MALN BANC The purpose of this analysis is to provide the reader with information relevant to understanding and assessing the Company's financial condition and results of operations for the periods indicated. To fully appreciate this analysis, the reader is encouraged to review the consolidated financial statements and accompanying notes thereto appearing under Item 8 of this report, and statistical data presented in this document.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
See the first page of this Annual Report on Form 10-K for information regarding forward-looking statements.
Critical Accounting Policies and Estimates
Management's Discussion and Analysis of Financial Condition and Results of
Operations is based on our consolidated financial statements, which have been
prepared in accordance with U. S. generally accepted accounting principles
("GAAP"). The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses. Note 2 to our audited consolidated financial statements
contains a summary of our significant accounting policies. Management believes
our policy with respect to the methodology for the determination of the
allowance for loan losses involves more complexity and requires management to
make difficult and subjective judgments which often require assumptions or
estimates about highly uncertain matters. Changes in these judgments,
assumptions or estimates could materially impact results of operations. This
critical policy and its application are periodically reviewed with the Audit
Committee and our Board of Directors.
Impact of COVID-19
The Company continues to take the following significant steps to protect the health and well-being of its employees and clients and to assist clients who have been impacted by COVID-19.
• Continuing limited lobby hours; prioritizing drive-thru and appointment
banking.
• High-risk designated hours offered to assist our high-risk clients.
• Continuing to assist customers in the Paycheck Protection Program.
• Continuing to provide payment deferrals and forbearances to business
customers and mortgage customers that are experiencing hardship because of
the crisis.
Paycheck Protection Program
In response to COVID-19, the Coronavirus Aid, Relief, and Economic Security
("CARES") Act was passed by Congress and signed into law on March 27, 2020 . The
CARES Act provides an estimated $2.2 trillion to fight the COVID-19 pandemic and
stimulate the economy by supporting individuals and businesses through loans,
grants, tax changes, and other types of relief. Section 4013 of the CARES Act,
provides that, from the period beginning March 1, 2020 until the earlier of
December 31, 2020 or the date that is 60 days after the date on which the
national emergency concerning the COVID-19 pandemic declared by the President of
the United States under the National Emergencies Act terminates (the "applicable
period").
The CARES Act established the Paycheck Protection Program ("PPP"), an expansion
of the Small Business Administration's 7(a) loan program and the Economic Injury
Disaster Loan Program ("EIDL"), administrated directly by the Small Business
Administration ("SBA").
The Company started accepting and processing applications for loans under the
PPP in early April 2020 , when the program was officially launched by the SBA and
Treasury Department under the CARES Act. As of September 30, 2020 , the Company
obtained approval from the SBA for 255 PPP loans totaling $20.8 million for both
existing and new customers, with an average loan size of approximately $81,000 .
Commercial and industrial loans represented 100 percent of PPP loans at
September 30, 2020 . These loans are expected to generate fee income of
approximately $574,000 to be recognized over the life of the loans or when the
loan is forgiven.
Liquidity Sources
Management has reviewed all primary and secondary sources of liquidity in preparation for any unforeseen funding needs due to the COVID-19 pandemic and prioritized based on available capacity, term flexibility, and cost.
-29-
--------------------------------------------------------------------------------
As of
Capital Strength The Company's capital ratios continue to exceed the highest required regulatory benchmark levels. As ofSeptember 30, 2020 , common equity Tier 1 capital ratio was 14.25 percent, Tier 1 leverage ratio was 11.87 percent, Tier 1 risk-based capital ratio was 14.25 percent and the total risk-based capital ratio was 17.85 percent. Deferral Requests As ofSeptember 30, 2020 , the Company had 43 COVID-19 loan modification agreements with respect to$147.9 million representing 14.2 percent of loans outstanding. The COVID-19 loan modifications do not classify as TDRs as they fall under the CARES Act Section 4013, and further details regarding these modifications are provided in the table below. AtJanuary 15, 2020 , the Company had 15 COVID-19-related modified loan deferrals totaling$71.3 million or 7.1% of total loans. Of the remaining$71.3 million deferrals, approximately$37.3 million or 52.3% of the deferrals are paying the contractual interest payments. For loans subject to the program, each borrower is required to resume making regularly scheduled loan payments at the end of the modification period and the deferred amounts will be moved to the end of the loan term. Management anticipates this activity will continue beyond fiscal year 2020. September 30, 2020 Loan Gross Loans Percentage of Deferment September 30, Gross Loans on Number of Loans Exposure 2020 Deferral (Dollars in thousands) Residential mortgage 5$ 1,288 $ 242,090 0.12 % Construction and Development: Residential and commercial - - 65,703 0.00 % Land loans - - 3,110 0.00 %Total Construction and - Development - 68,813 0.00 % Commercial: Commercial real estate 21 134,488 498,538 12.90 % Farmland 1 2,288 7,517 0.22 % Multi-family 2 3,718 67,767 0.36 % Commercial and industrial 10 5,547 116,584 0.53 % Other - - 10,142 0.00 % Total Commercial 34 146,041 700,548 14.01 % Consumer: Home equity lines of credit 3 579 17,128 0.06 % Second mortgages 1 17 10,711 0.00 % Other - - 2,851 0.00 % Total Consumer 4 596 30,690 0.06 % Total loans 43$ 147,925 $ 1,042,141 14.19 % -30-
--------------------------------------------------------------------------------
Certain industries are widely expected to be particularly impacted by social
distancing, quarantines, and the economic impact of the COVID-19 pandemic, such
as the following:
September 30, 2020
Loan Deferment Percentage of Gross
Number of Loans Exposure Loans on Deferral
(Dollars in thousands)
Industries:
Hotel 6 $ 58,640 5.63 %
Retail 9 28,315 2.72 %
Office/Medical Office 1 6,927 0.66 %
Fitness Centers 1 11,400 1.09 %
Restaurants and food service 1 1,191 0.11 %
Other 3 28,015 2.69 %
Total Outstanding Exposure 21 $ 134,488 12.90 %
Allowance for Loan Losses
The allowance for loan losses represents management's estimate of probable loan
losses inherent in the loan portfolio. Determining the amount of the allowance
for loan losses is considered a critical accounting estimate because it requires
significant judgment and the use of estimates related to the amount and timing
of expected future cash flows on impaired loans, estimated losses on pools of
homogeneous loans based on historical loss experience, and consideration of
current economic trends and conditions, all of which may be susceptible to
significant change. The loan portfolio also represents the largest asset type on
the Company's Consolidated Statements of Financial Condition.
The evaluation of the adequacy of the allowance for loan losses includes, among
other factors, an analysis of historical loss rates by loan category applied to
current loan totals and qualitative factors. However, actual loan losses may be
higher or lower than historical trends, which vary. Actual losses on specified
problem loans, which also are provided for in the evaluation, may vary from
estimated loss percentages, which are established based upon a limited number of
potential loss classifications. The allowance for loan losses is established
through a provision for loan losses charged to expense. Management believes that
the current allowance for loan losses will be adequate to absorb loan losses on
existing loans that may become uncollectible based on the evaluation of known
and inherent risks in the loan portfolio. The evaluation takes into
consideration such factors as changes in the nature and size of the portfolio,
overall portfolio quality, and specific problem loans and current economic
conditions which may affect our borrowers' ability to pay.
The evaluation also details historical losses by loan category and the resulting
loan loss rates which are projected for current loan total amounts. Loss
estimates for specified problem loans are also detailed. In addition, the OCC,
as an integral part of its examination process, periodically reviews our
allowance for loan losses. The OCC may require us to make additional provisions
for loan losses based upon information available at the time of the examination.
All of the factors considered in the analysis of the adequacy of the allowance
for loan losses may be subject to change. To the extent actual outcomes differ
from management estimates, additional provisions for loan losses may be required
that could materially adversely impact earnings in future periods.
Qualitative or environmental factors that may result in further adjustments to
the quantitative analyses include items such as changes in lending policies and
procedures, economic and business conditions, nature and volume of the
portfolio, changes in delinquency, concentration of credit trends, and value of
underlying collateral. The total net adjustments due to all qualitative factors
increased the allowance for loan losses by approximately $9.2 million and
$6.7 million at September 30, 2020 and September 30, 2019 , respectively.
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.
Other Real Estate Owned
Assets acquired through foreclosure consist of OREO and financial assets acquired from debtors. OREO is carried at the lower of cost or fair value, less estimated selling costs. The fair value of OREO is determined using current
-31-
--------------------------------------------------------------------------------
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 FASB Accounting Standards Codification ("ASC") Topic 820, Fair Value
Measurements, 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 September 30, 2020 , the Company had $16.3 million of
assets that were measured at fair value on a non-recurring basis using Level 3
measurements.
Income Taxes
We make estimates and judgments to calculate some of our tax liabilities and
determine the recoverability of some of our DTAs, which arise from temporary
differences between the tax and financial statement recognition of revenues and
expenses. We also estimate a reserve for DTAs if, based on the available
evidence, it is more likely than not that some portion of the recorded DTAs 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 DTAs, 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 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 DTAs.
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 DTA requires us to exercise significant judgment and is
inherently uncertain because it requires the prediction of future occurrences.
Our net DTA amounted to $3.5 million and $2.8 million at September 30, 2020 and
at September 30, 2019 , respectively. In accordance with ASC Topic 740, the
Company evaluates on a quarterly
-32-
--------------------------------------------------------------------------------
basis, all evidence, both positive and negative, to determine whether, based on
the weight of that evidence, a valuation allowance for DTAs is needed. In
conducting this evaluation, management explores all possible sources of taxable
income available under existing tax laws to realize the net DTA beginning with
the most objectively verifiable evidence first, including available carry back
claims and viable tax planning strategies. If needed, management will look to
future taxable income as a potential source. Management reviews the Company's
current financial position and its results of operations for the current and
preceding years. That historical information is supplemented by all currently
available information about future years. The Company understands that
projections about future performance are subjective. The Company did not have a
DTA valuation allowance as of September 30, 2020 and September 30, 2019 .
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 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 an asset or liability with related impacts to earnings or other comprehensive income. Other assets increased from$12.5 million atSeptember 30, 2019 to$16.3 million atSeptember 30, 2020 while other liabilities increased from$8.5 million atSeptember 30, 2019 to$13.4 million atSeptember 30, 2020 primarily due to the Bank's commercial loan hedging program during fiscal 2020.
