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Section 1: 10-Q (10-Q)

 

 

UNITED STATES OF AMERICA

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 June 30, 2018

 

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 E. Lancaster Avenue, Paoli, Pennsylvania 19301 

(Address of Principal Executive Offices) (Zip Code)

 

(610) 644-9400

(Registrant’s Telephone Number, Including Area Code)

 

 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 (or for such shorter period that the registrant was required to file such reports), 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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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 (check one):

 

 Large accelerated filer  ☐ Accelerated filer  ☒

Non-accelerated filer  ☐

(Do not check if smaller reporting company)

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 ☒

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

 Common Stock, par value $0.01: 6,575,179 shares
(Title of Class) (Outstanding as of August 9, 2018)

 

 

 

 

Table of Contents

 

    Page
     
PART I – FINANCIAL INFORMATION 3
     
Item  1. Financial Statements  
  Consolidated Statements of Financial Condition at June 30, 2018 (unaudited) and September 30, 2017 4
  Consolidated Statements of Operations for the three- and nine- month periods ended June 30, 2018 and 2017 (unaudited) 5
  Consolidated Statements of Comprehensive Income for the three- and nine- month periods ended June 30, 2018 and 2017 (unaudited) 6
  Consolidated Statements of Changes in Shareholders’ Equity for the nine- month periods ended June 30, 2018 and 2017 (unaudited) 7
  Consolidated Statements of Cash Flows for the nine- month periods ended June 30, 2018 and 2017 (unaudited) 8
  Notes to unaudited Consolidated Financial Statements 9
     
Item  2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 40
     
Item  3. Qualitative and Quantitative Disclosures about Market Risks 58
     
Item  4. Controls and Procedures 58
     
PART II – OTHER INFORMATION  
     
Item  1. Legal Proceedings 59
     
Item  1A. Risk Factors 59
     
Item  2. Unregistered Sales of Equity Securities and Use of Proceeds 59
     
Item  3. Default Upon Senior Securities 59
     
Item  4. Mine Safety Disclosure 59
     
Item  5. Other Information 59
     
Item  6. Exhibits 59
     
SIGNATURES 60

 

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PART I – FINANCIAL INFORMATION

 

The following unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles 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 U.S. generally accepted accounting principles for complete financial statements. However, in the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended June 30, 2018 are not necessarily indicative of the results that may be expected for the full year ending September 30, 2018, or for any other interim period. The Malvern Bancorp, Inc. 2017 Annual Report on Form 10-K should be read in conjunction with these financial statements.

 

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Item 1. Financial Statements

 

MALVERN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)

 

   June 30, 2018   September 30, 2017 
   (Dollars in thousands, except per share data) 
Assets        
Cash and due from depository institutions  $1,447   $1,615 
Interest bearing deposits in depository institutions   45,934    115,521 
Cash and Cash Equivalents   47,381    117,136 
Investment securities available for sale, at fair value (amortized cost of $34.8 million and $14.9 million at June 30, 2018 and September 30, 2017, respectively)   34,348    14,587 
Investment securities held to maturity, at cost (fair value of $30.0 million and $34.6 million at June 30, 2018 and September 30, 2017, respectively)   31,004    34,915 
Restricted stock, at cost   8,781    5,559 
Loans receivable, net of allowance for loan losses of $9.0 million and $8.4 million, respectively   893,355    834,331 
Accrued interest receivable   3,571    3,139 
Property and equipment, net   7,240    7,507 
Deferred income taxes, net   3,920    6,671 
Bank-owned life insurance   19,282    18,923 
Other assets   4,693    3,244 
Total Assets  $1,053,575   $1,046,012 
           
Liabilities and Shareholders’ Equity          
           
Liabilities          
Deposits:          
Deposits-noninterest-bearing  $48,296   $42,121 
Deposits-interest-bearing   739,636    748,275 
Total Deposits   787,932    790,396 
FHLB advances   123,000    118,000 
Other short-term borrowings   2,500    5,000 
Subordinated debt   24,421    24,303 
Advances from borrowers for taxes and insurance   3,148    1,553 
Accrued interest payable   1,095    694 
Other liabilities   3,506    3,546 
Total Liabilities   945,602    943,492 
           
Commitments and Contingencies        
           
Shareholders’ Equity          
Preferred stock, $0.01 par value, 10,000,000 shares authorized, none issued        
Common stock, $0.01 par value, 50,000,000 shares authorized, issued and outstanding: 6,575,179 and 6,572,684 shares at June 30, 2018 and September 30, 2017, respectively   66    66 
Additional paid-in-capital   60,985    60,736 
Retained earnings   47,770    43,139 
Unearned Employee Stock Ownership Plan (ESOP) shares   (1,374)   (1,483)
Accumulated other comprehensive income   526    62 
Total Shareholders’ Equity   107,973    102,520 
Total Liabilities and Shareholders’ Equity  $1,053,575   $1,046,012 

 

See accompanying notes to unaudited consolidated financial statements.

  

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MALVERN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

   Three Months Ended June 30,   Nine Months Ended June 30, 
(Dollars in thousands, except for per share data)  2018   2017   2018   2017 
                 
Interest and Dividend Income                    
Loans, including fees  $9,380   $8,246   $26,821   $21,926 
Investment securities, taxable   300    422    832    1,364 
Investment securities, tax-exempt   61    100    191    422 
Dividends, restricted stock   130    64    333    192 
Interest-bearing cash accounts   327    141    1,236    349 
       Total Interest and Dividend Income   10,198    8,973    29,413    24,253 
Interest Expense                    
Deposits   2,304    1,645    6,641    4,393 
Short-term borrowings   13    1    54    12 
Long-term borrowings   539    545    1,648    1,615 
Subordinated debt   366    383    1,144    604 
Total Interest Expense   3,222    2,574    9,487    6,624 
Net interest income   6,976    6,399    19,926    17,629 
Provision for Loan Losses   589    645    829    2,302 

Net Interest Income after Provision for Loan Losses 

   6,387    5,754    19,097    15,327 
Other Income                    
Service charges and other fees   530    233    1,038    730 
Rental income-other   63    51    196    161 
Net gains on sales of investments       374        432 
Net gains on sale of real estate           1,186     
Net gains on sale of loans   3    31    96    106 
Earnings on bank-owned life insurance   119    125    359    380 
Total Other Income   715    814    2,875    1,809 
Other Expense                    
Salaries and employee benefits   2,024    1,873    6,015    5,389 
Occupancy expense   577    533    1,725    1,541 
Federal deposit insurance premium   76    78    227    173 
Advertising   30    67    122    191 
Data processing   274    308    819    911 
Professional fees   1,088    621    2,326    1,421 
Other operating expenses   721    506    2,132    1,708 
Total Other Expense   4,790    3,986    13,366    11,334 
Income before income tax expense   2,312    2,582    8,606    5,802 
Income tax expense   69    863    3,942    1,940 
Net Income  $2,243   $1,719   $4,664   $3,862 
                     
Earnings Per Common Share:                    
  Basic  $0.35   $0.27   $0.72   $0.60 
  Diluted  $0.35   $0.27   $0.72   $0.60 

Weighted Average Common Shares Outstanding: 

                    
  Basic   6,453,031    6,443,515    6,449,089    6,427,978 
  Diluted   6,456,048    6,445,288    6,452,068    6,428,426 
                     
Dividends Declared Per Share  $   $   $   $ 

 

See accompanying notes to unaudited consolidated financial statements.

  

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MALVERN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

   Three Months Ended June 30,   Nine Months Ended June 30, 
(Dollars in thousands)  2018   2017   2018   2017 
                 
Net Income  $2,243   $1,719   $4,664   $3,862 
Other Comprehensive Income (loss), Net of Tax:                    
  Unrealized holding gains (losses) on available-for-sale securities
   34    446    (185)   (299)
  Tax effect   (7)   (152)   21    102 
      Net of tax amount   27    294    (164)   (197)

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

       (374)       (432)
  Tax effect       127        147 
      Net of tax amount       (247)       (285)

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

   1    2    7    7 
  Tax effect       (1)   (2)   (2)
   Net of tax amount   1    1    5    5 
  Fair value adjustments on derivatives   253    (151)   748    868 
  Tax effect   (49)   51    (158)   (295)
    Net of tax amount   204    (100)   590    573 
Total other comprehensive income (loss)   232    (52)   431    96 
Total comprehensive income  $2,475   $1,667   $5,095   $3,958 

 

 

(1) Amounts are included in net gains on sales of investments, net on the Consolidated Statements of Operations in total other income.

(2) Amounts are included in interest and dividends on investment securities on the Consolidated Statements of Operations.                                

 

See accompanying notes to unaudited consolidated financial statements.

 

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MALVERN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

 

   Common Stock  

Additional Paid-In

Capital

   Retained Earnings   Unearned ESOP Shares  

Accumulated Other
Comprehensive Income (Loss) 

   Total Shareholders’ Equity 
                         
   (Dollars in thousands, except share data) 
Balance, October 1, 2016  $66   $60,461   $37,322   $(1,629)  $(63)  $96,157 
Net Income           3,862            3,862 
Other comprehensive income                   96    96 
Committed to be released ESOP shares (10,800 shares)       115        109        224 
Stock based compensation       94                94 
Balance, June 30, 2017  $66   $60,670   $41,184   $(1,520)  $33   $100,433 
                               
Balance, October 1, 2017  $66   $60,736   $43,139   $(1,483)  $62   $102,520 
Net Income           4,664            4,664 
Reclassification of certain tax effects from accumulated other comprehensive income           (33)       33     
Other comprehensive income                   431    431 
Committed to be released ESOP shares (10,800 shares)       167        109        276 
Stock based compensation       82                82 
Balance, June 30, 2018  $66   $60,985   $47,770   $(1,374)  $526   $107,973 

 

See accompanying notes to unaudited consolidated financial statements.

