PAOLI, PA — Malvern Bancorp, Inc. (NASDAQ: MLVF), the parent company of Malvern Bank, National Association, has reported operating results for the fourth fiscal quarter and fiscal year ended September 30, 2020.
Net income for the quarter ended September 30, 2020 amounted to $2.2 million, or $0.30 per fully diluted common share, compared with net income of $2.7 million, or $0.35 per fully diluted common share, for the quarter ended September 30, 2019. The decreases in net income and diluted earnings per share from the fourth quarter of 2019 were primarily due to a decrease in net interest income. Net interest income for the quarter ended September 30, 2020 was $432,000 lower than in the quarter ended September 30, 2019. This decrease was mainly driven by the lower interest rate environment. Annualized return on average assets (“ROAA”) was 0.74 percent for the quarter ended September 30, 2020, compared to 0.86 percent for the quarter ended September 30, 2019, and annualized return on average equity (“ROAE”) was 6.08 percent for the quarter ended September 30, 2020, compared with 7.65 percent for the quarter ended September 30, 2019.
For the fiscal year ended September 30, 2020, net income amounted to $6.4 million, or $0.84 per fully diluted common share, compared with net income of $9.3 million, or $1.22 per fully diluted common share, for the fiscal year ended September 30, 2019. The decreases in net income and diluted earnings per share were primarily due to higher loan loss provision expense necessitated by the COVID-19 pandemic and lower net interest income, as well as the partial charge-off of $2.3 million in the first fiscal quarter ended December 31, 2019 related to one commercial loan relationship. ROAA was 0.52 percent for the fiscal year ended September 30, 2020, compared to 0.80 percent for the fiscal year ended September 30, 2019, and ROAE was 4.42 percent for the fiscal year ended September 30, 2020, compared with 6.78 percent for the fiscal year ended September 30, 2019.
“We continue to operate in an unprecedented environment of sustained low interest rates and, of course, the pandemic. While the economic outlook remains uncertain, we are encouraged by the resiliency of our customers who are also adapting to their own difficult operating conditions. I am very proud of the Malvern Bank team, which continues to execute day-to-day to fulfill our highest priority – to be a trusted partner to our customers, especially in difficult times,” commented Anthony C. Weagley, President and Chief Executive Officer.
Ongoing Impact of COVID–19
The Company continues to take the necessary steps to protect the health and well-being of both its employees and clients, and to assist clients who have been impacted by the COVID-19 pandemic. The Company also continues to focus on meeting the needs of its client base during the pandemic by maintaining close communication with both individual and commercial customers and allowing for deferral extensions on an as-needed, case-by-case basis.
There remains significant uncertainty about COVID-19, including the extent and duration of the impact on individuals, communities and the Company. While it is not possible to know at this time the full impact that COVID-19 will have on the Company’s operations, the Company will continue to disclose potentially material items of which it is aware.
Paycheck Protection Program (“PPP”) Loans
As of September 30, 2020, the Company funded 255 Small Business Administration (“SBA”) PPP loans, totaling $20.8 million for existing and new customers with an average loan size of approximately $81,000. These loans are expected to generate net origination fees of approximately $574,000, to be recognized over the life of the loans or when the loan is forgiven. The Company continues to work with customers on applying for loan forgiveness.
Loan Deferrals
The Bank continues to provide payment deferrals and forbearances to business customers and mortgage customers that are experiencing hardship because of the effects of COVID-19. At September 30, 2020, the Company had 44 COVID-19-related modified loan deferrals totaling approximately $146.6 million (down approximately $166.9 million or 53% from 153 COVID-19-related modified loan deferrals totaling approximately $313.5 million at June 30, 2020). At November 3, 2020, the Company had 20 COVID-19-related modified loan deferrals totaling $92.9 million or 8.9% of total loans. Of the remaining $92.9 million deferrals, approximately $56.3 million or 60.6% of the deferrals are paying the contractual interest payments.
Statement of Income Highlights at September 30, 2020
- Net interest income decreased $432,000, or 5.8 percent, for the three months ended September 30, 2020 when compared to the three months ended September 30, 2019. The decrease was mainly attributable to interest rate cuts by the Board of Governors of the Federal Reserve.
- Net interest margin (“NIM”) increased to 2.48 percent for the quarter ended September 30, 2020, compared to 2.45 percent for the prior year’s quarter and 2.29 percent in the sequential quarter ended June 30, 2020. These increases were driven by the reduction in interest expense, partially offset by a decrease in interest-earning assets. On a linked quarter basis, the average yield on interest-earning assets increased 14 basis points and the total cost of funds decreased 8 basis points, as the cost of interest-bearing deposits decreased 11 basis points.
