UNITED STATES OF AMERICA

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

                               (Mark One)

 

☒

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

 

For the Quarterly Period Ended June 30, 2015

 

OR

 

☐

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

 

For the transition period from                to               

 

Commission File Number:  000-54835 

 

 

MALVERN BANCORP, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

  

Pennsylvania	45-5307782
(State or Other Jurisdiction of Incorporation or Organization)	(IRS Employer Identification No.)

 

42 Lancaster Avenue, Paoli, Pennsylvania 19301

(Address of Principal Executive Offices) (Zip Code)

 

(610) 644-9400

(Registrant’s Telephone Number, Including Area Code)

 

 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐

 

 Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes   ☒    No   ☐

 

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

 

Large accelerated filer  ☐

Accelerated filer  ☐

Non-accelerated filer  ☐ (Do not check if smaller reporting company)

Smaller reporting company  ☒

 

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

 

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

 

Common Stock, no par value:	6,558,473 shares
(Title of Class)	(Outstanding as of August 12, 2015)

 

 

Table of Contents

 

		Page
PART I – FINANCIAL INFORMATION		1
Item  1.	Financial Statements
	Consolidated Statements of Financial Condition at June 30, 2015 (unaudited) and September 30, 2014	2
	Consolidated Statements of Operations for the three and nine months ended June 30, 2015 and 2014 (unaudited)	3
	Consolidated Statements of Comprehensive (Loss) Income for the three and nine months ended June 30, 2015 and 2014 (unaudited)	4
	Consolidated Statements of Changes in Shareholders’ Equity for the nine months ended June 30, 2015 and 2014 (unaudited)	5
	Consolidated Statements of Cash Flows for the nine months ended June 30, 2015 and 2014 (unaudited)	6
	Notes to Consolidated Financial Statements	7
		​
Item  2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34
Item  3.	Qualitative and Quantitative Disclosures about Market Risks	52
Item  4.	Controls and Procedures	52
PART II – OTHER INFORMATION
Item  1.	Legal Proceedings	52
Item  1A.	Risk Factors	52
Item  2.	Unregistered Sales of Equity Securities and Use of Proceeds	53
Item  3.	Default Upon Senior Securities	53
Item  4.	Mine Safety Disclosure	53
Item  5.	Other Information	53
Item  6.	Exhibits	53
SIGNATURES		54

 

 

PART I – FINANCIAL INFORMATION

 

The following unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X, and, accordingly, do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. However, in the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended June 30, 2015 are not necessarily indicative of the results that may be expected for the full year ending September 30, 2015, or for any other interim period. The Malvern Bancorp, Inc. 2014 Annual Report on Form 10-K should be read in conjunction with these financial statements.

 

 

Item 1. Financial Statements

 

MALVERN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

 

(in thousands, except for share data)		June 30, 2015				September 30, 2014
		(Unaudited)
ASSETS
Cash and due from depository institutions		$	3,460			$	1,203
Interest bearing deposits in depository institutions			20,833				17,984
Cash and cash equivalents			24,293				19,187
Investment securities available-for-sale, at fair value			130,509				100,943
Investment securities held-to-maturity (fair value of $58,181 and $0, respectively)			59,243				—
Restricted stock, at cost			4,369				3,503
Loans held for sale			657				—
Loans receivable, net of allowance for loan losses of $4,574 and $4,589, respectively			371,897				386,074
Other real estate owned			1,366				1,964
Accrued interest receivable			2,404				1,322
Property and equipment, net			6,502				6,823
Deferred income taxes, net			2,816				2,376
Bank-owned life insurance			18,659				18,264
Other assets			1,529				1,808
Total Assets		$	624,244			$	542,264
LIABILITIES
Deposits:
Deposits – noninterest-bearing		$	26,877			$	23,059
Deposits – interest-bearing			416,341				389,894
Total Deposits			443,218				412,953
FHLB advances			93,000				48,000
Advances from borrowers for taxes and insurance			4,245				1,786
Accrued interest payable			346				149
Other liabilities			3,623				2,604
Total Liabilities			544,432				465,492
Commitments and Contingencies			—				—
SHAREHOLDERS’ EQUITY
Preferred stock, $0.01 par value, 10,000,000 shares authorized, none issued			—				—
Common stock, $0.01 par value, 40,000,000 shares authorized, issued and outstanding: 6,558,473			66				66
Additional paid-in capital			60,346				60,317
Retained earnings			22,650				20,116
Unearned Employee Stock Ownership Plan (ESOP) shares			(1,811	)			(1,922	)
Accumulated other comprehensive (loss) income			(1,439	)			(1,805	)
Total Shareholders’ equity			79,812				76,772
Total Liabilities and Shareholders’ equity		$	624,244			$	542,264

 

See accompanying notes to unaudited consolidated financial statements. 

