UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended December 31, 2022
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 000-54835
MALVERN BANCORP, INC.
(Exact Name of Registrant as Specified in Its Charter)
| Pennsylvania | 45-5307782 |
| (State or Other Jurisdiction of Incorporation or Organization) | (IRS Employer Identification No.) |
42 East Lancaster Avenue, Paoli, Pennsylvania 19301
(Address of Principal Executive Offices) (Zip Code)
(610) 644-9400
(Registrant’s Telephone Number, Including Area Code)
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report: N/A
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Common Stock, par value $0.01 per share | MLVF | Nasdaq Stock Market, LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |
| Non-accelerated filer | ☒ | Smaller reporting company | ☒ | |
| Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
| Common Stock, par value $0.01: | 7,636,586 shares |
| (Title of Class) | (Outstanding as of February 10, 2023) |
| Page |
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| Item 1. |
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| Consolidated Statements of Financial Condition at December 31, 2022 and September 30, 2022 |
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| Consolidated Statements of Net Income for the three months ended December 31, 2022 and 2021 |
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| Consolidated Statements of Cash Flows for the three months ended December 31, 2022 and 2021 |
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| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Income |
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| Item 3. |
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| Item 4. |
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| Item 1. |
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| Item 1A. |
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| Item 2. |
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| Item 3. |
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| Item 4. |
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| Item 5. |
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| Item 6. |
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PART I – FINANCIAL INFORMATION
The following (a) consolidated statement of financial condition as of September 30, 2022, which has been derived from audited financial statements, and (b) unaudited consolidated financial statements, have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X, and, accordingly, do not include all of the information and footnotes required by GAAP for complete financial statements. However, in the opinion of management, all adjustments (consisting only of normal and recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended December 31, 2022 are not necessarily indicative of the results that may be expected for the full fiscal year ending September 30, 2023, or for any interim period. The Malvern Bancorp, Inc. Annual Report on Form 10-K for the fiscal year ended September 30, 2022, filed with the Securities and Exchange Commission (the “SEC”) on December 27, 2022 (the “2022 Annual Report”), should be read in conjunction with these financial statements.
MALVERN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
| December 31, | September 30, | |||||||
| 2022 | 2022 | |||||||
| (In thousands, except share data) | ||||||||
| ASSETS | ||||||||
| Cash and due from depository institutions | 1,901 | 4,677 | ||||||
| Interest bearing deposits in depository institutions | 33,106 | 48,590 | ||||||
| Cash and Cash Equivalents | 35,007 | 53,267 | ||||||
| Investment securities available for sale, at fair value | 50,385 | 49,844 | ||||||
| Equity securities, at fair value | 1,376 | 1,374 | ||||||
| Investment securities held to maturity, at amortized cost | 58,147 | 58,767 | ||||||
| Restricted stock, at cost | 7,060 | 7,104 | ||||||
| Loans held-for-sale | 13,232 | 13,780 | ||||||
| Loans receivable, net of allowance for loan losses | 798,862 | 801,854 | ||||||
| Other real estate owned | 259 | 259 | ||||||
| Accrued interest receivable | 4,675 | 4,252 | ||||||
| Property and equipment, net | 5,134 | 5,231 | ||||||
| Deferred income taxes | 3,649 | 3,722 | ||||||
| Bank-owned life insurance | 26,407 | 26,233 | ||||||
| Other assets | 13,599 | 18,673 | ||||||
| Total Assets | $ | 1,017,792 | $ | 1,044,360 | ||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Liabilities | ||||||||
| Deposits: | ||||||||
| Non-interest-bearing | 51,066 | 58,014 | ||||||
| Interest-bearing | 686,356 | 727,309 | ||||||
| Total Deposits | 737,422 | 785,323 | ||||||
| FHLB advances | 80,000 | 80,000 | ||||||
| Other borrowings | 18,000 | — | ||||||
| Subordinated debt | 25,000 | 25,000 | ||||||
| Advances from borrowers for taxes and insurance | 1,510 | 1,002 | ||||||
| Accrued interest payable | 1,068 | 543 | ||||||
| Other liabilities | 6,057 | 6,047 | ||||||
| Total Liabilities | 869,057 | 897,915 | ||||||
| Shareholders’ Equity | ||||||||
| Preferred stock, $ par value, shares authorized, issued | — | — | ||||||
| Common stock, $ par value, shares authorized; and shares issued and outstanding, respectively, at December 31, 2022 and and shares issued and outstanding, respectively, at September 30, 2022 | 76 | 76 | ||||||
| Additional paid-in-capital | 85,988 | 85,917 | ||||||
| Retained earnings | 69,155 | 67,247 | ||||||
| Unearned Employee Stock Ownership Plan (ESOP) shares | (718 | ) | (756 | ) | ||||
| Accumulated other comprehensive loss | (2,903 | ) | (3,176 | ) | ||||
| Treasury stock, at cost: shares at December 31, 2022 and September 30, 2022 | (2,863 | ) | (2,863 | ) | ||||
| Total Shareholders’ Equity | 148,735 | 146,445 | ||||||
| Total Liabilities and Shareholders’ Equity | $ | 1,017,792 | $ | 1,044,360 | ||||
See accompanying notes to unaudited consolidated financial statements.
MALVERN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF NET INCOME
(Unaudited)
| Three Months Ended December 31, |
||||||||
| 2022 |
2021 |
|||||||
| (In thousands, except share data) | ||||||||
| Interest and Dividend Income |
||||||||
| Loans, including fees |
$ | 9,150 | $ | 8,228 | ||||
| Investment securities, taxable |
669 | 455 | ||||||
| Investment securities, tax-exempt |
151 | 36 | ||||||
| Dividends, restricted stock |
113 | 91 | ||||||
| Interest-bearing deposits |
267 | 13 | ||||||
| Total Interest and Dividend Income |
10,350 | 8,823 | ||||||
| Interest Expense |
||||||||
| Deposits |
1,830 | 1,045 | ||||||
| Short-term borrowings |
9 | — | ||||||
| Long-term borrowings |
327 | 237 | ||||||
| Subordinated debt |
430 | 383 | ||||||
| Total Interest Expense |
2,596 | 1,665 | ||||||
| Net Interest Income |
7,754 | 7,158 | ||||||
| Provision for Loan Losses |
— | — | ||||||
| Net Interest Income after Provision for Loan losses |
7,754 | 7,158 | ||||||
| Other Income |
||||||||
| Service charges and other fees |
177 | 454 | ||||||
| Rental income |
49 | 52 | ||||||
| Net gains on sale of loans |
8 | 52 | ||||||
| Earnings on bank-owned life insurance |
173 | 169 | ||||||
| Other real estate owned income, net |
78 | — | ||||||
| Total Other Income |
485 | 727 | ||||||
| Other Expenses |
||||||||
| Salaries and employee benefits |
2,582 | 2,295 | ||||||
| Occupancy expense |
537 | 515 | ||||||
| Federal deposit insurance premium |
64 | 76 | ||||||
| Advertising |
32 | 32 | ||||||
| Data processing |
275 | 320 | ||||||
| Professional fees |
763 | 1,055 | ||||||
| Merger related expenses |
511 | — | ||||||
| Pennsylvania shares tax |
127 | 170 | ||||||
| Other operating expenses |
871 | 765 | ||||||
| Total Other Expenses |
5,762 | 5,228 | ||||||
| Income before income tax expense |
2,477 | 2,657 | ||||||
| Income tax expense |
569 | 640 | ||||||
| Net Income |
$ | 1,908 | $ | 2,017 | ||||
| Earnings Per Common Share: |
||||||||
| Basic |
$ | 0.25 | $ | 0.27 | ||||
| Diluted |
$ | 0.25 | $ | 0.27 | ||||
| Weighted Average Common Shares Outstanding: |
||||||||
| Basic |
7,578,873 | 7,551,606 | ||||||
| Diluted |
7,580,788 | 7,553,208 | ||||||
See accompanying notes to unaudited consolidated financial statements.
MALVERN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
| Three Months Ended December 31, |
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| 2022 |
2021 |
|||||||
| (In thousands) |
||||||||
| Net Income |
$ | 1,908 | $ | 2,017 | ||||
| Other Comprehensive Income, Net of Tax: |
||||||||
| Unrealized holding gains (losses) on available-for-sale securities |
594 | (149 | ) | |||||
| Tax effect |
(125 | ) | 31 | |||||
| Net of tax amount |
469 | (118 | ) | |||||
| Amortization of unrealized holding losses on securities transferred from available-for-sale to held-to-maturity (1) |
1 | 2 | ||||||
| Tax effect |
— | (1 | ) | |||||
| Net of tax amount |
1 | 1 | ||||||
| Fair value adjustments on derivatives |
(247 | ) | 479 | |||||
| Tax effect |
50 | (101 | ) | |||||
| Net of tax amount |
(197 | ) | 378 | |||||
| Total other comprehensive income |
273 | 261 | ||||||
| Total comprehensive income |
$ | 2,181 | $ | 2,278 | ||||
| (1) |
Amounts are included in interest and dividends on investment securities on the consolidated Statement of Net Income. |
See accompanying notes to unaudited consolidated financial statements.
MALVERN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
| Three Months Ended December 31, 2022 and 2021 | ||||||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||||||
| Additional | Unearned | Other | Total | |||||||||||||||||||||||||
| Common | Paid-In | Retained | ESOP | Comprehensive | Treasury | Shareholders' | ||||||||||||||||||||||
| Stock | Capital | Earnings | Shares | Income (Loss) | Stock | Equity | ||||||||||||||||||||||
| (In thousands, except share data) | ||||||||||||||||||||||||||||
| Balance, October 1, 2021 | $ | 76 | $ | 85,524 | $ | 60,296 | $ | (901 | ) | $ | 36 | $ | (2,863 | ) | $ | 142,168 | ||||||||||||
| Net income | — | — | 2,017 | — | — | — | 2,017 | |||||||||||||||||||||
| Other comprehensive income | — | — | — | — | 261 | — | 261 | |||||||||||||||||||||
| Committed to be released ESOP shares ( shares) | — | 23 | — | 36 | — | — | 59 | |||||||||||||||||||||
| Stock based compensation | — | 52 | — | — | — | — | 52 | |||||||||||||||||||||
| Balance, December 31, 2021 | $ | 76 | $ | 85,599 | $ | 62,313 | $ | (865 | ) | $ | 297 | $ | (2,863 | ) | $ | 144,557 | ||||||||||||
| Balance, October 1, 2022 | $ | 76 | $ | 85,917 | $ | 67,247 | $ | (756 | ) | $ | (3,176 | ) | $ | (2,863 | ) | $ | 146,445 | |||||||||||
| Net income | — | — | 1,908 | — | — | — | 1,908 | |||||||||||||||||||||
| Other comprehensive income | — | — | — | — | 273 | — | 273 | |||||||||||||||||||||
| Committed to be released ESOP shares ( shares) | — | 18 | — | 38 | — | — | 56 | |||||||||||||||||||||
| Stock based compensation | — | 53 | — | — | — | — | 53 | |||||||||||||||||||||
| Balance, December 31, 2022 | $ | 76 | $ | 85,988 | $ | 69,155 | $ | (718 | ) | $ | (2,903 | ) | $ | (2,863 | ) | $ | 148,735 | |||||||||||
See accompanying notes to unaudited consolidated financial statements.
MALVERN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Three Months Ended December 31, |
||||||||
| 2022 |
2021 |
|||||||
| (In thousands) |
||||||||
| Cash Flows from Operating Activities |
||||||||
| Net income |
$ | 1,908 | $ | 2,017 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
| Depreciation expense |
144 | 159 | ||||||
| Deferred income tax expense |
— | 69 | ||||||
| ESOP expense |
56 | 59 | ||||||
| Stock based compensation |
53 | 52 | ||||||
| Amortization of premiums and discounts on investments securities, net |
120 | 66 | ||||||
| Amortization of loan origination fees and costs |
(41 | ) | (23 | ) | ||||
| (Accretion) amortization of mortgage servicing rights |
4 | (3 | ) | |||||
| Net gain on sale of secondary market loans |
(8 | ) | (52 | ) | ||||
| Proceeds from sale of secondary market loans |
932 | 2,285 | ||||||
| Originations of secondary market loans |
(924 | ) | (2,233 | ) | ||||
| Earnings on bank-owned life insurance |
(173 | ) | (169 | ) | ||||
| (Increase) decrease in accrued interest receivable |
(423 | ) | 118 | |||||
| Increase in accrued interest payable |
525 | 207 | ||||||
| Operating lease liability payments |
128 | (149 | ) | |||||
| Decrease (increase) in other liabilities |
11 | (3,670 | ) | |||||
| Decrease in other assets |
4,692 | 261 | ||||||
| Amortization of subordinated debt issuance costs |
— | 40 | ||||||
| Net cash provided by (used in) operating activities |
7,004 | (966 | ) | |||||
| Cash Flows from Investing Activities |
||||||||
| Investment securities available-for-sale: |
||||||||
| Purchases |
— | (2,000 | ) | |||||
| Maturities, calls and principal repayments |
29 | 945 | ||||||
| Investment securities held-to-maturity: |
||||||||
| Purchases |
— | (13,711 | ) | |||||
| Maturities, calls and principal repayments |
523 | 3,109 | ||||||
| Net decrease in loans held for investment |
3,581 | 64,383 | ||||||
| Net decrease in restricted stock |
44 | 1,482 | ||||||
| Purchase of property and equipment |
(48 | ) | (18 | ) | ||||
| Net cash provided by investing activities |
4,129 | 54,190 | ||||||
| Cash Flows from Financing Activities |
||||||||
| Net decrease in deposits |
(47,901 | ) | (25,471 | ) | ||||
| Proceeds for long-term borrowings |
60,000 | — | ||||||
| Repayment of long-term borrowings |
(60,000 | ) | (30,000 | ) | ||||
| Proceeds from other borrowings |
18,000 | — | ||||||
| Increase in advances from borrowers for taxes and insurance |
508 | 561 | ||||||
| Net cash used in financing activities |
(29,393 | ) | (54,910 | ) | ||||
| Net Decrease in Cash and Cash Equivalents |
(18,260 | ) | (1,686 | ) | ||||
| Cash and Cash Equivalents - Beginning |
53,267 | 136,590 | ||||||
| Cash and Cash Equivalents - Ending |
$ | 35,007 | $ | 134,902 | ||||
| Supplemental Cash Flows Information |
||||||||
| Interest paid |
$ | 2,071 | $ | 1,458 | ||||
| Income taxes paid |
$ | — | $ | — | ||||
See accompanying notes to unaudited consolidated financial statements.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – The Company
Malvern Bancorp, Inc. (the “Company” or “Malvern Bancorp”), a Pennsylvania corporation, is a bank holding company registered under the Bank Holding Company Act of 1956, as amended (the “Holding Company Act”). Malvern Bancorp is the holding company for Malvern Bank, National Association (“Malvern Bank” or the “Bank”), a national bank that was originally organized in 1887 as a federally-chartered savings bank.
The Company’s primary business is the ownership and operation of the Bank. The Bank’s principal business consists of attracting deposits from businesses and the general public and investing those deposits, together with borrowings and funds generated from operations, in commercial and multi-family real estate loans, one-to-four family residential real estate loans, construction and development loans, commercial business loans, home equity loans, lines of credit, and other consumer loans. The Company also invests in and maintains a portfolio of investment securities, primarily comprised of corporate bonds, mortgage-backed securities, U.S. agency and municipal obligations. Malvern Bank is one of the oldest banks headquartered on the Philadelphia Main Line. For more than a century, the Bank has been committed to helping people build prosperous communities as a trusted financial partner, forging lasting relationships through teamwork, respect, and integrity. The Bank’s primary market niche is providing personalized service to its client base.
The Bank conducts business from its headquarters in Paoli, Pennsylvania, a suburb of Philadelphia, and through its nine other banking locations in Chester and Delaware counties, Pennsylvania, Morristown, New Jersey, its New Jersey regional headquarters, and Palm Beach, Florida. The Bank also maintains a representative office in Allentown, Pennsylvania.
In preparing the unaudited consolidated financial statements, management has made estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the unaudited consolidated statements of condition and that affect the results of operations for the periods presented. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to change in the near term relate to the determination of the allowance for loan losses, other real estate owned, the evaluation of deferred tax assets, the other-than-temporary impairment evaluation of securities, and the valuation of derivative positions. The unaudited consolidated financial statements have been prepared in conformity with GAAP.
As used in this Quarterly Report on Form 10-Q, the terms “Malvern”, “the Company”, “registrant”, “we”, “us”, and “our” mean Malvern Bancorp, Inc. and its subsidiaries, on a consolidated basis, unless the context indicates otherwise.
Note 2 – Summary of Significant Accounting Policies
Basis of financial statement presentation. The unaudited condensed consolidated financial statements of the Company include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements present the Company’s financial condition at December 31, 2022 and the results of operations for the three months ended December 31, 2022 and 2021, and cash flows for the three months ended December 31, 2022 and 2021. The consolidated statement of financial condition as of September 30, 2022 was derived from the audited consolidated statement of financial condition as of that date.
In management’s opinion, the unaudited condensed consolidated financial statements contain all adjustments, which include normal and recurring adjustments, necessary for a fair presentation of the financial position and results of operations as of the dates and for the interim periods presented. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and note disclosures included in the 2022 Annual Report filed with the SEC. The consolidated statements of net income for the three months ended December 31, 2022 and the consolidated statements of cash flows for the three months ended December 31, 2022 are not necessarily indicative of the results of operations or cash flows for the full fiscal year ending September 30, 2023 or any interim period. Subsequent events have been evaluated through the date of the issuance of the unaudited consolidated financial statements. No significant subsequent events have occurred through this date requiring adjustment to the financial statements or disclosures.
Recent Accounting Pronouncements Yet to Be Adopted
Credit Losses. In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied currently will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. Additionally, this ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. As amended, ASU is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company is currently evaluating the effects that the adoption of this amendment will have on its consolidated financial statements. Although no financial impacts have been determined the Company expects this ASU to have a significant impact on the methodology for calculating the ALLL.
In March 2022, the FASB issued ASU 2022-02, Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. These amendments eliminate the TDR recognition and measurement guidance and, instead, require that an entity evaluate (consistent with the accounting for other loan modifications) whether the modification represents a new loan or a continuation of an existing loan. The amendments also enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. For public business entities, these amendments require that an entity disclose current-period gross writeoffs by year of origination for financing receivables and net investment in leases within the scope of Subtopic 326-20. This ASU is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company is currently evaluating the effects that the adoption of this amendment will have on its consolidated financial statements.
Derivatives and Hedging. In March 2022, FASB ASU No. 2022-01, Derivatives and Hedging (Topic 815): Fair Value Hedging—Portfolio Layer Method. This update will allow non-prepayable financial assets to be included in a closed portfolio hedge using the portfolio method, rather than only prepayable assets. It also allows entities to hedge multiple layers rather than just a single layer of closed portfolio of financial assets or one or more beneficial interests secured by a portfolio of financial instruments. The guidance is effective for public business entities for fiscal years and interim periods within those fiscal years, beginning after December 15, 2022. The Company is currently evaluating the effects, if any, that the adoption of this amendment will have on its consolidated financial statements.
Note 3 - Business Combinations
Pending Business Combination – First Bank
On December 13, 2022, Malvern Bancorp, Malvern Bank and First Bank (“First Bank”) entered into an Agreement and Plan of Merger (the "Merger Agreement"), pursuant to which and subject to the terms and conditions of the Merger Agreement, Malvern Bancorp will merge with and into First Bank immediately followed by the merger of Malvern Bank with and into First Bank, with First Bank continuing as the surviving corporation in each case (collectively, the “Merger”). The Merger Agreement was unanimously approved by the board of directors of each of First Bank, Malvern Bancorp and Malvern Bank.
