MALVERN BANCORP, INC. - FORM 10-Q

Attached files

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EX-31.1 - EXHIBIT 31-1 - MALVERN BANCORP, INC.	s103131_ex31-1.htm
EX-31.2 - EXHIBIT 31-2 - MALVERN BANCORP, INC.	s103131_ex31-2.htm
EX-32.0 - EXHIBIT 32-0 - MALVERN BANCORP, INC.	s103131_ex32-0.htm

UNITED STATES OF AMERICA

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the Quarterly Period Ended March 31, 2016

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 x 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 x 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 x

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 x

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

Common Stock, par value $0.01:	6,560,713 shares
(Title of Class)	(Outstanding as of May 9, 2016)

Table of Contents

		Page

PART I – FINANCIAL INFORMATION		1

Item 1.	Financial Statements
	Consolidated Statements of Financial Condition at March 31, 2016 (unaudited) and September 30, 2015	2
	Consolidated Statements of Operations for the three and six months ended March 31, 2016 and 2015 (unaudited)	3
	Consolidated Statements of Comprehensive Income for the three and six months ended March 31, 2016 and 2015 (unaudited)	4
	Consolidated Statements of Changes in Shareholders’ Equity for the six months ended March 31, 2016 and 2015 (unaudited)	5
	Consolidated Statements of Cash Flows for the six months ended March 31, 2016 and 2015 (unaudited)	6
	Notes to Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	37

Item 3.	Qualitative and Quantitative Disclosures about Market Risks	57

Item 4.	Controls and Procedures	57

PART II – OTHER INFORMATION.

Item 1.	Legal Proceedings	57

Item 1A.	Risk Factors	57

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	57

Item 3.	Default Upon Senior Securities	57

Item 4.	Mine Safety Disclosure	58

Item 5.	Other Information	58

Item 6.	Exhibits	58

SIGNATURES		59

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 six months ended March 31, 2016 are not necessarily indicative of the results that may be expected for the full year ending September 30, 2016, or for any other interim period. The Malvern Bancorp, Inc. 2015 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 and per share data)	March 31, 2016			September 30, 2015
	(unaudited)
ASSETS
Cash and due from depository institutions	$	1,304		$	16,026
Interest bearing deposits in depository institutions		56,739			24,237
Total cash and cash equivalents		58,043			40,263
Investment securities available for sale, at fair value		100,895			128,354
Investment securities held to maturity at cost (fair value of $52,176 and $56,825)		52,272			57,221
Restricted stock, at cost		5,553			4,765
Loans receivable, net of allowance for loan losses of $4,937 and $4,667, respectively		515,094			391,307
Other real estate owned		700			1,168
Accrued interest receivable		2,622			2,484
Property and equipment, net		6,490			6,535
Deferred income taxes, net		2,202			2,874
Bank-owned life insurance		18,161			17,905
Other assets		1,954			2,814
Total assets	$	763,986		$	655,690
LIABILITIES
Deposits:
Non-interest bearing	$	30,720		$	27,010
Interest-bearing		518,070			438,512
Total deposits		548,790			465,522
FHLB Advances		123,000			103,000
Advances from borrowers for taxes and insurance		3,213			1,806
Accrued interest payable		436			396
Other liabilities		3,857			3,575
Total liabilities		679,296			574,299
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: 6,560,713 shares at March 31, 2016 and 6,558,473 at September 30, 2015		66			66
Additional paid in capital		60,412			60,365
Retained earnings		26,424			23,814
Unearned Employee Stock Ownership Plan (ESOP) shares		(1,702	)		(1,775	)
Accumulated other comprehensive loss		(510	)		(1,079	)
Total shareholders’ equity		84,690			81,391
Total liabilities and shareholders’ equity	$	763,986		$	655,690

MALVERN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended March 31,					Six Months Ended March 31,
(in thousands, except for per share data)	2016		2015			2016		2015

Interest and Dividend Income
Loans, including fees	$	5,121	$	4,126		$	9,666	$	8,328
Investment securities, taxable		795		778			1,670		1,292
Investment securities, tax-exempt		190		96			385		133
Dividends, restricted stock		63		142			117		179
Interest-bearing cash accounts		41		24			59		47
Total Interest and Dividend Income		6,210		5,166			11,897		9,979
Interest Expense
Deposits		1,161		859			2,125		1,718
Borrowings		549		471			1,061		864
Total Interest Expense		1,710		1,330			3,186		2,582
Net interest income		4,500		3,836			8,711		7,397
Provision for Loan Losses		375		—			375		90
Net Interest Income after Provision for Loan Losses		4,125		3,836			8,336		7,307
Other Income
Service charges and other fees		227		264			438		534
Rental income-other		50		64			100		128
Net gains on sales of investments, net		61		266			192		292
Net gains on sale of loans, net		36		20			70		39
Earnings on bank-owned life insurance		127		131			259		263
Total Other Income		501		745			1,059		1,256
Other Expense
Salaries and employee benefits		1,522		1,550			3,021		3,278
Occupancy expense		456		465			879		889
Federal deposit insurance premium		232		184			432		351
Advertising		25		60			55		145
Data processing		270		301			567		603
Professional fees		361		434			761		777
Other real estate owned expense (income), net		8		(59	)		7		(95	)
Other operating expenses		486		638			1,063		1,286
Total Other Expense		3,360		3,573			6,785		7,234
Income before income tax expense		1,266		1,008			2,610		1,329
Income tax expense		—		—			—		—
Net Income	$	1,266	$	1,008		$	2,610	$	1,329

Earnings Per Common Share:
Basic	$	0.20	$	0.16		$	0.41	$	0.21
Diluted	$	0.20		n/a		$	0.41		n/a
Weighted Average Common Shares Outstanding:
Basic		6,408,167		6,391,521			6,405,234		6,389,687
Diluted		6,408,167		n/a			6,405,234		n/a

Dividends Declared Per Share	$	0.00	$	0.00		$	0.00	$	0.00

MALVERN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	Three Months Ended March 31,						Six Months Ended March 31,
(in thousands)	2016			2015			2016			2015

Net Income	$	1,266		$	1,008		$	2,610		$	1,329
Other Comprehensive Income, Net of Tax:
Unrealized holding gains on available-for-sale securities		1,620			1,947			1,139			3,109
Tax effect		(551	)		(662	)		(388	)		(1,057	)
Net of tax amount		1,069			1,285			751			2,052
Reclassification adjustment for net gains arising during the period		(61	)		(266	)		(192	)		(292	)
Tax effect		21			90			65			99
Net of tax amount		(40	)		(176	)		(127	)		(193	)
Accretion of unrealized holding losses on securities transferred from available-for-sale to held-to- maturity		2			(33	)		4			(33	)
Tax effect		(1	)		11			(1	)		11
Net of tax amount		1			(22	)		3			(22	)
Fair value adjustments on derivatives		(494	)		—			(249	)		—
Tax effect		168			—			191			—
Net of tax amount		(326	)		—			(58	)		—
Total other comprehensive income		704			1,087			569			1,837
Total comprehensive income	$	1,970		$	2,095		$	3,179		$	3,166

MALVERN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

	Common Stock		Additional Paid-In Capital		Retained Earnings		Unearned ESOP Shares			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity
	(in thousands, except share data)
Balance, October 1, 2014	$	66	$	60,317	$	20,116	$	(1,922	)	$	(1,805	)	$	76,772
Net Income		—		—		1,329		—			—			1,329
Other comprehensive income		—		—		—		—			1,837			1,837
Committed to be released ESOP shares (7,200 shares)		—		14		—		74			—			88
Balance, March 31, 2015	$	66	$	60,331	$	21,445	$	(1,848	)	$	32		$	80,026

Balance, October 1, 2015	$	66	$	60,365	$	23,814	$	(1,775	)	$	(1,079	)	$	81,391
Net Income		—		—		2,610		—			—			2,610
Other comprehensive income		—		—		—		—			569			569
Committed to be released ESOP shares (7,200 shares)		—		47		—		73			—			120
Balance, March 31, 2016	$	66	$	60,412	$	26,424	$	(1,702	)	$	(510	)	$	84,690