Results of Operations
Net income for the year endedSeptember 30, 2020 was$3.6 million as compared to$9.3 million earned in fiscal 2019. Our net income for fiscal 2020 decreased by 61.4 percent compared to fiscal 2019. For fiscal 2020, the fully diluted earnings per common share was$0.47 as compared with$1.22 per share in fiscal 2019. The decreases in net income and diluted earnings per share were primarily due to higher loan loss provision expense necessitated by the COVID-19 pandemic and lower net interest income, as well as the partial charge-off of$2.3 million in the first fiscal quarter endedDecember 31, 2019 related to one commercial loan relationship and a -33-
--------------------------------------------------------------------------------
partial charge-off of
For the year endedSeptember 30, 2020 , the Company's return on average equity (''ROAE'') was 2.49 percent and its return on average assets (''ROAA'') was 0.29 percent. The comparable ratios for the year endedSeptember 30, 2019 were ROAE of 6.78 percent and ROAA of 0.80 percent.
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.
The following table presents the components of net interest income for the
periods indicated.
Net Interest Income
Year Ended September 30,
2020 2019 (As Restated)
Increase Increase
(Decrease) (Decrease)
from Prior Percent from Prior Percent
(In thousands) Amount Year Change Amount Year Change
Interest income:
Loans, including fees $ 41,441 $ (2,313 ) (5.29 ) $ 43,754 $ 6,712 18.12
Investment securities 1,172 (17 ) (1.43 ) 1,189 (156 ) (11.60 )
Dividends, restricted
stock 631 4 0.64 627 160 34.26
Interest-bearing cash
accounts 1,063 (1,202 ) (53.07 ) 2,265 909 67.04
Total interest income 44,307 (3,528 ) (7.38 ) 47,835 7,625 18.96
Interest expense:
Deposits 12,846 (1,502 ) (10.47 ) 14,348 5,148 55.96
Short-term borrowings - (7 ) (100.00 ) 7 (61 ) (89.71 )
Long-term borrowings 2,898 25 0.87 2,873 493 20.71
Subordinated debt 1,531 (1 ) (0.07 ) 1,532 5 0.33
Total interest expense 17,275 (1,485 ) (7.92 ) 18,760 5,585 42.39
Net interest income $ 27,032 $ (2,043 ) (7.03 ) $ 29,075 $ 2,040 7.55
Net interest income is directly affected by changes in the volume and mix of
interest-earning assets and interest-bearing liabilities, which support those
assets, as well as changes in the rates earned and paid.
Net interest income for the year ended September 30, 2020 decreased $2.1
million , or 7.0 percent, to $27.0 million , from $29.1 million for fiscal 2019.
The Company's net interest margin decreased twenty-six basis points to 2.30
percent in fiscal 2020 from 2.56 percent for the fiscal year ended September 30,
2019 . During fiscal 2020, our net interest margin was impacted by a decrease in
the yield on interest-earning assets, as well as a decrease in the cost of
deposits and borrowings.
The decrease in net interest income during fiscal 2020 was attributable in part
to the continued decrease in short-term interest rates throughout 2020. The
Company experienced a decrease of $5.3 million in non-interest bearing deposits
during fiscal 2020 and a decrease of $57.6 million in interest-bearing demand,
savings, money market and time deposits during fiscal 2020. During the fiscal
year ended September 30, 2020 , the Company's net interest spread decreased by
twenty-one basis points reflecting a forty-three basis points decrease in the
average yield on interest-earning assets as well as a twenty-two basis points
decrease in the average interest rates paid on interest-bearing liabilities.
For the fiscal year ended September 30, 2020 , average interest-earning assets
increased by $37.3 million to $1.2 billion , as compared with the fiscal year
ended September 30, 2019 . The fiscal 2020 change in average
-34-
--------------------------------------------------------------------------------
interest-earning asset volume was primarily due to increased loan volume.
Average interest-bearing liabilities increased by
The factors underlying the year-to-year changes in net interest income are re?ected in the tables presented on page 34. The table on page 35 (Average Statements of Condition with Interest and Average Rates) shows the Company's consolidated average balance of assets, liabilities and shareholders' equity, the amount of income produced from interest-earning assets and the amount of expense incurred from interest-bearing liabilities, and net interest income as a percentage of average interest-earning assets. Total Interest Income Interest income for the year endedSeptember 30, 2020 decreased by approximately$3.5 million or 7.4 percent as compared with the year endedSeptember 30, 2019 . This decrease was due primarily to a decrease in the rate earned on loans.
The average balance of the Company's loan portfolio increased
The average loan portfolio represented approximately 87.5 percent of the
Company's interest-earning assets (on average) during fiscal 2020 and 86.1
percent for fiscal 2019. Average investment securities decreased during fiscal
2020 by
Interest Expense
Interest expense for the year ended
The Company's net interest spread, (i.e., the average yield on average interest-earning assets minus the average rate paid on interest-bearing liabilities) decreased twenty-one basis points to 2.09 percent in fiscal 2020 from 2.30 percent for the year endedSeptember 30, 2019 . The decrease in fiscal 2020 reflected a decrease between yields earned on interest-earning assets that exceeded the decrease in overall cost of funds. The cost of total average interest-bearing liabilities decreased to 1.69 percent for the year endedSeptember 30, 2020 , a decrease of twenty-two basis points, from 1.91 percent for the year endedSeptember 30, 2019 .
Net Interest Margin
The following table quanti?es the impact on net interest income resulting from
changes in average balances and average rates over the past two years. Any
change in interest income or expense attributable to both changes in volume and
changes in rate has been allocated in proportion to the relationship of the
absolute dollar amount of change in each category.
-35-
--------------------------------------------------------------------------------Analysis of Variance in Net Interest Income Due to Volume and Rates
Fiscal 2020/2019
Increase (Decrease)
Due to Change in:
Average Average Net
(In thousands) Volume Rate Change
Interest-earning assets:
Loans, including fees $ 2,161 $ (4,474 ) $ (2,313 )
Investment securities (125 ) 108 (17 )
Interest-bearing cash accounts (159 ) (1,043 ) (1,202 )
Dividends, restricted stock 79 (75 ) 4
Total interest-earning assets 1,956 (5,484 ) (3,528 )
Interest-bearing liabilities:
Money market deposits 48 (824 ) (776 )
Savings deposits (1 ) 2 1
Certificates of deposit (395 ) (70 ) (465 )
Other interest-bearing deposits 605 (867 ) (262 )
Total interest-bearing deposits 257 (1,759 ) (1,502 )
Borrowings 496 (479 ) 17
Total interest-bearing liabilities 753 (2,238 ) (1,485 )
Change in net interest income
The following table, ''Average Statements of Condition with Interest and Average Rates'' presents for the years endedSeptember 30, 2020 and 2019, the Company's average assets, liabilities and shareholders' equity. The Company's net interest income, net interest spreads and net interest income as a percentage of interest-earning assets (net interest margin) are also re?ected. -36- -------------------------------------------------------------------------------- Year Ended September 30, 2020 2019 (As Restated) Average Interest Average Average Interest Average Outstanding Earned Yield Outstanding Earned Yield/ Balance /Paid /Rate Balance /Paid Rate (In thousands) ASSETS Interest earning assets: Loans receivable(1)$ 1,026,221 $ 41,441 4.04 %$ 977,876 $ 43,754 4.47 % Investment securities 43,237 1,172 2.71 48,327 1,189 2.46 Deposits in other banks 93,807 1,063 1.13 100,864 2,265 2.25 FHLB stock 10,089 631 6.25 8,954 627 7.00 Total interest earning assets(1) 1,173,354 44,307 3.78 1,136,021 47,835 4.21 Non-interest earning assets Cash and due from banks 15,365 1,426 Bank owned life insurance 20,260 19,656 Other assets 28,133 20,627 Other real estate owned 5,796 4,510 Allowance for loan losses (10,386 ) (9,562 ) Total non-interest earning assets 59,168 36,657 Total assets$ 1,232,522 $ 1,172,678 LIABILITIES AND SHAREHOLDERS' EQUITY Interest bearing liabilities: Money Market accounts$ 280,427 $ 4,010 1.43 %$ 277,644 $ 4,786 1.72 % Savings accounts 42,983 50 0.12 43,587 49 0.11 Certificate accounts 244,980 5,262 2.15 263,086 5,727 2.18 Other interest-bearing deposits 294,523 3,524 1.20 253,936 3,786 1.49 Total deposits 862,913 12,846 1.49 838,253 14,348 1.71 Borrowed funds 162,109 4,429 2.73 145,749 4,412 3.03 Total interest-bearing liabilities 1,025,022 17,275 1.69 984,002 18,760 1.91 Non-interest bearing liabilities Demand deposits 44,833 41,932 Other liabilities 18,150 9,024 Total non-interest-bearing liabilities 62,983 50,956 Shareholders' equity 144,517 137,720 Total liabilities and shareholders' equity$ 1,232,522 $ 1,172,678 Net interest spread 2.09 % 2.30 % Net interest margin 2.30 % 2.56 % Net Interest income$ 27,032
$ 29,075
(1) Includes non-accrual loans during the respective periods. Calculated net of
deferred loan fees and loan discounts.
Other Income
The following table presents the principal categories of other ("non-interest")
income for each of the years in the two-year period ended September 30, 2020 .
Year Ended September 30,
Increase %
2020 2019 (Decrease) Change
(In thousands)
Service charges and other fees
217 243 (26 ) (10.70 )
Net gains on sale of investments 330 28 302 1,078.57
Net gains on sale of loans 116 37 79
213.51
Earnings on bank-owned life insurance 509 488 21 4.30 Total other income$ 2,488 $ 2,592 $ (104 ) (4.01 )% For the fiscal year endedSeptember 30, 2020 , total other income decreased$104,000 compared to the fiscal year endedSeptember 30, 2019 . This decrease was primarily a result of decreases of$480,000 in service charges and other fees, partially offset by increases of$302,000 in gain on sale of investments and$79,000 in gain on sale of loans.