 

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MALVERN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   Nine Months Ended June 30, 
(Dollars in thousands)  2018   2017 
Cash Flows from Operating Activities          
Net income  $4,664   $3,862 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation expense   569    544 
Provision for loan losses   829    2,302 
Deferred income taxes expense   2,643    866 
ESOP expense   276    224 
Stock based compensation   82    94 
Amortization of premiums and discounts on investment securities, net   275    711 
Accretion of loan origination fees and costs   (132)   (807)
Amortization of mortgage service rights   35    47 
Net gain on sale of investment securities available-for-sale       (432)
Net gain on sale of real estate   (1,186)    
Net gain on sale of secondary market loans   (96)   (106)
Proceeds on sale of secondary market loans   8,615    6,755 
Originations of secondary market loans   (8,519)   (6,649)
Earnings on bank-owned life insurance   (359)   (380)
Increase in accrued interest receivable   (432)   (279)
Increase in accrued interest payable   401    633 
(Decrease) increase  in other liabilities   (40)   944 
Increase in other assets   (769)   (17)
Increase in income tax receivable       (179)
Amortization of subordinated debt   118     
     Net Cash Provided by Operating Activities   6,974    8,133 
Cash Flows from Investing Activities          
Investment securities available-for-sale:          
Purchases   (30,140)   (250)
Sales       48,860 
Maturities, calls and principal repayments   10,123    608 
Investment securities held-to-maturity:          
Maturities, calls and principal repayments   3,715    4,326 
(Loan originations) and principal collections, net   (59,720)   (227,672)
Net increase in restricted stock   (3,222)   (34)
Proceeds from sale of property and equipment   1,315     
Purchases of property and equipment   (431)   (1,089)
         Net Cash Used in Investing Activities   (78,360)   (175,251)
Cash Flows from Financing Activities          
Net (decrease) increase in deposits   (2,464)   157,633 
Net increase in short-term borrowings   5,000     
Proceeds from long-term borrowings   105,000    105,000 
Repayment of long-term borrowings   (105,000)   (105,000)
Repayment of other borrowed money   (2,500)    
Increase in advances from borrowers for taxes and insurance   1,595    1,887 
Proceeds from issuance of subordinated debt       24,263 
Net Cash Provided by Financing Activities   1,631    183,783 
Net Increase (Decrease) in Cash and Cash Equivalents   (69,755)   16,665 
Cash and Cash Equivalent – Beginning   117,136    96,762 
Cash and Cash Equivalent – Ending  $47,381   $113,427 
Supplementary Cash Flows Information          
    Interest paid  $9,086   $5,991 
    Income taxes paid  $1,871     

 

See accompanying notes to unaudited consolidated financial statements.

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1 – The Company

 

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

 

The Bank conducts business from its headquarters in Paoli, Pennsylvania, a suburb of Philadelphia and through its nine other banking locations in Chester, Delaware and Bucks counties, Pennsylvania and Morristown, New Jersey, its New Jersey regional headquarters. The Bank also maintains new representative offices in Palm Beach, Florida and Montchanin, Delaware. The Bank’s wholly-owned subsidiary, Malvern Insurance Associates, LLC (“Malvern Insurance”) offers a full line of business and personal insurance products.

 

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 wholly-owned subsidiary, Malvern Bank, National Association and the Bank’s wholly-owned subsidiary, Malvern Insurance. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

The accompanying unaudited condensed consolidated financial statements present the Company’s financial position at June 30, 2018 and the results of operations for the three-and nine-month periods ended June 30, 2018 and 2017, and cash flows for the nine-month periods ended June 30, 2018 and 2017. 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 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 Company’s Form 10-K filed with the Securities and Exchange Commission (“SEC”) on December 29, 2017. The consolidated results of operations for the three-and nine-month periods ended June 30, 2018 and the consolidated statements of cash flows for the nine-month periods ended June 30, 2018 are not necessarily indicative of the results of operations or cash flows for the full year ending September 30, 2018 or any other period.

 

There have been no significant changes to our Critical Accounting Policies as described in our 2017 Annual Report on Form 10-K.

 

Recently Issued Accounting Standards

 

Depository and Lending. In May 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-06, Codification Improvements to Topic 942, Financial Services-Depository and Lending to supersede the guidance in Subtopic 942-740, Financial Services—Depository and Lending—Income Taxes, that is related to Circular 202 because that guidance has been rescinded by the Office of the Comptroller of the Currency (OCC) and no longer is relevant. The changes were effective when issued. The adoption of this new requirement did not have a material impact on the consolidated earnings, financial position or cash flows of the Company.

 

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Income Taxes. In March 2018, the FASB issued ASU 2018-05, Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 to update the income tax accounting in U.S. generally accepted

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

accounting principles (“GAAP”) to reflect the Securities and Exchange Commission (“SEC”) interpretive guidance released on Dec. 22, 2017, when the Tax Cuts and Jobs Act was signed into law. The adoption of this new requirement is not expected to have a material impact on the consolidated earnings, financial position or cash flows of the Company.

 

Investments and Regulated Operations. In March 2018, the FASB issued ASU 2018-04, Investments — Debt Securities (Topic 320) and Regulated Operations (Topic 980): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 117 and SEC Release No. 33-9273, to delete ASC 320-10-S99-1, which had codified SAB Topic 5.M which provided the SEC guidance determining when a decline in fair value below cost for an available-for-sale equity security is OTTI. ASU 2018-04 also removes from the ASC special requirements in SEC Regulation S-X Rule 3A-05 for public utility holding companies. The changes were effective when issued. The adoption of this new requirement is not expected to have a material impact on the consolidated earnings, financial position or cash flows of the Company.

 

Leases. In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The update requires lessees to recognize, as of the lease commencement date, assets and liabilities for all such leases with lease terms of more than 12 months, which is a change from the current GAAP requirement to recognize only capital leases on the balance sheet. Pursuant to the new standard, the liability initially recognized for the lease obligation is equal to the present value of the lease payments not yet made, discounted over the lease term at the implicit interest rate of the lease, if available, or otherwise at the lessee’s incremental borrowing rate. The lessee is also required to recognize an asset for its right to use the underlying asset for the lease term, based on the liability subject to certain adjustments, such as for initial direct costs. Leases are required to be classified as either operating or finance, with expense on operating leases recorded as a single lease cost on a straight-line basis. For finance leases, interest expense on the lease liability is required to be recognized separately from the straight-line amortization of the right-of-use asset. Quantitative disclosures are required for certain items, including the cost of leases, the weighted-average remaining lease term, the weighted-average discount rate and a maturity analysis of lease liabilities. Additional qualitative disclosures are also required regarding the nature of the leases, such as basis, terms and conditions of: (i) variable interest payments; (ii) extension and termination options; and (iii) residual value guarantees. For lessors, the standard modifies classification criteria and accounting for sales- type and direct financing leases and requires a lessor to derecognize the carrying value of the leased asset that is considered to have been transferred to a lessee and record a lease receivable and residual asset (“receivable and residual” approach). This Update is effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company does not expect to early adopt this standard. The new standard must be adopted by applying the new guidance as of the beginning of the earliest comparative period presented, using a modified retrospective transition approach with certain optional practical expedients. The Company is still evaluating the impact of this new guidance.

 

Revenue Recognition. In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (a new revenue recognition standard). The ASU’s core principle is that a company will recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, this ASU specifies the accounting for certain costs to obtain or fulfill a contract with a customer and expands disclosure requirements for revenue recognition. This ASU is effective, as a result of ASU 2015-14, for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The Company expects to adopt the revenue recognition guidance on October 1, 2018 using the modified retrospective approach. A significant amount of the Company’s revenues is derived from net interest income on financial assets and liabilities, which are excluded from the scope of the amended guidance. Non-interest income streams of the Company that are out of scope of the new standard include BOLI, sales of investment securities, and certain items within other income. Non-interest items that fall within the scope of the new standard are items included within service charges and

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

other fees. With respect to non-interest income that falls within the scope of Topic 606, the Company is expected to complete the process of identifying and evaluating the revenue streams and underlying revenue contracts within the scope of the guidance. The Company believes The Company will develop processes and procedures during the fiscal fourth quarter of 2018 to ensure it is fully compliant with these amendments. To date, the Company has not yet identified any significant changes in the timing of revenue recognition when considering the amended accounting guidance; however, the Company’s implementation efforts are ongoing and such assessments may change prior to the October 1, 2018 implementation date.

 

Recently Adopted Accounting Standards

 

Income Statement. In February 2018, the FASB issued ASU 2018-02, Income Statement — Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this Update allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act (the “TCJA”). Consequently, the amendments eliminate the stranded tax effects resulting from the TCJA and will improve the usefulness of information reported to financial statement users. All entities may adopt the amendments in this Update for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The amendments in this Update should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the TCJA is recognized. We have elected to early adopt the ASU as of January 1, 2018. The adoption of the guidance resulted in a reclassification of an insignificant amount stranded in accumulated other comprehensive income to retained earnings in the fiscal second quarter of 2018.