- The Company did not record a provision during the three-month period ended September 30, 2020. For the fiscal year ended September 30, 2020, the Company recorded a provision for loan losses of $3.2 million. Due to the uncertainty created by COVID-19, the Company believes that additional provisioning might be required in future quarters until businesses have fully reopened and deferral periods have expired.
| Linked Quarter Financial Ratios (unaudited) |
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| As of or for the quarter ended: | 9/30/20 |
6/30/20 |
3/31/20 |
12/31/19 |
9/30/19 |
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| Return on average assets (1) | 0.74 | % | 0.48 | % | 0.61 | % | 0.26 | % | 0.86 | % | |||||
| Return on average equity (1) | 6.08 | % | 4.06 | % | 5.29 | % | 2.19 | % | 7.65 | % | |||||
| Net interest margin (1) | 2.48 | % | 2.29 | % | 2.25 | % | 2.33 | % | 2.45 | % | |||||
| Loans / deposits ratio | 116.83 | % | 117.45 | % | 110.56 | % | 106.14 | % | 106.64 | % | |||||
| Shareholders’ equity / total assets | 12.08 | % | 11.92 | % | 11.58 | % | 11.40 | % | 11.26 | % | |||||
| Efficiency ratio, non-GAAP (1) (2) (3) | 60.3 | % | 66.0 | % | 60.9 | % | 58.9 | % | 55.0 | % | |||||
| Book value per common share | $ | 19.23 | $ | 18.86 | $ | 18.67 | $ | 18.48 | $ | 18.35 | |||||
(1) Annualized.
(2) Information reconciling non-GAAP measures to GAAP measures is presented beginning on pages 10 and 11 in this press release.
(3) Efficiency ratio is a non-GAAP financial measure and is defined as other expense, excluding certain non-core items, as a percentage of net interest income plus other income.
Linked Quarter Income Statement Data
(unaudited)
(in thousands, except share and per share data)
| For the quarter ended: | 9/3/20 | 6/3/20 | 3/31/20 | 12/31/19 | 9/3/19 | ||||||||||
| Net interest income | $ | 6,986 | $ | 6,631 | $ | 6,793 | $ | 6,888 | $ | 7,418 | |||||
| Provision for loan losses | – | 435 | 625 | 2,150 | – | ||||||||||
| Net interest income after provision for loan losses | 6,986 | 6,196 | 6,168 | 4,738 | 7,418 | ||||||||||
| Other income | 692 | 389 | 964 | 443 | 551 | ||||||||||
| Other expense | 4,558 | 4,684 | 4,638 | 4,422 | 4,453 | ||||||||||
| Income before income tax expense | 3,120 | 1,901 | 2,494 | 759 | 3,516 | ||||||||||
| Income tax expense (benefit) | 886 | 447 | 586 | (26 | ) | 817 | |||||||||
| Net income | $ | 2,234 | $ | 1,454 | $ | 1,908 | $ | 785 | $ | 2,699 | |||||
| Earnings per common share | |||||||||||||||
| Basic | $ | 0.30 | $ | 0.19 | $ | 0.25 | $ | 0.10 | $ | 0.35 | |||||
| Diluted | $ | 0.30 | $ | 0.19 | $ | 0.25 | $ | 0.10 | $ | 0.35 | |||||
| Weighted average common shares outstanding | |||||||||||||||
| Basic | 7,522,199 | 7,538,375 | 7,663,771 | 7,665,842 | 7,663,242 | ||||||||||
| Diluted | 7,522,360 | 7,538,375 | 7,663,771 | 7,665,842 | 7,663,593 | ||||||||||
Net Interest Income
Net interest income was $7.0 million for the quarter ended September 30, 2020, a decrease of $432,000, or 5.8 percent, from $7.4 million for the quarter ended September 30, 2019. The decline continues to be driven by the Federal Reserve Board’s zero rate policy, as the yield on interest earning assets has declined 45 basis points for the period. However, the net interest spread on an annualized basis increased from 2.19 for the quarter ended September 30, 2019 to 2.31 percent for the quarter ended September 30, 2020.
For the quarter ended September 30, 2020, the Company’s NIM increased by 3 basis points to 2.48 percent, as compared to the quarter ended September 30, 2019. This increase was primarily driven by the decrease in the cost of interest-bearing deposits, which decreased by 58 basis points compared to the fourth fiscal quarter of 2019.
As of September 30, 2020, they have a total of $28.0 million of average interest-bearing cash balances. This excess liquidity diluted the NIM by approximately 9 basis points. In addition, they have $20.5 million of PPP loans that had a slightly dilutive effect on their NIM. The PPP loans have an annual interest rate of 1.00 percent plus the accretion of the origination fee.
Net interest income was $27.3 million for the fiscal year ended September 30, 2020, a decrease of $1.8 million, or 6.1 percent, from $29.1 million for the fiscal year ended September 30, 2019. The change for the fiscal year ended September 30, 2020 was primarily the result of the low rate environment and an increase in total interest-bearing liabilities of $41.1 million, partially offset by an increase of $48.3 million in the average balance of loans. The net interest spread was 2.12 percent and 2.31 percent for the fiscal year ended September 30, 2020 and 2019, respectively.
For the fiscal year ended September 30, 2020, the Company’s NIM decreased by 24 basis points to 2.33 percent as compared to 2.57 percent for the fiscal year ended September 30, 2019.