The decrease in service charges and other fees during the fiscal year ended
-37-
--------------------------------------------------------------------------------
The increase on the sale of investments resulted from managing and optimizing
normal portfolio activity, while the gain on sale of loans was a result of a
strategic effort to originate and sell residential loans in the current low
interest rate environment.
Other Expense
The following table presents the principal categories of other expense for each
of the years in the two-year period ended
Year Ended September 30,
Increase %
2020 2019 (Decrease) Change
(In thousands)
Salaries and employee benefits
2,309 2,256 53 2.35
Federal deposit insurance premium 155 221 (66 ) (29.86 )
Advertising 119 107 12 11.21
Data processing 1,105 1,024 81 7.91
Professional fees 1,995 1,799 196 10.89
Other real estate owned expense, net 88 192 (104 ) (54.17 )
Pennsylvania shares tax 678 431 247 57.31
Other operating expense 2,964 2,916 48 1.65
Total other expense $ 18,302 $ 17,487 $ 815 4.66 %
For the fiscal year ended
This increase primarily reflects a$348,000 increase in salaries and employee benefits, a$247,000 increase in thePennsylvania shares tax, and a$196,000 increase in professional fees. These increases were partially offset by a$104,000 decrease in OREO expense, net, and a$66,000 decrease in the federal deposit insurance premium.
The increase in salaries and employee benefits during the fiscal year ended
The increased
The increase in professional fees was due to higher legal and professional
services expenses of
The decrease in OREO expense, net, was due to successfully managing and leasing the space while actively working to dispose of the associated property.
The reduction in the federal deposit insurance premium resulted from theDeposit Insurance Fund reserve ratio exceeding the official required reserve ratio, which in turn generated credits to qualified participating banks. These credits have been fully utilized in fiscal 2020. Financial Condition Investment Portfolio For the year endedSeptember 30, 2020 , the average volume of investment securities decreased by$5.1 million to approximately$43.2 million or 3.7 percent of average interest-earning assets, from$48.3 million or 4.3 percent of average interest-earning assets, in fiscal 2019. AtSeptember 30, 2020 , the total investment portfolio amounted to$46.5 million , an increase of$5.6 million fromSeptember 30, 2019 . The increase in the investment portfolio was primarily due to purchases of$30.1 million , partially offset by maturities, calls and principal repayments in the amount of$15.8 million and sales in the amount of$8.9 million during fiscal 2020. AtSeptember 30, 2020 , the principal components of the investment portfolio were government agency obligations, federal agency obligations, including -38- --------------------------------------------------------------------------------
mortgage-backed securities, obligations of
During the year endedSeptember 30, 2020 , volume related factors decreased investment revenue by$125,000 , while rate related factors increased investment revenue by$108,000 . The yield on investments increased by twenty-five basis points to 2.71 percent from a yield of 2.46 percent during the year endedSeptember 30, 2019 . The investment revenue decreased in fiscal 2020 compared to fiscal 2019 due primarily to decreased average volume. As ofSeptember 30, 2020 , the estimated fair value of the available-for-sale securities disclosed below 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. As ofSeptember 30, 2020 , the Company held five corporate securities and one single issuer trust preferred security which were in an unrealized loss position. Although the fair value will fluctuate as the market interest rates move, management believes that these fair values will recover as the underlying portfolios mature and are reinvested in market rate yielding investments. 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 ofSeptember 30, 2020 represents other-than-temporary impairment. Securities available-for-sale are a part of the Company's interest rate risk management strategy and may be sold in response to changes in interest rates, changes in prepayment risk, liquidity management and other factors. The Company continues to reposition the investment portfolio as part of an overall corporate-wide strategy to produce reasonable and consistent margins where feasible, while attempting to limit risks inherent in the Company's balance sheet.
For fiscal 2020, proceeds of available-for-sale investment securities sold
amounted to approximately
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 long-term investments can, after changes in the market,
become securities that the Company wishes to sell to avoid losses and mismatches
of interest-earning assets and interest-bearing liabilities at a later time.
-39-
--------------------------------------------------------------------------------
The table below illustrates the maturity distribution and weighted average yield
for investment securities at September 30, 2020 , based on a contractual
maturity.
More than Five
More than One Year Years through Ten More than Ten
One year or less through Five Years Years Years Total
Weighted Weighted Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average Amortized Average Amortized Fair Average
Cost Yield Cost Yield Cost Yield Cost Yield Cost Value Yield
(In thousands)
Available for Sale
Securities:
U.S. government agencies and
obligations $ - - % $ - - % $ - - % $ 5,025 1.50 % $ 5,025 $ 5,040 1.50 %
State and
municipal
obligations 426 1.33 2,675 2.00 - - - - 3,101 3,105 1.91
Single issuer
trust preferred
security - - - - 1,000 0.88 - - 1,000 925 0.88
Corporate debt
securities - - 3,500 0.62 16,009 5.05 1,500 3.75 21,009 20,948 4.22
Mutual fund - - 500 2.00 - - 1,023 - 1,523 1,523 0.66 Total$ 426 1.33 %$ 6,675 1.28 %$ 17,009 4.81 %$ 7,548 1.74 %$ 31,658 $ 31,541 3.29 %
Held to Maturity Securities: State and municipal obligations $ - - % $ - - %$ 1,794 2.24 % $ - - %$ 1,794 $ 1,923 2.24 % Corporate debt securities - - 3,498 3.82 - - - - 3,498 3,758 3.82 Mortgage- backed securities - - - - 468 1.90 9,210 1.77 9,678 9,927 1.78 Total $ - - %$ 3,498 3.82 %$ 2,262 2.17 %$ 9,210 1.77 %$ 14,970 $ 15,608 2.31 %
Total Investment
Securities$ 426 1.33 %$ 10,173 2.15 %$ 19,271 4.50 %$ 16,758 1.76 %$ 46,628 $ 47,149 2.98 %
For information regarding the carrying value of the investment portfolio, see Note 7 and Note 13 of the Notes to the Consolidated Financial Statements.
The following table sets forth the carrying value of the Company's investment
securities, as of
2020 2019
(In thousands)
Investment Securities Available-for-Sale:
3,105 4,732
Single issuer trust preferred security 925 923
Corporate debt securities 20,948 9,506
Mutual fund 1,523 250
Total available-for-sale $ 31,541 $ 18,411
Investment Securities Held-to-Maturity:
U.S. government agencies $ - $ 1,000
State and municipal obligations 1,794 4,515
Corporate debt securities 3,498 3,608
Mortgage-backed securities:
Collateralized mortgage obligations, fixed-rate 9,678 13,362
Total held-to-maturity $ 14,970 $ 22,485
Total investment securities $ 46,511 $ 40,896 For additional information regarding the Company's investment portfolio, see Note 7 and Note 13 of the Notes to the Consolidated Financial Statements.
-40-
--------------------------------------------------------------------------------Loan Portfolio
Lending is one of the Company's primary business activities. The Company's loan portfolio consists of residential, construction and development, commercial and consumer loans, serving the diverse customer base in its market area. The composition of the Company's portfolio continues to change due to the local economy. Factors such as the economic climate, interest rates, real estate values and employment all contribute to these changes in the composition of the Company's portfolio. Growth is generated through business development efforts, repeat customer requests for new financings, penetration into existing markets and entry into new markets. The Company seeks to create growth in commercial lending, which primarily includes commercial real estate, multi-family, farmland, and commercial and industrial lending, by offering customer-focused products and competitive pricing and by capitalizing on the positive trends in its market area. Products offered are designed to meet the financial requirements of the Company's customers. It is the objective of the Company's credit policies to diversify the commercial loan portfolio to limit concentrations in any single industry. AtSeptember 30, 2020 , total gross loans amounted to$1.0 billion , an increase of$20.7 million or 2.0 percent as compared toSeptember 30, 2019 . AtSeptember 30, 2020 , total net loans amounted to$1.0 billion , an increase of$18.9 million or 1.9 percent as compared toSeptember 30, 2019 . For the year endedSeptember 30, 2020 , growth of$25.0 million in construction and development loans and$22.1 million in residential mortgage loans were partially offset by decreases of$21.8 million in commercial loans and$4.6 million in consumer loans. Even though the Company continues to be challenged by the competition for lending relationships that exists within its market, growth in volume has been achieved through successful lending sales efforts to build on continued customer relationships. Total loan growth for the fiscal year endedSeptember 30, 2020 included$20.8 million of PPP commercial and industrial loans. The average balance of our total loans increased$48.3 million or 4.9 percent for the year endedSeptember 30, 2020 as compared toSeptember 30, 2019 , while the average yield on loans decreased forty-three basis points to 4.04 percent in fiscal 2020 from 4.47 percent in fiscal 2019. During fiscal 2020 compared to fiscal 2019, the volume-related factors during the period contributed to an increase of interest income on loans of$2.2 million , while the rate-related changes decreased interest income by$4.5 million .
The following table presents information regarding the components of the Company's loan portfolio (which does not include loans held for sale, except as noted below) on the dates indicated.