At the effective time of the Merger each share of common stock of Malvern Bancorp will be converted into the right to receive $7.80 in cash and 0.7733 shares of common stock, par value $5.00 per share, of First Bank, subject to adjustment in accordance with the terms of the Merger Agreement if Malvern’s adjusted shareholders’ equity as of the tenth day prior to the closing of the Merger does not equal or exceed $140,000,000.
The Merger is anticipated to be completed in the second quarter of 2023, subject to shareholder and regulatory approval and other customary closing conditions.
The Corporation recorded $511,000 of merger-related expenses for the three months ended December 31, 2022, related to the pending merger with First Bank. These expenses primarily consisted of legal and professional fees.
Note 4 – Earnings Per Share
Basic earnings per common share is computed based on the weighted average number of shares outstanding reduced by unearned Employee Stock Ownership Plan (“ESOP”) shares. Diluted earnings per share is computed based on the weighted average number of shares outstanding and common stock equivalents that would arise from the exercise of dilutive securities, reduced by unearned ESOP shares. During the three months ended December 31, 2022 and 2021, the Company granted 2,758 and zero restricted shares, respectively. During the three months ended December 31, 2022 and 2021 no stock options were granted. During the three months ended December 31, 2022 and 2021 zero and 1,216 restricted shares were forfeited, respectively.
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, | ||||||||
| 2022 | 2021 | |||||||
| (In thousands, except share and per share data) | ||||||||
| Net Income | $ | 1,908 | $ | 2,017 | ||||
| Weighted average shares outstanding | 7,634,218 | 7,621,351 | ||||||
| Average unearned ESOP shares | (55,345 | ) | (69,745 | ) | ||||
| Basic weighted average shares outstanding | 7,578,873 | 7,551,606 | ||||||
| Plus: effect of potential dilutive common stock | 1,915 | 1,602 | ||||||
| equivalents - stock options | ||||||||
| Diluted weighted average common shares outstanding | 7,580,788 | 7,553,208 | ||||||
| Earnings per common share: | ||||||||
| Basic | $ | 0.25 | $ | 0.27 | ||||
| Diluted | $ | 0.25 | $ | 0.27 | ||||
Note 5 – Employee Stock Ownership Plan
The Company maintains an ESOP for substantially all of its full-time employees. The current ESOP trustee is Pentegra. Shares of the Company’s common stock purchased by the ESOP are held until released for allocation to participants. Shares released are allocated to each eligible participant based on the ratio of each such participant’s base compensation to the total base compensation of all eligible plan participants. As the unearned shares are committed to be released and allocated among participants, the Company recognizes compensation expense equal to the fair value of the ESOP shares during the periods in which they become committed to be released. To the extent that the fair value of the ESOP shares released differs from the cost of such shares, the difference is charged or credited to additional paid-in capital. During the period from May 20, 2008 to September 30, 2008, the ESOP purchased 241,178 shares of Company common stock for approximately $2.6 million, at an average price of $10.86 per share, which was funded by a loan from Malvern Federal Bancorp, Inc. (the Company’s predecessor). The ESOP loan, which bears an interest rate of 5%, is being repaid in quarterly installments through 2026 principally from the Bank’s contributions to the ESOP. Shares are released to participants proportionately as the ESOP loan is repaid. During the three months ended December 31, 2022 and 2021, there were 3,600 shares committed to be released. At December 31, 2022, there were 53,565 unallocated shares and 205,653 allocated shares held by the ESOP. The unallocated shares had an aggregate fair value of approximately $951,000 at December 31, 2022.
Note 6 - Investment Securities
The Company’s investment in debt securities are classified as available-for-sale or held-to-maturity at December 31, 2022 and at September 30, 2022. Investment securities available-for-sale are reported at fair value with unrealized gains or losses included in shareholder’s equity, net of tax. Accordingly, the carrying value of such securities reflects their fair value at the balance sheet date. Fair value is based upon either quoted market prices, or in certain cases where there is limited activity in the market for a particular instrument, assumptions are made to determine their fair value. Held-to-maturity securities, which are carried at amortized cost, are investments where there is positive intent and ability to hold to maturity. Equity securities are stated at fair value with any changes in fair value reported in other income.
Transfers of debt securities from the available-for-sale category to the held-to-maturity category are made at fair value at the date of transfer. The unrealized holding gain or loss at the date of transfer remains in accumulated other comprehensive income and in the carrying value of the held-to-maturity investment security. Premiums or discounts on investment securities are amortized or accreted using the effective interest method over the life of the security as an adjustment of yield. Unrealized holding gains or losses that remain in accumulated other comprehensive income are amortized or accreted over the remaining life of the security as an adjustment of yield, offsetting the related amortization of the premium or accretion of the discount.
The following tables present information related to the Company’s investment securities at December 31, 2022 and September 30, 2022:
| December 31, 2022 | ||||||||||||||||
| Gross | Gross | |||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | |||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
| (In thousands) | ||||||||||||||||
| Investment Securities Available-for-Sale: | ||||||||||||||||
| U.S. government agencies | $ | 5,000 | $ | — | $ | (1,484 | ) | $ | 3,516 | |||||||
| State and municipal obligations | 11,988 | — | (1,953 | ) | 10,035 | |||||||||||
| Single issuer trust preferred security | 1,000 | — | (67 | ) | 933 | |||||||||||
| Corporate debt securities | 35,990 | 1 | (3,609 | ) | 32,382 | |||||||||||
| Mortgage Backed Security ("MBS") | 2,373 | — | (300 | ) | 2,073 | |||||||||||
| U.S. Treasury Note | 1,490 | — | (44 | ) | 1,446 | |||||||||||
| Total | 57,841 | 1 | (7,457 | ) | 50,385 | |||||||||||
| Investment Securities Held-to-Maturity: | ||||||||||||||||
| U.S. government agencies | 29,190 | — | (5,121 | ) | 24,069 | |||||||||||
| State and municipal obligations | 17,697 | — | (1,739 | ) | 15,958 | |||||||||||
| Corporate debt securities | 3,232 | — | (93 | ) | 3,139 | |||||||||||
| Mortgage-backed securities: | ||||||||||||||||
| MBS | 2,247 | — | (481 | ) | 1,766 | |||||||||||
| Collateralized mortgage obligations (“CMO”), fixed-rate | 5,781 | — | (514 | ) | 5,267 | |||||||||||
| Total | 58,147 | — | (7,948 | ) | 50,199 | |||||||||||
| Equity Securities: | ||||||||||||||||
| Mutual Funds | 1,500 | — | (124 | ) | 1,376 | |||||||||||
| Total | 1,500 | — | (124 | ) | 1,376 | |||||||||||
| Total investment securities | $ | 117,488 | $ | 1 | $ | (15,529 | ) | $ | 101,960 | |||||||
There were no sales, called or matured available-for-sale investment securities for the three months ended December 31, 2022. One held-to-maturity investment security matured during the three month period ended December 31, 2022. For the three months ended December 31, 2021, $945,000 and $2.5 million of available-for-sale and held-to-maturity investment securities, respectively, were called. No purchases were made for during the three months ended December 31, 2022. For the same period ended December 31, 2021, $2.0 million of available-for sale and $13.7 million of held-for-sale investment securities were purchased.
The varying amount of sales from the available-for-sale portfolio over the past few years reflect the significant volatility present in the market. Given the historic low interest rates prevalent in the market, it is necessary for the Company to protect itself from interest rate exposure. Securities that once appeared to be sound investments can, after changes in the market, become securities that the Company has the flexibility to sell to avoid losses and mismatches of interest-earning assets and interest-bearing liabilities at a later time.
The following tables indicate gross unrealized losses not recognized in income and fair value, aggregated by investment category, and the length of time individual securities have been in a continuous unrealized loss position at December 31, 2022 and September 30, 2022:
| December 31, 2022 | ||||||||||||||||||||||||
| Less than 12 Months | 12 Months or more | Total | ||||||||||||||||||||||
| Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
| Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
| Investment Securities Available for Sale: | ||||||||||||||||||||||||
| U.S. government agencies | $ | — | $ | — | $ | 3,516 | $ | (1,484 | ) | $ | 3,516 | $ | (1,484 | ) | ||||||||||
| State and municipal obligations | 5,827 | (425 | ) | 4,208 | (1,528 | ) | 10,035 | (1,953 | ) | |||||||||||||||
| Single issuer trust preferred security | — | — | 933 | (67 | ) | 933 | (67 | ) | ||||||||||||||||
| Corporate debt securities | 6,252 | (748 | ) | 25,139 | (2,861 | ) | 31,391 | (3,609 | ) | |||||||||||||||
| MBS | 2,073 | (300 | ) | — | — | 2,073 | (300 | ) | ||||||||||||||||
| U.S. Treasury Note | 1,446 | (44 | ) | — | — | 1,446 | (44 | ) | ||||||||||||||||
| Total | $ | 15,598 | $ | (1,517 | ) | $ | 33,796 | $ | (5,940 | ) | $ | 49,394 | $ | (7,457 | ) | |||||||||
| Investment Securities Held-to-Maturity: | ||||||||||||||||||||||||
| U.S. government agencies | $ | 10,940 | $ | (750 | ) | $ | 13,129 | $ | (4,371 | ) | $ | 24,069 | $ | (5,121 | ) | |||||||||
| State and municipal obligations | 9,449 | (403 | ) | 6,509 | (1,336 | ) | 15,958 | (1,739 | ) | |||||||||||||||
| Corporate securities | 3,139 | (93 | ) | — | — | 3,139 | (93 | ) | ||||||||||||||||
| Mortgage-backed securities: | ||||||||||||||||||||||||
| MBS | — | — | 1,766 | (481 | ) | 1,766 | (481 | ) | ||||||||||||||||
| CMO | 2,393 | (130 | ) | 2,873 | (384 | ) | 5,266 | (514 | ) | |||||||||||||||
| Total | $ | 25,921 | $ | (1,376 | ) | $ | 24,277 | $ | (6,572 | ) | $ | 50,198 | $ | (7,948 | ) | |||||||||
| Equity Securities | ||||||||||||||||||||||||
| Mutual funds | 1,376 | (124 | ) | — | — | 1,376 | (124 | ) | ||||||||||||||||
| Total Mutual funds | 1,376 | (124 | ) | — | — | 1,376 | (124 | ) | ||||||||||||||||
| Total investment securities | $ | 42,895 | $ | (3,017 | ) | $ | 58,073 | $ | (12,512 | ) | $ | 100,968 | $ | (15,529 | ) | |||||||||
| September 30, 2022 | ||||||||||||||||||||||||
| Less than 12 Months | 12 Months or more | Total | ||||||||||||||||||||||
| Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
| Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
| Investment Securities Available for Sale: | ||||||||||||||||||||||||
| U.S. government agencies | $ | — | $ | — | $ | 3,580 | $ | (1,420 | ) | $ | 3,580 | $ | (1,420 | ) | ||||||||||
| State and municipal obligations | 9,660 | (2,354 | ) | — | — | 9,660 | (2,354 | ) | ||||||||||||||||
| Single issuer trust preferred security | — | — | 946 | (54 | ) | 946 | (54 | ) | ||||||||||||||||
| Corporate debt securities | 26,717 | (3,273 | ) | 5,411 | (589 | ) | 32,128 | (3,862 | ) | |||||||||||||||
| MBS | 2,087 | (316 | ) | — | — | 2,087 | (316 | ) | ||||||||||||||||
| U.S. Treasury Note | 1,443 | (45 | ) | — | — | 1,443 | (45 | ) | ||||||||||||||||
| Total investment securities | $ | 39,907 | $ | (5,988 | ) | $ | 9,937 | $ | (2,063 | ) | $ | 49,844 | $ | (8,051 | ) | |||||||||
| Investment Securities Held-to-Maturity: | ||||||||||||||||||||||||
| U.S. government agencies | $ | 18,662 | $ | (3,028 | ) | $ | 5,621 | $ | (1,879 | ) | $ | 24,283 | $ | (4,907 | ) | |||||||||
| State and municipal obligations | 15,491 | (2,526 | ) | — | — | 15,491 | (2,526 | ) | ||||||||||||||||
| Corporate securities | 3,167 | (96 | ) | — | — | 3,167 | (96 | ) | ||||||||||||||||
| Mortgage-backed securities: | ||||||||||||||||||||||||
| MBS | — | — | 1,789 | (489 | ) | 1,789 | (489 | ) | ||||||||||||||||
| CMO | 5,536 | (483 | ) | — | — | 5,536 | (483 | ) | ||||||||||||||||
| Total | $ | 42,856 | $ | (6,133 | ) | $ | 7,410 | $ | (2,368 | ) | $ | 50,266 | $ | (8,501 | ) | |||||||||
| Equity Securities | ||||||||||||||||||||||||
| Mutual funds | 1,500 | (126 | ) | — | — | 1,374 | (126 | ) | ||||||||||||||||
| Total Mutual funds | 1,500 | (126 | ) | — | — | 1,374 | (126 | ) | ||||||||||||||||
| Total investment securities | $ | 84,263 | $ | (12,247 | ) | $ | 17,347 | $ | (4,431 | ) | $ | 101,484 | $ | (16,678 | ) | |||||||||
As of December 31, 2022, the estimated fair value of the securities disclosed above was primarily dependent upon the movement in market interest rates, particularly given the inherent credit risk associated with these securities. These investment securities are comprised of securities that are rated investment grade by at least one bond credit rating service. Although the fair value will fluctuate as the market interest rates move, management believes that these fair values will recover as the underlying portfolios mature and are reinvested in market rate yielding investments. As of December 31, 2022, the Company held 13 corporate debt securities, municipal bonds, U.S. government agency, U.S. Treasury note, mortgage-backed security, 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 believe any individual unrealized loss as of December 31, 2022 represents an other-than-temporary impairment. The decrease in market value is primarily due to an increase in overall in interest rates, primarily the recent FED interest rate hikes.
Investment securities having a carrying value of $11.7 million and $11.9 million at December 31, 2022 and September 30, 2022, respectively, were pledged to secure public funds deposits and prospective FRB discount window borrowings. No investment securities were pledged to secure hedges at December 31, 2022 or September 30, 2022. No investment securities were pledged to secure short-term borrowings at December 31, 2022 and September 30, 2022.
The following table presents information for investment securities at December 31, 2022, based on scheduled maturities. Actual maturities can be expected to differ from scheduled maturities due to prepayment or early call options of the issuer.
