2023

By:

/s/ Joseph D. Gangemi

   

Joseph D. Gangemi

   

Executive Vice President and Chief Financial Officer

 

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