 

Note 3 – Earnings Per Share

 

Basic earnings per common share is computed based on the weighted average number of shares outstanding reduced by unearned ESOP shares. Diluted earnings per share is computed based on the weighted average number of shares outstanding and common stock equivalents (“CSEs”) that would arise from the exercise of dilutive securities reduced by unearned ESOP shares. The Company did not grant any stock options to purchase common stock or restricted shares during the three months ended June 30, 2018 and June 30, 2017. During the nine months ended June 30, 2018, the Company granted stock options to purchase 4,664 shares of common stock and 4,768 restricted shares. During the nine months ended June 30, 2017, the Company granted stock options to purchase 7,000 shares of common stock and 12,522 restricted shares.

 

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

 

   Three Months Ended June 30,   Nine Months Ended June 30, 
(Dollars in thousands, except for share data)  2018   2017   2018   2017 
                 
Net Income  $2,243   $1,719   $4,664   $3,862 
                     
Weighted average shares outstanding   6,573,178    6,578,062    6,572,849    6,566,138 
Average unearned ESOP shares   (120,147)   (134,547)   (123,760)   (138,160)
Basic weighted average shares outstanding   6,453,031    6,443,515    6,449,089    6,427,978 
                     
Plus: effect of dilutive options   3,017    1,773    2,979    448 
Diluted weighted average common shares outstanding   6,456,048    6,445,288    6,452,068    6,428,426 
                     
Earnings per share:                    
Basic  $0.35   $0.27   $0.72   $0.60 
Diluted  $0.35   $0.27   $0.72   $0.60 

 

-11-

 

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 4 – Employee Stock Ownership Plan

 

The Company established 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 common stock for approximately $2.6 million, an average price of $10.86 per share, which was funded by a loan from Malvern Federal Bancorp, Inc. (the Company’s predecessor). The ESOP loan is being repaid principally from the Bank’s contributions to the ESOP. The loan, which bears an interest rate of 5%, is being repaid in quarterly installments through 2026. Shares are released to participants proportionately as the loan is repaid. During the three and nine months ended June 30, 2018 and 2017 there were 3,600 and 10,800 shares, respectively, committed to be released. At June 30, 2018, there were 118,365 unallocated shares and 140,853 allocated shares held by the ESOP which had an aggregate fair value of approximately $2.9 million.

 

Note 5 - Investment Securities

 

The Company’s investment securities are classified as available-for-sale or held-to-maturity at June 30, 2018 and at September 30, 2017. Investment securities available-for-sale are reported at fair value with unrealized gains or losses included in equity, net of tax. Accordingly, the carrying value of such securities reflects their fair value at the balance sheet date. Fair value is based upon either quoted market prices, or in certain cases where there is limited activity in the market for a particular instrument, assumptions are made to determine their fair value.

 

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.

 

-12-

 

 

The following tables present information related to the Company’s investment securities at June 30, 2018 and September 30, 2017.

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

   June 30, 2018 
   Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Fair
Value
 
   (Dollars in thousands) 
Investment Securities Available-for-Sale:                    
U.S. treasury notes  $19,985   $   $(31)  $19,954 
State and municipal obligations   6,962        (31)   6,931 
Single issuer trust preferred security   1,000        (75)   925 
Corporate debt securities   6,611        (323)   6,288 
Mutual fund   250            250 
Total   34,808        (460)   34,348 
Investment Securities Held-to-Maturity:                    
U.S. government agencies  $1,999   $   $(23)  $1,976 
State and municipal obligations   8,239    7    (34)   8,212 
Corporate debt securities   3,741        (39)   3,702 
Mortgage-backed securities:                    
Collateralized mortgage obligations, fixed-rate   17,025        (925)   16,100 
Total  $31,004   $7   $(1,021)  $29,990 
Total investment securities  $65,812   $7   $(1,481)  $64,338 

 

   September 30, 2017 
   Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Fair
Value
 
   (Dollars in thousands) 
Investment Securities Available-for-Sale:                    
State and municipal obligations  $6,992   $39   $(2)  $7,029 
Single issuer trust preferred security   1,000        (66)   934 
Corporate debt securities   6,627        (253)   6,374 
Mutual fund   250            250 
Total   14,869    39    (321)   14,587 
Investment Securities Held-to-Maturity:                    
U.S. government agencies  $1,999   $   $(8)  $1,991 
State and municipal obligations   9,574    89        9,663 
Corporate debt securities   3,818    26        3,844 
Mortgage-backed securities:                    
Collateralized mortgage obligations, fixed-rate   19,524    1    (457)   19,068 
Total  $34,915   $116   $(465)  $34,566 
Total investment securities  $49,784   $155   $(786)  $49,153 

 

-13-

 

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

For the three and nine months ended June 30, 2018, no available-for-sale investment securities were sold. For the nine months ended June 30, 2017, proceeds of investment securities sold amounted to approximately $48.9 million and gross realized gains on investment securities sold amounted to approximately $0.4 million.

 

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 June 30, 2018 and September 30, 2017:

 

   June 30, 2018 
   Less than 12 Months   More than 12 Months   Total 
   Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
   Fair
value
   Unrealized
Losses
 
   (Dollars in thousands) 
Investment Securities Available-for-Sale:                              
U.S. treasury notes  $19,954   $(31)  $   $   $19,954   $(31)
State and municipal obligations   5,372    (27)   497    (4)   5,869    (31)
Single issuer trust preferred security           925    (75)   925    (75)
Corporate debt securities           6,288    (323)   6,288    (323)
Total  $25,326   $(58)  $7,710   $(402)  $33,036   $(460)
Investment Securities Held-to-Maturity:                              
U.S. government agencies           1,976    (23)   1,976    (23)
State and municipal obligations   5,140    (34)           5,140    (34)
Corporate securities   3,702    (39)           3,702    (39)
Mortgage-backed securities:                              
CMO, fixed-rate   741    (27)   15,359    (898)   16,100    (925)
Total   9,583    (100)   17,335    (921)   26,918    (1,021)
Total investment securities  $34,909   $(158)  $25,045   $(1,323)  $59,954   $(1,481)

 

   September 30, 2017 
   Less than 12 Months   12 Months or longer   Total 
   Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
   Fair
value
   Unrealized
Losses
 
   (Dollars in thousands) 
Investment Securities Available-for-Sale:                              
State and municipal obligations  $   $   $500   $(2)  $500   $(2)
Single issuer trust preferred security           934    (66)   934    (66)
Corporate debt securities           6,375    (253)   6,375    (253)
Total  $   $   $7,809   $(321)  $7,809   $(321)
Investment Securities Held-to-Maturity:                              
U.S. government agencies  $   $   $1,991   $(8)  $1,991   $(8)
State and municipal obligations                        
Mortgage-backed securities:                              
CMO, fixed-rate           18,902    (457)   18,902    (457)
Total           20,893    (465)   20,893    (465)
Total investment securities  $   $   $28,702   $(786)  $28,702   $(786)

 

-14-

 

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

As of June 30, 2018, the estimated fair value of the securities disclosed above was primarily dependent upon the movement in market interest rates, particularly given the negligible inherent credit risk associated with these securities. These investment securities are comprised of securities that are rated investment grade by at least one bond credit rating service. Although the fair value will fluctuate as market interest rates move, management believes that these fair values will recover as the underlying portfolios mature and are reinvested in market rate yielding investments. As of June 30, 2018, the Company held two U.S. government treasury notes, two U.S. government agency securities, thirteen municipal bonds, four corporate securities, thirty-seven mortgage-backed securities and one single issuer trust preferred security which were in an unrealized loss position. The Company does not intend to sell and expects that it is 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 June 30, 2018 represents other-than-temporary impairment.

 

Investment securities having a carrying value of approximately $31.5 million and $9.6 million at June 30, 2018 and September 30, 2017, respectively, were pledged to secure public deposits.

 

The following table presents information for investment securities at June 30, 2018, based on scheduled maturities. Actual maturities can be expected to differ from scheduled maturities due to prepayment or early call options of the issuer.

 

   June 30, 2018 
   Amortized Cost   Fair Value 
   (Dollars in thousands) 
Investment Securities Available-for-Sale:          
Due in one year or less  $20,486   $20,452 
Due after one year through five years   7,041    6,915 
Due after five years through ten years   5,826    5,601 
Due after ten years   1,455    1,380 
Total  $34,808   $34,348 
Investment Securities Held-to-Maturity:          
Due in one year or less  $1,000   $991 
Due after one year through five years   999    985 
Due after five years through ten years   5,612    5,562 
Due after ten years   6,368    6,352 
Mortgage-backed securities:          
Collateralized mortgage obligations, fixed-rate   17,025    16,100 
Total  $31,004   $29,990 
           
Total investment securities  $65,812   $64,338 

 

-15-

 

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 6 - Loans Receivable and Related Allowance for Loan Losses

 

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

 

   June 30,
2018
   September 30,
2017
 
   (Dollars in thousands) 
Residential mortgage  $192,901   $192,500 
Construction and Development:          
Residential and commercial   39,845    35,622 
Land   15,565    18,377 
Total Construction and Development   55,410    53,999 
Commercial:          
Commercial real estate   477,584    437,760 
Farmland   12,058    1,723 
Multi-family   45,204    39,768 
Other   82,856    74,837 
Total Commercial   617,702    554,088 
Consumer:          
Home equity lines of credit   14,446    16,509 
Second mortgages   19,063    22,480 
Other   2,311    2,570 
Total Consumer   35,820    41,559 
Total loans   901,833    842,146 
Deferred loan fees and cost, net   546    590 
Allowance for loan losses   (9,024)   (8,405)
Total loans receivable, net  $893,355   $834,331 

 

-16-

 

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

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 June 30, 2018 and September 30, 2017. Activity in the allowance is presented for the three and nine months ended June 30, 2018 and 2017 and the year ended September 30, 2017, respectively.