| December 31, 2022 | ||||||||
| Amortized Cost | Fair Value | |||||||
| (In thousands) | ||||||||
| Available-for-Sale: | ||||||||
| Over 1 year through 5 years | $ | 6,215 | $ | 5,980 | ||||
| After 5 years through 10 years | 32,807 | 29,592 | ||||||
| Over 10 years | 16,446 | 12,740 | ||||||
| Mortgage-backed securities: | ||||||||
| MBS | 2,373 | 2,073 | ||||||
| Total Available-for-sale securities | 57,841 | 50,385 | ||||||
| Held-to-Maturity: | ||||||||
| Within 1 year | 5,050 | 5,014 | ||||||
| Over 1 year through 5 years | 10,524 | 10,244 | ||||||
| After 5 years through 10 years | 3,114 | 2,613 | ||||||
| Over 10 years | 31,431 | 25,295 | ||||||
| Mortgage-backed securities: | ||||||||
| MBS | 2,247 | 1,766 | ||||||
| CMO | 5,781 | 5,267 | ||||||
| Total Held-to-maturity securities | 58,147 | 50,199 | ||||||
| Equity Securities: | ||||||||
| Within 1 year | 1,000 | 876 | ||||||
| After 5 years through ten years | 500 | 500 | ||||||
| Total Equity securities | 1,500 | 1,376 | ||||||
| Total investment securities | $ | 117,488 | $ | 101,960 | ||||
Note 7 – Loans Receivable and Related Allowance for Loan Losses
Loans receivable in the Company’s portfolio consisted of the following at the dates indicated below:
| December 31, 2022 | September 30, 2022 | |||||||
| (In thousands) | ||||||||
| Residential mortgage | $ | 176,207 | $ | 175,957 | ||||
| Construction and Development: | ||||||||
| Residential and commercial | 22,871 | 24,362 | ||||||
| Land | 545 | 550 | ||||||
| Total Construction and Development | 23,416 | 24,912 | ||||||
| Commercial: | ||||||||
| Commercial real estate | 408,671 | 406,914 | ||||||
| Farmland | 11,435 | 11,506 | ||||||
| Multi-family | 50,004 | 55,295 | ||||||
| Commercial and industrial | 105,345 | 102,703 | ||||||
| Other | 13,192 | 13,356 | ||||||
| Total Commercial | 588,647 | 589,774 | ||||||
| Consumer: | ||||||||
| Home equity lines of credit | 12,849 | 13,233 | ||||||
| Second mortgages | 4,024 | 4,395 | ||||||
| Other | 2,252 | 2,136 | ||||||
| Total Consumer | 19,125 | 19,764 | ||||||
| Total loans | 807,395 | 810,407 | ||||||
| Deferred loan costs, net | 566 | 537 | ||||||
| Allowance for loan losses | (9,099 | ) | (9,090 | ) | ||||
| Total loans receivable, net | $ | 798,862 | $ | 801,854 | ||||
The following tables summarize the primary classes of the allowance for loan losses (“ALLL”), segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment, as of December 31, 2022 and September 30, 2022. Activity in the ALLL is presented for the three months ended December 31, 2022 and 2021 and the fiscal year ended September 30, 2022:
| Construction and | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Development | Commercial | Consumer | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Residential | Residential and | Commercial | Multi- | Commercial and | Home Equity Lines of | Second | ||||||||||||||||||||||||||||||||||||||||||||||
| Mortgage | Commercial | Land | Real Estate | Farmland | Family | Industrial | Other | Credit | Mortgages | Other | Unallocated | Total | ||||||||||||||||||||||||||||||||||||||||
| Allowance for loan losses: | (In thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Three Months Ended December 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Beginning balance | $ | 708 | $ | 131 | $ | 3 | $ | 6,040 | $ | 57 | $ | 298 | $ | 1,158 | $ | 55 | $ | 67 | $ | 21 | $ | 15 | $ | 537 | $ | 9,090 | ||||||||||||||||||||||||||
| Charge-offs | — | — | — | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Recoveries | 5 | — | — | — | — | — | 1 | — | 1 | 2 | — | — | 9 | |||||||||||||||||||||||||||||||||||||||
| Provisions | 82 | (10 | ) | — | (64 | ) | — | (28 | ) | (162 | ) | (1 | ) | (3 | ) | (6 | ) | — | 192 | — | ||||||||||||||||||||||||||||||||
| Ending balance | $ | 795 | $ | 123 | $ | 3 | $ | 5,976 | $ | 57 | $ | 270 | $ | 996 | $ | 54 | $ | 65 | $ | 17 | $ | 15 | $ | 729 | $ | 9,099 | ||||||||||||||||||||||||||
| Ending balance: individually evaluated for impairment | 54 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | 54 | ||||||||||||||||||||||||||||
| Ending balance: collectively evaluated for impairment | 741 | 123 | 3 | 5,976 | 57 | 270 | 996 | 54 | 65 | 17 | 15 | 729 | 9,045 | |||||||||||||||||||||||||||||||||||||||
| Loans receivable: | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Ending balance | $ | 176,207 | $ | 22,871 | $ | 545 | $ | 408,671 | $ | 11,435 | $ | 50,004 | $ | 105,345 | $ | 13,192 | $ | 12,849 | $ | 4,024 | $ | 2,252 | $ | 807,395 | ||||||||||||||||||||||||||||
| Ending balance: individually evaluated for impairment | $ | 471 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 471 | ||||||||||||||||||||||||||||
| Ending balance: collectively evaluated for impairment | $ | 175,736 | $ | 22,871 | $ | 545 | $ | 408,671 | $ | 11,435 | $ | 50,004 | $ | 105,345 | $ | 13,192 | $ | 12,849 | $ | 4,024 | $ | 2,252 | $ | 806,924 | ||||||||||||||||||||||||||||
| Construction and | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Development | Commercial | Consumer | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Residential | Residential and | Commercial | Multi- | Commercial and | Home Equity Lines of | Second | ||||||||||||||||||||||||||||||||||||||||||||||
| Mortgage | Commercial | Land | Real Estate | Farmland | Family | Industrial | Other | Credit | Mortgages | Other | Unallocated | Total | ||||||||||||||||||||||||||||||||||||||||
| Allowance for loan losses: | (In thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Three Months Ended December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Beginning balance | $ | 934 | $ | 428 | $ | 15 | $ | 7,043 | $ | 56 | $ | 450 | $ | 2,221 | $ | 54 | $ | 76 | $ | 87 | $ | 20 | $ | 88 | $ | 11,472 | ||||||||||||||||||||||||||
| Charge-offs | — | — | — | — | — | — | (1,430 | ) | — | — | (85 | ) | — | — | (1,515 | ) | ||||||||||||||||||||||||||||||||||||
| Recoveries | 1 | — | — | 75 | — | — | — | — | — | 4 | — | — | 80 | |||||||||||||||||||||||||||||||||||||||
| Provisions | — | — | — | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Ending balance | $ | 935 | $ | 428 | $ | 15 | $ | 7,118 | $ | 56 | $ | 450 | $ | 791 | $ | 54 | $ | 76 | $ | 6 | $ | 20 | $ | 88 | $ | 10,037 | ||||||||||||||||||||||||||
| Ending balance: individually evaluated for impairment | 35 | $ | — | $ | — | $ | — | $ | 12 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 47 | |||||||||||||||||||||||||||
| Ending balance: collectively evaluated for impairment | $ | 900 | $ | 428 | $ | 15 | $ | 7,118 | $ | 44 | $ | 450 | $ | 791 | $ | 54 | $ | 76 | $ | 6 | $ | 20 | $ | 88 | $ | 9,990 | ||||||||||||||||||||||||||
| Loans receivable: | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Ending balance | $ | 187,516 | $ | 56,876 | $ | 2,138 | $ | 416,248 | $ | 15,582 | $ | 54,448 | $ | 106,493 | $ | 7,433 | $ | 13,174 | $ | 5,384 | $ | 2,282 | $ | 867,574 | ||||||||||||||||||||||||||||
| Ending balance: individually evaluated for impairment | $ | 482 | $ | — | $ | — | $ | — | $ | 589 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 1,071 | ||||||||||||||||||||||||||||
| Ending balance: collectively evaluated for impairment | $ | 187,034 | $ | 56,876 | $ | 2,138 | $ | 416,248 | $ | 14,993 | $ | 54,448 | $ | 106,493 | $ | 7,433 | $ | 13,174 | $ | 5,384 | $ | 2,282 | $ | 866,503 | ||||||||||||||||||||||||||||
| Construction and | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Development | Commercial | Consumer | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Residential | Residential and | Commercial | Multi- | Commercial and | Home Equity Lines of | Second | ||||||||||||||||||||||||||||||||||||||||||||||
| Mortgage | Commercial | Land | Real Estate | Farmland | Family | Industrial | Other | Credit | Mortgages | Other | Unallocated | Total | ||||||||||||||||||||||||||||||||||||||||
| Allowance for loan losses: | (In thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Year Ended September 30, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Beginning balance | $ | 934 | $ | 428 | $ | 15 | $ | 7,043 | $ | 56 | $ | 450 | $ | 2,221 | $ | 54 | $ | 76 | $ | 87 | $ | 20 | $ | 88 | $ | 11,472 | ||||||||||||||||||||||||||
| Charge-offs | — | — | — | — | — | — | (2,415 | ) | — | — | (106 | ) | — | — | (2,521 | ) | ||||||||||||||||||||||||||||||||||||
| Recoveries | 5 | — | — | 75 | — | — | 2 | — | 1 | 55 | 1 | — | 139 | |||||||||||||||||||||||||||||||||||||||
| Provisions | (231 | ) | (297 | ) | (12 | ) | (1,078 | ) | 1 | (152 | ) | 1,350 | 1 | (10 | ) | (15 | ) | (6 | ) | 449 | — | |||||||||||||||||||||||||||||||
| Ending balance | $ | 708 | $ | 131 | $ | 3 | $ | 6,040 | $ | 57 | $ | 298 | $ | 1,158 | $ | 55 | $ | 67 | $ | 21 | $ | 15 | $ | 537 | $ | 9,090 | ||||||||||||||||||||||||||
| Ending balance: individually evaluated for impairment | $ | 54 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 54 | ||||||||||||||||||||||||||
| Ending balance: collectively evaluated for impairment | $ | 654 | $ | 131 | $ | 3 | $ | 6,040 | $ | 57 | $ | 298 | $ | 1,158 | $ | 55 | $ | 67 | $ | 21 | $ | 15 | $ | 537 | $ | 9,036 | ||||||||||||||||||||||||||
| Loans receivable: | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Ending balance | $ | 175,957 | $ | 24,362 | $ | 550 | $ | 406,914 | $ | 11,506 | $ | 55,295 | $ | 102,703 | $ | 13,356 | $ | 13,233 | $ | 4,395 | $ | 2,136 | $ | 810,407 | ||||||||||||||||||||||||||||
| Ending balance: individually evaluated for impairment | $ | 477 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 477 | ||||||||||||||||||||||||||||
| Ending balance: collectively evaluated for impairment | $ | 175,480 | $ | 24,362 | $ | 550 | $ | 406,914 | $ | 11,506 | $ | 55,295 | $ | 102,703 | $ | 13,356 | $ | 13,233 | $ | 4,395 | $ | 2,136 | $ | 809,930 | ||||||||||||||||||||||||||||
In assessing the adequacy of the ALLL, it is recognized that the process, methodology and underlying assumptions require a significant degree of judgment. The estimation of loan losses is not precise; the range of factors considered is wide and is significantly dependent upon management’s judgment, including the outlook and potential changes in the economic environment. At present, reduction of commercial loan portfolio and increased historical loss levels are factored in accessing the portfolio. Any unallocated portion of the ALLL in conjunction with the quarterly review and changes to the qualitative factors to adjust for the risk due to current economic conditions reflects management’s estimate of probable inherent but undetected losses within the portfolio due to uncertainties in economic conditions, regulatory requirements, delays in obtaining information, including unfavorable information about a borrower’s financial condition, the difficulty in identifying triggering events that correlate perfectly to subsequent loss rates, and risk factors that have not yet manifested themselves in loss allocation factors.
Total impaired loans increased by $4.8 million from $19.7 million at September 30, 2022 to $24.5 million at December 31, 2022, primarily due to the additional impairment of one commercial and industrial loan at a carrying value of $4.8 million.
The following table presents impaired loans in the portfolio by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary, as of December 31, 2022 and September 30, 2022:
| Impaired | ||||||||||||||||||||
| Loans | ||||||||||||||||||||
| with No | ||||||||||||||||||||
| Impaired Loans with | Specific | |||||||||||||||||||
| Specific Allowance | Allowance | Total Impaired Loans | ||||||||||||||||||
| Unpaid | ||||||||||||||||||||
| Recorded | Related | Recorded | Recorded | Principal | ||||||||||||||||
| Investment | Allowance | Investment | Investment | Balance | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
| December 31, 2022 | ||||||||||||||||||||
| Residential mortgage | $ | 471 | $ | 54 | $ | 2,314 | $ | 2,785 | $ | 3,006 | ||||||||||
| Commercial: | ||||||||||||||||||||
| Commercial real estate | — | — | 13,893 | 13,893 | 15,475 | |||||||||||||||
| Farmland | — | — | 2,198 | 2,198 | 2,198 | |||||||||||||||
| Commercial and industrial | — | — | 5,481 | 5,481 | 5,481 | |||||||||||||||
| Consumer: | ||||||||||||||||||||
| Home equity lines of credit | — | — | 20 | 20 | 25 | |||||||||||||||
| Second mortgages | — | — | 158 | 158 | 186 | |||||||||||||||
| Total impaired loans | $ | 471 | $ | 54 | $ | 24,065 | $ | 24,536 | $ | 26,371 | ||||||||||
| September 30, 2022 | ||||||||||||||||||||
| Residential mortgage | $ | 477 | $ | 54 | $ | 2,342 | $ | 2,819 | $ | 3,029 | ||||||||||
| Commercial: | ||||||||||||||||||||
| Commercial real estate | — | — | 13,826 | 13,826 | 15,475 | |||||||||||||||
| Farmland | — | — | 2,213 | 2,213 | 2,213 | |||||||||||||||
| Commercial and industrial | — | — | 684 | 684 | 684 | |||||||||||||||
| Consumer: | ||||||||||||||||||||
| Home equity lines of credit | — | — | 20 | 20 | 25 | |||||||||||||||
| Second mortgages | — | — | 152 | 152 | 191 | |||||||||||||||
| Total impaired loans | $ | 477 | $ | 54 | $ | 19,237 | $ | 19,714 | $ | 21,617 | ||||||||||
The following table presents the average recorded investment in impaired loans in the loan portfolio and related interest income recognized for the three months ended December 31, 2022 and 2021:
| Three Months Ended December 31, 2022 | ||||||||
| Interest Income | ||||||||
| Average | Recognized on | |||||||
| Impaired Loans | Impaired Loans | |||||||
| (In thousands) | ||||||||
| Residential mortgage | $ | 2,773 | $ | 20 | ||||
| Commercial: | ||||||||
| Commercial real estate | 13,894 | 8 | ||||||
| Farmland | 2,204 | 20 | ||||||
| Commercial and industrial | 2,243 | 27 | ||||||
| Consumer: | ||||||||
| Home equity lines of credit | 19 | — | ||||||
| Second mortgages | 163 | — | ||||||
| Total | $ | 21,296 | $ | 75 | ||||
| Three Months Ended December 31, 2021 | ||||||||
| Interest Income | ||||||||
| Average | Recognized on | |||||||
| Impaired Loans | Impaired Loans | |||||||
| (In thousands) | ||||||||
| Residential mortgage | $ | 2,782 | $ | 29 | ||||
| Commercial: | ||||||||
| Commercial real estate | 13,283 | 8 | ||||||
| Farmland | 2,247 | 20 | ||||||
| Commercial and industrial | 2,655 | 6 | ||||||
| Consumer: | ||||||||
| Home equity lines of credit | 15 | — | ||||||
| Second mortgages | 678 | — | ||||||
| Total | $ | 21,660 | $ | 63 | ||||
The following table presents the classes of the loan portfolio categorized as "pass", "special mention", "substandard" and "doubtful" within the Company’s internal risk rating system as of December 31, 2022 and September 30, 2022:
| Pass | Special Mention | Substandard | Doubtful | Total | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
| December 31, 2022: | ||||||||||||||||||||
| Residential mortgage | $ | 173,375 | $ | — | $ | 2,832 | $ | — | $ | 176,207 | ||||||||||
| Construction and Development: | ||||||||||||||||||||
| Residential and commercial | 22,871 | — | — | — | 22,871 | |||||||||||||||
| Land | 545 | — | — | — | 545 | |||||||||||||||
| Commercial: | ||||||||||||||||||||
| Commercial real estate | 375,690 | 32,477 | 504 | — | 408,671 | |||||||||||||||
| Farmland | 9,237 | — | 2,198 | — | 11,435 | |||||||||||||||
| Multi-family | 50,004 | — | — | — | 50,004 | |||||||||||||||
| Commercial and industrial | 99,918 | — | 5,427 | — | 105,345 | |||||||||||||||
| Other | 13,192 | — | — | — | 13,192 | |||||||||||||||
| Consumer: | ||||||||||||||||||||
| Home equity lines of credit | 12,762 | — | 87 | — | 12,849 | |||||||||||||||
| Second mortgages | 3,746 | 55 | 223 | — | 4,024 | |||||||||||||||
| Other | 2,252 | — | — | — | 2,252 | |||||||||||||||
| Total | $ | 763,592 | $ | 32,532 | $ | 11,271 | $ | — | $ | 807,395 | ||||||||||
| Pass | Special Mention | Substandard | Doubtful | Total | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
| September 30, 2022: | ||||||||||||||||||||
| Residential mortgage | $ | 173,083 | $ | — | $ | 2,874 | $ | — | $ | 175,957 | ||||||||||
| Construction and Development: | ||||||||||||||||||||
| Residential and commercial | 24,362 | — | — | — | 24,362 | |||||||||||||||
| Land | 550 | — | — | — | 550 | |||||||||||||||
| Commercial: | ||||||||||||||||||||
| Commercial real estate | 373,729 | 32,682 | 504 | — | 406,914 | |||||||||||||||
| Farmland | 9,293 | — | 2,213 | — | 11,506 | |||||||||||||||
| Multi-family | 55,295 | — | — | — | 55,295 | |||||||||||||||
| Commercial and industrial | 97,219 | — | 5,484 | — | 102,703 | |||||||||||||||
| Other | 13,356 | — | — | — | 13,356 | |||||||||||||||
| Consumer: | ||||||||||||||||||||
| Home equity lines of credit | 13,143 | — | 90 | — | 13,233 | |||||||||||||||
| Second mortgages | 4,110 | 58 | 227 | — | 4,395 | |||||||||||||||
| Other | 2,136 | — | — | — | 2,136 | |||||||||||||||
| Total | $ | 766,276 | $ | 32,740 | $ | 11,391 | $ | — | $ | 810,407 | ||||||||||
The following table presents loans that are no longer accruing interest as of December 31, 2022 and September 30, 2022, by portfolio class:
| December 31, | September 30, | |||||||
| 2022 | 2022 | |||||||
| (In thousands) | ||||||||
| Non-accrual loans: | ||||||||
| Residential mortgage | $ | 1,141 | $ | 585 | ||||
| Commercial: | ||||||||
| Commercial and industrial | — | — | ||||||
| Consumer: | ||||||||
| Home equity lines of credit | 19 | 20 | ||||||
| Second mortgages | 117 | 148 | ||||||
| Total non-accrual loans | $ | 1,277 | $ | 753 | ||||
Under the Bank’s loan policy, once a loan has been placed on non-accrual status, we do not resume interest accruals until the loan has been brought current and has maintained a current payment status for not less than six consecutive months. Total non-accrual loans exclude loans held-for-sale. The increase in non-accrual loans was primarily due to the addition of two residential loans with a combined carrying value of $573,000 during the three months ended December 31, 2022.
Interest income that would have been recognized on non-accrual loans had they been current in accordance with their original terms was $26,000 for the three months ended December 31, 2022, and $28,000 for the three months ended December 31, 2022.
Management monitors the performance and credit quality of the loan portfolio by analyzing the age of the loans in the loan portfolio and categorizing each loan as “current”, meaning payment is received from a borrower by the scheduled due date, or by the length of time a scheduled payment is past due.
The following table presents the classes of the loan portfolio categorized by the following aging categories as of December 31, 2022 and September 30, 2022:
| Loans | ||||||||||||||||||||||||||||
| 90 Days | Total | Receivable > | ||||||||||||||||||||||||||
| 30-59 Days | 60-89 Days | and More | Total Past | Loans | 90 Days and | |||||||||||||||||||||||
| Current | Past Due | Past Due | Past Due | Due | Receivable | Accruing | ||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||
| December 31, 2022: | ||||||||||||||||||||||||||||
| Residential mortgage | $ | 173,402 | $ | 1,267 | $ | 502 | $ | 1,036 | $ | 2,805 | $ | 176,207 | $ | 171 | ||||||||||||||
| Construction and Development: | ||||||||||||||||||||||||||||
| Residential and commercial | 22,871 | — | — | — | — | 22,871 | — | |||||||||||||||||||||
| Land | 545 | — | — | — | — | 545 | — | |||||||||||||||||||||
| Commercial: | ||||||||||||||||||||||||||||
| Commercial real estate | 408,077 | 90 | — | 504 | 594 | 408,671 | 504 | |||||||||||||||||||||
| Farmland | 11,435 | — | — | — | — | 11,435 | — | |||||||||||||||||||||
| Multi-family | 50,004 | — | — | — | — | 50,004 | — | |||||||||||||||||||||
| Commercial and industrial | 105,306 | 39 | — | — | 39 | 105,345 | — | |||||||||||||||||||||
| Other | 13,192 | — | — | — | — | 13,192 | — | |||||||||||||||||||||
| Consumer: | — | |||||||||||||||||||||||||||
| Home equity lines of credit | 12,711 | 138 | — | — | 138 | 12,849 | — | |||||||||||||||||||||
| Second mortgages | 3,805 | 65 | 128 | 26 | 219 | 4,024 | — | |||||||||||||||||||||
| Other | 2,233 | — | 19 | — | 19 | 2,252 | — | |||||||||||||||||||||
| Total | $ | 803,581 | $ | 1,599 | $ | 649 | $ | 1,566 | $ | 3,814 | $ | 807,395 | $ | 675 | ||||||||||||||
| Loans | ||||||||||||||||||||||||||||
| 90 Days | Total | Receivable > | ||||||||||||||||||||||||||
| 30-59 Days | 60-89 Days | and More | Total Past | Loans | 90 Days and | |||||||||||||||||||||||
| Current | Past Due | Past Due | Past Due | Due | Receivable | Accruing | ||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||
| September 30, 2022: | ||||||||||||||||||||||||||||
| Residential mortgage | $ | 173,852 | $ | 1,198 | $ | 477 | $ | 430 | $ | 2,105 | $ | 175,957 | $ | 243 | ||||||||||||||
| Construction and Development: | ||||||||||||||||||||||||||||
| Residential and commercial | 24,362 | — | — | — | — | 24,362 | — | |||||||||||||||||||||
| Land | 550 | — | — | — | — | 550 | — | |||||||||||||||||||||
| Commercial: | ||||||||||||||||||||||||||||
| Commercial real estate | 406,809 | 105 | — | — | 105 | 406,914 | — | |||||||||||||||||||||
| Farmland | 9,293 | 2,213 | — | — | 2,213 | 11,506 | — | |||||||||||||||||||||
| Multi-family | 55,295 | — | — | — | — | 55,295 | — | |||||||||||||||||||||
| Commercial and industrial | 101,328 | 1,375 | — | — | 1,375 | 102,703 | — | |||||||||||||||||||||
| Other | 13,356 | — | — | — | — | 13,356 | — | |||||||||||||||||||||
| Consumer: | ||||||||||||||||||||||||||||
| Home equity lines of credit | 13,160 | 53 | 20 | — | 73 | 13,233 | — | |||||||||||||||||||||
| Second mortgages | 4,384 | 3 | — | 8 | 11 | 4,395 | — | |||||||||||||||||||||
| Other | 2,132 | 4 | — | — | 4 | 2,136 | — | |||||||||||||||||||||
| Total | $ | 804,521 | $ | 4,951 | $ | 497 | $ | 438 | $ | 5,886 | $ | 810,407 | $ | 243 | ||||||||||||||
The Company had 23 and 20 loans classified as troubled debt restructures (“TDRs”) at December 31, 2022 and September 30, 2022, respectively, with an aggregate outstanding balance million and $6.1 million, respectively. At December 31, 2022, these loans were also classified as impaired, except for one residential loan with a carrying value of $72,000. The increase is primarily related to the addition of one TDR commercial and industrial loan of $4.8 million. 19 of the TDR loans continue to perform under the restructured terms through December 31, 2022 and the Company continued to accrue interest on such loans through such date.