MALVERN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six Months Ended March 31,
(in thousands)	2016			2015
Cash Flows from Operating Activities
Net income	$	2,610		$	1,329
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense		316			321
Provision for loan losses		375			90
Deferred income taxes expense (benefit)		540			(1,510	)
ESOP expense		120			88
Amortization of premiums and discounts on investment securities, net		607			208
Amortization of loan origination fees and costs		823			202
Amortization of mortgage service rights		32			40
Net gain on sale of investment securities available-for-sale		(192	)		(292	)
Net gain (loss) on sale of secondary market loans		(70	)		(39	)
Proceeds on sale of secondary market loans		3,614			1,555
Originations of secondary market loans		(3,544	)		(1,516	)
Gain on sale of other real estate owned		(45	)		(114	)
Write down of other real estate owned		20			19
Earnings on bank-owned life insurance		(259	)		(263	)
Increase in accrued interest receivable		(138	)		(846	)
Increase in accrued interest payable		40			158
Increase in other liabilities		281			1,656
(Increase) decrease in other assets		(467	)		170
Net Cash Provided by Operating Activities		4,663			1,256
Cash Flows from Investing Activities
Investment securities available-for-sale:
Purchases		(2,115	)		(113,238	)
Sales		29,541			51,225
Maturities, calls and principal repayments		637			4,838
Investment securities held-to-maturity:
Purchases		—			(4,152	)
Maturities, calls and principal repayments		4,881			883
(Loan originations) and principal collections, net		(124,985	)		8,442
Proceeds from sale of other real estate owned		493			629
Additions to mortgage servicing rights		—			(12	)
Proceeds from death benefit of bank-owned life insurance		1,049			—
Net increase in restricted stock		(788	)		(1,099	)
Purchases of property and equipment		(271	)		(90	)
Net Cash Used in Investing Activities		(91,558	)		(52,574	)
Cash Flows from Financing Activities
Net increase in deposits		83,268			31,193
Proceeds from long-term borrowings		50,000			50,000
Repayment of long-term borrowings		(30,000	)		—
Increase in advances from borrowers for taxes and insurance		1,407			2,581
Net Cash Provided by Financing Activities		104,675			83,774
Net Increase in Cash and Cash Equivalents		17,780			32,456
Cash and Cash Equivalent – Beginning		40,263			19,187
Cash and Cash Equivalent – Ending	$	58,043		$	51,643
Supplementary Cash Flows Information
Interest paid	$	3,146		$	2,423
Transfer from investment securities available-for-sale to investment securities held-to-maturity	$	—		$	47,429

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.

We continue to execute on our business plans and are positioning the Company to take advantage of the growth activity we are achieving in our markets, which includes our two new private banking / loan production offices in Villanova, Pennsylvania and Morristown, New Jersey.

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 March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee share-Based Payment Accounting.” The new guidance simplifies certain aspects related to income taxes, statement of cash flows, and forfeitures when accounting for share-based payment transactions. This new guidance will be effective for the Company for the first reporting period beginning after December 15, 2016, with earlier adoption permitted. Certain of the amendments related to timing of the recognition of tax benefits and tax withholding requirements should be applied using a modified retrospective transition method. Amendments related to the presentation of the statement of cash flows should be applied retrospectively. All other provisions may be applied on a prospective or modified retrospective basis. The Company is currently evaluating the effect that the standard will have on its consolidated financial statements and related disclosures.

In March 2016, the FASB issued ASU No. 2016-05, “Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships.” The new guidance clarifies that a change in the counterparties to a derivative contract, i.e., a novation, in and of itself, does not require the de-designation of a hedging relationship. An entity will, however, still need to evaluate whether it is probable that the counterparty will perform under the contract as part of its ongoing effectiveness assessment for hedge accounting. This new guidance will be effective for the Company for the first reporting period beginning after December 15, 2016, with earlier adoption permitted. Adoption of the new guidance can be applied on a modified retrospective or prospective basis. The Company is currently evaluating the effect that the standard will have on its consolidated financial statements and related disclosures.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2 – Recent Accounting Pronouncements – (continued)

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” The guidance in this update supersedes the current lease accounting guidance for both the lessees and lessors under ASC 840, Leases. The new guidance requires lessees to evaluate whether a lease is a finance lease using criteria that are similar to what lessees use today to determine whether they have a capital lease. Leases not classified as finance leases are classified as operating leases. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. The lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to today’s guidance for operating leases. The new guidance will require lessors to account for leases using an approach that is substantially similar to the existing guidance for sales-type, direct financing leases and operating leases. This new guidance will be effective for the Company for the first reporting period beginning after December 15, 2018, with earlier adoption permitted. Adoption of the amendment must be applied on a modified retrospective approach. The Company is currently evaluating the effect that the standard will have on its consolidated financial statements and related disclosures.

In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” The new guidance is intended to improve the recognition and measurement of financial instruments. The ASU affects public and private companies, not-for-profit organizations, and employee benefit plans that hold financial assets or owe financial liabilities. ASU No. 2016-01 is effective for interim and annual reporting periods beginning after December 15, 2017. The Company is currently evaluating the effect that the standard will have on its consolidated financial statements and related disclosures.

In November 2015, the FASB issued ASU No. 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes.” 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. To simplify the presentation of deferred income taxes, the amendments in this Update require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments in this Update apply to all entities that present a classified statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by the amendments in this Update. ASU No. 2015-17 is effective for interim and annual reporting periods beginning after December 15, 2016. Early adoption is permitted, including adoption in an interim period. All other amendments will be effective upon the issuance of this Update. The Company has evaluated the standard and determined that it has no effect on the Company’s consolidated financial statements and related disclosures.

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. For the three and six months ended March 31, 2016, the Company had issued 5,000 shares of stock options. For the three and six months ended March 31, 2015, the Company had not issued and did not have any outstanding CSEs.

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 March 31,						Six Months Ended March 31,
(in thousands, except for share data)	2016			2015			2016			2015

Net Income	$	1,266		$	1,008		$	2,610		$	1,329

Weighted average shares outstanding		6,560,713			6,558,473			6,559,587			6,558,473
Average unearned ESOP shares		(152,546	)		(166,952	)		(154,353	)		(168,786	)
Basic weighted average shares outstanding		6,408,167			6,391,521			6,405,234			6,389,687

Plus: effect of dilutive options		—			—			—			—
Diluted weighted average common shares outstanding		6,408,167			—			6,405,234			—

Earnings per share:
Basic	$	0.20		$	0.16		$	0.41		$	0.21
Diluted	$	0.20			n/a		$	0.41			n/a

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 Bell Rock Capital, LLC. 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 six months ended March 31, 2016 and 2015, there were 3,600 and 7,200 shares, respectively, committed to be released. At March 31, 2016, there were 150,765 unallocated shares and 108,453 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 March 31, 2016 and at September 30, 2015. 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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5 - Investment Securities – (continued)

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. 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. 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.

The following tables present information related to the Company’s investment securities at March 31, 2016 and September 30, 2015.

	March 31, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(in thousands)
Investment Securities Available-for-Sale:
U.S. government agencies	$	787	$	8	$	—		$	795
State and municipal obligations		36,208		529		—			36,737
Single issuer trust preferred security		1,000		—		(214	)		786
Corporate debt securities		49,182		65		(533	)		48,714
		87,177		602		(747	)		87,032
Mortgage-backed securities:
Federal National Mortgage Association (FNMA), fixed-rate		8,232		3		(35	)		8,200
Federal Home Loan Mortgage Company (FHLMC), fixed-rate		5,661		5		(3	)		5,663
		13,893		8		(38	)		13,863
Total	$	101,070	$	610	$	(785	)	$	100,895
Investment Securities Held-to-Maturity:
U.S. government agencies	$	11,802	$	24	$	(1	)	$	11,825
State and municipal obligations		9,951		99		(20	)		10,030
Corporate debt securities		3,964		—		(68	)		3,896
Mortgage-backed securities:
Collateralized mortgage obligations, fixed-rate		26,555		56		(186	)		26,425
Total	$	52,272	$	179	$	(275	)	$	52,176

Total investment securities	$	153,342	$	789	$	(1,060	)	$	153,071

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5 - Investment Securities – (continued)