 

       Three Months Ended June 30, 2018 
       Construction and Development       Commercial   Consumer         
   Residential Mortgage   Residential and Commercial   Land  

Commercial Real

Estate

   Farmland   Multi-family   Other   Home Equity Lines of Credit   Second Mortgages   Other   Unallocated   Total 
       (Dollars in thousands) 
Allowance for loan losses:                                                            
Beginning balance  $987   $397   $158   $4,046   $82   $195   $490   $87   $407   $27   $1,589   $8,465 
Charge-offs                           (45)       (5)           (50)
Recoveries                           1        18    1        20 
Provisions   48    25    (40)   122    (13)   89    32    (8)   53    (2)   283    589 
Ending Balance  $1,035   $422   $118   $4,168   $69   $284   $478   $79   $473   $26   $1,872   $9,024 

 

       Three Months Ended June 30, 2017 
       Construction and Development       Commercial   Consumer         
   Residential Mortgage   Residential and Commercial   Land  

Commercial Real

Estate

   Farmland   Multi-family   Other   Home Equity Lines of Credit   Second Mortgages   Other   Unallocated   Total 
       (in thousands) 
Allowance for loan losses:                                                            
Beginning balance  $1,042   $1,343   $128   $2,479   $   $67   $369   $107   $415   $20   $1,211   $7,181 
Charge-offs                                   (64)           (64)
Recoveries   2            9            2    15    123    4        155 
Provision (Credit)   (24)   (660)   18    218    10    45    35    (25)   (98)   (7)   1,133    645 
Ending Balance  $1,020   $683   $146   $2,706   $10   $112   $406   $97   $376   $17   $2,344   $7,917 

 

-17-

 

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENT

 

       Nine Months Ended June 30, 2018 
       Construction and Development       Commercial   Consumer         
   Residential Mortgage   Residential and Commercial   Land  

Commercial Real

Estate

   Farmland   Multi-family   Other   Home Equity Lines of Credit   Second Mortgages   Other   Unallocated   Total 
       (Dollars in thousands) 
Allowance for loan losses:                                                            
Beginning balance  $1,004   $523   $132   $3,581   $9   $224   $541   $90   $402   $27   $1,872   $8,405 
Charge-offs   (6)           (221)           (45)       (59)   (2)       (333)
Recoveries   58            10            3    1    46    5        123 
Provisions   (21)   (101)   (14)   798    60    60    (21)   (12)   84    (4)       829 
Ending Balance  $1,035   $422   $118   $4,168   $69   $284   $478   $79   $473   $26   $1,872   $9,024 
Ending balance: individually evaluated for impairment  $   $   $   $570   $   $   $   $   $233   $1   $   $804 
Ending balance: collectively evaluated for impairment  $1,035   $422   $118   $3,598   $69   $284   $478   $79   $240   $25   $1,872   $8,220 
                                                             
Loans receivable:                                                            
Ending balance  $192,901   $39,845   $15,565   $477,584   $12,058   $45,204   $82,856   $14,446   $19,063   $2,311        $901,833 
Ending balance: individually evaluated for impairment  $2,438   $   $79   $17,504   $   $   $   $34   $661   $1        $20,717 
Ending balance: collectively evaluated for impairment  $190,463   $39,845   $15,486   $460,080   $12,058   $45,204   $82,856   $14,412   $18,402   $2,310        $881,116 

 

-18-

 

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

       Nine Months Ended June 30, 2017 
       Construction and Development       Commercial   Consumer         
   Residential Mortgage   Residential and Commercial   Land  

Commercial Real

Estate

   Farmland   Multi-family   Other   Home Equity Lines of Credit   Second Mortgages   Other   Unallocated   Total 
       (in thousands) 
Allowance for loan losses:                                                            
Beginning balance  $1,201   $199   $97   $1,874   $   $109   $158   $116   $467   $34   $1,179   $5,434 
Charge-offs                                   (185)   (5)       (190)
Recoveries   2    90        39            8    17    205    10        371 
Provisions   (183)   394    49    793    10    3    240    (36)   (111)   (22)   1,165    2,302 
Ending Balance  $1,020   $683   $146   $2,706   $10   $112   $406   $97   $376   $17   $2,344   $7,917 
Ending balance: individually evaluated for impairment  $   $   $   $   $   $   $112   $   $70   $   $   $182 
Ending balance: collectively evaluated for impairment  $1,020   $683   $146   $2,706   $10   $112   $294   $97   $306   $17   $2,344   $7,735 
                                                             
Loans receivable:                                                            
Ending balance  $190,788   $36,530   $18,325   $424,732   $1,734   $21,547   $71,248   $17,602   $23,658   $1,403        $807,567 
Ending balance: individually evaluated for impairment  $2,089   $97   $   $744   $   $   $246   $10   $219   $        $3,405 
Ending balance: collectively evaluated for impairment  $188,699   $36,433   $18,325   $423,988   $1,734   $21,547   $71,002   $17,592   $23,439   $1,403        $804,162 

 

-19-

 

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

       Year Ended September 30, 2017 
       Construction and Development       Commercial   Consumer         
   Residential Mortgage   Residential and Commercial   Land  

Commercial Real

Estate

   Farmland   Multi-family   Other   Home Equity Lines of Credit   Second Mortgages   Other   Unallocated   Total 
       (Dollars in thousands) 
Allowance for loan losses:                                                            
Beginning balance  $1,201   $199   $97   $1,874   $   $109   $158   $116   $467   $34   $1,179   $5,434 
Charge-offs                                   (218)   (5)       (223)
Recoveries   2    90        40            9    18    232    12        403 
Provisions   (199)   234    35    1,667    9    115    374    (44)   (79)   (14)   693    2,791 
Ending Balance  $1,004   $523   $132   $3,581   $9   $224   $541   $90   $402   $27   $1,872   $8,405 
Ending balance: individually evaluated for impairment  $   $   $   $   $   $   $109   $   $128   $   $   $237 
Ending balance: collectively evaluated for impairment  $1,004   $523   $132   $3,581   $9   $224   $432   $90   $274   $27   $1,872   $8,168 
                                                             
Loans receivable:                                                            
Ending balance  $192,500   $35,622   $18,377   $437,760   $1,723   $39,768   $74,837   $16,509   $22,480   $2,570        $842,146 
Ending balance: individually evaluated for impairment  $2,262   $   $94   $555   $   $   $243   $10   $356   $        $3,520 
Ending balance: collectively evaluated for impairment  $190,238   $35,622   $18,283   $437,205   $1,723   $39,768   $74,594   $16,499   $22,124   $2,570        $838,626 

 

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 credit 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, components of the commercial loan segments of the portfolio are new originations and the associated volumes continue to see increased growth. At the same time, historical loss levels have decreased as factors in assessing the portfolio. The combination of these factors has given rise to an increase in the unallocated level within the allowance. Any unallocated portion of the allowance 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, 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.

 

-20-

 

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

The following table presents impaired loans in portfolio by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary as of June 30, 2018 and September 30, 2017.

 

   Impaired Loans With
Specific Allowance
   Impaired
Loans
With No
Specific
Allowance
   Total Impaired Loans 
   Recorded
Investment
   Related
Allowance
   Recorded
Investment
   Recorded
Investment
   Unpaid
Principal
Balance
 
       (Dollars in thousands)         
June 30, 2018:                         
Residential mortgage  $121   $   $2,317   $2,438   $2,562 
Construction and Development:                         
Land           79    79    79 
Commercial:                         
Commercial real estate   16,954    570    550    17,504    17,725 
Consumer:                         
Home equity lines of credit           34    34    34 
Second mortgages   233    233    428    661    723 
Other   1    1        1    22 
Total impaired loans  $17,309   $804   $3,408   $20,717   $21,145 
September 30, 2017:                         
Residential mortgage  $   $   $2,262   $2,262   $2,379 
Construction and Development:                         
Land           94    94    94 
Commercial:                         
Commercial real estate           555    555    555 
Other   243    109        243    243 
Consumer:                         
Home equity lines of credit           10    10    11 
Second mortgages   131    128    225    356    385 
Total impaired loans  $374   $237   $3,146   $3,520   $3,667 

 

-21-

 

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

The following table presents the average recorded investment in impaired loans in portfolio and related interest income recognized for three and nine months ended June 30, 2018 and 2017.