Loans that have been classified as TDRs have modified payment terms and in some cases modified interest rates from the original agreements, which allow the borrowers, who were experiencing financial difficulty, to relieve some of their overall cash flow burden, including but not limited to making interest only payments for a period of time. Some loan modifications classified as TDRs may not ultimately result in the full collection of principal and interest, as modified, and could result in potential incremental losses. These potential incremental losses have been factored into our overall estimate of the ALLL. The level of any defaults will likely be affected by future economic conditions. A default on a TDR loan for purposes of this disclosure occurs when the borrower is 90 days past due or a foreclosure or repossession of the applicable collateral has occurred.
TDRs may arise in cases where, due to financial difficulties experienced by the borrower, the Company obtains through physical possession one or more collateral assets in satisfaction of all or part of an existing credit. Once possession is obtained, the Company reclassifies the appropriate portion of the remaining balance of the credit from loans to other real estate owned (“OREO”), which is included within other assets in the Consolidated Statements of Financial Condition. For any residential real estate property collateralizing a consumer mortgage loan, the Company is considered to possess the related collateral only if legal title is obtained upon completion of foreclosure, or the borrower conveys all interest in the residential real estate property to the Company through completion of a deed in lieu of foreclosure or similar legal agreement. Excluding OREO, the Company had $,000 and $359,000 of residential real estate properties in the process of foreclosure at December 31, 2022 and September 30, 2022, respectively. The Company also has one commercial real estate loan held for sale at a carrying value of $13.3 million in process of foreclosure at December 31, 2022. The court entered into a Judgment of Foreclosure with respect to a commercial real estate loan held for sale at a
carrying value of $13.3 million (i) directing the sale the property at public auction prior to December 13, 2023, (ii) upon sale of the property, directing the payment to the Company of the sum of approximately $17.2 million plus interest at the note rate from September 16, 2022 through December 14, 2022 and at the statutory rate of 9% thereafter through the date of the foreclosure sale, (iii) directing that the Company pay the transfer of the foreclosure sale and (iv) if Malvern is the successful bidder, directing that the Company must place the property back on the market for sale or leasing within 180 day of the foreclosure sale.
The following table presents total TDRs as of December 31, 2022 and September 30, 2022:
| Troubled Debt Restructured | ||||||||||||||||
| Loans That Have Defaulted on | ||||||||||||||||
| Total Troubled Debt | Modified Terms Within The Past | |||||||||||||||
| Restructurings | 12 Months | |||||||||||||||
| Number of | Recorded | Number of | Recorded | |||||||||||||
| Loans | Investment | Loans | Investment | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| December 31, 2022: | ||||||||||||||||
| Residential mortgage | 15 | $ | 2,671 | 1 | $ | 471 | ||||||||||
| Commercial: | ||||||||||||||||
| Commercial real estate | 3 | 593 | — | — | ||||||||||||
| Farmland | 1 | 2,198 | — | — | ||||||||||||
| Commercial and industrial | 2 | 5,427 | — | — | ||||||||||||
| Consumer: | ||||||||||||||||
| Second mortgages | 2 | 41 | — | — | ||||||||||||
| Total | 23 | $ | 10,930 | 1 | $ | 471 | ||||||||||
| September 30, 2022: | ||||||||||||||||
| Residential mortgage | 14 | 2,632 | — | — | ||||||||||||
| Commercial: | ||||||||||||||||
| Commercial real estate | 3 | 594 | — | — | ||||||||||||
| Farmland | 1 | 2,213 | — | — | ||||||||||||
| Commercial and industrial | 1 | 625 | — | — | ||||||||||||
| Consumer: | ||||||||||||||||
| Second mortgages | 1 | 4 | — | — | ||||||||||||
| Total | 20 | $ | 6,068 | — | $ | — | ||||||||||
The following table reports the performing status of all TDR loans as of December 31, 2022 and September 30, 2022. The performing status is determined by a loan’s compliance with the modified terms:
| December 31, 2022 | September 30, 2022 | |||||||||||||||
| Non- | Non- | |||||||||||||||
| Performing | Performing | Performing | Performing | |||||||||||||
| (In thousands) | ||||||||||||||||
| Residential mortgage | $ | 1,816 | $ | 856 | $ | 1,543 | $ | 1,089 | ||||||||
| Commercial: | ||||||||||||||||
| Commercial real estate | 593 | — | 594 | — | ||||||||||||
| Farmland | 2,198 | — | 2,213 | — | ||||||||||||
| Commercial and industrial | 5,427 | — | 625 | — | ||||||||||||
| Consumer: | ||||||||||||||||
| Second mortgages | 41 | — | 4 | — | ||||||||||||
| Total | $ | 10,075 | $ | 856 | $ | 4,979 | $ | 1,089 | ||||||||
The following table shows the new TDRs for the three months ended December 31, 2022 and 2021:
| For the Three Months Ended December 31, | ||||||||||||||||||||||||
| 2022 | 2021 | |||||||||||||||||||||||
| Pre- | Post- | Pre- | Post- | |||||||||||||||||||||
| Modifications | Modification | Modifications | Modification | |||||||||||||||||||||
| Outstanding | Outstanding | Outstanding | Outstanding | |||||||||||||||||||||
| Number of | Recorded | Recorded | Number of | Recorded | Recorded | |||||||||||||||||||
| Contracts | Investment | Investment | Contracts | Investment | Investment | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
| Troubled Debt Restructurings: | ||||||||||||||||||||||||
| Residential mortgage | 1 | $ | 72 | $ | 72 | $ | — | $ | — | $ | — | |||||||||||||
| Commercial: | ||||||||||||||||||||||||
| Commercial real estate | — | — | — | 2 | 504 | 504 | ||||||||||||||||||
| Farmland | — | — | — | — | — | — | ||||||||||||||||||
| Commercial and industrial | 1 | 4,802 | 4,802 | — | — | — | ||||||||||||||||||
| Consumer: | ||||||||||||||||||||||||
| Second mortgages | 1 | 38 | 38 | — | ||||||||||||||||||||
| Total troubled debt restructurings | 3 | $ | 4,912 | $ | 4,912 | 2 | $ | 504 | $ | 504 | ||||||||||||||
Under Section 4013 of the CARES Act, and separately based upon regulatory guidance promulgated by federal banking regulators (collectively, the “Interagency Statement”), qualifying short-term loan modifications resulting in payment deferrals that are attributable to the adverse impact of COVID-19 are not considered to be TDRs. As such, the applicable loans are reported as current with regard to payment status and continue to accrue interest during the payment deferral period. At December 31, 2022, there were three such loan modifications totaling $31.8 million, all rated “special mention”. At September 30, 2022, the Company had four COVID-19 modified loans totaling $32.0 million, all of which were rated “special mention”.
The following tables set forth the composition of these loans by loan segments as of December 31, 2022 and September 30, 2022:
| December 31, 2022 | ||||||||||||||||
| Number of | Loan Modified | Gross | Percentage of Gross Loans | |||||||||||||
| Loans | Exposure | Loans | Modified | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| Residential mortgage | — | $ | — | $ | 176,207 | 0.00 | % | |||||||||
| Construction and Development: | ||||||||||||||||
| Residential and commercial | — | — | 22,871 | 0.00 | % | |||||||||||
| Land loans | — | — | 545 | 0.00 | % | |||||||||||
| Total Construction and Development | — | — | 23,416 | 0.00 | % | |||||||||||
| Commercial: | ||||||||||||||||
| Commercial real estate | 3 | 31,842 | 408,671 | 7.79 | % | |||||||||||
| Farmland | — | — | 11,435 | 0.00 | % | |||||||||||
| Multi-family | — | — | 50,004 | 0.00 | % | |||||||||||
| Commercial and industrial | — | — | 105,345 | 0.00 | % | |||||||||||
| Other | — | — | 13,192 | 0.00 | % | |||||||||||
| Total Commercial | 3 | 31,842 | 588,647 | 5.41 | % | |||||||||||
| Consumer: | ||||||||||||||||
| Home equity lines of credit | — | — | 12,849 | 0.00 | % | |||||||||||
| Second mortgages | — | — | 4,024 | 0.00 | % | |||||||||||
| Other | — | — | 2,252 | 0.00 | % | |||||||||||
| Total Consumer | — | — | 19,125 | 0.00 | % | |||||||||||
| Total loans | 3 | $ | 31,842 | $ | 807,395 | 3.94 | % | |||||||||
| September 30, 2022 | ||||||||||||||||
| Number of | Loan Modified | Gross | Percentage of Gross Loans | |||||||||||||
| Loans | Exposure | Loans | Modified | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| Residential mortgage | — | $ | — | $ | 175,957 | 0.00 | % | |||||||||
| Construction and Development: | ||||||||||||||||
| Residential and commercial | — | — | 24,362 | 0.00 | % | |||||||||||
| Land loans | — | — | 550 | 0.00 | % | |||||||||||
| Total Construction and Development | — | — | 24,912 | 0.00 | % | |||||||||||
| Commercial: | ||||||||||||||||
| Commercial real estate | 3 | 32,041 | 406,914 | 7.87 | % | |||||||||||
| Farmland | — | — | 11,506 | 0.00 | % | |||||||||||
| Multi-family | — | — | 55,295 | 0.00 | % | |||||||||||
| Commercial and industrial | — | — | 102,703 | 0.00 | % | |||||||||||
| Other | — | — | 13,356 | 0.00 | % | |||||||||||
| Total Commercial | 3 | 32,041 | 589,774 | 5.74 | % | |||||||||||
| Consumer: | ||||||||||||||||
| Home equity lines of credit | — | — | 13,233 | 0.00 | % | |||||||||||
| Second mortgages | — | — | 4,395 | 0.00 | % | |||||||||||
| Other | — | — | 2,136 | 0.00 | % | |||||||||||
| Total Consumer | — | — | 19,764 | 0.00 | % | |||||||||||
| Total loans | 3 | $ | 32,041 | $ | 810,407 | 3.95 | % | |||||||||
Note 8 - Regulatory Matter
Regulatory Capital Requirements
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk-weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of tangible and core capital (as defined in the regulations) to total adjusted tangible assets (as defined in the regulations) and of risk-based capital (as defined in the regulations) to risk-weighted assets (as defined in the regulations).
As of both December 31, 2022 and September 30, 2022, the Bank’s current capital levels exceeded the required capital amounts to be considered “well capitalized” and they also met the fully-phased in minimum capital requirements, including the related capital conservation buffers, as required by the Basel III capital rules. The Company is not subject to regulatory capital requirements imposed by Basel III on bank holding companies because it is deemed to be a small bank holding company.
The following table summarizes the Bank’s compliance with applicable regulatory capital requirements as of December 31, 2022 and September 30, 2022:
| Minimum To be Well | ||||||||||||||||||||||||
| Capitalized | ||||||||||||||||||||||||
| Under Prompt | ||||||||||||||||||||||||
| Minimum For Capital | Corrective | |||||||||||||||||||||||
| Actual | Adequacy Purposes | Action Provisions | ||||||||||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
| As of December 31, 2022 | ||||||||||||||||||||||||
| Tier 1 Leverage (Core) Capital (to adjusted assets) | $ | 168,734 | 16.53 | % | $ | 40,820 | 4.00 | % | $ | 51,025 | 5.00 | % | ||||||||||||
| Common Equity Tier 1 Capital (to risk weighted assets) | 168,734 | 19.69 | % | 38,555 | 4.50 | % | 55,690 | 6.50 | % | |||||||||||||||
| Tier 1 Capital (to risk weighted assets) | 168,734 | 19.69 | % | 51,406 | 6.00 | % | 68,542 | 8.00 | % | |||||||||||||||
| Total Risk Based Capital (to risk weighted assets) | 177,916 | 20.77 | % | 68,542 | 8.00 | % | 85,680 | 10.00 | % | |||||||||||||||
| As of September 30, 2022 | ||||||||||||||||||||||||
| Tier 1 Leverage (Core) Capital (to adjusted assets) | $ | 166,340 | 16.30 | % | $ | 40,820 | 4.00 | % | $ | 51,025 | 5.00 | % | ||||||||||||
| Common Equity Tier 1 Capital (to risk weighted assets) | 166,340 | 19.27 | % | 38,836 | 4.50 | % | 56,096 | 6.50 | % | |||||||||||||||
| Tier 1 Capital (to risk weighted assets) | 166,340 | 19.27 | % | 51,751 | 6.00 | % | 69,042 | 8.00 | % | |||||||||||||||
| Total Risk Based Capital (to riskweighted assets) | 175,512 | 20.34 | % | 69,042 | 8.00 | % | 86,302 | 10.00 | % | |||||||||||||||
Failure to meet any of the capital requirements could result in enforcement actions by the regulators, including a capital directive, a cease and desist order, civil money penalties, the establishment of restrictions on the institution’s operations, termination of federal deposit insurance and the appointment of a conservator or receiver.
Note 9 – Derivatives and Hedging Activities
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its debt funding and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the payment of future uncertain cash amounts, the value of which are determined by interest rates.
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income (loss) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. At December 31, 2022, such derivatives were used to hedge the variable cash flows associated with advances from the Federal Home Loan Bank of Pittsburgh.
Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. During the next twelve months, the Company estimates approximately $1.3 million to be reclassified to earnings as a decrease to interest expense. The Company is hedging its exposure to the variability in future cash flows for forecasted transactions over a maximum period of 20 months (excluding forecasted transactions related to the payment of variable interest on existing financial instruments).
The Company also executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting interest rate swaps that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. These derivatives are not designated as hedges and are not speculative. Rather, these derivatives result from a service the Company provides to certain customers. As the interest rate swaps associated with this program do not meet the hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings.
The tables below present the fair value of the Company’s derivative financial instruments as well as their classification on the Consolidated Statements of Financial Condition as of December 31, 2022 and September 30, 2022:
| December 31, 2022 | ||||||||||||||||||
| Asset derivatives | Liability derivatives | |||||||||||||||||
| Statement of | Statement of | |||||||||||||||||
| Notional | Financial Condition | Notional | Financial Condition | |||||||||||||||
| Amount | Fair Value | Location | Amount | Fair Value | Location | |||||||||||||
| (In thousands) | ||||||||||||||||||
| Derivatives designated as a hedging instrument: | ||||||||||||||||||
| Interest rate swap agreements | $ | 60,000 | $ | 3,770 | Other assets | $ | — | $ | — | Other liabilities | ||||||||
| Derivatives not designated as a hedging instrument: | ||||||||||||||||||
| Interest rate swap agreements | $ | 43,930 | $ | 3,574 | Other assets | $ | 43,930 | $ | 3,574 | Other liabilities | ||||||||
| September 30, 2022 | ||||||||||||||||||
| Asset derivatives | Liability derivatives | |||||||||||||||||
| Statement of | Statement of | |||||||||||||||||
| Notional | Financial Condition | Notional | Financial Condition | |||||||||||||||
| Amount | Fair Value | Location | Amount | Fair Value | Location | |||||||||||||
| (In thousands) | ||||||||||||||||||
| Derivatives designated as a hedging instrument: | ||||||||||||||||||
| Interest rate swap agreements | $ | 60,000 | $ | 4,017 | Other assets | $ | — | $ | — | Other liabilities | ||||||||
| Derivatives not designated as a hedging instrument: | ||||||||||||||||||
| Interest rate swap agreements | $ | 44,132 | $ | 3,711 | Other assets | $ | 44,132 | $ | 3,712 | Other liabilities | ||||||||
The tables below present the derivative assets and liabilities offsetting as of December 31, 2022 and September 30, 2022:
| Offsetting of Derivative Assets | (In thousands) | |||||||||||||||||||||||
| as of December 31, 2022 | ||||||||||||||||||||||||
| Gross Amounts Not Offset in the Statements of | ||||||||||||||||||||||||
| Financial Condition | ||||||||||||||||||||||||
| Gross | Net Amounts | |||||||||||||||||||||||
| Amounts | of Assets | |||||||||||||||||||||||
| Gross | Offset in the | presented in | ||||||||||||||||||||||
| Amounts | Statement of | the Statement | Cash | |||||||||||||||||||||
| of Recognized | Financial | of Financial | Financial | Collateral | ||||||||||||||||||||
| Assets | Condition | Condition | Instruments | Received | Net Amount | |||||||||||||||||||
| Derivatives | $ | 7,344 | $ | — | $ | 7,344 | $ | — | $ | 4,210 | $ | 3,134 | ||||||||||||
| Offsetting of Derivative Liabilities | (In thousands) | |||||||||||||||||||||||
| as of December 31, 2022 | ||||||||||||||||||||||||
| Gross Amounts Not Offset in the Statements of | ||||||||||||||||||||||||
| Financial Condition | ||||||||||||||||||||||||
| Gross | Net Amounts | |||||||||||||||||||||||
| Amounts | of Liabilities | |||||||||||||||||||||||
| Gross | Offset in the | presented in | ||||||||||||||||||||||
| Amounts | Statement of | the Statement | Cash | |||||||||||||||||||||
| of Recognized | Financial | of Financial | Financial | Collateral | ||||||||||||||||||||
| Liabilities | Condition | Condition | Instruments | Posted | Net Amount | |||||||||||||||||||
| Derivatives | $ | 3,574 | $ | — | $ | 3,574 | $ | — | $ | — | $ | 3,574 | ||||||||||||
| Offsetting of Derivative Assets | (In thousands) | |||||||||||||||||||||||
| as of September 30, 2022 | ||||||||||||||||||||||||
| Gross Amounts Not Offset in the Statements of | ||||||||||||||||||||||||
| Financial Condition | ||||||||||||||||||||||||
| Gross | Net Amounts | |||||||||||||||||||||||
| Amounts | of Assets | |||||||||||||||||||||||
| Gross | Offset in the | presented in | ||||||||||||||||||||||
| Amounts | Statement of | the Statement | Cash | |||||||||||||||||||||
| of Recognized | Financial | of Financial | Financial | Collateral | ||||||||||||||||||||
| Assets | Condition | Condition | Instruments | Received | Net Amount | |||||||||||||||||||
| Derivatives | $ | 7,728 | $ | - | $ | 7,728 | $ | - | $ | 4,210 | $ | 3,518 | ||||||||||||
| Offsetting of Derivative Liabilities | (In thousands) | |||||||||||||||||||||||
| as of September 30, 2022 | ||||||||||||||||||||||||
| Gross Amounts Not Offset in the Statements of | ||||||||||||||||||||||||
| Financial Condition | ||||||||||||||||||||||||
| Gross | Net Amounts | |||||||||||||||||||||||
| Amounts | of Liabilities | |||||||||||||||||||||||
| Gross | Offset in the | presented in | ||||||||||||||||||||||
| Amounts | Statement of | the Statement | Cash | |||||||||||||||||||||
| of Recognized | Financial | of Financial | Financial | Collateral | ||||||||||||||||||||
| Liabilities | Condition | Condition | Instruments | Posted | Net Amount | |||||||||||||||||||
| Derivatives | $ | 3,712 | $ | - | $ | 3,712 | $ | — | $ | — | $ | 3,712 | ||||||||||||
The tables below present the net gains (losses) recorded in accumulated other comprehensive income (loss) and the Consolidated Statements of Net Income relating to the cash flow derivative instruments for the three months ended December 31, 2022 and 2021:
| Three Months Ended December 31, 2022 | ||||||||
| Amount of Gain Recognized | Amount of Gain Reclassified from OCI to | |||||||
| in OCI on Derivative | Interest Expense | |||||||
| (In thousands) | ||||||||
| Interest rate swap agreements | $ | 205 | $ | 452 | ||||
| Total derivatives | 205 | 452 | ||||||
| Three Months Ended December 31, 2021 | ||||||||
| Amount of Loss Recognized | Amount of Loss Reclassified from OCI to | |||||||
| in OCI on Derivative | Interest Expense | |||||||
| (In thousands) | ||||||||
| Interest rate swap agreements | $ | 394 | $ | (85 | ) | |||
| Total derivatives | 394 | (85 | ) | |||||
The tables below present the effect of the Company’s derivative financial instruments on the Consolidated Statements of net Income for the three months ended December 31, 2022 and 2021:
| Three Months Ended December 31, 2022 | ||||||
| Consolidated Statements of Net Income | Amount of Gain Recognized in Income on derivatives | |||||
| (In thousands) | ||||||
| Derivatives not designated as a hedging instrument: | ||||||
| Interest rate swap agreement | Other income | $ | — | |||
| Total | $ | — | ||||
| Three Months Ended December 31, 2021 | ||||||
| Consolidated Statements of Net Income | Amount of Loss Recognized in Income on derivatives | |||||
| (In thousands) | ||||||
| Derivatives not designated as a hedging instrument: | ||||||
| Interest rate swap agreement | Other income | $ | — | |||
| Total | $ | — | ||||
The Company has agreements with each of its derivative counterparties that contain a provision providing that if the Company defaults on any of its indebtedness, including defaults where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative agreements.