	September 30, 2015
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(in thousands)
Investment Securities Available-for-Sale:
U.S. government agencies	$	816	$	—	$	(1	)	$	815
State and municipal obligations		42,007		192		(116	)		42,083
Single issuer trust preferred security		1,000		—		(150	)		850
Corporate debt securities		70,874		34		(926	)		69,982
		114,697		226		(1,193	)		113,730
Mortgage-backed securities:
Federal National Mortgage Association (FNMA), fixed-rate		8,797		—		(105	)		8,692
Federal Home Loan Mortgage Company (FHLMC), fixed-rate		5,986		—		(54	)		5,932
		14,783		—		(159	)		14,624
Total	$	129,480	$	226	$	(1,352	)	$	128,354
Investment Securities Held-to-Maturity:
U.S. government agencies	$	14,301	$	8	$	(13	)	$	14,296
State and municipal obligations		10,075		23		(75	)		10,023
Corporate debt securities		4,011		—		(55	)		3,956
Mortgage-backed securities:
Collateralized mortgage obligations, fixed-rate		28,834		55		(339	)		28,550
Total	$	57,221	$	86	$	(482	)	$	56,825

Total investment securities	$	186,701	$	312	$	(1,834	)	$	185,179

During the year ended September 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 which is being amortized 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 six months ended March 31, 2016, proceeds of available-for-sale investment securities sold amounted to approximately $29.5 million. Gross realized gains on investment securities sold amounted to approximately $198,000, while gross realized losses amounted to approximately $6,000 for the period. For the six months ended March 31, 2015, proceeds of investment securities sold amounted to approximately $51.2 million. Gross realized gains on investment securities sold amounted to approximately $386,000, while gross realized losses amounted to approximately $94,000, for the six months ended March 31, 2015.

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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5 - Investment Securities – (continued)

The following tables indicate gross unrealized losses not recognized in income and fair value, aggregated by investment category and the length of time individual securities have been in a continuous unrealized loss position at March 31, 2016 and September 30, 2015:

	March 31, 2016
	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:
Single issuer trust preferred security	$	—	$	—		$	786	$	(214	)	$	786	$	(214	)
Corporate debt securities		6,987		(92	)		27,420		(441	)		34,407		(533	)
Mortgage-backed securities:
FNMA, fixed-rate		—		—			4,065		(35	)		4,065		(35	)
FHLMC, fixed-rate		1,087		(1	)		986		(2	)		2,073		(3	)
Total	$	8,074	$	(93	)	$	33,257	$	(692	)	$	41,331	$	(785	)
Investment Securities Held-to-Maturity:
U.S. government agencies		999		(1	)		—		—			999		(1	)
State and municipal obligations		2,990		(20	)		—		—			2,990		(20	)
Corporate debt securities		—		—			3,896		(68	)		3,896		(68	)
Mortgage-backed securities:
CMO, fixed-rate		4,575		(20	)		14,442		(166	)		19,017		(186	)
Total		8,564		(41	)		18,338		(234	)		26,902		(275	)
Total investment securities	$	16,638	$	(134	)	$	51,595	$	(926	)	$	68,233	$	(1,060	)

	September 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	$	—	$	—		$	815	$	(1	)	$	815	$	(1	)
State and municipal obligations		18,223		(116	)		—		—			18,223		(116	)
Single issuer trust preferred security		—		—			850		(150	)		850		(150	)
Corporate debt securities		58,064		(926	)		—		—			58,064		(926	)
Mortgage-backed securities:
FNMA, fixed-rate		5,459		(53	)		3,233		(52	)		8,692		(105	)
FHLMC, fixed-rate		3,280		(25	)		2,652		(29	)		5,932		(54	)
Total	$	85,026	$	(1,120	)	$	7,550	$	(232	)	$	92,576	$	(1,352	)
Investment Securities Held-to-Maturity:
U.S. government agencies		4,792		(13	)		—		—			4,792		(13	)
State and municipal obligations		6,917		(75	)		—		—			6,917		(75	)
Corporate debt securities		3,957		(55	)		—		—			3,957		(55	)
Mortgage-backed securities:
CMO, fixed-rate		22,734		(339	)		—		—			22,734		(339	)
Total		38,400		(482	)		—		—			38,400		(482	)
Total investment securities	$	123,426	$	(1,602	)	$	7,550	$	(232	)	$	130,976	$	(1,834	)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5 - Investment Securities – (continued)

As of March 31, 2016, the estimated fair value of the securities disclosed above was primarily dependent upon the movement in market interest rates, particularly given the negligible inherent credit risk associated with these securities. These investment securities are comprised of securities that are rated investment grade by at least one bond credit rating service. Although the fair value will fluctuate as market interest rates move, management believes that these fair values will recover as the underlying portfolios mature and are reinvested in market rate yielding investments. As of March 31, 2016, the Company held one U.S. government agency security, two municipal bonds, 20 corporate securities, 30 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 March 31, 2016 represents other-than-temporary impairment.

At March 31, 2016 and September 30, 2015 the Company had no securities pledged to secure public deposits.

The following table presents information for investment securities at March 31, 2016, based on scheduled maturities. Actual maturities can be expected to differ from scheduled maturities due to prepayment or early call options of the issuer.

	March 31, 2016
	Amortized Cost		Fair Value
	(in thousands)
Investment Securities Available-for-Sale:
Due in one year or less	$	—	$	—
Due after one year through five years		14,077		14,132
Due after five years through ten years		56,260		56,053
Due after ten years		30,733		30,710
Total	$	101,070	$	100,895
Investment Securities Held-to-Maturity:
Due after one year through five years	$	11,802	$	11,825
Due after five years through ten years		5,907		5,918
Due after ten years		34,563		34,433
Total	$	52,272	$	52,176

Total investment securities	$	153,342	$	153,071

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:

	March 31,			September 30,
	2016			2015
	(in thousands)
Residential mortgage	$	214,207		$	214,958
Construction and Development:
Residential and commercial		10,796			5,677
Land		7,755			2,142
Total Construction and Development		18,551			7,819
Commercial:
Commercial real estate		173,160			87,686
Multi-family		20,548			7,444
Other		34,585			13,380
Total Commercial		228,293			108,510
Consumer:
Home equity lines of credit		21,712			22,919
Second mortgages		33,987			37,633
Other		2,041			2,359
Total Consumer		57,740			62,911
Total loans		518,791			394,198
Deferred loan fees and cost, net		1,240			1,776
Allowance for loan losses		(4,937	)		(4,667	)
Total loans receivable, net	$	515,094		$	391,307

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 March 31, 2016 and September 30, 2015. Activity in the allowance is presented for the three and six months ended March 31, 2016 and 2015 and the year ended September 30, 2015, respectively.

	Three Months Ended March 31, 2016
			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	$	1,297	$	46	$	106	$	1,841		$	93	$	167	$	128	$	660		$	18		$	220	$	4,576
Charge-offs		-		-		-		(1	)		-		-		-		(58	)		(43	)		-		(102	)
Recoveries		40		16		-		1			-		1		-		23			7			-		88
Provision		62		12		-		(312	)		58		25		5		(45	)		47			523		375
Ending Balance	$	1,399	$	74	$	106	$	1,529		$	151	$	193	$	133	$	580		$	29		$	743	$	4,937

	Three Months Ended March 31, 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	$	1,648		$	363		$	-	$	1,082		$	152	$	49	$	154		$	916		$	29		$	207	$	4,600
Charge-offs		-			-			-		-			-		-		-			-			(16	)		-		(16	)
Recoveries		-			-			-		3			-		-		1			22			2			-		28
Provision		(61	)		(55	)		5		(27	)		5		10		(12	)		(87	)		17			205		-
Ending Balance	$	1,587		$	308		$	5	$	1,058		$	157	$	59	$	143		$	851		$	32		$	412	$	4,612

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

	Six Months Ended March 31, 2016
				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	$	1,486		$	30		$	35	$	1,235		$	104	$	108	$	139		$	761		$	24		$	745		$	4,667
Charge-offs		(9	)		-			-		(99	)		-		-		-			(255	)		(43	)		-			(406	)
Recoveries		40			204			-		3			-		2		-			44			8			-			301
Provisions		(118	)		(160	)		71		390			47		83		(6	)		30			40			(2	)		375
Ending Balance	$	1,399		$	74		$	106	$	1,529		$	151	$	193	$	133		$	580		$	29		$	743		$	4,937
Ending balance: individually evaluated for impairment	$	-		$	-		$	-	$	-		$	-	$	-	$	-		$	24		$	-		$	-		$	24
Ending balance: collectively evaluated for impairment	$	1,399		$	74		$	106	$	1,529		$	151	$	193	$	133		$	556		$	29		$	743		$	4,913

