MALVERN BANCORP, INC. - FORM 10-Q

Attached files

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EX-31.1 - EXHIBIT 31.1 - MALVERN BANCORP, INC.	s101635_ex31-1.htm
EX-32.0 - EXHIBIT 32.0 - MALVERN BANCORP, INC.	s101635_ex32-0.htm
EX-31.2 - EXHIBIT 31.2 - MALVERN BANCORP, INC.	s101635_ex31-2.htm

UNITED STATES OF AMERICA

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2015

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 000-54835

MALVERN BANCORP, INC.

(Exact Name of Registrant as Specified in Its Charter)

Pennsylvania

45-5307782

(State or Other Jurisdiction of

Incorporation or Organization)

(IRS Employer

Identification No.)

42 Lancaster Avenue, Paoli, Pennsylvania 19301

(Address of Principal Executive Offices) (Zip Code)

(610) 644-9400

(Registrant’s Telephone Number, Including Area Code)

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

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

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

Large accelerated filer ☐

Accelerated filer ☐

Non-accelerated filer ☐

(Do not check if smaller

reporting company)

Smaller reporting company ☒

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

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

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

Table of Contents

		Page

PART I – FINANCIAL INFORMATION		1

Item 1.	Financial Statements
	Consolidated Statements of Financial Condition at June 30, 2015 (unaudited) and September 30, 2014	2
	Consolidated Statements of Operations for the three and nine months ended June 30, 2015 and 2014 (unaudited)	3
	Consolidated Statements of Comprehensive (Loss) Income for the three and nine months ended June 30, 2015 and 2014 (unaudited)	4
	Consolidated Statements of Changes in Shareholders’ Equity for the nine months ended June 30, 2015 and 2014 (unaudited)	5
	Consolidated Statements of Cash Flows for the nine months ended June 30, 2015 and 2014 (unaudited)	6
	Notes to Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34

Item 3.	Qualitative and Quantitative Disclosures about Market Risks	52

Item 4.	Controls and Procedures	52

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	52

Item 1A.	Risk Factors	52

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	53

Item 3.	Default Upon Senior Securities	53

Item 4.	Mine Safety Disclosure	53

Item 5.	Other Information	53

Item 6.	Exhibits	53

SIGNATURES		54

PART I – FINANCIAL INFORMATION

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

Item 1. Financial Statements

MALVERN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(in thousands, except for share data)	June 30, 2015			September 30, 2014
	(Unaudited)
ASSETS
Cash and due from depository institutions	$	3,460		$	1,203
Interest bearing deposits in depository institutions		20,833			17,984
Cash and cash equivalents		24,293			19,187
Investment securities available-for-sale, at fair value		130,509			100,943
Investment securities held-to-maturity (fair value of $58,181 and $0, respectively)		59,243			—
Restricted stock, at cost		4,369			3,503
Loans held for sale		657			—
Loans receivable, net of allowance for loan losses of $4,574 and $4,589, respectively		371,897			386,074
Other real estate owned		1,366			1,964
Accrued interest receivable		2,404			1,322
Property and equipment, net		6,502			6,823
Deferred income taxes, net		2,816			2,376
Bank-owned life insurance		18,659			18,264
Other assets		1,529			1,808
Total Assets	$	624,244		$	542,264

LIABILITIES
Deposits:
Deposits – noninterest-bearing	$	26,877		$	23,059
Deposits – interest-bearing		416,341			389,894
Total Deposits		443,218			412,953
FHLB advances		93,000			48,000
Advances from borrowers for taxes and insurance		4,245			1,786
Accrued interest payable		346			149
Other liabilities		3,623			2,604
Total Liabilities		544,432			465,492

Commitments and Contingencies		—			—

SHAREHOLDERS’ EQUITY
Preferred stock, $0.01 par value, 10,000,000 shares authorized, none issued		—			—
Common stock, $0.01 par value, 40,000,000 shares authorized, issued and outstanding: 6,558,473		66			66
Additional paid-in capital		60,346			60,317
Retained earnings		22,650			20,116
Unearned Employee Stock Ownership Plan (ESOP) shares		(1,811	)		(1,922	)
Accumulated other comprehensive (loss) income		(1,439	)		(1,805	)
Total Shareholders’ equity		79,812			76,772
Total Liabilities and Shareholders’ equity	$	624,244		$	542,264

See accompanying notes to unaudited consolidated financial statements.

MALVERN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended June 30,					Nine Months Ended June 30,
(in thousands, except for per share data)	2015		2014			2015			2014

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

Basic Earnings Per Share	$	0.19	$	0.06		$	0.40		$	0.00
Dividends Declared Per Share	$	0.00	$	0.00		$	0.00		$	0.00

See accompanying notes to unaudited consolidated financial statements.

MALVERN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(Unaudited)

	Three Months Ended June 30,						Nine Months Ended June 30,
(in thousands)	2015			2014			2015			2014

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

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

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

See accompanying notes to unaudited consolidated financial statements.

MALVERN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

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

Balance, October 1, 2014	$	66	$	60,317	$	20,116	$	—	$	(1,922	)	$	(1,805	)	$	76,772
Net Income		—		—		2,534		—		—			—			2,534
Other comprehensive income		—		—		—		—		—			366			366
Committed to be released ESOP shares (10,800 shares)		—		29		—		—		111			—			140
Balance, June 30, 2015	$	66	$	60,346	$	22,650	$	—	$	(1,811	)	$	(1,439	)	$	79,812

See accompanying notes to unaudited consolidated financial statements.

MALVERN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

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

See accompanying notes to unaudited consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Basis of Presentation

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

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

In preparing the consolidated financial statements, management has made estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the consolidated statements of condition and that affect the results of operations for the periods presented. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to change in the near term relate to the determination of the allowance for loan losses, other real estate owned, the evaluation of deferred tax assets and the other-than-temporary impairment evaluation of securities.

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

Note 2 – Recent Accounting Pronouncements

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

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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2 – Recent Accounting Pronouncements – (continued)

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

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

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

Note 3 – Earnings Per Share

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 3 – Earnings Per Share – (continued)

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

	Three Months Ended June 30,						Nine Months Ended June 30,
(in thousands, except for share data)	2015			2014			2015			2014

Net Income	$	1,205		$	391		$	2,534		$	29

Weighted average shares outstanding		6,558,473			6,558,473			6,558,473			6,558,473
Average unearned ESOP shares		(163,347	)		(177,747	)		(166,959	)		(181,359	)
Weighted average shares outstanding – basic		6,395,126			6,380,726			6,391,514			6,377,114

Earnings per share – basic	$	0.19		$	0.06		$	0.40		$	0.00

Note 4 – Employee Stock Ownership Plan

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

Note 5 - Investment Securities

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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5 - Investment Securities – (continued)

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


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

Total investment securities	$	191,932	$	50	$	(3,292	)	$	188,690

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5 - Investment Securities – (continued)

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

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

The varying amount of sales from the available-for-sale portfolio over the past few years, reflect the significant volatility present in the market. Given the historic low interest rates prevalent in the market, it is necessary for the Company to protect itself from interest rate exposure. Securities that once appeared to be sound investments can, after changes in the market, become securities that the Company has the flexibility to sell to avoid losses and mismatches of interest-earning assets and interest-bearing liabilities at a later time.

The following tables indicate gross unrealized losses not recognized in income and fair value, aggregated by investment category and the length of time individual securities have been in a continuous unrealized loss position at June 30, 2015 and September 30, 2014:


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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5 - Investment Securities – (continued)


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

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

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

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

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

Total investment securities	$	191,932	$	188,690

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 6 - Loans Receivable and Related Allowance for Loan Losses

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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

Ending Balance	$	1,532		$	334	$	—		$	1,036		$	148		$	90	$	141		$	731		$	29		$	533	$	4,574

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

Ending Balance	$	1,717		$	455		$	26		$	1,224		$	64		$	49		$	164	$	951		$	35		$	173	$	4,858

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

	Nine Months Ended June 30, 2015
				Construction and Development						Commercial							Consumer
	Residential Mortgage			Residential and Commercial			Land			Commercial Real Estate			Multi- family		Other		Home Equity Lines of Credit			Second Mortgages			Other			Unallocated		Total
	(in thousands)
Allowance for loan losses:
Beginning balance	$	1,672		$	291		$	13		$	1,248		$	29	$	50	$	168		$	1,033		$	23		$	62	$	4,589
Charge-offs		—			(1	)		—			(48	)		—		—		—			(138	)		(33	)		—		(220	)
Recoveries		17			23			—			8			—		2		1			57			7			—		115
Provision		(157	)		21			(13	)		(172	)		119		38		(28	)		(221	)		32			471		90

Ending Balance	$	1,532		$	334		$	—		$	1,036		$	148	$	90	$	141		$	731		$	29		$	533	$	4,574

Ending balance: individually evaluated for impairment	$	—		$	—		$	—		$	—		$	—	$	—	$	—		$	1		$	—		$	—	$	1
Ending balance: collectively evaluated for impairment	$	1,532		$	334		$	—		$	1,036		$	148	$	90	$	141		$	730		$	29		$	533	$	4,573

Loans receivable:
Ending balance	$	219,197		$	6,751		$	25		$	67,617		$	5,451	$	9,839	$	23,173		$	40,121		$	2,523				$	374,697
Ending balance: individually evaluated for impairment	$	566		$	121		$	—		$	597		$	—	$	—	$	20		$	162		$	—				$	1,466
Ending balance: collectively evaluated for impairment	$	218,631		$	6,630		$	25		$	67,020		$	5,451	$	9,839	$	23,153		$	39,959		$	2,523				$	373,231

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

	Nine Months Ended June 30, 2014
				Construction and Development						Commercial								Consumer
	Residential Mortgage			Residential and Commercial			Land			Commercial Real Estate			Multi- family		Other			Home Equity Lines of Credit			Second Mortgages			Other			Unallocated		Total
	(in thousands)
Allowance for loan losses:
Beginning balance	$	1,414		$	164		$	56		$	1,726		$	40	$	59		$	137		$	1,393		$	22		$	79	$	5,090
Charge-offs		(48	)		(37	)		—			—			—		—			(14	)		(443	)		(6	)		—		(548	)
Recoveries		13			145			—			7			—		2			1			66			2			—		236
Provision		338			183			(30	)		(509	)		24		(12	)		40			(65	)		17			94		80