At December 31, 2022 and September 30, 2022, the fair value of derivatives was in a net asset position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements. There were no adjustments for nonperformance risk at December 31, 2022 and September 30, 2022. At December 31, 2022 and September 30, 2022, the Company had no collateral posting requirement against its obligations under these agreements. If the Company had breached any of these provisions of its contracts, it could have been required to settle its obligations under the agreements at the termination value and would have been required to pay any additional amounts due in excess of amounts previously posted as collateral with the respective counterparty.
Note 10 - Fair Value Measurements
The Company follows FASB ASC Topic 820 Fair Value Measurement to record fair value adjustments to certain assets and to determine fair value disclosures for the Company’s financial instruments. Investment and mortgage-backed securities available for sale and equity securities are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as impaired loans, OREO and certain other assets. These nonrecurring fair value adjustments typically involve application of lower-of-cost-or-market accounting or write-downs of individual assets.
The Company groups its assets at fair value in three levels, based on the markets in which the assets are traded and the reliability of the assumptions used to determine fair value. These levels are:
Level 1— valuation is based upon quoted prices for identical instruments traded in active markets.
Level 2—valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
Level 3—valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect the Company’s own estimates of assumptions that market participants would use in pricing the asset.
The Company bases its fair values on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It is the Company’s policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements, in accordance with the fair value hierarchy.
Fair value measurements for assets where there exists limited or no observable market data and, therefore, are based primarily upon the Company’s or other third-party’s estimates, are often calculated based on the characteristics of the asset, the economic and competitive environment, and other factors. Therefore, the results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset. Additionally, there may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results of current or future valuations.
The Company monitors and evaluates available data to perform fair value measurements on an ongoing basis and recognizes transfers among the levels of the fair value hierarchy as of the date event or a change in circumstances affects the valuation method chosen. There were no changes in valuation techniques or transfers between levels at December 31, 2022 or September 30, 2022.
The tables below present the balances of assets measured at fair value on a recurring basis as of December 31, 2022 and September 30, 2022:
| December 31, 2022 | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| (In thousands) | ||||||||||||||||
| Assets: | ||||||||||||||||
| Investment securities available for sale: | ||||||||||||||||
| Debt securities: | ||||||||||||||||
| U.S. government agencies | $ | 3,516 | $ | — | $ | 3,516 | $ | — | ||||||||
| State and municipal obligations | 10,035 | — | 10,035 | — | ||||||||||||
| Single issuer trust preferred security | 933 | — | 933 | — | ||||||||||||
| Corporate debt securities | 32,382 | — | 32,382 | — | ||||||||||||
| Mortgage backed securities | 2,073 | — | 2,073 | — | ||||||||||||
| U.S. treasury note | 1,446 | — | 1,446 | — | ||||||||||||
| Total investment Securities available -for-sale | 50,385 | — | 50,385 | — | ||||||||||||
| Equity Securities: | ||||||||||||||||
| Mutual Funds | 1,376 | 876 | — | 500 | ||||||||||||
| Total equity investment securities | 1,376 | 876 | — | 500 | ||||||||||||
| Derivative instruments | $ | 7,344 | $ | — | $ | 7,344 | $ | — | ||||||||
| Liabilities: | ||||||||||||||||
| Derivative instruments | $ | 3,574 | $ | — | $ | 3,574 | $ | — | ||||||||
| September 30, 2022 | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| (In thousands) | ||||||||||||||||
| Assets: | ||||||||||||||||
| Investment securities available for sale: | ||||||||||||||||
| Debt securities: | ||||||||||||||||
| U.S. government agencies | $ | 3,580 | $ | — | $ | 3,580 | $ | — | ||||||||
| State and municipal obligations | 9,660 | — | 9,660 | — | ||||||||||||
| Single issuer trust preferred security | 946 | — | 946 | — | ||||||||||||
| Corporate debt securities | 32,128 | — | 32,128 | — | ||||||||||||
| Mortgage backed securities | 2,087 | — | 2,087 | — | ||||||||||||
| U.S. treasury note | 1,443 | — | 1,443 | — | ||||||||||||
| Total investment Securities available -for-sale | 49,844 | — | 49,844 | — | ||||||||||||
| Equity Securities: | ||||||||||||||||
| Mutual Funds | 1,374 | 874 | — | 500 | ||||||||||||
| Total equity investment securities | 1,374 | 874 | — | 500 | ||||||||||||
| Derivative instruments | $ | 7,728 | $ | — | $ | 7,728 | $ | — | ||||||||
| Liabilities: | ||||||||||||||||
| Derivative instruments | $ | 3,712 | $ | — | $ | 3,712 | $ | — | ||||||||
The following tables present additional information about the equity securities measured at fair value on a recurring basis and for which the Company utilized significant unobservable inputs (Level 3 inputs) to determine fair value for three months ended December 31, 2022 and December 31, 2021
| Fair value measurements | ||||
| using significant | ||||
| unobservable inputs | ||||
| (Level 3) | ||||
| (In thousands) | ||||
| Balance, October 1, 2022 | $ | 500 | ||
| Payments received | — | |||
| Total gains or losses (realized/unrealized) | — | |||
| Included in earnings | — | |||
| Included in other comprehensive income | — | |||
| Purchases | — | |||
| Transfers in and/or out of Level 3 | — | |||
| Balance, December 31, 2022 | $ | 500 | ||
| Fair value measurements | ||||
| using significant | ||||
| unobservable inputs | ||||
| (Level 3) | ||||
| (In thousands) | ||||
| Balance, October 1, 2021 | $ | 500 | ||
| Payments received | — | |||
| Total gains or losses (realized/unrealized) | — | |||
| Included in earnings | — | |||
| Included in other comprehensive income | — | |||
| Purchases | — | |||
| Transfers in and/or out of Level 3 | — | |||
| Balance, December 31, 2021 | $ | 500 | ||
All of the Company’s available for sale investment securities and derivative instruments are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the securities’ terms and conditions, among other things. From time to time, the Company validates prices supplied by the independent pricing service by comparison to prices obtained from third-party sources or derived using internal models.
For assets measured at fair value on a nonrecurring basis that were still held at the end of the period, the following tables provide the level of valuation assumptions used to determine each adjustment and the carrying value of the related individual assets or portfolios at December 31, 2022 and September 30, 2022:
| December 31, 2022 | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| (In thousands) | ||||||||||||||||
| Other real estate owned | $ | 259 | $ | — | $ | — | $ | 259 | ||||||||
| Impaired loans(1) | 13,721 | — | — | 13,721 | ||||||||||||
| Total | $ | 13,980 | $ | — | $ | — | $ | 13,980 | ||||||||
| December 31, 2022 | |||||||||||
| Fair Value at | Range/(Weighted | ||||||||||
| December 31, 2022 | Valuation Technique | Unobservable Input | Average) | ||||||||
| (Dollars in thousands) | |||||||||||
| Other real estate owned | $ | 259 | Appraisal of Collateral(2) | Collateral discount(3) | |||||||
| Impaired loans(1) | 13,721 | Appraisal of Collateral(2) | Collateral discount(3) | ||||||||
| Total | $ | 13,980 | |||||||||
| (1) | Consisted of two loans with an aggregate balance of $13.7 million and with $54,000 in specific loan loss allowance. |
| (2) | Fair value is generally determined through independent appraisals of the underlying collateral primarily using comparable sales. |
| (3) | Appraisals may be adjusted by management for qualitative factors such as time, changes in economic conditions and estimated liquidation expense. |
| September 30, 2022 | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| (In thousands) | ||||||||||||||||
| Other real estate owned | $ | 259 | $ | — | $ | — | $ | 259 | ||||||||
| Impaired loans(1) | 13,722 | — | — | 13,722 | ||||||||||||
| Total | $ | 13,981 | $ | — | $ | — | $ | 13,981 | ||||||||
| September 30, 2022 | |||||||||||
| Fair Value at | Range/(Weighted | ||||||||||
| September 30, 2022 | Valuation Technique | Unobservable Input | Average) | ||||||||
| (Dollars in thousands) | |||||||||||
| Other real estate owned | $ | 259 | Appraisal of Collateral(2) | Collateral discount(3) | |||||||
| Impaired loans(1) | 13,722 | Appraisal of Collateral(2) | Collateral discount(3) | ||||||||
| Total | $ | 13,981 | |||||||||
| (1) | Consisted of three loans with an aggregate balance of $13.7 million and with $54,000 in specific loan loss allowance. |
| (2) | Fair value is generally determined through independent appraisals of the underlying collateral primarily using comparable sales. |
| (3) | Appraisals may be adjusted by management for qualitative factors such as time, changes in economic conditions and estimated liquidation expense. |
At December 31, 2022 and September 30, 2022, the Company did not have any additions to our mortgage servicing assets. At December 31, 2022 and September 30, 2022, the Company only sold loans with servicing released.
The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of FASB ASC 825. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methods. However, considerable judgment is necessarily required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company would realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. FASB ASC 825 excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.
The fair value estimates presented herein are based on pertinent information available to management as of December 31, 2022 and September 30, 2022. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since December 31, 2022 and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.
The following assumptions were used to estimate the fair value of the Company’s financial instruments:
Cash and Cash Equivalents—These assets are carried at historical cost. The carrying amount is a reasonable estimate of fair value because of the relatively short time between the origination of the instrument and its expected realization.
Investment Securities—Fair value measurements for these securities are typically obtained from independent pricing services that the Company has engaged for this purpose. When available, the Company, or its independent pricing service, use quoted market prices to measure fair value. If market prices are not available, fair value measurement is based upon models that incorporate available trade, bid and other market information and for structured securities, cash flow and, when available, loan performance data. Because many fixed income securities do not trade on a daily basis, our independent pricing service’s applications apply available information through processes such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing to prepare evaluations. For each asset class, pricing applications and models are based on information from market sources and integrate relevant credit information. All of our securities available for sale are valued using either of the foregoing methodologies to determine fair value adjustments recorded to our financial statements.
Loans Receivable—The Company does not record loans at fair value on a recurring basis. As such, valuation techniques discussed herein for loans are primarily for estimating fair value for FASB ASC 825 disclosure purposes. However, from time to time, we record nonrecurring fair value adjustments to loans to reflect partial write-downs for impairment or the full charge-off of the loan carrying value. The valuation of impaired loans is discussed below. The fair value estimate for FASB ASC 825 purposes differentiates loans based on their financial characteristics, such as product classification, loan category, pricing features and remaining maturity. Prepayment and credit loss estimates are evaluated by loan type and rate. The fair value of loans is estimated by discounting contractual cash flows using discount rates based on current industry pricing, adjusted for prepayment and credit loss estimates.
Impaired Loans—Impaired loans are valued utilizing independent appraisals that rely upon quoted market prices for similar assets in active markets. These appraisals include adjustments to comparable assets based on the appraisers’ market knowledge and experience. The appraisals are adjusted downward by management, as necessary, for changes in relevant valuation factors subsequent to the appraisal date and are considered Level 3 inputs. At December 31, 2022, one of the Company’s real estate loans totaling $13.2 million classified as held-for-sale was deemed impaired. This loan is fair valued at Level 3 based off an appraisal.
Accrued Interest Receivable—This asset is carried at historical cost. The carrying amount is a reasonable estimate of fair value because of the relatively short time between the origination of the instrument and its expected realization.
Restricted Stock—Although restricted stock are equity interests in the Federal Reserve Bank, FHLB and ACBB, they are carried at cost because they do not have a readily determinable fair value as its ownership is restricted and it lacks a market. The estimated fair value approximates the carrying amount.
Other Real Estate Owned—Assets acquired through foreclosure or deed in lieu of foreclosure are recorded at estimated fair value less estimated selling costs when acquired, thus establishing a new cost basis. Fair value is generally based on independent appraisals. These appraisals include adjustments to comparable assets based on the appraisers’ market knowledge and experience, and are considered Level 3 inputs. When an asset is acquired, the excess of the loan balance over fair value, less estimated selling costs, is charged to the ALLL. If the estimated fair value of the asset declines, a write-down is recorded through expense. The valuation of foreclosed assets is subjective in nature and may be adjusted in the future because of, among other factors, changes in the economic conditions.
Deposits—Deposit liabilities are carried at cost. As such, valuation techniques discussed herein for deposits are primarily for estimating fair value for FASB ASC 825 disclosure purposes. The fair value of deposits is discounted based on rates available for time deposits of similar maturities. Fair value approximates book value for saving accounts, checking and negotiable order of withdrawal accounts (“NOW accounts”), and money market accounts.
Borrowings—Advances from the FHLB are carried at amortized cost. However, the Company is required to estimate the fair value of long-term debt under FASB ASC 825. The fair value is based on the contractual cash flows discounted using rates currently offered for new notes with similar remaining maturities.
Subordinated Debt—The calculation of fair value in Level 2 is based on observable market values where available.
Derivatives—The fair value of derivatives are based on valuation models using observable market data as of the measurement date (Level 2). The Company’s derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices, and indices to generate continuous yield or pricing curves, prepayment rate, and volatility factors to value the position. The majority of market inputs is actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services.
Accrued Interest Payable—This liability is carried at historical cost. The carrying amount is a reasonable estimate of fair value because of the relatively short time between the origination of the instrument and its expected realization.
Commitments to Extend Credit and Letters of Credit— The majority of the Company’s commitments to extend credit and letters of credit carry current market interest rates if converted to loans and are not included in the table below. Because commitments to extend credit and letters of credit are generally unassignable by either the Bank or the borrower, they only have value to the Company and the borrower. The estimated fair value approximates the recorded deferred fee amounts, which are not significant.
Mortgage Servicing Rights—The fair value of mortgage servicing rights is based on observable market prices when available or the present value of expected future cash flows when not available. Assumptions, such as loan default rates, costs to service, and prepayment speeds significantly affect the estimate of future cash flows.
The carrying amount and estimated fair value of the Company’s financial instruments as of December 31, 2022 and September 30, 2022 are presented below:
| December 31, 2022 | ||||||||||||||||||||
| Carrying Amount | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
| Financial assets: | ||||||||||||||||||||
| Cash and cash equivalents | $ | 35,007 | $ | 35,007 | $ | 35,007 | $ | — | $ | — | ||||||||||
| Investment securities available-for-sale | 50,385 | 50,385 | — | 50,385 | — | |||||||||||||||
| Investment securities held-to-maturity | 58,147 | 50,199 | — | 50,199 | — | |||||||||||||||
| Equity investment securities | 1,376 | 1,376 | 876 | — | 500 | |||||||||||||||
| Loans held for sale | 13,232 | 13,232 | — | — | 13,232 | |||||||||||||||
| Loans receivable, net | 798,862 | 761,550 | — | — | 761,550 | |||||||||||||||
| Accrued interest receivable | 4,675 | 4,675 | — | 4,675 | — | |||||||||||||||
| Restricted stock | 7,060 | 7,060 | — | 7,060 | — | |||||||||||||||
| Mortgage servicing rights (included in Other Assets) | 83 | 110 | — | 110 | — | |||||||||||||||
| Derivatives (included in Other Assets) | 7,344 | 7,344 | — | 7,344 | — | |||||||||||||||
| Financial liabilities: | ||||||||||||||||||||
| Savings accounts | 53,655 | 53,655 | — | 53,655 | — | |||||||||||||||
| Checking and NOW accounts | 284,701 | 284,701 | — | 284,701 | — | |||||||||||||||
| Money market accounts | 250,936 | 250,936 | — | 250,936 | — | |||||||||||||||
| Certificates of deposit | 148,130 | 149,271 | — | 149,271 | — | |||||||||||||||
| Borrowings (excluding sub debt) | 98,000 | 98,119 | — | 98,119 | — | |||||||||||||||
| Subordinated debt | 25,000 | 25,000 | — | 25,000 | — | |||||||||||||||
| Derivatives (included in Other Liabilities) | 3,574 | 3,574 | — | 3,574 | — | |||||||||||||||
| Accrued interest payable | 1,068 | 1,068 | — | 1,068 | — | |||||||||||||||
| September 30, 2022 | ||||||||||||||||||||
| Carrying Amount | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
| Financial assets: | ||||||||||||||||||||
| Cash and cash equivalents | $ | 53,267 | $ | 53,267 | $ | 53,267 | $ | — | $ | — | ||||||||||
| Investment securities available-for-sale | 49,844 | 49,844 | — | 49,844 | — | |||||||||||||||
| Investment securities held-to-maturity | 58,767 | 50,266 | — | 50,266 | — | |||||||||||||||
| Equity investment securities | 1,374 | 1,374 | 874 | — | 500 | |||||||||||||||
| Loans receivable, net | 801,854 | 763,311 | — | — | 763,311 | |||||||||||||||
| Loans held for sale | 13,780 | 13,780 | — | — | 13,780 | |||||||||||||||
| Accrued interest receivable | 4,252 | 4,252 | — | 4,252 | — | |||||||||||||||
| Restricted stock | 7,104 | 7,104 | — | 7,104 | — | |||||||||||||||
| Mortgage servicing rights (included in Other Assets) | 87 | 117 | — | 117 | — | |||||||||||||||
| Derivatives (included in Other Assets) | 7,728 | 7,728 | — | 7,728 | — | |||||||||||||||
| Financial liabilities: | | | | |||||||||||||||||
| Savings accounts | 55,288 | 55,288 | — | 55,288 | — | |||||||||||||||
| Checking and NOW accounts | 240,819 | 240,819 | — | 240,819 | — | |||||||||||||||
| Money market accounts | 279,699 | 279,699 | — | 279,699 | — | |||||||||||||||
| Certificates of deposit | 151,503 | 153,087 | — | 153,087 | — | |||||||||||||||
| Borrowings (excluding sub debt) | 80,000 | 80,022 | — | 80,022 | — | |||||||||||||||
| Subordinated debt | 25,000 | 25,045 | — | 25,045 | — | |||||||||||||||
| Derivatives (included in Other Liabilities) | 3,712 | 3,712 | — | 3,712 | — | |||||||||||||||
| Accrued interest payable | 543 | 543 | — | 543 | — | |||||||||||||||
Note 11 – Comprehensive Income
Other comprehensive income and related tax effects are presented in the following table:
| Three Months Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| (In thousands) | ||||||||
| Net unrealized holding (losses) gains on available-for-sale securities | $ | 594 | $ | (149 | ) | |||
| Amortization of unrealized holding losses on securities transferred from available-for-sale to held-to-maturity (2) | 1 | 2 | ||||||
| Fair value adjustments on derivatives | (247 | ) | 479 | |||||
| Other comprehensive (loss) income before taxes | 348 | 332 | ||||||
| Tax effect | (75 | ) | (71 | ) | ||||
| Total other comprehensive (loss) income | $ | 273 | $ | 261 | ||||
| (1) | Amounts are included in net gains on sale and call of investments on the Consolidated Statements of Net Income in total other income. |
| (2) | Amounts are included in interest and dividends on investment securities on the Consolidated Statements of Net Income. |
Note 12 – Equity Based Incentive Compensation Plan
The Company maintains the Malvern Bancorp, Inc. 2014 Long-Term Incentive Compensation Plan (the “2014 Plan”), which permits the grant of long-term incentive and other stock and cash awards. The purpose of the 2014 Plan is to promote the success of the Company and the Bank by providing incentives to officers, employees and directors of the Company and the Bank that will link their personal interests to the financial success of the Company and to growth in shareholder value. The maximum total number of shares of the Company’s common stock available for grants under the 2014 Plan is 400,000. As of December 31, 2022, there were 281,018 remaining shares available for future grants.
