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Section 1: 10-Q (10-Q)

mlvf-10q_20181231.htm

 

 

 

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 December 31, 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 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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes       No  

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

 

Large accelerated filer 

 

Accelerated filer 

Non-accelerated filer 

 

Smaller reporting company 

Emerging growth company

 

 

 

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

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

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:

7,774,594 shares

(Title of Class)

(Outstanding as of February 11, 2019)

 

 

 


 

Table of Contents

 

 

 

Page

 

 

 

PART I – FINANCIAL INFORMATION

3

 

 

 

Item  1.

Financial Statements

4

 

Consolidated Statements of Financial Condition at December 31, 2018 (unaudited) and September 30, 2018

4

 

Consolidated Statements of Operations for the three months ended December 31, 2018 and 2017 (unaudited)

5

 

Consolidated Statements of Comprehensive Income for the three months ended December 31, 2018 and 2017 (unaudited)

6

 

Consolidated Statements of Changes in Shareholders’ Equity for the three months ended December 31, 2018 and 2017 (unaudited)

7

 

Consolidated Statements of Cash Flows for the three months ended December 31, 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

34

 

 

 

Item  3.

Qualitative and Quantitative Disclosures about Market Risks

48

 

 

 

Item  4.

Controls and Procedures

48

 

 

 

PART II – OTHER INFORMATION.

49

 

 

 

Item  1.

Legal Proceedings

49

 

 

 

Item  1A.

Risk Factors

49

 

 

 

Item  2.

Unregistered Sales of Equity Securities and Use of Proceeds

49

 

 

 

Item  3.

Default Upon Senior Securities

49

 

 

 

Item  4.

Mine Safety Disclosure

49

 

 

 

Item  5.

Other Information

49

 

 

 

Item  6.

Exhibits

49

 

 

 

SIGNATURES

50

 

 

 


 

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 and recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended December 31, 2018 are not necessarily indicative of the results that may be expected for the full year ending September 30, 2019, or for any other interim period. The Malvern Bancorp, Inc. Annual Report on Form 10-K for the fiscal year ended September 30, 2018 should be read in conjunction with these financial statements.

 

-3-


 

Item 1. Financial Statements

MALVERN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)

 

 

 

December 31,

2018

 

 

September 30,

2018

 

 

 

(Dollars in thousands, except per share data)

 

ASSETS

 

 

 

 

 

 

 

 

Cash and due from depository institutions

 

$

1,377

 

 

$

1,563

 

Interest bearing deposits in depository institutions

 

 

98,499

 

 

 

29,271

 

Cash and Cash Equivalents

 

 

99,876

 

 

 

30,834

 

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

   $19,768 and $24,804, respectively)

 

 

19,231

 

 

 

24,298

 

Investment securities held to maturity (fair value of $28,557 and $28,968,

   respectively)

 

 

29,323

 

 

 

30,092

 

Restricted stock, at cost

 

 

9,493

 

 

 

8,537

 

Loans receivable, net of allowance for loan losses of $9,247 and $9,021,

   respectively

 

 

924,639

 

 

 

902,136

 

Other real estate owned

 

 

5,796

 

 

 

-

 

Accrued interest receivable

 

 

3,724

 

 

 

3,800

 

Property and equipment, net

 

 

7,067

 

 

 

7,181

 

Deferred income taxes

 

 

3,367

 

 

 

3,195

 

Bank-owned life insurance

 

 

19,524

 

 

 

19,403

 

Other assets

 

 

6,452

 

 

 

4,475

 

Total Assets

 

$

1,128,492

 

 

$

1,033,951

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

Deposits-noninterest-bearing

 

 

39,734

 

 

 

41,677

 

Deposits-interest-bearing

 

 

803,466

 

 

 

732,486

 

Total Deposits

 

 

843,200

 

 

 

774,163

 

FHLB advances

 

 

118,000

 

 

 

118,000

 

Other short-term borrowings

 

 

-

 

 

 

2,500

 