Ending Balance	$	1,717		$	455		$	26		$	1,224		$	64	$	49		$	164		$	951		$	35		$	173	$	4,858

Ending balance: individually evaluated for impairment	$	—		$	—		$	—		$	—		$	—	$	—		$	—		$	—		$	—		$	—	$	—
Ending balance: collectively evaluated for impairment	$	1,717		$	455		$	26		$	1,224		$	64	$	49		$	164		$	951		$	35		$	173	$	4,858

Loans receivable:
Ending balance	$	235,050		$	7,484		$	1,537		$	69,788		$	2,086	$	5,492		$	21,914		$	48,866		$	3,011				$	395,228
Ending balance: individually evaluated for impairment	$	1,968		$	479		$	237		$	—		$	—	$	900		$	116		$	638		$	—				$	4,338
Ending balance: collectively evaluated for impairment	$	233,082		$	7,005		$	1,300		$	69,788		$	2,086	$	4,592		$	21,798		$	48,228		$	3,011				$	390,890

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

	Year Ended September 30, 2014
				Construction and Development						Commercial									Consumer
	Residential Mortgage			Residential and Commercial			Land			Commercial Real Estate			Multi- family			Other			Home Equity Lines of Credit			Second Mortgages			Other			Unallocated			Total
	(in thousands)
Allowance for loan losses:
Beginning balance	$	1,414		$	164		$	56		$	1,726		$	40		$	59		$	137		$	1,393		$	22		$	79		$	5,090
Charge-offs		(83	)		(37	)		—			(183	)		—			—			(14	)		(618	)		(6	)		—			(941	)
Recoveries		23			1			—			9			—			3			1			136			4			—			177
Provision		318			163			(43	)		(304	)		(11	)		(12	)		44			122			3			(17	)		263

Ending Balance	$	1,672		$	291		$	13		$	1,248		$	29		$	50		$	168		$	1,033		$	23		$	62		$	4,589

Ending balance: individually evaluated for impairment	$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—
Ending balance: collectively evaluated for impairment	$	1,672		$	291		$	13		$	1,248		$	29		$	50		$	168		$	1,033		$	23		$	62		$	4,589

Loans receivable:
Ending balance	$	231,324		$	5,964		$	1,033		$	71,579		$	1,032		$	5,480		$	22,292		$	47,034		$	2,839					$	388,577
Ending balance: individually evaluated for impairment	$	999		$	187		$	—		$	504		$	—		$	900		$	115		$	695		$	—					$	3,400
Ending balance: collectively evaluated for impairment	$	230,325		$	5,777		$	1,033		$	71,075		$	1,032		$	4,580		$	22,177		$	46,339		$	2,839					$	385,177

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

	Three Months Ended June 30, 2015				Nine Months Ended June 30, 2015
(in thousands)	Average Impaired Loans		Interest Income Recognized on Impaired Loans		Average Impaired Loans		Interest Income Recognized on Impaired Loans

Residential mortgage	$	674	$	—	$	819	$	—
Construction and Development:
Residential and commercial		133		1		151		3
Commercial:
Commercial real estate		608		—		669		—
Other		—		—		454		12
Consumer:
Home equity lines of credit		20		—		25		—
Second mortgages		430		—		618		—
Total	$	1,865	$	1	$	2,736	$	15

	Three Months Ended June 30, 2014				Nine Months Ended June 30, 2014
(in thousands)	Average Impaired Loans		Interest Income Recognized on Impaired Loans		Average Impaired Loans		Interest Income Recognized on Impaired Loans

Residential mortgage	$	2,040	$	—	$	1,788	$	—
Construction and Development:
Residential and commercial		522		5		685		14
Land		292		2		255		9
Commercial:
Other		900		8		900		22
Consumer:
Home equity lines of credit		161		—		100		—
Second mortgages		597		—		574		—
Total	$	4,512	$	15	$	4,302	$	45

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

	June 30, 2015
			Special
	Pass		Mention		Substandard		Doubtful		Total
	(in thousands)
Residential mortgage	$	218,405	$	131	$	661	$	—	$	219,197
Construction and Development:
Residential and commercial		6,524		106		121		—		6,751
Land		25		—		—		—		25
Commercial:
Commercial real estate		59,103		4,414		4,100		—		67,617
Multi-family		5,168		283		—		—		5,451
Other		8,842		276		721		—		9,839
Consumer:
Home equity lines of credit		23,056		—		117		—		23,173
Second mortgages		39,296		135		690		—		40,121
Other		2,509		14		—		—		2,523
Total	$	362,928	$	5,359	$	6,410	$	—	$	374,697

	September 30, 2014
			Special
	Pass		Mention		Substandard		Doubtful		Total
	(in thousands)
Residential mortgage	$	230,065	$	137	$	1,122	$	—	$	231,324
Construction and Development:
Residential and commercial		5,777		—		187		—		5,964
Land		1,033		—		—		—		1,033
Commercial:
Commercial real estate		63,125		5,797		2,657		—		71,579
Multi-family		1,032		—		—		—		1,032
Other		3,555		1,025		900		—		5,480
Consumer:
Home equity lines of credit		22,177		—		115		—		22,292
Second mortgages		46,292		21		721		—		47,034
Other		2,823		16		—		—		2,839
Total	$	375,879	$	6,996	$	5,702	$	—	$	388,577

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

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

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

			30 – 59		60 – 89		90 Days or
			Days Past		Days Past		More Past		Total		Total Loans
	Current		Due		Due		Due		Past Due		Receivable
	(in thousands)
June 30, 2015:
Residential mortgage	$	216,698	$	1,538	$	395	$	566	$	2,499	$	219,197
Construction and Development:
Residential and commercial		6,739		—		—		12		12		6,751
Land		25		—		—		—		—		25
Commercial:
Commercial real estate		66,517		503		—		597		1,100		67,617
Multi-family		5,451		—		—		—		—		5,451
Other		9,839		—		—		—		—		9,839
Consumer:
Home equity lines of credit		23,056		—		97		20		117		23,173
Second mortgages		39,724		235		—		162		397		40,121
Other		2,523		—		—		—		—		2,523
Total	$	370,572	$	2,276	$	492	$	1,357	$	4,125	$	374,697

September 30, 2014:
Residential mortgage	$	229,257	$	835	$	—	$	1,232	$	2,067	$	231,324
Construction and
Development:
Residential and Commercial		5,886		—		—		78		78		5,964
Land		1,033		—		—		—		—		1,033
Commercial:
Commercial real estate		71,075		—		—		504		504		71,579
Multi-family		1,032		—		—		—		—		1,032
Other		5,480		—		—		—		—		5,480
Consumer:
Home equity lines of credit		22,177		—		—		115		115		22,292
Second mortgages		45,847		200		525		462		1,187		47,034
Other		2,822		17		—		—		17		2,839
Total	$	384,609	$	1,052	$	525	$	2,391	$	3,968	$	388,577

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

The Company had three loans classified as TDRs with an aggregate outstanding balance of $608,000 and $1.1 million at June 30, 2015 and September 30, 2014, respectively. At June 30, 2015, these loans were also classified as impaired. Of the TDR loans, one construction and development loan continues to perform under the restructured terms through June 30, 2015 and we continued to accrue interest on such loan through such date. Two commercial loans to one borrower, with an aggregate balance of $499,000 were restructured during the quarter ended June 30, 2015 and deemed non-performing. The borrower is currently making payments as agreed under the terms of the restructuring of principal and interest payments. At September 30, 2014, three loans deemed TDRs with an aggregate balance of $1.1 million were classified as impaired; however, they were performing prior to the restructure and continued to perform under their restructured terms as of September 30, 2014, and, accordingly, were deemed to be performing loans at September 30, 2014 and we continued to accrue interest on such loans through such date. At September 30, 2014, one construction and development TDR loan with a balance of $78,000 was deemed a non-accruing TDR and was also deemed impaired at September 30, 2014. All of such loans have been classified as TDRs since we modified the payment terms and in some cases interest rate from the original agreements and allowed the borrowers, who were experiencing financial difficulty, to make interest only payments for a period of time in order to relieve some of their overall cash flow burden. Some loan modifications classified as TDRs may not ultimately result in the full collection of principal and interest, as modified, and result in potential incremental losses. These potential incremental losses have been factored into our overall estimate of the allowance for loan losses. The level of any defaults will likely be affected by future economic conditions. A default on a troubled debt restructured loan for purposes of this disclosure occurs when the borrower is 90 days past due or a foreclosure or repossession of the applicable collateral has occurred.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

The following table presents our TDR loans as of June 30, 2015 and September 30, 2014.


					Troubled Debt Restructured
					Loans That Have Defaulted on
	Total Troubled Debt				Modified Terms Within The Past
	Restructurings				12 Months
	Number of		Recorded		Number of		Recorded
	Loans		Investment		Loans		Investment
	(dollars in thousands)
At June 30, 2015:
Construction and Development:
Residential and commercial		1	$	109		—	$	—
Commercial:
Commercial real estate		2		499		2		499
Total		3	$	608		2	$	499
At September 30, 2014:
Construction and Development:
Residential and commercial		2	$	187		1	$	78
Commercial:
Other		1		900		—		—

Total		3	$	1,087		1	$	78

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

	June 30, 2015				September 30, 2014
	Performing		Non-Performing		Performing		Non-Performing
	(in thousands)
Construction and Development:
Residential and commercial	$	109	$	—	$	109	$	78
Commercial:
Commercial real estate		—		499		—		—
Other		—		—		900		—
Total	$	109	$	499	$	1,009	$	78

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

The following table shows the activity in loans which were first deemed to be TDRs during the three months and nine months ended June 30, 2015 and 2014. No loans were first deemed TDRs during the three months ended June 30, 2014.