Restricted stock and option awards granted typically vest annually in 20% increments beginning on the -year anniversary of the grant date, and accelerate upon a change in control of the Company. The options generally expire ten years from the date of grant. All issuances are subject to forfeiture if the recipient leaves the Company or is terminated prior to the awards vesting. Shares of restricted stock have the same dividend and voting rights as common stock, while stock options do not have such rights.
All awards are issued at fair value of the underlying shares at the grant date. The Company expenses the cost of the awards, which is determined to be the fair market value of the awards at the date of grant.
The Company did grant any stock options during the three months ended December 31, 2022 There were no stock options forfeited or expired for the same periods ended December 31, 2022 and 2021, respectively. Total compensation expense related to stock options granted under the 2014 Plan was $9,000 for the three months ended December 31, 2022 and 2021, respectively.
The Company awarded 2,758 shares of restricted stock during the three months ended December 31, 2022 There were no restricted stock awarded for the same period ended December 31, 2021. There were zero and 1,216 restricted shares forfeited for the three months ended December 31, 2022 and December 31, 2021, respectively. The compensation expense related to restricted stock awards was $44,000 and $43,000 for the three months ended December 31, 2022and 2021, respectively.
Stock-based compensation expense for the cost of the restricted stock awards granted is based on the grant-date fair value. For stock option awards, the fair value is estimated at the date of grant using the Black-Scholes option-pricing model. This model requires the input of highly subjective assumptions, changes to which can materially affect the fair value estimate. Additionally, there may be other factors that would otherwise have a significant effect on the value of employee stock options granted but are not considered by the model. Accordingly, while management believes that the Black-Scholes option-pricing model provides a reasonable estimate of fair value, the model does not necessarily provide the best single measure of fair value for the Company’s employee stock options.
Stock Options
The following is a summary of stock option activity for the three months ended December 31, 2022
| Weighted | ||||||||||||||||
| Weighted | Average | |||||||||||||||
| Average | Remaining | Aggregate | ||||||||||||||
| Exercise | Contractual | Intrinsic | ||||||||||||||
| Shares | Price | Term (In Years) | Value | |||||||||||||
| Outstanding, beginning of year | 36,830 | $ | 20.24 | — | $ | — | ||||||||||
| Granted | — | $ | — | — | $ | — | ||||||||||
| Exercised | — | $ | — | — | $ | — | ||||||||||
| Forfeited/cancelled/expired | — | $ | — | — | $ | — | ||||||||||
| Outstanding, at December 31, 2022 | 36,830 | $ | 20.24 | 6.576 | $ | 13,660 | ||||||||||
| Exercisable, at December 31, 2022 | 20,030 | $ | 21.77 | 5.294 | $ | 3,460 | ||||||||||
| Nonvested, at December 31, 2022 | 16,800 | $ | 18.40 | 8.105 | $ | 10,200 | ||||||||||
The following is a summary of stock option activity for the three months ended December 31, 2021
| Weighted | ||||||||||||||||
| Average | ||||||||||||||||
| Weighted | Remaining | Aggregate | ||||||||||||||
| Average | Contractual | Intrinsic | ||||||||||||||
| Shares | Exercise Price | Term (In Years) | Value | |||||||||||||
| Outstanding, beginning of year | 32,830 | $ | 20.96 | — | $ | — | ||||||||||
| Granted | — | $ | — | — | $ | — | ||||||||||
| Exercised | — | $ | — | — | $ | — | ||||||||||
| Forfeited/cancelled/expired | — | $ | — | — | $ | — | ||||||||||
| Outstanding, at December 31, 2021 | 32,830 | $ | 20.96 | 7.139 | $ | — | ||||||||||
| Exercisable, at December 31, 2021 | 14,480 | $ | 21.91 | 5.945 | $ | — | ||||||||||
| Nonvested, at December 31, 2021 | 18,350 | $ | 20.21 | 8.082 | $ | — | ||||||||||
As of December 31, 2022, there was $75,000 of total unrecognized compensation cost related to unvested stock options under the 2014 Plan. The cost is expected to be recognized over a weighted average period of 3.30 years.
Restricted Stock Awards
The table below summarizes the activity for the Company’s stock awards outstanding during the three months ended December 31, 2022 and 2021:
| Weighted Average | ||||||||
| Shares | Fair Value | |||||||
| Outstanding, beginning of year | 27,417 | $ | 19.34 | |||||
| Granted | 2,758 | $ | 17.36 | |||||
| Vested | (1,645 | ) | $ | 24.01 | ||||
| Forfeited/cancelled/expired | — | $ | — | |||||
| Outstanding, at December 31, 2022 | 28,530 | $ | 18.88 | |||||
| Weighted Average | ||||||||
| Shares | Fair Value | |||||||
| Outstanding, beginning of year | 31,486 | $ | 21.10 | |||||
| Granted | — | $ | — | |||||
| Vested | (1,907 | ) | $ | 23.83 | ||||
| Forfeited/cancelled/expired | (1,216 | ) | $ | 20.63 | ||||
| Outstanding, at December 31, 2021 | 28,363 | $ | 20.94 | |||||
As of December 31, 2022, there was $419,000 of total unrecognized compensation cost related to unvested shares of restricted stock granted under the 2014 Plan. The cost is expected to be recognized over a weighted average period of 3.31 years.
Note 13 – Deposits
Deposits classified by type with percentages to total deposits at December 31, 2022 and September 30, 2022 consisted of the following:
| December 31, | September 30, | |||||||||||||||
| 2022 | 2022 | |||||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| Balances by types of deposit: | ||||||||||||||||
| Savings | $ | 53,655 | 7.28 | % | $ | 55,288 | 7.04 | % | ||||||||
| Money market accounts | 250,936 | 34.03 | 279,699 | 35.62 | ||||||||||||
| Interest-bearing demand | 233,635 | 31.68 | 240,819 | 30.66 | ||||||||||||
| Non-interest-bearing demand | 51,066 | 6.92 | 58,014 | 7.39 | ||||||||||||
| 589,292 | 79.91 | 633,820 | 80.71 | |||||||||||||
| Certificates of deposit | 148,130 | 20.09 | 151,503 | 19.29 | ||||||||||||
| Total Deposits | $ | 737,422 | 100 | % | $ | 785,323 | 100 | % | ||||||||
The total amount of certificates of deposit greater than or equal to $250,000 at December 31, 2022 and September 30, 2022 was $55.7 million and $63.0 million, respectively. The Company had brokered deposits totaling $9.1 million at December 31, 2022 and September 30, 2022.
Interest expense on deposits consisted of the following:
| Three Months Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| (In thousands) | ||||||||
| Savings accounts | $ | 15 | $ | 11 | ||||
| Money market accounts | 402 | 278 | ||||||
| Interest-bearing demand | 710 | 444 | ||||||
| Certificates of deposit | 703 | 312 | ||||||
| Total | $ | 1,830 | $ | 1,045 | ||||
As of December 31, 2022, the scheduled maturities of certificates of deposits are as follows:
| Scheduled Maturities | ||||
| (In thousands) | ||||
| Period Ending December 31, | ||||
| 2023 | $ | 92,952 | ||
| 2024 | 40,226 | |||
| 2025 | 6,912 | |||
| 2026 | 5,489 | |||
| 2027 | 1,041 | |||
| Thereafter | 1,510 | |||
| Total | $ | 148,130 | ||
As of December 31, 2022, the scheduled maturities of certificates of deposits in amounts greater than $250,000 are as follows:
| Scheduled Maturities | ||||
| (In thousands) | ||||
| Three months or less | $ | 18,513 | ||
| Over three through six months | 15,265 | |||
| Over six through twelve months | 8,734 | |||
| Over twelve months | 13,146 | |||
| Total | $ | 55,658 | ||
Note 14 – Subordinated Debt
On February 7, 2017, the Company issued $25.0 million in aggregate principal amount of its 6.125% fixed-to-floating rate subordinated notes (the “Notes”). From February 7, 2017 to February 15, 2022, the Notes had a fixed rate of 6.125%. During the period ended March 31, 2022, the rate on the Notes converted from fixed to a variable interest rate. The rate at December 31, 2022 was 8.79%. All costs related to the issuance of the Notes have been amortized. As of December 31, 2022, the Notes bear interest until the maturity date or early redemption date at a variable rate equal to the then current three-month LIBOR rate plus 414.5 basis points. The Notes were structured to qualify as Tier 2 capital for regulatory purposes. The Company’s subordinated debt totaled $25.0 million at December 31, 2022.
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
The purpose of this analysis is to provide the reader with information relevant to understanding and assessing the Company’s results of operations for the periods presented herein and financial condition as of December 31, 2022 and September 30, 2022. In order to fully understand this analysis, the reader is encouraged to review the consolidated financial statements and accompanying notes thereto appearing elsewhere in this report.
Forward-Looking Statements
This report contains certain forward-looking statements with respect to the financial condition, results of operations, plans, objectives, future performance and business of the Company and its subsidiaries, including statements preceded by, followed by or that include words or phrases such as “believes,” “expects,” “anticipates,” “plans,” “trend,” “objective,” “continue,” “remain,” “pattern” or similar expressions or future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” “may” or similar expressions. The statements contained herein that are not historical facts are forward-looking statements based on management’s experience and beliefs concerning current conditions and future developments and their potential effects on the Company, including, without limitation, plans, strategies and goals, and statements about the Company’s expectations regarding revenue and asset growth, financial performance and profitability, loan and deposit growth, yields and returns, loan diversification and credit management, and shareholder value creation.
Such statements involve inherent risks and uncertainties, many of which are difficult to predict and are generally beyond the control of the Company. There can be no assurance that future developments affecting the Company will be the same as those anticipated by management. The Company cautions readers that a number of important factors could cause actual results to differ materially from those expressed in, or implied or projected by, such forward-looking statements. These risks and uncertainties include, but are not limited to, the following: the impact on our business, operations, financial condition, liquidity, results of operations, prospects and trading prices of our shares arising out of or resulting from the COVID-19 pandemic, and the related increase in FDIC premiums, the effects of, and changes in, trade, monetary and fiscal policies and laws, including changes in interest rate policies of the Board of Governors of the Federal Reserve System; inflation, interest rate, market and monetary fluctuations; the impact of competition and the acceptance of the Company’s products and services by new and existing customers; the impact of changes in financial services policies, laws and regulations; technological changes; any undersupply or oversupply of inventory and deterioration in values of real estate in the markets in which the Company operates, including residential and commercial; changes in the value of real estate held-for-sale; the effect of changes in accounting policies and practices, as may be adopted from time-to-time by bank regulatory agencies, the SEC, the Public Company Accounting Oversight Board, the FASB or other accounting standards setters; possible other-than-temporary impairment of securities held by the Company; the effects of the Company’s lack of a widely-diversified loan portfolio, including the risks of geographic and industry concentrations; ability to attract deposits and other sources of liquidity; changes in the competitive environment among financial and bank holding companies and other financial service providers and banks; unanticipated or prolonged litigation or other matters before regulatory agencies, whether currently existing or commencing in the future, that delay the occurrence or non-occurrence of events or results in elevated expenses or unexpected outcomes; changes in the interest rate environment may reduce interest margins or the fair value of financial instruments, or increase the cost of our subordinated debt securities; unexpected loss of key personnel and future to attract and retain talent; prepayment speeds, loan origination and sale volumes, charge-offs and loan loss provisions may vary substantially from period to period; general economic conditions and real estate valuations may be less favorable than expected; political developments, wars or other hostilities may disrupt or increase volatility in securities markets or other economic conditions; legislative or regulatory changes or actions may adversely affect the businesses in which the Company is engaged; changes and trends in the securities markets may adversely impact the Company; the impact on our business, operations, results of operations and prospects resulting from our pending merger with First Bank could be significant, including the Company’s ability to retain talent in connection with the announcement of and pendency of the merger; the ability of the Company and First Bank to obtain regulatory and shareholder approvals and meet other closing conditions to the pending merger on the expected terms and schedule; the impact of reputational risk created by the developments discussed above on such matters as business generation and retention, funding and liquidity could be significant; the outcome of any regulatory or legal investigations and proceedings; the impact of any change in the FDIC insurance assessment rate or the rules and regulations related to the calculation of the FDIC insurance assessment amount; and the Company’s ability to manage the risk involved in the foregoing. Additional factors that could cause actual results to differ materially from those expressed in the forward-looking statements are discussed in the Company’s 2022 Annual Report filed with the SEC and available at the SEC’s Internet site (http://www.sec.gov).
The Company undertakes no obligation to revise or publicly release any revision or update to these forward-looking statements to reflect events or circumstances that occur after the date on which such statements were made, unless required by law.
Critical Accounting Policies
The accounting and reporting policies followed by the Company conform, in all material respects, to GAAP. In preparing the consolidated financial statements, management has made estimates, judgments and assumptions that affect the reported amounts of assets and liabilities as of the dates of the consolidated statements of financial condition and for the periods indicated in the statements of net income. Actual results could differ significantly from those estimates.
The Company’s accounting policies are fundamental to understanding Management’s Discussion and Analysis (“MD&A”) of financial condition and results of operations. The Company has identified the determination of the ALLL, loans held for sale, fair value measurements, the evaluation of deferred tax assets, the other-than-temporary impairment evaluation of securities, and the valuation of our derivative positions to be critical because management must make subjective and/or complex judgments about matters that are inherently uncertain and could be most subject to revision as new information becomes available. Additional information on these policies can be found in the Company’s 2022 Annual Report and Note 2 of the Notes to the Unaudited Consolidated Financial Statements. There have been no significant changes to the Company’s Critical Accounting Policies as described in its 2022 Annual Report.
Liquidity Sources
Management has reviewed all primary and secondary sources of liquidity in preparation for any unforeseen funding needs due to the COVID-19 pandemic and prioritized such sources based on available capacity, term flexibility, and cost. As of December 31, 2022, the Company had adequate sources of liquidity.
Capital Strength
The Bank’s capital ratios continued to exceed the highest required regulatory benchmark levels. As of December 31, 2022, common equity Tier 1 capital ratio was 19.69%, Tier 1 leverage ratio was 16.53%, Tier 1 risk-based capital ratio was 19.69% and the total risk-based capital ratio was 20.77%.
Deferral and Modification Requests
The CARES Act provided guidance around the modification of loans as a result of the COVID-19 pandemic, which outlined, among other criteria, that short-term modifications made on a good faith basis to borrowers who were current as defined under the CARES Act prior to any relief, are not TDRs. This includes short-term modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers are considered current under the CARES Act and related regulatory guidance if they are less than 30 days past due on their contractual payments at the time a modification program is implemented. As of December 31, 2022, the Company had three COVID-19 modified loans totaling $31.8 million, representing 3.94 percent of loans outstanding as of such date. The COVID-19 loan modifications do not classify as TDRs as they fall under Section 4013 of the CARES Act, as amended, and further details regarding these modifications are provided in the table below. For loans subject to the program, each borrower is required to resume making regularly scheduled loan payments at the end of the modification period and the deferred amounts will be moved to the end of the loan term.
| December 31, 2022 |
||||||||||||||||
| Number of |
Loan Modified |
Gross |
Percentage of Gross |
|||||||||||||
| Loans |
Exposure |
Loans |
Loans Modified |
|||||||||||||
| (Dollars in thousands) |
||||||||||||||||
| Residential mortgage |
— | $ | — | $ | 176,207 | 0.00 | % | |||||||||
| Construction and Development: |
||||||||||||||||
| Residential and commercial |
— | — | 22,871 | 0.00 | % | |||||||||||
| Land loans |
— | — | 545 | 0.00 | % | |||||||||||
| Total Construction and Development |
— | — | 23,416 | 0.00 | % | |||||||||||
| Commercial: |
||||||||||||||||
| Commercial real estate |
3 | 31,842 | 408,671 | 7.79 | % | |||||||||||
| Farmland |
— | — | 11,435 | 0.00 | % | |||||||||||
| Multi-family |
— | — | 50,004 | 0.00 | % | |||||||||||
| Commercial and industrial |
— | — | 105,345 | 0.00 | % | |||||||||||
| Other |
— | — | 13,192 | 0.00 | % | |||||||||||
| Total Commercial |
3 | 31,842 | 588,647 | 5.41 | % | |||||||||||
| Consumer: |
||||||||||||||||
| Home equity lines of credit |
— | — | 12,849 | 0.00 | % | |||||||||||
| Second mortgages |
— | — | 4,024 | 0.00 | % | |||||||||||
| Other |
— | — | 2,252 | 0.00 | % | |||||||||||
| Total Consumer |
— | — | 19,125 | 0.00 | % | |||||||||||
| Total loans |
3 | $ | 31,842 | $ | 807,395 | 3.94 | % | |||||||||
| September 30, 2022 |
||||||||||||||||
| Number of |
Loan Modified |
Gross |
Percentage of Gross |
|||||||||||||
| Loans |
Exposure |
Loans |
Loans Modified |
|||||||||||||
| (Dollars in thousands) |
||||||||||||||||
| Residential mortgage |
— | $ | — | $ | 175,957 | 0.00 | % | |||||||||
| Construction and Development: |
||||||||||||||||
| Residential and commercial |
— | — | 24,362 | 0.00 | % | |||||||||||
| Land loans |
— | — | 550 | 0.00 | % | |||||||||||
| Total Construction and Development |
— | — | 24,912 | 0.00 | % | |||||||||||
| Commercial: |
||||||||||||||||
| Commercial real estate |
3 | 32,041 | 406,914 | 7.87 | % | |||||||||||
| Farmland |
— | — | 11,506 | 0.00 | % | |||||||||||
| Multi-family |
— | — | 55,295 | 0.00 | % | |||||||||||
| Commercial and industrial |
— | — | 102,703 | 0.00 | % | |||||||||||
| Other |
— | — | 13,356 | 0.00 | % | |||||||||||
| Total Commercial |
3 | 32,041 | 589,774 | 5.74 | % | |||||||||||
| Consumer: |
||||||||||||||||
| Home equity lines of credit |
— | — | 13,233 | 0.00 | % | |||||||||||
| Second mortgages |
— | — | 4,395 | 0.00 | % | |||||||||||
| Other |
— | — | 2,136 | 0.00 | % | |||||||||||
| Total Consumer |
— | — | 19,764 | 0.00 | % | |||||||||||
| Total loans |
3 | $ | 32,041 | $ | 810,407 | 3.95 | % | |||||||||
Certain industries included within our commercial real estate loans were particularly impacted by social distancing, quarantines, and the economic impact of the COVID-19 pandemic. All the three COVID-19 modified commercial real estate loans were hotels.