Loans receivable:
Ending balance	$	214,207		$	10,796		$	7,755	$	173,160		$	20,548	$	34,585	$	21,712		$	33,987		$	2,041					$	518,791
Ending balance: individually evaluated for impairment	$	624		$	121		$	-	$	1,468		$	-	$	-	$	20		$	197		$	-					$	2,430
Ending balance: collectively evaluated for impairment	$	213,583		$	10,675		$	7,755	$	171,692		$	20,548	$	34,585	$	21,692		$	33,790		$	2,041					$	516,361

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

	Six Months Ended March 31, 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	)		-		-		-			(31	)		(33	)		-		(113	)
Recoveries		1			-			-			5			-		1		1			34			4			-		46
Provisions		(86	)		18			(8	)		(147	)		128		8		(26	)		(185	)		38			350		90
Ending Balance	$	1,587		$	308		$	5		$	1,058		$	157	$	59	$	143		$	851		$	32		$	412	$	4,612
Ending balance: individually evaluated for impairment	$	-		$	-		$	-		$	-		$	-	$	-	$	-		$	-		$	-		$	-	$	-
Ending balance: collectively evaluated for impairment	$	1,587		$	308		$	5		$	1,058		$	157	$	59	$	143		$	851		$	32		$	412	$	4,612

Loans receivable:
Ending balance	$	225,232		$	5,922		$	344		$	68,858		$	5,508	$	5,506	$	23,073		$	43,013		$	2,610				$	380,066
Ending balance: individually evaluated for impairment	$	861		$	142		$	-		$	604		$	-	$	-	$	20		$	308		$	-				$	1,935
Ending balance: collectively evaluated for impairment	$	224,371		$	5,780		$	344		$	68,254		$	5,508	$	5,506	$	23,053		$	42,705		$	2,610				$	378,131

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

	Year Ended September 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	)		(34	)		-		(221	)
Recoveries		17			98			-		9			-		3		2			69			11			-		209
Provisions		(203	)		(358	)		22		26			75		55		(31	)		(203	)		24			683		90
Ending Balance	$	1,486		$	30		$	35	$	1,235		$	104	$	108	$	139		$	761		$	24		$	745	$	4,667
Ending balance: individually evaluated for impairment	$	-		$	-		$	-	$	-		$	-	$	-	$	-		$	-		$	-		$	-	$	-
Ending balance: collectively evaluated for impairment	$	1,486		$	30		$	35	$	1,235		$	104	$	108	$	139		$	761		$	24		$	745	$	4,667

Loans receivable:
Ending balance	$	214,958		$	5,677		$	2,142	$	87,686		$	7,444	$	13,380	$	22,919		$	37,633		$	2,359				$	394,198
Ending balance: individually evaluated for impairment	$	599		$	121		$	-	$	1,571		$	-	$	-	$	20		$	179		$	-				$	2,490
Ending balance: collectively evaluated for impairment	$	214,359		$	5,556		$	2,142	$	86,115		$	7,444	$	13,380	$	22,899		$	37,454		$	2,359				$	391,708

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 March 31, 2016 and September 30, 2015.

	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)
March 31, 2016:
Residential mortgage	$	—	$	—	$	624	$	624	$	672
Construction and Development:
Residential and commercial		—		—		121		121		253
Commercial:
Commercial real estate		—		—		1,468		1,468		1,468
Consumer:
Home equity lines of credit		—		—		20		20		36
Second mortgages		32		24		165		197		367
Total impaired loans	$	32	$	24	$	2,398	$	2,430	$	2,796
September 30, 2015:
Residential mortgage	$	—	$	—	$	599	$	599	$	696
Construction and Development:
Residential and commercial		—		—		121		121		253
Commercial:		—		—
Commercial real estate		—		—		1,571		1,571		1,807
Consumer:
Home equity lines of credit		—		—		20		20		36
Second mortgages		—		—		179		179		342
Total impaired loans	$	—	$	—	$	2,490	$	2,490	$	3,134

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 six months ended March 31, 2016 and 2015.

	Three Months Ended March 31, 2016				Six Months Ended March 31, 2016
(in thousands)	Average Impaired Loans		Interest Income Recognized on Impaired Loans		Average Impaired Loans		Interest Income Recognized on Impaired Loans

Residential mortgage	$	626	$	—	$	606	$	—
Construction and Development:
Residential and commercial		121		1		121		2
Commercial:
Commercial real estate		1,475		16		1,506		30
Consumer:
Home equity lines of credit		20		—		20		—
Second mortgages		200		—		194		—
Total	$	2,442	$	17	$	2,447	$	32

	Three Months Ended March 31, 2015				Six Months Ended March 31, 2015
(in thousands)	Average Impaired Loans		Interest Income Recognized on Impaired Loans		Average Impaired Loans		Interest Income Recognized on Impaired Loans

Residential mortgage	$	871	$	—	$	894	$	—
Construction and Development:
Residential and commercial		142		1		161		2
Commercial:
Commercial real estate		887		—		703		—
Other		458		—		681		12
Consumer:
Home equity lines of credit		20		—		28		—
Second mortgages		700		—		715		—
Total	$	3,078	$	1	$	3,182	$	14

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 March 31, 2016 and September 30, 2015.

	March 31, 2016
	Pass		Special Mention		Substandard		Doubtful		Total
	(in thousands)
Residential mortgage	$	213,226	$	126	$	855	$	—	$	214,207
Construction and Development:
Residential and commercial		10,675		—		121		—		10,796
Land		7,755		—		—		—		7,755
Commercial:
Commercial real estate		164,092		4,867		4,201		—		173,160
Multi-family		20,280		268		—		—		20,548
Other		33,608		266		711		—		34,585
Consumer:
Home equity lines of credit		21,593		—		119		—		21,712
Second mortgages		33,196		122		669		—		33,987
Other		2,028		13		—		—		2,041
Total	$	506,453	$	5,662	$	6,676	$	—	$	518,791

	September 30, 2015
	Pass		Special Mention		Substandard		Doubtful		Total
	(in thousands)
Residential mortgage	$	214,146	$	130	$	682	$	—	$	214,958
Construction and Development:
Residential and commercial		5,450		106		121		—		5,677
Land		2,142		—		—		—		2,142
Commercial:
Commercial real estate		78,207		4,791		4,688		—		87,686
Multi-family		7,166		278		—		—		7,444
Other		12,387		272		721		—		13,380
Consumer:
Home equity lines of credit		22,801		—		118		—		22,919
Second mortgages		36,834		133		666		—		37,633
Other		2,345		14		—		—		2,359
Total	$	381,478	$	5,724	$	6,996	$	—	$	394,198

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.

	March 31,		September 30,
	2016		2015
	(in thousands)
Residential mortgage	$	624	$	599
Construction and Development:
Residential and commercial		12		12
Commercial:
Commercial real estate		—		589
Consumer:
Home equity lines of credit		20		20
Second mortgages		197		179
Total non-accrual loans	$	853	$	1,399

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 $15,000 and $39,000 for the three months ended March 31, 2016 and 2015, respectively, and was $21,000 and $63,000 for the six months ended March 31, 2016 and 2015, respectively. There were no loans past due 90 days or more and still accruing interest at March 31, 2016 or September 30, 2015.

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 March 31, 2016 and September 30, 2015.

	Current		30 – 59 Days Past Due		60 – 89 Days Past Due		90 Days or More Past Due		Total Past Due		Total Loans Receivable
	(in thousands)
March 31, 2016:
Residential mortgage	$	207,093	$	4,202	$	2,288	$	624	$	7,114	$	214,207
Construction and Development:
Residential and commercial		10,390		394		—		12		406		10,796
Land		7,755		—		—		—		—		7,755
Commercial:
Commercial real estate		171,558		1,408		194		—		1,602		173,160
Multi-family		20,548		—		—		—		—		20,548
Other		33,803		782		—		—		782		34,585
Consumer:
Home equity lines of credit		21,479		20		193		20		233		21,712
Second mortgages		33,255		401		134		197		732		33,987
Other		2,029		12		—		—		12		2,041
Total	$	507,910	$	7,219	$	2,809	$	853	$	10,881	$	518,791