For the Three Months Ended June 30, 2015

For the Three Months Ended June 30, 2014

Restructured During Period

Pre-

Post-

Pre-

Post-

Modifications

Number

Outstanding

Number

Outstanding

Recorded

Loans

Investments

Loans

Investments

(dollars in thousands)

Commercial:

Commercial real estate

499

—

Total troubled debt restructurings

499

—


	For the Nine Months Ended June 30, 2015						For the Nine Months Ended June 30, 2014

	Restructured During Period
	Number of Loans		Pre- Modifications Outstanding Recorded Investments		Post- Modifications Outstanding Recorded Investments		Number of Loans		Pre- Modifications Outstanding Recorded Investments		Post- Modifications Outstanding Recorded Investments

					(dollars in thousands)
Construction and Development:
Residential and commercial		—	$	—	$	—		1	$	437	$	437
Commercial:
Commercial real estate		2	$	499	$	499		—	$	—	$	—
Total troubled debt restructurings		2	$	499	$	499		1	$	437	$	437

Note 7 - Regulatory Matters

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

In July of 2013, the respective U.S. federal banking agencies issued final rules implementing Basel III and the Dodd-Frank Act capital requirements to be fully phased in on a global basis on January 1, 2019. The new regulations establish a new tangible common equity capital requirement, increase the minimum requirement for the current Tier 1 risk-weighted asset (“RWA”) ratio, phase out certain kinds of intangibles treated as capital and certain types of instruments and change the risk weightings of certain assets used to determine required capital ratios. The new common equity Tier 1 capital component requires capital of the highest quality — predominantly composed of retained earnings and common stock instruments. For community banks such as Malvern Federal Savings Bank, a common equity Tier 1 capital ratio 4.5% became effective on January 1, 2015. The new capital rules also increased the current minimum Tier 1 capital ratio from 4.0% to 6.0% beginning on January 1, 2015. In addition, institutions that seek the freedom to make capital distributions and pay discretionary bonuses to executive officers without restriction must also maintain greater than 2.5% in common equity attributable to a capital conservation buffer to be phased in from January 1, 2016 until January 1, 2019. The new rules also increase the risk weights for several categories of assets, including an increase from 100% to 150% for certain acquisition, development and construction loans and more than 90-day past due exposures. The new capital rules maintain the general structure of the prompt corrective action rules, but incorporate the new common equity Tier 1 capital requirement and the increased Tier 1 RWA requirement into the prompt corrective action framework.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 7 - Regulatory Matters – (continued)

The Bank remains well capitalized under the implementation of Basel III, which was effective January 1, 2015.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of tangible and core capital (as defined in the regulations) to total adjusted tangible assets (as defined) and of risk-based capital (as defined) to risk-weighted assets (as defined). In addition to the standard regulatory capital requirements, the Bank also is required to satisfy individual minimum capital ratios (“IMCRs”) imposed by the Office of the Comptroller of the Currency of 8.5% Tier 1 capital to adjusted total assets, 10.5% Tier 1 risk-based capital to risk-weighted assets and 12.5% total risk-based capital to risk-weighted assets.

Management believes, as of June 30, 2015, that the Bank met all capital adequacy requirements to which it was subject.

The Bank’s actual capital amounts and ratios are also presented in the table:


	Actual					For Capital Adequacy Purposes					To be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(dollars in thousands)
As of June 30, 2015:

Core Capital (to adjusted tangible assets)	$	67,790		10.56	%	$	³25,682		4.00	%	$	³32,103		5.00	%
Tier 1 Capital (to risk-weighted assets)		67,790		16.22			³25,084		6.00			³33,445		8.00
Total risk-based Capital (to risk-weighted assets)		72,426		17.32			³33,445		8.00			³41,807		10.00
As of September 30, 2014:

Tangible Capital (to tangible assets)	$	64,414		12.09	%	$	³7,990		1.50	%	$	—		N/A
Core Capital (to adjusted tangible assets)		64,414		12.09			³21,305		4.00			³26,632		5.00	%
Tier 1 Capital (to risk-weighted assets)		64,414		19.50			³13,212		4.00			³19,818		6.00
Total risk-based Capital (to risk-weighted assets)		68,549		20.75			³26,424		8.00			³33,030		10.00

Note 8 - Fair Value Measurements

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 8 - Fair Value Measurements – (continued)

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

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

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

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

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

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

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

The Company monitors and evaluates available data to perform fair value measurements on an ongoing basis and recognizes transfers among the levels of the fair value hierarchy as of the date event or a change in circumstances that affects the valuation method chosen. There were no changes in valuation technique or transfers between levels at June 30, 2015 or September 30, 2014.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 8 - Fair Value Measurements – (continued)

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


	June 30, 2015
	Total		Level 1		Level 2		Level 3
	(in thousands)
Investment securities available-for-sale:
Debt securities:
U.S. government agencies	$	805	$	—	$	805	$	—
State and municipal obligations		40,070		—		40,070		—
Single issuer trust preferred security		850		—		850		—
Corporate debt securities		73,969		—		73,969		—
Total investment securities available-for-sale		115,694		—		115,694		—
Mortgage-backed securities available-for-sale:
FNMA, fixed-rate		8,807		—		8,807		—
FHLMC, fixed-rate		6,008		—		6,008		—
Total mortgage-backed securities available-for-sale		14,815		—		14,815		—
Total	$	130,509	$	—	$	130,509	$	—


	September 30, 2014
	Total		Level 1		Level 2		Level 3
	(in thousands)
Investment securities available-for-sale:
Debt securities:
U.S. government agencies	$	19,256	$	—	$	19,256	$	—
State and municipal obligations		2,500		—		2,500		—
Single issuer trust preferred security		880		—		880		—
Corporate debt securities		1,525		—		1,525		—
Total investment securities available-for-sale		24,161		—		24,161		—
Mortgage-backed securities available-for-sale:
FNMA:
Adjustable-rate		418		—		418		—
Fixed-rate		16,808		—		16,808		—
FHLMC:
Adjustable-rate		3,595		—		3,595		—
Fixed-rate		11,996		—		11,996		—
CMO, fixed-rate-fate		43,965		—		43,965		—
Total mortgage-backed securities available-for-sale		76,782		—		76,782		—
Total	$	100,943	$	—	$	100,943	$	—

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 8 - Fair Value Measurements – (continued)

For assets measured at fair value on a nonrecurring basis that were still held at the end of the period, the following table provides the level of valuation assumptions used to determine each adjustment and the carrying value of the related individual assets or portfolios at June 30, 2015 and September 30, 2014:


	June 30, 2015
	Total		Level 1		Level 2		Level 3
	(in thousands)
Other real estate owned	$	198	$	—	$	—	$	198
Impaired loans^{(1) (2)}		47		—		—		47
Mortgage servicing rights		17		—		17		—
Total	$	262	$	—	$	17	$	245


	June 30, 2015
	Fair Value at June 30, 2015		Valuation Technique	Unobservable Input	Range/(Weighted Average)
	(dollars in thousands)
Other real estate owned	$	198	Appraisal of collateral⁽³⁾	Collateral discounts⁽⁴⁾	0 − 7%/(7%)
Impaired loans^{(1) (2)}		47	Appraisal of collateral⁽³⁾	Collateral discounts⁽⁴⁾	65 − 80%/(7%)
Total	$	245


(1)	At June 30, 2015, consisted of two loans with an aggregate balance of $48,000 and $1,000 in specific loan loss allowance.
(2)	Includes assets directly charged-down to fair value during the year-to-date period.
(3)	Fair value is generally determined through independent appraisals of the underlying collateral primarily using comparable sales.
(4)	Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expense.


	September 30, 2014
	Total		Level 1		Level 2		Level 3
	(in thousands)
Other real estate owned	$	1,030	$	—	$	—	$	1,030
Impaired loans^{(1) (2)}		887		—		—		887
Mortgage servicing rights		160		—		160		—
Total	$	2,077	$	—	$	160	$	1,917


	September 30, 2014
	Fair Value at September 30, 2014		Valuation Technique	Unobservable Input	Range/(Weighted Average)
	(dollars in thousands)
Other real estate owned	$	1,030	Appraisal of collateral⁽³⁾	Collateral discounts⁽⁴⁾	16 − 72%/(38%)
Impaired loans^{(1) (2)}		887	Appraisal of collateral⁽³⁾	Collateral discounts⁽⁴⁾	7 − 52%/(20%)
Total	$	1,917


(1)	At September 30, 2014, consisted of six loans with an aggregate balance of $887,000 and no specific loan loss allowance.
(2)	Includes assets directly charged-down to fair value during the year-to-date period.
(3)	Fair value is generally determined through independent appraisals of the underlying collateral primarily using comparable sales.
(4)	Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 8 - Fair Value Measurements – (continued)

The following table shows active information regarding significant techniques and inputs used at June 30, 2015 and September 30, 2014 for measures in a non-recurring basis using unobservable inputs (Level 2):

Fair Value at
June 30,
2015

Valuation
Technique

Unobservable
Input

Method or Value as of
June 30, 2015

(in thousands)

Mortgage servicing rights

Discounted rate

Discount rate

11.50 − 12.50%

Rate used through modeling period

Loan prepayment speeds

13.45%

Weighted-average CPR

Servicing fees

0.25%

Of loan balance

Servicing costs

6.67%

Monthly servicing cost per account

$300 − 500

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

Fair Value at
September 30,
2014

Valuation
Technique

Unobservable
Input

Method or Value as of
September 30, 2014

(in thousands)

Mortgage servicing rights

160

Discounted rate

Discount rate

11.00 − 12.00%

Rate used through modeling period

Loan prepayment speeds

14.15%

Weighted-average CPR

Servicing fees

0.25%

Of loan balance

Servicing costs

6.25%

Monthly servicing cost per account

$300 − 500

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

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

The fair value estimates presented herein are based on pertinent information available to management as of June 30, 2015 and September 30, 2014. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since June 30, 2015 and September 30, 2014 and, therefore, current estimates of fair value may differ significantly from the amounts presented herein

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 8 - Fair Value Measurements – (continued)

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

Investment Securities Available-for-Sale. Investment and mortgage-backed securities available-for-sale (carried at fair value) are measured at fair value on a recurring basis. Fair value measurements for these securities are typically obtained from independent pricing services that we have engaged for this purpose. When available, we, or our independent pricing service, use quoted market prices to measure fair value. If market prices are not available, fair value measurement is based upon models that incorporate available trade, bid and other market information and for structured securities, cash flow and, when available, loan performance data. Because many fixed income securities do not trade on a daily basis, our independent pricing service’s applications apply available information through processes such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing to prepare evaluations. For each asset class, pricing applications and models are based on information from market sources and integrate relevant credit information. All of our securities are valued using either of the foregoing methodologies to determine fair value adjustments recorded to our financial statements. The Company had no Level 1 or Level 3 securities as of June 30, 2015 or September 30, 2014.