September 30,
2019 (As 2018 (As 2017 (As
2020 Restated) Restated) Restated) 2016
(In thousands)
Residential mortgage $ 242,090 $ 220,011 $ 197,219 $ 192,500 $ 209,186
Construction and Development:
Residential and commercial 65,703 40,346 37,433 35,622 18,579
Land 3,110 3,420 9,221 18,377 10,013
Total construction and development 68,813 43,766 46,654 53,999 28,592
Commercial:
Commercial real estate 498,538 547,727 498,229 442,060 231,439
Farmland 7,517 7,563 12,066 1,723 -
Multi-family 67,767 62,884 45,102 39,768 19,515
Commercial and industrial 116,584 99,747 73,895 70,677 33,832
Other 10,142 4,450 6,164 4,160 4,947
Total commercial 700,548 722,371 635,456 558,388 289,733
Consumer:
Home equity lines of credit 17,128 19,506 14,884 16,509 19,757
Second mortgages 10,711 13,737 18,363 22,480 29,204
Other 2,851 2,030 2,315 2,570 1,914
Total consumer 30,690 35,273 35,562 41,559 50,875
Total loans 1,042,141 1,021,421 914,891 846,446 578,386
Deferred loan fees and costs, net 326 663 566 590 1,208
Allowance for loan losses (11,623 ) (10,095 ) (9,021 ) (8,405 ) (5,434 )
Loans receivable, net $ 1,030,844 $ 1,011,989 $ 906,436 $ 838,631 $ 574,160
-41-
-------------------------------------------------------------------------------- AtSeptember 30, 2020 , our net loan portfolio totaled$1.0 billion or 85.1 percent of total assets. Our principal lending activity has been the origination of residential, commercial and commercial real estate loans. Through our loan policy, we utilize strict underwriting guidelines maintain low average loan-to-value ("LTV") ratios, and require maximum gross debt ratios and minimum debt coverage ratios. We have invested in software which facilitates our ability to internally review and grade loans in our portfolio and to monitor loan performance. Loans are subject to federal and state law and regulations. Interest rates charged by us on loans are affected principally by the demand for such loans and the supply of money available for lending purposes and the rates offered by our competitors. These factors are, in turn, affected by general and economic conditions, the monetary policy of the federal government, including the FRB, legislative tax policies and governmental budgetary matters. The loans receivable portfolio is segmented into residential mortgage loans, construction and development loans, commercial loans and consumer loans. The residential mortgage loan segment has one class, one- to four-family first lien residential mortgage loans. The construction and development loan segment consists of the following classes: residential and commercial construction loans and land loans. Residential construction loans are made for the acquisition of and/or construction on a lot or lots on which a residential dwelling is to be built and occupied by the home-owner. Commercial construction loans are made for the purpose of acquiring, developing and constructing a commercial use structure and for acquisition, development and construction of residential properties by residential developers. The commercial loan segment consists of the following classes: commercial real estate loans, multi-family real estate loans, and other commercial loans, which are also generally known as commercial and industrial loans or commercial business loans. The consumer loan segment consists of the following classes: home equity lines of credit, second mortgage loans and other consumer loans, primarily unsecured consumer lines of credit. Residential Lending. Residential mortgage originations are secured primarily by properties located in the Company's primary market area and surrounding areas. AtSeptember 30, 2020 ,$242.1 million , or 23.3 percent, of our total loans in portfolio consisted of single-family residential mortgage loans. During fiscal 2020, we had no charge-offs of residential loans, as compared to$17,000 of charge-offs of residential loans at fiscal 2019. Our single-family residential mortgage loans generally are underwritten on terms and documentation conforming to guidelines issued by Federal Home Loan Mortgage Corporation ("Freddie Mac") and The Federal National Mortgage Association ("Fannie Mae"). Applications for one- to four-family residential mortgage loans are taken by our loan origination officers and are accepted at any of our banking offices and are then referred to the lending department at our Morristown office in order to process the loan, which consists primarily of obtaining all documents required by Freddie Mac and Fannie Mae underwriting standards, and completing the underwriting, which includes making a determination whether the loan meets our underwriting standards such that the Bank can extend a loan commitment to the customer. We generally have retained for portfolio a substantial portion of the single-family residential mortgage loans that we originate. We currently originate fixed-rate, fully amortizing mortgage loans with maturities of 10 to 30 years. We also offer adjustable rate mortgage ("ARM") loans where the interest rate either adjusts on an annual basis or is fixed for the initial one, three, five or seven years and then adjusts annually. However, due to the low interest rate environment and demand for fixed rate products, we have not originated a significant amount of ARM loans in recent years. AtSeptember 30, 2020 ,$78.3 million , or 32.4 percent, of our one- to four-family residential mortgage loans consisted of ARM loans.
In prior years, the Company purchased single-family residential mortgage loans and consumer loans from a network of mortgage brokers. The Company now has correspondent lending relationships, but the Bank independently underwrites these loans.
We underwrite one- to four-family residential mortgage loans with loan-to-value
ratios of up to 95 percent, provided that the borrower obtains private mortgage
insurance on loans that exceed 80 percent of the appraised value or sales price,
whichever is less, of the secured property. We also require that title
insurance, hazard insurance and, if appropriate, flood insurance be maintained
on all properties securing real estate loans. We require that a licensed
appraiser from our list of approved appraisers perform and submit to us an
appraisal on all properties secured by a first mortgage on one- to four-family
first mortgage loans. Our mortgage loans generally include due-on-sale clauses,
which provide us with the contractual right to deem the loan immediately due and
payable in the event the borrower transfers ownership of the property.
Due-on-sale clauses are an important means of adjusting the yields of fixed-rate
mortgage loans in portfolio and we generally exercise our rights under these
clauses.
-42-
-------------------------------------------------------------------------------- Construction and Development Loans. The amount of our outstanding construction and development loans in portfolio increased to$68.8 million or 6.6 percent of gross loans atSeptember 30, 2020 from$43.8 million or 4.2 percent of total loans as ofSeptember 30, 2019 . We generally limit construction loans to builders and developers with whom we have an established relationship, or who are otherwise known to officers of the Bank. Our construction loans also include single-family residential construction loans which may if approved convert to permanent, long-term mortgage loans upon completion of construction ("construction/perm" loans). During the initial or construction phase, these construction/perm loans require payment of interest only, which generally is tied to prime rate, as the home is being constructed. On residential construction to perm loans the interest rate is as approved. Upon the earlier of the completion of construction or one year, these loans if approved by the appropriate approving authority convert to long-term (generally 30 years), amortizing, fixed-rate single-family mortgage loans. During fiscal 2020,$33.8 million of construction and development loans were originated. Our portfolio of construction loans generally have a maximum term as approved based upon the underwriting (for individual, owner-occupied dwellings), and loan-to-value ratios less than 80 percent. Residential construction loans to developers are made on either a pre-sold or speculative (unsold) basis. Limits are placed on the number of units that can be built on a speculative basis based upon the reputation and financial position of the builder, his/her present obligations, the location of the property and prior sales in the development and the surrounding area. Generally, a limit of two unsold homes (one model home and one speculative home) is placed per project. Prior to committing to a construction loan, we require that an independent appraiser prepare an appraisal of the property. Each project also is reviewed and inspected at its inception and prior to every disbursement of loan proceeds. Disbursements are made after inspections based upon a percentage of project completion and monthly payment of interest is required on all construction loans. Our construction loans also include loans for the acquisition and development of land for sale (i.e. roads, sewer and water lines). We typically make these loans only in conjunction with a commitment for a construction loan for the units to be built on the site. These loans are secured by a lien on the property and are limited to a loan-to-value ratio not exceeding 75 percent of the appraised value at the time of origination. The loans have a variable rate of interest and require monthly payments of interest. The principal of the loan is repaid as units are sold and released. We limit loans of this type to our market area and to developers with whom we have established relationships. In most cases, we also obtain personal guarantees from the borrowers. Our loan portfolio included six loans secured by unimproved real estate and lots ("land loan"), with an outstanding balance of$3.1 million , constituting 0.3 percent of total loans, atSeptember 30, 2020 . In order to mitigate some of the risks inherent to construction lending, we inspect properties under construction, review construction progress prior to advancing funds, work with builders with whom we have established relationships, require annual updating of tax returns and other financial data of developers and obtain personal guarantees from the principals. AtSeptember 30, 2020 , approximately$488,000 , or 4.2 percent, of our allowance for loan losses was attributed to construction and development loans. We had no construction and development loans that were non-performing atSeptember 30, 2020 and atSeptember 30, 2019 . We had no construction and development loans that were performing TDRs atSeptember 30, 2020 and atSeptember 30, 2019 . Commercial Lending. AtSeptember 30, 2020 , our loans secured by commercial real estate amounted to$498.5 million and constituted 47.8 percent of our gross loans at such date. During the year endedSeptember 30, 2020 , the commercial real estate loan portfolio decreased by$49.2 million , or 9.0 percent. During fiscal 2020, we had$5.2 million partial charge-offs of commercial real estate loans, as compared to$1.4 million of charge-offs of commercial real estate loans for fiscal 2019. Our commercial real estate loan portfolio consists primarily of loans secured by office buildings, retail and industrial use buildings, strip shopping centers, mixed-use and other properties used for commercial purposes located in our market area. -43- -------------------------------------------------------------------------------- Although terms for commercial real estate and multi-family loans vary, our underwriting standards generally allow for terms up to 10 years with the interest rate being reset in the fifth year and with amortization typically not greater than 25 years and loan-to-value ratios of not more than 80 percent. Interest rates are either fixed or adjustable, based upon the index rate plus a margin, and fees ranging from 0.5 percent to 1.50 percent are charged to the borrower at the origination of the loan. Prepayment fees are charged on most loans in the event of early repayment. Generally, we obtain personal guarantees of the principals as additional collateral for commercial real estate and multi-family real estate loans. Commercial and multi-family real estate loans generally present a higher level of risk than loans secured by one- to four-family residences. This greater risk is due to several factors, including the concentration of principal in a limited number of loans and borrowers, the effect of general economic conditions on income producing properties and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by commercial and multi-family real estate is typically dependent upon the successful operation of the related real estate project. If the cash flow from the project is reduced (for example, if leases are not obtained or renewed, a bankruptcy court modifies a lease term, or a major tenant is unable to fulfill its lease obligations), the borrower's ability to repay the loan may be impaired. As ofSeptember 30, 2020 , there was$17.6 million of non-accruing commercial real estate mortgage loans and an aggregate of$29.5 million of our commercial real estate loans at such date were classified for regulatory reporting purposes as substandard. As ofSeptember 30, 2020 ,$7.9 million , or 67.8 percent of our allowance for loan losses was allocated to commercial real estate mortgage loans. In addition, at each ofSeptember 30, 2020 and 2019 we had$5.8 million of OREO which was acquired from a foreclosure, or our acceptance of a deed-in-lieu of foreclosure, on a commercial real estate loan. As ofSeptember 30, 2020 , our commercial real estate loans held in portfolio that were deemed performing troubled debt restructurings increased to$11.4 million from$9.7 million atSeptember 30, 2019 primarily due to the additions of two commercial real estate loans with an aggregate outstanding balance of approximately$10.9 million partially offset by a charge-off of one commercial real estate loan with an outstanding balance of$9.2 million during the fiscal year 2020.