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

	Current		30 – 59 Days Past Due		60 – 89 Days Past Due		90 Days or More Past Due		Total Past Due		Total Loans Receivable
	(in thousands)
September 30, 2015:
Residential mortgage	$	213,253	$	913	$	193	$	599	$	1,705	$	214,958
Construction and Development:
Residential and commercial		5,665		—		—		12		12		5,677
Land		2,142		—		—		—		—		2,142
Commercial:
Commercial real estate		86,119		485		493		589		1,567		87,686
Multi-family		7,444		—		—		—		—		7,444
Other		13,380		—		—		—		—		13,380
Consumer:
Home equity lines of credit		22,899		—		—		20		20		22,919
Second mortgages		37,010		345		99		179		623		37,633
Other		2,329		30		—		—		30		2,359
Total	$	390,241	$	1,773	$	785	$	1,399	$	3,957	$	394,198

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

The Company had four and five loans classified as TDRs with an aggregate outstanding balance of $1.6 million at March 31, 2016 and September 30, 2015, respectively. At March 31, 2016, these loans were also classified as impaired. All of the TDR loans continue to perform under the restructured terms through March 31, 2016 and we continued to accrue interest on such loan through such date. Two commercial loans to one borrower, with an aggregate balance of $486,000 were returned to accruing status at December 31, 2015 and consolidated into one loan during the second quarter of fiscal 2016. At September 30, 2015, these two commercial loans to one borrower with a balance of $492,000 were non-accruing. All of such loans have been classified as TDRs since we modified the payment terms and in some cases interest rate from the original agreements and allowed the borrowers, who were experiencing financial difficulty, to make interest only payments for a period of time in order to relieve some of their overall cash flow burden. Some loan modifications classified as TDRs may not ultimately result in the full collection of principal and interest, as modified, and result in potential incremental losses. These potential incremental losses have been factored into our overall estimate of the allowance for loan losses. The level of any defaults will likely be affected by future economic conditions. A default on a troubled debt restructured loan for purposes of this disclosure occurs when the borrower is 90 days past due or a foreclosure or repossession of the applicable collateral has occurred.

TDRs may arise in which, due to financial difficulties experienced by the borrower, the Company obtains through physical possession one or more collateral assets in satisfaction of all or part of an existing credit. Once possession is obtained, the Company reclassifies the appropriate portion of the remaining balance of the credit from loans to OREO, which is included within other assets in the Consolidated Statements of Condition. For any residential real estate property collateralizing a consumer mortgage loan, the Company is considered to possess the related collateral only if legal title is obtained upon completion of foreclosure, or the borrower conveys all interest in the residential real estate property to the Company through completion of a deed in lieu of foreclosure or similar legal agreement. Excluding OREO, the Company had $986,000 and $1.2 million of residential real estate properties in the process of foreclosure at March 31, 2016 and September 30, 2015, respectively.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

The following table presents our TDR loans as of March 31, 2016 and September 30, 2015.

	Total Troubled Debt Restructurings				Troubled Debt Restructured Loans That Have Defaulted on Modified Terms Within The Past 12 Months
	Number of Loans		Recorded Investment		Number of Loans		Recorded Investment
	(dollars in thousands)
At March 31, 2016:
Construction and Development:
Residential and commercial		1	$	109		—	$	—
Commercial:
Commercial real estate		3		1,468		—		—
Total		4	$	1,577		—	$	—
At September 30, 2015:
Construction and Development:
Residential and commercial		1	$	109		—	$	—
Commercial:
Commercial real estate		4		1,474		2		982
Total		5	$	1,583		2	$	982

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

	March 31, 2016				September 30, 2015
	Performing		Non-Performing		Performing		Non-Performing
	(in thousands)
Construction and Development:
Residential and commercial	$	109	$	—	$	109	$	—
Commercial:
Commercial real estate		1,468		—		982		492
Total	$	1,577	$	—	$	1,091	$	492

There was no new TDR activity for the three and six months ended March 31, 2016 and 2015.

Note 7 - Regulatory Matters

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk-weightings and other factors.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 7 - Regulatory Matters – (continued)

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

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of tangible and core capital (as defined in the regulations) to total adjusted tangible assets (as defined) and of risk-based capital (as defined) to risk-weighted assets (as defined). The Office of the Comptroller of the Currency recently advised the Bank that, as of January 21, 2016, it no longer is required to satisfy the individual minimum capital ratios (“IMCRs”) previously imposed.

As of March 31, 2016, the Company’s and the Bank’s current capital levels exceed the required capital amounts to be considered “well capitalized” and we believe they also meet the fully-phased in minimum capital requirements, including the related capital conservation buffers, as required by the Basel III capital rules.

The following table summarizes the Company’s compliance with applicable regulatory capital requirements as of March 31, 2016:

	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
(Dollars in thousands)	Capital Amount		Ratio			Capital Amount		Ratio			Capital Amount		Ratio

As of March 31, 2016:

Tier 1 Leverage (Core) Capital (to average assets)	$	85,199		11.92	%	$	28,959		4.00	%	$	35,744		5.00	%
Common Equity Tier 1 Capital (to risk weighted assets)		85,199		15.68	%		24,447		4.50	%		35,312		6.50	%
Tier 1 Capital (to risk weighted assets)		85,199		15.68	%		32,595		6.00	%		43,461		8.00	%
Total Risk Based Capital (to risk weighted assets)		90,198		16.60	%		43,461		8.00	%		54,326		10.00	%

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 7 - Regulatory Matters – (continued)

The following table summarizes the Bank’s compliance with applicable regulatory capital requirements as of March 31, 2016 and September 30, 2015:

											To Be Well Capitalized
						For Capital					Under Prompt Corrective
	Actual					Adequacy Purposes					Action Provisions
(Dollars in thousands)	Capital Amount		Ratio			Capital Amount		Ratio			Capital Amount		Ratio

As of March 31, 2016:

Tier 1 Leverage (to average assets)	$	77,238		10.34	%	$	29,892		4.00	%	$	37,365		5.00	%
Common Equity Tier 1 Capital (to risk weighted assets)		77,238		14.23	%		24,422		4.50	%		35,276		6.50	%
Tier 1 Capital (to risk weighted assets)		77,238		14.23	%		32,562		6.00	%		43,416		8.00	%
Total Capital (to risk weighted assets)		82,237		15.15	%		43,416		8.00	%		54,271		10.00	%

As of September 30, 2015:

Tier 1 Leverage (to average assets)	$	69,030		10.80	%	$	25,573		4.00	%	$	31,966		5.00	%
Common Equity Tier 1 Capital (to risk weighted assets)		69,030		15.90	%		19,538		4.50	%		28,222		6.50	%
Tier 1 Capital (to risk weighted assets)		69,030		15.90	%		26,051		6.00	%		34,734		8.00	%
Total Capital (to risk weighted assets)		73,759		16.99	%		34,734		8.00	%		43,418		10.00	%

Note 8 – Derivatives and Hedging Activities

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

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

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in Accumulated Other Comprehensive Income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. At March 31, 2016, such derivatives were used to hedge the variable cash flows associated with FHLB advances. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. The Company’s derivatives did not have any hedge ineffectiveness recognized in earnings during the three and six months ended March 31, 2016.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 8 – Derivatives and Hedging Activities – (continued)

Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. During the next twelve months, the Company estimates approximately $273,000 to be reclassified to earnings in interest expense. The Company is hedging its exposure to the variability in future cash flows for forecasted transactions over a maximum period of twenty months (excluding forecasted transactions related to the payment of variable interest on existing financial instruments).

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Balance Sheet as of March 31, 2016 and September 30, 2015:

March 31, 2016

Notional

Amount

Fair

Value

Balance Sheet

Location

Expiration Date

(dollars in thousand)

Derivatives designated as hedging instruments

Interest rate swaps by effective date:

August 3, 2015

15,000

452

Other liabilities

August 3, 2020

February 5, 2016

20,000

145

Other liabilities

February 1, 2021

September 30, 2015

Notional

Amount

Fair

Value

Balance Sheet

Location

Expiration Date

(dollars in thousand)

Derivatives designated as hedging instruments

Interest rate swaps by effective date:

August 3, 2015

15,000

348

Other liabilities

August 3, 2020

The tables below presents the net gains (losses) recorded in accumulated other comprehensive income and the Consolidated Statements of Income relating to the cash flow derivative instruments for the three and six months ended March 31, 2016. There were no derivatives held by the Company at or for the three and six months ended March 31, 2015.