Investment Securities Held-to-Maturity. The fair value of investment securities held-to-maturity was primarily measured using information from a third-party pricing service. If quoted prices were not available, fair values were estimated primarily by obtaining quoted prices for similar assets in active markets or through the use of pricing models. In cases where there may be limited or less transparent information provided by the third-party pricing service, fair value may be estimated by the use of secondary pricing services or through the use of non-binding third-party broker quotes.

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

Loans Held-For-Sale. The fair values of mortgage loans originated and intended for sale in the secondary market are based on current quoted market prices. At June 30, 2015, there were two loans with an aggregate balance of $657,000 in loans held for sale. There were no loans held for sale at September 30, 2014.

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

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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 8 - Fair Value Measurements – (continued)

Other Real Estate Owned. Assets acquired through foreclosure or deed in lieu of foreclosure are recorded at estimated fair value less estimated selling costs when acquired, thus establishing a new cost basis. Fair value is generally based on independent appraisals. These appraisals include adjustments to comparable assets based on the appraisers’ market knowledge and experience, and are considered level 3 inputs. When an asset is acquired, the excess of the loan balance over fair value, less estimated selling costs, is charged to the allowance for loan losses. If the estimated fair value of the asset declines, a write-down is recorded through expense. The valuation of foreclosed assets is subjective in nature and may be adjusted in the future because of, among other factors, changes in the economic conditions.

Deposits. Non-maturity deposit liabilities are carried at cost. As such, valuation techniques discussed herein for these products are primarily for estimating fair value for FASB ASC 825 disclosure purposes. The fair value of non-maturity deposits is discounted based on rates available for borrowings of similar maturities. A decay rate is estimated for non-maturity deposits. The discount rate for non-maturity deposits is adjusted for servicing costs based on industry estimates.

Time deposits are valued using an “all in” cost for brokered CDs with a similar maturity. The rates are further adjusted to offset the “all in” cost against servicing cost based upon industry estimates.

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

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

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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 8 - Fair Value Measurements – (continued)

The carrying amount and estimated fair value of the Company’s financial instruments as of June 30, 2015 and September 30, 2014 are presented below:


	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
	(in thousands)
June 30, 2015:
Financial assets:
Cash and cash equivalents	$	24,293	$	24,293	$	24,293	$	—	$	—
Investment securities available-for-sale		130,509		130,509		—		130,509		—
Investment securities held-to-maturity		59,243		58,181		—		58,181		—
Loans held for sale		657		670		670		—		—
Loans receivable, net		371,897		379,307		—		—		379,307
Accrued interest receivable		2,404		2,404		—		2,404		—
Restricted stock		4,369		4,369		—		4,369		—
Mortgage servicing rights		406		443		—		443		—
Financial liabilities:
Savings accounts		44,949		44,949		—		44,949		—
Checking and NOW accounts		111,962		111,962		—		111,962		—
Money market accounts		78,963		78,963		—		78,963		—
Certificates of deposit		207,344		209,954		—		209,954		—
FHLB advances		93,000		94,649		—		94,649		—
Accrued interest payable		346		346		—		346		—

September 30, 2014:
Financial assets:
Cash and cash equivalents	$	19,187	$	19,187	$	19,187	$	—	$	—
Investment securities available-for-sale		100,943		100,943		—		100,943		—
Loans receivable, net		386,074		388,202		—		—		388,202
Accrued interest receivable		1,322		1,322		—		1,322		—
Restricted stock		3,503		3,503		—		3,503		—
Mortgage servicing rights		453		512		—		512		—
Financial liabilities:
Savings accounts		44,917		44,917		—		44,917		—
Checking and NOW accounts		104,980		104,980		—		104,980		—
Money market accounts		59,529		59,529		—		59,529		—
Certificates of deposit		203,527		207,080		—		207,080		—
FHLB advances		48,000		49,627		—		49,627		—
Accrued interest payable		149		149		—		149		—

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 9 – Income Taxes

The following is reconciliation between the statutory federal income tax rate of 34% and the effective income tax rate on income before income taxes:


	Nine Months Ended June 30,
	2015			2014
	(Dollar in thousands)
At federal statutory rate	$	—		$	—
Adjustments resulting from:
State tax, net of federal benefit		—			4
	$	—		$	4

Effective tax rate		0.00	%		12.12	%

Deferred income taxes at June 30, 2015 and September 30, 2014 were as follows:


	June 30, 2015			September 30, 2014
	(in thousands)
Deferred Tax Assets:
Unrealized loss on investments available-for-sale	$	741		$	932
Allowance for loan losses		2,979			3,051
Non-accrual interest		91			122
Write-down of real estate owned		124			270
Alternative minimum tax (AMT) credit carryover		96			64
Low-income housing tax credit carryover		337			337
Supplement Employer Retirement Plan		455			455
Charitable contributions		39			36
Depreciation		190			127
State net operating loss		1,408			—
Federal net operating loss		6,639			7,159
Other		308			54
Total Deferred Tax Assets		13,407			12,607
Valuation allowance for DTA		(10,248	)		(10,074	)
Total Deferred Tax Assets, Net of Valuation Allowance		3,159			2,533
Deferred Tax Liabilities:
State net operating income		—			(3	)
Mortgage servicing rights		(138	)		(154	)
Other		(205	)		—
Total Deferred Tax Liabilities		(343	)		(157	)
Deferred Tax Assets, Net	$	2,816		$	2,376

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

The purpose of this analysis is to provide the reader with information relevant to understanding and assessing the Company’s results of operations for the periods presented herein and financial condition as of June 30, 2015 and September 30, 2014. In order to fully understand this analysis, the reader is encouraged to review the consolidated financial statements and accompanying notes thereto appearing elsewhere in this report.

Forward-Looking Statements

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

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

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

Critical Accounting Policies

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

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

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

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

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

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

In addition, Federal bank regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses and may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination, which may not previously have been available to management. Based on management’s comprehensive analysis of the loan portfolio, management believes the level of the allowance for loan losses at June 30, 2015 was appropriate under GAAP.

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

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

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

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

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

Under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820, Fair Value 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 June 30, 2015, the Company had $245,000 of assets that were measured at fair value on a non-recurring basis using Level 3 measurements.

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

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

Realization of a deferred tax asset requires us to exercise significant judgment and is inherently uncertain because it requires the prediction of future occurrences. Our net deferred tax asset amounted to $2.8 million and $2.4 million at June 30, 2015 and September 30, 2014, respectively. In evaluating the need for a valuation allowance, we estimated our viable tax planning strategies that we could employ so that the asset would not go unused. We feel that the DTA balance of $2.8 million as of June 30, 2015 is appropriate since it is the amount of such estimated tax planning strategies. Our total deferred tax assets increased to $13.4 million at June 30, 2015 compared to $12.6 million at September 30, 2014. Our DTA valuation allowance amounted to $10.2 million at June 30, 2015 compared to $10.1 million at September 30, 2014. In the future, the DTA allowance may be reversed, depending on the Company’s financial position and results of operations in the future, among other factors, and, in such event, may be available to increase future net income. There can be no assurance, however, as to when we could be in a position to recapture our DTA allowance.

Other-Than-Temporary Impairment of Securities. Securities are evaluated on a quarterly basis, and more frequently when market conditions warrant such an evaluation, to determine whether declines in their value are other-than-temporary. To determine whether a loss in value is other-than-temporary, management utilizes criteria such as the reasons underlying the decline, the magnitude and duration of the decline and whether or not management intends to sell or expects that it is more likely than not that it will be required to sell the security prior to an anticipated recovery of the fair value. The term “other-than-temporary” is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value are 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.

Earnings

Net income available to common shareholders for the three months ended June 30, 2015 amounted to $1.2 million compared to net income of $391,000 for the comparable three-month period ended June 30, 2014. The Company recorded earnings per common share of $0.19 for the three months ended June 30, 2015 as compared with earnings of $0.06 per common share for the same three months in fiscal 2014. The annualized return on average assets was 0.77 percent for the three months ended June 30, 2015, compared to annualized return on average assets of 0.27 percent for three months ended June 30, 2014. The annualized return on average shareholders’ equity was 6.01 percent for the three-month period ended June 30, 2015, compared to 2.05 percent in annualized return on average shareholders’ equity for the three months ended June 30, 2014.

Net income available to common shareholders for the nine months ended June 30, 2015 amounted to $2.5 million compared to net income of $29,000 for the comparable nine-month period ended June 30, 2014. The Company recorded earnings per common share of $0.40 for the nine months ended June 30, 2015 as compared with earnings of $0.00 per common share for the same nine months in fiscal 2014. The annualized return on average assets was 0.55 percent for the nine months ended June 30, 2015, compared to annualized return on average assets of 0.01 percent for nine months ended June 30, 2014. The annualized return on average shareholders’ equity was 4.26 percent for the nine-month period ended June 30, 2015, compared to 0.05 percent in annualized return on average shareholders’ equity for the nine months ended June 30, 2014.

Net Interest Income and Margin

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

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

Net Interest Income (tax-equivalent basis)


	Three Months Ended June 30,												Nine Months Ended June 30,
(dollars in thousands)	2015			2014			Increase (Decrease)			Percent Change			2015			2014			Increase (Decrease)			Percent Change
Interest income:
Loans, including fees	$	4,030		$	4,477		$	(447	)		(9.98	)%	$	12,361		$	13,453		$	(1,092	)		(8.12	)%
Investment securities		1,089			558			531			95.16			2,560			1,807			753			41.67
Dividends, restricted stock		65			54			11			20.37			244			87			157			180.46
Interest-bearing cash accounts		15			13			2			15.38			62			40			22			55.00
Total interest income		5,199			5,102			97			1.90			15,227			15,387			(160	)		(1.04	)
Interest expense:
Deposits		843			980			(137	)		(13.98	)		2,561			3,046			(485	)		(15.92	)
Borrowings		458			285			173			60.70			1,322			810			512			63.21
Total interest expense		1,301			1,265			36			2.85			3,883			3,856			27			0.70
Net interest income on a fully tax-equivalent basis		3,898			3,837			61			1.59			11,344			11,531			(187	)		(1.62	)
Tax-equivalent adjustment (1)		(60	)		(11	)		(49	)		445.45			(109	)		(52	)		(57	)		109.62
Net interest income, as reported under GAAP	$	3,838		$	3,826		$	12			0.31	%	$	11,235		$	11,479		$	(244	)		(2.13	)%

⁽¹⁾ Computed using a federal income tax rate of 34 percent for the three and nine months ended June 30, 2015 and 2014.