Results of Operations
Net income available to common shareholders for the three months ended December 31, 2022 amounted to $1.9 million, or $0.25 per fully diluted common share, a decrease of $109,000 or 5.4%, as compared with net income of $2.0 million or $0.27 per fully diluted common share for the three months ended December 31, 2021. This decrease in net income and diluted earnings per share was primarily due to an increase in other operating expenses, driven by merger related expenses incurred during the three months ended December 31, 2022. Total other income decreased $242,000 during the three months ended December 31, 2022 as compared to the three months ended December 31, 2021 mainly due to decreased prepayment penalties and service charges. Partially offsetting these items was a $596,000 increase to net interest income during the three months ended December 31, 2022 due to rate related factors. The annualized return on average assets was 0.75% for the three months ended December 31, 2022, compared to annualized return on average assets of 0.69% for three months ended December 31, 2021. The annualized return on average shareholders’ equity was 5.14% for the three months ended December 31, 2022, compared to 5.61% in annualized return on average shareholders’ equity for the three months ended December 31, 2021.
Net Interest Income and Margin
Net interest income is the difference between the interest earned on the portfolio of earning assets (principally loans and investments) and the interest paid for deposits and borrowings, which primarily support the loans and investments comprising these assets.
Net Interest Income
The following table presents the components of net interest income for the periods indicated:
| For the Three Months Ended December 31, |
||||||||||||||||
| Increase |
Percent |
|||||||||||||||
| 2022 |
2021 |
(Decrease) |
Change |
|||||||||||||
| (Dollars in thousands) |
||||||||||||||||
| Interest income: |
||||||||||||||||
| Loans, including fees |
$ | 9,150 | $ | 8,228 | $ | 922 | 11.21 | % | ||||||||
| Investment securities |
820 | 491 | 329 | 67.01 | ||||||||||||
| Dividends, restricted stock |
267 | 13 | 254 | 1,953.85 | ||||||||||||
| Interest-bearing cash accounts |
113 | 91 | 22 | 24.18 | ||||||||||||
| Total interest income |
10,350 | 8,823 | 1,527 | 17.31 | ||||||||||||
| Interest expense: |
||||||||||||||||
| Deposits |
1,830 | 1,045 | 785 | 75.12 | ||||||||||||
| Short-term borrowings |
9 | — | 9 | — | ||||||||||||
| Long-term borrowings |
327 | 237 | 90 | 37.97 | ||||||||||||
| Subordinated debt |
430 | 383 | 47 | 12.27 | ||||||||||||
| Total interest expense |
2,596 | 1,665 | 931 | 55.92 | ||||||||||||
| Net interest income |
$ | 7,754 | $ | 7,158 | $ | 596 | 8.33 | % | ||||||||
Net interest income was $7.8 million for the quarter ended December 31, 2022, an increase of $596,000, or 8.3 percent, from $7.2 million for the quarter ended December 31, 2021. The increase was primarily due to an improvement in rate related factors in interest earning assets which was partially offset by an increase in average rates in interest bearing liabilities. The average yield on interest-earning assets increased 83 basis points for the quarter ended December 31, 2022, to 4.26%, when compared to the same period in 2021 primarily due rising interest rates resulting in additional interest income from net loans and investment securities, which was partially offset by lower average loans. The average rate on interest-bearing liabilities for the quarter ended December 31, 2022 increased 59 basis points to 1.28% compared to the quarter ended December 31, 2021, due to higher interest rates on deposits and borrowings. Net interest margin increased to 3.19% for the quarter ended December 31, 2022, from 2.78% for the same period in 2021 as a result of the rising interest rate environment.
Interest Income
For the quarters ended December 31, 2022 and 2021, total interest income was $10.3 million and $8.8 million, respectively. Total interest income increased $1.5 million or 17.3% for the quarter ended December 31, 2022, compared to the quarter ended December 31, 2021, primarily due to rising interest rates resulting in additional interest income from net loans and investment securities partially offset by lower average loans. The average yield on interest-earning assets increased 83 basis points for the quarter ended December 2022, to 4.26%, when compared to the same period in 2021.
Interest Expense
For the quarter ended December 31, 2022, interest expense increased by $931,000, or 55.9%, to $2.6 million, compared to $1.7 million for the quarter ended December 31, 2021. The increase in interest expense is attributable to higher interest rates on deposits and borrowings during the comparable period. Total average interest-bearing liabilities declined $159.1 million, or 16.4%, to $809.1 million, and the average rate on interest-bearing liabilities increased 59 basis points to 1.28%, compared to 0.69%, for the quarters ended December 31, 2022 and 2021, respectively.
Variance in Net Interest Income
The following table quantifies the impact on net interest income resulting from changes in average balances and average rates during the periods presented. Any change in interest income or expense attributable to both changes in volume and changes in rate has been allocated to change in rate of each category.
Analysis of Variance in Net Interest Income Due to Changes in Volume and Rates
| Three Months Ended December 31, |
||||||||||||
| 2022 and 2021 |
||||||||||||
| Increase (Decrease) Due to Change in: |
||||||||||||
| Average |
Average |
Net |
||||||||||
| Volume |
Rate |
Change |
||||||||||
| (In thousands) | ||||||||||||
| Interest Earning Assets: |
||||||||||||
| Loans, including fees |
$ | (803 | ) | $ | 1,725 | $ | 922 | |||||
| Investment securities |
225 | 104 | 329 | |||||||||
| Interest-bearing cash accounts |
(1 | ) | 255 | 254 | ||||||||
| Dividends, restricted stock |
3 | 19 | 22 | |||||||||
| Total interest-earning assets |
$ | (576 | ) | $ | 2,103 | $ | 1,527 | |||||
| Interest Bearing Liabilities: |
||||||||||||
| Money Market deposits |
$ | (145 | ) | $ | 269 | $ | 124 | |||||
| Savings deposits |
— | 4 | 4 | |||||||||
| Certificates of deposits |
100 | 290 | 390 | |||||||||
| Other interest-bearing deposits |
(22 | ) | 289 | 267 | ||||||||
| Total interest-bearing deposits |
(67 | ) | 852 | 785 | ||||||||
| Borrowings and Subordinated debt |
94 | 52 | 146 | |||||||||
| Total interest-bearing liabilities |
$ | 27 | $ | 904 | $ | 931 | ||||||
| Change in net interest income |
$ | (603 | ) | $ | 1,199 | $ | 596 | |||||
Average Balances, Net Interest Income, and Yields Earned and Rates Paid
The following table shows for the periods indicated the total dollar amount of interest from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and the NIM (net interest income as a percentage of average interest-earning assets). All average balances are based on monthly balances. Management does not believe that the monthly averages differ significantly from what the daily averages would be. Quarterly rates, yields, spreads, and margins throughout this MD&A are calculated on an annualized basis where appropriate. No tax equivalent adjustments have been made as the amounts are not material.
| Three Months Ended December 31, |
||||||||||||||||||||||||
| 2022 |
2021 |
|||||||||||||||||||||||
| Average |
Interest |
Average |
Interest |
|||||||||||||||||||||
| Outstanding |
Earned/ |
Yield/ |
Outstanding |
Earned/ |
Yield/ |
|||||||||||||||||||
| Balance |
Paid |
Rate |
Balance |
Paid |
Rate |
|||||||||||||||||||
| (Dollars in thousands) |
||||||||||||||||||||||||
| ASSETS |
||||||||||||||||||||||||
| Interest Earning Assets: |
||||||||||||||||||||||||
| Loans, including fees(1) |
$ | 824,361 | $ | 9,150 | 4.44 | % | $ | 913,587 | $ | 8,228 | 3.60 | % | ||||||||||||
| Investment securities |
110,033 | 820 | 2.98 | % | 75,427 | 491 | 2.60 | % | ||||||||||||||||
| Interest-bearing cash accounts |
30,650 | 267 | 3.48 | % | 32,775 | 13 | 0.16 | % | ||||||||||||||||
| Dividends, restricted stock |
6,949 | 113 | 6.50 | % | 6,699 | 91 | 5.43 | % | ||||||||||||||||
| Total interest-earning assets(1) |
971,993 | 10,350 | 4.26 | % | 1,028,488 | 8,823 | 3.43 | % | ||||||||||||||||
| Non-interest-earning assets: |
||||||||||||||||||||||||
| Cash and due from banks |
5,386 | 105,989 | ||||||||||||||||||||||
| Bank-owned life insurance |
26,292 | 26,125 | ||||||||||||||||||||||
| Other assets |
27,918 | 26,042 | ||||||||||||||||||||||
| Other real estate owned |
228 | 4,961 | ||||||||||||||||||||||
| Allowance for loan losses |
(9,121 | ) | (14,157 | ) | ||||||||||||||||||||
| Total non-interest-earning assets |
50,703 | 148,960 | ||||||||||||||||||||||
| Total assets |
$ | 1,022,696 | $ | 1,177,448 | ||||||||||||||||||||
| LIABILITIES & SHAREHOLDERS’ EQUITY |
||||||||||||||||||||||||
| Interest-Bearing Liabilities: |
||||||||||||||||||||||||
| Money Market deposits |
$ | 174,702 | 402 | 0.92 | % | $ | 367,761 | 278 | 0.30 | % | ||||||||||||||
| Savings deposits |
53,623 | 15 | 0.11 | % | 53,336 | 11 | 0.08 | % | ||||||||||||||||
| Certificates of deposits |
150,044 | 703 | 1.87 | % | 113,622 | 312 | 1.10 | % | ||||||||||||||||
| Other interest-bearing deposits |
324,911 | 710 | 0.87 | % | 341,550 | 444 | 0.52 | % | ||||||||||||||||
| Total interest-bearing deposits |
703,280 | 1,830 | 1.04 | % | 876,269 | 1,045 | 0.48 | % | ||||||||||||||||
| Borrowings |
105,837 | 766 | 2.90 | % | 91,919 | 620 | 2.70 | % | ||||||||||||||||
| Total interest-bearing liabilities |
809,117 | 2,596 | 1.28 | % | 968,188 | 1,665 | 0.69 | % | ||||||||||||||||
| Non-interest-bearing liabilities: |
||||||||||||||||||||||||
| Demand deposits |
56,755 | 54,092 | ||||||||||||||||||||||
| Other liabilities |
8,460 | 11,408 | ||||||||||||||||||||||
| Total non-interest bearing liabilities |
65,215 | 65,500 | ||||||||||||||||||||||
| Shareholders' equity |
148,364 | 143,760 | ||||||||||||||||||||||
| Total liabilities and shareholders' equity |
$ | 1,022,696 | $ | 1,177,448 | ||||||||||||||||||||
| Net interest spread |
2.98 | % | 2.74 | % | ||||||||||||||||||||
| Net interest margin |
3.19 | % | 2.78 | % | ||||||||||||||||||||
| Net interest income |
$ | 7,754 | $ | 7,158 | ||||||||||||||||||||
| (1) Includes non-accrual loans during the respective periods. Calculated net of deferred loan fees and loan discounts. |
||||||||||||||||||
Other Income
The following table presents the principal categories of other income for the periods indicated:
| Three Months Ended December 31, |
||||||||||||||||
| Increase |
Percent |
|||||||||||||||
| 2022 |
2021 |
(Decrease) |
Change |
|||||||||||||
| (Dollars in thousands) |
||||||||||||||||
| Service charges and other fees |
$ | 177 | $ | 454 | $ | (277 | ) | (61.01 | )% | |||||||
| Rental income-other |
49 | 52 | (3 | ) | (5.77 | ) | ||||||||||
| Net gains on sale of loans |
8 | 52 | (44 | ) | (84.62 | ) | ||||||||||
| Earnings on bank-owned life insurance |
173 | 169 | 4 | 2.37 | ||||||||||||
| Other real estate owned income, net |
78 | — | 78 | — | ||||||||||||
| Total other income |
$ | 485 | $ | 727 | $ | (242 | ) | (33.29 | )% | |||||||
For the three months ended December 31, 2022, total other income amounted to $485,000, a decrease of $242,000, or 33.3%, compared to the three months ended December 31, 2021. The decrease in total other income was primarily due to a decrease of $277,000 in prepayment penalties, service charges and other fees during the quarter ended December 31, 2022 as compared to the quarter ended December 31, 2021.
Other Expense
The following table presents the principal categories of other expense for the periods indicated:
| Three Months Ended December 31, |
||||||||||||||||
| Increase |
Percent |
|||||||||||||||
| 2022 |
2021 |
(Decrease) |
Change |
|||||||||||||
| (Dollars in thousands) |
||||||||||||||||
| Salaries and employee benefits |
$ | 2,582 | $ | 2,295 | $ | 287 | 12.51 | % | ||||||||
| Occupancy expense |
537 | 515 | 22 | 4.27 | ||||||||||||
| Federal deposit insurance premium |
64 | 76 | (12 | ) | (15.79 | ) | ||||||||||
| Advertising |
32 | 32 | — | — | ||||||||||||
| Data processing |
275 | 320 | (45 | ) | (14.06 | ) | ||||||||||
| Professional fees |
763 | 1,055 | (292 | ) | (27.68 | ) | ||||||||||
| Merger related expense |
511 | — | 511 | — | ||||||||||||
| Pennsylvania shares tax |
127 | 170 | (43 | ) | (25.29 | ) | ||||||||||
| Other operating expenses |
871 | 765 | 106 | 13.86 | ||||||||||||
| Total other expense |
$ | 5,762 | $ | 5,228 | $ | 534 | 10.21 | % | ||||||||
Other expenses for the quarter ended December 31, 2022 increased $534,000, or 10.2%, to $5.8 million when compared to the quarter ended December 31, 2021. The increase was primarily due to an increase of $511,000 of merger related expenses for the three months ended December 31, 2022. These expenses primarily consisted of legal and professional fees.
Income Taxes
The Company recorded income tax expense of $569,000 during the quarter ended December 31, 2022, compared to $640,000 for the quarter ended December 31, 2021. The effective tax rates for the Company for the quarters ended December 31, 2022 and 2021, were 23.0% and 24.1%, respectively. The effective tax rate includes discrete tax items related to non-deductible merger-related expenses recognized in the first quarter of the fiscal year 2023.
Investment Portfolio
For the three months ended December 31, 2022, the average volume of investment securities increased by $34.6 million to $110.0 million, or 11.3% of average earning assets, from $75.4 million, or 7.3% of average earning assets, for the three months ended December 31, 2021. At December 31, 2022, the total investment portfolio amounted to $109.9 million. At December 31, 2022, the principal components of the investment portfolio were government agency obligations, federal agency obligations, including mortgage-backed securities, obligations of U.S. states and political subdivisions, U.S. treasury note, corporate bonds and notes, a trust preferred security, and taxable mutual funds.
Loan Portfolio
The Company’s loan portfolio consists of residential, construction and development, commercial, and consumer loans, serving the diverse customer base in its market area. The composition of the Company’s portfolio continues to change due to local competition. Factors such as the economic climate, interest rates, real estate values and employment all contribute to changes in the composition of the Company’s portfolio. Any growth of the loan portfolio is generated through business development efforts, repeat customer requests for new financings, penetration into existing markets, and entry into new markets.
The Company seeks to create growth in commercial lending, which primarily includes commercial real estate, multi-family, farmland, and commercial and industrial lending, by offering customer-focused products and competitive pricing and by capitalizing on the positive trends in its market area. Products offered are designed to meet the financial requirements of the Company’s customers. It is the objective of the Company’s credit policies to diversify the commercial loan portfolio and limit concentrations in any single industry.
Total gross loans, which excludes loans held-for-sale decreased by $3.0 million to $807.4 million at December 31, 2022 when compared to September 30, 2022. Construction loans decreased by $1.5 million, commercial loans decreased by $1.1 million, consumer loans declined by $600,000, and residential loans increased by $250,000, in each case, at December 31, 2022 when compared to September 30, 2022.
Loans held-for-sale amounted to $13.2 million at December 31, 2022, compared to $13.4 million at September 30, 2022.
At December 31, 2022 the Company had $111.4 million in overall undisbursed loan commitments, which consisted primarily of available usage from active construction facilities, unused commercial lines of credit, and home equity lines of credit.
Average loan balances decreased $89.2 million, or 9.8% for the three months ended December 31, 2022, as compared to the same period in fiscal year 2021, while the average yield on loans increased by 84 basis points for the three months ended December 31, 2022, compared with the same period in fiscal year 2021. The decrease in average total loan volume was primarily due to increased paydowns and payoff activity.
Allowance for Loan Losses and Related Provision
The ALLL provides an estimate of probable but unconfirmed losses in the loan portfolio as of the financial statement date. Additions to the ALLL are made through provisions charged against current operations and through recoveries made on loans previously charged-off. The ALLL is maintained at an amount considered adequate by management to provide for probable loan losses inherent in the loan portfolio based upon a periodic evaluation of the portfolio’s risk characteristics. In establishing an appropriate ALLL, an assessment of the individual borrowers, a determination of the value of the underlying collateral, a review of historical loss experience and an analysis of the levels and trends of loan categories, delinquencies and problem loans are considered. Such qualitative factors as changes in lending policies and procedures, economic and business conditions, nature and volume of the portfolio, changes in delinquency, concentration of credit trends, value of underlying collateral, the level and trend of interest rates and peer group statistics are also reviewed. Given the economic volatility impacting national, regional, and local markets, the Company’s analysis of its ALLL takes into consideration the potential impact that current trends may have on the Company’s borrower base.
Although management uses the best information reasonably available to management, the level of the ALLL remains an estimate, which is subject to significant judgment and short-term change. Our regulators, as an integral part of their examination process, periodically review the Company’s ALLL. Our regulators may require the Company to increase the ALLL based on their analysis of information available to them at the time of their examination. Furthermore, the majority of the Company’s loans are secured by real estate in the State of New Jersey and the State of Pennsylvania. Future adjustments to the ALLL may be necessary due to economic factors impacting New Jersey and Pennsylvania real estate and the economy in general, as well as operating, regulatory and other conditions beyond the Company’s control.
The allowance for loan losses at December 31, 2022 amounted to $9.1 million, or 1.13% of total gross loans excluding loans held-for-sale, compared to $9.1 million, or 1.12% of total gross loans excluding loans held-for-sale, at September 30, 2022. The Company did not record a provision for loan losses for the quarters ended December 31, 2022 or 2021. Net charge-offs were ($9,000) and $1.0 million for the three months ended December 31, 2022 and 2021, respectively. The decrease is reflective of there not being any charge offs recorded during the December 2022 period.
We will continue to experience periodic charge-offs in the future as exit strategies with respect to certain of our loans are considered and executed, in particular as it relates to our clients impacted by the COVID-19 pandemic. Loans with previously established specific reserves may ultimately result in a charge-off under a variety of scenarios. The level of the ALLL for the respective periods reflects the credit quality within the loan portfolio, the loan volume recorded or lost during the periods, the changing composition of the commercial and residential real estate loan portfolios and other related factors. In management’s view, the level of the ALLL at December 31, 2022 was adequate to cover losses inherent in the loan portfolio. Actual results could differ materially from management’s analysis, based principally upon the factors considered by management in establishing the ALLL.