Total Interest Income
For the quarters ended September 30, 2020 and September 30, 2019, total interest income was $10.6 million and $12.7 million, respectively. Average interest-earning assets decreased $83.7 million for the quarter ended September 30, 2020 when compared to the quarter ended September 30, 2019, while the average yield on interest-earning assets declined 45 basis points when compared to the same period in 2019. The average yield was affected by the Federal Reserve Board’s zero rate policy.
For the fiscal year ended September 30, 2020, total interest income was $44.4 million, a decrease of $3.3 million, or 6.8 percent, from $47.7 million for the fiscal year ended September 30, 2019. The decline in total interest income was driven primarily by a lower earning asset yield of 41 basis points.
Interest Expense
For the quarter ended September 30, 2020, interest expense decreased by $1.7 million, or 32.1 percent, to $3.6 million, compared to the quarter ended September 30, 2019, primarily due to decreased rates on deposits and other interest-bearing liabilities. The decrease in interest expense on deposits is primarily attributable to a decrease of $59.7 million in certificate deposits, and a 58 basis point decrease in the rate on interest-bearing deposits. The decrease in deposits was a strategic decision to reduce excess cash on the balance sheet, match funding expectations and improve the margin. The reduction in certificates was primarily listing service deposits and the reduction in money market were primarily public funds deposits.
The annualized average rate of total interest-bearing liabilities decreased 8 basis points to 1.43 percent for the quarter ended September 30, 2020, compared to 1.51% for the third (June 30, 2020) fiscal quarter of 2020. For the quarter ended September 30, 2020, the average balance of total interest-bearing liabilities decreased by $16.1 million, reflecting a decrease in the average balance of total interest-bearing deposit accounts of $9.7 million and a decrease in the average balance of borrowings of $6.4 million, compared to the quarter ended June 30, 2020.
Total interest expense decreased by $1.5 million, or 8.0 percent, to $17.1 million for the fiscal year ended September 30, 2020, compared to the fiscal year ended September 30, 2019. The average rate of total interest-bearing liabilities decreased to 1.68 percent for the fiscal year ended September 30, 2020, from 1.90 percent for the fiscal year ended September 30, 2019. At the same time, the average balance of total interest-bearing liabilities increased by $41.1 million. This increase primarily reflects an increase in the average balance of interest-bearing deposits of $24.7 million and an increase in the average balance of borrowings of $16.4 million.
Other Income
Other income increased $141,000, or 25.6 percent, during the fourth fiscal quarter of 2020 compared with the fourth fiscal quarter of 2019. The increase in other income was primarily due to increases of $148,000 in gain on sale of investments and $102,000 in gain on sale of loans, offset by a decrease of $108,000 in service charges and other fees. The gain on sale of investments resulted from managing and optimizing portfolio activity in the ordinary course of business. The gain on sale of loans was a result of a strategic effort to originate and sell residential loans in this low interest rate environment. The decline in service charges and other fees was primarily the result of lower loan swap fees through the Bank’s commercial loan hedging program in the fourth quarter of 2019.
For the fiscal year ended September 30, 2020, total other income decreased $104,000 compared to the year ended September 30, 2019. This decrease was primarily a result of decreases of $480,000 in service charges and other fees, partially offset by increases of $302,000 in gain on sale of investments and $79,000 in gain on sale of loans. The decrease in service charges and other fees during the fiscal year ended September 30, 2020 is primarily due to the recognition of approximately $428,000 less of net swap fees through the Bank’s commercial loan hedging program. Consistent with the quarter, the increase on the sale of investments resulted from managing and optimizing normal portfolio activity. Also consistent with the quarterly results, the gain on sale of loans was a result of a strategic effort to originate and sell residential loans in this low interest rate environment.
Other Expense
Other expense for the quarter ended September 30, 2020 increased $105,000, or 2.4 percent, when compared to the quarter ended September 30, 2019. The increase was primarily due to increases of $117,000 in salaries and employee benefits, $88,000 in professional fees, which included COVID-19-related expenses, and $75,000 in federal deposit insurance premium expense. These increases were partially offset by decreases of $124,000 in other real estate owned (“OREO”) expense, net, and $66,000 in other operating expenses. The increase in salary and employee benefits was mainly due to adding employees throughout the year and was offset partially by other reductions in staff in response to conditions brought on by the pandemic during the quarter ended September 30, 2020. The increased federal deposit premium resulted from the Deposit Insurance Fund reserve ratio exceeding the required reserve ratio during the fourth quarter of 2019. This was the second consecutive quarter the Bank did not receive a credit from the fund and does not have a credit balance that can be used to offset premiums in future quarters. The decrease in OREO expense, net, was due to rent received from an OREO property that more than covered the expenses related to that property. The decrease in other operating expenses primarily related to events and travel that were postponed in response to COVID-19.