Net interest income on a fully tax-equivalent basis increased $61,000 or 1.59 percent to $3.9 million for the three months ended June 30, 2015 as compared to the same period in fiscal 2014. For the three months ended June 30, 2015, the net interest margin (which is defined as net interest income as a percentage of total average interest-earnings assets) on a fully tax-equivalent basis contracted 15 basis points to 2.61 percent from 2.76 percent during the three months ended June 30, 2014. For the three months ended June 30, 2015 a decrease in the average yield on interest-earning assets of 19 basis points with a decrease of three basis points in the average cost of interest-bearing liabilities, resulted in a decrease in the Company’s net interest spread of 16 basis points for the period. Net interest margin compression during the third quarter period of 2015 occurred primarily as result of a high liquidity pool carried during the quarter and the timing of new asset growth. This, coupled with a continued high level of interest-earning asset prepayments and maturities during the quarter, dampened other actions (including a growth in the Company’s customer base and enhancement the Company’s liquidity position, effected while the Company strives to increase its earning assets base as part of its efforts to improve the margin.

Net interest income on a fully tax-equivalent basis decreased $187,000 or 1.6 percent to $11.3 million for the nine months ended June 30, 2015 as compared to the same period in fiscal 2014. For the nine months ended June 30, 2015, the net interest margin on a fully tax-equivalent basis contracted 15 basis points to 2.60 percent from 2.75 percent during the nine months ended June 30, 2014. For the nine months ended June 30, 2015, a decrease in the average yield on interest-earning assets of 18 basis points was partially offset by a decrease in the average cost of interest-bearing liabilities of one basis point, resulting in a decrease in the Company’s net interest spread of 17 basis points for the period.

For the three-month period ended June 30, 2015, interest income on a tax-equivalent basis increased by $97,000 or 1.9 percent compared to the same three-month period in fiscal 2014. This increase in interest income was due primarily to an increase in the average volume of interest-earning assets, due primarily to an increase in investment securities owned. Average investment securities volume increased during the current three-month period by $64.1 million, to $178.7 million, compared to the third quarter of fiscal 2014. For the three-month period ended June 30, 2015, interest income on FHLB dividends increased by $11,000 or 20.4 percent compared to the same three-month period in fiscal 2014. The average balance of the loan portfolio decreased by $33.5 million, to $379.0 million, from an average of $412.5 million in the same quarter in fiscal 2014, reflecting net decreases in single-family residential loans, construction loans and consumer loans. Average loans represented approximately 63.4 percent of average interest-earning assets during the third quarter of fiscal 2015 compared to 74.1 percent in the same quarter in fiscal 2014.

For the nine-month period ended June 30, 2015, interest income on a tax-equivalent basis decreased by $160,000 or 1.0 percent compared to the same nine-month period in fiscal 2014. This decrease in interest income was due primarily to a decrease in the average volume of loans along with a decline in average yields due to the lower interest rate environment. The average balance of the loan portfolio decreased by $26.8 million, to $384.5 million during the first nine months of fiscal 2015, from an average of $411.2 million in the nine months ended June 30, 2014, reflecting net decreases in single-family residential loans, construction loans and consumer loans in the loan portfolio. Average loans represented approximately 66.1 percent of average interest-earning assets during the nine months ended June 30, 2015 compared to 73.5 percent in the nine months ended June 30, 2014. The decrease in interest income on loans was partially offset by an increase of $753,000 in interest income on investment securities and an increase of $157,000 in interest income on FHLB dividends. The average balance of our investment securities portfolio increased during the nine-month period ended June 30, 2015 by $26.0 million, to $148.1 million, compared to the nine-month period of fiscal 2014. The increase in interest income on FHLB dividends was primarily due to a special dividend paid during the second quarter of fiscal 2015.

For the three months ended June 30, 2015, interest expense increased $36,000, or 2.9 percent from the same period in fiscal 2014. The average rate of total interest-bearing liabilities decreased three basis points to 1.02 percent for the three months ended June 30, 2015, from 1.05 percent for the three months ended June 30, 2014. At the same time, the average balance of total interest-bearing liabilities increased by $32.3 million. This increase primarily reflects an increase in the average balance of borrowings of $47.4 million and a $9.4 million increase in the average balance of money market accounts and was partially offset by a decrease in the average balances of certificates of deposit, other interest-bearing deposits and savings accounts of $21.9 million, $1.8 million and $0.9 million, respectively. For the three months ended June 30, 2015, the Company’s net interest spread on a tax-equivalent basis decreased to 2.46 percent, from 2.62 percent for the three months ended June 30, 2014.

For the nine months ended June 30, 2015, interest expense increased $27,000, or 0.7 percent from the same period in fiscal 2014. The average rate of total interest-bearing liabilities decreased one basis point to 1.04 percent for the nine months ended June 30, 2015, from 1.05 percent for the nine months ended June 30, 2014. At the same time, the average balance of total interest-bearing liabilities increased by $11.8 million. This increase in volume of average interest-bearing liabilities primarily reflects an increase in the average balance of borrowings of $43.9 million, a $2.4 million increase in money market and a $0.9 million increase in savings accounts. These increases were partially offset by a decrease in the average balances of certificates of deposit and other interest-bearing deposits of $33.8 million and $1.8 million, respectively. For the nine months ended June 30, 2015, the Company’s net interest spread on a tax-equivalent basis decreased to 2.45 percent, from 2.62 percent for the nine months ended June 30, 2014.

The following table quantifies the impact on net interest income on a tax-equivalent basis resulting from changes in average balances and average rates during the periods presented. Any change in interest income or expense attributable to both changes in volume and changes in rate has been allocated in proportion to the relationship of the absolute dollar amount of change in each category.

Analysis of Variance in Net Interest Income Due to Changes in Volume and Rates

	Three Months Ended June 30, 2015 and 2014 Increase (Decrease) Due to Change in:									Nine Months Ended June 30, 2015 and 2014 Increase (Decrease) Due to Change in:
(tax-equivalent basis, in thousands)	Average Volume			Average Rate			Net Change			Average Volume			Average Rate			Net Change
Interest-earning assets:
Loans, including fees	$	(1,454	)	$	1,007		$	(447	)	$	(1,167	)	$	75		$	(1,092	)
Investment securities		1,250			(719	)		531			512			241			753
Interest-bearing cash accounts		19			(17	)		2			51			(29	)		22
Dividends, restricted stock		61			(50	)		11			34			123			157
Total interest-earning assets		(124	)		221			97			(570	)		410			(160	)
Interest-bearing liabilities:
Money market deposits		23			7			30			6			45			51
Savings deposits		(1	)		1			—			—			3			3
Certificates of deposit		(344	)		177			(167	)		(523	)		(14	)		(537	)
Other interest-bearing deposits		(2	)		2			—			(2	)		—			(2	)
Total interest-bearing deposits		(324	)		187			(137	)		(519	)		34			(485	)
Borrowings		1,105			(932	)		173			1,076			(564	)		512
Total interest-bearing liabilities		781			(745	)		36			557			(530	)		27
Change in net interest income	$	(905	)	$	966		$	61		$	(1,127	)	$	940		$	(187	)

Average Balances, Net Interest Income, and Yields Earned and Rates Paid. The following table shows for the periods indicated the total dollar amount of interest from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and the net interest margin (net interest income as a percentage of average interest-earning assets). Tax-exempt income and yields have been adjusted to a tax-equivalent basis. All average balances are based on monthly balances. Management does not believe that the monthly averages differ significantly from what the daily averages would be.

	Three Months Ended June 30,
	2015									2014
(tax-equivalent basis)	Average Balance			Interest Income/ Expense			Average Yield/ Rate			Average Balance			Interest Income/ Expense			Average Yield/ Rate
	(dollars in thousands)
Assets
Interest-earning assets:
Loans, including fees(1)	$	378,953		$	4,030			4.25	%	$	412,457		$	4,477			4.34	%
Investment securities		178,713			1,089			2.44			114,631			558			1.95
Interest-bearing cash accounts		35,472			15			0.17			25,760			13			0.20
Dividends, restricted stock		4,531			65			5.74			3,536			54			6.11
Total interest-earning assets		597,669			5,199			3.48			556,384			5,102			3.67
Non interest-earning assets:
Cash and due from banks		3,982									1,461
Bank-owned life insurance		18,590									20,933
Other assets		14,340									13,441
Allowance for loan losses		(4,649	)								(4,829	)
Total non interest-earning assets		32,263									31,006
Total assets	$	629,932								$	587,390
Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Money market deposits	$	73,430		$	68			0.37	%	$	64,023		$	38			0.24	%
Savings deposits		44,637			7			0.06			45,488			7			0.06
Certificates of deposit		210,757			747			1.42			232,653			914			1.57
Other interest-bearing deposits		86,822			21			0.10			88,616			21			0.09
Total interest-bearing deposits		415,646			843			0.81			430,780			980			0.91
Borrowings		96,462			458			1.90			49,014			285			2.33
Total interest-bearing liabilities		512,108			1,301			1.02			479,794			1,265			1.05
Non interest-bearing liabilities:
Demand deposits		28,943									24,834
Other liabilities		8,674									6,551
Total non interest-bearing liabilities		37,617									31,385
Shareholders’ equity		80,207									76,211
Total liabilities and shareholders’ equity	$	629,932								$	587,390
Net interest income (tax equivalent basis)					3,898									3,837
Net interest spread								2.46	%								2.62	%
Net interest margin (tax equivalent basis)								2.61	%								2.76	%
Tax equivalent effect								0.04	%								0.01	%
Net interest margin on a GAAP basis								2.57	%								2.75	%
Tax-equivalent adjustment (2)					(60	)								(11	)
Net interest income				$	3,838								$	3,826

(1)	Includes non-accrual loans during the respective periods. Calculated net of deferred loan fees and loan discounts.
(2)	Computed using a federal income tax rate of 34 percent for the periods ended June 30, 2015 and 2014.