 

 

MALVERN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

		Three Months Ended June 30,								Nine Months Ended June 30,
(in thousands, except for per share data)		2015				2014				2015				2014
Interest and Dividend Income
Loans, including fees		$	4,028			$	4,476			$	12,356			$	13,448
Investment securities, taxable			859				519				2,151				1,623
Investment securities, tax-exempt			172				29				305				137
Dividends, restricted stock			65				54				244				87
Interest-bearing cash accounts			15				13				62				40
Total Interest and Dividend Income			5,139				5,091				15,118				15,335
Interest Expense
Deposits			843				980				2,561				3,046
Borrowings			458				285				1,322				810
Total Interest Expense			1,301				1,265				3,883				3,856
Net interest income			3,838				3,826				11,235				11,479
Provision for Loan Losses			—				—				90				80
Net Interest Income after Provision for Loan Losses			3,838				3,826				11,145				11,399
Other Income
Service charges and other fees			286				230				820				712
Rental income-other			61				63				189				191
Net gains on sales of investments, net			145				69				437				83
Loss on disposal of fixed assets			—				(41	)			—				(41	)
Net gains on sale of loans, net			16				283				55				339
Earnings on bank-owned life insurance			132				140				395				425
Total Other Income			640				744				1,896				1,709
Other Expense
Salaries and employee benefits			1,333				1,995				4,611				6,134
Occupancy expense			407				571				1,296				1,676
Federal deposit insurance premium			203				184				554				552
Advertising			54				101				199				475
Data processing			312				295				915				933
Professional fees			364				463				1,141				1,638
Other real estate owned expense/(income), net			32				74				(63	)			171
Other operating expenses			568				496				1,854				1,496
Total Other Expense			3,273				4,179				10,507				13,075
Income before income tax expense			1,205				391				2,534				33
Income tax expense			—				—				—				4
Net Income		$	1,205			$	391			$	2,534			$	29
Basic Earnings Per Share		$	0.19			$	0.06			$	0.40			$	0.00
Dividends Declared Per Share		$	0.00			$	0.00			$	0.00			$	0.00

 

See accompanying notes to unaudited consolidated financial statements.

 

 

MALVERN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(Unaudited)

 

		Three Months Ended June 30,								Nine Months Ended June 30,
(in thousands)		2015				2014				2015				2014
Net Income		$	1,205			$	391			$	2,534			$	29
Other Comprehensive (Loss) Income, Net of Tax:
Unrealized holding (losses) gains on available-for-sale securities			(2,001	)			1,537				1,108				1,765
Tax effect			680				(522	)			(377	)			(600	)
Net of tax amount			(1,321	)			1,015				731				1,165
Reclassification adjustment for net gains arising during the period(1)			(145	)			(69	)			(437	)			(83	)
Tax effect			49				24				148				29
Net of tax amount			(96	)			(45	)			(289	)			(54	)
Accretion of unrealized holding losses on securities transferred from available-for-sale to held-to-maturity(2)			(82	)			—				(115	)			—
Tax effect			28				—				39				—
Net of tax amount			(54	)			—				(76	)			—
Total other comprehensive (loss) income			(1,471	)			970				366				1,111
Total comprehensive (loss) income		$	(266	)		$	1,361			$	2,900			$	1,140

 

(1) Amounts are included in net gain on sales of securities on the Consolidated Statements of Operations in total other income.

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

 

See accompanying notes to unaudited consolidated financial statements.

 

   

MALVERN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

 

						Additional																Accumulated Other				Total
		Common				Paid-In				Retained				Treasury				Unearned				Comprehensive				Shareholders’
		Stock				Capital				Earnings				Stock				ESOP Shares				Income (Loss)				Equity
		(in thousands, except share data)
Balance, October 1, 2013		$	66			$	60,302			$	19,793			$	—			$	(2,067	)		$	(2,688	)		$	75,406
Net Income			—				—				29				—				—				—				29
Other comprehensive income			—				—				—				—				—				1,111				1,111
Committed to be released ESOP shares (10,800 shares)			—				12				—				—				109				—				121
Balance, June 30, 2014		$	66			$	60,314			$	19,822			$	—			$	(1,958	)		$	(1,577	)		$	76,667
Balance, October 1, 2014		$	66			$	60,317			$	20,116			$	—			$	(1,922	)		$	(1,805	)		$	76,772
Net Income			—				—				2,534				—				—				—				2,534
Other comprehensive income			—				—				—				—				—				366				366
Committed to be released ESOP shares (10,800 shares)			—				29				—				—				111				—				140
Balance, June 30, 2015		$	66			$	60,346			$	22,650			$	—			$	(1,811	)		$	(1,439	)		$	79,812

  

See accompanying notes to unaudited consolidated financial statements.

 

  