For the fiscal year ended September 30, 2020, total other expense increased $815,000, or 4.7 percent, compared to the fiscal year ended September 30, 2019. This increase primarily reflects a $348,000 increase in salaries and employee benefits, a $247,000 increase in the Pennsylvania shares tax, and a $196,000 increase in professional fees. These increases were partially offset by a $104,000 decrease in OREO expense, net, and a $66,000 decrease in the federal deposit insurance premium. The increase in salaries and employee benefits during the fiscal year ended September 30, 2020 reflects normal increases to salary and benefits and additional hires to support overall franchise growth. The increased Pennsylvania shares tax was due to the Bank not being subject to this tax until the second quarter of 2019. The increase in professional fees was due to higher legal and professional services expenses of $182,000 and $160,000, respectively, partially offset by lower audit and accounting expenses of approximately $143,000. The decrease in OREO expense, net, was due to successfully managing and leasing the space while actively working to dispose of the associated property. The reduction in the federal deposit insurance premium resulted from the Deposit Insurance Fund reserve ratio exceeding the official required reserve ratio, which in turn generated credits to qualified participating banks. These credits have been fully utilized in fiscal 2020.
Income Taxes
The Company recorded $886,000 in income tax expense during the quarter ended September 30, 2020 compared to $817,000 in income tax expense during the quarter ended September 30, 2019. The effective tax rates for the Company for the quarters ended September 30, 2020 and 2019 were 28.4 percent and 23.2 percent, respectively.
For the fiscal year ended September 30, 2020, income tax expense decreased $576,000, or 23.3 percent, to $1.9 million from $2.5 million for the fiscal year ended September 30, 2019. The effective tax rates for the Company for the fiscal year ended September 30, 2020 and 2019 were 22.9 percent and 20.9 percent, respectively. Tax expense for the fiscal year ended September 30, 2020 was positively impacted by discreet items recorded in the first fiscal quarter ended December 31, 2019.
Statement of Condition Highlights at September 30, 2020
- Gross loans totaled $1.041 billion at September 30, 2020, increasing $23.7 million or 2.3 percent, compared to September 30, 2019.
- Total assets stood at $1.211 billion at September 30, 2020, decreasing $53.8 million, or 4.3 percent, compared to September 30, 2019. The decline in assets was driven by the strategic reduction in cash due from interest-bearing deposits in other institutions to better match loan funding expectations and improve the margin.
- The deposit mix improved with the reduction of wholesale certificates of $14.8 million and reduction of money market public fund deposits of $58.5 million from September 30, 2019 to September 30, 2020. Deposits totaled $890.9 million at September 30, 2020, a decrease of $62.9 million, or 6.6 percent, compared to September 30, 2019. The reductions in deposits are in line with the Bank’s overall funding strategy to reduce excess balance sheet cash and better match funding needs.
- Non-performing assets (“NPAs”) were 1.25 percent of total assets at September 30, 2020, compared to 0.64 percent at September 30, 2019. Excluding one OREO property of $5.8 million, NPAs were 0.77 percent of total assets and 0.18 percent of total assets at September 30, 2020 and September 30, 2019, respectively. The allowance for loan losses as a percentage of total non-performing loans was 118.6 percent at September 30, 2020, compared to 434.6 percent at September 30, 2019.
- The Company’s ratio of shareholders’ equity to total assets was 12.08 percent at September 30, 2020, compared to 11.26 percent at September 30, 2019.
- Book value per common share amounted to $19.23 at September 30, 2020, compared to $18.35 at September 30, 2019.
Linked Quarter Statement of Condition Data
(in thousands, unaudited)
| At quarter ended: | 9/30/20 | 6/30/20 | 3/31/20 | 12/31/19 | 9/30/19 | |||||||||
| Cash and due from depository institutions | $ | 16,386 | $ | 30,653 | $ | 1,829 | $ | 1,337 | $ | 1,400 | ||||
| Interest-bearing deposits in depository institutions | 45,053 | 28,291 | 124,239 | 158,465 | 152,143 | |||||||||
| Investment securities, available for sale, at fair value | 31,541 | 33,245 | 21,839 | 23,723 | 18,411 | |||||||||
| Investment securities held to maturity | 14,970 | 15,921 | 18,046 | 20,578 | 22,485 | |||||||||
| Restricted stock, at cost | 9,622 | 9,766 | 10,913 | 11,115 | 11,129 | |||||||||
| Loans receivable, net of allowance for loan losses | 1,030,069 | 1,028,093 | 1,002,907 | 992,629 | 1,007,714 | |||||||||
| OREO | 5,796 | 5,796 | 5,796 | 5,796 | 5,796 | |||||||||
| Accrued interest receivable | 3,714 | 5,680 | 4,121 | 4,061 | 4,253 | |||||||||
| Operating lease right-of-use-assets | 2,638 | 2,799 | 2,959 | 3,119 | — | |||||||||
| Property and equipment, net | 6,274 | 6,355 | 6,476 | 6,594 | 6,678 | |||||||||
| Deferred income taxes, net | 3,341 | 3,103 | 2,974 | 2,806 | 2,840 | |||||||||
| Bank-owned life insurance | 25,400 | 20,270 | 20,144 | 20,018 | 19,891 | |||||||||
| Other assets | 16,573 | 13,873 | 13,869 | 8,341 | 12,482 | |||||||||
| Total assets | $ | 1,211,377 | $ | 1,203,845 | $ | 1,236,112 | $ | 1,258,582 | $ | 1,265,222 | ||||
| Deposits | $ | 890,906 | $ | 884,444 | $ | 915,900 | $ | 943,819 | $ | 953,811 | ||||
| FHLB advances | 130,000 | 130,000 | 133,000 | 133,000 | 133,000 | |||||||||
| Subordinated debt | 24,776 | 24,737 | 24,697 | 24,658 | 24,619 | |||||||||
| Operating lease liabilities | 2,671 | 2,824 | 2,976 | 3,128 | — | |||||||||
| Other liabilities | 16,694 | 18,309 | 16,389 | 10,442 | 11,284 | |||||||||
| Shareholders’ equity | 146,330 | 143,531 | 143,150 | 143,535 | 142,508 | |||||||||
| Total liabilities and shareholders’ equity | $ | 1,211,377 | $ | 1,203,845 | $ | 1,236,112 | $ | 1,258,582 | $ | 1,265,222 | ||||
The following table sets forth the Company’s consolidated average statement of condition for the quarters presented.