	Nine Months Ended June 30,
	2015									2014
(tax-equivalent basis)	Average Balance			Interest Income/ Expense			Average Yield/ Rate			Average Balance			Interest Income/ Expense			Average Yield/ Rate
	(dollars in thousands)
Assets
Interest-earning assets:
Loans, including fees(1)	$	384,487		$	12,361			4.28	%	$	411,248		$	13,453			4.36	%
Investment securities		148,058			2,560			2.31			122,053			1,807			1.97
Interest-bearing cash accounts		44,989			62			0.19			22,953			40			0.23
Dividends, restricted stock		4,248			244			7.65			3,291			87			3.52
Total interest-earning assets		581,782			15,227			3.49			559,545			15,387			3.67
Non interest-earning assets:
Cash and due from banks		2,087									1,415
Bank-owned life insurance		18,461									21,257
Other assets		13,748									14,613
Allowance for loan losses		(4,621	)								(4,907	)
Total non interest-earning assets		29,675									32,378
Total assets	$	611,457								$	591,923
Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Money market deposits	$	68,041		$	173			0.33	%	$	65,594		$	122			0.25	%
Savings deposits		44,916			22			0.07			43,974			19			0.05
Certificates of deposit		210,346			2,304			1.47			244,107			2,841			1.55
Other interest-bearing deposits		86,014			62			0.09			87,769			64			0.09
Total interest-bearing deposits		409,317			2,561			0.84			441,444			3,046			0.92
Borrowings		87,908			1,322			2.00			44,000			810			2.45
Total interest-bearing liabilities		497,225			3,883			1.04			485,444			3,856			1.05
Non interest-bearing liabilities:
Demand deposits		27,571									25,310
Other liabilities		7,423									5,768
Total non interest-bearing liabilities		34,994									31,078
Shareholders’ equity		79,238									75,401
Total liabilities and shareholders’ equity	$	611,457								$	591,923
Net interest income (tax equivalent basis)				$	11,344								$	11,531
Net interest spread								2.45	%								2.62	%
Net interest margin (tax equivalent basis)								2.60	%								2.75	%
Tax equivalent effect								0.03	%								0.02	%
Net interest margin on a GAAP basis								2.57	%								2.73	%
Tax-equivalent adjustment (2)					(109	)								(52	)
Net interest income				$	11,235								$	11,479

(1)	Includes non-accrual loans during the respective periods. Calculated net of deferred loan fees and loan discounts.
(2)	Computed using a federal income tax rate of 34 percent for the periods ended June 30, 2015 and 2014.

Investment Portfolio

At June 30, 2015, the principal components of the investment securities portfolio were U.S. Government agency obligations, federal agency obligations including mortgage-backed securities, obligations of U.S. states and political subdivisions, corporate securities, trust preferred securities, asset backed securities and equity securities.

During the nine months ended June 30, 2015, approximately $59.4 million in investment securities were sold from the available-for-sale portfolio. The cash flow from the sale of investment securities was primarily used to purchase new securities. The Company’s sales from its available-for-sale investment portfolio reflect continued volatility present in the market. Given the historic low interest rates prevalent in the market, the Company has been actively reviewing its investments and has engaged in certain transactions in its investment securities in its efforts to protect itself from undue interest rate exposure. Securities that once appeared to be sound investments can, after changes in the market, become securities that the Company determines to sell in order to avoid losses and mismatches of interest-earning assets and interest-bearing liabilities.

For the three months ended June 30, 2015, the average balance of our investment securities increased $64.1 million to approximately $178.7 million, or 29.9 percent of average interest-earning assets, from $114.6 million on average, or 20.6 percent of average interest-earning assets, for the comparable period in fiscal 2014. For the nine months ended June 30, 2015, the average balance of our investment securities increased $26.0 million to approximately $148.1 million, or 25.5 percent of average interest-earning assets, from $122.1 million on average, or 21.8 percent of average interest-earning assets, for the comparable period in fiscal 2014.

During the three-month period ended June 30, 2015, the volume-related factors applicable to the investment portfolio increased interest income by approximately $1.3 million while rate-related changes resulted in a decrease in interest income of approximately $719,000 from the same period in fiscal 2014. The tax-equivalent yield on investments increased by 49 basis points to 2.44 percent for the three-month period ended June 30, 2015 as compared to the three-month period ended June 30, 2014 at 1.95 percent.

During the nine-month period ended June 30, 2015, the volume-related factors applicable to the investment portfolio increased interest income by approximately $512,000 while rate-related changes resulted in an increase in interest income of approximately $241,000 from the same period in fiscal 2014. The tax-equivalent yield on investments increased by 34 basis points to 2.31 percent for the nine-month period ended June 30, 2015 as compared to the nine-month period ended June 30, 2014 at 1.97 percent.

At June 30, 2015, net unrealized gains on investment securities available-for-sale, which is carried as a component of accumulated other comprehensive income and included in shareholders’ equity, net of tax, amounted to $731,000 as compared with net unrealized losses of $1.4 million at September 30, 2014. The gross unrealized losses associated with agency securities and federal agency obligations, mortgage-backed securities, corporate bonds, trust preferred security and tax-exempt securities are not considered to be other than temporary because their unrealized losses are related to changes in interest rates and do not affect the expected cash flows of the underlying collateral or issuer.

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. 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 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.

At June 30, 2015, total gross loans amounted to $374.7 million, a decrease of $13.9 million or 3.6 percent as compared to September 30, 2014. For the period ended June 30, 2015, growth of $8.8 million in the aggregate in multi-family and other commercial loans were offset by decreases of $12.1 million in residential mortgage loans, $4.0 million in commercial real estate loans, $221,000 in construction and development loans and $6.3 million in total consumer loans. Total gross loans recorded in the quarter included $19.8 million of new loans and advances, offset by payoffs and principal payments of $25.2 million.

At June 30, 2015, the Company had $30.0 million in outstanding loan commitments which were expected to fund over the next 90 days.

The average balance of our total loans decreased $33.5 million or 8.1 percent for the three months ended June 30, 2015 as compared to the same period in fiscal 2014, while the average yield on loans decreased by nine basis points as compared with the same period in fiscal 2014. The decrease in the average yield on loans was primarily the result of lower market interest rates on the repricing of existing loans and the origination of new loans. The decrease in average total loan volume was due primarily to loan prepayments and repayments which exceeded the volume of new loan originations. The volume-related factors during the period contributed to a decrease of interest income of $1.5 million, while the rate-related changes increased interest income by $1.0 million.

The average balance of our total loans decreased $26.8 million or 6.5 percent for the nine months ended June 30, 2015 as compared to the same period in fiscal 2014, while the average yield on loans decreased by eight basis points as compared with the same period in fiscal 2014. The volume-related factors during the period resulted in decreased interest income of $1.2 million, while the rate-related changes increased interest income by 75,000.

Allowance for Loan Losses and Related Provision

The purpose of the allowance for loan losses (the “allowance”) is to absorb the impact of 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 for loan losses is maintained at an amount considered adequate by management to provide for probable credit losses inherent in the loan portfolio based upon a periodic evaluation of the portfolio’s risk characteristics. 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 factors as the level and trend of interest rates and current economic conditions and peer group statistics are also reviewed. Given the extraordinary economic volatility impacting national, regional and local markets, the Company’s analysis of its allowance for loan losses takes into consideration the potential impact that current trends may have on the Company’s borrower base.

Although management uses the best information available, the level of the allowance for loan losses remains an estimate, which is subject to significant judgment and short-term change. Various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to increase the allowance based on their analysis of information available to them at the time of their examination. Furthermore, the majority of the Company’s loans are secured by real estate in the State of Pennsylvania. Future adjustments to the allowance may be necessary due to economic factors impacting Pennsylvania real estate and the economy in general, as well as operating, regulatory and other conditions beyond the Company’s control.

At June 30, 2015, the level of the allowance was $4.6 million, which was relatively constant with the amount of the allowance at September 30, 2014. There were no provisions to the allowance for the three-month period ended June 30, 2015 as well as for the same period in fiscal 2014. For the nine-month period ended June 30, 2015, we recorded $90,000 of provisions to the allowance as compared to $80,000 for the same period in fiscal 2014. The net charge-offs were $38,000 for the three months ended June 30, 2015 compared to $11,000 in net recoveries for the three months ended June 30, 2014, bringing the Company’s net charge offs to $105,000 for the nine months of fiscal 2015 compared to net charge offs of $312,000 for the same period of 2014. The allowance for loan losses as a percentage of total loans amounted to 1.22 percent at June 30, 2015 compared to 1.18 percent at September 30, 2014.

The level of the allowance for the respective periods of fiscal 2015 and fiscal 2014 reflects the credit quality within the loan portfolio, the loan volume recorded during the periods, the changing composition of the commercial and residential real estate loan portfolios and other related factors. In management’s view, the level of the allowance at June 30, 2015 was 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.

Changes in the allowance for loan losses are presented in the following table for the periods indicated.


	Nine Months Ended June 30,
	2015			2014
	(dollars in thousands)
Balance at beginning of period	$	4,589		$	5,090
Provision for loan losses		90			80
Charge-offs:
Residential mortgage		—			48
Construction and Development:
Residential and commercial		1			37
Commercial:
Commercial real estate		48			—
Consumer:
Home equity lines of credit		—			14
Second mortgages		138			443
Other		33			6
Total charge-offs		220			548
Recoveries:
Residential mortgage		17			13
Construction and Development:
Residential and commercial		23			145
Commercial:
Commercial real estate		8			7
Other		2			2
Consumer:
Home equity lines of credit		1			1
Second mortgages		57			66
Other		7			2
Total recoveries		115			236
Net charge-offs		105			312
Balance at end of period	$	4,574		$	4,858
Ratios:
Ratio of allowance for loan losses to non-accrual loans in portfolio		337.07	%		157.12	%
Ratio of net charge-offs to average loans outstanding in portfolio(1)		0.04	%		0.11	%
Ratio of net charge-offs to total allowance for loan losses(1)		3.06	%		8.56	%

(1)Annualized

Asset Quality

The Company manages asset quality and credit risk by maintaining diversification in its loan portfolio and through review processes that include analysis of credit requests and ongoing examination of outstanding loans, delinquencies, and potential problem loans, with particular attention to 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 cash flows, 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 be restored to an accruing basis when it again becomes well-secured, all past due amounts have been collected and the borrower continues to make payments for the next six months on a timely basis. Accruing loans past due 90 days or more are generally well-secured and in the process of collection.