	For the Three Months Ended March 31, 2016
	Amount of Gain (Loss) Recognized in OCI (Effective Portion)			Amount of Gain (Loss) Reclassified from OCI to Interest Expense			Amount of Gain (Loss) Recognized in Other Non-Interest Income (Ineffective Portion)
	(in thousands)
August 3, 2015	$	(397	)	$	(48	)	$	—
February 5, 2016		(166	)		(21	)		—

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 8 – Derivatives and Hedging Activities – (continued)

	For the Six Months Ended March 31, 2016
	Amount of Gain (Loss) Recognized in OCI (Effective Portion)			Amount of Gain (Loss) Reclassified from OCI to Interest Expense			Amount of Gain (Loss) Recognized in Other Non-Interest Income (Ineffective Portion)
	(in thousands)
August 3, 2015	$	(244	)	$	(104	)	$	—
February 5, 2016		(166	)		(21	)		—

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

At March 31, 2016, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $648,000. As of March 31, 2016, the Company has minimum collateral posting thresholds with certain of its derivative counterparties and has posted collateral of $1.3 million against its obligations under these agreements. If the Company had breached any of these provisions at March 31, 2016, 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.

At September 30, 2015, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $195,000. At September 30, 2015, the Company has minimum collateral posting thresholds with certain of its derivative counterparties and has posted collateral of $600,000 against its obligations under these agreements. If the Company had breached any of these provisions at September 30, 2015, it could have been required to settle its obligations under the agreements at the termination value and would have been required to pay any additional amounts due in excess of amounts previously posted as collateral with the respective counterparty.

Note 9 - Fair Value Measurements

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

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

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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 9 – Fair Value Measurements – (continued)

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

The Company bases its fair values on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It is our policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements, in accordance with the fair value hierarchy.

Fair value measurements for assets where there exists limited or no observable market data and, therefore, are based primarily upon the Company’s or other third-party’s estimates, are often calculated based on the characteristics of the asset, the economic and competitive environment and other factors. Therefore, the results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset. Additionally, there may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results of current or future valuations.

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

The Company monitors and evaluates available data to perform fair value measurements on an ongoing basis and recognizes transfers among the levels of the fair value hierarchy as of the date event or a change in circumstances that affects the valuation method chosen. There were no changes in valuation technique or transfers between levels at March 31, 2016 or September 30, 2015.

The table below presents the balances of assets measured at fair value on a recurring basis:

	March 31, 2016
	Total		Level 1		Level 2		Level 3
	(in thousands)
Assets:
Investment securities available-for-sale:
Debt securities:
U.S. government agencies	$	795	$	—	$	795	$	—
State and municipal obligations		36,737		—		36,737		—
Single issuer trust preferred security		786		—		786		—
Corporate debt securities		48,714		—		48,714		—
Total investment securities available-for-sale		87,032		—		87,032		—
Mortgage-backed securities available-for-sale:
FNMA, fixed-rate		8,200		—		8,200		—
FHLMC, fixed-rate		5,663		—		5,663		—
Total mortgage-backed securities available-for-sale		13,863		—		13,863		—
Total investments securities available for sale	$	100,895	$	—	$	100,895	$	—

Liabilities:
Derivative instruments	$	597	$	—	$	597	$	—

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 9 - Fair Value Measurements – (continued)

	September 30, 2015
	Total		Level 1		Level 2		Level 3
	(in thousands)
Assets:
Investment securities available-for-sale:
Debt securities:
U.S. government agencies	$	815	$	—	$	815	$	—
State and municipal obligations		42,083		—		42,083		—
Single issuer trust preferred security		850		—		850		—
Corporate debt securities		69,982		—		69,982		—
Total investment securities available-for-sale		113,730		—		113,730		—
Mortgage-backed securities available-for-sale:
FNMA, fixed-rate		8,692		—		8,692		—
FHLMC, fixed-rate		5,932		—		5,932		—
Total mortgage-backed securities available-for-sale		14,624		—		14,624		—
Total investments securities available for sale	$	128,354	$	—	$	128,354	$	—

Liabilities:
Derivative instruments	$	348	$	—	$	348	$	—

For assets measured at fair value on a nonrecurring basis that were still held at the end of the period, the following table provides the level of valuation assumptions used to determine each adjustment and the carrying value of the related individual assets or portfolios at March 31, 2016 and September 30, 2015:

	March 31, 2016
	Total		Level 1		Level 2		Level 3
	(in thousands)
Other real estate owned	$	700	$	—	$	—	$	700
Impaired loans^{(1) (2)}		8						8
Total	$	708	$	—	$	—	$	708

March 31, 2016

Fair Value at
March 31,
2016

Valuation Technique

Unobservable Input

Range/(Weighted
Average)

(dollars in thousands)

Other real estate owned

700

Appraisal of collateral⁽³⁾

Collateral discounts⁽⁴⁾

18%/(18%)

Impaired loans^{(1) (2)}

Appraisal of collateral⁽³⁾

Collateral discounts⁽⁴⁾

0%/(0%)

Total

708

________________

(1)

At March 31, 2016, consisted of one loan with an aggregate balance of $32,000 and with $24,000 in specific loan loss allowance.

(2)

Includes assets directly charged-down to fair value during the year-to-date period.

(3)

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

(4)

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 9 - Fair Value Measurements – (continued)

	September 30, 2015
	Total		Level 1		Level 2		Level 3
	(in thousands)
Impaired loans^{(1) (2)}	$	48	$	—	$	—	$	48
Mortgage servicing rights		30		—		30		—
Total	$	78	$	—	$	30	$	48

	September 30, 2015
	Fair Value at September 30, 2015		Valuation Technique	Unobservable Input	Range/(Weighted Average)
	(dollars in thousands)
Impaired loans^{(1) (2)}	$	48	Appraisal of collateral⁽³⁾	Collateral discounts⁽⁴⁾	65 – 80%/(74%)
Total	$	48

________________

(1)

At September 30, 2015, consisted of two loans with an aggregate balance of $48,000 and there were no specific loan loss allowance.

(2)

Includes assets directly charged-down to fair value during the year-to-date period.

(3)

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

(4)

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

At March 31, 2016, the Company did not have any additions to our mortgage servicing assets. The following table shows active information regarding significant techniques and inputs used at September 30, 2015 for measures in a non-recurring basis using unobservable inputs (Level 2):

Fair Value at
September 30,
2015

Valuation
Technique

Unobservable
Input

Method or Value as of
September 30, 2015

(in thousands)

Mortgage servicing rights

Discounted rate

Discount rate

11.00 − 12.00

Rate used through modeling period

Loan prepayment speeds

14.73

Weighted-average CPR

Servicing fees

0.25

Of loan balance

Servicing costs

6.25

Monthly servicing cost per account

$300 − 500

Additional monthly servicing cost per loan on loans more than 30 days delinquent

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 9 - Fair Value Measurements – (continued)

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

The fair value estimates presented herein are based on pertinent information available to management as of March 31, 2016 and September 30, 2015. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since March 31, 2016 and September 30, 2015 and, therefore, current estimates of fair value may differ significantly from the amounts presented herein

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

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

Investment Securities—Investment and mortgage-backed securities available for sale (carried at fair value) and held to maturity (carried at amortized cost) are measured at fair value on a recurring basis. Fair value measurements for these securities are typically obtained from independent pricing services that we have engaged for this purpose. When available, we, or our independent pricing service, use quoted market prices to measure fair value. If market prices are not available, fair value measurement is based upon models that incorporate available trade, bid and other market information and for structured securities, cash flow and, when available, loan performance data. Because many fixed income securities do not trade on a daily basis, our independent pricing service’s applications apply available information through processes such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing to prepare evaluations. For each asset class, pricing applications and models are based on information from market sources and integrate relevant credit information. All of our securities available for sale are valued using either of the foregoing methodologies to determine fair value adjustments recorded to our financial statements. The Company had no Level 1 or Level 3 securities as of March 31, 2016 or September 30, 2015.