Subordinated debt

 

 

24,500

 

 

 

24,461

 

Advances from borrowers for taxes and insurance

 

 

2,142

 

 

 

1,305

 

Accrued interest payable

 

 

1,251

 

 

 

784

 

Other liabilities

 

 

3,720

 

 

 

1,915

 

Total Liabilities

 

 

992,813

 

 

 

923,128

 

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:   7,774,594 at December 31, 2018 and 6,580,879 shares at

   September 30, 2018

 

 

78

 

 

 

66

 

Additional paid-in-capital

 

 

84,481

 

 

 

61,099

 

Retained earnings

 

 

52,423

 

 

 

50,412

 

Unearned Employee Stock Ownership Plan (ESOP) shares

 

 

(1,302

)

 

 

(1,338

)

Accumulated other comprehensive (loss) income

 

 

(1

)

 

 

584

 

Total Shareholders' Equity

 

 

135,679

 

 

 

110,823

 

Total Liabilities and Shareholders' Equity

 

$

1,128,492

 

 

$

1,033,951

 

 

See accompanying notes to unaudited consolidated financial statements.

-4-


 

MALVERN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

 

Three Months Ended December 31,

 

 

 

2018

 

 

2017

 

 

 

(Dollars in thousands, except per share data)

 

Interest and Dividend Income

 

 

 

 

 

 

 

 

Loans, including fees

 

$

10,095

 

 

$

8,701

 

Investment securities, taxable

 

 

251

 

 

 

230

 

Investment securities, tax-exempt

 

 

61

 

 

 

65

 

Dividends, restricted stock

 

 

133

 

 

 

69

 

Interest-bearing cash accounts

 

 

372

 

 

 

446

 

Total Interest and Dividend Income

 

 

10,912

 

 

 

9,511

 

Interest Expense

 

 

 

 

 

 

 

 

Deposits

 

 

2,944

 

 

 

2,155

 

Short-term borrowings

 

 

5

 

 

 

19

 

Long-term borrowings

 

 

633

 

 

 

563

 

Subordinated Debt

 

 

383

 

 

 

392

 

Total Interest Expense

 

 

3,965

 

 

 

3,129

 

Net Interest Income

 

 

6,947

 

 

 

6,382

 

Provision for Loan Losses

 

 

1,453

 

 

 

-

 

Net Interest Income after Provision for Loan losses

 

 

5,494

 

 

 

6,382

 

Other Income

 

 

 

 

 

 

 

 

Service charges and other fees

 

 

940

 

 

 

271

 

Rental income - other

 

 

67

 

 

 

66

 

Net gains on sale of real estate

 

 

-

 

 

 

1,186

 

Net gains on sale of loans

 

 

18

 

 

 

67

 

Earnings on bank-owned life insurance

 

 

121

 

 

 

121

 

Total Other Income

 

 

1,146

 

 

 

1,711

 

Other Expenses

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

2,008

 

 

 

1,990

 

Occupancy expense

 

 

539

 

 

 

562

 

Federal deposit insurance premium

 

 

69

 

 

 

76

 

Advertising

 

 

30

 

 

 

54

 

Data processing

 

 

254

 

 

 

278

 

Professional fees

 

 

499

 

 

 

788

 

Other real estate owned expense, net

 

 

21

 

 

 

-

 

Other operating expenses

 

 

674

 

 

 

723

 

Total Other Expenses

 

 

4,094

 

 

 

4,471

 

Income before income tax expense

 

 

2,546

 

 

 

3,622

 

Income tax expense

 

 

535

 

 

 

3,219

 

Net Income

 

$

2,011

 

 

$

403

 

Earnings Per Common Share:

 

 

 

 

 

 

 

 

Basic

 

$

0.27

 

 

$

0.06

 

Diluted

 

$

0.27

 

 

$

0.06

 

Weighted Average Common Shares Outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

7,555,810

 

 

 

6,445,264

 

Diluted

 

 

7,555,969

 

 

 

6,450,513

 

 

 

 

 

See accompanying notes to unaudited consolidated financial statements.