At
AtSeptember 30, 2020 , we had$126.7 million in commercial business loans (12.2 percent of gross loans outstanding) in portfolio, which includes$20.8 million of PPP loans that are 100% guaranteed by theU.S. government. Our commercial business loans generally have been made to small to mid-sized businesses located in our market area. The commercial business loans in our portfolio assist us in our asset/liability management since they generally provide shorter maturities and/or adjustable rates of interest in addition to generally having higher rates of return which are designed to compensate for the additional credit risk associated with these loans. The commercial business loans which we have originated may be either a revolving line of credit or for a fixed term of generally 10 years or less. Interest rates are adjustable, indexed to a published prime rate of interest, or fixed. Generally, equipment, machinery, real property or other corporate assets secure such loans. Personal guarantees from the business principals are generally obtained as additional collateral. Generally, commercial business loans are characterized as having higher risks associated with them than single-family residential mortgage loans. As ofSeptember 30, 2020 , we had no non-accruing other commercial loans in our loan portfolio. At such date, approximately$629,000 or 5.4 percent of the allowance for loan losses was allocated to commercial business loans. AtSeptember 30, 2020 and 2019, we held no other commercial loans in portfolio that were deemed performing troubled debt restructurings. In our underwriting procedures, consideration is given to the stability of the property's cash flow history, future operating projections, current and projected occupancy levels, location and physical condition. Generally, our practice in recent periods is to impose a debt service ratio (the ratio of net cash flows from operations before the payment of debt service/debt service) of not less than 120 percent. We also evaluate the credit and financial condition of the borrower, and if applicable, the guarantor. Appraisal reports prepared by independent appraisers are obtained on each loan to substantiate the property's market value, and are reviewed by us prior to the closing of the loan. Consumer Lending. In our efforts to provide a full range of financial services to our customers, we offer various types of consumer loans. Our consumer loans amounted to$30.7 million or 2.9 percent of our total loan portfolio atSeptember 30, 2020 . The largest components of our consumer loans are home equity lines of credit, which amounted to$17.1 million atSeptember 30, 2020 and loans secured by second mortgages, consisting primarily of home equity loans, which amounted to$10.7 million atSeptember 30, 2020 . Our consumer loans also include automobile loans, unsecured personal loans and loans secured by deposits. Consumer loans are originated primarily through existing and walk-in customers and direct advertising. -44-
-------------------------------------------------------------------------------- Our home equity lines of credit are variable rate loans tied to LIBOR, treasury, and prime rates. Our second mortgages may have fixed or variable rates, although they generally have had fixed rates in recent periods. Our second mortgages have a maximum term to maturity of 15 years. Both our second mortgages and our home equity lines of credit generally are secured by the borrower's primary residence. However, our security generally consists of a second lien on the property. Our lending policy provides that the maximum loan-to-value ratio on our home equity lines of credit is 80 percent, when the Bank has the first mortgage. However, the maximum loan-to-value ratio on our home equity lines of credit is reduced to 75 percent, when the Bank does not have the first mortgage. AtSeptember 30, 2020 , the unused portion of our home equity lines of credit was$24.8 million . Consumer loans generally have higher interest rates and shorter terms than residential loans; however, they have additional credit risk due to the type of collateral securing the loan or in some cases the absence of collateral. In the year endedSeptember 30, 2020 , we charged-off$66,000 of consumer loans mostly consisting of home equity lines of credit, as compared to$82,000 of charge-offs, mostly consisting of second mortgage loans, during fiscal 2019. As ofSeptember 30, 2020 , we had$254,000 of non-accruing second mortgage loans and$26,000 of non-accruing home equity lines of credit, representing a decrease of$9,000 over the amount of non-accruing second mortgage loans and home equity lines of credit atSeptember 30, 2019 . AtSeptember 30, 2020 ,$1.2 million of our consumer loans were classified as substandard consumer loans. AtSeptember 30, 2020 , an aggregate of$326,000 of our allowance for loan losses was allocated to second mortgages and home equity lines of credit. The following table presents the contractual maturity of our loans held in portfolio atSeptember 30, 2020 . The table does not include the effect of prepayments or scheduled principal amortization. Loans having no stated repayment schedule or maturity and overdraft loans are reported as being due in one year or less. At September 30, 2020, Maturing After One Years In One Year Through After Five or Less Five Years Years Total (In thousands) Residential mortgage $ 708$ 4,031 $ 237,351 $ 242,090 Construction and Development: Residential and commercial 39,793 18,291 7,619 65,703 Land - 1,809 1,301 3,110 Total construction and development 39,793 20,100 8,920 68,813 Commercial: Commercial real estate 32,258 172,212 294,068 498,538 Farmland 3,650 992 2,875 7,517 Multi-family 15,651 12,839 39,277 67,767 Commercial and industrial 16,715 85,075 14,794 116,584 Other 4,395 5,600 146 10,141 Total commercial 72,669 276,718 351,160 700,547 Consumer: Home equity lines of credit - 1,300 15,828 17,128 Second mortgages 641 2,266 7,804 10,711 Other 1,268 1,307 277 2,852 Total consumer 1,909 4,873 23,909 30,691 Total$ 115,079 $ 305,722 $ 621,340 $ 1,042,141 Loans with: Fixed rates$ 41,639 $ 200,508 $ 280,889 $ 523,036 Variable rates 73,440 105,214 340,451 519,105 Total$ 115,079 $ 305,722
$ 621,340 $ 1,042,141
For additional information regarding loans, see Note 8 of the Notes to the Consolidated Financial Statements.
-45-
--------------------------------------------------------------------------------Allowance for Loan Losses and Related Provision
The purpose of the allowance for loan losses ("ALLL" or "allowance") is to
absorb the impact of probable losses inherent in the loan portfolio. Additions
to the allowance are made through provisions charged against current operations
and through recoveries made on loans previously charged-off. The allowance is
maintained at an amount considered adequate by management to provide for
potential credit losses based upon a periodic evaluation of the risk
characteristics of the loan portfolio. In establishing an appropriate allowance,
an assessment of the individual borrowers, a determination of the value of the
underlying collateral, a review of historical loss experience and an analysis of
the levels and trends of loan categories, delinquencies and problem loans are
considered. Such qualitative factors as changes in lending policies and
procedures, economic and business conditions, nature and volume of the
portfolio, changes in delinquency, concentration of credit trends, value of
underlying collateral, the level and trend of interest rates, and peer group
statistics are also reviewed. At fiscal 2020 year-end, the level of the
allowance, was $11.6 million as compared to a level of $10.1 million at
September 30, 2019 . The Company made loan loss provisions of $6.7 million in
fiscal 2020 compared with $2.4 million in fiscal 2019. Provision expense was
higher during the fiscal year ended September 30, 2020 due primarily to impacts
of partial charge-offs recorded and due to economic uncertainties caused by
COVID-19. For the quarter ended December 31, 2018 , the Company added a new
qualitative factor, defined as Regulatory Oversight, to its allowance
methodology to address the difference in the required allowance based on asset
quality and the directionally consistent level of the allowance. Unique to the
other factors, this is a single calculation figure which is subsequently applied
to the loan portfolio by loan type (Commercial, Residential and Consumer) based
upon the percent of each to total loans. It is derived from a review of a peer
group consisting of 10 banks with similar asset size within the same general
geographic area of Malvern Bank . This new factor, added during the quarter ended
December 31, 2018 , amounted to an additional $390,000 added to the provision for
the period. The level of the allowance during the respective annual fiscal
periods of 2020 and 2019 re?ects the change in average volume, credit quality
within the loan portfolio, the level of charge-offs, loan volume recorded during
the periods and the Company's focus on the changing composition of the
commercial and residential real estate loan portfolios.
At September 30, 2020 , the allowance amounted to 1.12 percent of total loans,
and 1.14 percent of total loans less PPP loans, which do not require a reserve.
In management's view, the level of the allowance at September 30, 2020 is
adequate to cover losses inherent in the loan portfolio. Management's judgment
regarding the adequacy of the allowance constitutes a ''Forward Looking
Statement'' under the Private Securities Litigation Reform Act of 1995. Actual
results could differ materially from management's analysis, based principally
upon the factors considered by management in establishing the allowance.
Although management uses the best information available, the level of the
allowance remains an estimate, which is subject to signi?cant judgment and
short-term change. The OCC, as an integral part of its examination process,
periodically reviews the Company's allowance. The OCC may require the Company to
increase the allowance based on its analysis of information available to it at
the time of their examination. Furthermore, the majority of the Company's loans
are secured by real estate in the State of New Jersey and the State of
Pennsylvania . Future adjustments to the allowance may be necessary due to
economic factors impacting real estate in the Bank's market areas and a
deterioration of the economic climate, as well as, operating, regulatory and
other conditions beyond the Company's control. The allowance as a percentage of
total loans amounted to 1.12 percent and 0.99 percent at September 30, 2020 and
2019, respectively. At September 30, 2020 the allowance amounted to 1.14 percent
of total loans less PPP loans, which do not require a reserve. The increase in
the allowance as a percent of gross loans reflects an increase in qualitative
factors as a result of COVID-19 and the economic impact it could have on the
Company's loan portfolio.
Net charge-offs were $5.1 million in fiscal 2020, compared to net charge-offs of
$1.3 million in fiscal 2019. Charge-offs were higher primarily in the commercial
real estate portfolio segment in fiscal 2020 than in fiscal 2019 due to two
commercial real estate loans partially charged-off by $5.2 million compared to
one commercial real estate loan charged down by $1.2 million .
-46-
--------------------------------------------------------------------------------Five-Year Statistical Allowance for Loan Losses
The following table re?ects the relationship of loan volume, the provision and allowance for loan losses and net charge-offs for the past ?ve years.