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

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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 9 - Fair Value Measurements – (continued)

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

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

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

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

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

Commitments to Extend Credit and Letters of Credit—The majority of the Company’s commitments to extend credit and letters of credit carry current market interest rates if converted to loans. Because commitments to extend credit and letters of credit are generally unassignable by either the Bank or the borrower, they only have value to the Company and the borrower. The estimated fair value approximates the recorded deferred fee amounts, which are not significant.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 9 - Fair Value Measurements – (continued)

The carrying amount and estimated fair value of the Company’s financial instruments as of March 31, 2016 and September 30, 2015 are presented below:

	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
	(in thousands)
March 31, 2016:
Financial assets:
Cash and cash equivalents	$	58,043	$	58,043	$	58,043	$	—	$	—
Investment securities available-for-sale		100,895		100,895		—		100,895		—
Investment securities held-to-maturity		52,272		52,176		—		52,176		—
Loans receivable, net		515,094		530,611		—		—		530,611
Accrued interest receivable		2,622		2,622		—		2,622		—
Restricted stock		5,553		5,553		—		5,553		—
Mortgage servicing rights (included in Other Assets)		369		389		—		389		—
Financial liabilities:
Savings accounts		44,207		44,207		—		44,207		—
Checking and NOW accounts		129,874		129,874		—		129,874		—
Money market accounts		129,652		129,652		—		129,652		—
Certificates of deposit		245,057		247,739		—		247,739		—
FHLB advances		123,000		125,100		—		125,100		—
Derivatives		597		597		—		597		—
Accrued interest payable		436		436		—		436		—

September 30, 2015:
Financial assets:
Cash and cash equivalents	$	40,263	$	40,263	$	40,263	$	—	$	—
Investment securities available-for-sale		128,354		128,354		—		128,354		—
Investment securities held-to-maturity		57,221		56,825		—		56,825		—
Loans receivable, net		391,307		400,305		—		—		400,305
Accrued interest receivable		2,484		2,484		—		2,484		—
Restricted stock		4,765		4,765		—		4,765		—
Mortgage servicing rights		401		416		—		416		—
Financial liabilities:
Savings accounts		45,189		45,189		—		45,189
Checking and NOW accounts		109,907		109,907		—		109,907		—
Money market accounts		108,706		108,706		—		108,706		—
Certificates of deposit		201,720		203,257		—		203,257		—
FHLB advances		103,000		104,889		—		104,889		—
Derivatives		348		348		—		348		—
Accrued interest payable		396		396		—		396		—

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 10 – Income Taxes

Deferred income taxes at March 31, 2016 and September 30, 2015 were as follows:

	March 31,			September 30,
	2016			2015
	(in thousands)
Deferred Tax Assets:
Unrealized loss on investments available-for-sale	$	59		$	383
Allowance for loan losses		3,066			2,985
Non-accrual interest		86			98
Write-down of real estate owned		113			106
Alternative minimum tax (AMT) credit carryover		179			128
Low-income housing tax credit carryover		337			337
Supplement Employer Retirement Plan		409			455
Charitable contributions		49			36
Depreciation		9			205
Unrealized loss on derivatives		203			—
Federal net operating loss		5,509			6,375
Other		367			338
Total Deferred Tax Assets		10,386			11,446
Valuation allowance for DTA		(7,824	)		(8,043	)
Total Deferred Tax Assets, Net of Valuation Allowance		2,562			3,403
Deferred Tax Liabilities:
State net operating income		—			(187	)
Mortgage servicing rights		(125	)		(136	)
Other		(235	)		(206	)
Total Deferred Tax Liabilities		(360	)		(529	)
Deferred Tax Assets, Net	$	2,202		$	2,874

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 11 – Comprehensive Income (Loss)

The components of accumulated other comprehensive (loss) included in shareholders’ equity are as follows:

	March 31,			September 30,
	2016			2015
	(in thousands)
Net unrealized holding losses on available-for-sale securities	$	(175	)	$	(1,011	)
Tax effect		59			344
Net of tax amount		(116	)		(667	)

Net unrealized holding losses on securities transferred from available-for-sale to held-to-maturity		—			(115	)
Tax effect		—			39
Net of tax amount		—			(76	)

Fair value adjustments on derivatives		(597	)		(348	)
Tax effect		203			12
Net of tax amount		(394	)		(336	)

Total accumulated other comprehensive loss	$	(510	)	$	(1,079	)

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

	Three Months Ended March 31,						Six Months Ended March 31,
(in thousands)	2016			2015			2016			2015
Net unrealized holding gains on available-for-sale securities	$	1,620		$	1,947		$	1,139		$	3,109

Net realized gains on securities available-for-sale		(61	)		(266	)		(192	)		(292	)

Amortization (accretion) of unrealized holding losses on securities available-for-sale transferred to held-to-maturity		2			(33	)		4			(33	)

Fair value adjustments on derivatives		(494	)		—			(249	)		—

Other comprehensive income before taxes		1,067			1,648			702			2,784
Tax effect		(363	)		(561	)		(133	)		(947	)
Total comprehensive income	$	704		$	1,087		$	569		$	1,837

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 March 31, 2016 and September 30, 2015. In order to fully understand this analysis, the reader is encouraged to review the consolidated financial statements and accompanying notes thereto appearing elsewhere in this report.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains certain forward looking statements (as defined in the Securities Exchange Act of 1934, as amended, and the regulations thereunder). Forward looking statements are not historical facts but instead represent only the beliefs, expectations or opinions of Malvern Bancorp, Inc. and its management regarding future events, many of which, by their nature, are inherently uncertain. Forward looking statements may be identified by the use of such words as: “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” or words of similar meaning, or future or conditional terms such as “will,” “would,” “should,” “could,” “may,” “likely,” “probably,” or “possibly.” Forward looking statements include, but are not limited to, financial projections and estimates and their underlying assumptions; statements regarding plans, objectives and expectations with respect to future operations, products and services; and statements regarding future performance. Such statements are subject to certain risks, uncertainties and assumptions, many of which are difficult to predict and generally are beyond the control of Malvern Bancorp, Inc. and its management, that could cause actual results to differ materially from those expressed in, or implied or projected by, forward looking statements. The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward looking statements: (1) economic and competitive conditions which could affect the volume of loan originations, deposit flows and real estate values; (2) the levels of non-interest income and expense and the amount of loan losses; (3) competitive pressure among depository institutions increasing significantly; (4) changes in the interest rate environment causing reduced interest margins; (5) general economic conditions, either nationally or in the markets in which Malvern Bancorp, Inc. is or will be doing business, being less favorable than expected; (6) political and social unrest, including acts of war or terrorism; or (7) legislation or changes in regulatory requirements adversely affecting the business in which Malvern Bancorp, Inc. is or will be engaged. Malvern Bancorp, Inc. undertakes no obligation to update these forward looking statements to reflect events or circumstances that occur after the date on which such statements were made.

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

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

Critical Accounting Policies

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

The Company’s accounting policies are fundamental to understanding Management’s Discussion and Analysis (“MD&A”) of financial condition and results of operations. The Company has identified the determination of the allowance for loan losses, other real estate owned, fair value measurements, deferred tax assets, the other-than-temporary impairment evaluation of securities and the valuation of our derivative positions to be critical because management must make subjective and/or complex judgments about matters that are inherently uncertain and could be most subject to revision as new information becomes available. Additional information on these policies is provided below.

Allowance for Loan Losses. The allowance for loan losses consists of the allowance for loan losses and the reserve for unfunded lending commitments. The allowance for loan losses represents management’s estimate of losses inherent in the loan portfolio as of the statement of financial condition date and is recorded as a reduction to loans. The reserve for unfunded lending commitments represents management’s estimate of losses inherent in the Company’s unfunded loan commitments and is recorded in other liabilities on the consolidated statement of financial condition. The allowance for loan losses is increased by provisions for loan losses, and decreased by charge-offs, net of recoveries. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. All, or part, of the principal balance of loans receivable are charged off to the allowance as soon as it is determined that the repayment or collateral recovery of all, or part, of the principal balance is highly unlikely. Non-residential consumer loans are generally charged off no later than when they become 120 days past due on a contractual basis or earlier in the event of the borrower’s bankruptcy, or if there is an amount deemed uncollectible. Because all identified losses are immediately charged off, no portion of the allowance for loan losses is restricted to any individual loan or groups of loans, and the entire allowance is available to absorb any and all loan losses.

The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance. The allowance is based on the Company’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, the composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available.

The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as impaired. For loans that are classified as impaired, a charge-off is recognized when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers pools of loans by loan class including commercial loans not considered impaired, as well as smaller balance homogeneous loans, such as residential real estate, home equity and other consumer loans. These pools of loans are evaluated for loss exposure based upon historical loss rates for each of these categories of loans, as adjusted for qualitative factors.

An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. Once all factor adjustments are applied, general reserve allocations for each segment are calculated, summarized and reported on the ALLL summary. ALLL final schedules, calculations and the resulting evaluation process are reviewed quarterly.