Condensed Consolidated Average Statement of Condition
(in thousands, unaudited)
| For the quarter ended: | 9/30/20 | 6/30/20 | 3/31/20 | 12/31/19 | 9/30/19 | ||||||||||||||
| Investment securities | $ | 48,549 | $ | 43,349 | $ | 40,165 | $ | 40,855 | $ | 42,256 | |||||||||
| Interest-bearing cash accounts | 27,996 | 76,828 | 148,580 | 122,234 | 143,297 | ||||||||||||||
| Loans | 1,041,345 | 1,028,996 | 1,010,767 | 1,006,729 | 1,015,251 | ||||||||||||||
| Allowance for loan losses | (11,071 | ) | (10,618 | ) | (9,756 | ) | (10,095 | ) | (10,143 | ) | |||||||||
| All other assets | 107,512 | 85,169 | 63,434 | 62,341 | 61,615 | ||||||||||||||
| Total assets | $ | 1,214,331 | $ | 1,223,724 | $ | 1,253,190 | $ | 1,222,064 | $ | 1,252,276 | |||||||||
| Non-interest-bearing deposits | $ | 49,139 | $ | 46,450 | $ | 41,916 | $ | 41,716 | $ | 44,104 | |||||||||
| Interest-bearing deposits | 842,727 | 852,330 | 892,583 | 864,317 | 896,928 | ||||||||||||||
| FHLB advances | 130,000 | 136,121 | 133,000 | 133,000 | 133,000 | ||||||||||||||
| Other short-term borrowings | — | 276 | 275 | — | 54 | ||||||||||||||
| Subordinated debt | 24,760 | 24,719 | 24,680 | 24,641 | 24,602 | ||||||||||||||
| Other liabilities | 20,853 | 20,509 | 16,440 | 14,805 | 12,413 | ||||||||||||||
| Shareholders’ equity | 146,852 | 143,319 | 144,296 | 143,585 | 141,175 | ||||||||||||||
| Total liabilities and shareholders’ equity | $ | 1,214,331 | $ | 1,223,724 | $ | 1,253,190 | $ | 1,222,064 | $ | 1,252,276 | |||||||||
Deposits
The following table reflects the composition of the Company’s deposits as of the dates indicated.
(in thousands, unaudited)
| At quarter ended: | 9/30/20 | 6/30/20 | 3/31/20 | 12/31/19 | 9/30/19 | |||||||||
| Demand: | ||||||||||||||
| Non-interest-bearing | $ | 50,422 | $ | 47,443 | $ | 42,874 | $ | 41,273 | $ | 55,684 | ||||
| Interest-bearing | 303,682 | 277,238 | 291,191 | 327,956 | 302,039 | |||||||||
| Savings | 45,072 | 43,702 | 43,550 | 40,908 | 41,875 | |||||||||
| Money market | 277,711 | 281,419 | 280,173 | 279,883 | 276,644 | |||||||||
| Time | 214,019 | 234,642 | 258,112 | 253,799 | 277,569 | |||||||||
| Total deposits | $ | 890,906 | $ | 884,444 | $ | 915,900 | $ | 943,819 | $ | 953,811 | ||||
Loans
For the quarter ended September 30, 2020, the Company originated a total new loan volume of $45.7 million, which was partially offset by prepayments of $14.2 million, amortization of $6.5 million, loan payoffs of $22.3 million, and participations of $689,000. Total loan growth for the three months ended September 30, 2020 included an increase of $3.1 million of PPP loans.
Total net loans amounted to $1.030 billion at September 30, 2020 compared to $1.008 billion at September 30, 2019, for a net increase of $22.4 million or 2.2 percent year to year. The allowance for loan losses amounted to $11.1 million, or 1.09 percent of total loans, excluding PPP loans, at September 30, 2020 and $10.1 million or 0.99 percent at September 30, 2019. Average loan balances for the quarter ended September 30, 2020 totaled $1.041 billion as compared to $1.015 billion for the quarter ended September 30, 2019, representing a 2.6 percent increase.