Non-Performing Assets and Troubled Debt Restructured Loans

Non-performing loans include non-accrual loans and accruing loans past due 90 days or more. Non-accrual loans represent loans on which interest accruals have been suspended. In general, it is the policy of management 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. Non-performing assets include non-performing loans and other real estate owned. Troubled debt restructured loans represent loans to borrowers experiencing financial difficulties on which a concession was granted, such as a reduction in interest rate which is lower than the current market rate for new debt with similar risks, or modified repayment terms, and are performing under the restructured terms. Such loans, as restructured, are not included within the Company’s non-performing loans.

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, other real estate owned and troubled debt restructured loans.

	June 30, 2015		September 30, 2014
	(in thousands)
Non-accrual loans	$	1,357	$	2,391
Accruing loans past due 90 days or more		—		—
Total non-performing loans		1,357		2,391
Other real estate owned		1,366		1,964
Total non-performing assets	$	2,723	$	4,355

Troubled debt restructured loans — performing	$	109	$	1,009

At June 30, 2015, non-performing assets totaled $2.7 million, or 0.44 percent of total assets, as compared with $4.4 million, or 0.80 percent, at September 30, 2014 and $4.7 million, or 0.82 percent, at June 30, 2014. Non-performing assets decreased by $1.6 million at June 30, 2015 from September 30, 2014. The decrease was attributable primarily to the return to performing status of $368,000 of loans previously on non-performing status, pay-downs and payoffs of $354,000, and the transfer of $308,000 on previously non-performing loans to other real estate owned (which also is a non-performing asset). The decrease in non-performing assets was also due to the decrease in other real estate owned. At June 30, 2015, the Company had sale proceeds net of gain and loss of $852,000 and write downs of $54,000, offset in part by the addition of two commercial loans (totaling approximately $97,000) and one consumer loan (totaling approximately $23,000) to non-performing status.

The Company held $1.4 million in other real estate owned at June 30, 2015 and $2.0 million at September 30, 2014, respectively.

Troubled debt restructured loans totaled $608,000 at June 30, 2015 and $1.1 million at September 30, 2014. A total of $109,000 and $1.0 million of troubled debt restructured loans were performing pursuant to the terms of their respective modifications at June 30, 2015 and September 30, 2014, respectively. The $900,000 decrease in troubled debt restructured loans at June 30, 2015 was due to a commercial loan with an outstanding balance of approximately $900,000 being paid-off during the second quarter of fiscal 2015. A total of $499,000 and $78,000 in troubled debt restructured loans were deemed non-performing at June 30, 2015 and September 30, 2014, respectively.

Overall credit quality in the Bank’s loan portfolio at June 30, 2015 remained relatively strong. Non-performing loans amounted to $1.4 million and $2.4 million at June 30, 2015 and September 30, 2014, respectively. Other known “potential problem loans” (as defined by SEC regulations), some of which are non-performing loans and are included in the table above, as of June 30, 2015 have been identified and internally risk-rated as assets specially mentioned or substandard. Special mention loans were $5.4 million and $7.0 million at June 30, 2015 and September 30, 2014, respectively. Most of the change in special mention loans was attributable to seven commercial real estate loans with an aggregate balance of $1.7 million at June 30, 2015, being moved to substandard loan grading during the nine months ended June 30, 2015. Substandard loans were $6.4 million and $5.7 million at June 30, 2015 and September 30, 2014, respectively. The $708,000 increase in substandard loans was attributable to the seven special mentioned loans being classified as substandard loans during the nine months ended June 30, 2015, as well as six new loans with an aggregate balance of $1.2 million at June 30, 2015, being classified as substandard loans. The increase in substandard loans was offset by seven loans with an aggregate balance of $1.4 million being paid off during fiscal period 2015. Other decreases that offset the substandard loans were due to two loans with an aggregate balance of $288,000 were transferred to other real estate owned properties, as well as a consumer loan with an balance of approximately $165,000 which was sold during the quarter ended June 30, 2015. Our loans which have been identified as specially mentioned or substandard are considered potential problem loans due to a variety of changing conditions affecting the credits, including general economic conditions and/or conditions applicable to the specific borrowers. The Company has no foreign loans.

At June 30, 2015, other than the loans set forth above, the Company is not aware of any loans which present serious doubts as to the ability of its borrowers to comply with present loan repayment terms and which are expected to fall into one of the categories set forth in the tables or descriptions above.

Other Income

The following table presents the principal categories of other income for the periods indicated.

	Three Months Ended June 30,											Nine Months Ended June 30,
(dollars in thousands)	2015		2014			Increase (Decrease)			Percent Change			2015		2014			Increase (Decrease)			Percent Change
Service charges and other fees	$	286	$	230		$	56			24.35	%	$	820	$	712		$	108			15.17	%
Rental income-other		61		63			(2	)		(3.17	)		189		191			(2	)		(1.05	)
Gain on sale of investments, net		145		69			76			110.14			437		83			354			426.51
Loss on disposal of fixed assets		—		(41	)		41			100.00			—		(41	)		41			100.00
Gain on sale of loans, net		16		283			(267	)		(94.35	)		55		339			(284	)		(83.78	)
Earnings on bank-owned life insurance		132		140			(8	)		(5.71	)		395		425			(30	)		(7.06	)
Total other income	$	640	$	744		$	(104	)		(13.98	)%	$	1,896	$	1,709		$	187			10.94	%

For the three months ended June 30, 2015, total other income decreased $104,000, or 14.0 percent to $640,000, compared to total other income of $744,000 for the same period in fiscal 2014. During the third quarter of fiscal 2015, the Company recorded $145,000 in net gains on sales of investment securities compared to $69,000 net gains on sales of investment securities for the same period in fiscal 2014. Excluding net investment securities gains, a non-GAAP measure, the Company recorded total other income of $495,000 for the three months ended June 30, 2015, compared to $675,000 for the three months ended June 30, 2014. Decreases reflected a $267,000 decrease in net gain on sale of loans, an $8,000 decrease in bank owned life insurance income and a $2,000 decrease in rental income, partially offset by a $56,000 increase in service charges and a $41,000 difference in loss on disposal of fixed assets.

For the nine months ended June 30, 2015, total other income amounted to $1.9 million, compared to total other income of $1.7 million for the same period in fiscal 2014. The increase of $187,000 for the nine months ended June 30, 2015 was primarily as a result of $437,000 in net gains on sales of investment securities in the fiscal 2015 period compared to $83,000 in net gain on sales of investment securities for the same period in fiscal 2014. Excluding net investment securities gains, a non-GAAP measure, the Company recorded total other income of $1.5 million for the nine months ended June 30, 2015, compared to $1.6 million for the nine months ended June 30, 2014. This increase reflected an increase of $108,000 in service charges and other fees and a $41,000 difference in loss on disposal of fixed assets, which was partially offset by a $30,000 decrease in bank owned life insurance income and a decrease of $284,000 in net gain on sale of loans.

Other Expense

The following table presents the principal categories of other expense for the periods indicated.

	Three Months Ended June 30,										Nine Months Ended June 30,
(dollars in thousands)	2015		2014		Increase (Decrease)			Percent Change			2015			2014		Increase (Decrease)			Percent Change
Salaries and employee benefits	$	1,333	$	1,995	$	(662	)		(33.18	)%	$	4,611		$	6,134	$	(1,523	)		(24.83	)%
Occupancy expense		407		571		(164	)		(28.72	)		1,296			1,676		(380	)		(22.67	)
Federal deposit insurance premium		203		184		19			10.33			554			552		2			0.36
Advertising		54		101		(47	)		(46.53	)		199			475		(276	)		(58.11	)
Data processing		312		295		17			5.76			915			933		(18	)		(1.93	)
Professional fees		364		463		(99	)		(21.38	)		1,141			1,638		(497	)		(30.34	)
Other real estate owned expense, net		32		74		(42	)		(56.76	)		(63	)		171		(234	)		(136.84	)
Other operating expense		568		496		72			14.52			1,854			1,496		358			23.93
Total other expense	$	3,273	$	4,179	$	(906	)		(21.68	)%	$	10,507		$	13,075	$	(2,568	)		(19.64	)%

For the three months ended June 30, 2015, total other expense decreased $906,000, or 21.7 percent, from the comparable three months ended June 30, 2014. This was primarily attributable to decreases in salaries and employee benefits of $662,000, professional fees of $99,000, occupancy expense of $164,000, advertising of $47,000 and other real estate expense of $42,000. These decreases were partially offset by an increase of $72,000 in other operating expense, a $19,000 increase in federal deposit insurance premium and a $17,000 increase in data processing. For the nine months ended June 30, 2015, total other expense decreased $2.6 million, or 19.6 percent from the comparable nine months ended June 30, 2014.

Salaries and employee benefits expense for the quarter ended June 30, 2015 decreased $662,000, or 33.2 percent over the comparable period in the prior year. For the nine months ended June 30, 2015, salaries and employee benefits expense decreased $1.5 million, or 24.8 percent over the comparable period in the prior year. Decreases for the three and nine month-period ended June 30, 2015, primarily reflected reductions in salaries and employee benefits primarily due to workforce reductions. Full-time equivalent staffing levels were 72 at June 30, 2015 and 95 at June 30, 2014.

Occupancy expense for the quarter ended June 30, 2015 decreased $164,000, or 28.7 percent, from the comparable three-month period ended June 30, 2014. The decrease for the quarter was primarily attributable to a decrease in rent expense of $69,000, a decrease in building and equipment expenses of $34,000 and a decrease in building insurance of $46,000. For the nine months ended June 30, 2015, occupancy expense decreased $380,000, or 22.7 percent over the comparable period in the prior year. The decrease was primarily attributable to a decrease in rent expense of $111,000, a decrease in building and equipment expenses of $80,000 and a decrease in building insurance of $142,000. The reduction in rent and building and equipment expenses were due to elimination of expenses related to a branch closure in fiscal 2014 as well as a reduction in expenses associated with janitorial and related activities. The decrease in building insurance was due to a reclass of certain insurance expense from occupancy expense to other operating expenses.

Professional fee expense for the three months ended June 30, 2015 decreased $99,000, or 21.4 percent compared to the comparable quarter of fiscal 2014. For the nine months ended June 30, 2015, professional fee expense decreased $497,000, or 30.3 percent over the comparable period in the prior year. The decrease in professional fee expense was primarily reflecting lower expenses related to loan workouts.