 

   Three Months Ended June 30, 2018   Nine Months Ended June 30, 2018 
(Dollars in thousands)  Average Impaired Loans   Interest Income Recognized on Impaired Loans   Average Impaired Loans   Interest Income Recognized on Impaired Loans 
                 
Residential mortgage  $2,408   $17   $2,417   $38 
Construction and Development:                    
Land   80    2    86    4 
Commercial:                    
Commercial real estate   17,322    113    8,512    132 
Other   124        184     
Consumer:                    
Home equity lines of credit   33        18     
Second mortgages   658    2    605    6 
Other   1        1      
Total  $20,626   $134   $11,823   $180 

 

   Three Months Ended June 30, 2017   Nine Months Ended June 30, 2017 
(Dollars in thousands)  Average Impaired Loans   Interest Income Recognized on Impaired Loans   Average Impaired Loans   Interest Income Recognized on Impaired Loans 
                 
Residential mortgage  $2,099   $10   $2,091   $43 
Construction and Development:                    
Residential and commercial   104    2    107    4 
Commercial:                    
 Commercial real estate   747    6    1,038    14 
 Other   248    2    111    2 
Consumer:                    
Home equity lines of credit   10        47     
Second mortgages   205    1    190    2 
Total  $3,413   $21   $3,584   $65 

 

-22-

 

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

The following table presents the classes of the loan portfolio summarized by loans considered to be rated as pass and the categories of special mention, substandard and doubtful within the Company’s internal risk rating system as of June 30, 2018 and September 30, 2017.

 

   June 30, 2018 
   Pass   Special
Mention
   Substandard   Doubtful   Total 
   (Dollars in thousands) 
Residential mortgage  $189,158   $   $3,743   $   $192,901 
Construction and Development:                         
Residential and commercial   39,845                39,845 
Land   11,793        3,772        15,565 
Commercial:                         
Commercial real estate   456,928    1,791    18,865        477,584 
Farmland   12,058                12,058 
Multi-family   45,204                45,204 
Other   82,693        163        82,856 
Consumer:                         
Home equity lines of credit   14,313        133        14,446 
Second mortgages   17,862    105    1,096        19,063 
Other   2,310        1        2,311 
Total  $872,164   $1,896   $27,773   $   $901,833 

 

   September 30, 2017 
   Pass   Special
Mention
   Substandard   Doubtful   Total 
   (Dollars in thousands) 
Residential mortgage  $189,925   $114   $2,461   $   $192,500 
Construction and Development:                         
Residential and commercial   35,622                35,622 
Land   13,207        5,170        18,377 
Commercial:                         
Commercial real estate   431,336    4,456    1,968        437,760 
Farmland   1,723                1,723 
Multi-family   39,410    358            39,768 
Other   73,935        902        74,837 
Consumer:                         
Home equity lines of credit   16,399        110        16,509 
Second mortgages   21,611    112    757        22,480 
Other   2,563    6    1        2,570 
Total  $825,731   $5,046   $11,369   $   $842,146 

 

-23-

 

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

   June 30,   September 30, 
   2018   2017 
   (Dollars in thousands) 
Residential mortgage  $1,101   $826 
Commercial:          
Commercial real estate   575     
Other        
Consumer:          
Home equity lines of credit   34    10 
Second mortgages   312    202 
Other   1     
Total non-accrual loans  $2,023   $1,038 

 

Under the Bank’s loan policy, once a loan has been placed on non-accrual status, we do not resume interest accruals until the loan has been brought current and has maintained a current payment status for not less than six consecutive months. Interest income that would have been recognized on nonaccrual loans had they been current in accordance with their original terms was less than $0.1 million for each of the three months ended June 30, 2018 and 2017 and was less than $0.1 million for each of the nine months ended June 30, 2018 and 2017.

 

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by whether a loan payment is “current,” that is, it is received from a borrower by the scheduled due date, or the length of time a scheduled payment is past due. The following table presents the classes of the loan portfolio summarized by the aging categories as of June 30, 2018 and September 30, 2017.

 

   Current   30-59
Days Past
Due
   60-89
Days Past
Due
   90
Days or More Past
Due
   Total Past Due   Total Loans Receivable   Accruing 90
Days or More Past
Due
 
   (Dollars in thousands) 
June 30, 2018:                            
Residential mortgage  $189,896   $665   $239   $2,101   $3,005   $192,901   $1,140 
Construction and Development:                                   
Residential and commercial   39,845                    39,845     
Land   15,565                    15,565     
Commercial:                                   
Commercial real estate   477,009            575    575    477,584     
Farmland   12,058                    12,058     
Multi-family   45,204                    45,204      
Other   82,856                    82,856     
Consumer:                                   
Home equity lines of credit   14,376        36    34    70    14,446     
Second mortgages   18,274    360    9    420    789    19,063    198 
Other   2,285    26            26    2,311     
Total  $897,368   $1,051   $284   $3,130   $4,465   $901,833   $1,338 

 

-24-

 

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

   Current   30-59
Days Past
Due
   60-89
Days Past
Due
   90
Days or More Past
Due
   Total Past
Due
   Total Loans Receivable   Accruing 90
Days or More Past
Due
 
   (Dollars in thousands) 
September 30, 2017:                            
Residential mortgage  $189,272   $1,442   $1,145   $641   $3,228   $192,500   $31 
Construction and Development:                                   
Residential and commercial   35,622                    35,622     
Land   18,377                    18,377     
Commercial:                                   
Commercial real estate   436,804    160    796        956    437,760     
Farmland   1,723                    1,723     
Multi-family   39,768                    39,768     
Other   74,837                    74,837     
Consumer:                                   
Home equity lines of credit   16,122    350    37        387    16,509     
Second mortgages   21,183    844    182    271    1,297    22,480    141 
Other   2,561    7    1    1    9    2,570    1 
Total  $836,269   $2,803   $2,161   $913   $5,877   $842,146   $173 

 

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

 

The Company had sixteen loans classified as TDRs with an aggregate outstanding balance of $18.8 million at June 30, 2018. The Company had twelve loans classified as TDRs at September 30, 2017 with an aggregate outstanding balance of $2.3 million. At June 30, 2018, these loans were also classified as impaired. Fifteen of the TDR loans continue to perform under the restructured terms through June 30, 2018 and we continued to accrue interest on such loans through such date. The increase in TDRs at June 30, 2018 compared to September 30, 2017 was primarily due to two commercial real estate loans with an aggregate outstanding balance of approximately $16.4 million. These two commercial real estate loans were granted an interest rate reduction and an interest only repayment period.

 

All such loans have been classified as TDRs since we modified the payment terms and in some cases interest rate from the original agreements and allowed the borrowers, who were experiencing financial difficulty, to make interest only payments for a period of time in order to relieve some of their overall cash flow burden. Some loan modifications classified as TDRs may not ultimately result in the full collection of principal and interest, as modified, and result in potential incremental losses. These potential incremental losses have been factored into our overall estimate of the allowance for loan losses. The level of any defaults will likely be affected by future economic conditions. A default on a troubled debt restructured 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 which, due to financial difficulties experienced by the borrower, the Company obtains through physical possession one or more collateral assets in satisfaction of all or part of an existing credit. Once possession is obtained, the Company reclassifies the appropriate portion of the remaining balance of the credit from loans to OREO, which is included within other assets in the Consolidated Statements of 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 $0.5 million and $0.3 million of residential real estate properties in the process of foreclosure at June 30, 2018 and September 30, 2017, respectively.

 

-25-

 

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

The following table presents our TDR loans as of June 30, 2018 and September 30, 2017.

 

   Total Troubled Debt
Restructurings
   Troubled Debt Restructured
Loans That Have Defaulted on
Modified Terms Within The Past
12 Months
 
   Number of
Loans
   Recorded
Investment
   Number of
Loans
   Recorded
Investment
 
   (Dollars in thousands) 
At June 30, 2018:                
Residential mortgage   8   $1,687    1   $152 
Construction and Development:                    
Land   1    79         
Commercial:                    
Commercial real estate   4    16,929         
Consumer                    
Second mortgages   3    150         
Total   16   $18,845    1   $152 
At September 30, 2017:                    
Residential mortgage   6   $1,464       $ 
Construction and Development:                    
Land   1    94         
Commercial:                    
Commercial real estate   2    554         
Consumer                    
Second mortgages   3    148    1    22 
Total   12   $2,260    1   $22 

 

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

 

   June 30, 2018   September 30, 2017 
   Performing   Non-Performing   Performing   Non-Performing 
   (Dollars in thousands) 
Residential mortgage  $1,535   $152   $1,464   $ 
Construction and Development:                    
Land   79        94     
Commercial:                    
Commercial real estate   16,929        554     
Consumer                    
Second mortgages   150        126    22 
Total  $18,693   $152   $2,238   $22 

 

-26-

 

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

The following table shows the activity in loans which were first deemed to be TDRs during the three and nine months ended June 30, 2018 and 2017.

 

   For the Three Months Ended June 30, 
   2018   2017 
   Restructured During Period 
   Number of Loans   Pre-Modifications Outstanding Recorded Investments   Post-Modifications Outstanding Recorded Investments   Number of Loans   Pre-Modifications Outstanding Recorded Investments   Post-Modifications Outstanding Recorded Investments 
   (In thousands) 
Troubled Debt Restructurings:                              
Residential mortgage   1   $47   $47       $   $ 
Total   1   $47   $47       $   $ 

 

   For the Nine Months Ended June 30, 
   2018   2017 
   Restructured During Period 
   Number of Loans   Pre-Modifications Outstanding Recorded Investments   Post-Modifications Outstanding Recorded Investments   Number of Loans   Pre-Modifications Outstanding Recorded Investments   Post-Modifications Outstanding Recorded Investments 
   (In thousands) 

Troubled Debt Restructurings:

                              
Residential mortgage   2   $250   $250    3   $889   $889 
Commercial:                              
Commercial real estate    2    16,417    16,379    1    193    193 
Consumer:                              
Second mortgages               2    81    81 
Total   4   $16,667   $16,629    6   $1,163   $1,163 

 

Note 7 - Regulatory Matters

 

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’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.