At the end of the fourth fiscal quarter of 2020, the gross loan portfolio remained weighted toward two primary components: commercial and the core residential portfolio, with commercial loans accounting for 67.2 percent and single-family residential real estate loans accounting for 23.3 percent. Construction and development loans amounted to 6.6 percent and consumer loans represented 3.0 percent of the gross loan portfolio at such date. The increase in the gross loan portfolio at September 30, 2020 compared to September 30, 2019 primarily reflected an increase of $22.1 million in residential mortgage loans and $25.0 million in construction and development loans, which were partially offset by a decrease of $18.9 million in commercial loans, net of $20.8 million of PPP commercial and industrial loan originations, and a decrease of $4.6 million in consumer loans.
The following table reflects the Company’s loan portfolio composition (excluding loans held for sale) as of the dates indicated.
| (in thousands, unaudited) | |||||||||||||||||||
| At quarter ended: | 9/3/20 | 6/3/20 | 3/31/20 | 12/31/19 | 9/3/19 | ||||||||||||||
| Residential mortgage | $ | 242,090 | $ | 246,215 | $ | 240,633 | $ | 234,738 | $ | 220,011 | |||||||||
| Construction and Development: | |||||||||||||||||||
| Residential and commercial | 65,703 | 56,999 | 52,313 | 49,095 | 40,346 | ||||||||||||||
| Land | 3,110 | 3,535 | 3,579 | 3,625 | 3,420 | ||||||||||||||
| Total construction and development | 68,813 | 60,534 | 55,892 | 52,720 | 43,766 | ||||||||||||||
| Commercial: | |||||||||||||||||||
| Commercial real estate | 497,215 | 501,955 | 511,467 | 521,495 | 543,452 | ||||||||||||||
| Farmland | 7,517 | 7,531 | 7,537 | 7,563 | 7,563 | ||||||||||||||
| Multi-family | 67,767 | 66,416 | 59,978 | 43,473 | 62,884 | ||||||||||||||
| Commercial and industrial | 116,584 | 115,899 | 96,574 | 99,494 | 99,747 | ||||||||||||||
| Other | 10,142 | 8,397 | 7,604 | 8,569 | 4,450 | ||||||||||||||
| Total commercial | 699,225 | 700,198 | 683,160 | 680,594 | 718,096 | ||||||||||||||
| Consumer: | |||||||||||||||||||
| Home equity lines of credit | 17,128 | 18,097 | 18,441 | 18,372 | 19,506 | ||||||||||||||
| Second mortgages | 10,711 | 11,704 | 12,393 | 13,179 | 13,737 | ||||||||||||||
| Other | 2,851 | 2,074 | 2,112 | 2,160 | 2,030 | ||||||||||||||
| Total consumer | 30,690 | 31,875 | 32,946 | 33,711 | 35,273 | ||||||||||||||
| Total loans | 1,040,818 | 1,038,822 | 1,012,631 | 1,001,763 | 1,017,146 | ||||||||||||||
| Deferred loan costs, net | 326 | 338 | 832 | 828 | 663 | ||||||||||||||
| Allowance for loan losses | (11,075 | ) | (11,067 | ) | (10,556 | ) | (9,962 | ) | (10,095 | ) | |||||||||
| Loans Receivable, net | $ | 1,030,069 | $ | 1,028,093 | $ | 1,002,907 | $ | 992,629 | $ | 1,007,714 | |||||||||
At September 30, 2020, the Company had $132.0 million in overall undisbursed loan commitments, which consisted primarily of available usage from active construction facilities, unused commercial lines of credit, and home equity lines of credit.
Asset Quality
Non-accrual loans totaled $9.3 million at September 30, 2020 and $1.8 million at September 30, 2019. The portfolio of non-accrual loans at September 30, 2020 was comprised of two commercial real estate loans with an aggregate outstanding balance of approximately $7.0 million, fifteen residential real estate loans with an aggregate outstanding balance of approximately $2.0 million, and eleven consumer loans with an aggregate outstanding balance of approximately $280,000. The increase in non-accrual loans compared to September 30, 2019 was due primarily to one commercial real estate loan with an outstanding balance of approximately $6.7 million moving to non-accrual status during the first quarter of fiscal 2020.
At September 30, 2020, NPAs totaled $15.1 million, or 1.25 percent of total assets, as compared with $8.1 million, or 0.64 percent of total assets, at September 30, 2019.
OREO totaled $5.8 million at both September 30, 2020 and September 30, 2019. Excluding the $5.8 million of OREO, NPAs totaled $9.3 million, or 0.77 percent of total assets at September 30, 2020, and $2.3 million, or 0.18 percent of total assets at September 30, 2019.