MALVERN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		Nine Months Ended June 30,
(in thousands)		2015				2014
Cash Flows from Operating Activities
Net income		$	2,534			$	29
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation expense			484				484
Provision for loan losses			90				80
Deferred income taxes benefit			(628	)			(683	)
ESOP expense			140				121
Amortization (accretion) of premiums and discounts on investment securities, net			505				(504	)
Amortization (accretion) of loan origination fees and costs			305				(333	)
Amortization (accretion) of mortgage service rights			64				(23	)
Net gain on sale of investment securities available-for-sale			(437	)			(83	)
Net loss on disposal of fixed assets			—				41
Net gain on sale of loans			—				(280	)
Net gain on sale of secondary market loans			(55	)			(59	)
Proceeds on sale of secondary market loans			1,555				4,884
Originations of secondary market loans			(1,500	)			(4,825	)
Gain on sale of other real estate owned			(121	)			(29	)
Write down of other real estate owned			54				146
Earnings on bank-owned life insurance			(395	)			(425	)
(Increase) decrease in accrued interest receivable			(1,082	)			104
Increase in accrued interest payable			197				9
Increase in other liabilities			1,019				526
Decrease in other assets			231				521
Net Cash Provided by (Used in) Operating Activities			2,960				(299	)
Cash Flows from Investing Activities
Investment securities available-for-sale:
Purchases			(151,623	)			(4,266	)
Sales			59,427				16,751
Maturities, calls and principal repayments			5,594				9,466
Investment securities held-to-maturity:
Purchases			(4,152	)			—
Maturities, calls and principal repayments			2,432				—
Proceeds from sale of loans			—				25,836
Loan buyback for sale of loans			—				(1,117	)
Loan purchases			—				(29,040	)
Loan originations and principal collections, net			12,817				24,141
Proceeds from sale of other real estate owned			973				2,555
Additions to mortgage servicing rights			(17	)			(140	)
Proceeds from cash surrender on bank-owned life insurance			—				763
Net increase in restricted stock			(866	)			(457	)
Purchases of property and equipment			(163	)			(163	)
Net Cash (Used in) Provided by Investing Activities			(75,578	)			44,329
Cash Flows from Financing Activities
Net increase (decrease) in deposits			30,265				(38,560	)
Net increase in FHLB line of credit			—				4,500
Proceeds for long-term borrowings			78,000				10,000
Repayment of long-term borrowings			(33,000	)			(4,500	)
Increase in advances from borrowers for taxes and insurance			2,459				3,298
Net Cash Provided by (Used in) Financing Activities			77,724				(25,262	)
Net Increase in Cash and Cash Equivalents			5,106				18,768
Cash and Cash Equivalent – Beginning			19,187				23,687
Cash and Cash Equivalent – Ending		$	24,293			$	42,455
Supplementary Cash Flows Information
Interest paid		$	3,686			$	3,847
Income taxes paid		$	—			$	17
Non-cash transfer of loans to other real estate owned		$	308			$	355
Transfer from investment securities available-for-sale to investment securities held-to-maturity		$	57,523			$	—
Non-cash transfer of loans to loans held for sale		$	657			$	—

  

See accompanying notes to unaudited consolidated financial statements.

 

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1 – Basis of Presentation

 

The consolidated financial statements of Malvern Bancorp, Inc. (the “Company” or “Malvern Bancorp”) include the accounts of the Company and its wholly-owned subsidiary, Malvern Federal Savings Bank (“Malvern Federal Savings” or the “Bank”) and the Bank’s subsidiary, Strategic Asset Management Group, Inc. All significant intercompany accounts and transactions have been eliminated from the accompanying consolidated financial statements.

 

The Bank is a federally chartered stock savings bank which was originally organized in 1887. The Bank operates from its headquarters in Paoli, Pennsylvania and through its seven full service financial center offices in Chester and Delaware Counties, Pennsylvania.

 

In preparing the consolidated financial statements, management has made estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the 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 and the other-than-temporary impairment evaluation of securities.

 

 The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”).

 

Note 2 – Recent Accounting Pronouncements

 

In June 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-10, “Technical Correction and Improvements.” The amendments in this Update represent changes to clarify the Codification, correct unintended application of guidance, or make minor improvements to the Codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. Additionally, some of the amendments will make the Codification easier to understand and easier to apply by eliminating inconsistencies, providing needed clarifications, and improving the presentation of guidance in the Codification. Transition guidance varies based on the amendments in this Update. The amendments in this Update that require transition guidance are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. All other amendments will be effective upon the issuance of this Update. The Company is currently evaluating the effect that the standard will have on its consolidated financial statements and related disclosures.

 

In April 2015, the FASB issued ASU No. 2015-05, “Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.” This ASU provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The new guidance does not change the accounting for a customer’s accounting for service contracts. ASU No. 2015-05 is effective for interim and annual reporting periods beginning after December 15, 2015. The Company has evaluated the provisions of ASU No. 2015-05 and has determined that the new standard will have no material impact on the Company’s Consolidated Financial Statements.

 

In April 2015, the FASB issued ASU No. 2015-04, “Compensation—Retirement Benefits (Topic 715): Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets.” The FASB is issuing the amendments in this Update as part of its initiative to reduce complexity in accounting standards (the Simplification Initiative). The objective of the Simplification Initiative is to identify, evaluate, and improve areas of generally accepted accounting principles (GAAP) for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements. ASU No. 2015-04 is effective for interim and annual reporting periods beginning after December 15, 2015. The Company has evaluated the provisions of ASU No. 2015-05 and has determined that the new standard will have no material impact on the Company’s Consolidated Financial Statements.

  

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 2 – Recent Accounting Pronouncements – (continued)

  

In April 2015, the FASB issued ASU No. 2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.” This ASU requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. The amendments in ASU 2015-03 are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. This amendment should be applied on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. Upon transition, an entity is required to comply with the applicable disclosures for a change in an accounting principle. These disclosures include the nature of and reason for the change in accounting principle, the transition method, a description of the prior-period information that has been retrospectively adjusted, and the effect of the change on the financial statement line items (i.e., debt issuance cost asset and the debt liability). The Company is currently evaluating the provisions of ASU No. 2015-03 to determine the potential impact the new standard will have on the Company’s Consolidated Financial Statements.

 

Effective April 2015, the Company adopted ASU No. 2014-11, “Transfers and Servicing (Topic 860) - Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures (ASU 2014-11)”. The amendments in ASU 2014-11 change the accounting for repurchase-to-maturity transactions and repurchase financing arrangements. Additionally, ASU 2014-11 requires certain disclosures for repurchase agreements that are accounted for as secured borrowings. Management has evaluated and determined the adoption of ASU 2014-11 had no impact on the Company’s financial statements or disclosures.