 

-27-

 

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

The Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Act”) was signed into law during the fiscal second quarter of 2018. The Act, among other matters, amends the Federal Deposit Insurance Act to require federal banking agencies to develop a specified Community Bank Leverage Ratio (the ratio of a bank’s equity capital to its consolidated assets) for banks with assets of less than $10 billion. Banks that exceed this ratio shall be deemed to comply with all other capital and leverage requirements. We are unable to predict the specific impact the Act and the implementing rules and regulations, which have not yet been written, will have on the Company and the Bank.

 

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

 

As of June 30, 2018, the Company’s and the Bank’s current capital levels exceed the required capital amounts to be considered “well capitalized” and we believe they also meet the fully-phased in minimum capital requirements, including the related capital conservation buffers, as required by the Basel III capital rules.

 

The following table summarizes the Company’s compliance with applicable regulatory capital requirements as of June 30, 2018 and September 30, 2017:

 

   Actual   For Capital Adequacy Purposes   To Be Well
Capitalized
Under Prompt
Corrective
Action Provisions
 
(Dollars in thousands)  Capital
Amount
   Ratio   Capital
Amount
   Ratio   Capital
Amount
   Ratio 
As of June 30, 2018:                        
Tier 1 Leverage (Core) Capital (to average assets)  $107,448    10.21%  $42,097    4.00%  $52,621    5.00%
Common Equity Tier 1 Capital (to risk weighted assets)   107,448    12.33%   39,218    4.50%   56,648    6.50%
Tier 1 Capital (to risk weighted assets)   107,448    12.33%   52,290    6.00%   69,721    8.00%
Total Risk Based Capital (to risk weighted assets)   140,960    16.17%   69,721    8.00%   87,151    10.00%
                               
As of September 30, 2017:                              
Tier 1 Leverage (Core) Capital (to average assets)  $100,779    10.00%  $40,315    4.00%  $50,394    5.00%
Common Equity Tier 1 Capital (to risk weighted assets)   100,779    12.28%   36,945    4.50%   53,364    6.50%
Tier 1 Capital (to risk weighted assets)   100,779    12.28%   49,260    6.00%   65,679    8.00%
Total Risk Based Capital (to risk weighted assets)   133,549    16.27%   65,679    8.00%   82,099    10.00%

 

-28-

 

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

The following table summarizes the Bank’s compliance with applicable regulatory capital requirements as of June 30, 2018 and September 30, 2017:

 

   Actual   For Capital
Adequacy Purposes
   To Be Well
Capitalized
Under Prompt
Corrective
Action Provisions
 
(Dollars in thousands)  Capital
Amount
   Ratio   Capital
Amount
   Ratio   Capital
Amount
   Ratio 
As of June 30, 2018:                        
Tier 1 Leverage (to average assets)  $128,634    12.23%  $42,056    4.00%  $52,570    5.00%
Common Equity Tier 1 Capital (to risk weighted assets)   128,634    14.77%   39,180    4.50%   56,594    6.50%
Tier 1 Capital (to risk weighted assets)   128,634    14.77%   52,240    6.00%   69,654    8.00%
Total Risk Based Capital (to risk weighted assets)   137,725    15.82%   69,654    8.00%   87,067    10.00%
As of September 30, 2017:                              
Tier 1 Leverage (to average assets)  $120,902    12.02%  $40,234    4.00%  $50,292    5.00%
Common Equity Tier 1 Capital (to risk weighted assets)   120,902    14.75%   36,894    4.50%   53,292    6.50%
Tier 1 Capital (to risk weighted assets)   120,902    14.75%   49,192    6.00%   65,590    8.00%
Total Risk Based Capital (to risk weighted assets)   129,369    15.78%   65,590    8.00%   81,987    10.00%

 

Note 8 – 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 and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. At June 30, 2018, such derivatives were used to hedge the variable cash flows associated with FHLB advances. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. The Company’s derivatives did not have any hedge ineffectiveness recognized in earnings during the three and nine months ended June 30, 2018 and 2017.

 

Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. During the next twelve months, the Company estimates approximately $0.3 million to be reclassified to earnings in interest expense. The Company is hedging its exposure to the variability in future cash flows for forecasted transactions over a maximum period of twenty months (excluding forecasted transactions related to the payment of variable interest on existing financial instruments).

 

-29-

 

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Balance Sheet as of June 30, 2018 and September 30, 2017:

 

   June 30, 2018
   Notional Amount   Fair Value   Balance Sheet Location  Expiration Date
   (Dollars in thousand)
Derivatives designated as hedging instruments                
Interest rate swaps by effective date:                
August 3, 2015  $15,000   $301   Other assets  August 3, 2020
February 5, 2016   20,000    762   Other assets  February 1, 2021
October 22, 2018   30,000    63   Other assets  October 22, 2021

 

   September 30, 2017
   Notional Amount   Fair Value   Balance Sheet Location  Expiration Date
   (Dollars in thousand)
Derivatives designated as hedging instruments                
Interest rate swaps by effective date:                
August 3, 2015  $15,000   $9   Other assets  August 3, 2020
February 5, 2016   20,000    367   Other assets  February 1, 2021

 

The tables below present the net gains (losses) recorded in accumulated other comprehensive income (loss) and the Consolidated Statements of Operations relating to the cash flow derivative instruments for the three and nine months ended June 30, 2018 and 2017.

 

    For the Three Months Ended June 30, 2018 
    Amount of Gain (Loss) Recognized in OCI (Effective Portion)   Amount of Gain (Loss) Reclassified from OCI to Interest Expense   Amount of Gain (Loss) Recognized in Other Non-Interest Income (Ineffective Portion) 
    (Dollars in thousand) 
                 
August 3, 2015   $54   $15   $ 
February 5, 2016    93    44     
October 22, 2018    166         

 

    For the Nine Months Ended June 30, 2018 
    Amount of Gain (Loss) Recognized in OCI (Effective Portion)   Amount of Gain (Loss) Reclassified from OCI to Interest Expense   Amount of Gain (Loss) Recognized in Other Non-Interest Income (Ineffective Portion) 
    (Dollars in thousand) 
August 3, 2015   $285   $(6)  $ 
February 5, 2016    461    65     
October 22, 2018    63         

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

    For the Three Months Ended June 30, 2017 
    Amount of Gain (Loss) Recognized in OCI (Effective Portion)   Amount of Gain (Loss) Reclassified from OCI to Interest Expense   Amount of Gain (Loss) Recognized in Other Non-Interest Income (Ineffective Portion) 
    (Dollars in thousand) 
August 3, 2015   $(70)  $(25)  $ 
February 5, 2016    (113)   (8)    

 

    For the Nine Months Ended June 30, 2017 
    Amount of Gain (Loss) Recognized in OCI (Effective Portion)   Amount of Gain (Loss) Reclassified from OCI to Interest Expense   Amount of Gain (Loss) Recognized in Other Non-Interest Income (Ineffective Portion) 
    (Dollars in thousand) 
August 3, 2015   $280   $(91)  $ 
February 5, 2016    451    (47)    

 

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

 

At June 30, 2018 and September 30, 2017, 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 June 30, 2018 and September 30, 2017. At June 30, 2018 and September 30, 2017, the Company has minimum collateral posting thresholds with certain of its derivative counterparties and has posted collateral of zero for both periods against its obligations under these agreements. If the Company had breached any of these provisions at June 30, 2018, 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 9 - Fair Value Measurements

 

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

 

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

 

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

 

Level 2—Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

 

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

 

The Company bases its fair values on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It is our policy to maximize

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

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.

 

FASB ASC Topic 825 “Financial Instruments” provides an option to elect fair value as an alternative measurement for selected financial assets and financial liabilities not previously recorded at fair value. The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation.

 

The Company monitors and evaluates available data to perform fair value measurements on an ongoing basis and recognizes transfers among the levels of the fair value hierarchy as of the date event or a change in circumstances that affects the valuation method chosen. There were no changes in valuation technique or transfers between levels at June 30, 2018 or September 30, 2017.

 

The tables below present the balances of assets measured at fair value on a recurring basis at June 30, 2018 and September 30, 2017:

 

   June 30, 2018 
   Total   Level 1   Level 2   Level 3 
   (Dollars in thousands) 
Assets:                
Investment securities available-for-sale:                    
Debt securities:                    
U.S. treasury notes  $19,954   $19,954   $   $ 
State and municipal obligations   6,931        6,931     
Single issuer trust preferred security   925        925     
Corporate debt securities   6,288        6,288     
Mutual funds   250            250 
Total investment securities available-for-sale   34,348    19,954    14,144    250 
                     
Derivative instruments  $1,125   $   $1,125   $ 

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

   September 30, 2017 
   Total   Level 1   Level 2   Level 3 
   (Dollars in thousands) 
Assets:                
Investment securities available-for-sale:                    
Debt securities:                    
State and municipal obligations  $7,029   $   $7,029   $ 
Single issuer trust preferred security   934        934     
Corporate debt securities   6,374        6,374     
Mutual funds   250            250 
Total investment securities available-for-sale   14,587        14,337    250 
                     
Derivative instruments  $376   $   $376   $ 

 

For assets measured at fair value on a nonrecurring basis that were still held at the end of the period, the following table provides the level of valuation assumptions used to determine each adjustment and the carrying value of the related individual assets or portfolios at June 30, 2018 and September 30, 2017:

 

    June 30, 2018 
    Total   Level 1   Level 2   Level 3 
    (Dollars in thousands) 
Impaired loans(1)   $16,537   $   $   $16,537 
Total   $16,537   $   $   $16,537 

 

    June 30, 2018 
    Fair Value at
June 30, 2018
   Valuation Technique  Unobservable Input  Range/(Weighted
Average)
 
    (Dollars in thousands) 
Impaired loans(1)   $16,537   Appraisal of collateral(2)  Collateral discounts(3)     9.5%-21.4%/(7.0%) 
Total   $16,537            

 

 

(1)At June 30, 2018, consisted of ten loans with an aggregate balance of $17.3 million and with $0.8 million in specific loan loss allowance.