Performing TDR loans were $13.4 million at September 30, 2020 and $12.2 million at September 30, 2019. One commercial real estate loan in the amount of $10.6 million previously classified as non-impaired moved to substandard impaired and was accruing interest during the second (March 31, 2020) fiscal quarter of 2020. Management subsequently restructured this loan and reclassified it as a performing TDR during the third fiscal quarter ended June 30, 2020. There were no new TDRs in the fourth fiscal quarter of 2020.
Non-Performing Asset and Other Asset Quality Data:
(dollars in thousands, unaudited)
| As of or for the quarter ended: | 9/30/20 | 6/30/20 | 3/31/20 | 12/31/19 | 9/30/19 | ||||||||||||||
| Non-accrual loans(1) | $ | 9,279 | $ | 8,871 | $ | 8,655 | $ | 8,649 | $ | 1,821 | |||||||||
| Loans 90 days or more past due and still accruing | 58 | 265 | 168 | 1 | 502 | ||||||||||||||
| Total non-performing loans | 9,337 | 9,136 | 8,823 | 8,650 | 2,323 | ||||||||||||||
| OREO | 5,796 | 5,796 | 5,796 | 5,796 | 5,796 | ||||||||||||||
| Total NPAs | $ | 15,133 | $ | 14,932 | $ | 14,619 | $ | 14,446 | $ | 8,119 | |||||||||
| Performing TDR loans | $ | 13,418 | $ | 13,640 | $ | 3,243 | $ | 3,460 | $ | 12,170 | |||||||||
| NPAs / total assets | 1.25 | % | 1.24 | % | 1.18 | % | 1.15 | % | 0.64 | % | |||||||||
| Non-performing loans / total loans | 0.90 | % | 0.88 | % | 0.87 | % | 0.86 | % | 0.23 | % | |||||||||
| Net (recoveries) charge-offs | $ | (8 | ) | $ | (76 | ) | $ | 31 | $ | 2,283 | $ | 11 | |||||||
| Net (recoveries) charge-offs /average loans(2) | — | % | (0.03 | )% | 0.01 | % | 0.91 | % | — | % | |||||||||
| Allowance for loan losses / total loans | 1.09 | % | 1.08 | % | 1.04 | % | 0.99 | % | 0.99 | % | |||||||||
| Allowance for loan losses / non-performing loans | 118.6 | % | 121.1 | % | 119.6 | % | 115.2 | % | 434.6 | % | |||||||||
| Total assets | $ | 1,211,377 | $ | 1,203,845 | $ | 1,236,112 | $ | 1,258,582 | $ | 1,265,222 | |||||||||
| Total gross loans | 1,040,818 | 1,038,822 | 1,012,631 | 1,001,763 | 1,017,146 | ||||||||||||||
| Average loans | 1,041,345 | 1,028,996 | 1,010,767 | 1,006,729 | 1,015,251 | ||||||||||||||
| Allowance for loan losses | 11,075 | 11,067 | 10,556 | 9,962 | 10,095 | ||||||||||||||
(1) Fifteen loans totaling approximately $8.2 million, or 88.4 percent of the total non-accrual loan balance, were making payments as of September 30, 2020.
(2) Annualized.
The allowance for loan losses at September 30, 2020 amounted to approximately $11.1 million, or 1.09 percent of total loans excluding PPP loans, a non-GAAP measure, compared to $10.1 million, or 0.99 percent of total loans, at September 30, 2019. The Company did not record a provision for loan losses during the fiscal quarters ended September 30, 2020 and September 30, 2019.
Capital
At September 30, 2020, total shareholders’ equity amounted to $146.3 million, or 12.08 percent of total assets, compared to $142.5 million, or 11.26 percent of total assets at September 30, 2019. The Company’s capital position provides a source of strength and continues to significantly exceed all regulatory capital guidelines. The Bank’s common equity Tier 1 capital ratio was 15.94 percent, Tier 1 leverage ratio was 13.30 percent, Tier 1 risk-based capital ratio was 15.94 percent and the total risk-based capital ratio was 17.04 percent. At September 30, 2019, the Bank’s common equity Tier 1 capital ratio was 15.38 percent, Tier 1 leverage ratio was 12.23 percent, Tier 1 risk-based capital ratio was 15.38 percent and the total risk-based capital ratio was 16.40 percent.
Non-GAAP Financial Measures
In addition to the results presented in accordance with generally accepted accounting principles (“GAAP”), this press release includes certain non-GAAP financial measures. The Company’s management believes that the supplemental non-GAAP information provided in this press release is utilized by market analysts and others to evaluate a company’s financial condition and, therefore, that such information is useful to investors. These disclosures should not be viewed as a substitute for financial results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures presented by other companies.