Advertising for the three months ended June 30, 2015 decreased $47,000, or 46.5 percent compared to the comparable quarter of fiscal 2014. For the nine months ended June 30, 2015, advertising decreased $276,000, or 58.1 percent over the comparable period in the prior year.

Other operating expense for the three months ended June 30, 2015 increased $72,000, or 14.5 percent, compared to the same quarter of fiscal 2014. The increase in other operating expense during the quarter ended June 30, 2015 was primarily due to an increase of $70,000 in director compensation, a $45,000 increase in insurance and bond expense, a $57,000 increase in other operating expense and a $54,000 increase in amortization of mortgage servicing rights, offset by decreases in various expenses. The decreases in other operating expense were due to a $65,000 decrease associated with annual credit review such as appraisals and searches, a $61,000 decrease due to expenses related to education, subscriptions and dues, and a $31,000 decrease for third party fees associated with the Delaware Holding Companies which were dissolved during the fourth quarter of fiscal 2014. For the nine months ended June 30, 2015, other operating expense increased $358,000, or 23.9 percent over the comparable period in the prior year.

Provision for Income Taxes

For the quarter ended June 30, 2015 and 2014, the Company recorded no income tax expense. The effective tax rates for the quarterly periods ended June 30, 2015 and 2014 was 0.0 percent.

For the nine months ended June 30, 2015, the Company recorded no income tax expense, compared with $4,000 of income tax expense for the nine months ended June 30, 2014. The effective tax rates for the nine-month periods ended June 30, 2015 and 2014 were 0.0 percent and 12.1 percent, respectively

Recent Accounting Pronouncements

Note 2 of the Notes to Consolidated Financial Statements discusses the expected impact of accounting pronouncements recently issued or proposed but not yet required to be adopted.

Asset and Liability Management

Asset and Liability management encompasses an analysis of market risk, the control of interest rate risk (interest sensitivity management) and the ongoing maintenance and planning of liquidity and capital. The composition of the Company’s statement of condition is planned and monitored by the 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, a 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 June 30, 2015, the Company reflected a negative interest sensitivity gap with an interest sensitivity ratio of 0.47:1.00 at the cumulative one-year position. Based on management’s perception of interest rates remaining low through 2015, 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.

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 generally accepted accounting principles, 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 the Federal Home Loan Bank of Pittsburgh secured with loans and marketable securities.

The Company’s primary sources of short-term liquidity consist of cash and cash equivalents and investment securities available-for-sale.

At June 30, 2015, the Company had $24.3 million in cash and cash equivalent compared to $19.2 million at September 30, 2014. In addition, our investment securities available-for-sale amounted to $130.5 million at June 30, 2015 and $100.9 million at September 30, 2014.

Deposits

Total deposits increased to $443.2 million at June 30, 2015 from $413.0 million at September 30, 2014. Total interest-bearing deposits increased from $389.9 million at September 30, 2014 to $416.3 million at June 30, 2015, an increase of $26.4 million or 6.8 percent. Interest-bearing demand, savings, money market and time deposits under $100,000 increased $12.8 million to a total of $298.4 million at June 30, 2015 as compared to $285.6 million at September 30, 2014. Time deposits $100,000 and over increased $13.6 million as compared to September 30, 2014 primarily due to increase in certificates of deposit. Time deposits $100,000 and over represented 26.6 percent of total deposits at June 30, 2015 compared to 25.3 percent at September 30, 2014.

Core Deposits

The Company derives a significant proportion of its liquidity from its core deposit base. Total demand deposits, savings and money market accounts of $235.9 million at June 30, 2015 increased by $26.4 million, or 12.6 percent, from September 30, 2014. Total demand deposits, savings and money market accounts were 53.2 percent of total deposits at June 30, 2015 and 50.7 percent at September 30, 2014. Alternatively, the Company uses a more stringent calculation for the management of its liquidity positions internally, which calculation consists of total demand, savings accounts and money market accounts (excluding money market accounts and certificates of deposit greater than $100,000) as a percentage of total deposits. This number decreased by $3.4 million, or 1.3 percent, from $265.3 million at September 30, 2014 to $261.9 million at June 30, 2015 and represented 59.1 percent of total deposits at June 30, 2015 as compared with 64.2 percent at September 30, 2014.

The Company continues to place the main focus of its deposit gathering efforts in the maintenance, development, and expansion of its core deposit base. Management believes that the emphasis on serving the needs of our communities will provide a long term relationship base that will allow the Company to efficiently compete for business in its market. The success of this strategy is reflected in the growth of the demand, savings and money market balances during the nine-month period of fiscal 2015.

The following table depicts the Company’s core deposit mix at June 30, 2015 and September 30, 2014 based on the Company’s alternative calculation:


	June 30, 2015					September 30, 2014					Dollar
	Amount		Percentage			Amount		Percentage			Change
	(dollars in thousands)
Non interest-bearing demand	$	26,877		10.3	%	$	23,059		8.7	%	$	3,818
Interest-bearing demand		85,085		32.5			81,921		30.9			3,164
Savings		44,949		17.2			44,917		16.9			32
Money market deposits under $100,000		15,511		5.9			16,178		6.1			(667	)
Certificates of deposit under $100,000		89,430		34.1			99,214		37.4			(9,784	)
Total core deposits	$	261,852		100.0	%	$	265,289		100.0	%	$	(3,437	)

Total deposits	$	443,218				$	412,953				$	30,265
Core deposits to total deposits				59.1	%				64.2	%

Borrowings

Short-Term Borrowings

Short-term borrowings, which consist primarily of securities sold under agreements to repurchase, Federal Home Loan Bank (“FHLB”) advances and federal funds purchased, generally have maturities of less than one year. At June 30, 2015, we had no short-term borrowings.

Long-Term Borrowings

Long-term borrowings, which consist primarily of FHLB advances and securities sold under agreements to repurchase, totaled $93.0 million and $48.0 million at June 30, 2015 and September 30, 2014, respectively, and mature within one to eight years. The FHLB advances are secured by pledges of certain collateral, including but not limited to U.S. government and agency mortgage-backed securities and a blanket assignment of qualifying first lien mortgage loans, consisting of both residential mortgages and commercial real estate loans.

In April 2015, the Bank prepaid $28.0 million in FHLB convertible select advances. The Company determined to prepay the FHLB advances, which had an average cost of 3.27% and maturity dates in mid- to late – 2018, in order to reduce its average cost of funds and improve its net interest spread and net interest margin in future periods, lengthening liabilities and improve interest rate risk position. During the third quarter of fiscal 2015, we acquired $28.0 million in new FHLB fixed rate advances with an average cost of 2.79% and maturities of five years. An analysis was performed to validate that this was not an extinguishment of debt but a debt modification according to ASU 470-50.

Payments Due Under Contractual Obligations

The following table presents information relating to the Company’s payments due under contractual obligations as of June 30, 2015.


	Payments Due by Period
	Less than One Year		One to Three Years		Three to Five Years		More than Five Years		Total
	(in thousands)
Long-term debt obligations	$	—	$	10,000	$	83,000	$	—	$	93,000
Certificates of deposit		95,176		85,717		22,726		3,725		207,344
Operating lease obligations		195		429		429		4,119		5,172
Total contractual obligations	$	95,371	$	96,146	$	106,155	$	7,844	$	305,516

We anticipate that we will continue to have sufficient funds and alternative funding sources to meet our current commitments.

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 nine months ended June 30, 2015, cash and cash equivalents increased by $5.1 million over the balance at September 30, 2014. Net cash of $3.0 million was provided by operating activities, primarily, net income as adjusted to net cash. Net income of $2.5 million was adjusted principally by net gains on sales of investment securities of $437,000, amortization of premiums and accretion of discounts on investment securities net of $505,000, a decrease in other assets of $231,000 and an increase in other liabilities of $1.0 million. Net cash used by investing activities amounted to approximately $75.6 million, primarily reflecting a net increase in investment securities of $88.8 million. Net cash of $77.7 million was used in financing activities, primarily from the increase in deposits of $30.3 million and an increase of $45.0 million in FHLB advances.

Shareholders’ Equity

Total shareholders’ equity amounted to $79.8 million, or 12.8 percent of total assets, at June 30, 2015, compared to $76.8 million or 14.2 percent of total assets at September 30, 2014. Book value per common share was $12.17 at June 30, 2015, compared to $11.71 at September 30, 2014.

	June 30,		September 30,
	2015		2014
	(in thousands, except for share data)
Shareholders’ equity	$	79,812	$	76,772

Book value per common share	$	12.17	$	11.71

Item 3 - Quantitative and Qualitative Disclosures About Market Risk

For a discussion of the Company’s asset and liability management policies as well as the methods used to manage its exposure to the risk of loss from adverse changes in market prices and rates market, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – How We Manage Market Risk” in the Company’s Annual Report on Form 10-K for the year ended September 30, 2014. There has been no material change in the Company’s asset and liability position since September 30, 2014.

Item 4. Controls and Procedures

Our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and regulations and are operating in an effective manner.

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15(d)-15(f) under the Securities Exchange Act of 1934) occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1 - Legal Proceedings

Not applicable.

Item 1A - Risk Factors

See Item 1A, “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended September 30, 2014. There have been no material changes from the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended September 30, 2014.

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3 - Defaults Upon Senior Securities

There are no matters required to be reported under this item.

Item 4 - Mine Safety Disclosure

There are no matters required to be reported under this item.

Item 5 - Other Information

There are no matters required to be reported under this item.

Item 6 - Exhibits

31.1	Rule 13a-14(a)/15d-14(a) Section 302 Certification
31.2	Rule 13a-14(a)/15d-14(a) Section 302 Certification
32.1	Section 1350 Certification

101.INS	XBRL Instance Document.
101.SCH	XBRL Taxonomy Extension Schema Document.
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB	XBRL Taxonomy Extension Label Linkbase Document.
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF	XBRL Taxonomy Extension Definitions Linkbase Document.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


		MALVERN BANCORP, INC.

August 13, 2015	By:	/s/ Anthony C. Weagley
		Anthony C. Weagley
		President and Chief Executive Officer

August 13, 2015	By:	/s/ Joseph D. Gangemi
		Joseph D. Gangemi
		Senior Vice President and Chief Financial Officer

MALVERN BANCORP, INC. - FORM 10-Q - August 13, 2015

Attached files

MALVERN BANCORP, INC. Reports