September 30,
2019 (As 2018 (As 2017 (As
2020 Restated) Restated) Restated) 2016
(In thousands)
Average loans outstanding $ 1,026,221 $ 977,876 $ 860,366 $ 740,646 $ 507,973
Total loans at end of period $ 1,042,141 $ 1,021,421 $ 914,891 $ 846,446 $ 578,386
Analysis of the Allowance of Loan
Losses
Balance at beginning of year $ 10,095 $ 9,021 $ 8,405 $ 5,434 $ 4,667
Charge-offs:
Residential mortgage - 17 60 - 9
Construction and Development:
Residential and commercial - - - - 91
Commercial:
Commercial real estate 5,190 1,418 276 - 99
Commercial and industrial - - 45 - -
Consumer:
Home equity lines of credit 62 - - - -
Second mortgages 3 45 88 218 291
Other 1 37 2 5 70
Total charge-offs 5,256 1,517 471 223 560
Recoveries:
Residential mortgage 25 79 58 2 17
Construction and Development:
Residential and commercial - - - 90 243
Commercial:
Commercial real estate 6 23 11 40 3
Commercial and industrial 2 4 4 9 3
Consumer:
Home equity lines of credit 1 1 1 18 1
Second mortgages 88 94 52 232 100
Other 2 11 7 12 13
Total recoveries 124 212 133 403 380
Net charge-offs (recoveries) 5,132 1,305 338 (180 ) 180
Provision for loan losses 6,660 2,379 954 2,791 947
Balance at end of year $ 11,623 $ 10,095 $ 9,021 $ 8,405 $ 5,434
Ratio of net charge-offs
(recoveries) during the
year to average loans outstanding
during the
year 0.50 % 0.13 % 0.04 % (0.02 )% 0.04 %
Allowance for loan losses as a
percentage of total
loans at end of year 1.12 % 0.99 % 0.99 % 0.99 % 0.94 %
For additional information regarding loans, see Note 8 of the Notes to the Consolidated Financial Statements.
Implicit in the lending function is the fact that loan losses will be experienced and that the risk of loss will vary with the type of loan being made, the creditworthiness of the borrower and prevailing economic conditions. The allowance for loan losses has been allocated in the table below according to the estimated amount deemed to be reasonably necessary to provide for the possibility of losses being incurred within the following categories of loans atSeptember 30 , for each of the past ?ve years. -47- --------------------------------------------------------------------------------
The table below shows, for three types of loans, the amounts of the allowance allocable to such loans and the percentage of such loans to total loans.
September 30,
2020 2019 (As Restated) 2018 (As Restated) 2017 (As Restated) 2016
Loans Loans Loans Loans Loans
to to to to to
Total Total Total Total Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
(In thousands)
Residential mortgage $ 1,667 23.3 % $ 1,364 21.6 % $ 1,062 21.6 % $ 1,004 22.7 % $ 1,201 36.2 %
Construction and
Development:
Residential and
commercial 465 6.3 523 3.9 393 4.1 523 4.2 199 3.2
Land loans 23 0.3 20 0.3 49 1.0 132 2.2 97 1.7
Commercial:
Commercial real estate 7,886 47.8 5,903 53.7 5,031 54.4 3,581 52.2 1,874 40.0
Farmland 47 0.7 49 0.7 66 1.3 9 0.2 - -
Multi-family 511 6.5 369 6.2 232 4.9 224 4.7 109 3.4
Commercial and industrial 578 11.2 615 9.8 443 8.1 520 8.3 155 5.8
Other 51 1.0 21 0.4 24 0.7 21 0.5 3 0.9
Consumer:
Home equity lines of
credit 130 1.6 122 1.9 82 1.6 90 2.0 116 3.4
Second mortgages 196 1.0 267 1.3 326 2.0 402 2.7 467 5.0
Other 29 0.3 23 0.2 51 0.3 27 0.3 34 0.4
Total allocated 11,583 100.0 9,276 100.0 7,759 100.0 6,533 100.0 4,255 100.0
Unallocated 40 - 819 - 1,262 - 1,872 - 1,179 -
Balance at end of period
100.0 %
In assessing the adequacy of the allowance, it is recognized that the process,
methodology and underlying assumptions require a significant degree of judgment.
The estimation of credit losses is not precise; the range of factors considered
is wide and is significantly dependent upon management's judgment, including the
outlook and potential changes in the economic environment. At present,
components of the commercial loan segments of the portfolio are new originations
and the associated volumes continue to see increased growth. At the same time,
historical loss levels have decreased as factors in assessing the portfolio. Any
unallocated portion of the allowance reflects management's estimate of probable
inherent but undetected losses within the portfolio due to uncertainties in
economic conditions, delays in obtaining information, including unfavorable
information about a borrower's financial condition, the difficulty in
identifying triggering events that correlate perfectly to subsequent loss rates,
and risk factors that have not yet manifested themselves in loss allocation
factors.
Asset Quality
The Company manages asset quality and credit risk by maintaining diversi?cation
in its loan portfolio and through review processes that include analysis of
credit requests and ongoing examination of outstanding loans and delinquencies,
with particular attention to portfolio dynamics and mix. The Company strives to
identify loans experiencing difficulty early enough to correct the problems, to
record charge-offs promptly based on realistic assessments of current collateral
values, and to maintain an adequate allowance for loan losses at all times.
It is generally the Company's policy to discontinue interest accruals once a
loan is past due as to interest or principal payments for a period of ninety
days. When a loan is placed on non-accrual status, interest accruals cease and
uncollected accrued interest is reversed and charged against current income.
Payments received on non-accrual loans are applied against principal. A loan may
only be restored to an accruing basis when it again becomes well secured and in
the process of collection or all past due amounts have been collected and a
satisfactory period of ongoing repayment exists. Accruing loans past due 90 days
or more are generally well secured and in the process of collection. For
additional information regarding loans, see Note 8 of the Notes to the
Consolidated Financial Statements.
-48-
--------------------------------------------------------------------------------Non-Performing and Past Due Loans and OREO
Non-performing loans include non-accrual loans and accruing loans which are
contractually past due 90 days or more. Non-accrual loans represent loans on
which interest accruals have been suspended. It is the Company's general policy
to consider the charge-off of loans at the point they become past due in excess
of 90 days, with the exception of loans that are both well-secured and in the
process of collection. Troubled debt restructurings represent loans on which a
concession was granted to a borrower, such as a reduction in interest rate to a
rate lower than the current market rate for new debt with similar risks, and
which are currently performing in accordance with the modi?ed terms. For
additional information regarding loans, see Note 8 of the Notes to the
Consolidated Financial Statements.
The following table sets forth, as of the dates indicated, the amount of the
Company's non-accrual loans, accruing loans past due 90 days or more, OREO and
troubled debt restructurings.
At September 30,
2020 2019 2018 2017 2016
(In thousands)
Non-accrual loans $ 19,870 $ 1,821 $ 2,687 $ 1,038 $ 1,617
Accruing loans past due 90 days or
more 58 502 374 173 696
Total non-performing loans 19,928 2,323 3,061 1,211 2,313
Other real estate owned 5,796 5,796 - - -
Total non-performing assets $ 25,724 $ 8,119 $ 3,061 $ 1,211 $ 2,313
Troubled debt restructured loans -
performing $ 13,418 $ 12,170 $ 18,640 $ 2,238 $ 2,039
At September 30, 2020 , non-performing assets totaled $25.7 million , or 2.12
percent of total assets, as compared with $8.1 million , or 0.64 percent, at
September 30, 2019 . The increase in non-accrual loans was primarily due to
additions of three commercial real estate loans totaling $17.6 million , four
residential mortgage loans totaling $617,000 , and two second mortgage consumer
loans totaling $64,000 . Subsequent to the fiscal year ended September 30, 2020 ,
a $6.7 million non-accrual TDR commercial loan was returned to accruing status
on January 4, 2021 . The loan is performing in accordance with its modified terms
and has a positive payment history. Had this occurred prior to September 30,
2020 , it would have reduced non-accrual loans from $19.9 million to $13.2
million and total non-performing assets from $25.7 million to $19.1 million .
TDR loans totaled $21.7 million and $13.3 million at September 30, 2020 and at
September 30, 2019 , respectively. A total of $13.4 million and $12.2 million of
TDR loans were performing pursuant to the terms of their respective
modifications at September 30, 2020 and September 30, 2019 , respectively. At
September 30, 2020 , eight TDR loans with an outstanding balance of approximately
$8.3 million , were deemed non-performing, while four TDR loans with an
outstanding balance of approximately $1.1 million , were deemed non-performing at
September 30, 2019 . The performing TDR loans increased by $1.2 million at
September 30, 2020 compared to September 30, 2019 primarily due to two
commercial real estate loan and one residential loan with an aggregate
outstanding balance of approximately $10.9 million and $203,000 , respectively,
moving to TDR status partially offset by a full charge-off of one commercial
real estate loan and a payoff of one residential loan with an aggregate
outstanding balance of approximately $9.2 million and $23,000 , respectively,
during fiscal 2020.
Provision for Income Taxes
The Company recorded $957,000 in income tax expense in fiscal 2020 compared to
$2.5 million in income tax expense in fiscal 2019. The effective tax rates for
the Company for the years ended September 30, 2020 and 2019 were 21.0 percent
and 20.9 percent, respectively. For a more detailed description of income taxes
see Note 14 of the Notes to Consolidated Financial Statements.
Recent Accounting Pronouncements
Please refer to the note on Recent Accounting Pronouncements in Note 2 to the consolidated financial statements in Item 8 for a detailed discussion of new accounting pronouncements.
Asset and Liability Management
Asset and Liability management encompasses an analysis of market risk, the control of interest rate risk (interest sensitivity management) and the ongoing maintenance and planning of liquidity and capital. The composition of the
-49-
--------------------------------------------------------------------------------
Company's statement of condition is planned and monitored by the Asset and
Liability Committee ("ALCO"). In general, management's objective is to optimize
net interest income and minimize market risk and interest rate risk by
monitoring the components of the statement of condition and the interaction of
interest rates.
Short-term interest rate exposure analysis is supplemented with an interest
sensitivity gap model. The Company utilizes interest sensitivity analysis to
measure the responsiveness of net interest income to changes in interest rate
levels. Interest rate risk arises when an earning asset matures or when its
interest rate changes in a time period different than that of a supporting
interest-bearing liability, or when an interest-bearing liability matures or
when its interest rate changes in a time period different than that of an
earning asset that it supports. While the Company matches only a small portion
of specific assets and liabilities, total earning assets and interest-bearing
liabilities are grouped to determine the overall interest rate risk within a
number of specific time frames. The difference between interest-sensitive assets
and interest-sensitive liabilities is referred to as the interest sensitivity
gap. At any given point in time, the Company may be in an asset-sensitive
position, whereby its interest-sensitive assets exceed its interest-sensitive
liabilities, or in a liability-sensitive position, whereby its
interest-sensitive liabilities exceed its interest-sensitive assets, depending
in part on management's judgment as to projected interest rate trends.