The Company’s net income and EPS including non-core income and expense items, is presented in the table below.
| (in thousands) | ||||||||||||||||||
| For the quarter ended: | 9/30/20 | 6/3/20 | 3/31/20 | 12/31/19 | 9/3/19 | |||||||||||||
| Net income as reported under GAAP | $ | 2,234 | $ | 1,454 | $ | 1,908 | $ | 785 | $ | 2,699 | ||||||||
| Non-core items, net of tax: | ||||||||||||||||||
| OREO expense(1) | (8 | ) | 22 | — | 73 | 87 | ||||||||||||
| Net investment security gains | (107 | ) | (1 | ) | (138 | ) | — | (1 | ) | |||||||||
| Swap fees(2) | — | — | — | — | (71 | ) | ||||||||||||
| Other(3) | 32 | 24 | 31 | 54 | 16 | |||||||||||||
| Core net income, non-GAAP | $ | 2,151 | $ | 1,499 | $ | 1,801 | $ | 912 | $ | 2,730 | ||||||||
| Adjusted Earnings per common share: | ||||||||||||||||||
| Diluted | $ | 0.29 | $ | 0.20 | $ | 0.24 | $ | 0.12 | $ | 0.36 | ||||||||
| Weighted average common shares outstanding: | ||||||||||||||||||
| Diluted | 7,522,360 | 7,538,375 | 7,663,771 | 7,665,842 | 7,663,593 | |||||||||||||
| (1) Non-core items include OREO expense relating to one commercial real estate loan for all quarters presented. (2) Upfront recognition of net swap fees through the Bank’s commercial loan hedging program. (3) Items such as accelerated payoff and non-accrual interest amounts are included in non-core items. |
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| For the quarter ended: | 9/30/20 | 6/3/20 | 3/31/20 | 12/31/19 | 9/30/19 | |||||||||||
| Earnings per share GAAP | $ | 0.30 | $ | 0.19 | $ | 0.25 | $ | 0.10 | $ | 0.35 | ||||||
| Plus/(less): | ||||||||||||||||
| OREO expense, net investment | ||||||||||||||||
| security gains, swap fees and other | (0.01 | ) | 0.01 | (0.01 | ) | 0.02 | 0.01 | |||||||||
| Adjusted Earnings per common share non-GAAP | $ | 0.29 | $ | 0.20 | $ | 0.24 | $ | 0.12 | $ | 0.36 | ||||||
The Company’s other income including and excluding net investment securities gains and net swap fees is presented below. The Company’s management believes that many investors evaluate other income without regard to such gains.
| (in thousands) | ||||||||||||||
| For the quarter ended: | 9/30/20 | 6/3/20 | 3/31/20 | 12/31/19 | 9/30/19 | |||||||||
| Other income as reported under GAAP | $ | 692 | $ | 389 | $ | 964 | $ | 443 | $ | 551 | ||||
| Less: Net investment securities gains | 149 | 1 | 180 | — | 1 | |||||||||
| Less: Net swap fees | — | — | — | — | 92 | |||||||||
| Other income, excluding net investment securities gains and net swap fees | $ | 543 | $ | 388 | $ | 784 | $ | 443 | $ | 458 | ||||
“Efficiency ratio” is a non-GAAP financial measure and is defined as other expense, excluding certain non-core items, as a percentage of net interest income, plus other income, calculated as follows:
| (dollars in thousands) | |||||||||||||||||||
| For the quarter ended: | 9/30/20 | 6/30/20 | 3/31/20 | 12/31/19 | 9/3/19 | ||||||||||||||
| Other expense as reported under GAAP | $ | 4,558 | $ | 4,684 | $ | 4,638 | $ | 4,422 | $ | 4,453 | |||||||||
| Less: non-core items(1) | (11 | ) | 29 | (1 | ) | 71 | 113 | ||||||||||||
| Other expense, excluding non-core items, non-GAAP | $ | 4,569 | $ | 4,655 | $ | 4,639 | $ | 4,351 | $ | 4,340 | |||||||||
| Net interest income | $ | 6,986 | $ | 6,631 | $ | 6,793 | $ | 6,888 | $ | 7,418 | |||||||||
| Non-core items(2) | 45 | 32 | 41 | 52 | 21 | ||||||||||||||
| Net interest income, including non-core items, non-GAAP | 7,031 | 6,663 | 6,834 | 6,940 | 7,439 | ||||||||||||||
| Other income, excluding net gain on sale of investments and net swap fees | 543 | 388 | 784 | 443 | 458 | ||||||||||||||
| Total | $ | 7,574 | $ | 7,051 | $ | 7,618 | $ | 7,383 | $ | 7,897 | |||||||||
| Efficiency ratio, non-GAAP | 60.3 | % | 66.0 | % | 60.9 | % | 58.9 | % | 55.0 | % | |||||||||
| (1) Non-core items include OREO expense relating to one commercial real estate loan for all quarters presented. (2) Items such as accelerated payoff and non-accrual interest amounts are included in non-core items. |
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The Company’s efficiency ratio, calculated on a GAAP basis, without excluding net investment securities gains, swap fees, and without deducting non-core items from other expense, follows:
| For the quarter ended: | 9/30/20 | 6/30/20 | 3/31/20 | 12/31/19 | 9/3/19 | |||||
| Efficiency ratio on a GAAP basis | 59.4 | % | 66.7 | % | 59.8 | % | 60.3 | % | 55.9 | % |
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