 

In January 2015, the FASB issued ASU 2015-01, “Income Statement — Extraordinary and Unusual Items (Subtopic 225-20)”. This Update eliminates from GAAP the concept of extraordinary items. Subtopic 225-20, Income Statement—Extraordinary and Unusual Items, required that an entity separately classify, present, and disclose extraordinary events and transactions. Presently, an event or transaction is presumed to be an ordinary and usual activity of the reporting entity unless evidence clearly supports its classification as an extraordinary item. Paragraph 225-20-45-2 contains the following criteria that must both be met for extraordinary classification, (1) unusual nature - the underlying event or transaction should possess a high degree of abnormality and be of a type clearly unrelated to, or only incidentally related to, the ordinary and typical activities of the entity, taking into account the environment in which the entity operates; and (2) infrequency of occurrence - the underlying event or transaction should be of a type that would not reasonably be expected to recur in the foreseeable future, taking into account the environment in which the entity operates. The amendments in ASU 2015-01 are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. The adoption of this ASU is not expected to have a material impact on the Company’s financial statements.

 

Note 3 – Earnings Per Share

 

Basic earnings per common share is computed based on the weighted average number of shares outstanding reduced by unearned ESOP shares. Diluted earnings per share is computed based on the weighted average number of shares outstanding and common stock equivalents (“CSEs”) that would arise from the exercise of dilutive securities reduced by unearned ESOP shares. As of June 30, 2015 and for the three and nine months ended June 30, 2015 and 2014 the Company had not issued and did not have any outstanding CSEs and, at the present time, the Company’s capital structure has no potential dilutive securities.

 

  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

 

Note 3 – Earnings Per Share – (continued)

 

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

 

		Three Months Ended June 30,								Nine Months Ended June 30,
(in thousands, except for share data)		2015				2014				2015				2014
Net Income		$	1,205			$	391			$	2,534			$	29
Weighted average shares outstanding			6,558,473				6,558,473				6,558,473				6,558,473
Average unearned ESOP shares			(163,347	)			(177,747	)			(166,959	)			(181,359	)
Weighted average shares outstanding – basic			6,395,126				6,380,726				6,391,514				6,377,114
Earnings per share – basic		$	0.19			$	0.06			$	0.40			$	0.00

  

Note 4 – Employee Stock Ownership Plan

 

The Company established an employee stock ownership plan (“ESOP”) for substantially all of its full-time employees. The current ESOP trustee is Pentegra. Shares of the Company’s common stock purchased by the ESOP are held until released for allocation to participants. Shares released are allocated to each eligible participant based on the ratio of each such participant’s base compensation to the total base compensation of all eligible plan participants. As the unearned shares are committed to be released and allocated among participants, the Company recognizes compensation expense equal to the fair value of the ESOP shares during the periods in which they become committed to be released. To the extent that the fair value of the ESOP shares released differs from the cost of such shares, the difference is charged or credited to additional paid-in capital. During the period from May 20, 2008 to September 30, 2008, the ESOP purchased 241,178 shares of the common stock for approximately $2.6 million, an average price of $10.86 per share, which was funded by a loan from Malvern Federal Bancorp, Inc. (the Company’s predecessor). The ESOP loan is being repaid principally from the Bank’s contributions to the ESOP. The loan, which bears an interest rate of 5%, is being repaid in quarterly installments through 2026. Shares are released to participants proportionately as the loan is repaid. During the three and nine months ended June 30, 2015 and 2014, there were 3,600 and 10,800 shares, respectively, committed to be released. At June 30, 2015, there were 161,565 unallocated shares and 97,653 allocated shares held by the ESOP which had an aggregate fair value of approximately $2.4 million.

  

Note 5 - Investment Securities

 

The Company’s investment securities are classified as available-for-sale or held-to-maturity at June 30, 2015 and available-for-sale at September 30, 2014. Investment securities available-for-sale are reported at fair value with unrealized gains or losses included in equity, net of tax. Accordingly, the carrying value of such securities reflects their fair value at the balance sheet date. Fair value is based upon either quoted market prices, or in certain cases where there is limited activity in the market for a particular instrument, assumptions are made to determine their fair value.

 

Transfers of debt securities from the available-for-sale category to the held-to-maturity category are made at fair value at the date of transfer. The unrealized holding gain or loss at the date of transfer remains in accumulated other comprehensive income and in the carrying value of the held-to-maturity investment security. Premiums or discounts on investment securities are amortized or accreted using the effective interest method over the life of the security as an adjustment of yield. Unrealized holding gains or losses that remain in accumulated other comprehensive income are amortized or accreted over the remaining life of the security as an adjustment of yield, offsetting the related amortization of the premium or accretion of the discount.

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 5 - Investment Securities – (continued)

  

The following tables present information related to the Company’s investment securities at June 30, 2015 and September 30, 2014. At September 30, 2014 there were no held-to-maturity investment securities. 