The Company's interest rate sensitivity position in each time frame may be
expressed as assets less liabilities, as liabilities less assets, or as the
ratio between rate sensitive assets ("RSA") and rate sensitive liabilities
("RSL"). For example, a short-funded position (liabilities repricing before
assets) would be expressed as a net negative position, when period gaps are
computed by subtracting repricing liabilities from repricing assets. When using
the ratio method, an RSA/RSL ratio of 1 indicates a balanced position, a ratio
greater than 1 indicates an asset-sensitive position and a ratio less than 1
indicates a liability-sensitive position.
A negative gap and/or a rate sensitivity ratio less than 1 tends to expand net
interest margins in a falling rate environment and reduce net interest margins
in a rising rate environment. Conversely, when a positive gap occurs, generally
margins expand in a rising rate environment and contract in a falling rate
environment. From time to time, the Company may elect to deliberately mismatch
liabilities and assets in a strategic gap position.
At September 30, 2020 , the Company reflected a positive interest sensitivity gap
with an interest sensitivity ratio of 1.40:1.00 at the cumulative one-year
position. Based on management's perception of interest rates remaining low
throughout 2020, emphasis has been, and is expected to continue to be, placed on
controlling liability costs while extending the maturities of liabilities in our
efforts to insulate the net interest spread from rising interest rates in the
future. However, no assurance can be given that this objective will be met.
The following table sets forth the amounts of our interest-earning assets and
interest-bearing liabilities outstanding at September 30, 2020 , which we expect,
based upon certain assumptions, to reprice or mature in each of the future time
periods shown (the "GAP Table"). Except as stated below, the amount of assets
and liabilities shown which reprice or mature during a particular period were
determined in accordance with the earlier of term to repricing or the
contractual maturity of the asset or liability. The table sets forth
approximation of the projected repricing of assets and liabilities at September
30, 2020 , on the basis of contractual maturities, anticipated prepayments, and
scheduled rate adjustments within a three-month period and subsequent selected
time intervals. The loan amounts in the table reflect principal balances
expected to be redeployed and/or repriced as a result of contractual
amortization and anticipated
-50-
--------------------------------------------------------------------------------prepayments of adjustable-rate loans and fixed-rate loans, and as a result of contractual rate adjustments on adjustable-rate loans.
More than More than More than
6 Months 6 Months 1 Year 3 Year More than Total
or Less to 1 Year to 3 Years to 5 Years 5 Years Amount
(In thousands)
Interest-earning assets(1):
Loans receivable(2) $ 347,782 $ 86,120 $ 258,082 $ 243,886 $ 86,401 $ 1,022,271
Investment securities and
restricted
securities 15,934 1,183 4,828 19,570 14,618 56,133
Other interest-earning assets 45,053 - - - - 45,053
Total interest-earning assets 408,769 87,303 262,910 263,456 101,019 1,123,457
Interest-bearing liabilities:
Demand and NOW accounts 13,214 13,214 52,857 52,857 171,540 303,682
Money market accounts 28,031 28,031 112,125 108,877 647 277,711
Savings accounts 1,957 1,957 7,829 7,829 25,500 45,072
Certificate accounts 102,525 56,483 35,892 17,241 1,878 214,019
Borrowings 94,225 20,000 44,776 - - 159,001
Total interest-bearing
liabilities 239,952 119,685 253,479 186,804 199,565 999,485
Interest-earning assets less
interest-
bearing liabilities $ 168,817 $ (32,382 ) $ 9,431 $ 76,652 $ (98,546 ) $ 123,972
Cumulative interest-rate
sensitivity gap(3) $ 168,817 $ 136,435 $ 145,866 $ 222,518 $ 123,972
Cumulative interest-rate gap as
a
percentage of total assets at
September 30, 2020 13.93 % 11.26 % 12.03 % 18.36 % 10.23 % Cumulative interest-earning assets as a percentage of cumulative interest-bearing liabilities at September 30, 2020 170.35 % 137.94 % 123.79 % 127.82 % 112.40 %
(1) Interest-earning assets are included in the period in which the balances are
expected to be redeployed and /or repriced as a result of anticipated
prepayments, scheduled rate adjustments and contractual maturities.
(2) For purposes of the gap analysis, loans receivable excludes non-accrual loans
gross of the allowance for loan losses, undisbursed loan funds, unamortized
discounts and deferred loans fees.
(3) Interest-rate sensitivity gap represents the net cumulative difference
between interest-earning assets and interest-bearing liabilities.
Net Portfolio Value and Net Interest Income Analysis. Our interest rate
sensitivity also is monitored by management through the use of models which
generate estimates of the change in its net portfolio value ("NPV") and net
interest income ("NII") over a range of interest rate scenarios. NPV is the
present value of expected cash flows from assets, liabilities, and off-balance
sheet contracts. The NPV ratio, under any interest rate scenario, is defined as
the NPV in that scenario divided by the market value of assets in the same
scenario.
The table below sets forth as of September 30, 2020 and 2019 the estimated
changes in our net portfolio value that would result from designated
instantaneous changes in the United States Treasury yield curve. Computations of
prospective effects of hypothetical interest rates changes are based on numerous
assumptions including relative levels of market interest rates, loan prepayments
and deposit decay, and should not be relied upon as indicative of actual
results.
As of September 30, 2020 As of September 30, 2019
Changes in Interest Dollar Percentage Dollar Percentage
Rates Change from Change from Change from Change from
(basis points)(1) Amount Base Base Amount Base Base
(In thousands)
+300 $ 157,804 $ 3,988 3 % $ 166,280 $ (4,588 ) (3 )%
+200 161,245 7,429 5 170,385 (483 ) -
+100 160,495 6,679 4 172,926 2,058 1
0 153,816 - - 170,868 - -
-100 160,762 6,946 5 164,043 (6,825 ) (4 )
(1) Assumes an instantaneous uniform change in interest rates. A basis point
equals 0.01%.
-51-
-------------------------------------------------------------------------------- In addition to modeling changes in NPV, we also analyze potential changes to NII for a twelve-month period under rising and falling interest rate scenarios. The following table shows our NII model as ofSeptember 30, 2020 .
Changes in Interest Rates in Basis Points Net Interest
(Rate Shock) Income $ Change % Change
(In thousands)
200 $ 31,621 $ 2,938 10.24 %
100 30,283 1,600 5.58
Static 28,683 - -
(100) 27,738 (945 ) (3.29 )
As is the case with the GAP Table, certain shortcomings are inherent in the
methodology used in the above interest rate risk measurements. Modeling changes
in NPV and NII require the making of certain assumptions which may or may not
reflect the manner in which actual yields and costs respond to changes in market
interest rates. In this regard, the models presented assume that the composition
of our interest sensitive assets and liabilities existing at the beginning of a
period remains constant over the period being measured and also assumes that a
particular change in interest rates is reflected uniformly across the yield
curve regardless of the duration to maturity or repricing of specific assets and
liabilities. Accordingly, although the NPV measurements and net interest income
models provide an indication of interest rate risk exposure at a particular
point in time, such measurements are not intended to and do not provide a
precise forecast of the effect of changes in market interest rates on net
interest income and will differ from actual results.
Estimates of Fair Value
The estimation of fair value is significant to a number of the Company's assets, including investment securities available-for-sale. These are all recorded at either fair value or the lower of cost or fair value. Fair values are volatile and may be influenced by a number of factors. Circumstances that could cause estimates of the fair value of certain assets and liabilities to change include a change in prepayment speeds, discount rates, or market interest rates. Fair values for most available-for-sale investment securities are based on quoted market prices. If quoted market prices are not available, fair values are based on judgments regarding future expected loss experience, current economic condition risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature, involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Impact of Inflation and Changing Prices
The financial statements and notes thereto presented elsewhere herein have been prepared in accordance with GAAP, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of operations; unlike most industrial companies, nearly all of the Company's assets and liabilities are monetary. As a result, interest rates have a greater impact on performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
Liquidity
The liquidity position of the Company is dependent primarily on successful management of the Bank's assets and liabilities so as to meet the needs of both deposit and credit customers. Liquidity needs arise principally to accommodate possible deposit outflows and to meet customers' requests for loans. Scheduled principal loan repayments, maturing investments, short-term liquid assets and deposit inflows, can satisfy such needs. The objective of liquidity management is to enable the Company to maintain sufficient liquidity to meet its obligations in a timely and cost-effective manner. Management monitors current and projected cash flows, and adjusts positions as necessary to maintain adequate levels of liquidity. Under its liquidity risk management program, the Company regularly monitors correspondent bank funding exposure and credit exposure in accordance with guidelines issued by the banking regulatory authorities. Management uses a variety of potential funding sources and staggering maturities to reduce the risk of potential funding pressure. Management also maintains a detailed contingency funding plan designed to respond adequately to situations which could lead to stresses on liquidity. Management believes that the Company has the funding capacity to meet the liquidity needs arising from potential events. The Company maintains borrowing capacity through theFederal Home Loan Bank of Pittsburgh secured with loans and marketable securities. -52-
--------------------------------------------------------------------------------
The Company's primary sources of short-term liquidity consist of cash and cash equivalents and investment securities available-for-sale.
AtSeptember 30, 2020 , the Company had$61.4 million in cash and cash equivalents compared to$153.5 million atSeptember 30, 2019 . The decrease in cash and cash equivalents year over year was strategic to better match funding expectations and improve the margin. In addition, our investment securities available-for-sale amounted to$31.5 million atSeptember 30, 2020 and$18.4 million atSeptember 30, 2019 .
Deposits
Total deposits decreased to$890.9 million atSeptember 30, 2020 from$953.8 million atSeptember 30, 2019 . Total interest-bearing deposits decreased from$898.1 million atSeptember 30, 2019 to$840.5 million atSeptember 30, 2020 , a decrease of$57.6 million or 6.4 percent. Time deposits$100,000 and over decreased$57.7 million atSeptember 30, 2020 as compared toSeptember 30, 2019 , and represented 16.2 percent of total deposits atSeptember 30, 2020 compared to 21.1 percent atSeptember 30, 2019 . We had brokered deposits totaling$31.1 million atSeptember 30, 2020 compared to$73.1 million atSeptember 30, 2019 . The Company continues to place the main focus of its deposit gathering efforts in the maintenance, development, and expansion of its core deposit base. The reductions in deposits are in line with the Bank's overall funding strategy to reduce excess on balance sheet cash and better match funding needs along with improvement in the deposit mix with the reduction of wholesale certificates of$14.8 million and reduction of money market public fund deposits of$58.5 million . Management believes that the emphasis on serving the needs of our communities will provide a long-term relationship base which in turn will allow the Company to efficiently compete for and retain deposits in its market.