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

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

 

    September 30, 2017 
    Total   Level 1   Level 2   Level 3 
    (Dollars in thousands) 
Impaired loans(1)   $137   $   $   $137 
Total   $137   $   $   $137 

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

  September 30, 2017 
    Fair Value at
September 30, 2017
   Valuation Technique  Unobservable Input  Range/(Weighted
Average)
 
    (dollars in thousands) 
Impaired loans(1)   $137   Appraisal of collateral(2)  Collateral discounts(3)     0%/(0%) 
Total   $137            

 

 

(1)At September 30, 2017, consisted of five loans with an aggregate balance of $0.4 million and with $0.2 million in specific loan loss allowance.

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

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

 

At June 30, 2018 and September 30, 2017, the Company did not have any additions to our mortgage servicing assets. At June 30, 2018 and September 30, 2017, 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 June 30, 2018 and September 30, 2017. 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 June 30, 2018 and September 30, 2017 and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.

 

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

 

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

 

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

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

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

 

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

 

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

 

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 borrowings of similar maturities. A decay rate is estimated for non-time deposits. The discount rate for non-time deposits is adjusted for servicing costs based on industry estimates.

 

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

 

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

 

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

 

Commitments to Extend Credit and Letters of Credit—The majority of the Company’s commitments to extend credit and letters of credit carry current market interest rates if converted to loans. 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.

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

The carrying amount and estimated fair value of the Company’s financial instruments as of June 30, 2018 and September 30, 2017 are presented below:

 

   Carrying
Amount
   Fair Value   Level 1   Level 2   Level 3 
   (Dollars in thousands) 
June 30,2018:                    
Financial assets:                         
Cash and cash equivalents  $47,381   $47,381   $47,381   $   $ 
Investment securities available-for-sale   34,348    34,348    19,954    14,144    250 
Investment securities held-to-maturity   31,004    29,990        29,990     
Loans receivable, net (including impaired loans)   893,355    884,812            884,812 
Accrued interest receivable   3,571    3,571        3,571     
Restricted stock   8,781    8,781        8,781     
Mortgage servicing rights (included in Other Assets)   233    275        275     
Derivatives (included in Other Assets)   1,126    1,126        1,126     
Financial liabilities:                         
Savings accounts   44,629    44,629        44,629     
Checking and NOW accounts   246,706    246,706        246,706     
Money market accounts   276,807    276,807        276,807     
Certificates of deposit   219,790    221.385        221,385     
Borrowings(excluding sub debt)   125,500    125,395        125,395     
Subordinated debt   24,421    24,421        24,421     
Accrued interest payable   1,095    1,095        1,095     
                          
September 30, 2017:                         
Financial assets:                         
Cash and cash equivalents  $117,136   $117,136   $117,136   $   $ 
Investment securities available-for-sale   14,587    14,587        14,337    250 
Investment securities held-to-maturity   34,915    34,566        34,566     
Loans receivable, net (including impaired loans)   834,331    839,242            839,242 
Accrued interest receivable   3,139    3,139        3,139     
Restricted stock   5,559    5,559        5,559     
Mortgage servicing rights (included in Other Assets)   268    271        271     
Derivatives (included in Other Assets)   376    376        376     
Financial liabilities:                         
Savings accounts   44,526    44,526        44,526     
Checking and NOW accounts   197,700    197,700        197,700     
Money market accounts   276,404    276,404        276,404     
Certificates of deposit   271,766    273,723        273,723     
Borrowings(excluding sub debt)   123,000    123,658        123,658     
Subordinated debt   24,303    24,303        24,303     
Accrued interest payable   694    694        694     

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 10 – Income Taxes

 

In the fiscal first quarter of 2018, the Company revised its estimated annual effective rate to reflect a change in the federal statutory rate from 35% to 21%, resulting from legislation that was enacted on December 22, 2017. The rate change is administratively effective at the beginning of our calendar year, using a blended rate for the annual period. As a result, the blended statutory tax rate for the year is 24.25%. However, we are still analyzing certain aspects of the Tax Cuts and Jobs Act of 2017 and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. The provisional amount recorded in the first quarter of fiscal 2018 is related to the re-measurement of our deferred tax asset was $2.3 million, and no further adjustments were made.

 

A reconciliation from the expected federal income tax expense computed at the statutory federal income tax rate to the actual income tax expense included in the consolidated statements of income for the nine months ended June 30, 2018 and 2017 is as follows:

 

   Nine Months Ended June 30, 2018   Nine Months Ended June 30, 2017 
Tax at statutory rate  $2,087    24.3%  $1,972    34.0%
Increase/(reduction) in taxes resulting from:                    
Tax-exempt income   (84)   (1.0)   (139)   (2.4)
Bank-owned life insurance   (87)   (1.0)   (129)   (2.2)
State and local income taxes   122    1.4    236    4.0 
Deferred state taxes   (249)   (2.9)        
Other   (147)   (1.7)        
Subtotal   1,642    19.1%  $1,940    33.4%
Impact of change in tax law   2,300    26.7         
Total  $3,942    45.8%  $1,940    33.4%

 

Note 11 – Comprehensive Income

 

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

 

   June 30,
2018
   September 30,
2017
 
   (Dollars in thousands) 
Net unrealized holding (losses) on available-for-sale securities  $(460)  $(282)
Tax effect   97    96 
Net of tax amount   (363)   (186)
Fair value adjustments on derivatives   1,125    376 
Tax effect   (236)   (128)
Net of tax amount   889    248 
Total accumulated other comprehensive income  $526   $62 

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

   Three Months Ended June 30,   Nine Months Ended June 30, 
(Dollars in thousands)  2018   2017   2018   2017 
Net unrealized holding gains (losses) on available-for-sale securities  $34   $446   $(185)  $(299)
                     
Net realized (losses) on securities available- for-sale       (374)       (432)
                     
Accretion of unrealized holding losses on securities available-for-sale transferred to held-to-maturity   1    2    7    7 
                     
Fair value adjustments on derivatives   253    (151)   748    868 
                     
Other comprehensive income (loss) before taxes   288    (77)   570    144 
Tax effect   (56)   25    (139)   (48)
Total comprehensive income (loss)  $232   $(52)  $431   $96 

 

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 June 30, 2018, there were 367,057 remaining shares available for future grants.

 

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

 

All awards are issued at fair value of the underlying shares at the grant date. The Company expenses the cost of the awards, which is determined to be the fair market value of the awards at the date of grant. The Company did not grant any stock options to purchase common stock or restricted shares during the three months ended June 30, 2018 and June 30, 2017.

 

During the nine months ended June 30, 2018, stock options covering a total of 4,664 of common stock were granted. Total compensation expense related to stock options granted under the 2014 Plan was $2,000 and $11,000 for the three and nine months ended June 30, 2018, respectively. During the nine months ended June 30, 2017, stock options covering a total of 7,000 shares of common stock were granted. The compensation expense related to stock options for the three and nine months ended June 30, 2017 was $3,000 and $5,000, respectively.

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

During the nine months ended June 30, 2018, a total of 4,768 restricted shares were awarded. The compensation expense related to restricted stock awards for three and nine months ended June 30, 2018 was $14,000 and $43,000. During the nine months ended June 30, 2017, a total of 12,522 restricted shares were awarded. The compensation expense related to restricted stock awards for the three and nine months ended June 30, 2017 was $87,000 and $88,000, respectively.

 

Stock-based compensation expense for the cost of the awards granted is based on the grant-date fair value. For stock option awards, the fair value is estimated at the date of grant using the Black-Scholes option-pricing model. This model requires the input of highly subjective assumptions, changes to which can materially affect the fair value estimate. Additionally, there may be other factors that would otherwise have a significant effect on the value of employee stock options that have been 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.

 

The following is a summary of stock option activity for the nine months ended June 30, 2018:

 

   Shares   Weighted Average Exercise Price  

Weighted

Average Remaining Contractual Term

(In Years)

  

Aggregate

Intrinsic Value

 
Outstanding, beginning of fiscal year   11,000   $19.19        $83,170 
Granted   4,664    26.20          
Forfeited/cancelled/expired   (2,000)   18.51         7,580 
Outstanding, at June 30, 2018   13,664   $21.68    8.782   $45,090 
Exercisable at June 30, 2018   2,400   $18.51    8.246   $14,016 
Nonvested at June 30, 2018   11,264   $22.36           

 

The table below summarizes the activity for the Company’s restricted stock outstanding during the nine months ended at June 30, 2018:

 

    Shares   Weighted Average Fair Value 
Nonvested at September 30, 2017    10,711   $20.36 
Granted    4,768    26.20 
Forfeited/cancelled/expired    (700)   21.00 
Vested    (2,071)   20.22 
Nonvested at June 30, 2018    12,708   $22.54 

 

As of June 30, 2018, there was $259,000 of total unrecognized compensation cost related to non-vested shares of restricted stock granted under the Plan. The cost is expected to be recognized over a weighted average period of 3.96 years. As of June 30, 2018, there was $73,000 of total unrecognized compensation cost related to non-vested options under the Plan. The cost is expected to be recognized over a weighted average period of 3.97 years.