		June 30, 2015
		Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses				Fair Value
		(in thousands)
Investment Securities Available-for-Sale:
U.S. government agencies		$	816		$	—		$	(11	)		$	805
State and municipal obligations			40,470			20			(420	)			40,070
Single issuer trust preferred security			1,000			—			(150	)			850
Corporate debt securities			75,191			15			(1,237	)			73,969
			117,477			35			(1,818	)			115,694
Mortgage-backed securities:
Federal National Mortgage Association (FNMA), fixed-rate			9,053			—			(246	)			8,807
Federal Home Loan Mortgage Company (FHLMC), fixed-rate			6,159			—			(151	)			6,008
			15,212			—			(397	)			14,815
Total		$	132,689		$	35		$	(2,215	)		$	130,509
Investment Securities Held-to-Maturity:
U.S. government agencies		$	14,845		$	1		$	(138	)		$	14,708
State and municipal obligations			10,136			—			(210	)			9,926
Corporate debt securities			4,035			—			(101	)			3,934
Mortgage-backed securities:
Collateralized mortgage obligations, fixed-rate			30,227			14			(628	)			29,613
Total		$	59,243		$	15		$	(1,077	)		$	58,181
Total investment securities		$	191,932		$	50		$	(3,292	)		$	188,690

 

		September 30, 2014
		Amortized Cost			Gross  Unrealized  Gains			Gross Unrealized  Losses				Fair  Value
		(in thousands)
Investment Securities Available-for-Sale:
U.S. government agencies		$	19,719		$	1		$	(464	)		$	19,256
State and municipal obligations			2,543			—			(43	)			2,500
Single issuer trust preferred security			1,000			—			(120	)			880
Corporate debt securities			1,504			21			—				1,525
			24,766			22			(627	)			24,161
Mortgage-backed securities:
Federal National Mortgage Association (FNMA):
Adjustable-rate			403			15			—				418
Fixed-rate			17,390			9			(591	)			16,808
Federal Home Loan Mortgage Company (FHLMC):
Adjustable-rate			3,562			33			—				3,595
Fixed-rate			12,336			—			(340	)			11,996
Collateralized mortgage obligations (CMO), fixed-rate			45,222			46			(1,303	)			43,965
			78,913			103			(2,234	)			76,782
Total		$	103,679		$	125		$	(2,861	)		$	100,943

 

   

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 5 - Investment Securities – (continued)

 

During the nine months ended June 30, 2015, the Company transferred at fair value approximately $57.5 million in available-for-sale investment securities to the held-to-maturity category. The net unrealized loss at date of transfer amounted to $115,000, remained in accumulated other comprehensive income and will be discounted over the remaining life of the securities as an adjustment of yield, offsetting the related amortization of the premium or accretion of the discount on the transferred securities. No gains or losses were recognized at the time of transfer. Management considers the held-to-maturity classification of these investment securities to be appropriate as the Company has the positive intent and ability to hold these securities to maturity.

 

For the nine months ended June 30, 2015, proceeds of available-for-sale investment securities sold amounted to approximately $59.4 million. Gross realized gains on investment securities sold amounted to approximately $532,000, while gross realized losses amounted to approximately $95,000, for the period. For the nine months ended June 30, 2014, proceeds of investment securities sold amounted to approximately $16.8 million. Gross realized gains on investment securities sold amounted to approximately $83,000, while there were no gross realized losses for the period.

 

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 June 30, 2015 and September 30, 2014: 

		June 30, 2015
		Less than 12 Months							More than 12 Months							Total
		Fair Value			Unrealized Losses				Fair Value			Unrealized Losses				Fair value			Unrealized Losses
			(in thousands)
Investment Securities Available-for-Sale:
U.S. government agencies		$	—		$	—			$	805		$	(11	)		$	805		$	(11	)
State and municipal obligations			31,773			(420	)			—			—				31,773			(420	)
Single issuer trust preferred security			—			—				850			(150	)			850			(150	)
Corporate debt securities			65,908			(1,237	)			—			—				65,908			(1,237	)
Mortgage-backed securities:
FNMA, fixed-rate			5,503			(143	)			3,304			(103	)			8,807			(246	)
FHLMC, fixed-rate			3,275			(96	)			2,733			(55	)			6,008			(151	)
Total		$	106,459		$	(1,896	)		$	7,692		$	(319	)		$	114,151		$	(2,215	)
Investment Securities Held-to-Maturity:
U.S. government agencies			14,162			(138	)			—			—				14,162			(138	)
State and municipal obligations			9,925			(210	)			—			—				9,925			(210	)
Corporate debt securities			3,934			(101	)			—			—				3,934			(101	)
Mortgage-backed securities:
CMO, fixed-rate			25,663			(628	)			—			—				25,663			(628	)
Total			53,684			(1,077	)			—			—				53,684			(1,077	)
Total investment securities		$	160,143		$	(2,973	)		$	7,692		$	(319	)		$	167,835		$	(3,292	)

  

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

 

Note 5 - Investment Securities – (continued)

		September 30, 2014
		Less than 12 Months							More than 12 Months							Total
		Fair Value			Unrealized Losses				Fair Value			Unrealized Losses				Fair value			Unrealized Losses
			(in thousands)
Investment Securities Available-for-Sale:
U.S. government agencies		$	—		$	—			$	18,267		$	(464	)		$	18,267		$	(464	)
State and municipal obligations			—			—				2,501			(43	)			2,501			(43	)
Single issuer trust preferred security			—			—				880			(120	)			880			(120	)
Mortgage-backed securities:
FNMA, fixed-rate			—			—				16,715			(591	)			16,715			(591	)
FHLMC, fixed-rate			—			—				11,996			(340	)			11,996			(340	)
CMO, fixed-rate			3,945			(54	)			36,185			(1,249	)			40,130			(1,303	)
Total investment securities		$	3,945		$	(54	)		$	86,544		$	(2,807	)		$	90,489		$	(2,861	)

 

As of June 30, 2015, the estimated fair value of the securities disclosed above was primarily dependent upon the movement in market interest rates, particularly given the negligible inherent credit risk associated with these securities. These investment securities are comprised of securities that are rated investment grade by at least one bond credit rating service. Although the fair value will fluctuate as 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 June 30, 2015, the Company held 16 U.S. government agency securities, 38 municipal bonds, 31 corporate securities, 39 mortgage-backed securities and one single issuer trust preferred security which were in an unrealized loss position. The Company does not intend to sell and expects that it is not more likely than not that it will be required to sell these securities until such time as the value recovers or the securities mature. Management does not believe any individual unrealized loss as of June 30, 2015 represents other-than-temporary impairment.