The following table depicts the Company's deposits classified by interest rates
with percentages to total deposits at
September 30, September 30,
2020 2019 Dollar
Amount Percentage Amount Percentage Change
(In thousands)
Balances by types of deposit: Savings$ 45,072 5.0 %$ 41,875 4.4 %$ 3,197 Money market accounts 277,711 31.2 276,644 29.0 1,067 Interest bearing demand 303,682 34.1 302,039 31.7 1,643 Non-interest bearing demand 50,422 5.7 55,684 5.8 (5,262 )$ 676,887 76.0$ 676,242 70.9$ 645 Certificates of deposit 214,019 24.0 277,569 29.1 (63,550 ) Total$ 890,906 100.0 %$ 953,811 100.0 %$ (62,905 ) AtSeptember 30, 2020 , our certificates of deposit and other time deposits with a balance of$100,000 or more amounted to$145.7 million , of which$118.8 million are scheduled to mature within twelve months. AtSeptember 30, 2020 , the weighted average remaining maturity of our certificate of deposit accounts was 11.8 months. The following table presents the maturity of our certificates of deposit and other time deposits with balances of$100,000 or more atSeptember 30, 2020 . Amount (In thousands) Maturity Period: Three months or less $ 47,214 Over three months through six months 35,688 Over six months through twelve months 35,905 Over twelve months 26,853 Total$ 145,660 Borrowings Borrowings from the FHLB ofPittsburgh are available to supplement the Company's liquidity position and, to the extent that maturing deposits do not remain with the Company, management may replace such funds with -53- -------------------------------------------------------------------------------- advances. As ofSeptember 30, 2020 and 2019, the Company's outstanding balance of FHLB advances, totaled$130.0 million and$133.0 million , respectively. Of the$130.0 million in advances as ofSeptember 30, 2020 ,$40.0 million represents long-term, fixed-rate advances maturing in 2021 and 2022 that have terms enabling the FHLB to call the borrowing at its option prior to maturity. AtSeptember 30, 2020 , there were three short-term FHLB advances totaling$90.0 million of fixed-rate borrowing with rollover of 90 days. During both fiscal 2020 and 2019, the Company did not purchase any securities sold under agreements to repurchase as a short-term funding source. The Company has a secured borrowing agreement with a third party based on two loans totaling$4.2 million and$4.3 million atSeptember 30, 2020 and 2019, respectively. The Company originated$1.3 million of the secured borrowing agreement onApril 20, 2017 with a 4 month maturity and interest rate of 3.875%, and$3.0 million of the secured borrowing agreement onAugust 15, 2017 with an 18 month maturity and an interest rate of 4.25%. Subsequent toSeptember 30, 2020 , the two loan participation agreements were extinguished and are no longer secured borrowings.
Cash Flows
The Consolidated Statements of Cash Flows present the changes in cash and cash equivalents resulting from the Company's operating, investing and financing activities. During the year endedSeptember 30, 2020 , cash and cash equivalents decreased by$92.1 million from the balance atSeptember 30, 2019 . Net cash of$11.7 million was provided by operating activities in fiscal 2020 compared to net cash of$10.2 million provided by operating activities in fiscal 2019. Net cash used in investing activities amounted to approximately$35.3 million in fiscal 2020 compared to net cash used in investing activities of approximately$103.1 million in fiscal 2019. Net cash of$68.5 million was used in financing activities in fiscal 2020 compared to net cash of$215.6 million provided by financing activities in fiscal 2019.
Off-Balance Sheet Arrangements
In the normal course of operations, the Company engages in a variety of financial transactions that, in accordance with GAAP, are not recorded in its financial statements. These transactions involve, to varying degrees, elements of credit, interest rate, and liquidity risk. Such transactions are used primarily to manage customers' requests for funding and take the form of loan commitments, lines of credit and letters of credit. The contractual amounts of commitments to extend credit represent the amounts of potential accounting loss should the contract be fully drawn upon, the customer defaults and the value of any existing collateral becomes worthless. We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments. Financial instruments whose contract amounts represent credit risk atSeptember 30, 2020 and 2019 were as follows: September 30, 2020 2019 (In thousands) Commitments to extend credit:(1) Future loan commitments$ 7,687 $ 40,976 Undisbursed construction loans 24,551 27,645 Undisbursed home equity lines of credit 24,751 21,447 Undisbursed commercial lines of credit 81,363 88,164 Overdraft protection lines 1,362 1,363 Standby letters of credit 9,074 11,589 Total commitments$ 148,788 $ 191,184
(1) Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the
contract. Commitments may require payment of a fee and generally have fixed
expiration dates or other termination clauses.
We anticipate that we will continue to have sufficient funds and alternative funding sources to meet our current commitments.
Shareholders' Equity
Total shareholders' equity amounted to$143.6 million , or 11.8 percent of total assets, atSeptember 30, 2020 , compared to$142.5 million , or 11.2 percent of total assets atSeptember 30, 2019 . Book value per common share was$18.86 atSeptember 30, 2020 , compared to$18.35 atSeptember 30, 2019 . -54- --------------------------------------------------------------------------------
Capital
Malvern Bank's capital ratios as ofSeptember 30, 2020 andSeptember 30, 2019 are as follows: To Be Well Capitalized Under Prompt Excess Over Required for Capital Corrective Well-Capitalized Actual Adequacy Purposes Action Provisions Provision Amount Ratio Amount
Ratio Amount Ratio Amount Ratio
As of
(Dollars in thousands) Tier 1 leverage (core) capital (to adjusted tangible assets)$ 158,532 13.03 %$ 48,685 4.00 %$ 60,856 5.00 %$ 97,676 8.03 % Common equity Tier 1 (to risk-weighted assets)$ 158,532 15.65 45,591
4.50 65,854 6.50 92,678 9.15 Tier 1 risk-based capital
(to risk-weighted assets)$ 158,532 15.65 60,788
6.00 81,051 8.00 77,481 7.65 Total risk-based capital
(to risk-weighted assets)$ 170,237 16.80 81,051 8.00 101,314 10.00 68,923 6.80 As ofSeptember 30, 2019 (As Restated): Tier 1 leverage (core) capital
(to adjusted tangible
assets)$ 153,086 12.19 %$ 50,226 4.00 %$ 62,783 5.00 %$ 90,303 7.19 % Common equity Tier 1 (to risk-weighted assets)$ 153,086 15.32 44,980
4.50 64,972 6.50 88,114 8.82 Tier 1 risk-based capital
(to risk-weighted assets)$ 153,086 15.32 59,974
6.00 79,965 8.00 73,121 7.32 Total risk-based capital
(to risk-weighted assets)$ 163,253 16.33 79,965 8.00 99,957 10.00 63,296 6.33 -55-
--------------------------------------------------------------------------------Malvern Bancorp's capital ratios as ofSeptember 30, 2020 andSeptember 30, 2019 are as follows: To Be Well Capitalized Under Prompt Excess Over Required for Capital Corrective Well-Capitalized Actual Adequacy Purposes Action Provisions Provision Amount Ratio Amount
Ratio Amount Ratio Amount Ratio
As of
(Dollars in thousands) Tier 1 leverage (core) capital (to adjusted tangible assets)$ 144,638 11.87 %$ 48,743
4.00 %
risk-weighted assets)
4.50
(to risk-weighted assets)$ 144,638 14.25$ 60,880
6.00
(to risk-weighted assets)$ 181,119 17.85$ 81,174 8.00$ 101,467 10.00$ 79,652 7.85 As ofSeptember 30, 2019 (As Restated): Tier 1 leverage (core) capital (to adjusted tangible assets)$ 142,508 11.34 %$ 50,263
4.00 %
risk-weighted assets)$ 142,508 14.24 45,031
4.50 65,044 6.50 77,464 7.74 Tier 1 risk-based capital
(to risk-weighted assets)$ 142,508 14.24 60,041
6.00 80,054 8.00 62,454 6.24 Total risk-based capital
(to risk-weighted assets)$ 177,293 17.72 80,054 8.00 100,068 10.00 77,225 7.72 Looking Forward One of the Company's primary objectives is to achieve balanced asset and revenue growth, and at the same time expand market presence and diversify its ?nancial products. However, it is recognized that objectives, no matter how focused, are subject to factors beyond the control of the Company, which can impede its ability to achieve these goals. The following factors should be considered when evaluating the Company's ability to achieve its objectives: The ?nancial market place is rapidly changing. Banks are no longer the only place to obtain loans, nor the only place to keep ?nancial assets. The banking industry has lost market share to other ?nancial service providers. The future is predicated on the Company's ability to adapt its products, provide superior customer service and compete in an ever-changing marketplace. Net interest income, the primary source of earnings, is impacted favorably or unfavorably by changes in interest rates. Although the impact of interest rate ?uctuations is mitigated by ALCO strategies, signi?cant changes in interest rates can have a material adverse impact on pro?tability. The ability of customers to repay their obligations is often impacted by changes in the regional and local economy. Although the Company sets aside loan loss provisions toward the allowance for loan losses when management determines such action to be appropriate, signi?cant unfavorable changes in the economy could impact the assumptions used in the determination of the adequacy of the allowance. Technological changes will have a material impact on how ?nancial service companies compete for and deliver services. It is recognized that these changes will have a direct impact on how the marketplace is approached and ultimately on pro?tability. The Company has taken steps to improve its traditional delivery channels. However, continued success will likely be measured by the Company's ability to anticipate and react to future technological changes. -56-
--------------------------------------------------------------------------------
This ''Looking Forward'' discussion constitutes a forward-looking statement under the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those projected in the Company's forward-looking statements due to numerous known and unknown risks and uncertainties, including the factors referred to above, on the first page of this Annual Report on Form 10-K and in other sections of this Annual Report on Form 10-K.
© Edgar Online, source