-5-


 

MALVERN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

 

 

For the Three Months Ended December 31,

 

 

 

2018

 

 

2017

 

 

 

(In thousands)

 

Net Income

 

$

2,011

 

 

$

403

 

Other Comprehensive Income (Loss), Net of Tax:

 

 

 

 

 

 

 

 

Unrealized holding losses on available-for-sale securities

 

 

(33

)

 

 

(83

)

Tax effect

 

 

7

 

 

 

25

 

Net of tax amount

 

 

(26

)

 

 

(58

)

Accretion of unrealized holding losses on securites transferred from available-for-sale

   to held-to-maturity

 

 

2

 

 

 

2

 

Tax effect

 

 

(1

)

 

 

(1

)

Net of tax amount

 

 

1

 

 

 

1

 

Fair value adjustments on derivatives

 

 

(710

)

 

 

242

 

Tax effect

 

 

150

 

 

 

(23

)

Net of tax amount

 

 

(560

)

 

 

219

 

Total other comprehensive (loss),  income

 

 

(585

)

 

 

162

 

Total comprehensive income

 

$

1,426

 

 

$

565

 

 

See accompanying notes to unaudited consolidated financial statements.

-6-


 

MALVERN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

 

(Dollars in thousands, except per share data)

 

Common

Stock

 

 

Additional

Paid-In

Capital

 

 

Retained

Earnings

 

 

Unearned

ESOP

Shares

 

 

Accumulated

Other

Comprehensive

Income (Loss)

 

 

Total

Shareholders'

Equity

 

Balance, October 1, 2017

 

 

66

 

 

 

60,736

 

 

 

43,139

 

 

 

(1,483

)

 

 

62

 

 

 

102,520

 

Net Income

 

 

-

 

 

 

-

 

 

 

403

 

 

 

-

 

 

 

-

 

 

 

403

 

Other comprehensive income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

162

 

 

 

162

 

Committed to be released ESOP

   shares (3,600 shares)

 

 

-

 

 

 

60

 

 

 

-

 

 

 

36

 

 

 

-

 

 

 

96

 

Stock based compensation

 

 

-

 

 

 

15

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

15

 

Balance, December 31, 2017

 

 

66

 

 

 

60,811

 

 

 

43,542

 

 

 

(1,447

)

 

 

224

 

 

 

103,196

 

Balance, October 1, 2018

 

 

66

 

 

 

61,099

 

 

 

50,412

 

 

 

(1,338

)

 

 

584

 

 

 

110,823

 

Net Income

 

 

-

 

 

 

-

 

 

 

2,011

 

 

 

-

 

 

 

-

 

 

 

2,011

 

Other comprehensive loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(585

)

 

 

(585

)

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

 

 

12

 

 

 

23,332

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

23,344

 

Committed to be released ESOP

   shares (3,600 shares)

 

 

-

 

 

 

36

 

 

 

-

 

 

 

36

 

 

 

-

 

 

 

72

 

Stock based compensation

 

 

-

 

 

 

14

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

14

 

Balance, December 31, 2018

 

$

78

 

 

$

84,481

 

 

$

52,423

 

 

$

(1,302

)

 

$

(1

)

 

$

135,679

 

 

See accompanying notes to unaudited consolidated financial statements.

 

 

 

-7-


MALVERN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Three Months Ended December 31,

 

 

 

2018

 

 

2017

 

 

 

(In thousands)

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

 

Net income

 

$

2,011

 

 

$

403

 

Adjustments to reconcile net income to net cash provided by

   operating activities:

 

 

 

 

 

 

 

 

Depreciation expense

 

 

191

 

 

 

187

 

Provision for loan losses

 

 

1,453

 

 

 

-

 

Deferred income tax (benefit) expense

 

 

(295

)

 

 

2,849

 

ESOP expense

 

 

72

 

 

 

96

 

Stock based compensation

 

 

14

 

 

 

15

 