 

At June 30, 2015 and September 30, 2014 the Company had no securities pledged to secure public deposits.

 

 The following table presents information for investment securities at June 30, 2015, based on scheduled maturities. Actual maturities can be expected to differ from scheduled maturities due to prepayment or early call options of the issuer.

 

		June 30, 2015
		Amortized Cost				Fair Value
		(in thousands)
Investment Securities Available-for-Sale:
Due in one year or less		$	—			$	—
Due after one year through five years			15,041				14,952
Due after five years through ten years			81,040				79,738
Due after ten years			36,608				35,819
Total		$	132,689			$	130,509
Investment Securities Held-to-Maturity:
Due after one year through five years		$	12,846			$	12,729
Due after five years through ten years			6,034				5,913
Due after ten years			40,363				39,539
Total		$	59,243			$	58,181
Total investment securities		$	191,932			$	188,690

 

 

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 6 - Loans Receivable and Related Allowance for Loan Losses

 

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

 

		June 30,				September 30,
		2015				2014
		(in thousands)
Residential mortgage		$	219,197			$	231,324
Construction and Development:
Residential and commercial			6,751				5,964
Land			25				1,033
Total Construction and Development			6,776				6,997
Commercial:
Commercial real estate			67,617				71,579
Multi-family			5,451				1,032
Other			9,839				5,480
Total Commercial			82,907				78,091
Consumer:
Home equity lines of credit			23,173				22,292
Second mortgages			40,121				47,034
Other			2,523				2,839
Total Consumer			65,817				72,165
Total loans			374,697				388,577
Deferred loan fees and cost, net			1,774				2,086
Allowance for loan losses			(4,574	)			(4,589	)
Total loans receivable, net		$	371,897			$	386,074

 

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

 

Note 6 - Loans Receivable and Related Allowance for Loan Losses – (continued)

 

The following tables summarize the primary classes of the allowance for loan losses (“ALLL”), segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of June 30, 2015 and September 30, 2014.  Activity in the allowance is presented for the three and nine months ended June 30, 2015 and 2014 and the year ended September 30, 2014, respectively.

 

		Three Months Ended June 30, 2015
						Construction and Development								Commercial												Consumer
		Residential Mortgage				Residential and Commercial				Land				Commercial Real Estate				Multi- family				Other				Home Equity Lines of Credit				Second  Mortgages				Other				Unallocated				Total
		(in thousands)
Allowance for loan losses:
Beginning balance		$	1,587			$	308			$	5			$	1,058			$	157			$	59			$	143			$	851			$	32			$	412			$	4,612
Charge-offs			—				—				—				—				—				—				—				(107	)			—				—				(107	)
Recoveries			16				23				—				3				—				1				—				23				3				—				69
Provision			(71	)			3				(5	)			(25	)			(9	)			30				(2	)			(36	)			(6	)			121				—
Ending Balance		$	1,532			$	334			$	—			$	1,036			$	148			$	90			$	141			$	731			$	29			$	533			$	4,574

 

		Three Months Ended June 30, 2014
						Construction and Development								Commercial												Consumer
		Residential Mortgage				Residential and Commercial				Land				Commercial Real Estate				Multi- family				Other				Home Equity Lines of Credit				Second  Mortgages				Other				Unallocated				Total
		(in thousands)
Allowance for loan losses:
Beginning balance		$	1,783			$	455			$	32			$	1,223			$	67			$	55			$	152			$	989			$	39			$	52			$	4,847
Charge-offs			(43	)			—				—				—				—				—				—				(40	)			(1	)			—				(84	)
Recoveries			1				73				—				2				—				1				1				16				1				—				95
Provision			(24	)			(73	)			(6	)			(1	)			(3	)			(7	)			11				(14	)			(4	)			121				—
Ending Balance		$	1,717			$	455			$	26			$	1,224			$	64			$	49			$	164			$	951			$	35			$	173			$	4,858

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

 

Note 6 - Loans Receivable and Related Allowance for Loan Losses – (continued)

 