 

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

 

The purpose of this analysis is to provide the reader with information relevant to understanding and assessing the Company’s results of operations for the periods presented herein and financial condition as of June 30, 2018 and September 30, 2017. 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 Quarterly Report on Form 10-Q contains certain forward looking statements (as defined in the Securities Exchange Act of 1934, as amended, and the regulations thereunder). Forward looking statements are not historical facts but instead represent only the beliefs, expectations or opinions of Malvern Bancorp, Inc. and its management regarding future events, many of which, by their nature, are inherently uncertain. Forward looking statements may be identified by the use of such words as: ‘‘believes,’’ ‘‘expects,’’ ‘‘anticipates,’’ ‘‘plans,’’ ‘‘trend,’’ ‘‘objective,’’ ‘‘continue,’’ ‘‘remain,’’ ‘‘pattern,’’ or words of similar meaning, or future or conditional terms such as ‘‘will,’’ ‘‘would,’’ ‘‘should,’’ ‘‘could,’’ ‘‘might,’’ ‘‘can,’’ or ‘‘may.’’ Forward looking statements include, but are not limited to, financial projections and estimates and their underlying assumptions; statements regarding plans, objectives and expectations with respect to future operations, products and services; and statements regarding future performance. Such statements are subject to certain risks, uncertainties and assumptions, many of which are difficult to predict and generally are beyond the control of Malvern Bancorp, Inc. and its management, that could cause actual results to differ materially from those expressed in, or implied or projected by, forward looking statements. The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward looking statements: (1) competitive pressures among depository institutions may increase significantly; (2) changes in the interest rate environment may reduce interest margins; (3) prepayment speeds, loan origination and sale volumes, charge-offs and loan loss provisions may vary substantially from period to period; (4) general economic conditions may be less favorable than expected; (5) political developments, wars or other hostilities may disrupt or increase volatility in securities markets or other economic conditions; (6) legislative or regulatory changes or actions, including changes in state and federal tax laws, may adversely affect the businesses in which Malvern Bancorp, Inc. is engaged and our financial results; (7) changes and trends in the securities markets may adversely impact Malvern Bancorp, Inc.; (8) a delayed or incomplete resolution of regulatory issues could adversely impact our planning; (9) difficulties in integrating any businesses that we may acquire, which may increase our expenses and delay the achievement of any benefits that we may expect from such acquisitions; (10) the impact of reputation risk created by the developments discussed above on such matters as business generation and retention, funding and liquidity could be significant; and (11) the outcome of any regulatory and legal investigations and proceedings may not be anticipated.

 

As used in this report, unless the context otherwise requires, the terms “we,” “our,” “us,” or the “Company” refer to Malvern Bancorp, Inc., a Pennsylvania corporation, and the term the “Bank” refers to Malvern Bank, National Association, a national bank and wholly owned subsidiary of the Company. In addition, unless the context otherwise requires, references to the operations of the Company include the operations of the Bank.

 

This report contains certain financial information determined by methods other than in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These measures include net interest income on a fully tax equivalent basis and net interest margin on a fully tax equivalent basis, including the efficiency ratio. Our management uses these non-GAAP measures, together with the related GAAP measures, in its analysis of our performance and in making business decisions. Management also uses these measures for peer comparisons. The tax equivalent adjustment to net interest income recognizes the income tax savings when comparing taxable and tax-exempt assets and assumes a blended statutory rate of 24.5% for the current period and 34% for each of the prior periods presented. Management believes that it is standard practice in the banking industry to present net interest income and net interest margin on a fully tax equivalent basis, and accordingly believes that providing these measures may be useful for peer comparison purposes. These disclosures should not be viewed as substitutes for the results determined to be in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be represented by other companies. Reconciliations of net interest income on a fully tax equivalent basis to net interest income and net interest margin on a fully tax equivalent basis to net interest margin are contained in the tables under “Earnings-Net Interest Income and Margin.”

 

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Critical Accounting Policies

 

The accounting and reporting policies followed by Malvern Bancorp, Inc. and its subsidiaries (the “Company”) conform, in all material respects, to U.S. generally accepted accounting principles. In preparing the consolidated financial statements, management has made estimates, judgments and assumptions that affect the reported amounts of assets and liabilities as of the dates of the consolidated statements of condition and for the periods indicated in the statements of operations. Actual results could differ significantly from those estimates.

 

The Company’s accounting policies are fundamental to understanding Management’s Discussion and Analysis (“MD&A”) of financial condition and results of operations. The Company has identified the determination of the allowance for loan losses, other real estate owned, fair value measurements, 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 our 2017 Annual Report on Form 10-K. There have been no significant changes to our Critical Accounting Policies as described in our 2017 Annual Report on Form 10-K.

 

Earnings

 

Net income available to common shareholders for the three months ended June 30, 2018 amounted to $2.2 million, or $0.35 per fully diluted common share, an increase of $0.5 million, or 30.5 percent, as compared with net income of $1.7 million, or $0.27 per common share, for the quarter ended June 30, 2017. The annualized return on average assets was 0.85 percent for the three months ended June 30, 2018, compared to annualized return on average assets of 0.70 percent for three months ended June 30, 2017. The annualized return on average shareholders’ equity was 8.40 percent for the three-month period ended June 30, 2018, compared to 6.90 percent in annualized return on average shareholders’ equity for the three months ended June 30, 2017.

 

Net income available to common shareholders for the nine months ended June 30, 2018 amounted to $4.7 million, or $0.72 per fully diluted common share, an increase of $0.8 million, or 20.8 percent, as compared with net income of $3.9 million, or $0.60 per common share, for the nine months ended June 30, 2017. The annualized return on average assets was 0.59 percent for the nine months ended June 30, 2018, compared to annualized return on average assets of 0.57 percent for the nine months ended June 30, 2017. The annualized return on average shareholders’ equity was 5.92 percent for the nine-month period ended June 30, 2018, compared to 5.25 percent in annualized return on average shareholders’ equity for the nine months ended June 30, 2017.

 

Net Interest Income and Margin on a Fully Tax-Equivalent Basis, Non-GAAP Financial Measure

 

Net interest income is the difference between the interest earned on the portfolio of earning assets (principally loans and investments) and the interest paid for deposits and borrowings, which support these assets. Net interest income is presented on a fully tax-equivalent basis, a non-GAAP financial measure, by adjusting tax-exempt income (primarily interest earned on obligations of state and political subdivisions) by the amount of income tax which would have been paid had the assets been invested in taxable issues. We believe this to be the preferred measurement of net interest income as it provides a relevant comparison between taxable and non-taxable amounts.

 

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The following table shows the Company’s calculation of this non-GAAP financial measure.

 

   Three Months Ended June 30,   Nine Months Ended June 30, 
(Dollars in thousands)  2018   2017   2018   2017 
                 
Net interest income  $6,976   $6,399   $19,926   $17,629 
Tax-equivalent adjustment, investment income (1)   12    32    41    133 
Tax-equivalent adjustment, loan interest (1)   33    2    44    6 
Net interest income on a fully tax-equivalent basis   7,021    6,433    20,011    17,768 

(1)Computed using a federal income tax rate of 24.5 percent for the three and nine months ended June 30, 2018 and 34 percent for the three and nine months ended June 30, 2017.

 

The following table presents the components of net interest income on a fully tax-equivalent basis, a non-GAAP measure, for the periods indicated, together with a reconciliation of net interest income as reported under GAAP.

 

Net Interest Income (tax-equivalent basis)

 

   Three Months Ended June 30,   Nine Months Ended June 30, 
(dollars in thousands)  2018   2017   Increase
(Decrease)
   Percent
Change
   2018   2017   Increase
(Decrease)
   Percent Change 
Interest income:                                        
Loans, including fees  $9,413   $8,248   $1,165    14.12%  $26,865   $21,932   $4,933    22.49%
Investment securities   373    554    (181)   (32.67)   1,064    1,919    (855)   (44.55)
Dividends, restricted stock   130    64    66    103.13    333    192    141    73.44 
Interest-bearing cash accounts   327    141    186    131.19    1,236    349    887    254.15 
Total interest income   10,243    9,007    1,236    13.72    29,498    24,392    5,106    20.93 
Interest expense:                                        
Deposits   2,304    1,645    659    40.06    6,641    4,393    2,248    51.17 
Short-term borrowings   13    1    12    1,219.00    54    12    42    350.00 
Long-term borrowings   539    545    (6)   (1.10)   1,648    1,615    33    2.04 
Subordinated debt   366    383    (17)   (4.44)   1,144    604    540    89.40 
Total interest expense   3,222    2,574    648    25.17    9,487    6,624    2,863    43.22 
Net interest income on a fully tax-equivalent basis (non-GAAP)   7,021    6,433    588    9.14    20,011    17,768    2,243    12.62 
Tax-equivalent adjustment (1)   (45)   (34)