Amortization of premiums and discounts on investments securities, net

 

 

269

 

 

 

294

 

(Accretion) amortization of loan origination fees and costs

 

 

(192

)

 

 

8

 

Amortization of mortgage servicing rights

 

 

10

 

 

 

13

 

Net gain on sale of real estate

 

 

-

 

 

 

(1,186

)

Net gain on sale of secondary market loans

 

 

(18

)

 

 

(67

)

Proceeds from sale of secondary market loans

 

 

1,544

 

 

 

5,112

 

Originations of  secondary market loans

 

 

(1,525

)

 

 

(5,045

)

Earnings on bank-owned life insurance

 

 

(121

)

 

 

(121

)

Decrease (increase) in accrued interest receivable

 

 

76

 

 

 

(205

)

Increase in accrued interest payable

 

 

467

 

 

 

405

 

Increase in other liabilities

 

 

1,805

 

 

 

1,981

 

Increase in other assets

 

 

(2,419

)

 

 

(367

)

Amortization of subordinate debt

 

 

39

 

 

 

39

 

Net Cash Provided by Operating Activities

 

 

3,381

 

 

 

4,411

 

 

 

 

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

 

Investment securities available-for-sale:

 

 

 

 

 

 

 

 

Purchases

 

 

(5,000

)

 

 

(30,140

)

        Sales

 

 

25

 

 

 

-

 

Maturities, calls and principal repayments

 

 

10,000

 

 

 

123

 

Investment securities held-to-maturity:

 

 

 

 

 

 

 

 

Maturities, calls and principal repayments

 

 

512

 

 

 

747

 

(Loan originations) and principal collections, net

 

 

(29,560

)

 

 

27,559

 

Net increase in restricted stock

 

 

(956

)

 

 

(371

)

Proceeds from sale of real estate

 

 

-

 

 

 

1,315

 

Purchase of property and equipment

 

 

(78

)

 

 

(183

)

Net Cash Used in Investing Activities

 

 

(25,057

)

 

 

(950

)

Cash Flows from Financing Activities

 

 

 

 

 

 

 

 

Net increase in deposits

 

 

69,037

 

 

 

6,703

 

Proceeds for long-term borrowings

 

 

30,000

 

 

 

35,000

 

Repayment of long-term borrowings

 

 

(30,000

)

 

 

(35,000

)

Repayment of other borrowed money

 

 

(2,500

)

 

 

-

 

Increase in advances from borrowers for taxes and insurance

 

 

837

 

 

 

1,342

 

Net proceeds from issuance of common stock

 

 

23,344

 

 

 

-

 

Net Cash Provided by Financing Activities

 

 

90,718

 

 

 

8,045

 

Net Increase in Cash and Cash Equivalents

 

 

69,042

 

 

 

11,506

 

Cash and Cash Equivalents - Beginning

 

 

30,834

 

 

 

117,136

 

Cash and Cash Equivalents - Ending

 

$

99,876

 

 

$

128,642

 

Supplemental Cash Flows Information

 

 

 

 

 

 

 

 

Interest paid

 

$

3,498

 

 

$

2,724

 

Income taxes paid

 

$

163

 

 

$

-

 

    Non-cash transfer to other real estate owned

 

$

5,796

 

 

$

-

 

 

See accompanying notes to unaudited consolidated financial statements.

 

-8-


 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – The Company

Malvern Bancorp, Inc. (the “Company” or “Malvern Bancorp”), a Pennsylvania corporation, is a registered bank holding company under the Bank Holding Company Act of 1956, as amended (the “Holding Company Act”).  Malvern Bancorp is the holding company for Malvern Bank, National Association (“Malvern Bank” or the “Bank”), a national bank that was originally organized in 1887 as a federally-chartered savings bank.  Malvern Bank now serves as one of the oldest banks headquartered on the Philadelphia Main Line.  For more than a century, the Bank has been committed to helping people build prosperous communities as a trusted financial partner, forging lasting relationships through teamwork, respect and integrity.  Effective February 12, 2018, the Bank converted from a federal savings bank charter to a national bank charter and Malvern Bancorp converted from a savings and loan holding company to a bank holding company. On October 9, 2018, the Company closed an underwritten public offering of shares of our common stock for gross proceeds of $25.0 million and net proceeds of approximately $23.3 million (after deducting the underwriting discount and other estimated offering expenses).