		Nine Months Ended June 30, 2015
						Construction and Development								Commercial												Consumer
		Residential Mortgage				Residential and Commercial				Land				Commercial Real  Estate				Multi- family				Other				Home Equity Lines of Credit				Second  Mortgages				Other				Unallocated				Total
		(in thousands)
Allowance for loan losses:
Beginning balance		$	1,672			$	291			$	13			$	1,248			$	29			$	50			$	168			$	1,033			$	23			$	62			$	4,589
Charge-offs			—				(1	)			—				(48	)			—				—				—				(138	)			(33	)			—				(220	)
Recoveries			17				23				—				8				—				2				1				57				7				—				115
Provision			(157	)			21				(13	)			(172	)			119				38				(28	)			(221	)			32				471				90
Ending Balance		$	1,532			$	334			$	—			$	1,036			$	148			$	90			$	141			$	731			$	29			$	533			$	4,574
Ending balance: individually evaluated for impairment		$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	1			$	—			$	—			$	1
Ending balance: collectively evaluated for impairment		$	1,532			$	334			$	—			$	1,036			$	148			$	90			$	141			$	730			$	29			$	533			$	4,573
Loans receivable:
Ending balance		$	219,197			$	6,751			$	25			$	67,617			$	5,451			$	9,839			$	23,173			$	40,121			$	2,523							$	374,697
Ending balance: individually evaluated for impairment		$	566			$	121			$	—			$	597			$	—			$	—			$	20			$	162			$	—							$	1,466
Ending balance: collectively evaluated for impairment		$	218,631			$	6,630			$	25			$	67,020			$	5,451			$	9,839			$	23,153			$	39,959			$	2,523							$	373,231

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 6 - Loans Receivable and Related Allowance for Loan Losses – (continued)

 

		Nine Months Ended June 30, 2014
						Construction and Development								Commercial												Consumer
		Residential Mortgage				Residential and Commercial				Land				Commercial Real Estate				Multi- family				Other				Home Equity Lines of Credit				Second  Mortgages				Other				Unallocated				Total
		(in thousands)
Allowance for loan losses:
Beginning balance		$	1,414			$	164			$	56			$	1,726			$	40			$	59			$	137			$	1,393			$	22			$	79			$	5,090
Charge-offs			(48	)			(37	)			—				—				—				—				(14	)			(443	)			(6	)			—				(548	)
Recoveries			13				145				—				7				—				2				1				66				2				—				236
Provision			338				183				(30	)			(509	)			24				(12	)			40				(65	)			17				94				80
Ending Balance		$	1,717			$	455			$	26			$	1,224			$	64			$	49			$	164			$	951			$	35			$	173			$	4,858
Ending balance: individually evaluated for impairment		$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	—
Ending balance: collectively evaluated for impairment		$	1,717			$	455			$	26			$	1,224			$	64			$	49			$	164			$	951			$	35			$	173			$	4,858
Loans receivable:
Ending balance		$	235,050			$	7,484			$	1,537			$	69,788			$	2,086			$	5,492			$	21,914			$	48,866			$	3,011							$	395,228
Ending balance: individually evaluated for impairment		$	1,968			$	479			$	237			$	—			$	—			$	900			$	116			$	638			$	—							$	4,338
Ending balance: collectively evaluated for impairment		$	233,082			$	7,005			$	1,300			$	69,788			$	2,086			$	4,592			$	21,798			$	48,228			$	3,011							$	390,890

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

 

Note 6 - Loans Receivable and Related Allowance for Loan Losses – (continued)

 

		Year Ended September 30, 2014
						Construction and Development								Commercial												Consumer
		Residential Mortgage				Residential and Commercial				Land				Commercial Real   Estate				Multi- family				Other				Home Equity Lines of Credit				Second  Mortgages				Other				Unallocated				Total
		(in thousands)
Allowance for loan losses:
Beginning balance		$	1,414			$	164			$	56			$	1,726			$	40			$	59			$	137			$	1,393			$	22			$	79			$	5,090
Charge-offs			(83	)			(37	)			—				(183	)			—				—				(14	)			(618	)			(6	)			—				(941	)
Recoveries			23				1				—				9				—				3				1				136				4				—				177
Provision			318				163				(43	)			(304	)			(11	)			(12	)			44				122				3				(17	)			263
Ending Balance		$	1,672			$	291			$	13			$	1,248			$	29			$	50			$	168			$	1,033			$	23			$	62			$	4,589
Ending balance: individually evaluated for impairment		$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	—
Ending balance: collectively evaluated for impairment		$	1,672			$	291			$	13			$	1,248			$	29			$	50			$	168			$	1,033			$	23			$	62			$	4,589
Loans receivable:
Ending balance		$	231,324			$	5,964			$	1,033			$	71,579			$	1,032			$	5,480			$	22,292			$	47,034			$	2,839							$	388,577
Ending balance:  individually evaluated for impairment		$	999			$	187			$	—			$	504			$	—			$	900			$	115			$	695			$	—							$	3,400
Ending balance: collectively evaluated for impairment		$	230,325			$	5,777			$	1,033			$	71,075			$	1,032			$	4,580			$	22,177			$	46,339			$	2,839							$	385,177

 

  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 6 - Loans Receivable and Related Allowance for Loan Losses – (continued)

 

The following table presents impaired loans in portfolio by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary as of June 30, 2015 and September 30, 2014.