Changes in the ALLL are presented in the following table for the periods indicated:
| Three Months Ended December 31, |
||||||||
| 2022 |
2021 |
|||||||
| (Dollars in thousands) |
||||||||
| Average loans outstanding |
$ | 824,361 | $ | 913,857 | ||||
| Total gross loans at end of period |
$ | 807,395 | $ | 867,574 | ||||
| Analysis of the Allowance of Loan Losses: |
||||||||
| Balance at beginning of period |
$ | 9,090 | $ | 11,472 | ||||
| Charge-offs: |
||||||||
| Commercial: |
||||||||
| Commercial real estate |
— | — | ||||||
| Commercial and industrial |
— | 1,430 | ||||||
| Consumer: |
||||||||
| Second mortgages |
— | 85 | ||||||
| Other |
— | — | ||||||
| Total charge-offs |
— | 1,515 | ||||||
| Recoveries: |
||||||||
| Residential Mortgage |
5 | 1 | ||||||
| Commercial: |
||||||||
| Commercial real estate |
— | 75 | ||||||
| Commercial and industrial |
1 | — | ||||||
| Consumer: |
||||||||
| Home equity lines of credit |
1 | — | ||||||
| Second mortgages |
2 | 4 | ||||||
| Second mortgages |
— | — | ||||||
| Total recoveries |
9 | 80 | ||||||
| Net charge-offs |
(9 | ) | 1,435 | |||||
| Provision for loan losses |
— | — | ||||||
| Balance at end of period |
$ | 9,099 | $ | 10,037 | ||||
| Ratios: |
||||||||
| Ratio of allowance for loan losses to non-performing loans |
466.14 | % | 560.73 | % | ||||
| Ratio of net charge-offs to average loans outstanding (1) |
0.00 | % | 0.19 | % | ||||
| Ratio of net charge-offs to total allowance for loan losses |
(0.10 | )% | 14.30 | % | ||||
| (1) |
Annualized |
Asset Quality
The Company manages asset quality and credit risk by maintaining diversification in its loan portfolio and through review processes that include analysis of credit requests and ongoing examination of outstanding loans, delinquencies, and potential problem loans, with particular attention to the loan portfolio’s dynamics and mix of assets. The Company endeavors to identify loans experiencing difficulty early in the process in an attempt to correct the problems, to record charge-offs promptly based on realistic assessments of current collateral values and cash flows, and to maintain an adequate ALLL at all times.
It is generally the Company’s policy to discontinue interest accruals once a loan is past due as to interest or principal payments for a period of 90 days. When a loan is placed on non-accrual status, interest accruals cease, and uncollected accrued interest is reversed and charged against current income. Payments received on non-accrual loans are applied against principal. A loan may only be restored to an accruing basis when it again becomes well-secured, all past due amounts have been collected and a satisfactory period of ongoing repayments exists. Accruing loans past due 90 days or more are generally well-secured and in the process of collection.
Non-Performing Assets, OREO and Troubled Debt Restructured Loans
Non-performing loans include non-accrual loans and accruing loans that are contractually past due 90 days or more. Non-accrual loans represent loans on which interest accruals have been suspended. It is the Company’s general policy to consider the charge-off of loans at the point they become past due in excess of 90 days, with the exception of loans that are both well-secured and in the process of collection.
TDR loans represent loans to borrowers experiencing financial difficulties on which a concession was granted, such as a reduction in interest rate which is lower than the current market rate for new debt with similar risks, or modified repayment terms, and are performing under the restructured terms. Such loans, as long as they are performing in accordance with their restructured terms, are not included within the Company’s non-performing loans. For additional information regarding loans, see Note 7 of the Notes to the Unaudited Consolidated Financial Statements.
The following table sets forth, as of the dates indicated, the amount of the Company’s non-accrual loans, accruing loans past due 90 days or more, OREO and performing TDR loans:
| December 31, |
September 30, |
|||||||
| 2022 |
2022 |
|||||||
| (In thousands) |
||||||||
| Non-accruing loans: |
||||||||
| Non-accrual loans |
$ | 1,277 | $ | 753 | ||||
| Accruing loans more than 90 days past due |
675 | 243 | ||||||
| Total non-performing loans |
1,952 | 996 | ||||||
| OREO |
259 | 259 | ||||||
| Total non-performing assets |
$ | 2,211 | $ | 1,255 | ||||
| TDR loans - performing |
$ | 10,075 | $ | 4,979 | ||||
Non-accrual loans totaled $1.3 million at December 31, 2022 and $753,000 at September 30, 2022. The increase in non-accrual loans was primarily due to addition of two residential loans with a carrying value of $569,000 during the three months ended December 31, 2022. OREO was $259,000 at both December 31, 2022, and September 30, 2022. Performing TDR loans were $10.1 million at December 31, 2022 and $4.8 million at September 30, 2022. The increase is primarily related to one additional new TDR commercial and industrial loan at a carrying value of $4.8 million during the December 31, 2022 period.
Credit quality risk ratings include categories of “pass,” “special mention,” “substandard” and “doubtful.” Assets classified as “pass” are those protected by the current net worth and paying capacity of the obligor or by the value of the underlying collateral. Assets which do not currently expose the Company to sufficient risk to warrant classification as substandard or doubtful but possess certain identified weaknesses are required to be designated as “special mention.” If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects. An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the Company will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified as “substandard” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.”
Special mention loans amounted to $32.5 million and $32.7 million at December 31, 2022 and September 30, 2022 respectively. Substandard loans were $11.3 million and $11.4 million at December 31, 2022 and September 30, 2022 , respectively. Our loans that have been identified as special mention or substandard are considered potential problem loans due to a variety of changing conditions affecting the credits, including general economic conditions and/or conditions applicable to the specific borrowers.
Recent Accounting Pronouncements
Note 2 of the Notes to the Unaudited Consolidated Financial Statements discusses the expected impact of accounting pronouncements recently issued or proposed but not yet required to be adopted.
Asset and Liability Management
Asset and liability management encompasses an analysis of market risk, the control of interest rate risk (interest sensitivity management) and the ongoing maintenance and planning of liquidity and capital. The composition of the Company’s statement of condition is planned and monitored by the Company’s Asset and Liability Committee (“ALCO”). In general, management’s objective is to optimize net interest income and minimize market risk and interest rate risk by monitoring the components of the statement of condition and the interaction of interest rates.
Short-term interest rate exposure analysis is supplemented with an interest sensitivity gap model. The Company utilizes interest sensitivity analysis to measure the responsiveness of net interest income to changes in interest rate levels. Interest rate risk arises when an earning asset matures or when its interest rate changes in a time period different than that of a supporting interest-bearing liability, or when an interest-bearing liability matures or when its interest rate changes in a time period different than that of an earning asset that it supports. While the Company matches only a small portion of specific assets and liabilities, total earning assets and interest-bearing liabilities are grouped to determine the overall interest rate risk within a number of specific time frames. The difference between interest-sensitive assets and interest-sensitive liabilities is referred to as the interest sensitivity gap. At any given point in time, the Company may be in an asset-sensitive position, whereby its interest-sensitive assets exceed its interest-sensitive liabilities, or in a liability-sensitive position, whereby its interest-sensitive liabilities exceed its interest-sensitive assets, depending in part on management’s judgment as to projected interest rate trends.
The Company’s interest rate sensitivity position in each time frame may be expressed as assets less liabilities, as liabilities less assets, or as the ratio between rate sensitive assets (“RSA”) and rate sensitive liabilities (“RSL”). For example, a short-funded position (liabilities repricing before assets) would be expressed as a net negative position, when period gaps are computed by subtracting repricing liabilities from repricing assets. When using the ratio method, an RSA/RSL ratio of 1 indicates a balanced position, a ratio greater than 1 indicates an asset-sensitive position and a ratio less than 1 indicates a liability-sensitive position.
A negative gap and/or a rate sensitivity ratio less than 1 tends to expand NIMs in a falling rate environment and reduce NIMs in a rising rate environment. Conversely, when a positive gap occurs, generally margins expand in a rising rate environment and contract in a falling rate environment. From time to time, the Company may elect to deliberately mismatch liabilities and assets in a strategic gap position.
At December 31, 2022, the Company reflected a positive interest sensitivity gap with an interest sensitivity ratio of 1.11:1.00 at the cumulative one-year position. Based on current rising interest rate environment, that at the current time is estimated to continue through the first half of 2023, emphasis will be on controlling liability costs and duration in our efforts to insulate the net interest spread for a potential future decline in rates.
Estimates of Fair Value
The estimation of fair value is significant to a number of the Company’s assets, including loans held for sale, investment securities available-for-sale and loan swaps. These are all recorded at either fair value or the lower of cost or fair value. Fair values are volatile and may be influenced by a number of factors. Circumstances that could cause estimates of the fair value of certain assets and liabilities to change include a change in prepayment speeds, discount rates, or market interest rates. Fair values for most available-for-sale investment securities are based on quoted market prices. If quoted market prices are not available, fair values are based on judgments regarding future expected loss experience, current economic condition, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature, involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Liquidity
The liquidity position of the Company is dependent primarily on successful management of the Bank’s assets and liabilities so as to meet the needs of both deposit and credit customers. Liquidity needs arise principally to accommodate possible deposit outflows and to meet customers’ requests for loans. Scheduled principal loan repayments, maturing investments, short-term liquid assets, and deposit inflows can satisfy such needs. The objective of liquidity management is to enable the Company to maintain sufficient liquidity to meet its obligations in a timely and cost-effective manner.
Management monitors current and projected cash flows and adjusts positions as necessary to maintain adequate levels of liquidity. Under its liquidity risk management program, the Company regularly monitors correspondent bank funding exposure and credit exposure in accordance with guidelines issued by the banking regulatory authorities. Management uses a variety of potential funding sources and staggering maturities to reduce the risk of potential funding pressure. Management also maintains a detailed contingency funding plan designed to adequately respond to situations which could lead to stresses on liquidity. Management believes that the Company has the funding capacity to meet the liquidity needs arising from potential events. The Company maintains borrowing capacity through the Federal Home Loan Bank of Pittsburgh secured with loans and marketable securities.
The Company’s primary sources of short-term liquidity consist of cash and cash equivalents and investment securities available-for-sale.
Additionally, liquidity is derived from scheduled loan payments of principal and interest, as well as prepayments received. As a contingency plan for any liquidity constraints, liquidity could also be derived from the sale of conforming residential mortgages from our loan portfolio from the temporary curtailment of lending activities. At December 31, 2022, the Company had $35.0 million in cash and cash equivalents compared to $50.4 million at September 30, 2022. In addition, our available for sale investment securities amounted to $50.4 million at December 31, 2022 and $49.8 million at September 30, 2022.
Deposits
Total deposits decreased $47.9 million, or 6.1 percent, from $785.3 million at September 30, 2022 to $737.4 million at December 31, 2022. The decrease in deposits was primarily related to a reduction of $28.8 million in money market deposits and $7.2 million in interest-bearing demand deposits, a $7.0 million decline in non-interest-bearing deposits and a decrease of $3.4 million in time deposits. Non-interest-bearing core deposits; interest-bearing core deposits, savings, money market; and time deposits represent approximately 7%, 73%, and 20% of total deposits, respectively as of December 31, 2022.
Total interest-bearing deposits decreased $40.9 million from $727.3 million at September 30, 2022 to $686.4 million at December 31, 2022. Time deposits $250,000 and over decreased $7.3 million as compared to September 30, 2022. Time deposits $250,000 and over represented 7.5% of total deposits at December 31, 2022 compared to 8.0% at September 30, 2022. Brokered deposits remained at $9.1 million at both December 31, 2022 and September 30, 2022.
The Company continues to focus on the maintenance and development of its deposit base to align with its funding requirements and liquidity needs, but with an emphasis on serving the needs of its communities to provide a long-term relationship base to efficiently compete for and retain deposits in its market.
The following table depicts the Company’s deposits classified by type, with percentages to total deposits, at December 31, 2022 and September 30, 2022:
| December 31, |
September 30, |
|||||||||||||||||||
| 2022 |
2022 |
Dollar |
||||||||||||||||||
| Amount |
Percentage |
Amount |
Percentage |
Change |
||||||||||||||||
| Balances by types of deposit: |
(Dollars in thousands) |
|||||||||||||||||||
| Savings |
$ | 53,655 | 7.28 | % | $ | 55,288 | 7.04 | % | $ | (1,633 | ) | |||||||||
| Money market accounts |
250,936 | 34.03 | 279,699 | 35.62 | (28,763 | ) | ||||||||||||||
| Interest bearing demand |
233,635 | 31.68 | 240,819 | 30.66 | (7,184 | ) | ||||||||||||||
| Non-interest bearing demand |
51,066 | 6.92 | 58,014 | 7.39 | (6,948 | ) | ||||||||||||||
| 589,292 | 79.91 | 633,820 | 80.71 | (44,528 | ) | |||||||||||||||
| Certificates of deposit |
148,130 | 20.09 | 151,503 | 19.29 | (3,373 | ) | ||||||||||||||
| Total |
$ | 737,422 | 100.00 | % | $ | 785,323 | 100.00 | % | $ | (47,901 | ) | |||||||||
Borrowings
Advances from FHLB Pittsburgh are available to supplement the Company’s liquidity position and, to the extent that maturing deposits do not remain with the Company, management may replace such funds with these advances. As of December 31, 2022 and September 30, 2022, the Company’s outstanding balance of FHLB Pittsburgh advances totaled $80.0 million. Of the $80.0 million in advances, all are short-term fixed-rate advances except $60.0 million of advances that have a rolling 90-day maturity.
The Company did not purchase any securities under agreements to repurchase as a short-term funding source during the quarters ended December 31, 2022 or 2021.
Cash Flows
The Consolidated Statements of Cash Flows present the changes in cash and cash equivalents resulting from the Company’s operating, investing, and financing activities. During the three months ended December 31, 2022, cash and cash equivalents decreased by $18.3 million from the balance at September 30, 2022. Net cash of $7.0 million was provided by operating activities. Net cash provided by investing activities amounted to $4.1 million primarily due to decrease in loans of $3.6 million combined with $523,000 of investment securities. Net cash used in financing activities amounted to $29.4 million, which was primarily attributable to decrease in deposits of $47.9 million which was partially offset by a net increase in borrowings of $18.0 million.
Shareholders’ Equity
Total shareholders’ equity amounted to $148.7 million, or 14.6% of total assets, at December 31, 2022, compared to $146.4 million, or 14.0% of total assets, at September 30, 2022. Book value per common share was $19.48 at December 31, 2022, compared to $19.18 at September 30, 2022.
| December 31, |
September 30, |
|||||||
| 2022 |
2022 |
|||||||
| (In thousands, except for per share data) |
||||||||
| Shareholders’ equity |
$ | 148,735 | $ | 146,445 | ||||
| Book value per common share |
$ | 19.48 | $ | 19.18 | ||||
Capital
At December 31, 2022, the Bank’s common equity Tier 1 capital ratio was 19.69%, Tier 1 leverage ratio was 16.53%, Tier 1 risk-based capital ratio was 19.69% and the total risk-based capital ratio was 20.77%. At September 30, 2022, the Bank’s common equity Tier 1 capital ratio was 19.27%, Tier 1 leverage ratio was 16.30%, Tier 1 risk-based capital ratio was 19.27% and the total risk-based capital ratio was 20.34%. At December 31, 2022, the Bank was in compliance with all applicable regulatory capital requirements.
Information on Stock Repurchases
Information on Stock Repurchases is provided in “Part II. Other Information, Item 2, Unregistered Sales of Equity Securities and Use of Proceeds” herein.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
This Item has been omitted based on the Company’s status as a smaller reporting company.
Item 4. Controls and Procedures
Our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and regulations, and that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures.
Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Based on the evaluation of our disclosure controls and procedures as of December 31, 2022, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of December 31, 2022.
Changes in Internal Controls
There were no changes in the Company’s internal controls over financial reporting during the three months ended December 31, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
The Company and its subsidiaries are subject to various legal actions arising in the normal course of business. In the opinion of management, the resolution of these legal actions is not expected to have a material adverse effect on the Company’s financial condition or results of operations.
For a summary of risk factors relevant to the Company, see Part I, Item 1A, “Risk Factors” in the 2022 Annual Report. There are no material changes to the risk factors as previously disclosed under the section titled “Risk Factors” in Part I, Item 1A of our 2022 Annual Report. Additional risks not presently known to the Company, or that the Company currently deems immaterial, may also adversely affect the business, financial condition or results of operations.
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
There were no repurchases or unregistered sales of the Company’s stock during the quarter ended December 31, 2022.
Item 3 - Defaults Upon Senior Securities
None.
Item 4 - Mine Safety Disclosure
Not applicable.
None.
| 2.1 | Agreement and Plan of Merger, dated December 13, 2022, by and among First Bank, Malvern Bancorp, Inc. and Malvern Bank, National Association (1) | |
| 3.1 |
Amended and Restated Articles of Incorporation of Malvern Bancorp, Inc.(2) |
|
| 3.2 |
||
| 10.1 | Form of Voting Agreement dated December 13, 2022, by and among First Bank, Malvern Bancorp, Inc. and certain stockholders of Malvern Bancorp, Inc. (4) | |
| 31.1 |
||
| 31.2 |
||
| 32.0 |
||
| 101.INS |
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
|
| 101.SCH |
Inline XBRL Taxonomy Extension Schema Document. |
|
| 101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
|
| 101.LAB |
Inline XBRL Taxonomy Extension Label Linkbase Document. |
|
| 101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
|
| 101.DEF |
Inline XBRL Taxonomy Extension Definitions Linkbase Document. |
|
| 104 |
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
| (1) |
Incorporated by reference from Exhibit 2.1 to the Current Report on Form 8-K of Malvern Bancorp, Inc. filed with the SEC on December 14, 2022. |
| (2) |
Incorporated by reference from Exhibit 3.1 to the Current Report on Form 8-K of Malvern Bancorp, Inc. filed with the SEC on February 17, 2017. |
| (3) | Incorporated by reference from Exhibit 3.2 to the Current Report on Form 8-K of Malvern Bancorp, Inc. filed with the SEC on February 17, 2017. |
| (4) | Incorporated by reference from Exhibit 10.1 to the Current Report on Form 8-K of Malvern Bancorp, Inc. filed with the SEC on December 14, 2022. |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| February 14, 2023 |
By: |
/s/ Anthony C. Weagley |
| Anthony C. Weagley |
||
| President and Chief Executive Officer |
||
| February 14, 2023 |
By: |
/s/ Joseph D. Gangemi |
| Joseph D. Gangemi |
||
| Executive Vice President and Chief Financial Officer |
EXHIBIT 31.1
CERTIFICATION
I, Anthony Weagley, certify that:
|
1. |
I have reviewed this quarterly report on Form 10-Q of Malvern Bancorp, Inc. (the “registrant”); |
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
|
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
|
4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
(c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
(d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
|
5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): |
|
(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
|
(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
|
Date: February 14, 2023 |
/s/ Anthony C. Weagley |
|
|
Anthony C. Weagley |
||
|
President and Chief Executive Officer |
EXHIBIT 31.2
CERTIFICATION
I, Joseph Gangemi certify that:
|
1. |
I have reviewed this quarterly report on Form 10-Q of Malvern Bancorp, Inc. (the “registrant”); |
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
|
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
|
4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
(c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
(d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
|
5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): |
|
(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
|
(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
|
Date: February 14, 2023 |
/s/ Joseph D. Gangemi |
|
|
Joseph D. Gangemi |
||
|
Executive Vice President and Chief Financial Officer |
EXHIBIT 32.0
SECTION 1350 CERTIFICATION OF THE
CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
In connection with the Quarterly Report of Malvern Bancorp, Inc. (the “Company”) on Form 10-Q for the period ended December 31, 2022, each of the undersigned, Anthony C. Weagley, President and Chief Executive Officer of the Company, and Joseph D. Gangemi, Executive Vice President and Chief Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
|
(1) |
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
|
(2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
|
Date: February 14, 2023 |
By: |
/s/ Anthony C. Weagley |
|
|
Anthony C. Weagley |
|||
|
President and Chief Executive Officer |
|||
|
Date: February 14, 2023 |
By: |
/s/ Joseph D. Gangemi |
|
|
Joseph D. Gangemi |
|||
|
Executive Vice President and Chief Financial Officer |
|||
A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act has been provided to Malvern Bancorp, Inc. and will be retained by Malvern Bancorp, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.