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, Palm Beach Florida, and Morristown, New Jersey, its New Jersey regional headquarters.  The Bank also maintains a representative office in Montchanin, Delaware.  The Bank’s primary market niche is providing personalized service to its client base.  

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

Note 2 – Summary of Significant Accounting Policies

Basis of financial statement presentation. The unaudited condensed consolidated financial statements of the Company include the accounts of the Company and its wholly-owned subsidiary, Malvern Bank, National Association and the Bank’s wholly-owned subsidiary, Malvern Insurance Associates, LLC. 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 December 31, 2018 and the results of operations for the three-month periods ended December 31, 2018 and 2017, and cash flows for the three-month periods ended December 31, 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 as of the dates and for the interim periods presented. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and note disclosures included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on December 14, 2018. The consolidated statement of operations for the three- month periods ended December 31, 2018 and the consolidated statements of cash flows for the three-month periods ended December 31, 2018 are not necessarily indicative of the results of operations or cash flows for the full year ending September 30, 2019 or any other period.

There have been no significant changes to our Critical Accounting Policies as described in our 2018 Annual Report on Form 10-K.

Recently Issued Accounting Pronouncements

Financial. Instruments. In June 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied currently will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. For public companies, this ASU will be effective for interim and annual periods beginning

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after December 15, 2019. All entities may adopt the amendments in this Update earlier as of the fiscal year beginning after December 15, 2018, including interim periods within those fiscal years. The Company does not expect to early adopt these changes. The Bank has a software system in place to assist with the calculation of Current Expected Credit Losses (“CECL”).  Data is being collected and refined and testing of the various models is in process. The Company is evaluating the impact of this new requirement to the consolidated financial statements.

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 allows for a cumulative effect adjustment in the year of adoption 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 in the process of evaluating the impact of this guidance but expects to report higher assets and liabilities as a result of including additional leases on the consolidated statement of financial condition.

Note 3 – Non-Interest Income

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

 

 

 

Three Months Ended December 31,

 

 

 

2018

 

 

2017

 

 

 

(Dollars in thousands)

 

Rental income - other

 

$

67

 

 

$

66

 

Net gains on sale of real estate

 

 

-

 

 

 

1,186

 

Net gains on sale of loans

 

 

18

 

 

 

67

 

Earnings on bank-owned life insurance

 

 

121

 

 

 

121

 

Non-interest income within the scope of other GAAP topics

 

 

206

 

 

 

1,440

 

ATM fees

 

 

1

 

 

 

4

 

Credit card fee income

 

 

6

 

 

 

6

 

DDA fee income

 

 

37

 

 

 

36

 

DDA service fees

 

 

19

 

 

 

18

 

Debit card fees

 

 

60

 

 

 

56

 

Other loan fee income

 

 

764

 

 

 

65

 

Other fee income

 

 

52

 

 

 

84

 

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Other non-interest income

 

 

1

 

 

 

2

 

Non-interest income from contracts with customers

 

$

940

 

 

$

271

 

Total Non-interest Income

 

$

1,146

 

 

$

1,711

 

 

The majority of our revenue-generating transactions are not subject to ASC 606, including revenue generated from financial instruments, such as our loans, investment securities, derivatives as well as revenue related to BOLI, sales of investment securities, rental income, and gain on sale of loans. Revenue-generating activities that are within the scope of ASC 606, which are presented in our statements of operations as components of other income included certain fees such as credit card fee income, DDA service and fee income, and debit card fees. The increase in other loan fee income is primarily due to the recognition of approximately $708,000 of net swap fees through the Bank’s commercial loan hedging program.