  

		Impaired Loans With Specific Allowance						Impaired Loans With No Specific Allowance			Total Impaired Loans
		Recorded Investment			Related Allowance			Recorded Investment			Recorded Investment			Unpaid Principal Balance
		(in thousands)
June 30, 2015:
Residential mortgage		$	—		$	—		$	566		$	566		$	659
Construction and Development:
Residential and commercial			—			—			121			121			253
Commercial:
Commercial real estate			—			—			597			597			830
Consumer:
Home equity lines of credit			—			—			20			20			36
Second  mortgages			23			1			139			162			212
Total impaired loans		$	23		$	1		$	1,443		$	1,466		$	1,990
September 30, 2014:
Residential mortgage		$	—		$	—		$	999		$	999		$	1,149
Construction and Development:
Residential and commercial			—			—			187			187			842
Commercial:			—			—
Commercial real estate			—			—			504			504			688
Other			—			—			900			900			900
Consumer:
Home equity lines of credit			—			—			115			115			135
Second  mortgages			—			—			695			695			894
Total impaired loans		$	—		$	—		$	3,400		$	3,400		$	4,608

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 6 - Loans Receivable and Related Allowance for Loan Losses – (continued)

 

The following table presents the average recorded investment in impaired loans in portfolio and related interest income recognized for three and nine months ended June 30, 2015 and 2014.

 

		Three Months Ended June 30, 2015								Nine Months Ended June 30, 2015
(in thousands)		Average Impaired Loans				Interest Income Recognized on Impaired Loans				Average Impaired Loans				Interest Income Recognized on Impaired Loans
Residential mortgage		$	674			$	—			$	819			$	—
Construction and Development:
Residential and commercial			133				1				151				3
Commercial:
Commercial real estate			608				—				669				—
Other			—				—				454				12
Consumer:
Home equity lines of credit			20				—				25				—
Second  mortgages			430				—				618				—
Total		$	1,865			$	1			$	2,736			$	15

 

		Three Months Ended June 30, 2014								Nine Months Ended June 30, 2014
(in thousands)		Average Impaired Loans				Interest Income Recognized on Impaired Loans				Average Impaired Loans				Interest Income Recognized on Impaired Loans
Residential mortgage		$	2,040			$	—			$	1,788			$	—
Construction and Development:
Residential and commercial			522				5				685				14
Land			292				2				255				9
Commercial:
Other			900				8				900				22
Consumer:
Home equity lines of credit			161				—				100				—
Second  mortgages			597				—				574				—
Total		$	4,512			$	15			$	4,302			$	45

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 6 - Loans Receivable and Related Allowance for Loan Losses – (continued)

 

The following table presents the classes of the loan portfolio summarized by loans considered to be rated as pass and the categories of special mention, substandard and doubtful within the Company’s internal risk rating system as of June 30, 2015 and September 30, 2014.

 

		June 30, 2015
					Special
		Pass			Mention			Substandard				Doubtful			Total
		(in thousands)
Residential mortgage		$	218,405		$	131		$	661			$	—		$	219,197
Construction and Development:
Residential and commercial			6,524			106			121				—			6,751
Land			25			—			—				—			25
Commercial:
Commercial real estate			59,103			4,414			4,100				—			67,617
Multi-family			5,168			283			—				—			5,451
Other			8,842			276			721				—			9,839
Consumer:
Home equity lines of credit			23,056			—			117				—			23,173
Second mortgages			39,296			135			690				—			40,121
Other			2,509			14			—				—			2,523
Total		$	362,928		$	5,359		$	6,410			$	—		$	374,697
		September 30, 2014
					Special
		Pass			Mention			Substandard				Doubtful			Total
		(in thousands)
Residential mortgage		$	230,065		$	137		$	1,122			$	—		$	231,324
Construction and Development:
Residential and commercial			5,777			—			187				—			5,964
Land			1,033			—			—				—			1,033
Commercial:
Commercial real estate			63,125			5,797			2,657				—			71,579
Multi-family			1,032			—			—				—			1,032
Other			3,555			1,025			900				—			5,480
Consumer:
Home equity lines of credit			22,177			—			115				—			22,292
Second mortgages			46,292			21			721				—			47,034
Other			2,823			16			—				—			2,839
Total		$	375,879		$	6,996		$	5,702			$	—		$	388,577

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 6 - Loans Receivable and Related Allowance for Loan Losses – (continued)

 

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

 

		June 30,				September 30,
		2015				2014
		(in thousands)
Residential mortgage		$	566			$	1,232
Construction and Development:
Residential and commercial			12				78
Commercial:
Commercial real estate			597				504
Consumer:
Home equity lines of credit			20				115
Second mortgages			162				462
Total non-accrual loans		$	1,357			$	2,391

 

Under the Bank’s loan policy, once a loan has been placed on non-accrual status, we do not resume interest accruals until the loan has been brought current and has maintained a current payment status for not less than six consecutive months. Interest income that would have been recognized on nonaccrual loans had they been current in accordance with their original terms was $22,000 and $19,000 for the three months ended June 30, 2015 and 2014, respectively, and was $69,000 and $86,000 for the nine months ended June 30, 2015 and 2014, respectively. There were no loans past due 90 days or more and still accruing interest at June 30, 2015 or September 30, 2014.

 

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by whether a loan payment is “current,” that is, it is received from a borrower by the scheduled due date, or the length of time a scheduled payment is past due. The following table presents the classes of the loan portfolio summarized by the aging categories as of June 30, 2015 and September 30, 2014.

 

						30 – 59				60 – 89				90 Days or
						Days Past				Days Past				More Past				Total				Total Loans
		Current				Due				Due				Due				Past Due				Receivable
		(in thousands)
June 30, 2015:
Residential mortgage		$	216,698			$	1,538			$	395			$	566			$	2,499			$	219,197
Construction and Development:
Residential and commercial			6,739				—				—				12				12				6,751
Land			25				—				—				—				—				25
Commercial:
Commercial real estate			66,517				503				—				597				1,100				67,617
Multi-family			5,451				—				—				—				—				5,451