In addition, Federal bank regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses and may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination, which may not previously have been available to management. Based on management’s comprehensive analysis of the loan portfolio, management believes the level of the allowance for loan losses at March 31, 2016 was appropriate under GAAP.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and industrial loans, commercial real estate loans and commercial construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.

The allowance is adjusted for other significant factors that affect the collectibility of the loan portfolio as of the evaluation date including changes in lending policy and procedures, loan volume and concentrations, seasoning of the portfolio, loss experience in particular segments of the portfolio, and bank regulatory examination results. Other factors include changes in economic and business conditions affecting our primary lending areas and credit quality trends. Loss factors are reevaluated each reporting period to ensure their relevance in the current economic environment. We review key ratios such as the allowance for loan losses to total loans receivable and as a percentage of non-performing loans; however, we do not try to maintain any specific target range for these ratios.

While management uses the best information available to make loan loss allowance evaluations, adjustments to the allowance may be necessary based on changes in economic and other conditions or changes in accounting guidance. In addition, the OCC, as an integral part of its examination processes, periodically reviews our allowance for loan losses. The OCC may require the recognition of adjustments to the allowance for loan losses based on their judgment of information available to them at the time of their examinations. To the extent that actual outcomes differ from management’s estimates, additional provisions to the allowance for loan losses may be required that would adversely impact earnings in future periods.

Other Real Estate Owned. Assets acquired through foreclosure consist of other real estate owned and financial assets acquired from debtors. Other real estate owned is carried at the lower of cost or fair value, less estimated selling costs. The fair value of other real estate owned is determined using current market appraisals obtained from approved independent appraisers, agreements of sale, and comparable market analysis from real estate brokers, where applicable. Changes in the fair value of assets acquired through foreclosure at future reporting dates or at the time of disposition will result in an adjustment in assets acquired through foreclosure expense or net gain (loss) on sale of assets acquired through foreclosure, respectively.

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

Under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurement, 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.

Under FASB ASC Topic 820, the Company bases its fair values on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It is our policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements, in accordance with the fair value hierarchy in FASB ASC Topic 820.

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 such 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, that could significantly affect the results of current or future valuations. At March 31, 2016, the Company had $708,000 of assets that were measured at fair value on a non-recurring basis using Level 3 measurements.

Deferred Tax Assets. We make estimates and judgments to calculate some of our tax liabilities and determine the recoverability of some of our deferred tax assets (“DTAs”), which arise from temporary differences between the tax and financial statement recognition of revenues and expenses. We also estimate a reserve for deferred tax assets if, based on the available evidence, it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. These estimates and judgments are inherently subjective. Historically, our estimates and judgments to calculate our deferred tax accounts have not required significant revision to our initial estimates.

In evaluating our ability to recover deferred tax assets, we consider all available positive and negative evidence, including our past operating results and our forecast of future taxable income. In determining future taxable income, we make assumptions for the amount of taxable income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require us to make judgments about our future taxable income and are consistent with the plans and estimates we use to manage our business. Any reduction in estimated future taxable income may require us to record a valuation allowance against our deferred tax assets. An increase in the valuation allowance would result in additional income tax expense in the period and could have a significant impact on our future earnings.

Realization of a deferred tax asset requires us to exercise significant judgment and is inherently uncertain because it requires the prediction of future occurrences. Our net deferred tax asset amounted to $2.2 million and $2.9 million at March 31, 2016 and at September 30, 2015, respectively. In evaluating the need for a valuation allowance, we estimated our viable tax planning strategies that we could employ so that the asset would not go unused. We believe that the DTA balance of $2.2 million as of March 31, 2016 is appropriate since it is the amount resulting from such estimated tax planning strategies. Our total deferred tax assets decreased to $10.4 million at March 31, 2016 compared to $11.4 million at September 30, 2015. Our DTA valuation allowance amounted to $7.8 million at March 31, 2016 compared to $8.0 million at September 30, 2015. In the future, the DTA allowance may be reversed, depending on the Company’s financial position and results of operations in the future, among other factors, and, in such event, may be available to increase future net income. There can be no assurance, however, as to when we could be in a position to recapture our DTA allowance or the amount that may be reversed at any particular time.

Other-Than-Temporary Impairment of Securities. Securities are evaluated on a quarterly basis, and more frequently when market conditions warrant such an evaluation, to determine whether declines in their value are other-than-temporary. To determine whether a loss in value is other-than-temporary, management utilizes criteria such as the reasons underlying the decline, the magnitude and duration of the decline and whether or not management intends to sell or expects that it is more likely than not that it will be required to sell the security prior to an anticipated recovery of the fair value. The term “other-than-temporary” is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value for a debt security is determined to be other-than-temporary, the other-than-temporary impairment is separated into (a) the amount of the total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of the total other-than-temporary impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the total other-than-temporary impairment related to all other factors is recognized in other comprehensive income.

Derivatives. 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 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. The Company primarily uses interest rate swaps as part of its interest rate risk management strategy.

Interest rate swaps are valued by a third party, using models that primarily use market observable inputs, such as yield curves, and are validated by comparison with valuations provided by the respective counterparties. The credit risk associated with derivative financial instruments that are subject to master netting agreements is measured on a net basis by counterparty portfolio. The significant assumptions used in the models, which include assumptions for interest rates, are independently verified against observable market data where possible. Where observable market data is not available, the estimate of fair value becomes more subjective and involves a high degree of judgment. In this circumstance, fair value is estimated based on management’s judgment regarding the value that market participants would assign to the asset or liability. This valuation process takes into consideration factors such as market illiquidity. Imprecision in estimating these factors can impact the amount recorded on the balance sheet for a particular asset or liability with related impacts to earnings or other comprehensive income.

Earnings

Net income available to common shareholders for the three months ended March 31, 2016 amounted to $1.3 million compared to net income of $1.0 million for the comparable three-month period ended March 31, 2015. The Company recorded earnings per common share of $0.20 for the three months ended March 31, 2016 as compared with earnings of $0.16 per common share for the same three months in fiscal 2015. The annualized return on average assets was 0.68 percent for the three months ended March 31, 2016, compared to annualized return on average assets of 0.64 percent for three months ended March 31, 2015. The annualized return on average shareholders’ equity was 6.03 percent for the three-month period ended March 31, 2016, compared to 5.05 percent in annualized return on average shareholders’ equity for the three months ended March 31, 2015.

Net income available to common shareholders for the six months ended March 31, 2016 amounted to $2.6 million compared to net income of $1.3 million for the comparable six-month period ended March 31, 2015. The Company recorded earnings per common share of $0.41 for the six months ended March 31, 2016 as compared with earnings of $0.21 per common share for the same six months in fiscal 2015. The annualized return on average assets was 0.73 percent for the six months ended March 31, 2016, compared to annualized loss on average assets of 0.44 percent for six months ended March 31, 2015. The annualized return on average shareholders’ equity was 6.29 percent for the six-month period ended March 31, 2016, compared to 3.38 percent in annualized loss on average shareholders’ equity for the six months ended March 31, 2015.

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

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

Net Interest Income (tax-equivalent basis)

	Three Months Ended March 31,												Six Months Ended March 31,
(dollars in thousands)	2016			2015			Increase (Decrease)			Percent Change			2016			2015			Increase (Decrease)			Percent Change
Interest income:
Loans, including fees	$	5,122		$	4,128		$	994			24.08	%	$	9,671		$	8,331		$	1,340			16.08	%
Investment securities		1,050			907			143			15.77			2,186			1,470			716			48.71
Dividends, restricted stock		63			142			(79	)		(55.63	)		117			179			(62	)		(34.64	)
Interest-bearing cash accounts		41			24			17			70.83			59			47			12			25.53
Total interest income		6,276			5,201			1,075			20.67			12,033			10,027			2,006			20.01
Interest expense:
Deposits		1,161			859			302			35.16			2,125			1,718			407			23.69
Borrowings		549			471			78			16.56			1,061			864			197			22.80
Total interest expense		1,710			1,330			380			28.57			3,186			2,582			604			23.39
Net interest income on a fully tax-equivalent basis		4,566			3,871			695			17.95			8,847			7,445			1,402			18.83
Tax-equivalent adjustment (1)		(66	)		(35	)		(31	)		88.57			(136	)		(48	)		(88	)		183.33
Net interest income, as reported under GAAP	$	4,500		$	3,836		$	664			17.31	%	$	8,711		$	7,397		$	1,314			17.76	%

MALVERN BANCORP, INC. - FORM 10-Q - May 10, 2016

Attached files