 

Note 4 – 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.  During the three months ended December 31, 2018, the Company granted  3,238 restricted shares , which are considered CSEs. The Company did not grant any stock options during the three months ended December 31, 2018.

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

 

 

 

Three Months Ended December 31,

 

 

 

2018

 

 

2017

 

 

 

(Dollars in thousands, except share and per share data)

 

Net Income

 

$

2,011

 

 

$

403

 

Weighted average shares outstanding

 

 

7,668,751

 

 

 

6,572,605

 

Average unearned ESOP shares

 

 

(112,941

)

 

 

(127,341

)

Basic weighted average share outstanding

 

 

7,555,810

 

 

 

6,445,264

 

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

 

 

159

 

 

 

5,249

 

Diluted weighted average common shares outstanding

 

 

7,555,969

 

 

 

6,450,513

 

Earnings per common share:

 

 

 

 

 

 

 

 

Basic

 

$

0.27

 

 

$

0.06

 

Diluted

 

$

0.27

 

 

$

0.06

 

 

Note 5 – Employee Stock Ownership Plan

The Company established an employee stock ownership plan (“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 the 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 each of the three months ended December 31, 2018 and 2017, there were 3,600 shares committed to be released.  At December 31, 2018, there were 111,165 unallocated shares and 148,053 allocated shares held by the ESOP. The unallocated shares had an aggregate fair value of approximately $2.2 million at December 31, 2018.

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Note 6 - Investment Securities

The Company’s investment securities are classified as available-for-sale or held-to-maturity at December 31, 2018 and at September 30, 2018. 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.

The following tables present information related to the Company’s investment securities at December 31, 2018 and September 30, 2018.

 

 

 

December 31, 2018

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

 

 

(In thousands)

 

Investment Securities Available-for-Sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

State and municipal obligations

 

$

6,944

 

 

$

3

 

 

$

(14

)

 

$

6,933

 

Single issuer trust preferred security

 

 

1,000

 

 

 

-

 

 

 

(128

)

 

 

872

 

Corporate debt securities

 

 

11,574

 

 

 

-

 

 

 

(398

)

 

 

11,176

 

Mutual fund

 

 

250

 

 

 

-

 

 

 

-

 

 

 

250

 

Total

 

 

19,768

 

 

 

3

 

 

 

(540

)

 

 

19,231

 

Investment Securities Held-to-Maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

2,000

 

 

$

-

 

 

$

(14

)

 

$

1,986

 

State and municipal obligations

 

 

8,124

 

 

 

6

 

 

 

(27

)

 

 

8,103

 

Corporate debt securities

 

 

3,689

 

 

 

-

 

 

 

(48

)

 

 

3,641

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collateralized mortgage obligations (CMO), fixed-rate

 

 

15,510

 

 

 

-

 

 

 

(683

)

 

 

14,827

 

 

 

 

29,323

 

 

 

6

 

 

 

(772

)

 

 

28,557

 

Total investment securities

 

$

49,091

 

 

$

9

 

 

$

(1,312

)

 

$

47,788

 

 

 

 

September 30, 2018

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

 

 

(In thousands)

 

Investment Securities Available-for-Sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury notes

 

$

9,996

 

 

$

-

 

 

$

(10

)

 

$

9,986

 

State and municipal obligations

 

 

6,953

 

 

 

-

 

 

 

(66

)

 

 

6,887

 

Single issuer trust preferred security

 

 

1,000

 

 

 

-

 

 

 

(79

)

 

 

921

 

Corporate debt securities

 

 

6,605

 

 

 

-

 

 

 

(351

)

 

 

6,254

 

Mutual fund

 

 

250

 

 

 

-

 

 

 

-

 

 

 

250

 

Total

 

 

24,804

 

 

 

-

 

 

 

(506

)

 

 

24,298

 

Investment Securities Held-to-Maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

1,999

 

 

$

-

 

 

$

(20

)

 

$

1,979

 

State and municipal obligations

 

 

8,181

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